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Tuesday, November 13, 2007 8:20:07 PM
For the quarterly period ended JUNE 30, 2007
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
¢ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___ to _______
Commission file number 333-131017
CHINA VOIP & DIGITAL TELECOM INC..
(Exact name of small business issuer as specified in its charter)
Nevada 98-0509797
(State or other jurisdiction of incorporation or organization) (IRS Employee Identification No.)
No.786 Xinluo Street, High-tech Industrial Development Zone, Jinan, China
(Address of principal executive offices)
+86 531 8702 7114
(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes[ ] No[ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:
Common Stock: par value of $0.001; 51,758,000 shares issued and outstanding on July 14, 2007.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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CHINA VOIP & DIGITAL TELECOM INC.
FORM 10-QSB
INDEX
PAGE
Important Notice
PART I.
FINANCIAL INFORMATION
1
Item 1.
Unaudited Financial Statements and Notes – Six Months Ended June 30, 2007
1
Item 2.
Management’s Discussion and Analysis or Plan of Operation
13
Item 3.
Controls and Procedures
16
PART II.
OTHER INFORMATION
18
Item 1.
Legal Proceedings
18
Item 2.
Changes in Securities and Use of Proceeds
18
Item 3.
Default Upon Senior Securities
18
Item 4.
Submission of Matters to a Vote of Security Holders
18
Item 5.
Other Information
18
Item 6.
Exhibits
18
Signatures
19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
1
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CHINA VOIP & DIGITAL TELECOM, INC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
UNAUDITED
June 30, 2007
Assets
Current assets
Cash and cash equivalents
$
724,251
Accounts receivable, net
312,903
Inventories, net
142,519
Advance to suppliers
420,819
Other Current Assets
64,129
Total current assets
1,664,621
Property & equipment, net
1,054,196
Intangible assets
15,323
Total assets
$
2,734,140
Liabilities & Stockholders' Equity
Current liabilities
Accounts payable
$
3,284
Accrued expenses and other current liabilities
217,582
Due to related parties
10,000
Total current liabilities
230,866
Stockholders' Equity
Common Stock, part value $.001 per share, 75,000,000 shares authorized; 51,758,000 shares issued and outstanding
51,758
Additional paid-in-capital
2,146,765
Other comprehensive income
68,176
Statutory Reserves
130,974
Retained Earnings
105,601
Total stockholders' equity
2,503,274
Total liabilities and stockholders' equity
$
2,734,140
The accompanying notes are an integral part of these unaudited consolidated financial statements
2
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CHINA VOIP & DIGITAL TELECOM INC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2007 AND 2006
UNAUDITED
Three month periods ended
Six month periods ended
June 30,
June 30,
2007
2006
2007
2006
Revenue, net
$
1,267,867
$
503,035
$
2,256,001
737,273
Cost of revenue
1,019,038
436,016
1,789,462
484,995
Gross profit
248,829
67,019
466,539
252,278
Operating Expenses
Selling, general and administrative
94,640
37,442
174,321
64,918
Depreciation and amortization
30,262
5,380
44,721
11,011
Total operating expenses
124,902
42,822
219,042
75,929
Income from operations
123,927
24,197
247,497
176,349
Other income (expenses)
Interest income
162
197
3,186
271
Interest expenses
-
(1,003)
-
(1,003)
Subsidy income
3,988
543
11,507
18,123
Other expenses
(20)
(101)
(84)
(107)
Total other income (expenses)
4,130
(364)
14,609
17,284
Net income
128,057
23,833
262,106
193,633
Other comprehensive gain
Foreign currency translation gain
6,391
4,974
13,873
9,356
Net comprehensive income
$
134,448
$
28,807
$
275,979
$
202,989
EARNING PER COMMON SHARE - BASIC AND DILUTED
$
0.00
$
0.00
$
0.01
0.01
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED
51,758,000
40,000,000
51,758,000
40,000,000
The accompanying notes are an integral part of these unaudited consolidated financial statements
3
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CHINA VOIP & DIGITAL TELECOM, INC AND SUBSIDIARY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2007 AND 2006
UNAUDITED
2007
2006
Cash flows from operating activities:
Net income
$
262,106
$
193,633
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization
44,721
11,011
Reserve for inventory obsolesce
-
-
Provision on accounts receivable
-
Issuance of shares for services
-
-
Changes in operating assets and liabilities:
Accounts receivable
(308,644)
(77,133)
Inventories
(56,978)
(134,927)
Advances to suppliers
(401,777)
(11,592)
Prepaid expenses and other assets
172,093
(24,467)
Accounts payable
-
180
Deferred revenue
-
26,814
Accrued expenses and other current liabilities
69,538
(119,695)
Total Adjustments
(481,047)
(329,809)
Net cash used in operating activities
(218,941)
(136,176)
Cash flows from investing activities:
Purchase of property and equipment
(555,982)
(265,329)
Net cash used in operating activities
(555,982)
(265,329)
Cash flows from financing activities
Proceeds on short term loan
-
125,069
Effect of Foreign currency translation
11,358
9,356
Net decrease in cash and cash equivalents
(763,565)
(267,080)
Cash and cash equivalents, beginning balance
1,487,816
492,089
Cash and cash equivalents, ending balance
$
724,251
$
225,009
SUPPLEMENTARY DISCLOSURE:
Interest paid
$
-
$
1,003
Income tax paid
$
-
$
-
The accompanying notes are an integral part of these unaudited consolidated financial statements
4
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CHINA VOIP & DIGITAL TELECOM INC AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the three month and six month periods ended June 30, 2007 and 2006
(Unaudited)
NOTE 1
GENERAL
China VOIP & Digital Telecom Inc. (“the Company” or “We”), formerly, Crawford Lake Mining, Inc. acquired on August 17, 2006, all of the outstanding capital stock of Jinan YinQuan Technology Co. Ltd. (“Jinan YinQuan”) in exchange for the issuance of 40,000,000 shares of our common stock to the Jinan Shareholders and $200,000. Such shares are restricted in accordance with Rule 144 of the 1933 Securities Act. In addition, as further consideration for the acquisition, Apollo Corporation, the principal shareholder of the Company, agreed to cancel 11,750,000 post-split shares of its outstanding common stock. Based upon same, Jinan YinQuan became our wholly-owned subsidiary.
Jinan YinQuan was established in JiNan in the People’s Republic of China (“the PRC”) in 2001. The exchange of shares with Jinan YinQuan has been accounted for as a reverse acquisition under the purchase method of accounting since the stockholders of the Jinan YinQuan obtained control of the consolidated entity. Accordingly, the merger of the two companies has been recorded as a recapitalization of Jinan YinQuan, with Jinan YinQuan being treated as the continuing entity. The historical financial statements presented are those of Jinan YinQuan. The continuing company has retained December 31 as its fiscal year end. The financial statements of the legal acquirer are not significant; therefore, no pro forma financial information is submitted.
The Company’s principal activities are developing and sales of computer software and hardware, digital video pictures system; developing and sales of computer network and network audio devices, parts, low value consumables and etc (exclusive of the business not obtained the license). Currently, the Company is focused on the Voice Over Internet Phone (“VOIP”) technology related business.
N OTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information
The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for the presentation of interim financial information, but do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2006. Operating results for the three month and six month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007.
Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Our functional currency is the Chinese Renminbi; however the accompanying financial statements have been translated and presented in United States Dollars ($).
5
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Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Risks and Uncertainties
The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.
Inventories
Inventories are valued at the lower of cost (determined on a weighted average basis) or market. The Management compares the cost of inventories with the market value and allowance is made for writing down the inventories to their market value, if lower. As of June 30, 2007, the reserve for obsolenscence was $20,142.
Revenue Recognition
The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.
The Company recognizes revenue from telecommunications as services are provided. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue.
Earnings Per Share (EPS)
Earnings per share is calculated in accordance with the Statement of financial accounting standards No. 128 (SFAS No. 128), “Earnings per share”. SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per share for all periods presented has been restated to reflect the adoption of SFAS No. 128. Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted EPS is not presented as the Company has no potential dilutive shares outstanding.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company is approved as hi-tech software company, the company is completely exempt of income tax for the first 2 years up to December 2007 and is 50% exempt of income tax for the next 3 years pursuant to State Tax notice no. [2003] 82.
6
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Segment Reporting
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related Information" requires use of the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. As per SFAS 131, the company operates in two segments based on nature of products and services: Telecommunocations & Sale of equipments
Recently Issued Accounting Standards
In September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on financial statements.
In September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)’ This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:
A brief description of the provisions of this Statement
l
The date that adoption is required
l
The date the employer plans to adopt the recognition provisions of this Statement, if earlier.
l
The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management is currently evaluating the effect of this pronouncement on financial statements.
In February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” The statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The company is analyzing the potential accounting treatment.
Foreign Currency Translation
The Company uses the United States dollar ("U.S. dollars") for financial reporting purposes. The Company maintains books and records in their functional currency, being the primary currency of the economic environment in which the operations are conducted. In general, the Company translates the assets and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting period. Gain or loss on foreign currency transactions are reflected on the income statement. Gain or loss on financial statement translation from foreign currency are recorded as a separate component in the equity section of the balance sheet, as component of comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive Income” as a component of shareholders’ equity
As of June 30, 2007, the accounts of Jinan Yinquan were maintained and expressed in the Chinese Yuan Renminbi (CNY). The consolidated financial statements of the Company were translated into United States Dollars (USD) in accordance with Statement of Financial Accounts Standards ("SFAS") No. 52, "Foreign Currency Translation," with the CNY as the functional currency. According to the Statement, all assets and liabilities were translated at the exchange rate on the balance sheet date, stockholder's equity are translated at the historical rates and statement of operations items are translated at the weighted average exchange rate for the year. For the six months ended June 30, 2007 and 2006, the foreign currency translation gain is $13,873 and $9,356 respectively. The accumulated comprehensive foreign currency translation gain amounted to $68,176 as on June 30, 2007.
7
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NOTE 3 PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of China VOIP & Digital Telecom (the “Company”) and its 100% wholly-owned subsidiary Jinan Yinquan Technology Co. Ltd. (“Jinan YinQuan”). All significant inter-company accounts and transactions have been eliminated in consolidation.
NOTE 4 CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC's economy. The Company's business may be influenced by change s in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
For the six months ended June 30, 2007, one customer provided 11% of the net revenues and one supplier provided 80% of the cost of sales. The balance receivable as of June 30, 2007 from this customer was $288,532. The balance advanced to the supplier as of June 30, 2007 was $153,469.
For the six months ended June 30, 2006, one customer provided 55% of the net revenues and one supplier provided 80% of the cost of sales. The balance receivable as of June 30, 2006 from this customer was $50,028. The balance payable to the supplier as of June 30, 2006 was $0.
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and cash equivalents as the same is not covered by insurance.
NOTE 5 ADVANCES TO SUPPLIERS
The Company made prepayments to suppliers to purchase inventory, equipment or services. This amount represents the advances paid by the Company to suppliers of $420,819 at June 30, 2007.
8
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NOTE 6 OTHER CURRENT ASSETS
As of June 30, 2007, the other current assets comprise of the following:
Loans receivable (unsecured, non-interest bearing and payable on demand)
20,715
Advances to Staff
43,414
Total
64,129
NOTE 7 PROPERTIES AND EOUIPMENT
The balances of Company property and equipment as of June 30, 2007 are summarized as follows:
Electronic Equipment
598,197
Vehicles
86,011
Office Equipment
9,563
Construction in progress
419,740
1,113,511
Less: Accumulated depreciation
(59,315)
Property and equipment, net
$
1,054,196
The depreciation expense for the six months ended June 30, 2007 and 2006 was $35,652 and $2,273 respectively. The depreciation expense for the three months ended June 30, 2007 and 2006 was $25,728 and $1,011 respectively.
9
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NOTE 8 INTANGIBLE ASSET
Intangible asset comprised of a software acquired from third parties. This set of software is used for the core technology of the Company’s VOIP business. It is amortized over 5 years.
2007
Original cost
$
91,937
Less: amortization
(76,614)
Intangible asset, net
$
15,323
Amortization for the next 5 years is as follows :-
2007
$
9,069
2008
6,254
$
15,323
The amortization expense for the six months ended June 30, 2007 and 2006 was $9,069 and $8,738 respectively. The amortization expense for the three month periods ended June 30, 2007 and 2006 was $4,534 and $4,369 respectively.
NOTE 9 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of June 30, 2007 are summarized as follows:
2007
Accrued audit fee
$
18,250
Accrued staff welfare
10,157
Security deposits
41,949
Tax payables
137,976
Other
9,250
Total
$
217,582
10
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NOTE 10 DUE TO RELATED PARTY
Due to related party of $10,000 as of June 30, 2007 represents payable to former beneficial owner of Crawford Lake Mining Inc. This payable is unsecured, non interest bearing and payable on demand.
NOTE 11 COMMITMENTS
a) Operating Leases
The Company leases its offices and facilities under long-term, non-cancelable lease agreements expiring at various dates through June 30, 2007. The non-cancelable operating lease agreements provide that the Company pays certain operating expenses applicable to the leased premises according to the Chinese Law. The Company rent the offices on month-to-month basis started from July 2007.
NOTE 12 SEGMENT REPORTING
The Company has two reportable segments consisting of (1) Equipment Sales and (2) Telecommunications minutes. The Company evaluates performance based on sales, gross profit margins and operating profit before income taxes. Unallocated assets and loss from continuing operations are primarily related to general corporate expenses.
The following is information for the Company’s reportable segments for the six months ended June 30, 2007 and 2006:
2007
Telecommunication
Equipment
Corporate
Total
Revenue
2,012,748
243,253
2,256,001
Gross margin
444,310
22,229
466,539
Net Income before taxes
286,252
14,321
(38,467)
262,106
Identifiable Assets
2,445,608
288,532
2,734,140
Depreciation and amortization
44,721
44,721
capital expenditure
555,982
555,982
2006
Telecommunication
Equipment
Corporate
Total
Revenue
324,761
407,512
732,273
Gross margin
220,358
31,920
252,278
Net Income before taxes
169,133
24,500
193,633
Identifiable Assets
1,273,583
184,239
1,457,822
Depreciation and amortization
11,011
11,011
capital expenditure
265,329
265,329
11
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NOTE 13 STATUTORY RESERVES
As stipulated by the Company Law of the People's Republic of China (PRC), net income after taxation can only be distributed as dividends after appropriation has been made for the following:
1.
Making up cumulative prior years' losses, if any;
2.
Allocations to the "Statutory surplus reserve" of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital;
3.
Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company's "Statutory common welfare fund", which is established for the purpose of providing employee facilities and other collective benefits to the Company's employees; and
4.
Allocations to the discretionary surplus reserve, if approved in the shareholders' general meeting.
In accordance with the Chinese Company Law, the company has allocated 10% of its net income to surplus as of June 30, 2007. The amount included in the statutory reserves as of June 30, 2007 amounted to $65,487.
The Company established a reserve for the annual contribution of 10% of net income to the common welfare fund as of June 30, 2007. The amount included in the statutory reserves as of June 30, 2007 amounted to $65,487.
NOTE 14 SUBSEQUENT EVENT
On July16, 2007, the Registrant signed a term sheet with Downshire Capital Inc. to raise $3 million fund by issuance of 3.2 million shares of common stock of the Registrant to Downshire Capital Inc. or its assigned parties.
Pursuant to the term sheet, on July 18, 2007, the Company issued 1.2 million shares to Downshire Capital Inc. and its assigned parties as first installment. The remainder 2 million shares will be issued to Downshire Capital Inc. and its assigned parties after $3 million USD received by August 15, 2007. According to the term sheet, if Downshire Capital Inc. is not able to fund the Company by August 15, 2007, Downshire Capital and its designed investors need to return the 1.2 million shares and the Registrant will cancel it accordingly.
The transaction has not completed yet till date.
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS
This quarterly report contains forward-looking statements that involve risks and uncertainties. We use words such as anticipate, believe, plan, expect, future, intend and similar expressions to identify such forward-looking statements. You should not place too much reliance on these forward-looking statements. Our actual results are likely to differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described in this Risk Factors section and elsewhere in this annual report.
Plan of Operation
We were originally incorporated in Nevada on October 18, 2004 as a development stage company named “Crawford Lake Mining, Inc.” in the business of mineral exploration. On August 17, 2006, we entered in an agreement with Jinan Yinquan Technology Co., Ltd., a Chinese registered company. Upon the effectiveness of the Acquisition, the Company succeeded to the business of Jinan Yinquan, which will be continued as its sole line of business. Accordingly, the Company has changed its name to China VoIP & Digital Telecom Inc. and has also changed its symbol to CVDT.
During the next twelve months, we expect to take the following steps in connection with the development of our business and the implementation of our plan of operations:
l
We intend to continue with our marketing strategies to market our NPSoft Switch System in the People's Republic of China. We currently offer our products to 17 cities within the Shandong Province, 3 cities within Zhejiang Province and 1 city in Anhui Province. Furthermore, our NP Soft Switch system is being tested in 2 other markets.
l
Along with the continued marketing activities of our current products and services, we are also developing other telecommunication technologies in order to complement our VOIP product offering.
l
During the next twelve months, the Company expects to roll out new technologies and also expand into new markets within the People's Republic of China.
l
During the next twelve months, the Company is planning to raise additional US$2-5 million cash to expand our business into other cities of China. The capital will be used to some or all of the following activities: 1) acquisition of other companies running VoIP business in other provinces of China; 2) purchase of new equipment to satisfy increasing region and customer requirements; 3) marketing and general administrative expenses for new launched regions of China. We may raise such capital through issuing our common stocks or warrants.
Our aggressive expansion plan will be replied on such capital support. We can not assure the successful result of fund raising. As such, we may not execute our initial business strategy or plan as expected, and furthermore, our competitors may stand in a better position than us, which results in an adverse effect on our business, although we believe that currently, even without such funds, we can still run a healthy business within our already occupied markets.
Critical Accounting Policies
In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Senior management has discussed the development and selection of these critical accounting policies and their disclosure in this Report with the Audit Committee of our Board of Directors. We believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments: revenue recognition; allowance for doubtful accounts; income taxes; stock-based compensation; asset impairment.
13
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Revenue Recognition
In accordance with generally accepted accounting principles ("GAAP") in the United States, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collection of the resulting receivable is reasonably assured. Noted below are brief descriptions of the product or service revenues that the Company recognizes in the financial statements contained herein.
Sale of goods
Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.
Rendering of services
When the provision of services is started and completed within the same accounting year, revenue is recognized at the time of completion of the services.
When the provision of services is started and completed in different accounting year, revenue is recognized using the percentage of completion method.
Amounts collected prior to satisfying the above revenue recognition criteria are included in deferred revenue.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts to reduce amounts to their estimated realizable value. A considerable amount of judgment is required when we assess the realization of accounts receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts could be required. We initially record a provision for doubtful accounts based on our historical experience, and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, we consider: (i) the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable; (iv) our historical provision for doubtful accounts; (v) the credit worthiness of the customer; and (vi) the economic conditions of the customer's industry as well as general economic conditions, among other factors.
Income taxes
We account for income taxes in accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. SFAS 109 prescribes the use of the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance, or increase or decrease this allowance in a period, we increase or decrease our income tax provision in our statement of operations. If any of our estimates of our prior period taxable income or loss prove to be incorrect, material differences could impact the amount and timing of income tax benefits or payments for any period.
The Company operates in several countries. As a result, we are subject to numerous domestic and foreign tax jurisdictions and tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases: income before taxes, deemed profits and withholding taxes based on revenue. The calculation of our tax liabilities involves consideration of uncertainties in the application and interpretation of complex tax regulations in a multitude of jurisdictions across our global operations.
14
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We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. The tax liabilities are reflected net of realized tax loss carry forwards. We adjust these reserves upon specific events; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the contingency has been resolved and the liabilities are no longer necessary.
Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of income taxes that we provide during any given year.
Asset Impairment
We periodically evaluate the carrying value of other long-lived assets, including, but not limited to, property and equipment and intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Significant estimates are utilized to calculate expected future cash flows utilized in impairment analyses. We also utilize judgment to determine other factors within fair value analyses, including the applicable discount rate.
Results of Operations for the Three Month Period Ended June 30, 2007
During the three months ended June 30, 2007, we earned $1,267,867 in revenues as compared to $503,035 during the same period ended in 2006, an increase of $764,832 or 152%. The sharp increase of revenue is mainly contributed to more acceptances of our products and services. In addition, with the fund support, we are able to expand to more geographic areas.
Cost of sales increased to $1,019,038 during the three months ended June 30, 2007 from $436,016 during the period ended June 30, 2006, an increase of $583,022 or 134%. The increase is mainly due to the increase of actual dialing time for all customers.
The gross profit increase from $67,019 during the three months ended June 30, 2006 to $248,829 in the same period of 2007. The increase is due to the increase of revenue. However, the gross margin increased from 13% to 20% during the three months ended June 30, 2006. It is mainly due to the reason that the Company recorded revenue of $380,187 in the three months ended June 30, 2006 with gross margin of 5%.
Selling, general and administrative expenses were $94,640 during the three month period ended June 30, 2007 as compared to $37,442 for the same period ended in 2006, an increase of $57,198 or 152%. This increase is primarily due to an increase in marketing activities to further promote the Company’s products and services. Additionally, $30,295 expenses related to a public company are incurred during the 3 months ended June 30, 2007.
15
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Depreciation and amortization expenses increased by 462% to $30,262 during the three months ended June 30, 2007 as compared to the same period in 2006. The incrase is mainly attributed to the increase of equipments used for current business and future expansion purposes.
Net gain recorded $128,057 during the three months ended June 30, 2007, representing a 437% or $104,224 increase as compared to $23,833 during the same period of 2006. The increase of net profit is mainly due to the increase of gross profit netting-off the increase of expenses recorded in the three months ended June 30, 2007.
Net comprehensive gain recorded $164,505 during the three months ended June 30, 2007, which is $135,698 or 471% increase as compared to $28,807 during the same period of 2006. The net comprehensive gain during the three months ended June 30, 2007 included $36,448 of foreign currency translation gain.
Results of Operations for the Six Month Period Ended June 30, 2007
During the six months ended June 30, 2007, we recorded revenue of $2,256,001 as compared to $737,273 during the same period ended in 2006, an increase of $1,518,728 or 206%. The sharp increase of revenue is mainly contributed to more acceptances of our products and services. In addition, with the fund support, we are able to expand to more geographic areas.
Cost of sales increased to $1,789,462 during the six months ended June 30, 2007 from $484,995 during the period ended June 30, 2006, an increase of $1,304,467 or 269%. The increase is mainly due to the increase of actual dialing time for all customers which are general in line with the increase of revenue.
The gross profit increase from $252,278 during the six months ended June 30, 2006 to $466,539 in the same period of 2007. The increase is due to the increase of revenue. However, the gross margin dropped from 34% to 21% during the six months ended June 30, 2007. It is mainly due to one-off VoIP service, which was related to software service, had relatively high gross margin compared to phone call services.
Selling, general and administrative expenses were $174,321 during the six month period ended June 30, 2007 as compared to $64,918 for the same period ended in 2006, an increase of $109,403 or 169% This increase is primarily due to an increase in marketing activities to further promote the Company’s products and services. Additionally, $38,467 expenses related to a public company are incurred during the 6 months ended June 30, 2007.
Depreciation and amortization expenses increased by 306% or $33,710 to $44,721 during the six months ended June 30, 2007 as compared to the same period in 2006. The incrase is mainly attributed to the increase of equipments used for current business and future expansion purposes.
Net gain recorded $262,106 during the six months ended June 30, 2007, representing a 35% or $68,473 increase as compared to $193,633 during the same period of 2006. The increase of net profit is mainly due to the increase of gross profit netting-off the increase of expenses recorded in the six months ended June 30, 2007.
Net comprehensive gain recorded $306,036 during the six months ended June 30, 2007, which is $103,047 or 51% increase as compared to $202,989 during the same period of 2006. The net comprehensive gain during the six months ended June 30, 2007 included $43,930 of foreign currency translation gain.
16
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Liquidity and Capital Resources
Cash used in operating activities were $218,941 during the six months ended June 30, 2007 as compared to cash used in operating activities of $136,176 for the same period ended in 2006. Cash used in operating activities mainly consisted of net income of $262,106, decrease of prepaid and other current assets of $172,093, depreciation and amortization of $44,721, increase of accounts payable and other current liabilities of $69,538, partially offset by an increase in accounts receivable, an increase in inventories, an increase in advances to suppliers of $767,399. Cash used in operating activities for the six months ended June 30, 2006 mainly resulted from net income of $193,633, depreciation and amortization of $11,011, increase of accounts payable and deferred revenue of $26,994 partially offset by increases in accounts receivable, inventories, advance to suppliers and other current assets of $248,119, and decrease of other current liabilities of $119,695.
Cash flows used in investing activities were $555,982 for the six month period ended June 30, 2007 as compared to $265,369 for the same period ended in 2006. Cash used in investing activities consisted of purchase of property and equipment.
Cash flows provided by financing activities were $0 for the six month period ended June 30, 2007 as compared to $125,069 for the same period ended in 2006. Cash provided by financing activities represented the proceeds on short term loans.
Foreign currency tranlation were $11,358 for the six month period ended June 30, 2007 as compared to $9,356 for the same period ended in 2006.
ITEM 3: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
Our management evaluated the effectiveness of our disclosure controls and procedures as of the end of our fiscal quarter on June 30, 2007. This evaluation was conducted by our chief executive officer and our principal accounting officer, Mr. Li Kunwu.
Disclosure controls are controls and other procedures that are designed to ensure that information that we are required to disclose in the reports we file pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported.
16
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Limitations on the Effective of Controls
Our management does not expect that our disclosure controls or our internal controls over financial reporting will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, but no absolute, assurance that the objectives of a control system are met.
Further, any control system reflects limitations on resources, and the benefits of a control system must be considered relative to its costs. These limitations also include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of a control. A design of a control system is also based upon certain assumptions about potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Conclusions
Based upon his evaluation of our controls, our chief executive officer and principal accounting officer has concluded that, subject to the limitations noted above, the disclosure controls are effective providing reasonable assurance that material information relating to us is made known to management on a timely basis during the period when our reports are being prepared. There were no changes in our internal controls that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect our internal controls.
17
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PART II- OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any pending legal proceeding. Management is not aware of any threatened litigation, claims or assessments.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Report on Form 8-K
31.1 Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
18
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATED: August 12, 2007
China VoIP & Digital Telecom Inc.
------------------------------
Li Kunwu, President
19
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CERTIFICATION
SECTION 302 CERTIFICATION OF OUR CHIEF EXECUTIVE OFFICER
I, Li Kunwu, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of China VoIP & Digital Telecom Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ Li Kunwu
---------------------------
Li Kunwu
Chief Executive Officer, Chief Financial Officer
August 14, 2007
CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-QSB ("Form 10-QSB") of China VoIP & Digital Telecom Inc. (the "Company") for the three month period ended June 30, 2007 as filed with
the Securities and Exchange Commission on the date hereof, I, Li Kunwu, Chief Executive
Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 10-QSB fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Form 10-QSB fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Li Kunwu
---------------------------
Li Kunwu
Chief Executive Officer, Chief Financial Officer
August 14, 2007
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
¢ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___ to _______
Commission file number 333-131017
CHINA VOIP & DIGITAL TELECOM INC..
(Exact name of small business issuer as specified in its charter)
Nevada 98-0509797
(State or other jurisdiction of incorporation or organization) (IRS Employee Identification No.)
No.786 Xinluo Street, High-tech Industrial Development Zone, Jinan, China
(Address of principal executive offices)
+86 531 8702 7114
(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes[ ] No[ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:
Common Stock: par value of $0.001; 51,758,000 shares issued and outstanding on July 14, 2007.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
--------------------------------------------------------------------------------
CHINA VOIP & DIGITAL TELECOM INC.
FORM 10-QSB
INDEX
PAGE
Important Notice
PART I.
FINANCIAL INFORMATION
1
Item 1.
Unaudited Financial Statements and Notes – Six Months Ended June 30, 2007
1
Item 2.
Management’s Discussion and Analysis or Plan of Operation
13
Item 3.
Controls and Procedures
16
PART II.
OTHER INFORMATION
18
Item 1.
Legal Proceedings
18
Item 2.
Changes in Securities and Use of Proceeds
18
Item 3.
Default Upon Senior Securities
18
Item 4.
Submission of Matters to a Vote of Security Holders
18
Item 5.
Other Information
18
Item 6.
Exhibits
18
Signatures
19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
1
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CHINA VOIP & DIGITAL TELECOM, INC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
UNAUDITED
June 30, 2007
Assets
Current assets
Cash and cash equivalents
$
724,251
Accounts receivable, net
312,903
Inventories, net
142,519
Advance to suppliers
420,819
Other Current Assets
64,129
Total current assets
1,664,621
Property & equipment, net
1,054,196
Intangible assets
15,323
Total assets
$
2,734,140
Liabilities & Stockholders' Equity
Current liabilities
Accounts payable
$
3,284
Accrued expenses and other current liabilities
217,582
Due to related parties
10,000
Total current liabilities
230,866
Stockholders' Equity
Common Stock, part value $.001 per share, 75,000,000 shares authorized; 51,758,000 shares issued and outstanding
51,758
Additional paid-in-capital
2,146,765
Other comprehensive income
68,176
Statutory Reserves
130,974
Retained Earnings
105,601
Total stockholders' equity
2,503,274
Total liabilities and stockholders' equity
$
2,734,140
The accompanying notes are an integral part of these unaudited consolidated financial statements
2
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CHINA VOIP & DIGITAL TELECOM INC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2007 AND 2006
UNAUDITED
Three month periods ended
Six month periods ended
June 30,
June 30,
2007
2006
2007
2006
Revenue, net
$
1,267,867
$
503,035
$
2,256,001
737,273
Cost of revenue
1,019,038
436,016
1,789,462
484,995
Gross profit
248,829
67,019
466,539
252,278
Operating Expenses
Selling, general and administrative
94,640
37,442
174,321
64,918
Depreciation and amortization
30,262
5,380
44,721
11,011
Total operating expenses
124,902
42,822
219,042
75,929
Income from operations
123,927
24,197
247,497
176,349
Other income (expenses)
Interest income
162
197
3,186
271
Interest expenses
-
(1,003)
-
(1,003)
Subsidy income
3,988
543
11,507
18,123
Other expenses
(20)
(101)
(84)
(107)
Total other income (expenses)
4,130
(364)
14,609
17,284
Net income
128,057
23,833
262,106
193,633
Other comprehensive gain
Foreign currency translation gain
6,391
4,974
13,873
9,356
Net comprehensive income
$
134,448
$
28,807
$
275,979
$
202,989
EARNING PER COMMON SHARE - BASIC AND DILUTED
$
0.00
$
0.00
$
0.01
0.01
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED
51,758,000
40,000,000
51,758,000
40,000,000
The accompanying notes are an integral part of these unaudited consolidated financial statements
3
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CHINA VOIP & DIGITAL TELECOM, INC AND SUBSIDIARY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2007 AND 2006
UNAUDITED
2007
2006
Cash flows from operating activities:
Net income
$
262,106
$
193,633
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization
44,721
11,011
Reserve for inventory obsolesce
-
-
Provision on accounts receivable
-
Issuance of shares for services
-
-
Changes in operating assets and liabilities:
Accounts receivable
(308,644)
(77,133)
Inventories
(56,978)
(134,927)
Advances to suppliers
(401,777)
(11,592)
Prepaid expenses and other assets
172,093
(24,467)
Accounts payable
-
180
Deferred revenue
-
26,814
Accrued expenses and other current liabilities
69,538
(119,695)
Total Adjustments
(481,047)
(329,809)
Net cash used in operating activities
(218,941)
(136,176)
Cash flows from investing activities:
Purchase of property and equipment
(555,982)
(265,329)
Net cash used in operating activities
(555,982)
(265,329)
Cash flows from financing activities
Proceeds on short term loan
-
125,069
Effect of Foreign currency translation
11,358
9,356
Net decrease in cash and cash equivalents
(763,565)
(267,080)
Cash and cash equivalents, beginning balance
1,487,816
492,089
Cash and cash equivalents, ending balance
$
724,251
$
225,009
SUPPLEMENTARY DISCLOSURE:
Interest paid
$
-
$
1,003
Income tax paid
$
-
$
-
The accompanying notes are an integral part of these unaudited consolidated financial statements
4
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CHINA VOIP & DIGITAL TELECOM INC AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the three month and six month periods ended June 30, 2007 and 2006
(Unaudited)
NOTE 1
GENERAL
China VOIP & Digital Telecom Inc. (“the Company” or “We”), formerly, Crawford Lake Mining, Inc. acquired on August 17, 2006, all of the outstanding capital stock of Jinan YinQuan Technology Co. Ltd. (“Jinan YinQuan”) in exchange for the issuance of 40,000,000 shares of our common stock to the Jinan Shareholders and $200,000. Such shares are restricted in accordance with Rule 144 of the 1933 Securities Act. In addition, as further consideration for the acquisition, Apollo Corporation, the principal shareholder of the Company, agreed to cancel 11,750,000 post-split shares of its outstanding common stock. Based upon same, Jinan YinQuan became our wholly-owned subsidiary.
Jinan YinQuan was established in JiNan in the People’s Republic of China (“the PRC”) in 2001. The exchange of shares with Jinan YinQuan has been accounted for as a reverse acquisition under the purchase method of accounting since the stockholders of the Jinan YinQuan obtained control of the consolidated entity. Accordingly, the merger of the two companies has been recorded as a recapitalization of Jinan YinQuan, with Jinan YinQuan being treated as the continuing entity. The historical financial statements presented are those of Jinan YinQuan. The continuing company has retained December 31 as its fiscal year end. The financial statements of the legal acquirer are not significant; therefore, no pro forma financial information is submitted.
The Company’s principal activities are developing and sales of computer software and hardware, digital video pictures system; developing and sales of computer network and network audio devices, parts, low value consumables and etc (exclusive of the business not obtained the license). Currently, the Company is focused on the Voice Over Internet Phone (“VOIP”) technology related business.
N OTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information
The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for the presentation of interim financial information, but do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2006. Operating results for the three month and six month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007.
Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Our functional currency is the Chinese Renminbi; however the accompanying financial statements have been translated and presented in United States Dollars ($).
5
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Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Risks and Uncertainties
The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.
Inventories
Inventories are valued at the lower of cost (determined on a weighted average basis) or market. The Management compares the cost of inventories with the market value and allowance is made for writing down the inventories to their market value, if lower. As of June 30, 2007, the reserve for obsolenscence was $20,142.
Revenue Recognition
The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.
The Company recognizes revenue from telecommunications as services are provided. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue.
Earnings Per Share (EPS)
Earnings per share is calculated in accordance with the Statement of financial accounting standards No. 128 (SFAS No. 128), “Earnings per share”. SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per share for all periods presented has been restated to reflect the adoption of SFAS No. 128. Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted EPS is not presented as the Company has no potential dilutive shares outstanding.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company is approved as hi-tech software company, the company is completely exempt of income tax for the first 2 years up to December 2007 and is 50% exempt of income tax for the next 3 years pursuant to State Tax notice no. [2003] 82.
6
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Segment Reporting
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related Information" requires use of the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. As per SFAS 131, the company operates in two segments based on nature of products and services: Telecommunocations & Sale of equipments
Recently Issued Accounting Standards
In September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on financial statements.
In September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)’ This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:
A brief description of the provisions of this Statement
l
The date that adoption is required
l
The date the employer plans to adopt the recognition provisions of this Statement, if earlier.
l
The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management is currently evaluating the effect of this pronouncement on financial statements.
In February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” The statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The company is analyzing the potential accounting treatment.
Foreign Currency Translation
The Company uses the United States dollar ("U.S. dollars") for financial reporting purposes. The Company maintains books and records in their functional currency, being the primary currency of the economic environment in which the operations are conducted. In general, the Company translates the assets and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting period. Gain or loss on foreign currency transactions are reflected on the income statement. Gain or loss on financial statement translation from foreign currency are recorded as a separate component in the equity section of the balance sheet, as component of comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive Income” as a component of shareholders’ equity
As of June 30, 2007, the accounts of Jinan Yinquan were maintained and expressed in the Chinese Yuan Renminbi (CNY). The consolidated financial statements of the Company were translated into United States Dollars (USD) in accordance with Statement of Financial Accounts Standards ("SFAS") No. 52, "Foreign Currency Translation," with the CNY as the functional currency. According to the Statement, all assets and liabilities were translated at the exchange rate on the balance sheet date, stockholder's equity are translated at the historical rates and statement of operations items are translated at the weighted average exchange rate for the year. For the six months ended June 30, 2007 and 2006, the foreign currency translation gain is $13,873 and $9,356 respectively. The accumulated comprehensive foreign currency translation gain amounted to $68,176 as on June 30, 2007.
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NOTE 3 PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of China VOIP & Digital Telecom (the “Company”) and its 100% wholly-owned subsidiary Jinan Yinquan Technology Co. Ltd. (“Jinan YinQuan”). All significant inter-company accounts and transactions have been eliminated in consolidation.
NOTE 4 CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC's economy. The Company's business may be influenced by change s in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
For the six months ended June 30, 2007, one customer provided 11% of the net revenues and one supplier provided 80% of the cost of sales. The balance receivable as of June 30, 2007 from this customer was $288,532. The balance advanced to the supplier as of June 30, 2007 was $153,469.
For the six months ended June 30, 2006, one customer provided 55% of the net revenues and one supplier provided 80% of the cost of sales. The balance receivable as of June 30, 2006 from this customer was $50,028. The balance payable to the supplier as of June 30, 2006 was $0.
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and cash equivalents as the same is not covered by insurance.
NOTE 5 ADVANCES TO SUPPLIERS
The Company made prepayments to suppliers to purchase inventory, equipment or services. This amount represents the advances paid by the Company to suppliers of $420,819 at June 30, 2007.
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NOTE 6 OTHER CURRENT ASSETS
As of June 30, 2007, the other current assets comprise of the following:
Loans receivable (unsecured, non-interest bearing and payable on demand)
20,715
Advances to Staff
43,414
Total
64,129
NOTE 7 PROPERTIES AND EOUIPMENT
The balances of Company property and equipment as of June 30, 2007 are summarized as follows:
Electronic Equipment
598,197
Vehicles
86,011
Office Equipment
9,563
Construction in progress
419,740
1,113,511
Less: Accumulated depreciation
(59,315)
Property and equipment, net
$
1,054,196
The depreciation expense for the six months ended June 30, 2007 and 2006 was $35,652 and $2,273 respectively. The depreciation expense for the three months ended June 30, 2007 and 2006 was $25,728 and $1,011 respectively.
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NOTE 8 INTANGIBLE ASSET
Intangible asset comprised of a software acquired from third parties. This set of software is used for the core technology of the Company’s VOIP business. It is amortized over 5 years.
2007
Original cost
$
91,937
Less: amortization
(76,614)
Intangible asset, net
$
15,323
Amortization for the next 5 years is as follows :-
2007
$
9,069
2008
6,254
$
15,323
The amortization expense for the six months ended June 30, 2007 and 2006 was $9,069 and $8,738 respectively. The amortization expense for the three month periods ended June 30, 2007 and 2006 was $4,534 and $4,369 respectively.
NOTE 9 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of June 30, 2007 are summarized as follows:
2007
Accrued audit fee
$
18,250
Accrued staff welfare
10,157
Security deposits
41,949
Tax payables
137,976
Other
9,250
Total
$
217,582
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NOTE 10 DUE TO RELATED PARTY
Due to related party of $10,000 as of June 30, 2007 represents payable to former beneficial owner of Crawford Lake Mining Inc. This payable is unsecured, non interest bearing and payable on demand.
NOTE 11 COMMITMENTS
a) Operating Leases
The Company leases its offices and facilities under long-term, non-cancelable lease agreements expiring at various dates through June 30, 2007. The non-cancelable operating lease agreements provide that the Company pays certain operating expenses applicable to the leased premises according to the Chinese Law. The Company rent the offices on month-to-month basis started from July 2007.
NOTE 12 SEGMENT REPORTING
The Company has two reportable segments consisting of (1) Equipment Sales and (2) Telecommunications minutes. The Company evaluates performance based on sales, gross profit margins and operating profit before income taxes. Unallocated assets and loss from continuing operations are primarily related to general corporate expenses.
The following is information for the Company’s reportable segments for the six months ended June 30, 2007 and 2006:
2007
Telecommunication
Equipment
Corporate
Total
Revenue
2,012,748
243,253
2,256,001
Gross margin
444,310
22,229
466,539
Net Income before taxes
286,252
14,321
(38,467)
262,106
Identifiable Assets
2,445,608
288,532
2,734,140
Depreciation and amortization
44,721
44,721
capital expenditure
555,982
555,982
2006
Telecommunication
Equipment
Corporate
Total
Revenue
324,761
407,512
732,273
Gross margin
220,358
31,920
252,278
Net Income before taxes
169,133
24,500
193,633
Identifiable Assets
1,273,583
184,239
1,457,822
Depreciation and amortization
11,011
11,011
capital expenditure
265,329
265,329
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NOTE 13 STATUTORY RESERVES
As stipulated by the Company Law of the People's Republic of China (PRC), net income after taxation can only be distributed as dividends after appropriation has been made for the following:
1.
Making up cumulative prior years' losses, if any;
2.
Allocations to the "Statutory surplus reserve" of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital;
3.
Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company's "Statutory common welfare fund", which is established for the purpose of providing employee facilities and other collective benefits to the Company's employees; and
4.
Allocations to the discretionary surplus reserve, if approved in the shareholders' general meeting.
In accordance with the Chinese Company Law, the company has allocated 10% of its net income to surplus as of June 30, 2007. The amount included in the statutory reserves as of June 30, 2007 amounted to $65,487.
The Company established a reserve for the annual contribution of 10% of net income to the common welfare fund as of June 30, 2007. The amount included in the statutory reserves as of June 30, 2007 amounted to $65,487.
NOTE 14 SUBSEQUENT EVENT
On July16, 2007, the Registrant signed a term sheet with Downshire Capital Inc. to raise $3 million fund by issuance of 3.2 million shares of common stock of the Registrant to Downshire Capital Inc. or its assigned parties.
Pursuant to the term sheet, on July 18, 2007, the Company issued 1.2 million shares to Downshire Capital Inc. and its assigned parties as first installment. The remainder 2 million shares will be issued to Downshire Capital Inc. and its assigned parties after $3 million USD received by August 15, 2007. According to the term sheet, if Downshire Capital Inc. is not able to fund the Company by August 15, 2007, Downshire Capital and its designed investors need to return the 1.2 million shares and the Registrant will cancel it accordingly.
The transaction has not completed yet till date.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS
This quarterly report contains forward-looking statements that involve risks and uncertainties. We use words such as anticipate, believe, plan, expect, future, intend and similar expressions to identify such forward-looking statements. You should not place too much reliance on these forward-looking statements. Our actual results are likely to differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described in this Risk Factors section and elsewhere in this annual report.
Plan of Operation
We were originally incorporated in Nevada on October 18, 2004 as a development stage company named “Crawford Lake Mining, Inc.” in the business of mineral exploration. On August 17, 2006, we entered in an agreement with Jinan Yinquan Technology Co., Ltd., a Chinese registered company. Upon the effectiveness of the Acquisition, the Company succeeded to the business of Jinan Yinquan, which will be continued as its sole line of business. Accordingly, the Company has changed its name to China VoIP & Digital Telecom Inc. and has also changed its symbol to CVDT.
During the next twelve months, we expect to take the following steps in connection with the development of our business and the implementation of our plan of operations:
l
We intend to continue with our marketing strategies to market our NPSoft Switch System in the People's Republic of China. We currently offer our products to 17 cities within the Shandong Province, 3 cities within Zhejiang Province and 1 city in Anhui Province. Furthermore, our NP Soft Switch system is being tested in 2 other markets.
l
Along with the continued marketing activities of our current products and services, we are also developing other telecommunication technologies in order to complement our VOIP product offering.
l
During the next twelve months, the Company expects to roll out new technologies and also expand into new markets within the People's Republic of China.
l
During the next twelve months, the Company is planning to raise additional US$2-5 million cash to expand our business into other cities of China. The capital will be used to some or all of the following activities: 1) acquisition of other companies running VoIP business in other provinces of China; 2) purchase of new equipment to satisfy increasing region and customer requirements; 3) marketing and general administrative expenses for new launched regions of China. We may raise such capital through issuing our common stocks or warrants.
Our aggressive expansion plan will be replied on such capital support. We can not assure the successful result of fund raising. As such, we may not execute our initial business strategy or plan as expected, and furthermore, our competitors may stand in a better position than us, which results in an adverse effect on our business, although we believe that currently, even without such funds, we can still run a healthy business within our already occupied markets.
Critical Accounting Policies
In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Senior management has discussed the development and selection of these critical accounting policies and their disclosure in this Report with the Audit Committee of our Board of Directors. We believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments: revenue recognition; allowance for doubtful accounts; income taxes; stock-based compensation; asset impairment.
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Revenue Recognition
In accordance with generally accepted accounting principles ("GAAP") in the United States, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collection of the resulting receivable is reasonably assured. Noted below are brief descriptions of the product or service revenues that the Company recognizes in the financial statements contained herein.
Sale of goods
Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.
Rendering of services
When the provision of services is started and completed within the same accounting year, revenue is recognized at the time of completion of the services.
When the provision of services is started and completed in different accounting year, revenue is recognized using the percentage of completion method.
Amounts collected prior to satisfying the above revenue recognition criteria are included in deferred revenue.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts to reduce amounts to their estimated realizable value. A considerable amount of judgment is required when we assess the realization of accounts receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts could be required. We initially record a provision for doubtful accounts based on our historical experience, and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, we consider: (i) the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable; (iv) our historical provision for doubtful accounts; (v) the credit worthiness of the customer; and (vi) the economic conditions of the customer's industry as well as general economic conditions, among other factors.
Income taxes
We account for income taxes in accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. SFAS 109 prescribes the use of the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance, or increase or decrease this allowance in a period, we increase or decrease our income tax provision in our statement of operations. If any of our estimates of our prior period taxable income or loss prove to be incorrect, material differences could impact the amount and timing of income tax benefits or payments for any period.
The Company operates in several countries. As a result, we are subject to numerous domestic and foreign tax jurisdictions and tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases: income before taxes, deemed profits and withholding taxes based on revenue. The calculation of our tax liabilities involves consideration of uncertainties in the application and interpretation of complex tax regulations in a multitude of jurisdictions across our global operations.
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We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. The tax liabilities are reflected net of realized tax loss carry forwards. We adjust these reserves upon specific events; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the contingency has been resolved and the liabilities are no longer necessary.
Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of income taxes that we provide during any given year.
Asset Impairment
We periodically evaluate the carrying value of other long-lived assets, including, but not limited to, property and equipment and intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Significant estimates are utilized to calculate expected future cash flows utilized in impairment analyses. We also utilize judgment to determine other factors within fair value analyses, including the applicable discount rate.
Results of Operations for the Three Month Period Ended June 30, 2007
During the three months ended June 30, 2007, we earned $1,267,867 in revenues as compared to $503,035 during the same period ended in 2006, an increase of $764,832 or 152%. The sharp increase of revenue is mainly contributed to more acceptances of our products and services. In addition, with the fund support, we are able to expand to more geographic areas.
Cost of sales increased to $1,019,038 during the three months ended June 30, 2007 from $436,016 during the period ended June 30, 2006, an increase of $583,022 or 134%. The increase is mainly due to the increase of actual dialing time for all customers.
The gross profit increase from $67,019 during the three months ended June 30, 2006 to $248,829 in the same period of 2007. The increase is due to the increase of revenue. However, the gross margin increased from 13% to 20% during the three months ended June 30, 2006. It is mainly due to the reason that the Company recorded revenue of $380,187 in the three months ended June 30, 2006 with gross margin of 5%.
Selling, general and administrative expenses were $94,640 during the three month period ended June 30, 2007 as compared to $37,442 for the same period ended in 2006, an increase of $57,198 or 152%. This increase is primarily due to an increase in marketing activities to further promote the Company’s products and services. Additionally, $30,295 expenses related to a public company are incurred during the 3 months ended June 30, 2007.
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Depreciation and amortization expenses increased by 462% to $30,262 during the three months ended June 30, 2007 as compared to the same period in 2006. The incrase is mainly attributed to the increase of equipments used for current business and future expansion purposes.
Net gain recorded $128,057 during the three months ended June 30, 2007, representing a 437% or $104,224 increase as compared to $23,833 during the same period of 2006. The increase of net profit is mainly due to the increase of gross profit netting-off the increase of expenses recorded in the three months ended June 30, 2007.
Net comprehensive gain recorded $164,505 during the three months ended June 30, 2007, which is $135,698 or 471% increase as compared to $28,807 during the same period of 2006. The net comprehensive gain during the three months ended June 30, 2007 included $36,448 of foreign currency translation gain.
Results of Operations for the Six Month Period Ended June 30, 2007
During the six months ended June 30, 2007, we recorded revenue of $2,256,001 as compared to $737,273 during the same period ended in 2006, an increase of $1,518,728 or 206%. The sharp increase of revenue is mainly contributed to more acceptances of our products and services. In addition, with the fund support, we are able to expand to more geographic areas.
Cost of sales increased to $1,789,462 during the six months ended June 30, 2007 from $484,995 during the period ended June 30, 2006, an increase of $1,304,467 or 269%. The increase is mainly due to the increase of actual dialing time for all customers which are general in line with the increase of revenue.
The gross profit increase from $252,278 during the six months ended June 30, 2006 to $466,539 in the same period of 2007. The increase is due to the increase of revenue. However, the gross margin dropped from 34% to 21% during the six months ended June 30, 2007. It is mainly due to one-off VoIP service, which was related to software service, had relatively high gross margin compared to phone call services.
Selling, general and administrative expenses were $174,321 during the six month period ended June 30, 2007 as compared to $64,918 for the same period ended in 2006, an increase of $109,403 or 169% This increase is primarily due to an increase in marketing activities to further promote the Company’s products and services. Additionally, $38,467 expenses related to a public company are incurred during the 6 months ended June 30, 2007.
Depreciation and amortization expenses increased by 306% or $33,710 to $44,721 during the six months ended June 30, 2007 as compared to the same period in 2006. The incrase is mainly attributed to the increase of equipments used for current business and future expansion purposes.
Net gain recorded $262,106 during the six months ended June 30, 2007, representing a 35% or $68,473 increase as compared to $193,633 during the same period of 2006. The increase of net profit is mainly due to the increase of gross profit netting-off the increase of expenses recorded in the six months ended June 30, 2007.
Net comprehensive gain recorded $306,036 during the six months ended June 30, 2007, which is $103,047 or 51% increase as compared to $202,989 during the same period of 2006. The net comprehensive gain during the six months ended June 30, 2007 included $43,930 of foreign currency translation gain.
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Liquidity and Capital Resources
Cash used in operating activities were $218,941 during the six months ended June 30, 2007 as compared to cash used in operating activities of $136,176 for the same period ended in 2006. Cash used in operating activities mainly consisted of net income of $262,106, decrease of prepaid and other current assets of $172,093, depreciation and amortization of $44,721, increase of accounts payable and other current liabilities of $69,538, partially offset by an increase in accounts receivable, an increase in inventories, an increase in advances to suppliers of $767,399. Cash used in operating activities for the six months ended June 30, 2006 mainly resulted from net income of $193,633, depreciation and amortization of $11,011, increase of accounts payable and deferred revenue of $26,994 partially offset by increases in accounts receivable, inventories, advance to suppliers and other current assets of $248,119, and decrease of other current liabilities of $119,695.
Cash flows used in investing activities were $555,982 for the six month period ended June 30, 2007 as compared to $265,369 for the same period ended in 2006. Cash used in investing activities consisted of purchase of property and equipment.
Cash flows provided by financing activities were $0 for the six month period ended June 30, 2007 as compared to $125,069 for the same period ended in 2006. Cash provided by financing activities represented the proceeds on short term loans.
Foreign currency tranlation were $11,358 for the six month period ended June 30, 2007 as compared to $9,356 for the same period ended in 2006.
ITEM 3: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
Our management evaluated the effectiveness of our disclosure controls and procedures as of the end of our fiscal quarter on June 30, 2007. This evaluation was conducted by our chief executive officer and our principal accounting officer, Mr. Li Kunwu.
Disclosure controls are controls and other procedures that are designed to ensure that information that we are required to disclose in the reports we file pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported.
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Limitations on the Effective of Controls
Our management does not expect that our disclosure controls or our internal controls over financial reporting will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, but no absolute, assurance that the objectives of a control system are met.
Further, any control system reflects limitations on resources, and the benefits of a control system must be considered relative to its costs. These limitations also include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of a control. A design of a control system is also based upon certain assumptions about potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Conclusions
Based upon his evaluation of our controls, our chief executive officer and principal accounting officer has concluded that, subject to the limitations noted above, the disclosure controls are effective providing reasonable assurance that material information relating to us is made known to management on a timely basis during the period when our reports are being prepared. There were no changes in our internal controls that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect our internal controls.
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PART II- OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any pending legal proceeding. Management is not aware of any threatened litigation, claims or assessments.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Report on Form 8-K
31.1 Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATED: August 12, 2007
China VoIP & Digital Telecom Inc.
------------------------------
Li Kunwu, President
19
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CERTIFICATION
SECTION 302 CERTIFICATION OF OUR CHIEF EXECUTIVE OFFICER
I, Li Kunwu, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of China VoIP & Digital Telecom Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ Li Kunwu
---------------------------
Li Kunwu
Chief Executive Officer, Chief Financial Officer
August 14, 2007
CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-QSB ("Form 10-QSB") of China VoIP & Digital Telecom Inc. (the "Company") for the three month period ended June 30, 2007 as filed with
the Securities and Exchange Commission on the date hereof, I, Li Kunwu, Chief Executive
Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 10-QSB fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Form 10-QSB fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Li Kunwu
---------------------------
Li Kunwu
Chief Executive Officer, Chief Financial Officer
August 14, 2007
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