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CVDT.OB > SEC Filings for CVDT.OB > Form 10QSB on 14-Nov-2007 All Recent SEC Filings
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Form 10QSB for CHINA VOIP & DIGITAL TELECOM INC.
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14-Nov-2007
Quarterly Report
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$5-7 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 or convertible bonds.
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CHINA VOIP & DIGITAL TELECOM INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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
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CHINA VOIP & DIGITAL TELECOM INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 September 30, 2007
During the three months ended September 30, 2007, we earned $1,899,854 in revenues as compared to $152,329 during the same period ended in 2006, an increase of $1,747,525 or 1147%. 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 $1,175,312 during the three months ended September 30, 2007 from $94,633 during the period ended September 30, 2006, an increase of $1,080,679 or 1142%. The increase is mainly due to the increase of actual dialing time for all customers.
The gross profit increase from $57,696 during the three months ended September 30, 2006 to $724,542 in the same period of 2007. The increase is due to the increase of revenue. The gross margin was 37.9% during the three months ended September 30, 2007, which is comparatively stable as compared to 38.1% during the three months ended September 30, 2006.
Selling, general and administrative expenses were $116,266 during the three month period ended September 30, 2007 as compared to $68,922 for the same period ended in 2006, an increase of $47,344 or 69%. This increase is primarily due to an increase in marketing activities to further promote the Company's products and services. Additionally, $25,290 expenses related to a public company are incurred during the 3 months ended September 30, 2007.
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CHINA VOIP & DIGITAL TELECOM INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Depreciation and amortization expenses increased by 623% to $42,308 during the three months ended September 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 $592,772 during the three months ended September 30, 2007, representing a $611,298 increase as compared to $(18,526) loss during the same period of 2006. The increase of net profit is mainly due to the siginificant increase of gross profit netting-off the slight increase of expenses recorded in the three months ended September 30, 2007.
Net comprehensive gain recorded $669,258 during the three months ended September 30, 2007, which is $676,059 increase as compared to $(6,801) loss during the same period of 2006. The net comprehensive gain during the three months ended September 30, 2007 included $76,486 of foreign currency translation gain.
Results of Operations for the Nine Month Period Ended September 30, 2007
During the nine months ended September 30, 2007, we recorded revenue of $4,155,855 as compared to $889,602 during the same period ended in 2006, an increase of $3,266,253 or 367%. 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 $2,964,774 during the nine months ended September 30, 2007 from $579,628 during the period ended September 30, 2006, an increase of $2,385,146 or 411%. 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 $309,974 during the nine months ended September 30, 2006 to $1,191,081 in the same period of 2007. The increase is due to the increase of revenue. However, the gross margin dropped from 35% to 29% during the nine months ended September 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 $290,587 during the nine month period ended September 30, 2007 as compared to $133,840 for the same period ended in 2006, an increase of $156,747 or 117%. This increase is primarily due to an increase in marketing activities to further promote the Company's products and services. Additionally, $63,757 expenses related to a public company are incurred during the 9 months ended September 30, 2007.
Depreciation and amortization expenses increased by 416% or $70,170 to $87,029 during the nine months ended September 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 $854,878 during the nine months ended September 30, 2007, representing a 388% or $679,773 increase as compared to $175,105 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 nine months ended September 30, 2007.
Net comprehensive gain recorded $945,237 during the nine months ended September 30, 2007, which is $749,015 or 382% increase as compared to $196,186 during the same period of 2006. The net comprehensive gain during the nine months ended September 30, 2007 included $90,359 of foreign currency translation gain.
Liquidity and Capital Resources
Cash provided by operating activities were $27,849 during the nine months ended September 30, 2007 as compared to cash provided in operating activities of $65,602 for the same period in 2006. Cash provided in operating activities mainly consisted of net income of $854,878, depreciation and amortization of $87,029, and increase of accounts payable and other current liabilities of $185,378, partially offset by an increase in accounts receivable of $318,854, an increase in inventories of $107,352, an increase in advances to suppliers of $659,300 and increase of other current assets of $13,930. Cash provided by operating activities for the nine months ended September 30, 2006 mainly resulted from net income of $175,105, depreciation and amortization of $16,859, increase of accounts payable and deferred revenue of $99,132, partially offset by increases in accounts receivable, inventories, advance to suppliers and other current assets totaling amount of $204,693, and decrease of other current liabilities of $20,801.
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CHINA VOIP & DIGITAL TELECOM INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Cash flows used in investing activities were $985,580 for the nine month period ended September 30, 2007 as compared to $360,132 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 $260,561 for the nine month period ended September 30, 2007 as compared to $126,443 for the same period ended in 2006. Cash provided by financing activities represented the proceeds on short term loans.
Foreign currency tranlation were $37,612 for the nine month period ended September 30, 2007 as compared to $21,082 for the same period ended in 2006.
