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| CVDT.OB > SEC Filings for CVDT.OB > Form 10-Q on 19-Nov-2008 | All Recent SEC Filings |
19-Nov-2008
Quarterly Report
The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to future events or our future performance. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this prospectus. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this 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:
·
We intend to continue with our marketing strategies to market our NP Soft 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.
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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. The newly developed International Business Communication Center ("IBCC") platform based on our original VoIP technology was released late of this October.
·
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. The main products and technologies that will be provided in the following times are Diver Hard-disk computer and virtualization technology solutions for enterprises.
Our aggressive expansion plan will be replied on such capital support. We cannot 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
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.
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 months ended September 30, 2008
During the three months ended September 30, 2008, we recorded revenue of $1,300,906 as compared to $1,899,854 of the same period of 2007, a decrease of $598,948 or 32%. The decrease of revenue is mainly because the company concentrated on the development of the International Business Communication Center (IBCC) in the third quarter, and didn't accept any external development projects which could bring large revenue as before.
Cost of sales increased to $1,755,329 during the three months ended September 30, 2008 from $1,175,312 during the same period of 2007, an increase of $580,017 or 49%. The increase is mainly due to the increase of sales tax based on the increase of revenue, and also due to the increase of promotion expenses during the Olympic games.
The gross profit decreased from $724,542 in the three months ended September 30, 2007 to $(454,424) during the three months ended September 30, 2008. The decrease of 163% or $1,178,966 is due to the increase of the sales cost.
Selling, general and administrative expenses were $391,225 during the three months ended September 30, 2008 as compared to $116,266 during the same period of 2007, an increase of $274,959 or 236%. The increase was mainly contributed to development expenses of IBCC platform and more administrative expenses in relation to more sales offices in China.
Depreciation and amortization expenses increased by 310% or $131,252 to $173,560 during the three month periods ended September 30, 2008 as compared to the same period of 2007. The increase is mainly attributed to the increase of equipments used for current business and future expansion purposes.
We recorded operation loss of $1,019,209during the three months ended September 30, 2008 as compared to operation income $565,968 during the same period of 2007. This is mainly due to the big increase of operation costs in the quarter ended September 30, 2008.
Other income/(expenses) recorded other expense of amortization of convertible debt of $416,667, interest expenses of $423,820 and other income of change in derivative liability of $3,516,431 during the three months ended September 30, 2008 which were resulted from convertible notes issued in December of 2007. The income of change in derivative liability of $3,516,431 was varied in accordance with our stock market price. After setting-off other expenses, net other income recorded $2,847,156 during the three months ended September 30, 2008 compared to the gain of $26,804 during the same period of 2007, an increase of $2,820,352 or 10522%.
Net gain recorded $1,735,147 during the three months ended September 30, 2008 as compared to gain of $592,772 during the same period of 2007, an increase of $1,142,375 or 193% The increase of net gain from other income is mainly due to change in derivative liability,.
Results of operations for the nine months ended September 30, 2008
During the nine months ended September 30, 2008, we recorded revenue of $6,699,368 as compared to $4,155,855 of the same period of 2007, an increase of $2,543,513 or 61%. 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 $4,802,118 during the nine months ended September 30, 2008 from $2,964,774 during the same period of 2007, an increase of $1,837,344 or 62%. The increase is mainly due to the increase of actual dialing time for all customers which is general in line with the increase of settlement cost with China Tietong, and also due to the increase of sales tax.
The gross profit increased from $1,191,081 in the nine months ended September 30, 2007 to $1,897,250 during the nine months ended September 30, 2008. The increase of 59% or $706,169 is due to the increase of revenue. The increase of gross margin is mainly due to the change in revenue segments.
Selling, general and administrative expenses were $1,063,399 during the nine months ended September 30, 2008 as compared to $290,587 during the same period of 2007, an increase of $772,812 or 266%. The increase was mainly contributed to the marketing expenses in order to achieve higher revenue and more administrative expenses in relation to more sales offices in China.
Depreciation and amortization expenses increased by 348% or $302,892 to $389,921 during the nine months ended September 30, 2008 as compared to the same period of 2007. The increase is mainly attributed to the increase of equipments used for current business and future expansion purposes.
We recorded operation gain of $443,930 during the nine months ended September 30, 2008 as compared to $813,465 during the same period of 2007. This is mainly due to the big gross loss incurred in the nine months ended September 30, 2008.
Other income/(expenses) recorded other expense of amortization of convertible
debt of $1,250,000, interest expenses of $735,471 and other income of change in
derivative liability of $4,153,572 during the nine months ended September 30,
2008 which were resulted from convertible notes issued in December of 2007.
After setting-off other income, net other income recorded $2,448,543 during the
nine months ended September 30, 2008 compared to the gain of $41,413 during the
same period of 2007.
Net gain recorded $2,792,724 during the nine months ended September 30, 2008 as compared to net gain of $854,878 during the same period of 2007, an increase of $1,937,846 or 227%. Apart from the net gain from other income due to change in derivative liability, the gain in 2008 is mainly due to the increase in revenue and operating margin.
Liquidity and Capital Resources
Cash flows used in investing activities were $2,691,556 during the nine months
ended September 30, 2008 as compared to $985,580 during the same period of 2007.
Cash used in investing activities during the nine months ended September 30,
2008 mainly consisted of purchase of property and equipment of $601,887,
purchase of intangible assets of $1,408,747, cash payment for acquisition of
$582,889 by setting off cash from acquired subsidiary of $98,033. The cash used
in investing activities during the nine months ended September 30, 2007
represent the cash used for purchase of property and equipment.
Cash flows from financing activities were $571,522 during the nine months ended September 30, 2008 as compared to $260,561 during the same period of 2007. Cash from financing activities during the nine months ended September 30,2008 mainly consisted of proceeds on short-term loan.
Foreign currency translation was $(110,757) during the nine months ended September 30, 2008 as compared to $37,612 during the same period of 2007.
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