UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______to______.
CHINA VOIP & DIGITAL TELECOM INC.
(Exact name of registrant as specified in the Charter)
Nevada |
| 333-131017 |
| 91-2132336 |
(State or other jurisdiction of incorporation or organization) |
| (Commission File No.) |
| (IRS Employee Identification No.) |
11th Floor Tower B1, Yike Industrial Base, Shunhua Rd,
High-tech Industrial Development Zone, Jinan, China 250101
(Address of Principal Executive Offices)
86-53187027114
(Issuer Telephone number)
(Former Name or Former Address if Changed Since Last Report)
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.
Yes x
Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filero |
| Accelerated filer o |
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Non-accelerated filero |
| Smaller reporting company x |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.
Yeso
No x
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; 53,008,000 shares issued and 51,808,000 shares outstanding on November 18, 2008.
CHINA VOIP & DIGITAL TELECOM, INC.
FORM 10-Q
September 30, 2008
TABLE OF CONTENTS
PART I— FINANCIAL INFORMATION |
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Item 1. | Financial Statements |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
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Item 4T. | Controls and Procedures |
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PART II— OTHER INFORMATION |
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Item 1. | Legal Proceedings |
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Item 1A. | Risk Factors |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3. | Defaults Upon Senior Securities |
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Item 4. | Submission of Matters to a Vote of Security Holders |
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Item 5. | Other Information |
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Item 6. | Exhibits and Reports on Form 8-K |
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SIGNATURES |
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PART 1 - FINANCIAL INFORMATION
Item 1.
Financial Statements
CHINA VOIP & DIGITAL TELECOM, INC. AND SUBSIDIARIES | ||||||
CONSOLIDATED BALANCE SHEETS | ||||||
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| September 30, 2008 |
| December 31, 2007 |
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| (Unaudited) |
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Assets | ||||||
| Current assets |
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| Cash and cash equivalents | $ | 852,231 | $ | 5,346,165 |
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| Accounts receivable |
| 230,493 |
| 174,641 |
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| Advance to suppliers |
| 2,216,394 |
| 1,109,350 |
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| Loans to unrelated parties |
| 1,631,876 |
| - |
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| Inventories - net |
| 669,763 |
| 148,548 |
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| Other current assets |
| 166,598 |
| 79,680 |
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| Total Current Assets |
| 5,767,355 |
| 6,858,384 |
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| Debt issuance cost |
| 332,976 |
| 443,967 | |
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| Property & Equipment - net |
| 2,678,333 |
| 1,876,477 | |
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| Intangible Assets - net |
| 1,620,043 |
| 6,388 | |
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| Goodwill |
| 355,848 |
| - | |
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| Total Assets | $ | 10,754,555 | $ | 9,185,216 |
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Liabilities & Stockholders' Equity | ||||||
| Current Liabilities |
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| Short-term loan | $ | 583,507 | $ | - |
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| Accounts payable and Accred expenses |
| 674,142 |
| 81,139 |
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| Warrant Liability |
| 3,523,344 |
| 7,676,915 |
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| Tax payables |
| 219,377 |
| 128,381 |
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| Other current liabilities |
| 328,085 |
| 125,228 |
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| Due to related party |
| 20,000 |
| 20,000 |
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| Total Current Liabilities |
| 5,348,455 |
| 8,031,663 |
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| Long term Liabilities - Convertible debt |
| 1,296,296 |
| 46,296 | |
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| Stockholders' Equity |
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| Common Stock, part value $.001 per share, 75,000,000 shares authorized; 53,008,000 shares issued and outstanding |
| 53,008 |
| 53,008 |
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| Additional paid-in-capital |
| 3,408,515 |
| 3,408,515 |
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| Shares to be cancelled |
| (1,212,000) |
| (1,212,000) |
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| Other comprehensive income |
| 517,070 |
| 241,230 |
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| Statutory reserves |
| 365,677 |
| 228,633 |
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| Retained earnings / (accumulated deficit) |
| 977,534 |
| (1,612,129) |
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| Total Stockholders' Equity |
| 4,109,804 |
| 1,107,257 |
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| Total Liabilities and Stockholders' equity | $ | 10,754,555 | $ | 9,185,216 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements |
| CHINA VOIP & DIGITAL TELECOM INC. AND SUBSIDIARIES | |||||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||
| FOR THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND 2007 | |||||||||||
| (UNAUDITED) | |||||||||||
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| Three month ended September 30, |
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| Nine month ended September 30, | |||||
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| 2008 |
| 2007 |
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| 2008 |
| 2007 | |
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Net sales | $ | 1,300,906 | $ | 1,899,854 |
| $ | 6,699,368 | $ | 4,155,855 | |||
Cost of sales |
| 1,755,329 |
| 1,175,312 |
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| 4,802,118 |
| 2,964,774 | |||
| Gross profit (loss) |
| -454,424 |
| 724,542 |
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| 1,897,250 |
| 1,191,081 | ||
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Operating Expenses : |
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| Selling, general and administrative |
| 391,225 |
| 116,266 |
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| 1,063,399 |
| 290,587 | |
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| Depreciation and amortization |
| 173,560 |
| 42,308 |
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| 389,921 |
| 87,029 | |
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| Total operating expenses |
| 564,785 |
| 158,574 |
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| 1,453,320 |
| 377,616 | |
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| Income (loss) from operations |
| (1,019,209) |
| 565,968 |
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| 443,930 |
| 813,465 | ||
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Other income (expenses) |
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| Interest income |
| 118,855 |
| 10,569 |
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| 122,388 |
| 13,755 | |
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| Interest expenses |
| (423,820) |
| - |
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| (735,471) |
| - | |
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| Subsidy income |
| 34,416 |
| 16,236 |
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| 104,241 |
| 27,743 | |
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| Beneficial conversion feature |
| (416,667) |
| - |
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| (1,250,000) |
| - | |
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| Change in derivative liability |
| 3,516,431 |
| - |
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| 4,153,572 |
| - | |
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| Other income(expense) |
| 17,940 |
| (1) |
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| 53,813 |
| (85) | |
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| Total other income |
| 2,847,156 |
| 26,804 |
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| 2,448,543 |
| 41,413 | |
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| Income before income tax |
| 1,827,947 |
| 592,772 |
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| 2,892,473 |
| 854,878 | ||
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| Income tax |
| 92,801 |
| - |
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| 111,117 |
| - |
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| Minority interest |
| - |
| - |
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| (11,368) |
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| Net income |
| 1,735,147 |
| 592,772 |
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| 2,792,724 |
| 854,878 | ||
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Other comprehensive gain |
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| Foreign currency translation gain/(loss) |
| (125,629) |
| 76,486 |
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| 275,840 |
| 90,359 | ||
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| Net comprehensive income | $ | 1,609,517 | $ | 669,258 |
| $ | 3,068,564 | $ | 945,237 | |
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NET INCOME PER COMMON SHARE - BASIC & DILUTED | $ | 0.04 | $ | 0.01 |
| $ | 0.06 | $ | 0.02 | |||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC & DILUTED |
| 53,008,000 |
| 52,088,882 |
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| 53,008,000 |
| 52,088,882 | |||
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The accompanying notes are an integral part of these unaudited consolidated financial statements
| CHINA VOIP & DIGITAL TELECOM, INC AND SUBSIDIARIES | ||||
| CONSOLIDATED CASH FLOW STATEMENTS | ||||
| FOR THE NINE MONTH PERIODS ENDE SEPTEMBER 30, 2008 AND 2007 | ||||
| (UNAUDITED) | ||||
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| 2008 |
| 2007 |
Cash flows from operating activities: |
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| Net income | $ | 2,792,724 | $ | 854,878 |
| Adjustments to reconcile net income to net cash provided by/ |
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| (used in) operating activities: |
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| Beneficial conversion feature |
| 1,250,000 |
| - |
| Change in derivative liability |
| (4,153,571) |
| - |
| Depreciation and amortization |
| 389,921 |
| 87,029 |
| Reserve for inventory obsolesce |
| 89,319 |
| - |
| Reserve for bad debts |
| 8,807 |
| - |
| Amortization of debt discount and fund raising fee |
| 110,991 |
| - |
| Changes in operating assets and liabilities: |
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| Accounts receivable |
| (51,979) |
| (318,854) |
| Inventories |
| (463,342) |
| (107,352) |
| Loans to unrelated parties |
| (1,598,357) |
| - |
| Advances to suppliers |
| (879,764) |
| (659,300) |
| Prepaid expenses and other assets |
| (12,179) |
| (13,930) |
| Accounts payable and accured expense |
| 7,470 |
| - |
| Tax payable |
| 80,708 |
| 125,682 |
| Other current liabilities |
| 166,109 |
| 59,696 |
| Total Adjustments |
| (5,055,867) |
| (827,029) |
| Net cash provided by/(used in) operating activities |
| (2,263,143) |
| 27,849 |
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Cash flows from investing activities: |
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| Purchase of property and equipment |
| (601,887) |
| (985,580) |
| Cash from acquired subsidiary |
| (98,033) |
| - |
| Purchase of intangible assets |
| (1,408,747) |
| - |
| Cash paid for acquisition |
| (582,889) |
| - |
| Net cash used in investing activities |
| (2,691,556) |
| (985,580) |
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Cash flows from financing activities: |
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| Proceeds on short-term loan |
| 571,522 |
| 260,561 |
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| Foreign currency translation |
| (110,757) |
| 37,612 |
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Net decrease in cash and cash equivalents |
| (4,493,934) |
| (659,558) | |
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Cash and cash equivalents, beginning balance |
| 5,346,165 |
| 1,487,816 | |
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Cash and cash equivalents, ending balance | $ | 852,231 | $ | 828,258 | |
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| SUPPLEMENTARY DISCLOSURE: |
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| Interest paid | $ | 129,609 | $ | - |
| Income tax paid | $ | 20,251 | $ | - |
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| Non-cash transactions in investing and financing activities: |
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| Construction in process completed in to a building | $ | 609,706 | $ | - |
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The accompanying notes are an integral part of these unaudited consolidated financial statements | |||||
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CHINA VOIP & DIGITAL TELECOM INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information
The accompanying unaudited consolidated financial statements have been prepared by China Voip & Digital Telecom Inc., pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) Form 10-QSB and Item 310 of Regulation S-B, and generally accepted accounting principles for interim financial reporting. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes includ ed in the Company’s Annual Report on Form 10-KSB. The results of the three month periods ended September 30, 2008 are not necessarily indicative of the results to be expected for the full year ending December 31, 2008.
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 ($).
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.
Allowance for Doubtful Accounts
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. As of September 30, 2008 and December 31, 2007, the allowances for doubtful accounts were $8,992 and $0, respectively.
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 September 30, 2008 and December 31, 2007, the reserve for obsolescence was $188,159 and $90,882, respectively.
Property, Plant & Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:
Furniture and Fixtures
5-10 years
Equipment
5-10 years
Vehicles
10 years
Computer Hardware and Software
5 years
Building
20 years
Intangible Assets
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business.” The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. I n that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.
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 collectability 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.
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’), which requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in the consolidated statements of operations. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for public companies. The Company has adopted SFAS 123R and related FASB Staff Positions (“FSPs”) as of October 01, 2005 and will recognize stock-based compensation expense using the modified prospective method.
Advertising
Advertising expenses consist primarily of costs of promotion for corporate image and product marketing and costs of direct advertising. The Company expenses all advertising costs as incurred.
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.
Statement of Cash Flows
In accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the Company’s operations is based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
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 and Technical services.
Recently Issued Accounting Standards
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:
l
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
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 December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for the Company’s fiscal year beginning October 1, 2009. Management is currently evaluating the effect of this pronouncement on financial statements.
In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The new standard also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. Management is currently evaluating the effect of this pronouncement on f inancial statements.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This Statement replaces SFAS No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) will apply prospectively to business combinations for which the acquisition date is on or after Company’s fiscal year beginning October 1, 2009. While the Company has not yet evaluated this statement for the impact, if any, that SFAS No. 141(R) will have on its consolidated financial statements, the Company will be required to expense costs related to any acquisitions after September 30, 2009.
In May 0f 2008, FSAB issued SFASB No.162, The Hierarchy of Generally Accepted Accounting Principles. The pronouncement mandates the GAAP hierarchy reside in the accounting literature as opposed to the audit literature. This has the practical impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP
hierarchy. This pronouncement will become effective 60 days following SEC approval. The company does not believe this pronouncement will impact its financial statements.
In May of 2008, FASB issued SFASB No. 163, Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60. The scope of the statement is limited to financial guarantee insurance (and reinsurance) contracts. The pronouncement is effective for fiscal years beginning after December 31, 2008. The company does not believe this pronouncement will impact its financial statements.
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
For the nine month periods ended September 30, 2008 and 2007, the foreign currency translation gain is $265,391 and $90,359 respectively. The accumulated comprehensive foreign currency translation gain amounted to $506,621 as on September 30, 2008.
NOTE 3 PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of China VOIP & Digital Telecom Inc. (the “Company”) and its 100% wholly-owned subsidiary Jinan YinQuan Technology Co. Ltd. (“Jinan YinQuan”). It also includes the Power Unique (Beijing) Technology Co., Ltd, a 100% owned subsidiary of Jinan YinQuan as of September 30, 2008. 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 status of the PRC's economy. The Company's business may be influenced by changes 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 nine month periods ended September 30, 2008, two customers contributed 22% of total revenue without outstanding accounts receivable balance and one supplier provided 93% of the cost of sales. The balance of advanced to the suppliers as of September 30, 2008 was $2,071,467.
Financial instruments, which potentially subject to concentration of credit risk, consist of cash and cash equivalents as the same is not covered by insurance.
NOTE 5 ACQUISITION
During the nine month periods ended September 30, 2008, the Company, via its Chinese subsidiary, Jinan YinQuan, acquired Power Unique (Beijing) Technology Co., Ltd. (“Power Unique”), located and operate in Beijing, China. Power Unique is the producer of security IT products in mainland China. On March 27, 2008, the Company paid $582,089 (RMB 4,000,000) to Power Unique and, increased the share capital of Power Unique to RMB 5,000,000. After the share capital increased, Jinan YinQuan became 80% shareholders of Power Unique. The transaction was consummated in May 2008.
On June 24, 2008, the Company paid another $583,507 (RMB 4,000,000) to acquire the remaining 20% ownership of Power Unique from the original shareholders and became 100% shareholder of Power Unique Thereafter. As of
July 5, 2008, the acquisition was consummated. In July 2008, Jinan YinQuan increased the share capital of Power Unique with extra RMB 6 million to RMB 11 million.
A summary of Power Unique’s assets acquired, liabilities assumed and consideration paid for them as of May 2008 is as follows:
| Amount |
| (Unaudited) |
Cash | $ 482,244 |
Receivable and prepaid expense | 206,965 |
Inventory | 130,395 |
Fixed Assets, net | 184,754 |
Intangible assets, net | 421,694 |
Assets, total | 1,426,052 |
|
|
Current liabilities | 464,214 |
|
|
Net assets acquired | $ 961,838 |
|
|
80% of net assets acquired | 769,470 |
|
|
Consideration paid by cash | 582,089 |
|
|
(Negative) Goodwill | $ (187,381) |
The acquisition of 80% of net assets of Power Unique by the Company resulted in negative goodwill of $187,381, which was allocated against the intangible assets and the property & equipment of the Company.
The Compamy acquired the remaining 20% of the equity Power Unique on July 5, 2008. Following is the fair value of the assets and liabilities is as follows:
|
| Amount |
|
| (Unaudited) |
|
|
|
Fair market value of 20% of asset acquired | $ | 246,310 |
|
|
|
Fair market value of 20% of liabilities assumed |
| (65,078) |
|
|
|
Net asset |
| 181,232 |
|
|
|
Consideration paid | 583,507 | |
80% of operation during the period between two acquisitions |
| (46,427) |
Total consideration, net |
| 537,080 |
|
|
|
Goodwill | $ | 355,848 |
The following un-audited pro forma consolidated financial information for the nine month periods ended September 30, 2008 and 2007, as presented below, reflects the results of operations of the Company assuming the acquisition of Power Unique occurred on January 1, 2008 and 2007 respectively. These pro forma results have been prepared for information purposes only and do not purport to be indicative of what operating results would have been had the acquisition actually taken place on January 1, 2008 and 2007 respectively, and may not be indicative of future operating results.
|
| Nine month periods ended September 30, | ||
|
| 2008 |
| 2007 |
|
|
| ||
|
|
|
|
|
Net Revenues | $ | 6,699,368 | $ | 4,155,855 |
|
|
|
|
|
Cost of revenues and operating expenses |
| (5,760,637) |
| (3,342,390) |
|
|
|
|
|
Operating income |
| 938,731 |
| 813,465 |
|
|
|
|
|
Other income, net |
| 168,935 |
| 41,413 |
|
|
|
|
|
Net Income | $ | 1,107,666 | $ | 854,878 |
|
|
|
|
|
Earnings per share - basic & diluted | $ | 0.02 | $ | 0.02 |
NOTE 6 ADVANCES TO SUPPLIERS
The Company made prepayments to suppliers to purchase inventory, equipment or services. The Company advanced to suppliers amounting of $2,216,394 and $1,109,350 as of September 30, 2008 and December 31, 2007 respectively. The balance included advanced to one supplier - Shandong Tietong as of September 30, 2008 was $2,071,467, which was 93% of the total advance balance as of September 30, 2008.
NOTE 7
LOANS TO UNRELATED PARTIES
As of September 30, 2008 and December 31, 2007, the other current assets comprise of the following:
|
| 9/30/2008 | Due on | Interest rate |
|
| (Unaudited) |
|
|
|
|
|
|
|
Loan to unrelated party A | $ | 875,261 | 12-03-2008 | 32.4% |
Loan to unrelated party A |
| 539,744 | 09-17-2009 | 25.2% |
Loan to unrelated party B |
| 145,877 | 10-4-2008 | 73.0% |
Interest income receivable |
| 70,994 |
|
|
Total | $ | 1,631,876 |
|
|
The loans in the amount of $875,261 and $539,744 were secured by the personal properties owned by the shareholder of the unrelated party A. The loan to unrelated party B was paid back on October 7, 2008 subsequently.
NOTE 8 OTHER CURRENT ASSETS
As of September 30, 2008 and December 31, 2007, the other current assets comprise of the following:
|
| 9/30/2008 |
| 12/31/2007 |
|
| (Unaudited) |
|
|
|
|
|
|
|
Security deposit | $ | 58,056 | $ | - |
Advance to attorney |
| 50,000 |
| 50,000 |
Advances to Staff and other |
| 37,700 |
| 29,680 |
Others |
| 20,842 |
|
|
Total | $ | 166,598 | $ | 79,680 |
NOTE 9 DEBT ISSUANCE COST
As of September 30, 2008 and December 31, 2007, the Company has debt issuance cost amounting $332,976 and $443,967, respectively, associated with issuance of 5 million senior convertible notes. The amount will be amortized with the life time of the senior convertible notes.
During the nine month periods ended September 30, 2008, $110,991debt issuance cost was amortized.
.
|
|
| By |
|
|
|
|
Amortization for the next 3 years is as follows : |
|
| |
September 30, 2009 |
| $ | 147,988 |
September 30, 2010 |
|
| 147,988 |
September 30, 2011 |
|
| 37,000 |
|
|
|
|
Total |
| $ | 332,976 |
NOTE 10 PROPERTY AND EQUIPMENT, NET
The balances of the Company property and equipment as of September 30, 2008 and December 31, 2007 are summarized as follows:
|
| 9/30/2008 |
| 12/31/2007 |
|
| (Unaudited) |
|
|
Electronic Equipment | $ | 1,928,700 | $ | 1,506,841 |
Vehicles |
| 295,188 |
| 89,664 |
Office Equipment |
| 140,046 |
| 9,969 |
Office Building |
| 778,116 |
| 437,571 |
|
| 3,142,049 |
| 2,044,045 |
|
|
|
|
|
Less: Accumulated depreciation |
| (463,716) |
| (167,568) |
|
|
|
|
|
Property and Equipment, net | $ | 2,678,333 | $ | 1,876,477 |
The depreciation expense for the nine month periods ended September 30, 2008 and 2007 was $273,392 and $73,330 respectively.
NOTE 11 INTANGIBLE ASSET
Intangible asset comprised of a set of software in Jinan YinQuan acquired from third parties and a set of software from Power Unique. The set of software acquired from third parties is used for the core technology of the Company’s VOIP business. They are amortized over 5 years. Intangible assets comprised of following at September 30, 2008:
|
| 9/30/2008 |
| 12/31/2007 |
|
| (Unaudited) |
|
|
Softwares, cost | $ | 1,834,458 | $ | 95,842 |
Less: amortization |
| (214,415) |
| (89,454) |
Intangible asset, net | $ | 1,620,043 | $ | 6,388 |
The amortization expense for the nine month periods ended September 30, 2008 and 2007 was $116,529 and $13,699 respectively.
|
|
|
|
Amortization for the next 5 years is as follows : |
|
| |
|
|
| |
September 30, 2009 |
| $ | 346,440 |
September 30, 2010 |
| 346,440 | |
September 30, 2011 |
|
| 346, 440 |
September 30, 2012 |
| 346,440 | |
September 30, 2013 |
|
| 234,283 |
|
|
| |
Total |
| $ | 1,620,043 |
|
|
|
|
NOTE 12 – SENIOR SECURITY NOTE
On December 21, 2007, the Company issued a senior debenture to CASTLERIGG MASTER INVESTMENTS LTD (“Castlerigg”) in the amount of $5,000,000 that accrues interest at 8.75% per annum and is due on December 21, 2010. In addition, the Company also issued to CASTLERIGG MASTER INVESTMENTS LTD three series of warrants, titled Series A Warrant, Series B Warrant, Series C Warrant (collectively the “Warrants”) to purchase 21,459,038 shares of the Company’s common stock. The Warrants are exercisable at price per share of $.5627 and are subject to economic anti-dilution protection. The Series A Warrant is exercisable for 8,885,730 shares of the Company’s common stock and expires the date eighty four (84) months after the earlier of (A) such time as all of the Registrable Securities (as defined in the Registration Rights Agreement) are available for resale pursuant to an effective Registration Statement and (B) two (2) years after December 21, 2007. The Series B Warrant is exercisable for 6,220,011 shares of the Company’s common stock and expires on the date on which the Notes issued pursuant to the Securities Purchase Agreement are no longer issued and outstanding. The Series C Warrant is exercisable for 6,353,297 shares of the Company’s common stock and expires on the date sixty (60) months after the first time the Company elects a Company Optional Redemption.
The Company shall initially reserve out of its authorized and unissued Common Stock a number of shares of Common Stock for each of the Notes equal to 130% of the Conversion Rate with (i) issuable upon conversion of the
Notes, (ii) upon exercise of the Warrants, without taking into account any limitations on the Conversion of the Notes or exercise of the Warrants set forth in the Notes and Warrants, respectively) and (iii) as Interest Shares pursuant to the terms of the Notes. As of September 30, 2008, the Company did not have enough authorized and unissued common stock to reserve 130% shares. This amount is due subject to default.
Per EITF 00-19, paragraph 4, these convertible debentures do not meet the definition of a “conventional convertible debt instrument” since the Company does not have sufficient unissued authorized share capital. The Company is required to increase the authorized share capital which is not within the control of the Company. Therefore, the convertible debenture is considered “non-conventional,” which means that the conversion feature must be bifurcated from the debt and shown as a separate derivative liability. This beneficial conversion liability was calculated to be nil at September 30, 2008. In addition, since the Company does not have enough number of unissued authorized shares of common stock, it is assumed that the Company could never have enough authorized and unissued shares to settle the conversion of the warrants into common stock. Therefore, the warrants issued in connection with this transaction have been reported as liabi lity at September 30, 2008 in the accompanying balance sheet with a fair value of $3,523,344. The value of the warrant was calculated using the Black-Scholes model using the following assumptions:
|
|
|
|
| Series A | Series B | Series C |
Risk-free interest rate | 3% | 2.5% | 2.85% |
Expected life of the warrants | 7 years | 3 years | 6 years |
Expected volatility | 133.47% | 133.47% | 133.47% |
Expected dividend yield | 0% | 0% | 0% |
The fair value of the beneficial conversion feature and the warrant liability will be adjusted to fair value each balance sheet date with the change being shown as a component of net income.
The fair value of the beneficial conversion feature and the warrants at the inception of these convertible debentures were $331,438 and $11,244,857, respectively. The first $5,000,000 of these discounts has been shown as a discount to the convertible debentures which will be amortized over the term of the debentures and the excess of $4,153,572 and $6,576,294 has been shown as financing costs in the statement of operations as of September 30, 2008 and December 31, 2007.
Warrants outstanding at September 30, 2008 and related weighted average price and intrinsic value is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exercise Prices |
| Total Warrants Outstanding |
| Weighted Average Remaining Life (Years) |
| Total Weighted Average Exercise Price |
| Warrants Exercisable |
| Weighted Average Exercise Price |
| Aggregate Intrinsic Value |
Series A | 0.5627 |
| 8,885,730 |
| 2.59 |
| 0.15 |
| 8,885,730 |
| 0.15 |
| - |
Series B | 0.5627 |
| 6,220,011 |
| 0.65 |
| 0.24 |
| 6,220,011 |
| 0.24 |
| - |
Series C | 0.5627 |
| 6,353,297 |
| 1.55 |
| 0.17 |
| 6,353,297 |
| 0.17 |
| - |
Total |
|
| 21,459,038 |
| 4.79 |
| 0.56 |
| 21,459,038 |
| 0.56 |
| _ |
The Company received two Event of Default Redemption Notices dated on July 25, 2008 and October 6, 2008 from Castlerigg with respect to the senior security note. Specifically, the July Default Notice and the October Default Notice stated that the Company is in default for failure to: (1) cause the Initial Registration Statement to be declared effective by the SEC on or prior to June 18, 2008; and (2) make the required Registration Delay Payments to Castlerigg on or prior to the applicable Payment Date. The October Default Notice seeks to redeem the Note in full at the Event of Default Redemption Price, which calculated as of the date in the October Default Notice equals $6,371,201.
As of September 30, 2008 and 2007, the Company incurred interest expense and penalty related to the said note in the amount of $736,860 and $0 respectively.
NOTE 13
SHORT TERM LOAN
The Company has an approved line of credit up to the amount of $1,458,768. The line of credit expires on July 29, 2010. The line is un-secured with a flexible interest rate which equals to 1.5 times of the benchmark interest rate of People’s bank of China.
As of September 30, 2008, the Company has a short-term loan balanced at $583,507 under the line of credit.
NOTE 14 ACCOUNT PAYABLES AND ACCRUED EXPENSES
Accrued expenses and other current liabilities as of September 30, 2008 and December 31, 2007 are summarized as follows:
|
| 9/30/2008 |
| 12/31/2007 |
|
| (Unaudited) |
|
|
Account payables | $ | 31,402 | $ | 17,166 |
Accrued staff welfare |
| 4,554 |
| 9,385 |
Interest payable |
| 614,600 |
| - |
Accrued expenses |
| 23,586 |
| 54,588 |
Total | $ | 674,142 | $ | 81,139 |
NOTE 15 OTHER CURRENT LIABILITIES
Other current liabilities as of September 30, 2008 and December 31, 2007 are summarized as follows:
|
| 9/30/2008 |
| 12/31/2007 |
|
| (Unaudited) |
|
|
Payable of purchasing building | $ | 155,623 | $ | - |
Deposits |
| 135,615 |
| 43,330 |
Subsidy income |
| 29,175 |
| 20,833 |
Others |
| 7,672 |
| 61,065 |
Total | $ | 328,085 | $ | 125,228 |
NOTE 16 DUE TO RELATED PARTY
Due to related party of $20,000 as of September 30, 2008 and December 31, 2007 represents $10,000 payable to former beneficial owner of Crawford Lake Mining Inc. and $10,000 payable to the CEO of the Company. The payables are unsecured, non interest bearing and payable on demand.
NOTE 17 STATUTORY RESERVES
As stipulated by the Company Law of the People's Republic of China (PRC) executed on 2006, 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; (The reserve is no more required for the foreign invested enterprises since 2006).
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 after tax to surplus as of September 30, 2008 and December 31, 2007. The Company allocated its statutory reserve $137,044 and $157,774 as of September 30, 2008 and December 31, 2007 respectively.
Balances of Statutory reserves as of September 30, 2008 are as follows:
|
|
|
|
| |
| September 30, 2008 |
|
Net income of operation in PRC | $ 1,370,440 |
|
Reserve rate of statutory fund | 10% |
|
Amount reserved in 2007 | $ 137,044 |
|
|
|
|
Balance of statutory reserve at December 31, 2007 | $ 228,633 |
|
Change during the nine months ended September 30, 2008 | 137,044 |
|
Balance of statutory reserve at September 30, 2008 | $ 365,677 |
|
|
|
|
According to the new Company Law of the People's Republic of China (PRC) executed in 2006, the Company is not required to reserve the “Statutory common welfare fund”. Accordingly, the Company did not reserve the common welfare fund in 2007 and 2008.
NOTE 18 SHARES TO BE CANCELLED
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 for financing assistance. While according to the term sheet, $3 million USD should be received by the company before August 15, 2007, otherwise, Downshire Capital and its designed investors need to return the 1.2 million shares and the Registrant will cancel it accordingly.
As of August 21, 2007, Downshire Capital Inc. was not able to complete the financing before closing deadline according to the termsheet signed with the Registrant on July 17, 2007. After further negotiation, both parties could not reach further agreement to extend the term sheet and the term sheet was terminated accordingly. The stock transfer agent of the Company has put restriction on the stock to trade. The Company requested its stock transfer agent to cancel the shares. However, Downshire Capital Inc. did not return the certificates to stock transfer agent as of September 30, 2008. The shares have been classified as “Shares to be cancelled” in the accompanying financial statements.
Note 19 INCOME TAXES
The Company is registered in the State of Navada and has operations in primarily two tax jurisdictions - the PRC and the United States. For the operation in the U.S., the Company has incurred net accumulated operating losses for income tax purposes The Company believes that it is more likely than not that these net accumulated operating losses will not be utilized in the future. Therefore, the Company has provided full valuation allowance for the deferred tax assets arising from the losses at these locations as of September 30, 2008. Accordingly, the Company has no net deferred tax assets.
The operation in PRC is approved as hi-tech software company and enjoys 15% income tax rate.And Jinan YinQuan 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) because being a foreign invested company.
As of September 30, 2008 and 2007, the Company had income tax expense $111,117 and $0 respectively.
The following is a reconciliation of the provision for income taxes at the U.S. federal income tax rate to the income taxes reflected in the Statement of Operations:
|
|
|
| September 30, 2008 | September 30, 2007 |
Tax expense (credit) at statutory rate - federal | 34% | 34% |
State tax expense net of federal tax | 6% | 6% |
Valuation allowance | (40%) | (40%) |
Foreign income tax - PRC | 15% | 15% |
Exempt from income tax | (11%) | (15%) |
Tax expense at actual rate | 4% | 0% |
United States of America
As of September 30, 2008, the Company in the United States had approximately $1,044,445 in net operating loss carry forwards available to offset future taxable income. Federal net operating losses can generally be carried forward 20 years. The deferred tax assets for the United States entities at September 30, 2008 consists mainly of net operating loss carry forwards and were fully reserved as the management believes it is more likely than not that these assets will not be realized in the future.
The following table sets forth the significant components of the net deferred tax assets for operation in the U.S. as of September 30, 2008 and December 31, 2007.
|
|
|
| September 30, 2008 | December 31, 2007 |
Net operation loss carry forward | $ 1,044,445 | $ 2,905,645 |
Total deferred tax assets | 376,000 | 74,525 |
Less: valuation allowance | (376,000) | (74,525) |
Net deferred tax assets | $ - | $ - |
NOTE 20 OPERATING LEASE
The Power Unique leases its office space in Beijing China under an operating lease starting from January 25, 2008 and expiring January 24, 2011. Jinan YinQuan leased its office space under an operating lease expiring May 2008. Starting from June 2008, Jinan YinQuan’s new building was ready and Jinan YinQuan doesn’t need to incur rent expense any more.
Rent expense under this operating lease was approximately $31,856 and $ during the nine month period ended September 30, 2008.
The rent expenses for the next five years after September 30, 2008 are as follows:
September 30, 2009 | $ | 61,268 |
September 30, 2010 | $ | 61,268 |
September 30, 2011 | $ | 20,423 |
NOTE 21 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.
During the nine months ended September 30, 2008 and 2007, the Company is organized into three main business segments: (1) Telecommunications minutes, (2) Equipment Sales and (3) Technical services. There were no transactions between segments. The following table presents a summary of operating information and certain period-end balance sheet information for the nine months ended September 30, 2008 and 2007:
|
|
|
|
| |||
|
| nine month periods ended September 30, | |||||
|
| 2008 |
| 2007 | |||
Revenues from unaffiliated customers: |
|
|
|
| |||
Telecommunication | $ | 4,893,534 | $ | 3,074,260 | |||
Equipment sales |
| 395,115 |
| 387,912 | |||
Technical services |
| 1,410,719 |
| 479,580 | |||
Consolidated | $ | 6,699,368 | $ | 3,941,752 | |||
|
|
|
|
| |||
Operating income (loss): |
|
|
|
| |||
Telecommunication | $ | (507,076) | $ | 414,085 | |||
Equipment sales |
| 31,565 |
| 20,026 | |||
Technical services |
| 1,227,026 |
| 443,394 | |||
Corporation (1) |
| (307,585) |
| (64,040) | |||
Consolidated | $ | 443,930 | $ | 813,465 | |||
|
|
|
|
| |||
Net income (loss) before taxes: |
|
|
|
| |||
Telecommunication | $ | (300,680) | $ | 446,854 | |||
Equipment sales |
| 48,230 |
| 23,892 | |||
Technical services |
| 1,286,526 |
| 448,173 | |||
Corporation (1) |
| 1,858,397 |
| (64,040) | |||
Consolidated | $ | 2,892,473 | $ | 854,878 | |||
|
|
|
|
| |||
Net income (loss): |
|
|
|
| |||
Telecommunication | $ | (381,845) | $ | 446,854 | |||
Equipment sales |
| 41,677 |
| 23,892 | |||
Technical services |
| 1,274,495 |
| 448,173 | |||
Corporation (1) |
| 1,858,397 |
| (64,040) | |||
Consolidated | $ | 2,792,724 | $ | 854,878 | |||
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Identifiable assets: |
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Telecommunication | $ | 7,151,866 | $ | 3,632,032 | |||
Equipment sales |
| 1,969,546 |
| 159,199 | |||
Technical services |
| 32,166 |
| - | |||
Corporation (1) |
| 1,600,977 |
| - | |||
Consolidated | $ | 10,754,555 | $ | 3,791,231 | |||
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Depreciation and amortization |
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Telecommunication | $ | 359,906 | $ | 87,029 | |||
Equipment sales |
| 30,015 |
| - | |||
Consolidated | $ | 389,921 | $ | 87,029 | |||
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Capital contribution |
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Telecommunication | $ | 2,163,061 | $ | 985,580 | |||
Equipment sales |
| 430,462 |
| - | |||
Consolidated | $ | 2,593,523 | $ | 985,580 | |||
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(1). Unallocated loss from Operating income (loss) and Net income (loss) before taxes are primarily related to general corporate expenses.
Note 22 GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the company as a going concern. However, the Company has a retained earnings (accumulated deficit) of $977,534 and ($1,612,129) as of September 30, 2008 and December 31, 2007, and the Company is in default of the terms of Senior Security Note as of September 30, 2008. In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the company, which in turn is dependent upon the Company’s ability to raise additional capital, obtain financing and succeed in its future operations, The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Management has taken certain restructuring steps to provide the necessary capital to continue its operations. These steps included: 1) acquire profitable operations through issuance of equity instruments; and 2) to continue actively seeking additional funding and restructure the acquired subsidiaries to increase profits and minimize the liabilities;3)seek governmental funds support.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
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.
·
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 areDiver 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
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) t he 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 st atement 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 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 used in operating activities were $2,263,143 during the nine months ended September 30, 2008 as compared to cash provided by operating activities of $27,849 for nine months ended September 30, 2007. Cash used in operating activities mainly consisted of change in derivative liability of $4,153,571, increase in advance to suppliers of $879,764 increase in inventory of $463,342 and increase in accrued and other current liabilities of $246,817, partially offset by net gain of $2,792,724, change in beneficial conversion feature of $1,250,000, depreciation and amortization of $389,921, provision for bad debts of $8,807, and amortization of debt discount and fund raising fee of $110,991. Cash used in operating activities during the same period of 2007 mainly consisted of increase of accounts receivables of $318,854, increase of advances to suppliers of $659,300, increase of prepaid and othe r current assets of $13,930 and increase in inventory of $107,352, partially setting off by net income of $854,878, , depreciation and amortization of $87,029, increase of other current liabilities of $185,378..
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable for smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management , including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There have been no changes in the Company's internal control over financial reporting during the latest fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Currently we are not aware of any litigation pending or threatened by or against the Company.
Item 1A. Risk Factors
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
Reference is made to the disclosures contained in Item 2.04 of our Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 10, 2008 for information concerning certain triggering event that accelerate or increase a direct financial obligation thereof.
On October 6, 2008, we received an Event of Default Redemption Notice (the "October Default Notice") from Castlerigg Master Investments Ltd. ("Castlerigg") with respect to the Securities Purchase Agreement and related transaction documents dated December 21, 2007 (the "Financing Transaction") which are disclosed in more detail in the Form 8-k filed on December 26, 2007.
As previously disclosed in the Company's Form 10-Q filed on August 14, 2008, we received an Event of Default Redemption Notice dated July 25, 2008 (the "July Default Notice") from Castlerigg with respect to the Financing Transaction. Due to our inability to settle the issues raised in the July Default Notice, Castlerigg issued the October Default Notice which reaffirmed and repeated the events of default stated in the July Default Notice. Specifically, the July Default Notice and the October Default Notice stated that we are in default for failure to: (1) cause the Initial Registration Statement to be declared effective by the SEC on or prior to June 18, 2008; and (2) make the required Registration Delay Payments to Castlerigg on or prior to the applicable Payment Date. On July 29, 2008, the Registration Statement went effective. The October Default Notice seeks to redeem the Note in full at the Event of Default Redemption Price (as defined in the Note), which calculated as of the date in the October Defaul t Notice equals $6,371,200.77.
As the Company previously reported in the October 10, 2008 Form 8-K (with regard to the October Default Notice) and August 14, 2008 Form 10-Q (with regard to the July Default Notice) and reaffirms here, the Company does not believe that it is in default under the Note. The Company does not believe that any of the Events constitutes a default under the Note. Although no assurances can be given as to the ultimate outcome of this matter, the Company disagrees with the claims in the July Default Notice and the October Default Notice that a default has occurred under the Note and intends to vigorously contest these claims.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports of Form 8-K.
(a) Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CHINA VOIP & DIGITAL TELECOM, INC. | |
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Date: November 19 , 2008 | By: | /s/ Li Kunwu |
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| Li Kunwu |
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| Chief Executive Officer and Chief Financial Officer |