ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this Report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such a difference include, among others, uncertainties relating to general economic and business conditions; industry trends; changes in demand for our products and services; uncertainties relating to customer plans and commitments and the timing of orders received from customers; announcements or changes in our pricing policies or that of our competitors; unanticipated delays in the development, market acceptance or installation of our products and services; changes in government regulations; availability of management and other key personnel; availability, terms and deployment of capital; relationships with third-party equipment suppliers; and worldwide political stability and economic growth. The words "believe," "expect," "anticipate," "intend," "plan," and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the unaudited interim Condensed Consolidated Financial Statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. The Company believes there have been no significant changes during the three and nine month periods ended September 30, 2008, to the items disclosed as significant accounting policies in management's Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K and Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2007. The Company filed a 10-K/A after identifying errors related to certain intercompany transactions and the recognition of expense during the fourth quarter of 2007.
Overview
We are a global telecommunications firm generating our revenue from the provision of domestic and international telecommunications services to business, residential, and wholesale customers. We provide both local and long distance services utilizing traditional wireline and VoIP technologies on both a prepaid and postpaid basis. Historically, our traditional bundled wireline service offerings have represented the majority of our revenue, followed by revenue derived from our VoIP service offerings and business process outsourced services. We believe that our revenue patterns will change going forward, and that although our wireline revenue will remain strong, we will see an increase in revenues related to prepaid service offerings that will surpass wireline revenues by the end of fiscal 2009.
Our traditional wireline service offerings include local exchange, local access, domestic and international long distance telephone services, and a full suite of local features and calling plans, and are provided to small business and residential consumers in various states throughout the country. Historically we focused primarily on the Qwest and Verizon territories; however we recently launched service in new territories under a commercial agreement in place with another non-incumbent local exchange carrier in an effort to expand our footprint, keep costs low, and reduce our reliance on the incumbent carriers. We believe our wireline revenue will remain strong with our expansion into new territories, reduced acquisition and G&A costs as a result of the launch of our call center in the Philippines, and the strong sales resulting from our 2007 acquisition of Midwest Marketing and Northstar Telecom, a telemarketing firm and competitive local exchange carrier.
During the second quarter of 2008, we formed Cordia Prepaid Corp. (“CPC”) for the purpose of acquiring prepaid assets from TSI Prepaid, LLC (“TSI”). This acquisition has allowed us to diversify our position in the telecommunications marketplace by introducing prepaid international phone cards to our service portfolio, as well as additional products such as prepaid wireline, prepaid wireless, and prepaid VoIP services. As a result of the acquisition and the introduction of these new products, we expect to see an increase in our prepaid revenues and report future profits related to these service offerings.
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We believe that providing prepaid phone cards, as well as serving as one of the underlying network service providers for these cards, will comprise approximately 50% of the Company’s overall revenues during the next twelve months. Utilizing our own network not only allows us to control costs but also allows us to control quality while at the same time increasing revenue for both our VoIP and prepaid service offerings. We recently launched our first international prepaid calling card targeting Mexico and anticipate additional roll-outs of country specific cards in the future. These calling cards are available in nearly 7,000 locations nationwide. Further, our entrance into prepaid services will also contribute to the expansion of the sales and distribution channels of our wireline and VoIP services by promoting these services in our retail outlets, the first of which is scheduled to open in the fourth quarter of 2008.
Our VoIP service offerings include a flat rate plan starting as low as $14.95 per month, combined with a full suite of enhanced features which make our service an attractive value proposition to existing and potential customers. Customers also have the option of choosing their desired area code with this service, being able to choose from more than forty (40) countries and hundreds of cities worldwide for their telephone number regardless of their physical location – making any long distance or international call local. As a complement to our mainstream VoIP service offering, we also provide a fully integrated Spanish language VoIP service.
Our service portfolio also includes our MagellanÒ service which is supported by our internally developed VoIP network. MagellanÒ customers get their own personal international telephone number or extension that is routed through our IP platform to the customers landline or mobile phone allowing customers to be reached anywhere in the world at local rates. We believe this service offering will be attractive to executives traveling abroad and ex-patriates who need to stay in touch with their colleagues, friends and family. We use this product internally to keep in touch with our offices and employees located abroad and/or on field assignment. As a result, we are constantly testing the integrity of the service and making improvements on functionality based on our experience with the service.
We also offer an extensive outsourced service product line, which includes as its primary offering outsourced billing on a wholesale basis to telecommunications service providers. Our wholesale customers have access to our secure Internet enabled software systems in which user-friendly web client front-ends called WorkspacesÒ serve as an interface for integration with our software systems. The full suite of services available is described in its entirety in the Business Process Outsourcing (BPO) Service below.
Wireline Services
We offer small business and residential consumers wireline service by leasing a portion of the network owned by other, larger telecommunications carriers, namely Verizon and Qwest. These leasing arrangements are controlled by multi-state, multi-year interconnection and commercial services agreements that allow us to offer telecommunications services to consumers without incurring the capital expenditures associated with building our own network. We also have a commercial services agreement with McLeodUSA, Inc. (“McLeod”), which has allowed for the expansion of our geographic footprint while broadening our underlying service provider portfolio.
We offer local exchange, domestic and international long distance telephone services, and a full suite of local features and calling plans to small business and residential consumers in approximately twenty (20) states in the contiguous United States. Subsequent to the balance sheet date, we launched sales and provisioning pursuant to our relationship with McLeod, by offering services to customers in Illinois, Indiana, Michigan, Ohio, and Texas. We are also licensed to provide local and/or long distance telecommunications services, but are not actively marketing or providing services, in Connecticut, Florida, Georgia, Kansas, Kentucky, Louisiana, Missouri, North Carolina, and Oklahoma. An application for authorization to operate as a local and long distance telecommunications carrier is pending in Arizona.
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Prepaid Services
As a complement to our wireline services, we launched prepaid calling services through CPC. In the second quarter of 2008, CPC completed an asset purchase with TSI Prepaid, LLC, (“TSI”) a distributor of prepaid telecommunications services. The purchase included all assets necessary to carry out the business of TSI such as inventory, fixed assets, billing systems and management information systems, agreements, customer lists and vendor lists. In a separate transaction, Cordia entered into an investment agreement to acquire a minority interest, up to 17%, in Wholetel, Inc., a startup company that operates a turnkey products and services delivery system for retailers and consumers.
The acquisition diversifies our position in the telecommunications marketplace by introducing wireline, wireless and VoIP services on a prepaid basis as well as international phone cards to our service portfolio. The Company believes the purchase will boost overall revenue impacting both its wireline and VoIP revenues. Our products have been marketed primarily through telemarketing, however through the addition of a retail distribution network that reaches approximately 7,000 locations we now have the opportunity to greatly expand our sales and distribution channels reaching a much larger audience.
Since the asset purchase, Cordia’s prepaid services offerings have fast become the Company’s second highest generator of revenue, behind only our traditional wireline services. With the introduction of our first international calling card as well as other prepaid telecommunications services we anticipate that prepaid services will become our greatest source of revenue by the end of fiscal 2009. We believe that the positive effects of this offering will also improve our VoIP revenues, as most of our prepaid services utilize our own IP network. We further expect to begin providing network services to the calling card industry by utilizing our existing worldwide network and established relationships with partners around the world.
VoIP Services
We launched the commercial roll-out of our VoIP service offering, a voice over broadband solution enabling delivery of voice services over any broadband Internet Protocol (“IP”) connection through our majority-owned subsidiary CordiaIP Corp. (“CordiaIP”) in January 2006. We believe VoIP is the logical extension of our traditional wireline telecommunications service offerings and have invested in the architecture and construction of our own proprietary VoIP network, including our own network software and operating support systems.
We offer a wide range of service plans, including a flat rate plan starting as low as $14.95 per month. Along with a full suite of enhanced features, our service is an attractive value proposition to existing and potential customers. We strive to be “the world’s local phone company”® and give our customers the option of choosing their desired area code, offering telephone numbers from more than forty (40) countries and hundreds of cities worldwide. This will allow consumers to make international calls at local rates, a feature not available with traditional wireline service. We also recognize that a large percentage of the United States population speaks Spanish as a primary language. To accommodate these users we launched VozsIP, a fully integrated Spanish language VoIP service. This service, which is identical in quality and functionality to its English counterpart, was designed to be a purely Spanish language experience and includes all Spanish user interfaces, voice prompts, invoices, customer service and targeted country calling plans. While the target market for our VoIP service is small business and consumers, we also offer our service on both a wholesale and resale basis.
International Services
We have focused on creating a niche in the international VoIP marketplace as “the world’s local phone company”® by providing value added services worldwide and creating partnerships and/or acquiring international VoIP providers on a global scale. In 2005, we formed Cordia International Corp. (“CIC”) to serve as a holding and management company for our overseas assets, which include our foreign based subsidiaries and affiliates in Brazil, Hong Kong, India, and the Philippines. We have made significant investments in our international services and have not yet reached a point of profitability relative to these efforts. To date we have incurred losses in executing our plan, and these investments have detracted from the true value of our wireline business, which on a stand alone basis would report a profit that is not apparent when reporting on a consolidated basis. In spite of our current costs and losses, we believe that our international services, which had revenue growth of approximately 300% for the nine months ended September 30, 2008, as compared to the same period in 2007, have long term value and we will continue our efforts to develop these businesses so that they may become self-sustaining.
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We laid the foundation for the commercial launch of our VoIP product in Brazil by test marketing, through in house telemarketing, resold VoIP services of another licensed Brazilian entity. Our efforts were well received by the Brazilian marketplace and on June 25, 2008, the Agéncia Nacional de Telecomunicações (“ANATEL”), the Brazilian equivalent to the Federal Communication Commission (“FCC”), issued our Brazilian subsidiary a Serviçe Comunicação Multimídia (“SCM”) license. The license allows the Company to offer VoIP and value added services, including its Magellan® service line, internationally and domestically throughout Brazil, targeting residential and small to mid-size business customers. Issuance of the license has allowed us to move forward with the commercial launch of our VoIP product in Brazil utilizing our own network, rather than reselling the services of another carrier, giving us the ability to ensure the quality of the services delivered to our customers while reducing expenses. In addition to our telemarketing efforts we anticipate rolling out an agent sales program designed to facilitate our rapid entry into this newly emerging industry, giving the Company the opportunity to play a central role in the deployment of IP based communications networks in Brazil.
In addition, during the first quarter of 2008, though our Indian joint venture, Cordia LT Communication Private Limited, we launched VoIP service offerings on a nationwide basis throughout India pursuant to the license granted by the Ministry of Communications. This license also allows us to operate as an Internet Service Provider in India, although to date we are only providing VoIP to our customers.
In Hong Kong, we have the authority to offer telecommunications services under a Public Non-Exclusive Telecommunications Services (“PNETS”) License. We recently opted not to renew our previously issued Services-Based Operator (“SBO”) license with the Office of Telecommunications Authority (“OFTA”), which covers VoIP services. While OFTA requires SBO holders to interconnect with the incumbent carriers in Hong Kong the regulatory authority does not impose the same requirement on the incumbent carriers. Therefore, due to the lack of regulatory guidance on interconnection and the incumbent carriers’ unwillingness to interconnect we believed it was in the best interest of the company not to renew this license. We still believe that Hong Kong serves as the gateway to Asia and represents the opportunity to serve the more than 40% of the world’s internet and broadband subscribers located in that region, and will renew our efforts in the future.
In the Philippines, we launched our offshore call center during 2007. The center provides the Company with various services including outbound telemarketing, customer service, welcome calls, and collections. The launch of this location has allowed us to provide better service to our customers at a reduced cost to the company. During 2008, we further expanded this location by increasing personnel to take over functions that were previously conducted in our US offices thus reducing our operating expenses. In addition, capitalizing on the recent growth of outsourced call center locations in the country, we are expanding our service portfolio so we can target these call centers, and other enterprise business customers, offering products, which utilize our worldwide network.
In addition to our overseas holdings we continue to foster bilateral relationships with international VoIP carriers. We recently entered into a reseller agreement with IP Converge, an Asia Pacific data center and telecommunications company with operations and facilities in the Philippines, Singapore and Hong Kong. This agreement provides us with license coverage allowing us to fully deploy managed data and VoIP services to business and residential customers in the Philippines. In addition to the license agreement we also have network interconnection with Bayan Telecommunications, Inc. (“Bayan”), the second largest Philippine landline provider. This will allow unlimited calling from Cordia’s international network to Bayan’s wireline and wireless customers sold by Cordia. Our goal in seeking out these global partnerships is to gain low cost access to their networks, allowing us to deliver high quality, low cost global communications services to our domestic and international customers.
To date, our VoIP network includes international Direct Inward Dial (“DID”) telephone numbers from more than forty (40) countries; network points of presence in Hong Kong, India, Brazil and the United States; and peering agreements with approximately ten (10) carriers. We believe that by blending our marketing capabilities, proprietary billing and operation support systems (“OSS”), IP communications technology and international bilateral agreements we can take advantage of the large disparity between wholesale costs in some markets and retail rates in other markets to create a competitive advantage in the international communications market. We believe that by offering a wide range of international numbers integrated with broadband, wireline, wireless and VoIP services bundled from our network and those of our peering partners we can create bundled service offerings that present an attractive value proposition to our customers.
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Business Process Outsourcing Service (“BPO Services”)
We offer an extensive outsourced service product line, which includes as its primary offering outsourced billing on a wholesale basis to telecommunications service providers. Our wholesale customers have access to our secure Internet enabled software systems in which user-friendly web client front-ends called Workspaces® serve as an interface for integration with our software systems. The services available to wholesalers through our Workspaces® are the same services utilized internally for the provision of our own traditional wireline and VoIP services to our customers. As such, we are continuously updating and improving these processes to ensure optimal functionality. We believe our outsourced solutions are an attractive offering because it is not a pre-packaged all or nothing product; the wholesale customer has the power to assess their organization and then adopt and utilize only the functions they believe will increase their own profitability. Our goal is to tailor our services to our client’s needs and create a mutually beneficial and profitable relationship. We believe this is achieved by offering process driven software whereby client required modifications to our systems are made at the server level and then instantly passed onto the client’s end users, promoting our commitment to the continuous development and improvement of our Workspaces®. We bill these services on a predominantly per line basis and have experienced a decrease in BPO Services revenues as a result of the decreased line count experienced by our wholesale customer’s operations.
Accordingly, revenue derived from our BPO Services has become a less material part of our total revenue.
Plan of Operation
For the last several years we have focused on both the global and domestic expansion of our telecommunications products. Historically, our wireline products have met with success and on a standalone basis would be profitable. However, as our wireline services have been the main source of revenue for us, we have utilized these resources to facilitate the architecture and construction of our global VoIP network both domestically and abroad. Our current goal is to reach profitability for the Company as a whole; at present, our revenues are now diversified in three specific areas consisting of Wireline, VoIP, and Prepaid Services, each of which should become profitable on a stand alone basis contributing to the overall profitability of the company. We intend to reach profitability by expanding our physical reach as well as our service portfolio, by reducing our costs, and by driving our existing international operations to profitability.
We will continue to focus on our wireline service offerings and expect our revenues to remain steady going forward. We recently expanded our territory taking advantage of our most recently acquired commercial agreement by launching services in five (5) new states during this reporting period. It is our intention to begin launching our wireline services in additional gross margin favorable states throughout the remainder of 2008 and beyond. Our expansion plans also include the introduction of prepaid wireline, prepaid wireless and prepaid VoIP services to our product line. In addition, we have just launched our first international prepaid calling card which targets Mexico and plan to roll-additional country specific cards going forward. We expect to continue utilizing the distributor network in place at the time we acquired the prepaid assets of TSI as well as expanding this network internationally utilizing Cordia’s established global relationships. In addition, we will expand the sales and distribution channels of our existing wireline and VoIP products from traditional telemarketing with the addition of 7,000 plus retail distributors that are in place though the purchase of the TSI assets. We believe this will have a positive effect on our revenue growth throughout the remainder of 2008 and into the future. Further, we believe that the revenues generated by our prepaid services will eventually exceed that of our wireline revenues providing an additional sustainable stream of revenue to help shoulder the financial burden our wireline business currently has to support all of our operations. Prepaid services will also positively impact our IP services as we plan on using our own underlying network to support our offerings.
We realize that achieving profitability does not rest solely upon increased revenues and new service offerings and that we will need to take steps to reduce our costs. Our biggest reduction has resulted from the launch of our call center in Cebu, Philippines. The decision to open the call center was made after successfully transitioning a portion of our sales and marketing efforts offshore, reducing our customer acquisition costs during the latter half of 2006. We have saved approximately 50% on our costs associated with acquiring new customers and believe that having our own domestic based telemarketing firm and our own overseas call center will also contribute to the increased growth of our wireline, VoIP, and Magellan customer base. We anticipate nearly 90% of future telemarketing sales will be handled between our Midwest call center and our call center in Cebu, Philippines and that these sales, coupled with lower acquisition costs and improved operating efficiency, will have a positive effect on our 2008 results of operations. During 2008, we further expanded this location by increasing personnel to take over functions that were previously conducted in the United States. By utilizing our Cebu center to perform a majority of customer service, welcome calls, and credit and collections for the company we have seen signification cost reductions.
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Finally, we will focus our efforts on driving our existing international businesses to profitability. During the first six months of 2008, we launched our VoIP services in Brazil and India. Further we also have a presence in Hong Kong and the Philippines and our goal is for these entities to become self sustaining on revenues derived from VoIP service offerings in each of these countries. To date, our service offerings have been well received in each of these markets and we are now building strong relationships with the larger carriers in each of these countries such as Embratel in Brazil and Bayan Telecommunications, Inc. and IP Converge in the Philippines to ensure a quality network. To date we are only providing VoIP service, but our long-term objective in these countries is to deploy our own next generation wireless IP network utilizing WiMAX technology capable of providing mobile voice, data and value added services. While it is our intention to reach these goals prior to entering into any new regions we will not dismiss lucrative opportunities if presented to us and if they will help us achieve profitability.
Results of Operations
The following table compares our operating revenue for the nine and three month periods ended September 30, 2008 and 2007:
Operating Revenues
| | | | | | | | |
| | Nine Months Ended September 30, | | Three Months Ended September 30, |
| | 2008 | | 2007 | | 2008 | | 2007 |
| | | | | | | | |
Wireline services | | $ 34,933,000 | | $ 31,094,000 | | $ 11,884,000 | | $ 11,529,000 |
Prepaid services | | 14,295,000 | | - | | 11,005,000 | | - |
VoIP services | | 1,975,000 | | 602,000 | | 732,000 | | 275,000 |
Business Process Outsourced Services | | 14,000 | | 383,000 | | 5,000 | | 130,000 |
| | | | | | | | |
| | $ 51,217,000 | | $ 32,079,000 | | $ 23,626,000 | | $ 11,934,000 |
Total operating revenues for the nine and three month periods ended September 30, 2008, increased by approximately $19,138,000 and $11,692,000, respectively, to approximately $51,217,000 and $23,626,000, respectively, as compared to approximately $32,079,000 and $11,934,000, respectively, reported in same periods ended September 30, 2007.
Our primary source of revenue is through our wireline services and is earned primarily through the provisioning of services to business, residential and wholesale customers for basic telephone service, including local and long distance service, as well as ancillary services such as voice mail and call waiting and to a lesser extent from Carrier Access Billing (“CABS”) billing. For the nine and three month periods ended September 30, 2008, our wireline services revenue increased by approximately $3,839,000 (12.3%) and $355,000 (3.1%) to approximately $34,933,000 and $11,884,000, respectively from approximately $31,094,000 and $11,529,000 reported in the same periods last year. This increase is attributable to a 29% and 30%, respectively, increase in lines, which is primarily due to the acquisition of NST in August 2007 offset, in part, by lower average rates.
The Company generated prepaid services revenues of approximately $14,295,000 from June 5, 2008 to September 30, 2008, and $11,005,000 for the three months ended September 30, 2008. We anticipate an increase in prepaid revenue, surpassing that of our wireline revenue by the end of fiscal year 2009.
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For the nine and three month periods ended September 30, 2008, our VoIP services revenue increased by approximately $1,373,000 (228%) and $457,000 (166%) respectively, to approximately $1,975,000 and $732,000, as compared to the same period ended 2007. Included in the nine month period ended September 30, 2008 were equipment sales of approximately $196,000. Approximately $950,000 and $309,000, respectively, of the increase in VoIP revenue was related to our international services. These increases were primarily due to increased volume in the Company’s Brazilian operations.
For the nine and three month periods ended September 30, 2008, billing services revenue, consisting primarily of income earned through our outsourcing of billing services, data, and website technology to wholesale telecommunications providers, decreased by approximately $369,000 and $125,000 to approximately $14,000 and $5,000, as compared to approximately $383,000 and $130,000 reported in the same periods in 2007. This change occurred as a result of our wholesale customers’ decreased line counts. We expect this revenue source to be insignificant over the next couple of quarters due to decreasing line counts experienced by our BPO customers.
COST OF REVENUES
The following table compares our cost of revenues for the nine and three month periods ended September 30, 2008 and 2007:
| | | | | | | | |
| | Nine Months Ended September 30, | | Three Months Ended September 30, |
| | 2008 | | 2007 | | 2008 | | 2007 |
| | | | | | | | |
Wireline Services | | $ 20,303,000 | | $ 16,881,000 | | $ 6,924,000 | | $ 6,380,000 |
Prepaid Services | | 13,743,000 | | - | | 10,582,000 | | - |
VoIP Services | | 1,637,000 | | 573,000 | | 575,000 | | 190,000 |
| | $ 35,683,000 | | $ 17,454,000 | | $18,081,000 | | $ 6,570,000 |
Wireline Services
Cost of revenue from wireline services consists of resale and wholesale line charges and represents our network access fees paid in order to provide local and long distance telephone service to our customers. These expenses vary in direct correlation to the size of our telecommunications customer base. We have experienced an increase of approximately $3,422,000 (20%) and $544,000 (9%) for the nine and three months ended September 30, 2008, respectively, as compared to the same periods in 2007. The majority of this increase is due to the increase in our line count and higher wholesale line charges for the nine month period.
Prepaid Services
Cost of revenue from prepaid services from June 5, 2008, the date we commenced services to September 30, 2008, was $13,743,000. The cost of prepaid services for the most recent three month period was $10,582,000.
VoIP Services
Cost of revenue for VoIP services increased $1,064,000 (186%) and $385,000 (203%) for the nine and three month periods ended September 30, 2008, respectively, as compared to the same periods in 2007. Approximately, $626,000 and $201,000, respectively of these increases were related to international operations, including $115,000 related to the sale of equipment in the nine month period. The remaining international increases are primarily due to the Brazilian operations.
Gross Profit Margin
For the nine and three month periods ended September 30, 2008, we experienced a decrease of our gross profit margin to 30% and 23%, respectively, from approximately 46% and 45% reported for the same periods in 2007. The decrease is due, in part, to prepaid services with gross margins of 3.86%. The gross margin decrease for wireline services is due to lower average rates and an increase of wholesale line charges. Gross margin for VoIP services decreased to 17.1 % and 21.4% for the nine and three month periods ended September 30, 2008. VoIP services have disproportionately higher expenses associated with the ongoing roll out of the service. In addition, BPO revenue decreased with no reduction in expenses.
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OPERATING EXPENSES
The following tables compare our operating expenses for the nine and three month periods ended September 30, 2008 and 2007:
| | | | | | | | | |
| | Nine Months Ended | Nine Months Ended |
| | September 30, 2008 | September 30, 2007 |
| | Corporate | | | | | Corporate | | |
| Total | Overhead | Prepaid | Wireline | VoIP | Total | Overhead | Wireline | VoIP |
Sales and Marketing | $ 3,543,000 | $ - | $27,000 | $ 3,008,000 | $ 508,000 | $2,963,000 | $ - | $ 2,621,000 | $ 342,000 |
Bad Debts | 2,648,000 | - | - | 2,520,000 | 128,000 | 2,688,000 | - | 2,626,000 | 62,000 |
General and Administrative | 9,420,000 | 1,891,000 | 504,000 | 5,160,000 | 1,865,000 | 9,509,000 | 1,365,000 | 6,602,000 | 1,542,000 |
Impairment of Goodwill | - | - | - | - | - | 284,000 | - | - | 284,000 |
Depreciation and Amortization | 1,266,000 | - | 62,000 | 1,057,000 | 147,000 | 803,000 | 1,000 | 725,000 | 77,000 |
| | | | | | | | | |
| $16,877,000 | $1,891,000 | $593,000 | $11,745,000 | $2,648,000 | $16,247,000 | $1,366,000 | $12,574,000 | $2,307,000 |
| | | | | | | | | |
| | Three Months Ended | | Three Months Ended |
| | September 30, 2008 | | September 30, 2007 |
| | Corporate | | | | | Corporate | | |
| Total | Overhead | Prepaid | Wireline | VoIP | Total | Overhead | Wireline | VoIP |
Sales and Marketing | $1,163,000 | $ - | $ 5,000 | $ 969,000 | $189,000 | $ 836,000 | $ - | $ 676,000 | $ 160,000 |
Bad Debts | 979,000 | - | - | 922,000 | 57,000 | 1,113,000 | - | 1,091,000 | 22,000 |
General and Administrative | 3,170,000 | 592,000 | 345,000 | 1,552,000 | 681,000 | 3,219,000 | 546,000 | 2,033,000 | 640,000 |
Impairment of Goodwill | - | - | - | - | - | - | - | - | - |
Depreciation and Amortization | 445,000 | - | 47,000 | 353,000 | 45,000 | 292,000 | - | 266,000 | 26,000 |
| | | | | | | | | |
| $5,757,000 | $ 592,000 | $397,000 | $3,796,000 | $972,000 | $ 5,460,000 | $ 546,000 | $4,066,000 | $ 848,000 |
Consolidated operating expenses increased by approximately $630,000 (3%) for the nine month period and increased $297,000 (5%) for the three month period ended September 30, 2008, as compared to approximately $16,247,000 and $5,460,000, respectively, reported during the comparable periods in 2007. Approximately $256,000 of the increase is related to our VoIP and international operations and $600,000 is related to our new prepaid operations. These increases were offset by the decrease of approximately $219,000 in our wireline and corporate operations for the nine months ended September 30, 2008.
Sales and Marketing
For the nine and three months ended September 30, 2008, sales and marketing expenses increased by approximately $580,000 and $327,000, respectively, to approximately $3,543,000 and $1,163,000, respectively, as compared to approximately $2,963,000 and $836,000, respectively, reported in the prior year. These increases are primarily due to the growth of our wireline customer base and marketing expenses to promote our international VoIP product.
Bad Debts
For the nine months ended September 30, 2008, our bad debt expense decreased by approximately $40,000 to approximately $2,648,000 compared to the prior year and decreased by approximately $134,000 for the three month period, from approximately $1,113,000 reported in the prior year to approximately $979,000 for the three months ended September 30, 2008. We expect that our increased efforts and close monitoring of our receivables will enable us to effectively manage our bad debt exposure throughout the remainder of 2008.
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General and Administrative
General and administrative (“G&A”) expenses include, but are not limited to salaries, rent, office expenses, insurance, commissions, telephone, bank and credit card processing fees, license expense and registration fees. G&A expenses decreased by approximately $89,000 and $50,000, respectively, for the nine and three month periods ended September 30, 2008, as compared to the same periods in 2007. This was due primarily to an increase in costs associated with both our domestic and international VoIP initiatives. For the nine month period approximately $238,000 is an increase relating to our VoIP and international operations, $504,000 is related to our prepaid operations and a decrease of $831,000 is related to our wireline and corporate operations. We believe that G&A expense will increase throughout 2008, as compared to 2007, due to the expansion of our international operations, the inclusion of Midwest and NST for the full year, and CPC’s launch of prepaid services.
Impairment of Goodwill
At March 31, 2007, the Company evaluated the goodwill associated with the purchase of Triamis and deemed the carrying value of the goodwill to be impaired. In accordance with FASB 142 the Company wrote down the goodwill with an impairment charge of $284,000. For the periods ended September 30, 2008, the Company deemed that no impairment charge was needed.
Depreciation and Amortization
Depreciation and amortization expense increased approximately $463,000 and $153,000, respectively, for the nine and three month periods ended September 30, 2008, as compared to the same periods in 2007. This increase was due to the amortization of the customer lists associated with the acquisition of Midwest and NST, as well as the customer list amortization associated with our new prepaid subsidiary, additions of depreciable office equipment and labor costs associated with our rollout of VoIP, which was capitalized and depreciated in accordance with Statement of Position (“SOP”) 98-1. Depreciation and amortization associated with Midwest, NST and CPC totaled approximately $245,000 and $108,000 for the nine and three month periods, respectively.
Depreciation on equipment and capitalized software costs are calculated using the straight line method and declining balance method over a three (3) year period. Amortization of leasehold improvements and other assets is computed using the straight-line method over the lesser of the estimated useful lives of the asset or the remaining lease term.
Liquidity and Capital Resources
At September 30, 2008, we had cash and cash equivalents, including restricted cash, of approximately $926,000, a decrease of approximately $247,000 from amounts reported at December 31, 2007, and negative working capital of approximately $13,787,000, as compared to negative working capital of approximately $9,781,000 reported at December 31, 2007. The decrease in working capital is primarily related to the increase in accounts payable and billed taxes payable, purchase of customer lists and payment on notes payable.
Net cash provided by operating activities for the nine month period ended September 30, 2008, aggregated approximately $2,153,000, a decrease of approximately $643,000, from approximately $2,796,000 provided during the same period in 2007. The principal source of net cash for the nine month period ended September 30, 2008 was an increase in accounts payable and billed taxes payable aggregating $5,398,000, the net loss from operations (net of non cash expenses of compensatory stock, bad debts and depreciation and amortization) of $1,721,000. This was offset, in part, by increases in accounts receivable of $4,771,000. The principal source of cash for the nine-month period ended September 30, 2007, was primarily the increase in billed taxes payable and bad debts expense aggregating approximately $4,922,000 offset, in part, by an increase in accounts receivable, of approximately $1,400,000 and net loss for the period amounting to $1,977,000.
Net cash used by investing activities for the nine month period ended September 30, 2008, aggregated approximately $1,809,000 compared to net cash used of approximately $1,665,000 during the same period in 2007. For the nine months ended September 30, 2008, net cash used by investing activities consisted primarily of the acquisition of TSI operations of approximately $797,000, expenditures for internally developed software for our VoIP platform of approximately $400,000 ($529,000 in 2007), the purchase of customer lists of approximately $224,000, purchase of property plant and equipment of $280,000 ($595,000 in 2007) and investment in unconsolidated affiliates of $107,000.
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For the period ending September 30, 2008, net cash used by financing activities was approximately $530,000 as compared to approximately $25,000 for the 2007 period. Financing expenditures consisted primarily of payments of notes payable amounting to $500,000.
Long-term debt (including interest) and operating lease obligations as of September 30, 2008, mature as follows:
| | | | | | | | | | |
| | | | | | | | | | |
| | | | Less than | | | | | | More Than |
Obligations | | Total | | 1 year | | 2-3 years | | 4-5 years | | 5 years |
| | | | | | | | | | |
Notes Payable | | $ 2,722,000 | | $ 1,839,000 | | $ 883,000 | | $ - | | $ - |
| | | | | | | | | | |
Telephone Capital Lease | | 31,000 | | 16,000 | | 15,000 | | - | | - |
| | | | | | | | | | |
Rental (Office) | | 1,878,000 | | 571,000 | | 904,000 | | 403,000 | | - |
| | | | | | | | | | |
TOTAL OBLIGATIONS | | $ 4,631,000 | | $ 2,426,000 | | $1,802,000 | | $ 403,000 | | $ - |
At September 30, 2008, our balance sheet showed $142,000 in restricted cash in the form of a LOC for the benefit of Qwest secured by funds deposited into a restricted money market account. The LOC was originally effective for a term of one (1) year, however Qwest renewed it for an additional one (1) year period. The LOC was due to expanding our wireline service offerings into additional states covered by our commercial services agreement with Qwest. Additionally, at the December 31, 2007 date we had an LOC of $30,000 for NST. This was acquired in the Midwest Acquisition in August of 2007 and was obtained for the benefit of Verizon, and is included in the December 31, 2007 balance sheet. The remaining amount represents interest on the LOC’s.
The Company has incurred losses and also has a negative working capital and a deficiency in stockholders' equity as of September 30, 2008 and December 31, 2007. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management, however, believes that the Company will be able to generate sufficient cash flows from operations to meet its obligations as they come due during the next twelve month period.
The Company recognized the need for additional working capital to strengthen its financial position, maintain growth, payment of tax obligations and continue to carry out its plans for its international expansion of VoIP and related value added services and entered into the Factoring and Security Agreement (“Factoring Agreement”) with Thermo Credit, LLC (“Thermo”), a Colorado limited liability company, in September 2007. In July 2008, the parties entered into an amendment to the Factoring Agreement increasing the commitment amount by Five Hundred Thousand dollars ($500,000) to an aggregate Five Million Five Hundred Thousand dollars ($5,500,000).
Management believes that with the increase in sales from NST, the entry into the prepaid market, and the cost savings generated from our lower customer acquisition costs, the Company will generate sufficient cash flows from operations to meet its obligations as they come due during the next twelve month period. We do, however, recognize the limiting effect that our liquidity has on our growth rate and management may seek additional sources of capital in the future, including but not limited to a private placement of the Company’s common stock, to neutralize this limitation in the future.
The Company recognizes the financial strain the losses of its VoIP and international initiatives have put on the rest of the business and the manner in which it detracts from the overall value of the Company. We still, however, believe that our VoIP and international initiatives have the potential for long term shareholder value as we have seen revenue growth associated with these services increase by approximately 166% this quarter as compared to the same period last year. Further, we believe that the current market price of our common stock is not an accurate reflection of its true value and that it may take a significant amount of time for these benefits to be realized.
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Off –Balance Sheet Arrangements
We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, or other contingent arrangements that exposes us to material continuing risks, contingent liabilities or any other obligations that provide financing, liquidity, market risk or credit risk support to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We earn a majority of our revenue in U.S. dollars where our primary operating activities are located. We also maintain offices and operate in Brazil, Hong Kong, and the Philippines. This creates an exposure to loss if any of those currencies appreciate against the dollar. We believe however, than any risk due to currency rate exchange fluctuations are immaterial as our operations overseas do not represent a majority of our business.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Disclosure controls and procedures are to ensure that information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms. In addition, the evaluation is to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to the Company’s management, including Company’s principal executive and principal financial officer to allow timely decisions regarding required disclosure and that our internal controls are effective to provide reasonable assurances that our financial condition, results of operations and cash flows are fairly presented in all material respects. Based on that evaluation of the Company’s disclosure controls and procedures as of the end of the period covered by this report, the Company’s management, including its Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2008 because it has not yet been concluded that the material weaknesses in the Company’s internal control over financial reporting reported as of December 31, 2007 in the Company’s Form 10-K/A have been remediated.
Subsequent to December 31, 2007, the Company has implemented, or plans to implement, certain measures to remediate the identified material weaknesses and to enhance the Company’s internal control over its quarterly and year-end financial reporting processes. As of the date of the filing of this Quarterly Report on Form 10-Q, the Company has implemented the following measures:
·
Increased the size, expertise and training of the finance and accounting staff to include adequate resources for ensuring GAAP is properly applied.
·
Enhanced the accounting policies and procedures to provide adequate, sufficient, and useful guidance.
·
Increased the level of interdepartmental communication in a way that will foster information sharing between our finance staff and operational personnel.
The Company anticipates that these remediation actions represent ongoing improvement measures.
Furthermore, while the Company has taken steps to remediate the material weaknesses, these steps may not be adequate to fully remediate those weaknesses, and additional measures may be required. The Company believes that the identified weaknesses will be fully remediated by its year ended December 31, 2008.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 27, 2008, Cordia Corporation, VOzsIP, Corp. and CordiaIP Corp. were served by Plaintiff, Rates Technology, Inc. the holder of two (2) separate US Patents, for patent infringement. The lawsuit was filed against the Company in the Southern District of New York on June 26, 2008. On September 24, 2008, the lawsuit was settled and on October 1, 2008 the parties filed a Stipulation of Dismissal with Prejudice.
The Company is not currently a party to any additional legal proceedings that we believe will have a material adverse effect on our financial condition or results of operations.
ITEM 1A. RISK FACTORS
The have been no changes in the Company’s Risk Factors as disclosed in its Form 10-K for the period ended December 31, 2007, and its Form 10-Q for the period ended June 30, 2008.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We have no unregistered sales of equity securities and use of proceeds to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
We have no defaults upon senior securities to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders.
ITEM 5. OTHER INFORMATION
We have no additional information to report that would require disclosure in a report on Form 8-K during the period ended September 30, 2008 for which we did not file a Form 8-K report.
ITEM 6. EXHIBITS
(a) Exhibits. The following exhibits are filed herewith.
| |
31.1 | Certification of Cordia Corporation's Principal Executive Officer, Joel Dupré, |
| pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
31.2 | Certification of Cordia Corporation's Principal Financial Officer, Gandolfo Verra, |
| pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
32.1 | Certificate of Cordia Corporation's Principal Executive Officer, Joel Dupré, |
| pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
32.2 | Certification of Cordia Corporation's Principal Financial Officer, Gandolfo Verra, |
| pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
In accordance Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CORDIA CORPORATION
Date: November 14, 2008
By:/s/ Joel Dupré
Joel Dupré
Chief Executive Officer
Date: November 14, 2008
By: /s/ Gandolfo Verra
Gandolfo Verra
Chief Financial Officer
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