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| CANM.PK > SEC Filings for CANM.PK > Form 10-Q on 19-Nov-2008 | All Recent SEC Filings |
19-Nov-2008
Quarterly Report
The discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this quarterly report on Form 10-Q (the "Quarterly Report") and the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2007 (the "2007 Annual Report"), as filed with the Securities and Exchange Commission ("SEC"). In addition to historical information, this discussion and analysis contains forward looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward looking statements as a result of certain factors, including but are not limited to those identified in 2007 Annual Report in the section entitled "Risk of Foreign Operations" and "Competition".
Forward-Looking Statements
This report contains certain forward-looking statements and information that are based on assumptions made by management and on information currently available. When used in this report, the words "anticipate," "believe," "estimate," "expect," "intend," "plan," and similar expressions, as they relate to our company or its management, are intended to identify forward-looking statements. These statements reflect management's current view of our company concerning future events and are subject to certain risks, uncertainties and assumptions, including among many others the following: changes in the information technology industry; changes in out-sourcing and off-shore operations; a general economic downturn; a further downturn in the securities markets; our early phase of operations; reliance on foreign suppliers and contractors; the inability to locate suitable acquisition targets; and other risks and uncertainties. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected.
Background
We have two wholly owned operating subsidiaries, Tier One Consulting, Inc., which operates from our Newport Beach, California, offices, and Caneum India Private Limited, formerly Continuum Systems Private Limited, which operates from our offices located in Gurgaon, Delhi, India, and is owned by our wholly owned holding company formed and located in Singapore, Caneum Asia Pacific Pte. Ltd.
Overview
We are a global provider of business process and information technology outsourcing services across vertical industries, including technology, energy, government, transportation, financial services, education and healthcare. We provide a suite of business strategies and planning capabilities to assist companies with their outsourcing decisions in the areas of data, network, product development, product maintenance and customer support, and fulfill our services in-house, on-shore and off-shore, depending on the business goals and objectives of our global customers. In parallel, we are opportunistically pursuing accretive acquisitions within our core outsourcing service suite in order to broaden our core capabilities, expand our customer base and supplement our organic growth.
We offer our customers business process outsourcing (BPO) services and information technology outsourcing (ITO) services. BPO services are comprised of the following:
• Customer Support, including call centers and web agents for online and offline technical, customer and product support;
• Human Resources, including benefits packages, pre-employment screening, retained and contingent recruiting and information technology centric staffing;
• Sales and Marketing, including online web agents, lead generation and distribution channel expansion;
• Investor Relations and Public Relations, including audio transcription and web development, deployment and maintenance for investor communications; and
• Finance and Accounting, including data entry and back office processing.
ITO services are comprised of the following: Information Technology Enterprise Software Services, including architecting, integrating, deploying, migrating and maintaining front-end Sales Force Automation (SFA), back-end Enterprise Resource Planning (ERP), case management, expert system and enterprise application software packages; Information Technology Infrastructure Services, including systems administration, database administration, web development, network optimization, infrastructure audits and system architecture; and Product Development, including hardware, firmware and software coding, development and maintenance for existing product lines and next generation product prototyping.
Results of Operations
Three and Nine months ended September 30, 2008, versus the Three and Nine months ended September 30, 2007
Revenue
Revenue was $2,644,029 and $3,127,234 for the three months ended September 30, 2008 and 2007, respectively, representing a decrease of $483,205, or approximately 15%, compared to the same period in the prior year (the "comparable prior year period"). An increasing proportion of our revenue came from our largest customer, DIRECTV, which accounted for almost 54% of our total revenue for the three months ended September 30, 2008. For the prior year period DIRECTV accounted for approximately 29% of our total revenue. Expanded operations at DIRECTV were offset by reduced revenue at other customers such as Los Angeles Unified School District which accounted for 10% of our revenue in the prior year period and loss of customers such as Countrywide which accounted for 6% of our revenue in the prior year period. Beginning in the fourth quarter of 2008, we are expecting significant revenue reduction due to economic conditions as well as loss of business development personnel.
Revenue was $9,163,437 and $9,118,922 for the nine months ended September 30, 2008 and 2007, respectively, representing an increase of $44,515, or less than 1% compared to the comparable prior year period. Over 47% of our total revenue for the nine months ended September 30, 2008 was due to expanded operations at our largest customer, DIRECTV, this compares to DIRECTV contributing 22% of our total revenue during the prior year period. Expanded operations at DIRECTV were offset by reduced revenue at other customers such as Los Angeles Unified School District which accounted for 12% of our revenue in the prior year period and loss of customers such as Keane which accounted for 7% of our revenue in the prior year period. Beginning in the fourth quarter of 2008, we are expecting significant revenue reduction due to economic conditions as well as loss of business development personnel.
Cost of Revenue and Gross Profit
Cost of revenue was $2,249,409 and $2,604,439 for the three months ended September 30, 2008 and 2007, respectively, representing a decrease of $355,236, or 14%. The decrease was due to decreased revenue as discussed above. Beginning in the fourth quarter of 2008, we are expecting significant cost of revenue reduction due to the revenue reduction previously discussed.
Cost of revenue was $7,718,700 and $7,334,629 for the nine months ended September 30, 2008 and 2007, respectively, representing an increase of $384,071, or 5%. The increase was primarily due to decreased margins as discussed below. Beginning in the fourth quarter of 2008, we are expecting significant cost of revenue reduction due to the revenue reduction previously discussed.
Our gross margin percentages were 15% and 17% for the three months ended September 30, 2008 and 2007, respectively. The decrease in the gross margin percentages was the result of three factors: higher commission payments to recruiters, a lower proportion of permanent placements (which are typically much higher margins) and a decline in margins at one of our key clients, DIRECTV. Beginning in the fourth quarter of 2008, we are expecting significant gross profit reduction due to the revenue reduction previously discussed. However, we may see slight margin percentage improvement due to lower commission payments.
Our gross margin percentages were 16% and 20% for the nine months ended September 30, 2008 and 2007, respectively. The decrease in the gross margin percentages was the result of three factors: higher commission payments to recruiters, a lower proportion of permanent placements (which are typically much higher margins) and a decline in the volume of high margin business with one of our key clients, DIRECTV. Beginning in the fourth quarter of 2008, we are expecting significant gross profit reduction due to the revenue reduction previously discussed. However, we may see slight margin percentage improvement due to lower commission payments.
Operating Expenses
Operating expenses were $852,639 and $1,329,297 for the three months ended September 30, 2008 and 2007, respectively, representing a decrease of $476,658 or 36%. A significant factor for the decrease was U.S. payroll and professional services, as described below offset by higher office rent of $36,071. Beginning in the fourth quarter of 2008, we are expecting significant operating expense reduction due to loss of personnel as well as other cost savings measures.
The major components of our operating expenses are as follows:
· Stock-Based Compensation expense and Expenses Paid by
Stock Issuance were $214,007 and $251,505 for the three
months ended September 30, 2008 and 2007, respectively.
This represents a decrease of $37,498 and is due to
increased use of restricted stock compensation rather
than stock option compensation.
· U.S. Payroll and Related Expenses, (excluding stock
based) amounted to $258,665 and $412,415 for the three
months ended September 30, 2008 and 2007, respectively.
The decrease of $153,750 resulted from the departure of
three senior executives in April and May 2008.
· U.S. Professional Services, including legal, auditing and
other consulting services amounted to $65,885 and
$321,754 during the three months ended September 30, 2008
and 2007 respectively. The decrease of $255,869 was
primarily attributable to the prior year period including
excess audit and accounting costs due to restatement of
2006 quarterly reports and legal fees associated with
litigation.
· Most expenses of our wholly-owned India subsidiary are a
direct cost of revenue and are recoded as such. Operating
expenses of our India subsidiary, excluding depreciation
and amortization, were $120,306 and $54,275 for the three
months ended September 30, 2008 and 2007, respectively.
Operating expenses were $3,056,486 and $3,627,091 for the nine months ended September 30, 2008 and 2007, respectively, representing a decrease of $570,605 or 16%. Significant factors for the decrease are described below, and are offset by higher office rent expense of $98,988. Beginning in the fourth quarter of 2008, we are expecting significant operating expense reduction due to loss of personal as well as other cost savings measures.
The major components of our operating expenses are as follows:
· Stock-Based Compensation expense and Expenses Paid by
Stock Issuance were $747,941 and $867,720 for the nine
months ended September 30, 2008 and 2007, respectively.
This represents a decrease of $119,779 and principally
results from the lower value of our stock used as
incentives for services.
· U.S. Payroll and Related Expenses, (excluding stock
based) amounted to $985,084 and $1,101,766 for the nine
months ended September 30, 2008 and 2007, respectively.
The decrease of $116,682 or 11% resulted from the
departure of three senior executives in April and May
2008.
· U.S. Professional Services, including legal, auditing and
other consulting services amounted to $497,406 and
$739,904 for the nine months ended September 30, 2008 and
2007 respectively. The decrease of $242,498 was primarily
attributable to the prior year's excess accounting and
auditing costs associated with restatement of our 2006
quarterly results.
· Most expenses of our wholly-owned India subsidiary are a
direct cost of revenue and are recoded as such. Operating
expenses of our India subsidiary, excluding depreciation
and amortization, were $334,638 and $170,230 for the nine
months ended September 30, 2008 and 2007, respectively.
Impairment loss
For the three and nine months ended September 30, 2008 we recorded $394,500 of impairment charges related to customer list and the trade name acquired with the acquisition of Tier One and $20,000 impairment of property and equipment anticipated to be liquidated. The intangible assets were deemed impaired due to departure of the Tier One executives and several customers. The fair value of the remaining customers acquired with the acquisition of Tier One was determined using the projected discounted cash flow profit from these customers.
Other Income (Expense)
For the three months ended September 30, 2008 we recorded other expense, net of $714 compared to other expense, net of $94,443 for the three months ended September 30, 2007. The decrease in other expense resulted from $61,265 of foreign exchange gain during the current year period versus $20,396 of foreign exchange loss during the prior year period. The foreign exchange gain and loss is due to our wholly owned subsidiary transacting business in currencies other than their functional currency. Net interest expense decreased $4,425 from the prior year period primarily due decreased debt on our Bridge Bank line of credit offset by interest expense associated with our promissory note offering.
Other expense, net was $50,237 and $251,514 for the nine months ended September 30, 2008 and 2007, respectively. The decrease in other expense was primarily the result of $124,411 of foreign exchange gain in the current year period versus $73,444 of foreign exchange loss in the prior year period. Net interest expense increased $4,221 from the prior year period due to interest expense associated with our promissory note offering as well as nine months of borrowings on our Bridge Bank line of credit compared to only seven months of borrowings in the prior year period.
Net loss
We incurred a net loss of $875,313 and $919,187 for the three months ended September 30, 2008 and 2007, respectively. We are expecting a net loss reduction in the fourth quarter due to cost savings measures.
We incurred a net loss of $2,093,585 and $2,206,638 for the nine months ended September 30, 2008 and 2007, respectively. We are expecting a net loss reduction in the fourth quarter due to cost savings measures.
Liquidity and Capital Resources
Cash and cash equivalents were $79,900 and $91,095 as of September 30, 2008 and 2007, respectively.
Net cash provided by operations was $120,837 for the nine months ended September 30, 2008 and was primarily due to extension of payables, as well as timely collection of accounts receivable. This compares to $1,137,320 used in operations for the nine months ended September 30, 2007. The greater amount of cash used in operations during the prior year period was primarily due to slow collection of accounts receivable offset by extension of payables.
Net cash used in investing activities was $6,976 and $160,773 for the nine months ended September 30, 2008 and 2007, respectively. The prior year period included $89,300 of acquisition expenditures for the remaining 45% Interest of Continuum.
Net cash used in financing activities was $69,593 for the nine months ended September 30, 2008 compared to net cash provided by financing activities of $1,032,973 for the nine months ended September 30, 2007. During the current year period we repurchased from Barron Partners all outstanding convertible Preferred Shares, 330,397 common shares, and warrants for $500,000. Following the repurchase, all of the shares and warrants were retired. The funds for the repurchase were obtained by issuing for cash our promissory notes. For the nine months ended September 30, 2008 we raised $777,500 from the issuance of promissory notes. The current year also includes reduction in notes payable to the prior Tier One shareholders as well as some reduction in our Bridge Bank line of credit. The prior year period included $1,525,660 of net advances from our lines of credit, offset by principal payments of $561,606 to the prior Tier One shareholders and a $50,000 payment to a prior shareholder of Continuum Systems (now wholly owned as Caneum India).
In March 2008, in conjunction with our promissory note offering, we converted $200,000 of the Tier One principal balance into promissory notes due in 2011. The remaining balance of $23,948 for the first installment on the Tier One acquisition debt was also paid off in March 2008. The final installment of $687,500 initially due March 28, 2008, was refinanced into a series of thirty-nine monthly installment payments of $20,000 beginning May 15, 2008 and going through July 15, 2011, with a final payment of $10,031 due August 15, 2011. Beginning in July 2008, we were unable to continue full payments and in October 2008 discontinued payments. The note bears 8% interest and any remaining balance becomes immediately due upon change of control of the Company. The unpaid balance at September 30, 2008 was $654,892 and the full amount has been recorded as a current liability.
In August 2008, we initiated a Services Agreement, whereby certain of our vendor liabilities are managed and paid by an outside company for a small mark up charge. As of September 30, 2008 total amount due to this vendor was $217,781 including mark up charges of $16,180.
Our current cash position is very limited placing great constraint on our operations. Without additional funding, we will not be able to continue operations beyond the foreseeable future.
Off-Balance Sheet Arrangements
During the nine months ended September 30, 2008, we did not engage in any off-balance sheet arrangements.
Recent Accounting Pronouncements
Refer to Note 2 to the unaudited condensed consolidated financial statements for a discussion of the impact of recent accounting pronouncements.
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