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| DDDC.OB > SEC Filings for DDDC.OB > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
Quarterly Report
This Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.
Forward-Looking Statements
This MD&A contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates, forecasts and projections about us, our future performance, the industries in which we operate our beliefs and our management's assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as "expect," "anticipate," "target," "goal," "project," "intend," "plan," "believe," "seek," "estimate," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to assess. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. These risks and uncertainties include, but are not limited to, the following:
? our ability to reduce our costs and expenses and expand our revenues;
? our ability to obtain additional capital in the near term to finance
operations;
? our ability to retain key personnel and employees needed to support
our services and ongoing operations;
? our failure to retain key customers;
? decreasing rates of all related telecommunications services;
? the public's acceptance of Voice over Internet Protocol, or VoIP,
telephony, and the level and rate of customer acceptance of our new
products and services;
? the competitive environment of Internet telephony and our ability to compete
effectively;
? fluctuations in our quarterly financial results;
? our ability to maintain and operate our computer and communications
systems without interruptions or security breaches;
? our ability to operate in international markets;
? our ability to provide quality and reliable service, which is in
part dependent upon the proper functioning of equipment owned and
operated by third parties;
? the uncertainty of future governmental regulation;
? the need for ongoing product and service development in an
environment of rapid technological change; and
? other risks referenced from time to time in our filings with the
SEC.
For a more complete list and description of such risks and uncertainties, as well as other risks, please refer to the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements or risk factors after the distribution of this MD&A, whether as a result of new information, future events, changes in assumptions or otherwise.
Overview
We are a well-known provider of integrated Voice over Internet Protocol, or VoIP, telephony services, products, hosted solutions and infrastructure. We were founded in 1996 to capitalize on the growth of the Internet as a communications tool by commercially offering Internet Protocol, or IP, telephony services, or VoIP telephony. VoIP telephony is the real-time transmission of voice communications in the form of digitized "packets" of information over the Internet or a private network, similar to the way in which e-mail and other data is transmitted. While we began as primarily a low-cost alternative source of wholesale minutes for carriers around the world, we have evolved into a well-known provider of next generation communication services.
Today we support tens of thousands of active users around the globe through our two primary distribution channels: our service provider and reseller channel, and our direct-to-consumer channel. We offer a broad suite of private label VoIP products and services as well as a back-office platform for service providers, resellers and corporate customers, such as VoIP operators and various corporate enterprises. Based on our customizable VoIP solutions, these customers can offer private label telecommunications to their own customer bases under their own brand name, a "white-label" brand (in which no brand name is indicated and different customers can offer the same product), or the deltathree brand. At the same time, our direct-to-consumer channel includes our iConnectHere offering (which provides VoIP products and services directly to consumers and small businesses online using the same primary platform) and our joip offering (which serves as the exclusive VoIP service provider embedded in the Globarange cordless phones of Panasonic Communications).
During the first quarter of 2009 we continued to see some signs of stabilization in terms of sequential revenue, as the restructuring and cost reduction measures we began implementing in 2008 continued to gain traction and positively affect our financial performance. Following a comprehensive review of the company's strategy initiated by the Board of Directors, we refocused our near-term strategy and market initiatives around our core VoIP reseller business, with an additional enhanced focus on key higher-growth international markets such as the Middle East, Africa, Asia and Latin America, while still supporting our existing business segments in both the service provider and direct-to-consumer business segments. On February 12, 2009, we consummated a transaction with D4 Holdings, pursuant to which, among other things, D4 Holdings acquired (i) 39,000,000 shares of our common stock, representing approximately 54.3% of the total number of issued and outstanding shares of our common stock following the transaction and (ii) a warrant, exercisable for ten years, to purchase up to an additional 30,000,000 shares of our common stock at an exercise price of $0.04 per share. As a result of the investment in our company by D4 Holdings, we expect to seek opportunities to provide services to ACN and enter into other commercial transactions that give us access to ACN's international marketing and distribution capabilities.
Results of Operations - Three Months Ended March 31, 2009, Compared to Three Months Ended March 31, 2008
Revenues
Revenues decreased by approximately $0.1 million or 2% to approximately $5.3 million for the three months ended March 31, 2009, from approximately $5.4 million for the three months ended March 31, 2008.
Revenues from VoIP telephony services through our reseller and service provider division decreased approximately $0.1 million or 2% to approximately $5.2 million for the three months ended March 31, 2009, from approximately $5.3 million for the corresponding period in 2008.
Revenues from our reseller channel increased by approximately $0.3 million or 10% to approximately $3.8 million for the three months ended March 31, 2009, from approximately $3.5 million for the three months ended March 31, 2008. This increase resulted from the strategic decision we made to focus more of our efforts and resources on our reseller business. Within the reseller business itself we made a decision to focus on servicing fewer, larger resellers rather than more, smaller resellers. Consequently, our three largest resellers accounted for $2.56 million or approximately 68% of the reseller revenues generated. This represents approximately 49% of all revenues for the quarter. By comparison, our three largest resellers in the first quarter of 2008 accounted for $1.32 million or approximately 38% of the reseller revenue generated, which equaled approximately 25% of the total revenue for the quarter.
Revenues generated by our service provider channel decreased by approximately $0.2 million or 22% from approximately $1.0 million for the three months ended March 31, 2008, to approximately $0.8 million for the three months ended March 31, 2009; of the revenues generated in the three months ended March 31, 2009, $230,000 was a one-time payment we received from RCN Digital Services, LLC, in connection with the termination of the Standard Service Agreement for VoIP Telephony Services dated August 8, 2007, between us and RCN. For the majority of the first quarter of 2009 we had only three service provider customers as opposed to five for the first quarter of 2008; consequently, the monthly recurring user customer base fell by nearly 50% from approximately 81,000 users in the first quarter of 2008 to 42,000 users in the first quarter of 2009.
For the three months ended March 31, 2009, gross revenues from our service provider agreement with Verizon Communications, or Verizon, equaled approximately $0.4 million, or approximately 7.6% of our gross revenues; for the three months ended March 31, 2009, gross revenues from this agreement equaled approximately $0.7 million, or approximately 7.6% of our gross revenues. On January 15, 2009, we received notice from Verizon that no later than May 15, 2009, our service provider contract with Verizon would be terminated pursuant to the terms of the agreement. Following the termination date we will not receive any more revenue as a result of this agreement, which could have a material adverse effect on our financial condition and results of operations.
In addition to the decrease in revenues from our service provider channel, our revenues from VoIP telephony services through our direct-to-consumer channel (primarily iConnectHere) decreased by approximately $0.2 million or 27% to approximately $0.6 million for the three months ended March 31, 2009, from approximately $0.8 million for the same period in 2008. This was caused by a lower number of iConnectHere users, continuing the decline that occurred through most of 2008 that resulted from our decision to focus more of our efforts and resources on our reseller business. The revenues generated by our direct-to-consumer channel include sales of our joip service, which had sales of approximately $25,000 for the quarter.
The number of minutes on our network utilized by our resellers and end-users dropped by approximately 9.8% from approximately 123 million minutes for the three months ended March 31, 2008, to approximately 111 million minutes for the three months ended March 31, 2009.
Costs and Operating Expenses
Cost of revenues. Cost of revenues increased by approximately $0.2 million or 5% to approximately $4.2 million, at a 19.8% gross margin, for the three months ended March 31, 2009, from approximately $4.0 million, at a 25.3% gross margin, for the three months ended March 31, 2008. The increase in cost of revenues for the first quarter of 2009 was primarily due to the following:
? pricing pressures affecting our margins, increasing our termination and network costs for the period approximately $0.5 million; ? we were required to reassess our cost allocation due to the reductions in force that occurred during 2008, which contributed an additional $0.2 million to our cost of revenue; and ? we incurred $0.2 million of expenses for devices shipped to new customers.
These were partially offset by a decrease in salaries and related costs of approximately $0.4 million due to the reductions in force that occurred during 2008 and one-time credits for settlement of old accounts payable of approximately $0.1 million.
We also had the following one-time expenses during the first quarter of 2008 that affected our cost of revenues during that period:
? customer support costs of approximately $0.2 million for our joip offering; and
? a restatement of revenues related to previous years of $0.2 million, which was included in cost of sales during the first quarter of 2008.
Research and development expenses. Research and development expenses for the three months ended March 31, 2009, were approximately $0.1 million, which represented a decrease of approximately 91% compared to research and development expenses during the three months ended March 31, 2008, of approximately $1.2 million. As a percentage of revenues, research and development expenses decreased to 1.9% for the three months ended March 31, 2009, from 22.2% for the three months ended March 31, 2008. Salaries and related expenses is the main component that comprises this item, and the decrease is mainly a result of reduction in force during 2008.
Selling and marketing expenses. Selling and marketing expenses decreased by approximately $0.8 million or 66.6% to approximately $0.4 million for the three months ended March 31, 2009, from approximately $1.2 million for the three months ended March 31, 2008. As a percentage of revenues, selling and marketing expenses decreased to 7.5% for the three months ended March 31, 2009, from 22.2% for the three months ended March 31, 2008. The cost of marketing efforts during the three months ended March 31, 2009, was reduced by the decrease in sales commissions' expense resulting from our revenue decline and the reductions in force that occurred during 2008.
General and administrative expenses. General and administrative expenses decreased by approximately $0.1 million or 12.5% to approximately $0.7 million for the three months ended March 31, 2009, from approximately $0.8 million for the three months ended March 31, 2008. As a percentage of revenues, general and administrative expenses decreased to 13.2% for the first quarter of 2009 from 14.8% in the first quarter of 2008. Included in both periods were certain one-time costs. During the first quarter of 2008 these costs included professional fees for consultants providing strategic advisory services to the Company and costs associated with our ongoing litigation, which together totaled approximately $0.3 million. For the first quarter of 2009 these costs consisted of $0.1 million in the allowance for doubtful accounts, $0.2 million for costs associated with our ongoing litigation offset by $0.1 million as credits for settlements of old account payables.
Depreciation and amortization. Depreciation and amortization decreased by approximately $0.3 million or 50% to approximately $0.3 million for the three months ended March 31, 2009. from approximately $0.6 million for the three months ended March 31, 2008. This was primarily due to amortization of the intangible asset that was recorded as a result of the Go2Call acquisition and write-offs of various fixed assets at the end of 2008, which substantially changed the base value of our fixed assets.
Restructuring costs. We did not record any reorganization expenses in the three month period ended March 31, 2009. For the three month period ended March 31, 2008, we recorded reorganization expenses totaling approximately $0.4 million. These were primarily one-time costs related to reductions in force as well as severance costs paid to our former Chief Executive Officer.
(Loss) Income from Operations
Net loss from operations for the three months ended March 31, 2009, was $0.5 million, compared to a net loss from operations of $2.8 million for the corresponding period in 2008. This was due primarily to the following:
? a decrease of 21% or $0.3 million in the gross margin
for the three month period ended March 31, 2009,
compared to the same period in 2008;
? a restatement of deferred revenues relating to
previous years of $200,000 that was recorded in the
first quarter of 2008;
? one-time reorganization expenses incurred during the
first quarter of 2008 of approximately $370,000;
? amortization of intangible assets during the first
quarter of 2008 of approximately $235,000; and
? a decrease of approximately $1.2 million in salaries
and related expenses for the three month period ended
March 31, 2009, compared to the same period in 2008
due to the reductions in force that occurred during
2008.
Interest Expense, Net
Interest expense, net decreased by approximately $9,000 or 90% to approximately $1,000 for the three months ended March 31, 2009, from net expense of approximately $10,000 for the three months ended March 31, 2008.
Income Taxes, Net
Net income taxes have remained consistent at approximately $6,000 for the three months ended March 31, 2009, and for the corresponding period in 2008.
Net (Loss) Profit
For the three months ended March 31, 2009, we had a net loss of approximately $0.4 million, or $0.00 per share. For the three months ended March 31, 2008, we had a net loss of approximately $2.8 million, or $0.09 per share. The decrease in the net loss was due to the factors set forth above.
Net Operating Losses
As of December 31, 2008, we had net operating loss carryforwards, or NOLs, generated in the U.S. of approximately $80.0 million. Our issuance of common stock to D4 Holdings in February 2009 may constitute an "ownership change" as defined in Section 382 of the Internal Revenue Code, which may result in a loss of a substantial amount of the NOLs we have accrued and our ability to offset income that we may generate in the future. Our ability to use our remaining NOLs could be additionally reduced if we experience any further "ownership change," as defined under Section 382.
Liquidity and Capital Resources
Since our inception in 1996, we have incurred significant operating and net losses, due in large part to the start-up and development of our operations and our recent losses from operations. As of March 31, 2009, we had an accumulated deficit of approximately $173 million.
As of March 31, 2009, we had cash and cash equivalents of approximately $2.6 million and restricted cash and short-term investments of approximately $0.3 million, or a total of $2.9 million in cash and restricted cash, which represented an increase of $0.8 million as compared to December 31, 2008. The increase in cash and restricted cash was primarily due to the net cash provided by financing activity of approximately $1.1 million. On February 12, 2009, we issued to D4 Holdings 39,000,000 shares of our common stock for an aggregate purchase price of $1,170,000, payable in cash, offset by $0.1 million of costs incurred in the transaction.
We generated negative cash flow from operating activities of approximately $0.3 million during the three months ended March 31, 2009, compared with negative cash flow from operating activities of approximately $2.4 million during the three months ended March 31, 2008. The decline in negative cash flow was directly attributable to the decrease in the loss for the period.
Our capital expenditures during the three months ended March 31, 2009, declined to $5,000 compared to $82,000 for the three months ended March 31, 2008. Due to the level of investment we had made in capital expenditures in previous years, we were only required to make minimal investments to maintain our overall utilization of our existing domestic and international network infrastructure. During the first quarter of 2009 we had proceeds of approximately $60,000 from sales of equipment, which resulted in a capital gain of $14,000.
We obtained our funding from our utilization of the remaining proceeds from our IPO, offset by positive or negative cash flow from our operations, and most recently from the sale of shares of our common stock to D4 Holdings. These proceeds are maintained as cash, restricted cash and short term investments. We have sustained significant operating losses in recent periods, which has led to a significant reduction in our cash reserves. In 2008 we initiated a restructuring plan that helped us cut operating costs significantly and better align our operations with our current business model, but there are no assurances that these reductions in costs will be sufficient to return us to positive cash flow. Based on current trends in our operations we believe that we will not have sufficient funds to meet our working capital requirements, including operating losses, and capital expenditure requirements for the next fiscal year if we do not receive additional financing. There can be no assurance that we will be able to raise such additional capital on favorable terms or at all. If additional funds are raised through the issuance of equity securities, our existing stockholders will experience significant further dilution. As a result of the foregoing factors, there is substantial doubt about our ability to continue as a going concern.
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