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| DDDC.OB > SEC Filings for DDDC.OB > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-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 obtain additional capital in the near term to finance operations;
? our ability to reduce our costs and expenses and expand our revenues;
? 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).
Following a comprehensive review of the company's strategy initiated by the Board of Directors, we have decided to focus our near-term strategy and market initiatives on growing our service provider business while still supporting our core VoIP reseller and direct-to-consumer business segments. While our revenues for the second quarter of 2009 remained substantially similar to our revenues for the first quarter of 2009, our net loss increased from approximately $441,000 to approximately $1,262,000. As a result, as of June 30, 2009, we had negative working capital equal to approximately $863,000 and negative stockholders' equity equal to approximately $24,000.
On February 12, 2009, we consummated a transaction with D4 Holdings, LLC, or 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. D4 Holdings is a private investment fund whose ownership includes owners of ACN, Inc., or ACN, a direct seller of telecommunications services. 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. On July 29, 2009, we entered into an agreement with ACN Pacific Pty Ltd., or ACN Pacific, a wholly-owned subsidiary of ACN, pursuant to which we will provide digital phone and video VoIP telecommunications services to ACN Pacific. ACN Pacific will provide such services in combination with the products and services it makes available to be resold by its independent sales representatives in Australia. Under the agreement, ACN Pacific will pay us a one-time set-up fee of $260,000 and a monthly subscriber-based fee thereafter. We will provide services under the agreement for a period of two years from the date of the launch of the services, which is expected to take place in mid-August 2009. The agreement can be terminated by either party for cause or upon 120 days notice, and by ACN Pacific upon 30 days notice if the parties cease to remain affiliated entities.
Results of Operations - Three Months Ended June 30, 2009, Compared to Three Months Ended June 30, 2008
Revenues
Revenues decreased approximately $0.1 million, or 2%, to approximately $5.3 million for the three months ended June 30, 200,9 from approximately $5.4 million for the three months ended June 30, 2008. Revenues from VoIP telephony services through our reseller and service provider sales efforts increased by approximately $0.1 million, or 2%, to approximately $4.7 million for the three months ended June 30, 2009 from approximately $4.6 million for the three months ended June 30, 2008. This occurred primarily as a result of an increase in our revenues to our biggest reseller from $0 in the second quarter of 2008 to approximately $1.9 million in the second quarter of 2009. In addition, revenues from our second largest reseller increased from approximately $0.9 million in the second quarter of 2008 to approximately $1.0 million in the second quarter of 2009. At the same time, sales to direct end-users (including our iConnectHere and joip end-users) decreased by approximately $0.2 million, or 28%, from approximately $0.7 million for the three months ended June 30, 2008, to approximately $0.5 million for the three months ended June 30, 2009. The decrease in end-user revenues was primarily due to a shift in our focus and resources away from our consumer business towards our service provider and reseller businesses. Within the reseller business itself, we made a decision in the first quarter of 2009 to focus on servicing fewer, larger resellers rather than more, smaller resellers. Consequently, our two largest resellers accounted for approximately $2.94 million or approximately 67% of the reseller revenues generated in the second quarter of 2009. This represents approximately 56% of all revenues for the second quarter of 2009. By comparison, our two largest resellers in the second quarter of 2008 accounted for approximately $1.36 million or approximately 37% of the reseller revenue generated, which equaled approximately 23% of the total revenue for the second quarter of 2008.
Revenues generated by our Outsourced Platform Solution fell by approximately $0.6 million for the three months ended June 30, 2009, primarily due to the termination of our agreements with two customers. During 2008 one of these customers accounted for approximately 10.9% of our gross revenues; in the fourth quarter of 2008 this customer accounted for approximately 9.7% of our gross revenues. Due to the termination of our agreement with this customer we will not receive any more revenue as a result of this agreement, which could have a material adverse effect on our business, financial condition and results of operations.
Costs and Operating Expenses
Cost of revenues. Cost of revenues increased by approximately $0.6 million, or 15%, to approximately $4.6 million, at a 13% gross margin, for the three months ended June 30, 2009, from approximately $4.0 million, at a 26% gross margin, for the three months ended June 30, 2008. The increase in cost of revenues for the second quarter of 2009 was primarily due to:
? pricing pressures affecting our margins, increasing our termination and network costs for the period by approximately $0.7 million; and
? a reassessment of 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.
These were partially offset by a decrease in salaries and related costs of approximately $0.3 million due to the reductions in force that occurred during 2008.
Research and development expenses. Research and development expenses decreased by approximately $1.0 million, or 91%, to approximately $0.1 million for the three months ended June 30, 2009 from approximately $1.1 million for the three months ended June 30, 2008. As a percentage of revenues, research and development expenses decreased to 2% for the three months ended June 30, 2009, from 19% for the three months ended June 30, 2008, due to the reductions in force that occurred during the second half of 2008.
Selling and marketing expenses. Selling and marketing expenses decreased by approximately $0.9 million, or 75%, to approximately $0.3 million for the three months ended June 30, 2009, from approximately $1.2 million for the three months ended June 30, 2008. As a percentage of revenues, sales and marketing expenses decreased to 6% for the three months ended June 30, 2009, from 22% for the three months ended June 30, 2008. This decline was primarily caused by the decrease in sales commissions' expenses resulting from the decline in our revenue and the reductions in force that occurred during the second half of 2008.
General and administrative expenses. General and administrative expenses increased by approximately $0.9 million, or 225%, to approximately $1.3 million for the three months ended June 30, 2009, from approximately $0.4 million for the three months ended June 30, 2008. As a percentage of revenues, general and administrative expenses increased to 25% for the three months ended June 30, 2009, from 7% for the three months ended June 30, 2008, primarily due to an increase in legal and professional fees and litigation and other related expenses.
Depreciation and amortization. Depreciation and amortization decreased by approximately $0.1 million, or 25%, to approximately $0.3 million for the three months ended June 30, 2009, from approximately $0.4 million for the three months ended June 30, 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 for the three months ended June 30, 2009. For the three months ended June 30, 2008, we recorded reorganization expenses totaling approximately $0.6 million. These were primarily one-time costs related to reductions in force. In addition, we subleased our New York office for the remaining term of the lease and have accrued the shortfall due to the landlord and legal costs and broker fees associated with the sublease.
Write-down of Go2Call intangible asset. During the three months ended June 30, 2008, we wrote off $475,000, approximately representing the entire amount of an asset we acquired as part of the Go2Call transaction in order to properly adjust the value of the intangible asset associated with that asset. No such expenses were recorded for the three months ended June 30, 2009.
Deferred revenue restatement. For the three months ended June 30, 2008, we restated the deferred revenue liability to include $396,000 in deferred revenue. We did not take any such charge for the three months ended June 30, 2009.
Loss from Operations
As a result of the above, operating loss for the three months ended June 30, 2009, was approximately $1.2 million, a decrease of 63% compared to the operating loss of approximately $3.2 million for the three months ended June 30, 2008.
Interest Expense, Net
Interest expense, net decreased by approximately $30,000 to approximately $31,000 for the three months ended June 30, 2009 from net expense of approximately $61,000 for the three months ended June 30, 2008.
Income Taxes, Net
We accrued net income taxes of approximately $4,000 for the three months ended June 30, 2009, compared to approximately $9,000, for the three months ended June 30, 2008. There was no income tax provisions recorded during the three months ended June 30, 2009, since we experienced a net loss for the period.
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. We have not recorded deferred taxes in respect of the NOLs since it is unlikely that we will be able to utilize these NOLs.
Net Loss
For the three months ended June 30, 2009 we had a net loss of approximately $1.3 million. For the three months ended June 30, 2008 we had a net loss of approximately $3.2 million. The decrease in the net loss was due to the factors set forth above.
Results of Operations - Six Months Ended June 30, 2009, Compared to Six Months Ended June 30, 2008
Revenues
Revenues decreased by approximately $0.3 million, or 3%, to approximately $10.5 million for the six months ended June 30, 2009, from approximately $10.8 million for the six months ended June 30, 2008. Revenues from VoIP telephony services through our reseller and service provider sales efforts increased approximately $0.2 million, or 2%, to approximately $9.3 million for the six months ended June 30, 2009, from approximately $9.1 million for the six months ended June 30, 2008. This occurred primarily as a result of an increase in our revenues to our biggest reseller from $0 in the first half of 2008 to approximately $3.1 million in the first half of 2009. In addition, revenues from our second largest reseller increased from approximately $1.5 million in the first half of 2008 to approximately $2.0 million in the first half of 2009. At the same time, sales to direct end-users (including our iConnectHere and joip end-users) decreased by approximately $0.4 million, or 27%, from approximately $1.5 million for the six months ended June 30, 2008, to approximately $1.1 million for the six months ended June 30, 2009. The decrease in end-user revenues was primarily due to a shift in our focus and resources away from our consumer business towards our service provider and reseller businesses. Within the reseller business itself, we made a decision in the first quarter of 2009 to focus on servicing fewer, larger resellers rather than more, smaller resellers. Consequently, our two largest resellers accounted for approximately $5.25 million or approximately 64% of the reseller revenues generated in the first half of 2009. This represents approximately 50% of all revenues for the first half of 2009. By comparison, our two largest resellers in the first half of 2008 accounted for approximately $2.38 million or approximately 33% of the reseller revenue generated, which equaled approximately 22% of the total revenue for the first half of 2008.
Revenues generated by our Outsourced Platform Solution fell by approximately $0.9 million for the six months ended June 30, 2009, primarily due to the termination of our agreements with two material customers.
Costs and Operating Expenses
Cost of revenues. Cost of revenues increased by approximately $0.9 million, or 11.4%, to approximately $8.8 million, at a 16.6% gross margin, for the six months ended June 30, 2009, from approximately $7.9 million, at a 27.2% gross margin, for the six months ended June 30, 2008. The increase in cost of revenues for the first half of 2009 was primarily due to:
? pricing pressures affecting our margins, which lead to an increase in our termination and network costs for the period by approximately $1.4 million;
? a reassessment of our cost allocation due to the reductions in force that occurred during 2008, which contributed an additional $0.4 million to our cost of revenue; and
? the incurrence of $0.3 million of expenses for devices shipped to new customers.
These were partially offset by a decrease in salaries and related costs of approximately $0.7 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 half 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 for the first half of 2008.
Research and development expenses. Research and development expenses for the six months ended June 30, 2009, were approximately $0.2 million, which represented a decrease of approximately 91% compared to research and development expenses of approximately $2.2 million for the six months ended June 30, 2008. As a percentage of revenues, research and development expenses decreased to 1.9% for the six months ended June 30, 2009, from 20.4% for the six months ended June 30, 2008. Since salaries and related expenses are the main components that comprise this item, the decrease was mainly a result of the reductions in force that occurred during the second half of 2008.
Selling and marketing expenses. Selling and marketing expenses decreased by approximately $1.7 million, or 71%, to approximately $0.7 million for the six months ended June 30, 2009, from approximately $2.4 million for the six months ended June 30, 2008. As a percentage of revenues, selling and marketing expenses decreased to 7% for the six months ended June 30, 2009, from 22% for the six months ended June 30, 2008. This decline was primarily caused by the decrease in sales commissions' expense and salaries resulting from our decline in our revenue and the reductions in force that occurred during the second half of 2008.
General and administrative expenses. General and administrative expenses increased by approximately $0.8 million, or 67%, to approximately $2.0 million for the six months ended June 30, 2009, from approximately $1.2 million for the six months ended June 30, 2008. As a percentage of revenues, general and administrative expenses increased to 19% for the first half of 2009 from 11% for the first half of 2008, primarily due to an increase in legal and professional fees and litigation and other related expenses.
Depreciation and amortization. Depreciation and amortization decreased by approximately $0.5 million, or 50%, to approximately $0.5 million for the six months ended June 30, 2009, from approximately $1.0 million for the six months ended June 30, 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 for the six months ended June 30, 2009. For the six months ended June 30, 2008, we recorded reorganization expenses totaling approximately $1.0 million. These were primarily one-time costs related to reductions in force. In addition, we subleased our New York office for the remaining term of the lease and have accrued the shortfall due to the landlord and legal costs and broker fees associated with the sublease.
Write-down of Go2Call intangible asset. During the first half of 2008, we wrote off approximately $475,000, representing the entire amount of an asset we acquired as part of the Go2Call transaction in order to properly adjust the value of the intangible asset associated with that asset. We did not write off any intangible asset for the six months ended June 30, 2009.
Deferred revenue restatement. For the three months ended March 31, 2008, we took a $200,000 charge as an initial estimate to the deferred revenue liability. As part of a continued review of the deferred revenue liability, we determined that amount was insufficient and adjusted such amount during the three months ended June 30, 2008, by an additional $396,000. We did not take any such charge for the six months ended June 30, 2009.
Loss from Operations
As a result of the above, operating loss for the six months ended June 30, 2009, was approximately $1.7 million, a decrease of 72% compared to the operating loss of approximately $6.0 million for the six months ended June 30, 2008.
Interest Expense, Net
Interest expense, net decreased by approximately $39,000, or 55%, to approximately $32,000 for the six months ended June 30, 2009, from net expense of approximately $71,000 for the six months ended June 30, 2008.
Income Taxes, Net
Income taxes, net decreased by approximately $5,000, or 33%, to approximately $10,000 for the six months ended June 30, 2009, from net expense of approximately $15,000 for the six months ended June 30, 2008.
Net Loss
For the six months ended June 30, 2009, we had a net loss of approximately $1.7 million, or $0.02 per share. For the six months ended June 30, 2008, we had a net loss of approximately $6.1 million or $0.18 per share. The decrease in the net loss was due to the factors set forth above.
Liquidity and Capital Resources
Since our inception in 1996, we have incurred significant operating and net losses. As of June 30, 2009, we had an accumulated deficit of approximately $174 million.
As of June 30, 2009, we had cash and cash equivalents of approximately $2.4 million and restricted cash and short-term investments of approximately $0.3 million, or a total of $2.7 million in cash and restricted cash, which represented an increase of $0.6 million as compared to $2.1 million in cash and restricted cash as of December 31, 2008. 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. The increase in cash and restricted cash was primarily due to the net cash provided by financing activities of approximately $1.1 million, as reduced by our losses during the first half of 2009.
During the six months ended June 30, 2009, we generated negative cash flow from operating activities of approximately $0.4 million compared with negative cash flow from operating activities of approximately $4.1 million during the six months ended June 30, 2008.
Our capital expenditures during the six months ended June 30, 2009, declined to $49,000 compared to $241,000 for the six months ended June 30, 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 half 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 initial public offering, 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 in February 2009. These proceeds are maintained as cash, restricted cash and short term investments. As of June 30, 2009, we had negative working capital equal to approximately $863,000 as well as negative stockholders` equity equal to approximately $24,000. Management believes that we will continue to experience losses and increased negative working capital and negative stockholders' equity in the near future and may not be able to return to positive cash flow before we require additional cash. 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. There can be no assurances that our financial condition will improve in the foreseeable future. As a result of the foregoing factors, there is substantial doubt about our ability to continue as a going concern.
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