pvqsb.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-QSB
x QUARTERLY REPORT UNDER
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the
quarterly period ended May 31,
2008
o TRANSITION REPORT UNDER
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the
transition period from _______ to _______
Commission
file number 0-4465
Pervasip
Corp.
(Exact
Name of Small Business Issuer as Specified in Its Charter)
|
New
York
|
|
13-2511270
|
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
75
South Broadway, Suite 400, White Plains, New York
|
|
10601
|
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
914-620-1500
(Issuer’s
Telephone Number, Including Area Code)
_________________________________
(Former
name, former address and former fiscal year, if changed since last
report)
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x No
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check
whether the registrant filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution under a plan
confirmed by a court. Yes o No
o
APPLICABLE
ONLY TO CORPORATE ISSUERS
State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date:
25,996,172 shares
of Common Stock, par value $.10 per share, as of July, 1
2008.
Traditional
Small Business Disclosure Format (Check one): Yes o No
x
PART 1. FINANCIAL
INFORMATION
Item
1. Financial
Statements
Pervasip
Corp. and Subsidiaries
Condensed
Consolidated Balance Sheet
|
|
|
May 31, 2008
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
26,664 |
|
|
Restricted
Cash
|
|
|
146,970 |
|
|
Accounts
receivable, net
|
|
|
140,810 |
|
|
Prepaid
expenses and other current assets
|
|
|
68,106 |
|
|
Total
current assets
|
|
|
382,550 |
|
|
|
|
|
|
|
|
Property
plant and equipment, net
|
|
|
722,294 |
|
|
Deferred
finance costs, net
|
|
|
664,240 |
|
|
Deferred
debt discount
|
|
|
535,672 |
|
|
Carrier
deposit
|
|
|
300,000 |
|
|
Other
assets
|
|
|
143,980 |
|
|
Total
assets
|
|
$ |
2,748,736 |
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity Deficiency
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
Current
maturities of long-term debt and capital lease obligations
|
|
$ |
88,716 |
|
|
Accounts
payable and accrued expenses
|
|
|
2,016,784 |
|
|
Total
current liabilities
|
|
|
2,105,500 |
|
|
|
|
|
|
|
|
Long-term
debt and capital lease obligations, less current
maturities
|
|
|
2,736,182 |
|
|
Accrued
pension obligation
|
|
|
820,805 |
|
|
Warrant
liabilities
|
|
|
7,522,061 |
|
|
Total
liabilities
|
|
|
13,184,548 |
|
|
|
|
|
|
|
|
Stockholders’
equity deficiency
|
|
|
|
|
|
Preferred
stock, $.10 par value; 1 million authorized, none issued and
outstanding
|
|
|
- |
|
|
Common
stock $.10 par value, 150,000,000 shares authorized, 25,835,458 shares
issued
|
|
|
2,583,546 |
|
|
Capital
in excess of par value
|
|
|
27,832,100 |
|
|
Deficit
|
|
|
(40,827,458 |
) |
|
Accumulated
other comprehensive loss, unrealized loss on securities
|
|
|
(24,000 |
) |
|
Total
stockholders’ equity deficiency
|
|
|
(10,435,812 |
) |
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity deficiency
|
|
$ |
2,748,736 |
|
See notes
to the condensed consolidated financial statements.
Pervasip
Corp. and Subsidiaries
Condensed
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
|
|
|
For
the Six Months Ended
|
|
|
For
the Three Months Ended
|
|
|
|
|
May 31, 2008
|
|
|
May 31, 2007
|
|
|
May 31, 2008
|
|
|
May 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,065,352 |
|
|
$ |
408,506 |
|
|
$ |
634,648 |
|
|
$ |
213,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
of services
|
|
|
1,068,436 |
|
|
|
535,535 |
|
|
|
615,386 |
|
|
|
230,968 |
|
|
Selling,
general and administrative
|
|
|
1,486,111 |
|
|
|
1,340,739 |
|
|
|
786,854 |
|
|
|
675,498 |
|
|
Depreciation
and amortization
|
|
|
246,718 |
|
|
|
235,352 |
|
|
|
124,741 |
|
|
|
137,853 |
|
|
Total
costs and expenses
|
|
|
2,801,265 |
|
|
|
2,111,626 |
|
|
|
1,526,981 |
|
|
|
1,044,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,735,913 |
) |
|
|
(1,703,120 |
) |
|
|
(892,333 |
) |
|
|
(830,930 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(464,563 |
) |
|
|
(355,903 |
) |
|
|
(221,085 |
) |
|
|
(212,183 |
) |
|
Interest
and other income
|
|
|
12,401 |
|
|
|
21,363 |
|
|
|
1,448 |
|
|
|
10,593 |
|
|
Change
in warrant valuation
|
|
|
(2,092,117 |
) |
|
|
(510,148 |
) |
|
|
621,979 |
|
|
|
450,074 |
|
|
Total
other income (expense)
|
|
|
(2,544,279 |
) |
|
|
(844,688 |
) |
|
|
402,342 |
|
|
|
248,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(4,280,192 |
) |
|
|
(2,547,808 |
) |
|
|
(489,991 |
) |
|
|
(582,446 |
) |
|
Loss
from discontinued operations
|
|
|
- |
|
|
|
(182,117 |
) |
|
|
- |
|
|
|
(147,020 |
) |
|
Net
loss
|
|
|
(4,280,192 |
) |
|
|
(2,729,925 |
) |
|
|
(489,991 |
) |
|
|
(729,466 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss –
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized
loss on marketable securities
|
|
|
(24,000 |
) |
|
|
(1,820 |
) |
|
|
(9,000 |
) |
|
|
(364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$ |
(4,304,192 |
) |
|
$ |
(2,731,745 |
) |
|
$ |
(498,991 |
) |
|
$ |
(729,830 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(0.17 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
Loss
from discontinued operations
|
|
|
.00 |
|
|
|
(.01 |
) |
|
|
.00 |
|
|
|
(.01 |
) |
|
Net
loss
|
|
$ |
(0.17 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in computation of basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loss
per share
|
|
|
25,835,458 |
|
|
|
22,447,744 |
|
|
|
25,835,458 |
|
|
|
22,459,282 |
|
See notes
to the condensed consolidated financial statements.
Pervasip
Corp. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
For
the Six Months Ended
|
|
|
|
|
May 31, 2008
|
|
|
May 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities:
|
|
$ |
(1,609,041 |
) |
|
$ |
(1,457,096 |
) |
|
|
|
|
|
|
|
|
|
|
| Cash
flows used in investing activities: |
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(76,375 |
) |
|
|
(84,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from notes
|
|
|
- |
|
|
|
275,000 |
|
|
Repayment
of long-term debt
|
|
|
(25,460 |
) |
|
|
(22,075 |
) |
|
Debt
issue costs paid
|
|
|
(71,500 |
) |
|
|
- |
|
|
Inflow
from restricted cash
|
|
|
1,676,962 |
|
|
|
- |
|
|
Net
cash provided by financing activities
|
|
|
1,580,002 |
|
|
|
252,925 |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
|
(105,414 |
) |
|
|
(1,288,342 |
) |
|
Cash
and cash equivalents at beginning of period
|
|
|
132,078 |
|
|
|
1,337,525 |
|
|
Cash
and cash equivalents at the end of period
|
|
$ |
26,664 |
|
|
$ |
49,183 |
|
See notes
to the condensed consolidated financial statements.
Notes
To Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of
Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the rules and regulations of the
Securities and Exchange Commission for Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three-month or six-month periods ended May 31, 2008 are not necessarily
indicative of the results that may be expected for the year ended November 30,
2008. For further information, refer to the consolidated financial statements
and footnotes thereto included in our Annual Report on Form 10-KSB for the year
ended November 30, 2007.
Note 2 - Major
Customers
During
the six-month and three-month periods ended May 31, 2008, one customer accounted
for approximately 27% and 28%, respectively, of our revenues and a second
customer accounted for approximately 27% and 20%, respectively, of our revenues.
During the six-month and three-month periods ended May 31, 2007, one customer
accounted for 42% and 50%, respectively, of our revenues. At May 31,
2008, monies owed to us from three customers accounted for 41% of our total
accounts receivable.
Note 3 - Loss Per Common
Share
Basic
loss per common share is calculated by dividing net loss by the weighted average
number of common shares outstanding during the period.
Approximately
140,688,000 and 13,093,000 shares of common stock issuable upon the exercise of
our outstanding stock options or warrants were excluded from the calculation of
loss per share for the six-month and three-month periods ended May 31, 2008 and
2007, respectively, because the effect would be anti-dilutive.
Note 4 - Risks and
Uncertainties
We have
created a proprietary Internet Protocol (“IP”) telephony network and have
transitioned from a reseller of traditional wireline telephone services into a
facilities-based broadband service provider to take advantage of the network
cost savings that are inherent in an IP network. Although the IP telephony
business continues to grow, we face strong competition. We have built our IP
telephony business with significantly less financial resources than many of our
competitors. The survival of our business currently is dependent upon the
success of our IP operations. Future results of operations involve a number of
risks and uncertainties. Factors that could affect future operating results and
cash flows and cause actual results to vary materially from historical results
include, but are not limited to:
|
·
|
Our
ability to market our services to current and new customers and generate
customer demand for our products and services in the geographical areas in
which we operate;
|
|
·
|
The
cooperation of other carriers and industry service partners that have
signed agreements with us;
|
|
·
|
The
availability of additional funds to successfully pursue our business
plan;
|
|
·
|
The
impact of changes the Federal Communications Commission or State Public
Service Commissions may make to existing telecommunication laws and
regulations, including laws dealing with Internet
telephony;
|
|
·
|
Our
ability to comply with provisions of our financing
agreements;
|
|
·
|
The
highly competitive nature of our
industry;
|
|
·
|
The
acceptance of telephone calls over the Internet by mainstream
consumers;
|
|
·
|
Our
ability to retain key personnel;
|
|
·
|
Our
ability to maintain adequate customer care and manage our churn
rate;
|
|
·
|
Our
ability to maintain, attract and integrate internal management, technical
information and management information
systems;
|
|
·
|
Our
ability to manage rapid growth while maintaining adequate controls and
procedures;
|
|
·
|
The
availability and maintenance of suitable vendor relationships, in a timely
manner, at reasonable cost;
|
|
·
|
The
decrease in telecommunications prices to consumers;
and
|
|
·
|
General
economic conditions.
|
Notes
To Condensed Consolidated Financial Statements
(Unaudited)
Note 5 - Stock-Based
Compensation Plans
We issue
stock options to our employees and outside directors pursuant to
stockholder-approved and non-approved stock option programs. In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R, “Share-Based Payment”. SFAS 123R is a revision of SFAS 123, and
supersedes APB 25. Among other items, SFAS 123R eliminates the use of
APB 25 and the intrinsic value method of accounting, and requires companies to
recognize in their financial statements the cost of employee services received
in exchange for awards of equity instruments, based on the grant date fair value
of those awards. SFAS 123R permits companies to adopt its
requirements using either a “modified prospective” method, or a “modified
retrospective” method. Under the “modified prospective” method,
compensation cost is recognized in the financial statements beginning with the
effective date, based on the requirements of SFAS 123R for all share-based
payments granted after that date, and based on the requirements of SFAS 123 for
all unvested awards granted prior to the effective date of SFAS
123R. Under the “modified retrospective” method, the requirements are
the same as under the “modified prospective” method, but this method also
permits entities to restate financial statements of previous periods based on
proforma disclosures made in accordance with SFAS 123. Beginning in
fiscal 2006, we account for stock-based compensation in accordance with the
provisions of SFAS 123R and have elected the “modified prospective” method and
have not restated prior financial statements. For the six-month
periods ended May 31, 2008 and 2007, we recorded approximately $48,000 and
$91,000, respectively, in employee stock-based compensation expense, which is
included in our selling, general and administrative expenses. For the three
months ended May 31, 2008 and 2007, we recorded approximately $21,000 and
$44,000, respectively, in employee stock-based compensation
expense. As of May 31, 2008, there was approximately $116,000 of
unrecognized stock-compensation expense for previously granted unvested options
that will be recognized over a three-year period.
Note 6 - Accounts Payable
and Accrued Expenses
We have
recorded other liabilities of approximately $796,000 for items with which we are
negotiating settlements in conjunction with transactions related to the sale of
former subsidiaries. We believe we have valid disputes for many of these
liabilities and we are continuing to submit claims and present other evidence to
reduce such liabilities. There can be no assurance that we will be successful in
our negotiations with various entities, and ultimately, we may have to pay such
amounts.
Note 7 - Defined Benefit
Plan
We
sponsor a defined benefit plan covering one active employee and a number of
former employees. Our funding policy with respect to the defined
benefit plan is to contribute annually not less than the minimum required by
applicable law and regulation to cover the normal cost and to fund supplemental
costs, if any, from the date each supplemental cost was
incurred. Contributions are intended to provide not only for benefits
attributable to service to date, but also for those expected in the
future.
For each
of the six-month periods ended May 31, 2008 and May 31, 2007, we recorded
pension expense of $99,000 and $48,000, respectively. In the six-month period
ended in May 31, 2008 and 2007 we contributed approximately $55,000 and $10,000,
respectively. In the three-month periods ended May 31, 2008 and 2007, we
recorded pension expense of $49,000 and $24,000, respectively. For the
three-month period ended in May 31, 2008 we contributed approximately
$35,000. There was no contribution to the pension plan in the second
quarter ended May 31, 2007. The expected long-term rate on plan assets is
8%.
We also
sponsor a 401(k) profit sharing plan for the benefit of all eligible employees,
as defined. The plan provides for the employees to make voluntary
contributions not to exceed the statutory limitation provided by the Internal
Revenue Code. We may make discretionary
contributions. There were no discretionary contributions made for the
six or three months ended May 31, 2008 or 2007.
Note 8 – Principal Financing
Arrangements
We have
executed five financings agreements with our principal lender. The
first financing was repaid in full in connection with the sale of two
subsidiaries, as described in Note 11, and the second, third and fourth
financings were amended upon the signing of the fifth financing on May 28, 2008.
The fourth financing, in the amount of $4,000,000, requires that we make
principal payments of $100,000 each month, beginning in October 2009, and a
balloon payment when the note is due on September 30, 2010. The
second, third and fifth financings are also due on September 30, 2010, in the
aggregate amount of a face value of $3,694,667 as of May 31, 2008, and there are
no principal payments due until the notes mature. Our principal
lender has sent us written notice that it has agreed to waive any potential
defaults on our loans until December 1, 2008. In addition, we have
requested and received assurances from our principal lender that it will
continue to provide financing to our company until December 1,
2008. We remain dependent on our principal lender to fund our cash
needs and we have no assurances that it will continue to fund such needs after
December 1, 2008. Interest on the fifth financing is set at 20%
and the maximum amount we can borrow is $1.4 million. At May 31,
2008, $300,000 was outstanding on the fifth financing and as of July 18, 2008,
the entire $1.4 million has been borrowed and deposited in our restricted cash
account. The fourth financing is set at prime plus 2%, subject to a minimum of
9.75% per annum, and was 9.75% per annum at May 31, 2008. Interest on the second
and third notes are set at prime plus 2% per annum, or 7% per annum at May 31,
2008. In conjunction with the fifth financing, all interest payments through May
31, 2009 are accrued and added to the principal balances of the notes. Cash
interest payments begin again on a monthly basis commencing in June
2009.
As part
of the financing on May 28, 2008, certain warrants to purchase approximately 126
million shares of our common stock, which had already been issued to our
principal lender, were extended from a 10-year term to a 15-year term. Also,
certain cancellation provisions, which were included in warrants to purchase
approximately 32 million shares of our common stock, were rescinded. As a result
of the amendments to the outstanding warrants, the value of the outstanding
warrants increased by approximately $682,000. A portion of the increase in
value, totaling approximately $146,000, was recorded as a loan discount as of
May 31, 2008, and the balance of approximately $536,000 was recorded as a
deferred debt discount and will be applied against the remaining $1.1 million
that we borrowed from our principal lender during the third quarter of fiscal
2008.
Notes
To Condensed Consolidated Financial Statements
(Unaudited)
Note 9 - Income
Taxes
At
November 30, 2007, we had net operating loss carryforwards for Federal income
tax purposes of approximately $26,000,000 expiring in the years 2008 through
2027. There is an annual limitation of approximately $187,000 on the
utilization of approximately $2,000,000 of such net operating loss carryforwards
under the provisions of Internal Revenue Code Section 382. We did not
provide for a tax benefit, since it is more likely than not that any such
benefit would not be realized.
Note 10 – Related Party
Transactions
In
connection with its internal use software development costs, we paid fees to a
third-party intellectual property development firm (“Consultant”) for the
six-month periods ended May 31, 2008 and 2007, $181,500 and $210,000,
respectively. For the three-month periods ended May 31, 2008 and 2007 we paid
fees of $72,000 and $98,000, respectively. We have hired individuals who were
performing work for us on behalf of the Consultant, and during fiscal 2007, we
hired the owner of the Consultant. An officer of our company has performed work
for the Consultant, including disbursement by the officer to distribute such
funds to appropriate vendors. Our officer received fees from the Consultant of
$30,000. The funds paid to the Consultant resulted in capitalized internal use
software cost and equipment for the six-month periods ended May 31, 2008 and
2007 of $55,000 and $82,500, respectively. The software cost and equipment
capitalized for the three-month periods ended May 31, 2008 and 2007 was $12,000
and $31,000, respectively. The remaining fees for the six-month periods ended
May 31, 2008 and 2007 of $126,500 and $127,500, respectively, were deemed to be
operating costs. The amount of operating cost for the three-month periods ended
May 31, 2008 and 2007 was $60,000 and $67,000, respectively.
Note 11 - Sale of
Subsidiaries
On
December 14, 2006, we entered into two separate definitive purchase agreements
to sell to Cyber Digital, Inc., a publicly-traded shell company, two wholly
owned subsidiaries that operated as competitive local exchange carriers
(“CLECs”). The sale of the CLECs was completed in June 2007. The operations of
the CLECs are presented in our income statement as discontinued operations. For
the six and three months ended May 31, 2007, there was a loss from discontinued
operations of $182,117 and $147,020. A net gain on discontinued operations that
resulted from the sale of the CLECs of approximately $1,026,000 was recorded in
fiscal 2007.
CLEC
revenues amounted to approximately $3,013,000 and $1,456,000 for the six- and
three-month periods ended May 31, 2007, respectively.
Note 12 – Other
Assets
In 2008,
we provided an international vendor with a $300,000 deposit as part of an
agreement to supply us with favorable international calling rates and we are no
longer doing business with this vendor. To facilitate the transaction and
provide us with additional assurance that the deposit would be returned, the
agreement was signed by a New York investment banking firm and included a
limited personal guarantee from a principal of the firm. After requesting
several times that our deposit be returned, we sued the investment banking firm
and the principal for $300,000 plus other associated costs. Based
upon advice from our counsel and contact that we have had with the defendant, we
believe the amount is collectible in full, and we have recorded the $300,000 as
an other asset, without taking any reserves against it.
Item
2. Management’s
Analysis and Discussion of Financial Condition and Results of
Operations
The
statements contained in this Report that are not historical facts are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to our financial condition, results
of operations and business, which can be identified by the use of
forward-looking terminology, such as “estimates,” “projects,” “plans,”
“believes,” “expects,” “anticipates,” “intends,” or the negative thereof or
other variations thereon, or by discussions of strategy that involve risks and
uncertainties. Management wishes to caution the reader of the
forward-looking statements that such statements, which are contained in this
Report, reflect our current beliefs with respect to future events and involve
known and unknown risks, uncertainties and other factors, including, but not
limited to, economic, competitive, regulatory, technological, key employee, and
general business factors affecting our operations, markets, growth, services,
products, licenses and other factors discussed in our other filings with the
Securities and Exchange Commission, and that these statements are only estimates
or predictions. No assurances can be given regarding the achievement
of future results, as actual results may differ materially as a result of risks
facing us, and actual events may differ from the assumptions underlying the
statements that have been made regarding anticipated events. Factors
that may cause our actual results, performance or achievements, or industry
results, to differ materially from those contemplated by such forward-looking
statements include, without limitation those factors set forth under Note 4 –
Risks and Uncertainties.
These
forward-looking statements are subject to numerous assumptions, risks and
uncertainties that may cause our actual results to be materially different from
any future results expressed or implied by us in those
statements. These risk factors should be considered in connection
with any subsequent written or oral forward-looking statements that we or
persons acting on our behalf may issue. All written and oral forward looking
statements made in connection with this Report that are attributable to us or
persons acting on our behalf are expressly qualified in their entirety by these
cautionary statements. Given these uncertainties, we caution
investors not to unduly rely on our forward-looking statements. We do not
undertake any obligation to review or confirm analysts’ expectations or
estimates or to release publicly any revisions to any forward-looking statements
to reflect events or circumstances after the date of this Report or to reflect
the occurrence of unanticipated events. Further, the information
about our intentions contained in this Report is a statement of our intention as
of the date of this Report and is based upon, among other things, the existing
regulatory environment, industry conditions, market conditions and prices, the
economy in general and our assumptions as of such date. We may change our
intentions, at any time and without notice, based upon any changes in such
factors, in our assumptions or otherwise.
Overview
We are a
provider of local, long distance and international voice telephone
services. We provide these services using a proprietary Linux-based,
open-source softswitch that utilizes an Internet Protocol (“IP”) telephony
product. IP telephony is the real-time transmission of voice
communications in the form of digitized “packets” of information over the
Internet or a private network, which is analogous to the way in which e-mail and
other data is transmitted. We provide our digital telephone services
primarily on a wholesale basis to other service providers, such as cable
operators, Internet service providers, WiFi and fixed wireless broadband
providers, data integrators, value-added resellers, and satellite broadband
providers. Our technology enables these carriers to quickly and inexpensively
offer premiere broadband telephone services, complete with order flow management
for efficient provisioning, billing and support services and user interfaces
that are easily customized to reflect the carrier’s unique brand.
The
worldwide rollout of broadband voice services has allowed consumers and
businesses to communicate at dramatically reduced costs in comparison to
traditional telephony networks. Traditionally, telephone service
companies have built networks based on circuit switching technology, which
creates and maintains a dedicated path for individual telephone calls until the
call is terminated. While circuit-switched networks have provided
reliable voice communications services for more than 100 years, transmission
capacity is not efficiently utilized in a circuit-switched
system. When a telephone call is made on a circuit-switching
technology platform, a circuit is created and remains dedicated for the entire
duration of that call, rendering the circuit unavailable for the transmission of
any other calls. Because of the high cost and inefficiencies of a
circuit-switched network, we have never owned a circuit-switched
network.
We have
created a scalable IP platform and have transitioned into a facilities-based
digital telephony service provider to take advantage of the network cost savings
that are inherent in an IP network. Our proprietary softswitch
provides more than 20 of the Class 5 call features, voice mail and enhanced call
handling on our own Session Initiation Protocol (“SIP”) server
suite. We control all of the features we offer to broadband voice
customers because, rather than relying on a software vendor, we write the code
for any new features that we desire to offer our customers. In
addition, we have no software licensing fees as we only utilize open source
software through which we share ideas and concepts with other companies that
write open source code.
Our SIP
servers are part of a cluster of servers that we refer to as a server farm, in
which each server performs different network tasks, including back-up and
redundant services. We believe the server farm structure can be
easily and cost-effectively scaled as our broadband voice business grows. In
addition, servers within our server farm can be assigned different tasks as
demand on our network dictates. If an individual server ceases to
function, our server farm is designed in a manner that subscribers should not
have a call interrupted. We support origination and termination using
both the G.711 and G.729 voice codecs. Codecs are the algorithms that
enable us to carry analog voice traffic over digital lines. There are
several codecs that vary in complexity, bandwidth required and voice
quality. G.711 is a standard to represent 8-bit compressed pulse code
modulation samples for signals of voice frequency. We prefer the
G.729 codec, which allows us to utilize the Internet in more cost-effective ways
and allows for the compression of more calls in limited bandwidth, that reduces
a call to approximately 8 kilobits per second. For all of our retail
customers and our more sophisticated wholesale accounts, we use G.729 to save
cost and enhance the quality of the call.
Plan
of Operation
Our
objective is to build a profitable telephone company on a stable and scalable
platform with minimal network costs. We want to be known for our high
quality of service, robust features and ability to deliver any new product to a
wholesale customer without delay. We believe that to achieve
our objective we need to have “cradle to grave” automation of our back-office
web and billing systems. We have written our software for maximum
automation, flexibility and changeability.
We know
from experience in provisioning complex telecom orders that back-office
automation is a key factor in keeping overhead costs low. Technology
continues to work for 24 hours a day and we believe that the fewer people a
company is required to employ in the back office, the more efficiently it can
run, which should drive down the cost per order.
Furthermore,
our strategy is to grow rapidly by leveraging the capital, customer base and
marketing strength of larger companies that sell broadband
services. Many of our targeted wholesale customers and some of our
existing wholesale customers have significant financial resources to market a
private-labeled digital voice product to their existing customer bases or to new
customers. We believe our strength is our technology-based
platform. In providing our technology on a wholesale basis, our goal
is to obtain and manage 500 customers that have an average customer base of
1,000 end-users. We believe we will be more successful and more
profitable taking this approach to reaching 500,000 end-users than we would be
if we tried to attract and manage 500,000 individual end-users by
ourselves.
Six Months Ended May 31,
2008 vs. Six Months Ended May 31, 2007
Our
revenue for the six-month period ended May 31, 2008 increased by approximately
$656,000, or approximately 160%, to approximately $1,065,000 as compared to
approximately $409,000 reported for the six-month period ended May 31,
2007. The increase in revenues was directly related to the increase
in the number of wholesale customers that began reselling our Internet telephone
service. At May 31, 2008, we were billing 67 wholesale customers, as
compared to 45 customers at May 31, 2007. We have numerous wholesale
customers who have signed a contract with us who are not generating revenue yet,
and we have other potential wholesale customers in trial. We believe
the customers that we have already identified and with which we have already
signed agreements will continue to add to our sales
growth. Furthermore, we increased our sales of minutes to
international destinations, for which we are able to generate higher revenue per
minute than we generate on domestic usage. Our revenues from
international calling in the six-month period ended May 31, 2008 amounted to
approximately $360,000. We cannot predict the amount of future
revenues from international calling because rapid price changes impact the
amount of sales we can make, and some routes that were available to us in the
second quarter are no longer available. However, we are establishing
specific routes to high-cost countries where we anticipate we can earn a higher
gross profit per minute than what we would earn in low-cost
countries.
For the
six-month period ended May 31, 2008, our direct costs of services exceed our net
sales by approximately $3,000, which was an improvement of approximately
$124,000 over the gross margin of approximately ($127,000) reported in the
six-month period ended May 31, 2007. Our IP telephony facilities have
significant unused capacity and we have therefore been unable to generate a
positive gross profit on a quarterly basis, although we did achieve a positive
gross profit for the three-month period ended May 31, 2008. We
anticipate we can continue to achieve higher sales volumes to cover fixed costs
and to negotiate lower variable costs with vendors. We estimate that
our switching facilities have substantial additional capacity.
Selling,
general and administrative expenses increased by approximately $145,000, or
approximately 11%, to approximately $1,486,000 for the six-month period ended
May 31, 2008 from approximately $1,341,000 reported in the same prior-year
fiscal period. Additional salary and marketing expense accounted for
the majority of the increase. Approximately $15,000 each month of our
salary expense over the previous 12 months was reimbursed to us for services
that three of our employees provided to another company. Beginning in
the third quarter of fiscal 2008, we are no longer providing these
services.
Depreciation
and amortization expense increased by approximately $12,000 for the six months
ended May 31, 2008 to approximately $247,000 which was comparable to
approximately $235,000 for the same period in fiscal 2007.
Interest
expense increased by approximately $109,000 to approximately $465,000 for the
six months ended May 31, 2008 as compared to approximately $356,000 for the six
months period ended May 31, 2007. The increase was due additional
borrowing in the fourth quarter of fiscal 2007.
Warrant
expense for the six months ended May 31, 2008 amounted to approximately
$2,092,000, primarily due to the increase in the market value of our common
stock from November 30, 2007 to May 31, 2008, as compared to the warrant income
of approximately $510,000 for the same period in fiscal 2007. The
warrant income resulted from a decrease in the price of our common stock at May
31, 2007 as compared to the value at November 30, 2006.
Discontinued
operations reflect the net loss for the six month period ended May 31, 2007
attributable to our former CLEC operations, which were sold in June
2007.
Three Months Ended May 31,
2008 vs. Three Months Ended May 31, 2007
Our
revenue for the three-month period ended May 31, 2008 increased by approximately
$422,000, or approximately 198%, to approximately $635,000 as compared to
approximately $213,000 reported for the three-month period ended May 31,
2007. The increase in revenues was directly related to the increase
in the number of wholesale customers that began reselling our Internet telephone
service. As discussed above, at May 31, 2008, we were billing 67
wholesale customers as compared to 45 customers at May 31, 2007, and in fiscal
2008 we increased our sales of minutes to international destinations, which
generated approximately $260,000 in second quarter revenues.
We
attained a gross profit for the three-month period ended May 31, 2008 of
approximately $19,000, which was an improvement of approximately
$37,000 over the negative gross profit of approximately ($18,000) reported in
the three-month period ended May 31, 2007. Our IP telephony
facilities have significant unused capacity and we have therefore been unable to
generate the level of gross profit that we believe we will generate when our
sales are higher. We continue to increase the number of minutes
running over our network on a quarterly basis. The increased volume
of minutes on our network allows us to cover all of our fixed network costs and
to negotiate lower variable costs with other carriers.
Selling,
general and administrative expenses increased by approximately $112,000, or
approximately 17%, to approximately $787,000 for the three-month period ended
May 31, 2008 from approximately $675,000 reported in the same prior year fiscal
period. Most of the increase related to increased personnel costs and
marketing expenses. Approximately $15,000 each month of our salary
expense over the previous 12 months was reimbursed to us for services that three
of our employees provided to another company. Beginning in the third
quarter of fiscal 2008, we are no longer providing these services.
Depreciation and amortization expense
decreased by approximately $13,000 for the three months ended May 31, 2008 to
approximately $125,000 as compared to approximately $138,000 for the same period
in fiscal 2007. The decrease consisted of a reduction of
approximately $30,000 in the amortization of deferred financing costs related to
our financing agreements, offset by an increase of approximately $17,000 in
depreciation expense.
Interest
expense increased by approximately $9,000 to approximately $221,000 for the
three months ended May 31, 2008 as compared to approximately $212,000 for the
three months period ended May 31, 2007. The increase was due to
additional borrowing in September 2007.
Warrant
income for the three months ended May 31, 2008 amounted to approximately
$622,000 due to the decrease in the market price of our common stock at May 31,
2008 as compared to February 28, 2008. Similarly, a decrease in the
market price of our common stock at May 31, 2007 as compared to the market price
at February 28, 2007, generated warrant income of approximately $450,000 in the
three month period ended May 31, 2007.
Discontinued
operations reflected our net loss for the three-month period ending May 31, 2007
attributable to our former CLEC operations, which were sold in June
2007.
Liquidity and Capital
Resources
At May
31, 2008, we had cash and cash equivalents of approximately $27,000 and negative
working capital of approximately $1,723,000.
Net cash
used in operating activities aggregated approximately $1,609,000 and $1,457,000
in the six-month periods ended May 31, 2008 and 2007,
respectively. The principal use of cash in fiscal 2008 was the loss
for the period of approximately $4,280,000, which included a non-cash
mark-to-market warrant adjustment charge of approximately
$2,092,000. The principal use of cash in fiscal 2007 was the loss for
the period of approximately $2,730,000 partially offset by income from a
non-cash mark-to-market warrant adjustment of approximately
$510,000.
Net cash
used in investing activities in the six-month periods ended May 31, 2008 and
2007 aggregated approximately $76,000 and $84,000, respectively, resulting
primarily from expenditures related to enhancements to our IP telephony
software.
Net cash
provided by financing activities aggregated approximately $1,580,000 and
$253,000 in the six-month periods ended May 31, 2008 and 2007, respectively. In
fiscal year 2008, cash provided by financing activities resulted from cash
received from a restricted bank account that was funded in connection with
financings on September 28, 2007 and May 28, 2008. In fiscal 2007, net cash
provided by financing activities was primarily the proceeds of a short-term note
of $275,000.
For the
six months ended May 31, 2008, we had approximately $76,000 in capital
expenditures primarily related to our IP telephony business. We
expect to make equipment purchases of approximately $50,000 to $100,000 in the
third fiscal quarter of 2008, depending on our growth and the availability of
cash or equipment financing. We expect that other capital
expenditures over the next 12 months will relate primarily to a continued
roll-out of our IP telephony network that will be required to support our
growing customer base of IP telephony subscribers.
We have
sustained net losses from operations during the last three years, as we have
worked to build the software and back-office systems required to provide digital
telephony services. Our operating losses have been funded through the
sale of non-operating assets, the issuance of equity securities and
borrowings. We have experienced significant quarterly growth in
revenues in the first and second quarters of fiscal 2008. We
continually evaluate our cash needs and growth opportunities and we have
recently completed additional debt financing of $1.4 million to support our
projected future negative cash-flow. Our lender releases cash to us
from a restricted cash account so that our lender can evaluate the individual
items upon which we make cash expenditures. In conjunction with our
lending agreement, the release of operating cash to pay our expenditures is
totally in the discretion of our lender. Although we are not yet
profitable and we are not generating cash from operations, our lender has
committed to us that it will continue to fund our operations until at least
December 1, 2008 and will not call our loan.
Item
3. Controls
and Procedures
(a) Disclosure Controls and
Procedures. Our management, with the participation of our chief executive
officer/chief financial officer, has evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this Report. Based on
such evaluation, our chief executive officer/chief financial officer has
concluded that, as of the end of such period, for the reasons set forth below,
our disclosure controls and procedures were not effective. We are presently
taking the necessary steps to improve the effectiveness of such disclosure
controls and procedures.
(b) Internal Control Over Financial
Reporting. There have not been any changes in our internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the quarter ended May 31, 2008 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. We have noted an
inadequately-designed accounting system within our VoX subsidiary. We continue
to address weaknesses so that our month-end substantive procedures can be
moderated. Subsequent to the end of fiscal 2007, we implemented daily automated
reporting, which has provided a significant improvement to the flow of financial
information. As reported in fiscal 2005, we also have a lack of staffing within
our accounting department, both in terms of the small number of employees
performing our financial and accounting functions and their lack of experience
to account for complex financial transactions. This lack of staffing continued
throughout fiscal 2007 and remains at the date of this Report. Management
believes the lack of qualified personnel, in the aggregate, and the inadequate
accounting system for VoX amounts to a material weakness in our internal control
over financial reporting. We will continue to evaluate the employees involved,
the need to engage outside consultants with technical and accounting-related
expertise to assist us in accounting for complex financial transactions and the
hiring of additional accounting staff with complex financing
experience.
We are
also evaluating our internal controls systems so that in fiscal 2008 our
management will be able to report on our internal controls, as required by
Section 404 of the Sarbanes-Oxley Act of 2002. We will be performing
the system and process evaluation and testing (and any necessary remediation)
required in an effort to comply with the management certification requirements
of Section 404 of the Sarbanes-Oxley Act. We were not an accelerated filer for
fiscal year 2007.
PART II-OTHER
INFORMATION
Item
6. Exhibits
Exhibit
Number Description
|
31.1
|
Certification
of our Chief Executive Officer and Chief Financial Officer, Paul H. Riss,
Pursuant to 18 U.S.C. 1350 (Section 302 of the Sarbanes-Oxley Act of
2002)
|
| |
|
| 32.1 |
Certification
of our Chief Executive Officer and Chief Financial Officer, Paul H. Riss,
Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of
2002) |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
Pervasip Corp.
Date: July 21,
2008 By: /s/ Paul H.
Riss
Paul H.
Riss
Chief
Executive Officer
(Principal
Financial and Accounting Officer)
EXHIBIT
INDEX
Exhibit
Number Description
|
31.1
|
Certification
of our Chief Executive Officer and Chief Financial Officer, Paul H. Riss,
Pursuant to 18 U.S.C. 1350 (Section 302 of the Sarbanes-Oxley Act of
2002)
|
| |
|
| 32.1 |
Certification
of our Chief Executive Officer and Chief Financial Officer, Paul H. Riss,
Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of
2002) |