pvsp10q.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 August
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 Noo
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:
26,026,172 shares
of Common Stock, par value $.10 per share, as of October 7,
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
|
|
|
Aug.31, 2008
|
|
|
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
55,283 |
|
|
Restricted
cash
|
|
|
206,402 |
|
|
Accounts
receivable, net
|
|
|
214,392 |
|
|
Prepaid
expenses and other current assets
|
|
|
318,967 |
|
|
Total
current assets
|
|
|
795,044 |
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
670,880 |
|
|
Deferred
finance costs, net
|
|
|
592,881 |
|
|
Deposits
|
|
|
525,631 |
|
|
Other
assets
|
|
|
233,545 |
|
|
Total
assets
|
|
$ |
2,817,981 |
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity Deficiency
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Current
maturities of long-term debt and capital lease obligations
|
|
$ |
93,403 |
|
|
Accounts
payable and accrued expenses
|
|
|
1,808,237 |
|
|
Total
current liabilities
|
|
|
1,901,640 |
|
|
|
|
|
|
|
|
Long-term
debt and capital lease obligations, less current
maturities
|
|
|
3,543,219 |
|
|
Accrued
pension obligation
|
|
|
862,805 |
|
|
Warrant
liabilities
|
|
|
6,822,285 |
|
|
Total
liabilities
|
|
|
13,129,949 |
|
|
|
|
|
|
|
|
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, 26,026,172 shares
issued
|
|
|
2,602,617 |
|
|
Capital
in excess of par value
|
|
|
28,412,852 |
|
|
Deficit
|
|
|
(41,302,937 |
) |
|
Accumulated
other comprehensive loss, unrealized loss on securities
|
|
|
(24,500 |
) |
|
Total
stockholders’ equity deficiency
|
|
|
(10,311,968 |
) |
|
Total
liabilities and stockholders’ equity deficiency
|
|
$ |
2,817,981 |
|
See notes
to the condensed consolidated financial statements.
Pervasip
Corp. and Subsidiaries
Condensed
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
|
|
|
For
the Nine Months Ended
|
|
|
For
the Three Months Ended
|
|
|
|
|
Aug. 31, 2008
|
|
|
Aug. 31, 2007
|
|
|
Aug. 31, 2008
|
|
|
Aug. 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,522,056 |
|
|
$ |
676,995 |
|
|
$ |
456,704 |
|
|
$ |
268,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
of services
|
|
|
1,467,756 |
|
|
|
846,288 |
|
|
|
399,320 |
|
|
|
310,753 |
|
|
Selling,
general and administrative
|
|
|
2,468,638 |
|
|
|
1,938,448 |
|
|
|
982,527 |
|
|
|
597,709 |
|
|
Depreciation
and amortization
|
|
|
382,819 |
|
|
|
425,176 |
|
|
|
136,101 |
|
|
|
189,824 |
|
|
Total
costs and expenses
|
|
|
4,319,213 |
|
|
|
3,209,912 |
|
|
|
1,517,948 |
|
|
|
1,098,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(2,797,157 |
) |
|
|
(2,532,917 |
) |
|
|
(1,061,244 |
) |
|
|
(829,796 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(661,878 |
) |
|
|
(590,183 |
) |
|
|
(197,315 |
) |
|
|
(234,280 |
) |
|
Interest
and other income
|
|
|
14,705 |
|
|
|
30,881 |
|
|
|
2,304 |
|
|
|
9,518 |
|
|
Change
in warrant valuation
|
|
|
(1,311,341 |
) |
|
|
494,920 |
|
|
|
780,776 |
|
|
|
1,005,068 |
|
|
Total
other income (expense)
|
|
|
(1,958,514 |
) |
|
|
(64,382 |
) |
|
|
585,765 |
|
|
|
780,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before discontinued
operations
|
|
|
(4,755,671 |
) |
|
|
(2,597,299 |
) |
|
|
(475,479 |
) |
|
|
(49,490 |
) |
|
Earnings
(loss) from discontinued operations
|
|
|
- |
|
|
|
(330,363 |
) |
|
|
- |
|
|
|
(148,247 |
) |
|
Gain
on disposal of discontinued operations
|
|
|
- |
|
|
|
1,169,037 |
|
|
|
- |
|
|
|
1,169,037 |
|
|
Net income (loss)
|
|
|
(4,755,671 |
) |
|
|
(1,758,625 |
) |
|
|
(475,479 |
) |
|
|
971,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
– unrealized loss on marketable securities
|
|
|
(24,500 |
) |
|
|
(3,185 |
) |
|
|
(500 |
) |
|
|
(1,365 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$ |
(4,780,171 |
) |
|
$ |
(1,761,810 |
) |
|
$ |
(475,979 |
) |
|
$ |
969,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before discontinued operations
|
|
|
(0.18 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.00 |
|
|
Earnings
from discontinued operations
|
|
|
0.00 |
|
|
|
0.04 |
|
|
|
0.00 |
|
|
|
0.04 |
|
|
|
|
$ |
(0.18 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,881,385 |
|
|
|
22,750,279 |
|
|
|
25,972,740 |
|
|
|
23,348,774 |
|
See notes to the condensed consolidated
financial statements.
Pervasip
Corp. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
For
the Nine Months Ended
|
|
|
|
|
Aug. 31, 2008
|
|
|
Aug. 31, 2007
|
|
|
|
|
|
|
|
|
|
| Net
cash used in operating activities: |
|
$ |
(2,518,502 |
) |
|
$ |
(1,669,778 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(89,292 |
) |
|
|
(108,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
|
(28,961 |
) |
|
|
(33,717 |
) |
|
Debt
issue costs paid
|
|
|
(71,500 |
) |
|
|
- |
|
|
Proceeds
from exercise of options
|
|
|
3,000 |
|
|
|
- |
|
|
Proceeds
from exercise of warrants
|
|
|
- |
|
|
|
48,095 |
|
|
Proceeds
from officer notes
|
|
|
- |
|
|
|
81,000 |
|
|
Proceeds
from notes
|
|
|
- |
|
|
|
370,000 |
|
|
Inflow
from restricted cash
|
|
|
2,628,460 |
|
|
|
- |
|
|
Net
cash provided by financing activities
|
|
|
2,530,999 |
|
|
|
465,378 |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
|
(76,795 |
) |
|
|
(1,312,571 |
) |
|
Cash
and cash equivalents at beginning of period
|
|
|
132,078 |
|
|
|
1,337,525 |
|
|
Cash
and cash equivalents at the end of period
|
|
$ |
55,283 |
|
|
$ |
24,954 |
|
See notes to
the condensed consolidated financial statements.
PERVASIP
CORP.
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 nine-month periods
ended August 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 nine-month and three-month periods ended August 31, 2008, one customer
accounted for approximately 30% and 39%, respectively, of our
revenues. A second customer accounted for approximately 19% of our
revenues for the nine-month period ended August 31, 2008. During the
nine-month and three-month periods ended August 31, 2007, one customer accounted
for 45% and 52%, respectively, of our revenues. At August 31, 2008,
monies owed to us from two customers accounted for 46% 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
142,130,000 and 12,969,000 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 nine-month and three-month periods ended August 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
voice over IP 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:
|
·
|
The
availability of additional funds to successfully pursue our business
plan;
|
|
·
|
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 incumbent carriers and industry service partners that have
signed agreements with us;
|
|
·
|
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. |
PERVASIP
CORP.
Notes To
Condensed Consolidated Financial Statements
(Unaudited)
Note 5 -
Stock-Based Compensation Plans
We issue
stock options to our employees, consultants and outside directors pursuant to
stockholder-approved and non-approved stock option programs and record the
applicable expense in accordance with the Financial Accounting Standards Board
SFAS No. 123R, “Share-Based Payment”. For the nine-month periods ended August
31, 2008 and 2007, we recorded approximately $80,000 and $133,000, respectively,
in employee stock-based compensation expense, which was included in our selling,
general and administrative expenses. For the three months ended August 31, 2008
and 2007, we recorded approximately $32,000 and $44,000, respectively, in
employee stock-based compensation expense. As of August 31, 2008,
there was approximately $117,000 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 the total remaining liability is significantly
less, based upon public disclosures made by the entity that purchased our former
subsidiaries. However, the purchaser has not confirmed the reduction to us
directly, and accordingly, we have not reduced the amount of the liability. One
of our former subsidiaries filed for bankruptcy protection on September 23,
2008, and continues to operate while it seeks to restructure. We believe the
bankruptcy filing further decreases our potential liability to the purchaser.
However, there can be no assurance that we will be successful in reducing such
potential liabilities, 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 the
nine-month periods ended August 31, 2008 and August 31, 2007, we recorded
pension expense of $161,000 and $72,000, respectively. In the nine-month periods
ended in August 31, 2008 and 2007, we contributed approximately $75,000 and
$10,000, respectively, to our defined benefit plan. In the three-month periods
ended August 31, 2008 and 2007, we recorded pension expense of $62,000 and
$24,000, respectively. For the three-month period ended in August 31, 2008 we
contributed approximately $20,000. There was no contribution to the pension plan
in the quarter ended August 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 was a mandatory
contribution made, to the plan for the quarter ended August 31, 2008 of
approximately $7,000.
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, and there are no
principal payments required to be made until the notes mature. The notes are
recorded on our balance sheet at $3,418,575, which is a discount to their face
amount of $8,794,667. Our lender has sent us written notice that it has waived
all defaults on the 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 they will continue to fund such needs after December 1, 2008.
Interest on the fifth financing is set at 20%. The interest rate on our fourth
financing is set at prime plus 2%, subject to a minimum of 9.75% per annum and
was 9.75% per annum at August 31, 2008. Interest on the second and
third notes is set at prime plus 2% per annum, or 7% per annum at August 31,
2008. In conjunction with the fifth financing, all interest payments
for the next twelve months 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. This amount was recorded as a loan discount.
PERVASIP
CORP.
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 use of software development costs, we paid fees to a third-party
intellectual property development firm (“Consultant”) for the nine-month periods
ended August 31, 2008 and 2007, of $247,500 and $298,000, respectively. For the
three-month periods ended August 31, 2008 and 2007 we paid fees of $66,000 and
$88,000, 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. One of our officers has performed work for the Consultant, including
the function of distributing such funds to appropriate vendors. Our officer
received fees from the Consultant of $45,000 during the nine-month period ended
August 31, 2008. The funds paid to the Consultant resulted in the capitalization
of internal use software cost and equipment for the nine-month periods ended
August 31, 2008 and 2007 of $55,000 and $106,500, respectively. The software
cost and equipment capitalized for the three-month periods ended August 31, 2008
and 2007 was $0 and $24,000, respectively. The remaining fees for the nine-month
periods ended in August 31, 2008 and 2007 of $192,500 and $191,500,
respectively, were deemed to be operating costs. The amount of operating costs,
for the three-month period ended August 31, 2008 and 2007 were $66,000 and
$64,000, 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 for the year ended November 30,
2007 as discontinued operations. For the nine-and three-months ended August 31,
2007, there was a loss from discontinued operations of $330,363 and $148,247,
respectively. A net gain on discontinued operations that resulted
from the sale of the CLECs of approximately $1,169,000 was recorded in fiscal
2007.
CLEC
revenues amounted to approximately $3,013,000 and $0 for the nine- and
three-month periods ended August 31, 2007, respectively.
Note 12 –
Deposits
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. We are no
longer doing business with this vendor. To facilitate the transaction and to
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 that firm. After requesting that
our deposit be returned, we commenced an action against the investment banking
firm and the principal for $300,000 plus other associated costs. Based upon
advice from our counsel and from discussions that we have had with the
defendant, we believe the amount is collectible in full, and we have recorded
the $300,000 as an 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. We recently signed an agreement to provide our IP telephone service
over a major international cell phone network. Our technology enables
these carriers to quickly and inexpensively offer premiere IP 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 our IP telephone 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.
The
flexibility of our technology has allowed us to now provide our IP telephone
services over a cell phone network. Most cell phones are capable of receiving
email and other transmissions of data. We have a signed agreement that allows
our IP telephone service to transmit over a GSM network, which is the most
popular standard for mobile phones around the world. This agreement
includes a guarantee from our customer of a minimum of 50,000 “voice over GSM”
lines by October 31, 2009. We believe one of the most expensive telephone calls
a cell phone user can make today is a call to an international destination.
Consumers are frequently charged more than one dollar a minute for these
calls. By utilizing our IP telephony service over the data side of
the GSM network, we can complete telephone calls to international destinations
for pennies a minute. We believe cost savings provides significant
marketing opportunities to our wholesale customers that plan to sell a voice
over GSM product.
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 or a web store 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 has 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 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 base 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.
Nine Months Ended August 31,
2008 vs. Nine Months Ended August 31, 2007
Our revenue from continuing operations
for the nine-month period ended August 31, 2008 increased by approximately
$845,000, or approximately 125%, to approximately $1,522,000 as compared to
approximately $677,000 reported for the nine-month period ended August 31, 2007.
The increase in our revenues was directly related to the increase in the number
of wholesale customers to which we sell our IP telephone service. At August 31,
2008, we were billing 76 wholesale customers, as compared to 48 customers at
August 31, 2007. We have numerous wholesale customers who have signed a contract
with us but 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. Our largest opportunity with an existing customer is with
Unified Technologies Group, Inc. (“UTGI”) which recently signed a wholesale
services agreement with us that requires them to sell a minimum of 50,000 IP
telephony lines running over a national cell phone network by October 2009. UTGI
has agreed to pay us for the revenue we would have received from 50,000 lines,
in the event they do not achieve that level. We anticipate they will sell
significantly more than 50,000 lines. Due to the international calling plans
that UTGI is anticipating it will sell, we believe that 50,000 lines will
approximate $2 million in monthly revenue for us. We have also 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 nine-month period ended August 31,
2008, amounted to approximately $362,000. 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 of fiscal 2008 are no longer
available. However, we are attempting to establish specific routes to
high-cost countries for which we anticipate we can earn a higher gross profit
per minute than that we would earn in low-cost countries.
For the
nine-month period ended August 31, 2008, our gross profit amounted to
approximately $54,000, which was an improvement of approximately $223,000 over
the negative gross profit of approximately ($169,000) reported in the nine-month
period ended August 31, 2007. Our IP telephony facilities have significant
unused capacity and we have therefore only recently been able to generate a
positive gross profit on a quarterly basis. We anticipate we can
continue to achieve higher sales volumes to cover fixed costs and to negotiate
lower variable costs with vendors, so that our gross profit and gross profit
percentage should continue to increase.
Selling,
general and administrative expenses increased by approximately $531,000, or
approximately 27%, to approximately $2,469,000 for the nine-month period ended
August 31, 2008 from approximately $1,938,000 reported in the same prior-year
fiscal period. Additional salary, consulting and marketing expense accounted for
the majority of the increase. Approximately $15,000 each month of our salary
expense until May 31, 2008 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 $42,000 for the nine months
ended August 31, 2008 to approximately $383,000 as compared to approximately
$425,000 for the same period in fiscal 2007. Approximately $64,000 of the
decrease was the elimination of amortization costs as a result of the
satisfaction of a note that was paid in full in conjunction with the sale of our
CLECs, while depreciation of our Internet telephony platform amounted to an
increase of approximately $22,000.
Interest
expense increased by approximately $72,000 to approximately $662,000 for the
nine-months ended August 31, 2008 as compared to approximately $590,000 for the
nine-months ended August 31, 2007. The increase was due to additional
borrowing in September 2007 and May 2008.
Interest
and other income for the nine-month period ended August 31, 2008 amounted to
approximately $15,000 primarily due to interest earned on amounts on deposit in
a restricted cash account. For the nine-month period ended August 31, 2007,
other income amounted to approximately $31,000 which related primarily to
commission income.
Warrant
expense for the nine-month period ended August 31, 2008 amounted to
approximately $1,311,000, which was primarily due to the increase in the market
value of our common stock from November 30, 2007 to August 31, 2008. During the
comparable period of fiscal 2007, we recorded warrant income of approximately
$495,000, which resulted from a decrease in the price of our common stock at
August 31, 2007 as compared to the value at November 30, 2006.
During
the nine-month period ended August 31, 2007, we reflected a loss from the
discontinued operations of our former CLEC subsidiaries amounting to
approximately $330,000. These subsidiaries were sold during fiscal 2007 and
there was no loss in fiscal 2008.
Discontinued
operations reflected the income for the nine-month periods ended August 31, 2007
attributable to our former CLEC operations, which were sold in June 2007. The
gain from discontinued operations in fiscal 2007 included a gain of
approximately $1,169,000 on the sale of the CLEC operations. There was no such
income in 2008.
Three Months Ended August
31, 2008 vs. Three Months Ended August 31, 2007
Our
revenue from continuing operations for the three-month period ended August 31,
2008 increased by approximately $189,000, or approximately 70%, to approximately
$457,000 as compared to approximately $268,000 reported for the three-month
period ended August 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 August 31, 2008, we were
billing 76 wholesale customers as compared to 48 customers at August 31,
2007.
We
reported gross profit for the three-month period ended August 31, 2008 of
approximately $57,000, which was an improvement of approximately $99,000 over
the negative gross profit of approximately $42,000 reported in the three-month
period ended August 31, 2007. The increase in gross profit during the
three-month period ended August 31, 2008, was primarily the result of a decrease
in our variable costs from the routing of instate calls to low cost
carriers.
Selling,
general and administrative expenses increased by approximately $385,000, or
approximately 64%, to approximately $983,000 for the three-month period ended
August 31, 2008 from approximately $598,000 reported in the same prior year
fiscal period. Most of the increase related to increased personnel costs and
outside consultants.
Depreciation
and amortization expense decreased by approximately $54,000 for the three months
ended August 31, 2008 to approximately $136,000 as compared to approximately
$190,000 for the same period in fiscal 2007. Amortization expense decreased by
approximately $61,000 due to the elimination of amortization costs as a result
of the satisfaction of a note that was paid in full in conjunction with the sale
of our CLECs. This decrease was offset by an increase of
approximately $7,000 of depreciation expense related to our Internet telephony
platform.
Interest
expense decreased by approximately $37,000 to approximately $197,000 for the
three months ended August 31, 2008 as compared to approximately $234,000 for the
three months period ended August 31, 2007, as a result of amendments to our
existing loan agreements.
Warrant
income for the three months ended August 31, 2008 amounted to approximately
$781,000 due to the decrease in the market price of our common stock at August
31, 2008 as compared to May 31, 2008. Similarly, a decrease in the
market price of our common stock at August 31, 2007 as compared to the market
price at May 31, 2007 generated warrant income of approximately $1,005,000 in
the three month period ended August 31, 2007.
Discontinued
operations reflected the net income for the three-month periods ending August
31, 2007 attributable to our former CLEC operations, which were sold in June
2007. The gain from the sale of the discontinued operations in fiscal
2007 was approximately $1,169,000.
Liquidity and Capital
Resources
At August
31, 2008, we had cash and cash equivalents of approximately $55,000 and negative
working capital of approximately $1,107,000.
Net cash
used in operating activities aggregated approximately $2,519,000 and $1,670,000
in the nine-month periods ended August 31, 2008 and 2007,
respectively. The principal use of cash in fiscal 2008 was the loss
for the period of approximately $4,756,000, which was partially offset by a
non-cash mark-to-market warrant adjustment charge of approximately
$1,311,000. The principal use of cash in fiscal 2007 was the loss for
the period of approximately $1,759,000, which included a non-cash item of
approximately $495,000 of income that resulted from a mark-to-market warrant
adjustment.
Net cash
used in investing activities in the nine-month periods ended August 31, 2008 and
2007 aggregated approximately $89,000 and $108,000, respectively, resulting
primarily from expenditures related to enhancements to our IP telephony
software.
Net cash
provided by financing activities aggregated approximately $2,531,000 and
$465,000 in the nine-month periods ended August 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 $370,000.
For the
nine-months ended August 31, 2008, we had approximately $89,000 in capital
expenditures primarily related to our IP telephony business. We expect to make
equipment purchases of less than $50,000 in the fourth 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 our IP
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 nine months of fiscal 2008. We continually evaluate our
cash needs and growth opportunities and we have reached an understanding with
our principal lender to borrow an additional $500,000 at an interest rate of 15%
from our principal lender to support our negative cash flow from operations for
the months of October and November 2008. We anticipate that these borrowings
will be deposited in a restricted cash account that is controlled by our
principal lender. Our principal lender releases cash to us from a
restricted cash account so that it 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 principal lender to pay current operating bills and cannot necessarily be
used to pay past due invoices. Although we are not yet profitable and we are not
generating cash from operations, our principal lender has committed to us that
it will continue to fund our operations and will not call our loan until at
least December 1, 2008. We are working with our principal lender for additional
financing and with other entities that have expressed an interest to provide
additional financing. However, there can be no assurance that such
financing will be sufficient to get us to a break-even level, or that we will be
able to raise new capital. Our failure to generate sufficient revenues and raise
additional capital will have an adverse impact on our ability to achieve our
longer-term business objectives, and would adversely affect our ability to
continue operating as a going concern.
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 August
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.
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:
October 15,
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)
|