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| PVSP.OB > SEC Filings for PVSP.OB > Form 10QSB on 21-Jul-2008 | All Recent SEC Filings |
21-Jul-2008
Quarterly Report
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.
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