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| PVSP.OB > SEC Filings for PVSP.OB > Form 10QSB on 15-Oct-2008 | All Recent SEC Filings |
15-Oct-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. 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.
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.
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.
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