Add
PVSP.OB to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| PVSP.OB > SEC Filings for PVSP.OB > Form 10KSB on 2-Mar-2009 | All Recent SEC Filings |
2-Mar-2009
Annual Report
Certain statements set forth below under this caption constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to page 1 of this Report for additional factors relating to such statements.
Overview
We offer a customized wholesale IP telephone solution to other service providers. This type of telephone service is also referred to as digital telephone service or voice-over-IP, or VoIP. Because of the intense competition on the retail level and the high marketing costs that digital voice providers have incurred to acquire a subscriber, we decided that we would not compete in the retail arena. Our goal is to obtain several significant wholesale customers that will private label and resell our digital voice services to their customer bases. We target companies that are already providing high-speed Internet services, such as cable operators, Internet service providers, WiFi and fixed wireless broadband providers, broadband-over-powerline companies, satellite broadband providers, and most recently, a Mobile VoIP provider. Our technology is very flexible and customizable and, consequently, we have been able to attract what we believe will become a significant Mobile VoIP customer that is capable of providing our VoIP service over the data side of the cell phone network.
Cell phone networks provide both voice and data services. In a traditional cell phone service, we speak over the voice side of the network and we receive email messages and obtain Internet access over the data side of the network. With our service, the voice transmission runs over the data side of the cell phone networks, and the voice side would not be used. The data side of the cell phone network is simply another avenue upon which we can run our IP telephony services. However, it is a cost-invasive method of delivering telephone service and it threatens to take away a significant number of subscribers from the large and more expensive cell phone carriers. We refer to our use of the data side of the cell phone networks as voice-over-IP enabled mobile phone service, or as Mobile VoIP.
Our Mobile VoIP wholesale customer, UTGI, plans to utilize the GSM network. UTGI has advised us that the use of the GSM network will allow it to be a service provider in 130 countries. Most cell phone plans charge relatively high rates per minute for completing international calls from or to a cell phone. We plan to terminate all calls made on the Mobile VoIP phones sold by UTGI at low international rates, as the call will be treated as a VoIP call, not a cell phone call. These calls will not register as phone calls on the voice side of the mobile phone network because these calls will travel over the Internet. In some instances, UTGI will be able to charge international cell phone rates that are 90% less than the standard per-minute rates charged by most major cell phone carriers. In addition to low rates for subscribers, since Mobile VoIP calls travel over the Internet without being handed off to local cell phone carriers, there are no roaming charges as the person travels from country to country. As a result, a person using a UTGI mobile phone, who lives in New York and has a New York telephone number will still be treated as though he is calling from New York, even if he is driving through Europe and moving through several countries. There will be no roaming charges to this consumer, as he did not have his telephone call handed off to several local mobile phone companies. Instead, the call will stay on UTGI's virtual private network and run over the Internet.
We anticipate that UTGI will launch its product in the second quarter of 2009. It has not given us a launch date, but we believe it is working to establish publicity for any launch it does. Employees of UTGI continue to make test calls on our network and UTGI has provided us with a Mobile VoIP telephone so that we can make test calls and monitor the quality of the calls. We believe the voice service has been working at a carrier-grade level. UTGI has informed us that its Mobile VoIP product has been very well received by cell phone distributors, and that it has signed take-or-pay contracts with approximately 100 distributors that have in the aggregate committed to purchase a minimum of 500,000 Mobile VoIP lines within 12 months of the launch of the product. Although UTGI has only guaranteed to pay us for 50,000 Mobile VoIP lines at the end of 12 months, it cautions us that we should be ready to expand to handle 800,000 to 1 million Mobile VoIP lines within 12 months. UTGI has advised us that it plans to continue to market to new dealers once it has launched the product and it expects to have much higher minimum take-or-pay quantities after it launches the product. As UTGI has not yet launched its product offerings or received any revenues to date from its proposed Mobile VoIP service, there can be no assurance that UTGI will be successful in its marketing efforts or that it will be able to meet its contractual obligations under its wholesale agreement with us.
Revenues
Revenues consist of telephony services revenue and customer equipment revenue.
Telephony services revenue. The majority of our operating revenues are telephony services revenues. We offer several bundled plans, unlimited plans and basic plans for wholesale and retail customers. The wholesale plans do not change much from customer to customer as the plan we offer to a cable operator is typically the same plan we offer to a WiFi carrier, Internet service providers or Mobile VoIP company. Each of our unlimited plans offers unlimited domestic calling, subject to certain restrictions, and each of our basic plans offers a limited number of calling minutes per month. Under our basic plans, we charge on a per-minute basis when the number of calling minutes included in the plan is exceeded for a particular month. For all of our U.S. plans, we charge on a per-minute basis for international calls to destinations other than Canada. These per-minute fees are not included in our monthly subscription fees. Any plan we offer to our wholesale customers is also available to an individual end-user at a higher price that approximates the retail-selling price that most of our wholesale customers charge. We also have products that are on a per-minute usage basis, such as toll-free telephone numbers to businesses and international cell phone termination.
We derive most of our telephony services revenue from usage fees and monthly subscription fees we charge our customers under our service plans. We also offer a fax service over broadband, virtual phone numbers, toll free numbers and other services, for each of which we may charge an additional monthly fee. We automatically charge service fees monthly in advance to the credit cards of all of our retail customers. Our wholesale customers typically do not pay by credit card, but are required to give us a deposit. Depending on the volume of revenue generated by a wholesale customer, we bill them either weekly or monthly.
We charge retail customers a fee for activating service. Further, since we do not charge a retail customer for the cost of an ATA, we generally charge a disconnect fee to customers who do not return their ATA to us upon termination of service, if the length of time between activation and termination is less than one year. Disconnect fees are recorded as revenue and are recognized at the time the customer terminates service. These revenues were nominal in fiscal 2008 and 2007.
Customer equipment revenue. Customer equipment revenue consists of revenue from sales of customer equipment to our wholesalers or directly to customers. In addition, customer equipment revenue includes the fees we charge our customers for shipping any equipment to them.
Direct cost of telephony services. Direct cost of telephony services primarily consists of fees that we pay to third parties on an ongoing basis in order to provide our services. These fees include:
• Access charges we pay to other telephone companies to terminate digital voice calls on the public switched telephone network ("PSTN"). When a VoX subscriber calls another VoX subscriber, we do not pay an access charge, as the call routes through our network without touching the PSTN.
• The cost of leasing interconnections to route calls over the Internet and transfer calls between the Internet and the PSTN of various long distance carriers.
• The cost of leasing from other telephone companies the telephone numbers we provide to our customers. We lease these telephone numbers on a monthly basis.
• The cost of co-locating our connection point equipment in third-party facilities owned by other telephone companies.
• The cost of providing local number portability, which allows customers to move their existing telephone numbers from another provider to our service. Only regulated telecommunications providers have access to the centralized number databases that facilitate this process. Because VoX is not a regulated telecommunications provider, we must pay other telecommunications providers to process our local number portability requests.
• The cost of complying with the new FCC regulations regarding emergency services, which require us to provide enhanced emergency dialing capabilities to transmit 911 calls for all of our customers. This cost may increase in future periods.
• Taxes we pay on our purchases of telecommunications services from our suppliers.
Direct cost of customer equipment and shipping. Direct cost of equipment sold primarily consists of costs we incur when a customer first subscribes to our service. These costs include:
• The cost of the equipment we provide to customers who subscribe to our service through our direct sales channel, in each case in excess of activation fees.
• The cost of shipping and handling for customer equipment, together with the installation manual, we ship to customers.
Results of Operations
Fiscal Year 2008 Compared to Fiscal Year 2007
Our revenues for fiscal 2008 increased by approximately $1,095,000, or approximately 110%, to approximately $2,094,000 as compared to approximately $999,000 reported for fiscal 2007. The increase in revenues was directly related to the increase in the number of wholesale customers using our IP telephony service. In November 2008, we billed 90 wholesale customers, as compared to 48 in November 2007. Furthermore, our monthly revenue continues to grow, as our existing customers continue to put more digital telephone lines on our network. In December 2008, we billed approximately $226,000, as compared to approximately $92,000 in December 2007. As a result, we anticipate that our revenue for fiscal 2009 will be significantly higher than our revenue in fiscal 2008. We anticipate that all revenue growth in fiscal 2009 will come from existing customers, including the launch of UTGI's Mobile VoIP product, as we have eliminated our sales and marketing personnel in February 2009 at the request of our lender.
Selling, general and administrative expenses ("SG&A") increased by approximately $745,000, or approximately 24.8%, to approximately $3,744,000 for fiscal 2008 from approximately $2,999,000 reported in the prior year fiscal period. The increase is attributable (i) a $300,000 reserve taken on a deposit in 2008; (ii) an increase in marketing costs and commission expense of approximately $127,000; (iii) an increase in consulting fees of approximately $224,000; (iv) increased rent expense of approximately $78,000 and (v) increased salary expense of approximately $58,000. In February 2009, we reduced the number of our employees from 19 to 11 and we project that our monthly cash expenditures for salary will decrease from approximately $144,000 in February 2009 to approximately $78,000 in March 2009. We are also reducing our rent expense by approximately $4,000 a month and our consulting expense by approximately $25,000 a month beginning in March 2009. We believe these reductions in selling, general and administrative costs will reduce our cash loss from operations to approximately $75,000 a month before the end of the second quarter.
Depreciation and amortization expense decreased by approximately $71,000 to approximately $518,000 for fiscal 2008 as compared to approximately $589,000 for the prior fiscal year. Deferred financing costs related to the debt financings we completed in November 2005, May 2006, September 2007, May 2008 and October 2008 (See Note 6) decreased by approximately $99,000 and deprecation of our IP telephony platform increased approximately $28,000.
Interest expense increased by approximately $265,000 to approximately $1,011,000 for the year ended November 30, 2008 as compared to approximately $746,000 for the prior fiscal year, primarily as a result of our increase in borrowing in May 2008 and October 2008 financings (see Note 6).
Other income (expense) amounted to approximately $10,000 expense for the year ended November 30, 2008 as compared to $24,000 income for the prior fiscal year. In fiscal 2008, other income (expense) consisted of interest income from a restricted cash account amounting to $10,000 as compared to a write off of marketable securities of $25,000. In fiscal 2007, other income resulted primarily from commission income.
For the year ended November 30, 2008, we recorded an expense of approximately $191,000, which resulted from the change in the market value of the warrants issued to our primary lender (see Note 6). In fiscal 2007, we recorded income of $573,000.
For the fiscal year ended November 30, 2007, we recorded a gain on the sale of our CLECs of approximately $1,197,000, which consisted of the excess of the liabilities assumed over the assets purchased by the buyer. The CLECs generated pretax losses of approximately ($171,000) in fiscal 2007. There was no such activity in fiscal 2008.
At November 30, 2008, we had cash and cash equivalents of approximately $130,000 and negative working capital of approximately $1,375,000 as compared to cash and cash equivalents of approximately $132,000 and negative working capital of approximately $533,000 at November 30, 2007.
Net cash used in operating activities aggregated approximately $3,384,000 and $2,252,000 in fiscal 2008 and 2007, respectively. The principal use of cash from operating activities in fiscal 2008 was the loss for the year of approximately $5,382,000, which included non-cash items for a mark-to-market adjustment of approximately $191,000, depreciation and amortization of approximately $518,000 and amortization of debt discount of approximately $688,000. The principal use of cash in 2007 was the loss of approximately $2,993,000.
Net cash used in investing activities aggregated approximately $83,000 and $305,000 in fiscal 2008 and 2007, respectively. The principal use of cash from investing activities in fiscal 2007 was the purchase of property and equipment of approximately $83,000. The principal use of cash from investing activities in fiscal 2007 was the purchase of property and equipment of approximately $129,000 and cash that was included in the sale of subsidiaries of approximately $175,000.
Net cash provided by financing activities aggregated approximately $3,466,000 and $1,351,000 in fiscal 2008 and 2007, respectively. The principal source of cash from financing activities in fiscal 2008 was a drawdown of approximately $3,618,000 from the restricted cash account that was established from the sale of secured term notes. In fiscal 2007, our principle source of cash from financing activities was the drawdown from the restricted account of approximately $1,042,000.
In fiscal 2008 and 2007, we spent approximately $93,000 and $129,000, respectively, on capital expenditures, primarily for software, servers and routers related to our IP network. We believe we also will make capital expenditures for our IP platform in fiscal 2009, and that capital additions will be flexible depending upon the number of customers we are able to attract to our network.
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of our company as a going concern. However, we have sustained net losses from operations during the last three years, and we have limited liquidity. Management anticipates that we will be dependent, for the near future, on additional capital to fund our operating expenses and anticipated growth and the report of our independent registered public accounting firm expresses doubt about our ability to continue as a going concern. Our operating losses have been funded through the sale of non-operating assets, the issuance of equity securities and borrowings, including borrowings from our primarily lender eight times over the past four years. We continually evaluate our cash needs and growth opportunities and we believe we require additional equity or debt financing in order to achieve our overall business objectives. We completed a $600,000 round of funding with our primary lender on February 18, 2009, that added an additional $578,755 to our restricted cash account, which amount will be available to us to fund our operating expenses, subject to certain restrictions, through June 2009. In connection with such funding, our lender required us to reduce our overhead and eliminate certain salaried employees to cut our negative cash flow before interest and debt payments to approximately $75,000 a month beginning in March 2009. In conjunction with such cost reductions, our Chief Executive Officer's salary is being accrued for, but he is not taking any compensation from the latest round of funding to help us conserve our cash balances. As in the past, cash will be released to us from a restricted cash account solely in the discretion of our lender so that our lender can evaluate the individual items upon which we make cash expenditures. Although we are not yet profitable and we are not generating cash from operations, our lender has indicated verbally that it plans to continue funding us, but such commitment is not in writing, and we cannot rely on our lender to continue to fund us in the future. While we continually look for other financing sources, in the current economic environment, the procurement of outside funding is extremely difficult and there can be no assurance that such financing will be available, or, if available, that such financing will be at a price that will be acceptable to us. Failure to generate sufficient revenues, raise additional capital, or renegotiate payment terms of our debt would 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.
New Accounting Standards
The new accounting pronouncements in Note 1 to our consolidated financial statements, which are included in this Report, are incorporated herein by reference thereto.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates include:
* revenue recognition and estimating allowance for doubtful accounts;
* valuation of long-lived assets;
* income tax valuation allowance; and
* valuation of debt discount.
We continually evaluate our accounting policies and the estimates we use to prepare our consolidated financial statements. In general, the estimates are based on historical experience, on information from third party professionals and on various other sources and assumptions that are believed to be reasonable under the facts and circumstances at the time such estimates are made. Management considers an accounting estimate to be critical if:
* it requires assumptions to be made that were uncertain at the time the estimate was made; and
* changes in the estimate, or the use of different estimating methods, could have a material impact on our consolidated results of operations or financial condition.
Actual results could differ from those estimates. Significant accounting policies are described in Note 1 to our consolidated financial statements, which are included in this Report. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result.
Certain of our accounting policies are deemed "critical", as they require management's highest degree of judgment, estimates and assumptions. The following critical accounting policies are not intended to be a comprehensive list of all of our accounting policies or estimates:
We apply the provisions of Staff Accounting Bulletins relating to revenue recognition. We recognize revenue from telecommunication services in the period that the service is provided. We estimate amounts earned for carrier interconnection and access fees based on usage.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses that result from the inability or unwillingness of our customers to make required payments. We base our allowances on our determination of the likelihood of recoverability of trade accounts receivable based on past experience and current collection trends that are expected to continue. In addition, we perform ongoing credit evaluations of our significant customers and we require most of our wholesale customers to post a deposit, typically an amount between $2,500 and $5,000, which may be refunded after several months of prompt payments.
Impairment of Long-Lived Assets
We follow the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement requires that certain assets be reviewed for impairment and, if impaired, remeasured at fair value whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Impairment loss estimates are primarily based upon management's analysis and review of the carrying value of long-lived assets at each balance sheet date, utilizing an undiscounted future cash flow calculation. During fiscal years 2008 and 2007 there were no impairment losses.
We estimate the degree to which tax assets and loss carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined that such assets will more likely than not go unused. If it becomes more likely than not that a tax asset or loss carryforward will be used, the related valuation allowance on such assets is reversed. If actual future taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Share-Based Payment
Effective December 1, 2006, we adopted the provisions of SFAS No. 123R, "Share-Based Payment," which establishes accounting for stock-based awards exchanged for employee and non-employee services. Accordingly, equity classified stock-based compensation cost is measured at grant date, based on the fair value of the award and is recognized as expense over the requisite service period. Liability classified stock-based compensation cost is re-measured at each reporting date and is recognized over the requisite service period. Consistent with our practices prior to adopting SFAS 123(R), we calculate the fair value of our employee stock options and non-employee options and warrants using the Black-Scholes option pricing model. Compensation expense for awards with graded vesting provisions is recognized on a straight-line basis over the requisite service period of each separately vesting portion of the award. Compensation expense for contingent stock option awards is recognized when it is probable that the contingent event will occur.
|
|