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| PVSP.OB > SEC Filings for PVSP.OB > Form 10-Q on 15-Jul-2009 | All Recent SEC Filings |
15-Jul-2009
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 6 - 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 are statements of our intentions as of the date of this Report and are 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 IP 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.
We are currently enhancing the reach of our IP telephony services by using the data side of the cell phone network to run our telephone calls. Cell phone networks provide both voice and data services. In a traditional cell phone service, the users speak over the voice side of the network and 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 network, and the voice side is not 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 low-cost method of delivering telephone service and we believe it will attract a significant number of subscribers to our service from the larger 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 ("Mobile VoIP").
Our company sells IP telephony services primarily on a wholesale basis to high-speed Internet service providers, which is the manner in which we plan to sell Mobile VoIP services. In October 2008, we entered into a wholesale agreement to sell Mobile VoIP services to Unified Technologies Group, Inc. ("UTGI"), a diversified technology company that intends to sell our Mobile VoIP service directly to end-users, or indirectly to end-users via multi-level marketing companies, retail stores and cell phone distributors. UTGI utilizes the Global System for Mobile ("GSM") communications standard for the transmission of the Mobile VoIP calls. GSM is the most popular standard for mobile phones in the world, with more than 3 billion users in more than 200 countries and territories. According to UTGI, it will have access to the data side of the GSM network in approximately 130 countries, and usage of the product will not generate roaming charges to end-users who travel to any of those countries, as the entire call stays on the UTGI data network. UTGI believes it will be able to provide a high-quality call to hundreds of thousands of customers because it uses its own virtual private network over the GSM network to provide the high-speed Internet access to the mobile phone. By placing software on the mobile phone to create a dynamic virtual stabilized network, UTGI intends to ensure the highest level of quality by enhancing the call with services such as bandwidth limitation correction, compression, sampling, jitter correction, echo cancellation and buffering. When the consumer uses the mobile device and makes a Mobile VoIP telephone call, the entire operation is intended to be seamless to the cell phone user, who receives no indication that the call is a VoIP call. Similar to our company, UTGI is primarily a software entity. UTGI's software is designed to run on smart phones and other mobiles devices that are manufactured by third-parties, including well-known brand names, such as the iPhone and BlackBerry. The initial launch of the mobile phone service is on the Pharos Traveler 137 mobile telephone. These smart phones contain a variety of advanced features and are now beginning to be imported into the U.S., as they were just approved by the Federal Communications Commission for use in the United States in June 2009. In March 2009, UTGI announced that after the initial commercial launch, UTGI plans to have a "bring your own device" program, in which it will encourage iPhone and BlackBerry users to keep their existing smart phone, but switch service from their current GSM carrier to UTGI's service. Although we believe the telephone calls on UTGI's broadband service are a very high carrier-grade quality, we also believe the entities that are marketing UTGI's product are focused more on low price and the fact that UTGI does not require a contract with the consumer.
We do not control the timing of the marketing, the marketing dollars or any of the decisions regarding the selling and marketing of the UTGI service. Furthermore, UTGI has adopted the strategy of letting other entities sell its mobile phone services to the end-user, and consequently UTGI's customers are the entities that plan and control the sales and marketing activities of the UTGI product. UTGI has advised us that is has signed distributor agreements with several entities and that each entity is entitled to market the UTGI services as it sees fit, in its given territory. As a result, the distributor will make the sale of the smart phone and the service plan, the data service will be provided by UTGI and we will provide the voice service. For each subscriber that is signed up, we will receive revenue for the monthly voice service. UTGI has also contracted with us to provide the VoIP billing and customer service at a price of $2 per month per line.
We believe the wireless communications industry recognizes UTGI's Mobile VoIP product as a significant development in the industry, as evidenced by UTGI receiving the award at the 2009 CTIA wireless show for "best overall product." There can be no assurance that we will be successful with our plan with UTGI, and our future revenue from UTGI depends upon, in part, the success of UTGI's distributors in selling its product and retaining customers. We cannot control the timing of the marketing efforts of any distributor or the speed with which any distributor signs up customers. However, we see publicity from a large distributor that is in the process of distributing the phone to its key insiders, and that it plans to launch the product to the public in August 2009. Our agreement with UTGI does not prohibit us from providing our VoIP services to other carriers who utilize the data side of the cell phone network, and we have been approached by other companies who have expressed an interest in buying our VoIP services for the purpose of carrying our VoIP service over the data side of the cell phone network. We anticipate that the majority of our focus for at least the remainder of the year will be centered on Mobile VoIP.
Plan of Operation
Our objective is to build a profitable IP 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, such as UTGI, which sells a broadband service over GSM cell phone networks. 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 500,000 individual end-users, or lines in service, by leveraging the sales, marketing, financial and other resources of our wholesale customers. Our strategy is to focus on the Mobile VoIP product as a driving force to accelerate our efforts to reach the level of 500,000 lines in service. We believe UTGI will become our largest wholesale customer over the next 12 months, as UTGI has represented to us that it has commitments from cell phone distributors to purchase several hundred thousand Mobile VoIP lines within the next 12 months.
Six Months Ended May 31, 2009 vs. Six Months Ended May 31, 2008
Our revenue for the six-month period ended May 31, 2009 increased by approximately $94,000, or approximately 9%, to approximately $1,159,000 as compared to approximately $1,065,000 reported for the six-month period ended May 31, 2008. The increase in our revenues was due to a combination of an increase in the number of wholesale VoIP customers and an increase in the average revenue per wholesale VoIP customer. In the six-month period ending May 31, 2008, we recorded international termination revenues of approximately $369,000, and we had no such revenues in the six-month period ended May 31, 2009. If we analyze only our core VoIP revenues, without consideration to the international termination revenues from fiscal 2008, in the six-month period ended May 31, 2009, our core VoIP revenue increased by approximately $463,000, or approximately 67%, as compared to revenue from our core VoIP services of approximately $696,000 in the six-month period ended May 31, 2008. We expect to see continued growth in our core VoIP revenues, as 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. Our largest opportunity with an existing customer is with UTGI, which signed a wholesale services agreement with us in October 2008 that requires them to pay us for a minimum of 50,000 Mobile VoIP lines within one year of the commercial launch of its Mobile VoIP product. UTGI announced its commercial launch on July 1, 2009. We anticipate UTGI will sell significantly more than 50,000 lines based upon the minimum commitments it tells us it has received from its customers, and based upon the positive industry reaction and publicity it has received from winning the "best overall product" award at the CTIA wireless trade show on April 3, 2009. We believe we will see significant revenues from the UTGI contract in our fourth fiscal quarter.
For the six-month period ended May 31, 2009, our gross profit amounted to approximately $227,000, which was an improvement of approximately $230,000 over the negative gross profit of approximately ($3,000) reported in the six-month period ended May 31, 2008. 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 decreased by approximately $281,000, or approximately 20%, to approximately $1,142,000 for the six-month period ended May 31, 2009 from approximately $1,422,000 reported in the same prior-year fiscal period. We made significant reductions to our salary and consulting expense, which accounted for approximately $187,000 of the decrease. We also decreased marketing expense in the six-month period ended May 31, 2009 by approximately $113,000, as compared to the six-month period ended May 31, 2008. We anticipate that we will be able to hold down our salary expense until we need to hire more personnel in conjunction with the Mobile VoIP product, which we began to do in our third fiscal quarter. We have no short-term plans to increase our marketing expense.
Stock based compensation expense, which is a non-cash item, increased by approximately $193,000, or approximately 75%, to approximately $256,000 for the six-month period ended May 31, 2009 from approximately $64,000 reported in the same prior-year fiscal period. This expense varies from period-to-period depending upon the number of option grants, the vesting period of such grants and the valuation of the grants.
Interest expense increased by approximately $648,000, or approximately 139% to approximately $1,113,000 for the six-months ended May 31, 2009 as compared to approximately $465,000 for the six-months ended May 31, 2008. The increase was due to additional borrowings in the aggregate amount of $3.1 million in May, October and December 2008, and in February 2009 and the accretion of that debt.
The mark-to-market adjustment to our warrant liability resulted in warrant expense for the six-month period ended May 31, 2009 of approximately $638,000, which was due to the increase in the market value of our common stock from November 30, 2008 to May 31, 2009. During the comparable period of fiscal 2008, we recorded warrant expense of approximately $2,092,000, which resulted from an increase in the price of our common stock at May 31, 2008, as compared to the value at November 30, 2007. We anticipate that our warrant income or expense will continue to fluctuate in future fiscal periods as the price of our common stock in the market continues to fluctuate.
Three Months Ended May 31, 2009 vs. Three Months Ended May 31, 2008
Our revenue for the three-month period ended May 31, 2009 decreased by approximately $69,000, or approximately 11%, to approximately $566,000 as compared to approximately $635,000 reported for the three-month period ended May 31, 2008. The decrease in our revenues was due to the lack of any international termination revenues in the second quarter of fiscal 2009 as compared to $260,000 in international termination revenues in the second quarter of fiscal 2008. Our core VoIP revenue continued to increase in the second quarter of fiscal 2009, as compared to the second quarter of fiscal 2008, as these revenues increased by approximately $191,000, or approximately 51%, to approximately $566,000, as compared to revenue from our core VoIP services of approximately $375,000 in the three-month period ended May 31, 2008. We anticipate that revenues for our third fiscal quarter in 2009 will significantly exceed our revenues for the third fiscal quarter of 2008, even though, as we noted above, we do not anticipate significant revenues from UTGI until the fourth quarter of fiscal 2009.
For the three-month period ended May 31, 2009, our gross profit amounted to approximately $157,000, which was an improvement of approximately $138,000 over the gross profit of approximately $19,000 reported in the three-month period ended May 31, 2008. 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. As discussed above, we anticipate we will be able to continue to achieve higher sales volumes to cover fixed costs and to negotiate lower variable costs with vendors, to improve our gross profit and gross profit percentage. We have already identified new carriers and routes and we are beginning to incur lower domestic termination costs.
Selling, general and administrative expenses decreased by approximately $348,000, or approximately 46%, to approximately $410,000 for the three-month period ended May 31, 2009 from approximately $758,000 reported in the same prior-year fiscal period. Reduction in personnel and consulting costs accounted for the majority of the decrease. We made significant reductions to our salary and consulting expense during February 2009 and, consequently, our costs, beginning in March 2009 were substantially lower. The reduction in the quarter ended May 31, 2009 for salary and consulting expense, as compared to the quarter ended May 31, 2008, was approximately $259,000. We also decreased our marketing and travel expense by approximately $65,000 in the quarter ended May 31, 2009, as compared to the quarter ended May 31, 2008. Because of the commercial launch of the UTGI product, we have hired three additional customer service personnel in the third fiscal quarter of 2009.
Stock-based compensation expense, which is a non-cash item, increased by approximately $98,000, or approximately 338%, to approximately $127,000 for the three-month period ended May 31, 2009 from approximately $29,000 reported in the same prior-year fiscal period.
Depreciation and amortization expense increased by approximately $14,000 for the three- months ended May 31, 2009 to approximately $139,000 as compared to approximately $125,000 for the same period in fiscal 2008. The increase was a result of slightly higher depreciation expense due to software and equipment additions and slightly higher amortization due to additions to deferred finance costs associated with recent financings.
Interest expense increased by approximately $430,000 to approximately $651,000 for the three-months ended May 31, 2009 as compared to approximately $221,000 for the three-months ended May 31, 2008. The increase was due to the additional borrowings discussed above.
The mark-to-market adjustment to our warrant liability resulted in warrant expense for the three-month period ended May 31, 2009 of approximately $3,189,000, which was due to the increase in the market value of our common stock from February 28, 2009 to May 31, 2009. During the comparable period of fiscal 2008, we recorded warrant income of approximately $622,000, which resulted from a decrease in the price of our common stock at May 31, 2008, as compared to the value at February 29, 2008. We anticipate that our warrant income or expense will continue to fluctuate in future fiscal periods as the price of our common stock in the market continues to fluctuate.
Liquidity and Capital Resources
At May 31, 2009, we had cash and cash equivalents of approximately $73,000 and negative working capital of approximately $1,609,000.
Net cash used in operating activities aggregated approximately $933,000 and $1,609,000 in the six-month periods ended May 31, 2009 and May 31, 2008, respectively. The principal use of cash in the fiscal 2009 was a net loss of approximately $3,195,000, which included a mark-to-market charge of approximately $638,000 and amortization of debt discount of approximately $993,000. The principal uses of cash in the fiscal year ended May 31, 2008 was a net loss of approximately $4,280,000, which included a non-cash mark-to-market warrant adjustment charge of approximately $2,092,000.
Net cash used in investing activities in the six-month periods ended May 31, 2009 and 2008 aggregated approximately $59,000 and $76,000, respectively, resulting primarily from expenditures related to enhancements to our IP telephony software.
Net cash provided by financing activities aggregated approximately $934,000 and $1,580,000 in the six-month periods ended May 31, 2009 and May 31, 2008, respectively. In fiscal year 2009, cash provided by financing activities resulted primarily from cash received from a restricted bank account that was funded in connection with financings on October 15, 2008 and February 18, 2009. In the 2008 period, cash provided by financing activities resulted primarily from cash received from a restricted bank account that was funded in connection with financings on September 28, 2007 and May 28, 2008.
For the six-month period ended May 31, 2009, we had capital expenditures of approximately $59,000. We expect to make additional capital expenditures of approximately $50,000 to $100,000 in the second half of fiscal year 2009; however such purchases will be dependent 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 Mobile VoIP customer.
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 past several 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. The audit report of our independent registered public accounting firm on our financial statements for the year ended November 30, 2008 contained a paragraph expressing 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 primary lender on eight separate occasions over the past four years. We continually evaluate our cash needs and growth opportunities and we believe we will require additional equity or debt financing immediately in order to achieve our overall business objectives. We believe we will be generating positive cash flow from operations when we have approximately 10,000 Mobile VoIP lines added to a projected modest growth of our current customer base. 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 and to arrange for such a funding at the end of July 2009. However, 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. Our 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.
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