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PERVASIP CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the U.S. Securities and Exchange Commission (collectively, the "Filings") contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by Company's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words "anticipate," "believe," "estimate," "expect," "future," "intend," "plan," or the negative of these terms and similar expressions as they relate to the Company or the Company's management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Our financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report. Overview We are a provider of video and voice over Internet Protocol, or VoIP, telephony services. The nature of our technology is cloud-based computing, and therefore our target market is not limited to our physical presence in the United States. In particular, we have transformed our VoIP service to a downloadable digital product, which coupled with our fully-automated back office, allows us to sell our voice, video and messaging services instantly to a large variety of mobile devices around the world. We sell under the brand name of VoX Communications, VoX or VoX Mobile. The continued growth in both mobile telephone services and video telephone services has resulted in a rapidly growing mobile VoIP market that allows subscribers to make inexpensive calls from their mobile phones or tablets instead of using costly airtime minutes. We offer our mobile VoIP service to Android and Apple devices as a download from the app stores for Android or Apple users. We offer a free trial that allows subscribers to call up to 60 countries for 60 minutes with a temporary phone number. A paid subscriber is able to download, over an Internet connection, a real telephone number from VoX that allows the subscriber to make or receive a low-cost mobile telephone call to any person on the public switched telephone network (the "PSTN"). We currently offer telephone numbers from 57 countries to be downloaded to a subscriber's Android phone or tablet, and no other company offers as diverse a choice of telephone numbers as we offer. Since June 2014, we have been selling a private labeled version of our mobile VoIP app so that other companies can sell our product under their own brand name. Our mobile VoIP app also allows video calling and text messaging to other subscribers. Adding video calling to mobile devices provides corporate managers the ability to see their mobile employees, agents or customers when a telephone call is made, and provides families with the ability to see loved ones who are otherwise inaccessible to visual contact. Our VoIP platform enables a user to access and utilize our voice, video and messaging services and features regardless of how they are connected to the Internet, including connections over the 3G, 4G, WiFi, cable, DSL or satellite broadband networks. We are able to provide our services at a cost per user that is generally lower than that charged by traditional service providers because we minimize our network costs by using efficient packet-switched technology and interconnecting to a wide variety of termination options, which allows us to benefit from pricing differences between vendors to the same termination points. 17 -------------------------------------------------------------------------------- Having built a fully-automated and scalable VoIP and video calling platform, which began as a wholesale platform for broadband carriers, our growth initiative is mobile services. Plan of Operation We are focused on growth in three primary areas that target existing revenue streams with significant addressable markets. Services to mobile and other connected devices. We are developing next-generation services to meet the increasing demand for VoIP telephony and messaging services by users of smart phones, tablets and other connected devices. We believe that we can capitalize on favorable trends in the mobile Internet market, including the worldwide proliferation of low cost 3G and 4G services and low or no-cost WiFi broadband, and the accelerating rate of smart phone and tablet adoption. We offer VoX Mobile, our mobile VoIP application, with free, high quality voice and video calling and messaging between users who have this application, as well as low-cost international calling to more than 200 countries to any other phone. Recent data from the research firm ComScore shows that the Android operating system is currently outselling other operating systems with a 51.7 percent share and that Apple's iOS has a 41.6 percent share. The VoX Mobile app can be downloaded to either of these operating systems, representing more than 93% of the worldwide mobile phones in circulation. In January 2014 the analyst firm Gartner, Inc. estimated that Android will have 1.9 billion installed devices (smart phones, tablets and laptops) in 2014, compared with 682 million Apple devices, giving an addressable market of more than 2.5 million devices for the VoX Mobile app. International long distance calling. The markets for international long distance are large and growing and we plan to leverage our VoIP network by offering consumers a low-cost and convenient alternative to the international services offered by telephone and cable companies and international calling cards. Industry data estimates the international long distance calling market to be $80 billion annually, with up to 15% of such calling originating in the United States, using a mix of home and mobile phones. We are focusing on serving the rapidly growing ethnic segments in the United States and we are offering a mobile VoIP product that no other company currently offers. For a fee of $9.95 per month, a user can download from the VoX Mobile app on the Google Play store, a phone number from a choice of 57 countries. People in the United States, or in any other country, are able to choose a phone number that is local to their friends and family, in any of 57 countries, so that when their friends and family call them, and they are overseas, the cost of the international call to a mobile phone is recorded as a local call, and charged a local calling rate, which frequently is free. Although we have a limited marketing budget, to increase the visibility of our international telephone numbers and calling plans, we have shifted a portion of our marketing budget to target attractive segments of the international long distance market. We are also negotiating with foreign companies to sell our app to their subscribers. Given our ability to instantly provide a foreign phone number on a download to an Android device, we are negotiating with an IPTV company in Mexico and Colombia, to install our Android app on their Android set-top box so that they can offer a triple-play solution to their customer base; a mobile wallet company in South Africa to sell our app to its subscribers and others; and an Eastern European VoIP provider that is seeking to offer our app to its subscribers and others in Eastern Europe. Low-end domestic. While our primary emphasis remains mobile calling, the domestic-only calling segment, with more than 40 million broadband households, is a sizeable opportunity that we target with Android-based home phones. We currently support this segment with an analog telephone adapter device that we sell with our monthly VoIP service plan, similar to many of our competitors, and with a cordless Android home-phone that runs on the household's WiFi connection. We believe this segment represents a large incremental market opportunity for light users who want to keep their home phone number, but no longer want to pay a monthly recurring line fee for the benefit of having a landline or a VoIP line in their home. By using our Pay and Go application, these users can pay for calls as they make them, from an Android-based cordless phone, port their existing phone number to our VoIP platform, and not have to pay the monthly recurring line charges that subscription-based plans require of users. Our approach to VoIP does not require expensive network equipment to provide telephony services. Instead we rely on our proprietary software and a "server cluster" or "server farm" architecture. Unlike the typical telecom model where one large expensive machine performs almost every task, we have a server farm comprised of a cluster of Dell servers and Cisco routers, which have a carrying value on our books of $-0-, where each machine performs a different task and has from one to three backup machines to ensure that services never go down. By not relying on the equipment and related software of telecom equipment vendors, we are able to control our own destiny and scale without the limitations and delays associated with equipment financing, installation and the integration of new machines and source code updates that equipment vendors impose on VoIP carriers. . 18 -------------------------------------------------------------------------------- Results of Operations For the Six Months Ended May 31, 2014 Compared to the Six Months Ended May 31, 2013 Our revenue for the six-month period ended May 31, 2013 decreased by $18,877, or 4%, to $451,015, as compared to $468,892 reported for the six-month period ended May 31, 2013. The decrease in revenues was mainly due to the loss of wholesale business during the first half of 2014, which we consider less desirable than our mobile VoIP product. Given the large addressable market for mobile apps and the advantages that our app offers consumers for low-cost calling, and free text messaging, voice and video calls to other app users, our sales representatives and our advertising are only focused on the growth of our mobile app product. Monthly revenue from our wholesale customers has been more volatile in recent months and we anticipate significant decreases in our wholesale business in the remainder of fiscal 2014. To accelerate the growth of our mobile app we are negotiating with other companies to resell our app to their existing subscriber base. For the six-month period ended May 31, 2014, our gross profit amounted to $213,526, which was a decrease of $45,294 from the gross profit of $258,820 reported in the six-month period ended May 31, 2013. The reduction in gross profit is attributable to the reduction of revenue for the period. Our gross margin percentage for the six-month periods ended May 31, 2014 and 2013 decreased to 47% from 55%. To attract retail customers, we offer calling rates that are steeply discounted in comparison to wireless carriers and we offer several calling plans with free minutes or a free month of service. Consequently, we anticipate that any growth in retail customers will not increase our gross margin percentage. Selling, general and administrative expenses decreased by $94,318, or 12%, to $722,062 for the six-month period ended May 31, 2014 from $816,380 reported in the same prior-year fiscal period. The decrease was primarily due to a reduction in personnel cost of approximately $71,000, a reduction in professional fees of approximately $72,000, a reduction in insurance costs of approximately $11,000 and a reduction in stockholder expenses of approximately $7,000, offset by an increase in marketing costs and finance fees of approximately $48,000 and $30,000, respectively. As a result of the reduction in our selling, general and administrative expenses, our loss from operations for the six-month period ended May 31, 2014 decreased by $49,024 to $508,537 from $557,560 reported in the prior fiscal period. However, significant non-operating income and expenses impact our results, thus: º Interest expense decreased by $858,034 to $818,552 for the six-month period ended May 31, 2014 as compared to $1,676,586 for the prior fiscal period. The decrease in interest expense is attributable to less debt outstanding and large borrowings in fiscal 2013 in which debt discounts equaled or exceeded the face value of new promissory notes. º For the six-month period ended May 31, 2014, we reported no gain on troubled debt restructuring as compared to a gain on troubled debt restructuring of $2,714,461 for the six-month period ended May 31, 2013. The gain was the result of one-time transactions negotiated with a lender. º For the six-month period ended May 31, 2014, we reported a gain of $640,180 on the sale of a subsidiary. No such gain was reported in the prior fiscal period. º For the six-month period ended May 31, 2014, we reported a gain on the settlement of liabilities of $300,686, as compared to a gain of $1,344,326 reported in the prior fiscal period. Each instance of a liability settlement is contingent upon the terms we can negotiate for a particular transaction. º For the six-month period ended May 31, 2014, we had a gain on the change in value of derivative liabilities of $43,938, as compared to a loss of $148,955 for the six-month period ended May 31, 2013. Any change in the market value of derivative liabilities is contingent on the market value of embedded derivatives in our debt instruments, at the end of the fiscal quarter, in comparison with the market value when the debt originated. 19 -------------------------------------------------------------------------------- Our net result for the six-month period ended May 31, 2014, then, was a net loss of $342,285, compared to net income of $1,675,686 recorded in the prior-year fiscal period. In fiscal 2013, the net income occurred only because the gain we realized through the restructuring and settlement of our debt exceeded the losses we incurred from the remainder of our business. For the Three Months Ended May 31, 2014 Compared to the Three Months Ended May 31, 2014 Our revenue for the three-month period ended May 31, 2014 increased by $6,026, or 4%, to $237,353, as compared to $231,327 reported for the three-month period ended May 31, 2013. The increase in revenues was mainly due to one of our wholesale customers who had an unusual amount of international traffic on our platform. Traffic from our wholesale customers has been more erratic than in prior years and we anticipate that our wholesale revenues will see a significant decrease in the remainder of fiscal 2014. We believe that the wholesale business is less desirable than our mobile VoIP product. Given the large addressable market for mobile apps and the advantages that our app offers consumers for low-cost calling, and free text messaging, voice and video calls to other app users, our sales representatives and our advertising are only focused on the growth of our mobile app product. To accelerate the growth of our mobile app we are negotiating with other companies to resell our app to their existing subscriber base. For the three-month period ended May 31, 2014, our gross profit amounted to $123,898, which was a decrease of $7,228 from the gross profit of $131,126 reported in the three-month period ended May 31, 2013. The reduction in gross profit is attributable to the low profit margin on international traffic for the period. Our gross margin percentage for the three-month periods ended May 31, 2014 and 2013 decreased to 52% from 57%. To attract retail customers, we offer calling rates that are steeply discounted in comparison to wireless carriers and we offer several calling plans with free minutes or a free month of service. Consequently, we anticipate that any growth in retail customers will not increase our gross margin percentage. Selling, general and administrative expenses decreased by $91,194, or 21%, to $344,637 for the three-month period ended May 31, 2014 from $435,831 reported in the same prior-year fiscal period. The decrease was primarily due to a reduction in personnel cost of approximately $62,000, a reduction in professional fees of approximately $39,000, a reduction in insurance costs of approximately $10,000 and a reduction in stockholder expenses of approximately $6,000, offset by an increase in marketing costs and finance fees of approximately $15,000 and $15,000, respectively. As a result of the reduction in our selling, general and administrative expenses, our loss from operations for the three-month period ended May 31, 2014 decreased by $83,966 to $220,739 from $304,705 reported in the prior-year fiscal period. However, significant non-operating income and expenses reversed those results, thus: º Interest expense decreased by $260,456 to $299,701 for the three-month period ended May 31, 2014 as compared to $560,157 for the prior-year fiscal period. The decrease in interest expense is attributable to less debt outstanding and large borrowings in fiscal 2013 in which debt discounts equaled or exceeded the face value of new promissory notes. º For the three-month period ended May 31, 2014, we reported a gain on debt conversions of $1,128,098, as compared no transactions reported in the three-month period ended May 31, 2013. Each instance of a liability settlement is contingent upon the terms we can negotiate for a particular transaction. º For the three-month period ended May 31, 2014, we had a loss from the change in the valuation of derivative liabilities of $241,539, as compared to a gain of $3,287,164 for the period three-month period ended May 31, 2013. The gain in 2013 is due to the lower market value of embedded derivatives in our debt instruments, at the end of the fiscal quarter, in comparison with the market value when the debt originated. 20 -------------------------------------------------------------------------------- Our net result for the three-month period ended May 31, 2014, was a net loss of $761,979, compared to a net income of $3,550,400 recorded in the prior-year fiscal period. In fiscal 2013, however, the net income occurred because of the gains we realized when we settled debt with creditors and when our derivative liabilities decreased in market value, exceeded the losses we incurred from the remainder of our business. Liquidity and Capital Resources At May 31, 2014, we had cash and cash equivalents of $25,225 and negative working capital of $10,632,869. Operating activities for the six months ended May 31, 2014 used $167,301 of cash, consisting principally of operating losses of $508,536 and interest payments of $52,899, offset by approximately $55,000 in non-cash income statement charges and approximately $522,000 in changes in operating assets and liabilities. Operating results for the six months ended May 31, 2013 used $450,823 of cash, consisting principally of net income of $1,675,686 and non-cash interest expense of $1,575,019, offset by approximately $1,344,000 in gains on debt settlements and a gain on troubled debt restructuring of approximately $2,700,000. Net cash provided by financing activities aggregated $175,284 and $440,667 in the six-month periods ended May 31, 2014 and 2013, respectively. In fiscal 2014, cash provided by financing activities resulted from proceeds from short-term borrowing of $276,500, less repayments of debt of $101,216. In fiscal 2013, cash provided by financing activities resulted from proceeds from short-term borrowing of $448,000, less repayments of debt of $7,333. For the six months ended May 31, 2014 and 2013, we had no capital expenditures. We do not expect to make equipment purchases in the remainder of fiscal 2014. 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 several years, and we have very limited liquidity. Our operating losses have been funded through the issuance of equity securities and borrowings. Management anticipates that we will be dependent, for the near future, on our ability to obtain additional capital to fund our operating expenses and anticipated growth. The report of our independent registered public accounting firm, included in our From 10-K for the year ended November 30, 2013 expresses doubt about our ability to continue as a going concern. Our operating losses have been funded through the issuance of equity securities and borrowings. Although we have significantly improved our balance sheet with transactions to settle our debt, we continue to have liabilities in excess of our assets. We are working to settle our remaining liabilities and to raise cash to support our operating loss, and we continually consider a variety of possible 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. If we are unable to generate sufficient revenues or raise additional capital, our operations will terminate. |