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EX-23 - CONSENT - PERVASIP CORP | ex23.htm |
EX-31.2 - CERTIFICATION - PERVASIP CORP | ex31-2.htm |
EX-32.2 - CERTIFICATION - PERVASIP CORP | ex32-2.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
[X] ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended November 30, 2009
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from
to
.
Commission
File No. 0-4465
PERVASIP
CORP.
(Name
of Small Business Issuer in Its Charter)
New
York
|
13-2511270
|
(State or Other
Jurisdiction
|
(I.R.S
Employer Identification No.)
|
of Incorporation
or Organization)
|
|
75
South Broadway, Suite 400, White Plains, New York
|
10601
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(914)
620-1500
(Issuer’s
Telephone Number)
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, par value $.10 per share
Check
whether the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes __ No X
Check
whether the issuer is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes __ No X
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
__
Check
whether the registrant has submitted electronically and posted on its corporate
web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding twelve months
(or for such shortest time that the registrant was required to submit and post
such files). Yes __ No __
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
Check
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act) Yes __ No X
Check
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a small reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “small
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer Accelerated
filer
Non-accelerated filer Smaller
reporting company X
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes __ No X
The
aggregate market value of the common stock held by non-affiliates computed based
on the closing price of such stock as of May 31, 2009 was approximately
$6,218,000.
The
number of shares outstanding of the registrant’s classes of common stock, as of
February 28, 2010, was 30,358,519.
TABLE
OF CONTENTS
Special
Note Regarding Forward Looking Statements
PART
I
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||
Item
1.
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Business
|
2 |
Item
1A.
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Risk
Factors
|
11 |
Item
1B
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Unresolved Staff Comments |
11
|
Item
2.
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Properties
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11 |
Item
3.
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Legal
Proceedings
|
12 |
PART
II
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||
Item
5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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13 |
Item
6.
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Selected
Financial Data
|
15 |
Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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15 |
Item
7A.
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Quanitative
and Qualitative Disclosures about Market Risk
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21 |
Item
8.
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Financial
Statements and Supplementary Data
|
21 |
Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
21 |
Item
9A.
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Controls
and Procedures
|
22 |
Item
9B.
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Other
Information
|
23 |
PART
III
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||
Item
10.
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Directors,
Executive Officers and Corporate Governance
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24 |
Item
11.
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Executive
Compensation
|
27 |
Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
29 |
Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
|
31 |
Item
14.
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Principal
Accountant Fees and Services
|
32 |
Item
15.
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Exhibits
and Financial Statement Schedules
|
33 |
Special
Note Regarding Forward Looking Statements
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:
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·
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The availability of additional
funds to successfully pursue our business
plan;
|
|
·
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The cooperation of our lender
who has waived non-payment defaults on a monthly basis and has not
accelerated our debt;
|
|
·
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The cooperation of industry
service partners that have signed agreements with
us;
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|
·
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Our ability to market our
services to current and new customers and generate customer demand for our
products and services in the geographical areas in which we
operate;
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|
·
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The impact of changes the
Federal Communications Commission or State Public Service Commissions may
make to existing telecommunication laws and regulations, including laws
dealing with Internet
telephony;
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|
·
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The ability to comply with
provisions of our financing
agreements;
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·
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The highly competitive nature
of our industry;
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·
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The acceptance of telephone
calls over the Internet by mainstream
consumers;
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·
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Our ability to retain key
personnel;
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|
·
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Our ability to maintain
adequate customer care and manage our churn
rate;
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|
·
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Our ability to maintain,
attract and integrate internal management, technical information and
management information
systems;
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|
·
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Our ability to manage rapid
growth while maintaining adequate controls and
procedures;
|
|
·
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The availability and
maintenance of suitable vendor relationships, in a timely manner, at
reasonable cost;
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|
·
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The decrease in
telecommunications prices to consumers;
and
|
|
·
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General economic
conditions.
|
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 document or to reflect the
occurrence of unanticipated events. Further, the information about our
intentions contained in this document is a statement of our intention as of the
date of this document 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.
PART
I
In this
Annual Report on Form 10-K, we will refer to Pervasip Corp., a New York
corporation, as “our company,” “we,” “us” and “our.”
Item
1. – Business
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, which 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 also works efficiently over mobile phone
networks. In lieu of routing a call from a mobile phone over the
voice side of a mobile phone network, we route the call over the data side of
the network. The data side of the mobile phone network is simply
another avenue upon which we can run our IP telephony services. It is
a low-cost method of delivering telephone service. We believe it will attract a
significant number of subscribers to our service from the large and expensive
mobile phone carriers. We refer to our use of the data-side of mobile
phone networks as voice-over-IP enabled mobile phone service (“Mobile
VoIP”).
We
believe that Mobile VoIP, a wireless telephone service, will demonstrate rapid
growth. We utilize the Global System for Mobile communications
(“GSM”) standard for Mobile VoIP calls. GSM is the most popular
standard for mobile phones in the world, with 4.3 billion users, in more than
200 countries and territories. We operate our Mobile VoIP on two
different smart phones, the Linux-based Nokia N900 and the Windows Mobile-based
HTC Touch Pro 2. We are a Linux based software company and prefer
operating on Linux-based devices, however, we plan to run over multiple smart
phones, by developing a downloadable application for the Android mobile
operating system and for the BlackBerry line of wireless mobile
devices. When we operate our Mobile VoIP over a non-Linux smart
phone, we license a software program from a third party. The program
is loaded on the smart phone and it instructs the phone to send a radio wave to
the data side of the cell phone network when a call is dialed, instead of
sending a signal to the voice side of the cell phone network. When
the consumer makes a Mobile VoIP telephone call, the entire operation is
seamless to the cell phone user, who receives no indication that the call is a
VoIP call. We also sell our VoIP as an application that can be
downloaded to a smart phone that is already in use.
2
Development of Business
We were
incorporated in the State of New York in 1964 under the name Sirco Products Co.
Inc. and developed a line of high-quality handbags, totes, luggage and sport
bags. In 1999, we divested our handbag and luggage operations, which
had experienced several years of operating losses
We
commenced operations in the telecommunications industry in fiscal 1998 by
acquiring a Competitive Local Exchange Carrier (“CLEC”) that was formed to
attract and retain a geographically-concentrated customer base in the
metropolitan New York region, primarily through the resale of products and
services of incumbent and alternative facilities-based local
providers. In 1999, we changed our name to eLEC Communications Corp.
to signify our new focus on telecommunications and our vision to run local
exchange services over the Internet. In October 2000, we purchased
another CLEC, and in November 2002 we started a third CLEC.
Our CLEC
operations always leased circuit-switched network elements from other carriers
in order to provide wireline services to customers. Although we
entered the telephone business in 1998 by leasing wirelines, it was always our
intention to use that platform as a stepping-stone on our way to becoming an IP
telephone company. Consequently, we sold our wireline business during
fiscal 2007. In conjunction with this sale and the shift of our focus
to IP telephony, in December 2007, we changed our name to Pervasip Corp. The
word Pervasip is a contraction of the phrase “Pervasive IP” and our intention is
to be known as a pervasive IP company with a ubiquitous global
presence.
In 2004,
we incorporated VoX Communications Corp. (“VoX”) as our wholly-owned IP
subsidiary to pursue the deployment of our own IP network for IP telephony
services. In addition to the general cost advantages of IP telephone service, we
believe IP communication technologies will continue to advance rapidly and will
further the potential for the Internet to become the preferred medium of
communication and commerce. Consequently, since fiscal 2006, we
expended a vast amount of our resources on the planning, development and
implementation of our IP network.
Although
we allow individual users to purchase our digital voice service on the VoX
website at www.voxcorp.net, we focused our efforts on becoming a wholesale
provider of digital voice services. As a wholesaler, we enable
broadband service providers to sell a voice product to their existing customers
before a retail VoIP company approaches the broadband customer with its voice
product. This wholesale model contains many cost advantages for us,
especially with regard to customer acquisition costs. Companies that
sell digital voice services on a retail level typically experience significant
customer acquisition costs because of the high marketing expenses and special
promotions they use to attract an end-user who already has broadband
service. We do not incur the expense of retail customer acquisitions,
as these costs are borne by our wholesale customers. Our wholesale
customers, however, often can attract retail customers in a more cost-effective
manner than we can because the wholesale customer already has a customer base of
end-users who are utilizing broadband services.
With the
launching of our Mobile VoIP product, we anticipate we will change our focus to
the retail smart phone consumer. This consumer could be a customer of
VoX, or it could be a person who bought a phone and phone service under a
different name, but VoX is providing the service. For example, we
have provided an HTC smart phone with our Mobile VoIP service to Best Buy Corp.,
which has expressed an interest in selling a smart phone that it makes under its
own brand name. We have also shown a smart phone with our Mobile VoIP
to the US Military exchange services for military and retired military
personnel. Furthermore, we have developed our Mobile VoIP as an
application that can be purchased on our website and downloaded to a Nokia N900
smart phone.
3
Available
Information
We
maintain a corporate website with the address www.pervasip.com and
VoX maintains a corporate website with the address www.voxcorp.net. We
have not incorporated by reference into this Report on Form 10-K the information
on any of our websites and you should not consider any of such information to be
a part of this document. Our website addresses are included in this document for
reference only. We make available free of charge through our corporate website
our Annual Reports on Form 10-K or 10-KSB, Quarterly Reports on Form 10-Q or
Form 10-QSB and Current Reports on Form 8-K, and amendments to these reports
through a link to the EDGAR database as soon as reasonably practicable after we
electronically file such material with, or furnish such material to, the
Securities and Exchange Commission.
Business
Strategy
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.
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,
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. Our philosophy is that VoIP is an application and should be
treated the same way that companies such as Google, Inc. process their
data. Consequently, data servers and routers are the appropriate
vehicle on which to process our VoIP calls.
Our
approach to VoIP makes it possible for us to provide VoIP as an application that
a consumer can download over the Internet to his or her smart
phone. We believe the U.S. is in the early stages of a smart phone
revolution. A smart phone is a mobile telephone offering advanced
capabilities, including PC-like functionality. The growth in demand
for smart phones with powerful processors, plentiful memory, open operating
systems, sizeable video screens, and the ability to tether the smartphone to an
even larger PC or television screen, has outpaced the sales growth of mobile
phones. We believe the smart phone revolution is a significant
component of an even larger mobile Internet revolution. We believe we
can participate and benefit from the mobile Internet revolution by providing our
Mobile VoIP service to smart phone users. We currently provide our
Mobile VoIP service on two smart phones: an HTC Touch Pro 2 and a Nokia
N900. These devices allow us to deliver voice, data and video
services, or what is known as a “mobile triple-play,” to the
consumer. Just like cable carriers have introduced television,
high-speed Internet access and telephone service to landline consumers, we plan
to deliver videos (including television stations on some smart phones),
high-speed wireless access and voice services to the mobile
consumer. Our high-speed wireless service is not limited to a
WiFi-hot spot, but is available on the 3G mobile network or the EDGE network –
basically anywhere that a GSM carrier can provide service.
4
Overall,
the market for online content, mobile broadband and mobile devices has
experienced significant growth during the past few years. This growth
is expected to continue, with certain sub-segments, including the market for
Internet video, expected to contribute significantly to the
trend. Many smart phone users are also heavy data users, and they
currently complain that data usage costs are too high. For example,
when iPhone users go over a predetermined monthly limit, they incur excess data
usage charges from the service provider, AT&T. The smart
phones and services that we provide run on a national network that allows users
to enjoy unlimited data usage. Consequently, we are selling unlimited
data, voice and text messaging for approximately $80 a month, including
taxes. Consumers are even encouraged to tether their smart phone to a
laptop or a television screen so that the consumer can watch videos on a screen
that is larger than the smart phone screen. Our voice and data
service run over the data portion of the GSM network. The
possibilities of additional services for consumers are endless once we have
thousands of consumers on a smart phone, each with a fixed IP address that we
know. For example, a text message, email or recorded call could be
sent to a smartphone with GPS functionality to alert the driver of a car that a
Starbucks store is just 30 seconds away on the right side of the
road. The mobile triple-play service is especially an important
entrée to the consumer because it offers the best price-to-value data and voice
service on a smart phone, by utilizing VoIP technology over the GSM
network. Analysts at Gartner Group predict that 50 percent of mobile
voice will be VoIP by 2019, and that 30 percent of the mobile voice traffic will
be initiated or terminated through third-party mobile portals such as Google,
Facebook, MySpace and Yahoo, all of which are anticipated to adopt VoIP service
as a part of their basic features. TMCnet.com notes that the global
mobile voice market is currently $692.6 billion in annual revenues to the
incumbent carriers. Almost $350 billion in annual revenues are
therefore projected to be moving to Mobile VoIP carriers. This
transfer of mobile voice traffic to Mobile VoIP presents us with a timely
opportunity to capture those customers for data downloads of videos, music,
games and hundreds of applications
We
believe that the increasing demand for Mobile VoIP services and our approach to
providing a mobile triple-play at what is currently the best cost-to-value ratio
in the industry presents a compelling reason for us to focus our product
development and marketing efforts on Mobile VoIP. We believe the
following areas are important to our business plan:
|
·
|
Growth Strategy – We
plan to expand in both the wholesale and retail markets. We
have launched our own service on an HTC Touch Pro 2 phone and we sell our
VoIP as an application for the Nokia N900 phone. We are set-up,
however, to enable other entities to sell the data and VoIP service on a
smart phone under their own name, if they so desire. These
entities can have their own brand name and choose which additional
applications they want to offer to their customers. Currently,
we are offering our service in the U.S. and we are testing it in
Canada. We believe it will work in more than 100
countries.
|
|
·
|
Scalability – Unlike
many of our competitors, our growth is not limited by the architecture
design of our network. We can expand our network in $100,000
increments by adding or expanding a server farm to support an additional
20,000 new VoIP lines and new applications. We know of no other
VoIP platform that has network equipment costs as low as our cost of $5
per subscriber.
|
5
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·
|
Technology Advantage –
Our proprietary VoIP technology gives us the ability to offer disruptive
leading-edge services and control our product development
cycle. Our ability to quickly test vendor devices on our
network, including video softphones, IPTV, WiFi enabled VoIP phones and
Mobile VoIP phones, allows us to continuously offer the best and newest
products as they become available. We are not dependent upon
one or two device manufacturers, which has resulted in considerable cost
savings, greater capacity and flexibility per port, and the ability to
provide convergent solutions with new features, services and service
creation capabilities in a timely
manner.
|
|
·
|
Market Potential –
According to GSMworld.com, there were 4.3 billion users of GSM mobile
services in the world as of February 28, 2010. Our Mobile VoIP
product runs over the GSM network, and every GSM user is a potential
customer for our Mobile VoIP. The addressable market in our
initial launch on a Windows Mobile phone and a Nokia Linux phone is
significant enough to create a successful
business.
|
Principal
Products and Markets
Our IP
telephony offerings are tailored to meet the specific needs of unique wholesale
customers and Mobile VoIP users. We have focused on marketing to
wholesale accounts that have an existing customer base of residential and small
business users. We believe we provide compelling product offerings to
Cable Operators, Internet Service Providers (“ISPs”), Wireless Internet Service
Providers (“WISPs”), CLECs and other broadband service providers, as we enable
them to quickly roll out private-labeled broadband voice solutions to their
residential and small business customers. Because of a limited amount
of capital that is available to us, we anticipate that in fiscal 2010 we may
abandon the above types of wholesale customers and focus almost exclusively on
the development of our Mobile VoIP business. We believe our ability
to participate in the mobile Internet revolution will provide the best
opportunity for our company to become profitable.
Mobile VoIP – We are
negotiating with entities that desire to sell Mobile VoIP or a mobile
triple-play. We believe the basic strategy of these companies is to
attract the customer base of the large incumbent mobile phone companies by
offering a carrier grade service at significantly reduced prices. Our
Mobile VoIP product has been demonstrated to large retail chains and to the
United States military stores. A large distributor that sells
telephone systems to small and medium sized businesses has purchased a Nokia
N900 phone from us that utilizes our VoIP and data service to demonstrate our
Mobile VoIP product to its corporate accounts.
Cable Operators - We have
identified approximately 3,000 cable operators in the United States, of which
more than 75 are large multiple system operators (“MSOs”) and over 2,900 are
independent cable operators. All of these cable operators are
potential wholesale customers of our IP telephone product. We believe
every MSO is already selling some form of an IP telephone product, typically a
packet-cable solution in large metropolitan areas. The equipment
expenditures required under packet cable generally do not justify the capital
investment in the remote areas of an MSO’s footprint. We believe our
SIP-based solution, which does not require our wholesale customers to purchase
any equipment, is a reliable, low-cost solution for any carrier. We
anticipate that MSOs will be able to generate revenue sooner than our wholesale
customers that have never sold a telephony product because the MSOs already have
experience with selling, marketing, billing, customer service and other
operational aspects related to providing digital voice services.
6
ISPs – ISPs range in size
from small town ISPs to those with several international
facilities. This potential customer base has been under considerable
pressure of late to offer more services to compete against the major telecom
companies and MSO cable companies. Furthermore, we believe ISPs are
looking for additional revenue streams as the pricing pressure on Internet
access has steadily increased. Many ISPs in the major cities have either sold
their client base to larger operators or found a unique niche to stay in
business. We believe the secondary and tertiary markets are more
likely a better target for our services.
WISPs - From Starbucks and
McDonalds to the cities of San Francisco and Philadelphia, wireless Internet
access is a powerful force in the broadband market. We estimate there
are more than 750 WISPs in the U.S. As with any broadband medium,
these providers want to layer on as many applications and additional revenue
streams as possible. Although the voice-over-Wi-Fi market is young,
Clearwire Corporation and other companies have proven the demand in this market
by rolling out voice-over-Wi-Fi and WiMax in several markets in the United
States.
Other Broadband Providers -
Various other entities provide a broadband service that is suitable for our IP
telephony product. We have satellite providers and broadband-over-powerline
providers that use our digital voice service. We are not able to
predict at this time the broadband market penetration that these types of
entities will obtain. It is possible that broadband over
powerline will be able to carry our voice product to areas in which cable
operators and telephone companies cannot bring their broadband.
Agent and retail sales - Our
focus is to serve the wholesale IP telephony market. However, we
maintain a web site for retail sales so that agents can promote and sell our
product. We also offer a low-cost, toll-free product on a wholesale
and retail basis. We have switched hundreds of toll-free telephone
numbers to our platform primarily because we can offer a significant per-minute
savings to our customers. Many states, such as New Mexico and
Arizona, still have in-state rates that are higher than ten cents a
minute. We offer in-state rates at 3.9 cents a minute.
Our
Network
We operate a sophisticated IP network to deliver our broadband voice
services. We carefully monitor the network as it automatically
minimizes the route taken by packets carrying a voice conversation, and
self-regulates traffic volumes to directly control the quality of service from
the origination to the termination of a call. Calls are connected on
our network with minimal post-dial delay and our G.729 compression yields
virtually no jitter. When compared to other broadband voice carriers
or wireline connections, we deliver a high-quality call. Our
softswitch utilizes advanced SIP infrastructure on a cluster of SIP servers and
has the ability to scale at a low cost. We believe the collective
thought process of our SIP servers makes us unique, as our servers are capable
of “thinking” about what they are doing and will perform self-healing functions
when necessary to ensure a call is not dropped. Unlike many of our
competitors, we do not rely on Microsoft to power our softswitch. By
using our own open-source software platform, we are able to update the network
as needed, avoid the delays of waiting for software upgrades from Microsoft and
avert the problems associated with having too much reliance on one vendor in
order to run our network.
7
We
consider voice to be an application on an IP transport. Our network
does not use the mainframe technology approach that Sonus Networks, Inc. or
BroadSoft, Inc. promotes. Instead, we have a fully-scalable,
redundant, power-backed stable platform with a server farm that contains no
specifically-designed telecom equipment. By not relying on the
telecom equipment and related software of the larger equipment vendors, we are
able to own and control our own proprietary source code and to scale without the
limitations and delays associated with equipment financing, installation,
integration and source code updates that equipment vendors impose on other
broadband voice carriers.
Competition
The
communications industry is highly competitive and the market for enhanced
Internet and IP communications services is new and rapidly
evolving. We believe the primary competitive factors that will
determine our success in the Internet and IP communications market
are:
|
·
|
Quality
of service
|
|
·
|
Responsive
customer care services
|
|
·
|
Ability
to provide customers with a telephone number in their local calling
area
|
|
·
|
Pricing
levels and policies
|
|
·
|
Ability
to provide E911 and 911 service
|
|
·
|
Bundled
service offerings
|
|
·
|
Innovative
features
|
|
·
|
Ease
of use
|
|
·
|
Accurate
billing
|
|
·
|
Brand
recognition
|
|
·
|
Quality
of analog telephone adapter supported by us and used by our
customer
|
Future
competition could come from a variety of companies, both in the Internet and
telecommunications industries. This competition includes major
companies that have been in operation for many years and have greater resources
and larger subscriber bases than we have, as well as companies operating in the
growing market of discount telecommunications services, including calling cards
and prepaid cards. In addition, some Internet service providers have
begun to aggressively enhance their real-time interactive communications, and
are focusing initially on instant messaging, with the intent to progress toward
providing PC-to-Phone services and broadband telephony services.
We
anticipate that competition also will come from several traditional
telecommunications companies, including industry leaders, such as AT&T Inc.,
Sprint Nextel Corporation, Deutsche Telekom AG and Qwest Communications
International, Inc., as well as established broadband services providers, such
as Time Warner Inc., Comcast Corporation and Cablevision Inc. These
companies provide enhanced Internet and IP communications services in both the
United States and internationally. All of these competitors are significantly
larger than we are and have:
|
·
|
substantially
greater financial, technical and marketing
resources;
|
|
·
|
stronger
name recognition and customer
loyalty;
|
|
·
|
well-established
relationships with many of our target
customers;
|
|
·
|
larger
networks; and
|
|
·
|
large
existing user bases to cross sell new
services.
|
8
These and
other competitors may be able to bundle services and products that are not
offered by us together with enhanced Internet and IP communications services,
which could place us at a significant competitive disadvantage. Many of our
competitors enjoy economies of scale that can result in a lower cost structure
for transmission and related costs, which could cause significant pricing
pressures within the industry.
Major
Customer
We had
one customer that accounted for 34% of our revenues in fiscal 2009 and 32% of
our revenue in fiscal 2008. This customer has moved its lines to a
larger competitor of ours. Loss of this account is hurtful to us, as
it represented approximately $63,000 in monthly revenues. We hope to
replace this lost revenue by increasing services to existing customers and with
the addition of Mobile VoIP customers.
Government
Regulation
The
Federal Communications Commission (“FCC”) has jurisdiction over all U.S.
telecommunications common carriers to the extent they provide interstate or
international communications services, including the use of local networks to
originate or terminate such services. The FCC also has jurisdiction over certain
issues relating to interconnection between providers of local exchange service
and the provision of service via fixed wireless spectrum.
The use
of the Internet and private IP networks to provide voice communication services
is a relatively recent market development. Although the provision of such
services is currently permitted by United States law and largely unregulated
within the United States, several foreign governments have adopted laws and/or
regulations that could restrict or prohibit the provision of voice communication
services over the Internet or private IP networks. More aggressive regulation of
the Internet in general, and Internet telephony providers and services
specifically, may materially and adversely affect our business.
On
March 10, 2004, the FCC initiated a broad rulemaking proceeding concerning
the provision of voice and other services and applications utilizing IP
technology. The FCC’s generic rulemaking proceeding could result in the FCC
determining, for instance, that certain types of Internet telephony should be
regulated like landline telecommunications services. Thus, Internet telephony
would no longer be exempt from more onerous telecommunications-related
regulatory obligations, or other economic regulations typically imposed on
traditional telecommunications carriers.
In June
2005, the FCC adopted rules requiring providers of broadband voice services to
provide 911 emergency access. We believe we are in compliance with this
order. In August 2005, the FCC adopted rules that these providers
must design their systems to facilitate authorized wiretaps pursuant to the
Communications Assistance to Law Enforcement Act. We anticipate that
we will continue to develop technologies as required by governmental regulation
that support emergency access and enhanced services. We believe that
almost all digital voice providers have difficulty in achieving full compliance
within the stated deadlines due to the level of complexity and cost of some of
the requirements. We find that we in a position similar to our peers
in the industry, where a strict interpretation of an FCC order could lead to an
enforcement action including fines or an order to cease and desist marketing a
certain service in a certain area where we do not have full
compliance.
9
In June
2006, the FCC announced that interconnected digital voice providers, such as
VoX, would be required to contribute to the Universal Service Fund (“USF”) on an
interim basis, beginning October 2006. The FCC permitted interconnected digital
voice providers to determine their USF contribution according to one of three
different calculation methods. Implementation of the regulatory requirements
compelled by the FCC’s action take considerable time and cost, and we cannot
guarantee that we have implemented these requirements fully. If we fail to
report our revenue and remit USF on that revenue accurately, we may be subject
to late fees, penalties or other actions, which could negatively affect our
business.
In
April 2007, the FCC released its order extending the application of the
customer proprietary network information (“CPNI”) rules to interconnected VoIP
providers. CPNI includes information such as the telephone numbers
called by a consumer; the frequency, duration and timing of such calls; and any
services and features purchased by the consumer, such as call waiting, call
forwarding and caller ID.
Under the
FCC’s existing rules, carriers may not use CPNI without customer approval except
in circumstances related to their provision of existing services, and must
comply with detailed customer approval processes when using CPNI outside of
these circumstances. The new CPNI requirements are aimed at establishing more
stringent security measures for access to a customer’s CPNI data in the form of
enhanced passwords for on-line access and call-in access to account information
as well as customer notification of account or password changes.
On August
6, 2007 and effective November 2007, the FCC adopted an Order concerning the
collection of regulatory fees requiring the collection of such fees from
interconnected VoIP providers. Interconnected VoIP providers pay regulatory fees
based on interstate and international revenues. The Regulatory Fees Order became
effective in November 2007.
On
November 8, 2007, the FCC released an Order relating to local number portability
imposing local number portability and related obligations on interconnected VoIP
Providers like us. The Order requires interconnected VoIP providers to
contribute to shared numbering administration costs. Additionally, the Order
mandates that we port telephone numbers within certain timeframes. As
a result of the steps we have taken, we believe that we comply with the FCC’s
order regarding local number portability.
The FCC
is considering enhancing proposed reforms of the intercarrier compensation
system, which is a set of FCC rules and regulations by which telecommunications
carriers compensate each other for the use of their respective networks. These
rules and regulations affect the prices we pay to our suppliers for access to
the facilities and services that they provide to us, such as termination of
calls by our customers onto the public switched telephone network (“PSTN”). In
addition, proceedings have been initiated to determine what intercarrier
compensation charges should apply to the termination of VoIP traffic. We
currently operate under various commercial agreements with carriers who complete
calls from our customers to the PSTN. We cannot predict what, if any,
intercarrier compensation regulations the FCC’s order may impose on VoIP
providers.
Other
action by the FCC has expanded the possibility that our digital voice services
may become subject to state regulation, which will likely lead to higher costs
and reduce some of the competitive advantage digital voice services hold over
traditional telecommunications services.
10
Some
state and local regulatory authorities believe they retain jurisdiction to
regulate the provision of, and impose taxes, fees and surcharges on, intrastate
Internet and VoIP telephony services, and have attempted to impose such taxes,
fees and surcharges, such as a fee for providing E-911 service. Rulings by the
state commissions on the regulatory considerations affecting Internet and IP
telephony services could affect our operations and revenues, and we cannot
predict whether state commissions will be permitted to regulate the services we
offer in the future.
In
addition, it is possible that we will be required to collect and remit taxes,
fees and surcharges in other states and local jurisdictions for virtual data
products, based upon a billing address or phone number of a VoIP customer and
such authorities may take the position that we should have collected such taxes,
fees and surcharges even though we did not. If so, they may seek to
collect those past taxes, fees and surcharges from us and impose fines,
penalties or interest charges on us. Our payment of these past taxes, fees and
surcharges, as well as penalties and interest charges, could have a material
adverse effect on us.
Employees
As of
February 28, 2010, we had 9 employees on a full-time basis. We are
not subject to any collective bargaining agreement and we believe our
relationship with our employees is good. In conjunction with a
financing on February 18, 2009, our lender required us to eliminate our entire
sales force and various other employees. We continued to operate our
business and improve our VoIP product with a small number of employees, but our
sales and marketing efforts have been limited. We plan to operate
with a small number of employees until our revenues increase
further.
Item
1A. Risk Factors
We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide information under this item.
Item
1B. Unresolved Staff Comments
There are
no unresolved staff comments
Item
2. – Properties
The
following table sets forth pertinent facts concerning our office leases at
February 28, 2010.
Location
|
Use
|
Approximate Square
Feet
|
Annual Rent
|
75
South Broadway
White
Plains, NY 10601
12249
Science Drive
Orlando,
Florida 32826
|
Office
Office
|
500
1,600
|
$28,000
$22,000
|
The lease
for our office space in White Plains, New York is renewable every three
months. We maintain up to three employees at this location, and we
plan to maintain this location in 2010. Our lease for our office
space in Orlando, Florida is under a sub-lease agreement that expires on October
31, 2010. There is available space in the buildings that we currently occupy
that we anticipate renting if we have such need. We are also aware of
other vacant office space if the need arises.
11
Item
3. - Legal Proceedings
We are
subject to legal proceedings and claims that arise in the ordinary course of
business. In the opinion of management, the amount of ultimate
liability, if any, is not likely to have a material effect on our financial
condition, results of operations or liquidity. However, as the
outcome of litigation or legal claims is difficult to predict, significant
changes in exposures could occur.
12
PART
II
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Market
for Securities
Our
common stock currently trades on The OTC Bulletin Board® (“OTCBB”) under the
symbol PVSP. Prior to February 21, 2008 our common stock traded on
the OTCBB under the symbol ELEC. The high and low closing price for
each quarterly period of our last two fiscal years are listed
below:
High
|
Low
|
||||||||
Fiscal 2009
|
|||||||||
1st Quarter
|
$ | 0.25 | $ | 0.07 | |||||
2nd
Quarter
|
0.37 | 0.09 | |||||||
3rd
Quarter
|
0.40 | 0.15 | |||||||
4th
Quarter
|
0.21 | 0.10 | |||||||
Fiscal 2008
|
|||||||||
1st Quarter
|
$ | 0.31 | $ | 0.14 | |||||
2nd
Quarter
|
0.31 | 0.19 | |||||||
3rd
Quarter
|
0.24 | 0.12 | |||||||
4th
Quarter
|
0.40 | 0.14 |
The
quotations set forth in the table above reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions. As of February 28, 2010, there were 182 holders
of record of our common stock and approximately 2,000 beneficial
holders.
We have
never paid dividends on our common stock and do not expect to do so in the
foreseeable future. Our loan agreements with our lender does not
allow us to directly or indirectly declare or pay any dividends so long as
certain amounts of our secured term notes remain outstanding.
Recent
Issuances of Unregistered Securities
The
issuances described in this Item 5 were made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act relating to sales
by an issuer not involving any public offering. None of the foregoing
transactions involved a distribution or public offering.
During
the fourth quarter of fiscal 2009, we issued a total of 300,000 shares of common
stock to two officers of our Company in lieu cash payments for services
rendered.
13
The
following table provides information as of November 30, 2009 with respect to
shares of our common stock that are issuable under equity compensation
plans.
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
Number
of Securities remaining available to future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|||||||||
Equity
compensation plans approved by security holders:
|
||||||||||||
1995 Stock Option Plan(1) | 165,000 | $0.42 | - | |||||||||
1996
Restricted Stock Plan(2)
|
- | 400,000 | ||||||||||
2007
Equity Incentive Plan(3)
|
855,000 | 0.23 | 1,145,000 | |||||||||
Subtotal
|
1,020,000 | 1,545,000 | ||||||||||
Equity
compensation plans not approved by security holders:
|
||||||||||||
Employee
stock options
|
1,500,000 | 0.15 | - | |||||||||
2004
Equity Incentive Plan (3)
|
828,000 | 0.34 | 172,000 | |||||||||
2007
Contingent Option Plan (4)
|
7,893,506 | 0.18 | - | |||||||||
2009
Equity Incentive Plan (3)
|
2,100,000 | 0.10 | 1,389,000 | |||||||||
Institutional
Marketing Services, Inc. (5)
|
100,000 | 0.63 | - | |||||||||
Investor
Relations International (5)
|
1,500,000 | 0.67 | - | |||||||||
Guilford
Securities, Inc. (6)
|
100,000 | 0.40 | - | |||||||||
Subtotal
|
14,021,506 | 1,561,000 | ||||||||||
Total
|
15,041,506 | 3,106,000 |
(1)
|
Options
are no longer issuable under our 1995 Stock Option
Plan.
|
(2)
|
Our
Restricted Stock Plan provides for the issuance of restricted share grants
to officers and non-officer
employees.
|
(3)
|
Our
2004, 2007 and 2009 Equity Incentive Plans allow for the granting of share
options to members of our board of directors, officers, non-officer
employees and consultants.
|
(4)
|
The
contingent options vest only if three consecutive months of positive cash
flow from operations is achieved before their expiration in November
2012.
|
(5)
|
Warrants
were issued for investor relations
services.
|
(6)
|
Warrants
were issued for consulting
services.
|
14
Item
6. – Selected Financial Data
We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide information under this item.
Item
7. - Management’s Discussion and Analysis of Financial Condition and Results of
Operations
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
deliver wholesale voice over IP (“VoIP”) telephone services for the residential
and small business markets. In addition to being a provider of
wholesale VoIP telephone services, we are the first VoIP carrier to deploy an
unlimited data and voice service plan on a smart phone that runs on a nationwide
GSM network in the United States. We have developed our technology to
allow us to sell our VoIP as an application that can be downloaded over the
Internet to the Nokia N900 smart phone for $29.95 a month. We are
selling smart phones, at our cost, along with unlimited voice and data services
in the United States for only $69.95 a month and the lowest international rates
in the mobile phone industry. Our data service includes unlimited
downloads of files, unlike other carriers who advertise unlimited web access,
but charge overage fees if more than 5 gigabyte of content is downloaded in one
month to the smart phone. We use a nationwide GSM cell phone network
for our VoIP, unlike other VoIP carriers that can only use the limited range of
the WiFi network when running on a smart phone.
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 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 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.
We
believe our Mobile VoIP product is a significant development in the mobile
Internet industry and we plan to continue to use our existing resources to
develop this business. Our access to capital has been limited, and we
may abandon our existing wholesale VoIP business in order to further develop and
sell our Mobile VoIP services. We launched our Mobile VoIP in
December of 2009, and we plan to have our service working on a variety on mobile
devices in 2010.
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.
15
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 analog telephone adapter
(“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 2009 and
2008.
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. Beginning in December 2009 we are
selling smart phones to retail customers, and these phones are considered
customer equipment. Unlike the ATA, we charge the customer for the
smart phone.
Cost
of Revenues
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.
16
• 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 2009 Compared to Fiscal Year 2008
Our
revenues for fiscal 2009 increased by approximately $148,000, or approximately
7%, to approximately $2,242,000 as compared to approximately $2,094,000 reported
for fiscal 2008. The increase in revenues correlates with the
increase in the number of wholesale customers using our IP telephony
service. In November 2009, we billed 98 wholesale customers, as
compared to 90 in November 2008. Our revenue will be lower in the
first quarter of fiscal 2010 because our largest customer, who accounted for
approximately $60,000 a month in revenues, moved its VoIP lines to a larger VoIP
carrier. However, we just launched our Mobile VoIP product on a Nokia
N900 phone and we have our monthly service available to new phone purchasers and
to existing N900 customers as an application that can be downloaded over the
Internet. We cannot predict yet what future Mobile VoIP revenues will
be, but we are encouraged that our low monthly pricing, which includes unlimited
voice service and data downloads in the United States will attract a significant
number of users.
Our gross
profit for fiscal 2009 increased by approximately $396,000 to approximately
$505,000 from a gross profit of approximately $109,000 reported in fiscal 2008,
while our gross profit percentage of 22.5% in fiscal 2009, as compared to 5.2%
in fiscal 2008, increased by 17.3 percentage points. Higher revenues
have improved our gross margins. With higher revenues, we are able to
cover our fixed network costs and buy minutes at a lower cost. We
also implemented more sophisticated least-cost-routing strategies that allowed
us to increase our gross margin percentage.
Selling,
general and administrative expenses (“SG&A”) decreased by approximately
$935,000, or approximately 25%, to approximately $2,809,000 for fiscal 2009 from
approximately $3,744,000 reported in the prior year fiscal
period. The decrease is attributable to overhead cuts is salaries,
rent and consulting fees that were implemented in February 2009. We
were able to operate the remainder of the year with the reduced SG&A costs
and reduce our monthly operating loss.
17
Bad debt
expense increased by approximately $129,000 to approximately $146,000 for fiscal
2009 as compared to approximately $17,000 for the prior fiscal
year. In fiscal 2009, several customers who had been paying their
bills on time became delinquent. After unsuccessful attempts at
collecting payments, we blocked these customers from using minutes on our
switch, and our ability to collect payments from them were mostly
unsuccessful.
A loss of
approximately $785,000 due to the impairment of long-lived assets was recorded
in fiscal 2009. No such loss was recorded in fiscal
2008. We determined that our long-lived assets, consisting of
capitalized software, equipment and deferred finance costs no longer had a
market value. Approximately $536,000 of the impairment loss was
attributable to fixed assets, and approximately $249,000 was attributable to
deferred finance costs.
Depreciation
and amortization expense increased by approximately $37,000 to approximately
$555,000 for fiscal 2009 as compared to approximately $518,000 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 4) decreased by approximately $30,000 and deprecation of
our IP telephony platform increased approximately $7,000.
Interest
expense increased by approximately $6,246,000 to approximately $7,257,000 for
the year ended November 30, 2009 as compared to approximately $1,011,000 for the
prior fiscal year. At November 30, 2008 long-term debt was carried at
amortized cost. At November 30, 2009, long-term debt was carried at its face
value plus accrued interest due to the fact that the debt is fully callable by
the lender and as such the remaining unamortized debt discount was fully
expensed as interest.
For the
year ended November 30, 2009, we recorded other income of approximately
$6,030,000, which resulted from the change in the market value of the warrants
issued to our primary lender (see Note 5). Based on a number of
factors, we determined that the warrants issued to our lender had no market
value as of November 30, 2009. In fiscal 2008, we recorded an expense
of approximately $191,000 to reflect the change in the market value of the
warrants issued to our lender.
Liquidity
and Capital Resources
At
November 30, 2009, we had cash and cash equivalents of approximately $36,000 and
negative working capital of approximately $14,380,000 as compared to cash and
cash equivalents of approximately $130,000 and negative working capital of
approximately $1,375,000 at November 30, 2008.
Net
cash used in operating activities aggregated approximately $1,277,000 and
$3,384,000 in fiscal 2009 and 2008, respectively. The principal use
of cash from operating activities in fiscal 2009 was the loss for the year of
approximately $5,014,000, which included non-cash gain for a mark-to-market
adjustment of warrants of approximately $6,030,000. These uses of
cash were offset in part by an increase in accounts payable and accrued expenses
of approximately $608,000, depreciation and amortization expense of
approximately 555,000, an impairment loss of approximately $785,000 and
amortization of debt discount of approximately $7,194,000. 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 warrants of approximately $191,000, depreciation and amortization
of approximately 518,000 and amortization of debt discount of approximately
$668,000.
18
Net cash
used in investing activities aggregated approximately $181,000 and $83,000 in
fiscal 2009 and 2008, respectively. The principal use of cash from
investing activities in fiscal 2009 and 2008 was the purchase of property and
equipment.
Net cash
provided by financing activities aggregated approximately $1,364,000 and
$3,466,000 in fiscal 2009 and 2008, respectively. The principal
source of cash from financing activities in fiscal 2009 and 2008 was a drawdown
of approximately $1,166,000 and $3,618,000, respectively, from a restricted cash
account that was established from the sale of secured term notes.
In fiscal
2009 and 2008, we spent approximately $181,000 and $83,000, respectively, on
capital expenditures, primarily for software, servers and routers related to our
IP network. While we believe we also will make capital expenditures for our IP
platform in fiscal 2010, primarily for programmers who are creating VoIP
applications to download to mobile phones, we are not able to quantify our
projected expenditures because the amount we spend will be dependent
upon our cash resources during fiscal 2010, which cannot be estimated at this
time and will be dependent on our ability to raise additional equity capital in
the capital markets.
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 issuance
of equity securities and borrowings, including borrowings from our primarily
lender on eight separate occasions over the past four years. Although
we are not yet profitable and we are not generating cash from operations, our
lender has indicated verbally that it plans to continue to be cooperative with
us, although it cannot provide us with any additional funding. Our
lender, up to this point in time, has been deferring payments of interest and
principal on a monthly basis and has not accelerated any
indebtedness. We need immediate funding in order to continue our
business operations. On February 11, 2010, in order to help us
attract additional capital, we signed a warrant cancellation agreement with our
lender that cancels warrants to purchase 25 million shares of common stock for
each $50,000 in new equity or all the warrants held by our lender if we raise
$300,000 in new equity from a specified investment group. We are
working with a small group of investors to raise money so that the outstanding
warrants can be canceled. 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.
19
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles (“GAAP”) in the United States 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;
|
*
|
valuation
of warrant liability;
|
*
|
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:
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.
20
Impairment
of Long-Lived Assets
Financial
Accounting Standards Board (“FASB”) authoritative guidance 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 2009 we recognized an impairment loss as we concluded
the carrying amount of internally developed capitalized software was not
recoverable. We also deemed the remaining book value of deferred
finance costs to be impaired. No impairment losses were recognized in fiscal
2008.
Income
Taxes
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
We
account for our stock-based compensation under the FASB authoritative guidance.
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. 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.
Item
7A. Quanitative and Qualitative Disclosures about Market
Risk
We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide information under this item.
Item
8. – Financial Statements and Supplementary Data
The
Company's Consolidated Financial Statements required by this Item are included herein,
commencing on page F-1.
Item
9. - Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
21
Item
9A. Controls and Procedures.
(a) Disclosure Controls and
Procedures. Our management, with the participation of
our chief executive officer/chief financial officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), as of the end of the period
covered by this Report. Based on such evaluation, our chief executive
officer/chief financial officer has concluded that, as of the end of such
period, for the reasons set forth below, our disclosure controls and procedures
were not effective.
(b) Internal Control Over Financial
Reporting. There have not been any changes in our internal
control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of
2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. Under the
supervision and with the participation of our chief executive officer/chief financial
officer, management has evaluated internal control over financial
reporting by the Company using the framework for effective internal control
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Management assessed the
effectiveness of our internal control over financial reporting as of November
30, 2009. During the course of this assessment, management identified material
weaknesses relating primarily to:
|
·
|
segregation
of duties
|
|
·
|
recording
complex financial transactions, primarily in the analysis and calculation
of debt financings and the issuance of warrants and
options
|
|
·
|
performance
of a timely and accurate year-end closing
process
|
We have a
lack of staffing within our accounting department, both in terms of the small
number of employees performing our financial and accounting functions and their
lack of experience to account for complex financial and taxation
transactions. This lack of staffing continued throughout fiscal 2009
and as of the date of this report. Management believes the lack of
qualified, accounting and financial personnel amounts to a material weakness in
our internal control over financial reporting and, as a result, at November 30,
2009 and on the date of this Report, our internal control over financial
reporting is not effective. We will continue to evaluate the employees involved,
the need to engage outside consultants with technical and accounting-related
expertise to assist us in accounting for complex financial transactions and the
hiring of additional accounting staff. However, we will be unable to
remedy this material weakness in our internal controls until we have the
financial resources that allow us to hire additional qualified
employees.
Our
management, including our chief executive officer/chief financial officer, does
not expect that our disclosure controls and procedures or our internal control
over financial reporting are or will be capable of preventing or detecting all
errors or all fraud. Any control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system’s objectives will be met. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements, due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the
company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns may occur
because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of controls. The design of any system of controls is based
in part on certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Projections of any evaluation of controls
effectiveness to future periods are subject to risk.
22
This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our independent
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this Report.
Item
9B. Other Information.
None.
23
PART
III
Item
10. – Directors, Executive Officers and Corporate Governance.
Our
Amended and Restated Certificate of Incorporation provides that a director shall
hold office until the annual meeting for the year in which his or her term
expires except in the case of elections to fill vacancies or newly created
directorships. Each director is elected for a one-year term. Set forth below are
the name, age and the positions and offices held by each of our current
directors, his principal occupation and business experience during at least the
past five years and the names of other publicly-held companies of which he
serves as a director.
The
following table sets forth certain information regarding our directors as of
February, 28, 2010. All of the following individuals
currently serve as directors of our company.
Name
|
Age
|
Principal
Occupation for Past Five Years and
Current Public Directorships or
Trusteeships
|
Paul
H. Riss
|
54
|
Director
since 1995; Chairman of our board of directors since March 2005; our Chief
Executive Officer since August 1999 and our Chief Financial Officer and
Treasurer since November 1996.
|
Greg
M Cooper
|
50
|
Director
since April 2004; partner for more than five years of Cooper, Niemann
& Co., CPAs, LLP, certified public accountants; member of the board of
directors of Mid Hudson Cooperative Insurance Company in Montgomery, New
York, a privately-held insurance company.
|
Mark
Richards
|
50
|
Director
since January 2008; Chief Information Officer of VoX Communications Corp.,
our wholly owned subsidiary, since October 2004.
|
Cherian
Mathai
|
53
|
Director
since March 2008; President of Sophia Associates Inc., a management
consulting and advisory firm since 2007; Co-founded and served as Chief
Operating Officer of Tralliance Corporation, the registry for .travel
Internet Top Level Domain from January 2002 to June 2007.
|
Scott
Widham
|
52
|
Director
since March 2008; Principal in CAS, LLC, a technology and
telecom consulting company since 2007; President – Sales and
Marketing, President – Corporate Development and Co-CEO of Broadwing
Corporation, a voice, data and video service provider from 2001 to
2007; Serves on the board of directors of Priva Technologies,
Stages and Game Rail.
|
Mr. Riss
and Mr. Richards serve as our named executive officers or key
employees.
24
Board
Meetings and Committees; Management Matters
Our
amended and restated certificate of incorporation provides that the number of
members of our Board of Directors shall be not less than three and not more than
five. There are currently five directors on the Board. At each annual meeting of
stockholders, directors are elected to hold office for a term of one year and
until their respective successors are elected and qualified.
Our board
of directors held nine meetings during the fiscal year ended November 30,
2009. During fiscal 2009, each director attended at least 75% of the
board of directors and committee meetings of which he was a member during such
time as he served as a director.
Four of
the members of our board of directors at the time of the 2009 annual meeting of
shareholders were in attendance at the 2009 annual meeting of shareholders held
on May 13, 2009. Our out-of-town director, Mr. Widham, did not
attend. From time to time, the members of our board of directors act
by unanimous written consent pursuant to the laws of the State of New
York. No fees are paid to directors for attendance at meetings of the
board of directors.
Compensation
Committee
We have a
compensation committee currently composed of Greg M Cooper and Scott
Widham. Mr. Widham is the Chairman of the committee. The
compensation committee establishes remuneration levels for our executive
officers. The compensation committee held one meeting during the
fiscal year ended November 30, 2009.
Nominating
Committee
Our board
of directors does not have a nominating committee. Our entire board
of directors is responsible for this function. Due to the relatively
small size of our company and the resulting efficiency of a board of directors
that is also limited in size, our board of directors has determined that it is
not necessary or appropriate at this time to establish a separate nominating
committee. Our board of directors intends to review periodically
whether such a nominating committee should be established.
Our board
of directors uses a variety of methods for identifying and evaluating nominees
for director. It regularly assesses the appropriate size of the board
of directors, and whether any vacancies exist or are expected due to retirement
or otherwise. If vacancies exist, are anticipated or otherwise arise, our board
of directors considers various potential candidates for
director. Candidates may come to their attention through current
members of our board of directors, shareholders or other
persons. These candidates are evaluated at regular or special
meetings of our board of directors, and may be considered at any point during
the year.
Qualifications
for consideration as a director nominee may vary according to the particular
areas of expertise that may be desired in order to complement the qualifications
that already exist among our board of directors. Among the factors
that our directors consider when evaluating proposed nominees are their
independence, financial literacy, business experience, character, judgment and
strategic vision. Other considerations would be their knowledge of
issues affecting our business, their leadership experience and their time
available for meetings and consultation on company matters. Our
directors seek a diverse group of candidates who possess the background skills
and expertise to make a significant contribution to our board of directors, our
company and our shareholders.
25
Audit
Committee
We have
an audit committee that, during the fiscal year ended November 30, 2009, was
composed of Greg M Cooper, Cherian Mathai and Scott Widham. Each
audit committee member is an independent director as defined by the rules of the
National Association of Securities Dealers. A written charter
approved by our board of directors and attached as Annex A to our 2007 proxy
statement, which was filed with the Securities and Exchange Commission (“the
Commission”) on May 15, 2007, governs the audit committee.
Our board
of directors has determined that Greg M Cooper qualifies as an “audit committee
financial expert,” as defined under the rules of the Commission adopted pursuant
to the Sarbanes-Oxley Act of 2002. Our board of directors has
determined that Mr. Mathai and Mr. Widham are financially literate and
experienced in business matters and fully qualified to monitor the performance
of management, the public disclosures by our company of our financial condition
and performance, our internal accounting operations, and our independent
auditors.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
requires our directors and executive officers, and persons who own more than ten
percent of a registered class of our equity securities (“10% Shareholders”), to
file with the Commission initial reports of ownership and reports of changes in
ownership of our common stock and other equity securities. Officers, directors
and 10% Shareholders are required by Commission regulation to furnish us with
copies of all Section 16(a) forms they file.
Based
solely on our review of the copies of such reports received by us, we believe
that for the fiscal year ended November 30, 2009, all Section 16(a) filing
requirements applicable to our officers, directors and 10% shareholders were
complied with, except for three directors, Cherian Mathai, Greg M Cooper and
Scott Widham, who did not file a Statement of Beneficial Ownership of Securities
on Form 4 on a timely basis in conjunction with an automatic grant of stock
options that occurred at our annual meeting on May 13, 2009.
Code
of Ethics
We have
adopted a code of business conduct and ethics for our directors, officers and
employees, including our chief executive officer and chief financial
officer. In addition, we have adopted a supplemental code of ethics
for our financial executives and all employees in our accounting
department. The text of our codes are posted on our Internet website
at www.pervasip.com.
26
Item
11. - Executive Compensation.
Summary
Compensation Table
The
following table sets forth, for the fiscal years indicated, all compensation
awarded to, earned by or paid to Mr. Paul H. Riss, our Chairman, Chief Executive
Officer and Chief Financial Officer, and Mr. Mark Richards, our Chief
Information Officer (collectively, the “Named Executives”). We have
no other executive officers.
Fiscal
2009 Summary Compensation Table
Name
and Principal Position
|
Year
|
Salary
($)
(1)
|
Bonus
($)
|
Stock
Awards
($)(2)
|
Option
Awards
($)(3)
|
Non-equity
Incentive
Plan
Compensation
($)
|
Change
in
Pension
Value
and
Non-Qualified
Deferred
Comp
Earnings
($)
|
All
Other
Compensation
($)(4)
|
Total
($)
|
||||||||||||||||||||||||
Paul H. Riss | 2009 | $ | 175,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 175,000 | ||||||||||||||||
Chairman, Chief Executive Officer | 2008 | 175,000 | 0 | 0 | 0 | 0 | 0 | 0 | 175,000 | ||||||||||||||||||||||||
and Chief Financial Officer |
2007
|
175,000 | 0 | 0 | 0 | 0 | 0 | 0 | 175,000 | ||||||||||||||||||||||||
Mark Richards | 2009 | 125,000 | 0 | 0 | 10,190 | 0 | 0 | 60,000 | 195,190 | ||||||||||||||||||||||||
Chief Information Officer
|
2008 | 125,000 | 0 | 0 | 5,782 | 0 | 0 | 60,000 | 190,782 | ||||||||||||||||||||||||
2007
|
120,000 | 0 | 0 | 69,380 | 0 | 0 | 60,000 | 249,380 |
|
(1)
|
The
salary for Mr. Riss has been accrued for since February 6, 2009 and the
salary for Mr. Richards has been accrued for since September 1,
2009. In partial payment for accrued salary, Mr. Riss was
issued 100,000 shares of common stock and Mr. Richards was issued 200,000
shares of common stock.
|
|
(2)
|
Amounts
in this column reflect the expense recognized for financial reporting
purposes for the indicated fiscal year, in accordance with FASB
authoritative guidance, with respect to awards of restricted shares of
common stock, which may include awards made during earlier years as well
as the indicated year. No individual grants of restricted shares were made
during fiscal years 2009, 2008 and
2007.
|
|
(3)
|
Amounts
in this column reflect the expense recognized for financial reporting
purposes for the indicated fiscal year, in accordance with FASB
authoritative guidance, with respect to awards of options to purchase
common stock, which may include awards made during earlier years as well
as the indicated year.
|
|
(4)
|
Mr.
Richards received consulting fees from one of our vendors amounting to
$60,000 in each of fiscal 2009, 2008 and 2007.
|
27
Outstanding
Equity Awards at Fiscal Year End
The
following table sets forth certain information with respect to stock options
outstanding as of November 30, 2009 for each of the named executive
officers. No stock awards have been made to the named executive
officers. The Named Executives did not exercise any options in Fiscal
2009.
Option Awards
|
|||||
Name
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Equity
Incentive
Plan
Awards
(1):
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
|
Option
Expiration
Date
|
Paul
H. Riss
|
-
|
-
|
1,894,441
|
$0.30
|
11/17/2012
|
Mark
Richards
|
-
|
-
|
2,368,053
|
$0.30
|
11/17/2012
|
Mark
Richards
|
-
|
1,500,000
|
-
|
$0.15
|
10/09/2014
|
(1) The options granted to Mr.
Riss and Mr. Richards are contingent stock options, which vest only if we
achieve positive cash flow from operations for three consecutive months before
the options expire in November 2012.
Stock
Option Grants
The
following table sets forth individual grants of stock options and stock
appreciation rights (“SARs”) made during fiscal 2009 to the Named
Executives.
Option/SAR
Grants In Last Fiscal Year
Name
|
Number
of
Securities
Underlying
Options/SARs
Granted(1)
|
Percent
of
Total
Options/SARs
Granted
to
Employees
in
Fiscal Year(2)
|
Exercise
or
Base
Price
($/Share)
|
Expiration
Date
|
Mark
Richards
|
1,500,000
|
28.5%
|
$0.15
|
10/09/2014
|
(1) No
SARs were granted in fiscal 2009.
(2) In
fiscal 2009, we granted options to 10 employees, three members of our board of
directors and six consultants to purchase an aggregate of 5,260,000 shares of
our common stock.
28
Board
of Directors Compensation
We do not
currently compensate directors in cash for service on our board of
directors. We maintain a Non-Employee Director Stock Option Plan (the
“Director Option Plan”). Under the Director Option Plan, each
non-employee director is granted a non-statutory option to purchase 10,000
shares of our common stock on the date on which he or she is elected, re-elected
or appointed to our board of directors. Our existing directors were
last re-elected on May 13, 2009. Options granted pursuant to the
Director Option Plan will vest in full on the one-year anniversary of the grant
date, provided the non-employee director is still our director at that
time. The exercise price granted under the Director Option Plan is
100% of the fair market value per share of the common stock on the date of the
grant as reported on The OTC Bulletin Board.
Item
12. - Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
As of
February 28, 2010, there were 30,358,519 shares of our common stock issued and
outstanding. Each share of common stock entitles the holder thereof
to one vote with respect to each item to be voted on by holders of the shares of
common stock. We have no other securities, voting or nonvoting,
outstanding.
The
following table sets forth information with respect to the beneficial ownership
of shares of our common stock as of February 28, 2010 by:
|
each
person whom we know beneficially owns more than 5% of the common
stock;
|
|
each
of our directors individually;
|
|
each
of our named executive officers individually; and
|
|
all
of our current directors and executive officers as a
group.
|
Unless
otherwise indicated, to our knowledge, all persons listed below have sole voting
and investment power with respect to their shares of common stock. Each person
listed below disclaims beneficial ownership of their shares, except to the
extent of their pecuniary interests therein. Shares of common stock that an
individual or group has the right to acquire within 60 days of February 28, 2010
pursuant to the exercise of options or restricted stock are deemed to be
outstanding for the purpose of computing the percentage ownership of such person
or group, but are not deemed outstanding for the purpose of calculating the
percentage owned by any other person listed.
29
Name and Address
|
Number
of Shares Beneficially
Owned
|
Percent
of Shares Beneficially
Owned
|
Paul
H. Riss
Pervasip
Corp.
75
South Broadway, Suite 400
White
Plains, New York 10601
|
3,135,334(1)
|
10.70%
|
Laurus
Capital Management, LLC
335
Madison Avenue, 10th
Floor
New
York, NY 10017
|
3,090,683(2)
|
9.71%
|
Mark
Richards
5955
T.G. Lee Blvd. Suite 100
Orlando,
Florida 32822
|
560,000(3)
|
1.93%
|
Greg
M. Cooper
Cooper,
Niemann & Co., CPAs, LLP
PO
Box 190
Mongaup
Valley, New York 12762
|
160,000(4)
|
*
|
Scott
Widham
9865
Litzsinger Road
St
Louis, Missouri 63124
|
200,000(5)
|
*
|
Cherian
Mathai
75
South Broadway, Suite 400
White
Plains, New York 10601
|
100,000(6)
|
*
|
All
directors and executive officers
as
a group (five individuals)
|
4,155,334
|
14.01%
|
* Less
than 1%.
(1)
|
Includes
560,000 shares of common stock subject to warrants that are presently
exercisable or exercisable within 60 days after February 28,
2010.
|
(2)
|
Based
on 9.99% of the total of 30,358,519 shares of common stock outstanding as
of February 28, 2010. Certain warrants issued to Laurus Capital
Management, LLC and its affiliates (“Investors”) contain an issuance
limitation prohibiting the Investors from exercising or converting those
securities to the extent that such exercise would result in beneficial
ownership by the Investors of more than 9.99% of the shares then issued
and outstanding. Other warrants issued to the Investor group
contain an issuance limitation prohibiting the Investors from exercising
or converting those securities to the extent that such exercise would
result in beneficial ownership by the Investors of more than 4.99% of the
shares then issued and outstanding (the "4.99% Issuance
Limitation"). The 4.99% Issuance Limitation may be revoked upon
75 days notice and is automatically null and void upon an event of
default (as defined in and pursuant to the terms of the
applicable instrument). The 4.99% Issuance Limitation may be
waived by the Investors upon at least 61 days prior notice to us and shall
automatically become null and void following notice to us of the
occurrence and continuance of an event of default (as defined in and
pursuant to the terms of the applicable instrument). We have
not received any notices from the Investors that we are in
default. In total, the Investors possess warrants that allow
them to purchase up to 159,352,573 shares of common stock, or
approximately 80% of the fully diluted shares of common stock
outstanding. On February 11, 2010 we signed a warrant
cancellation agreement with the Investors that cancels warrants to
purchase 25 million shares of common stock for each $50,000 in new equity
or all the warrants if we raise $300,000 in new equity from a specified
investment group. There can be no assurance that we will be
successful in raising new equity.
|
30
(3)
|
Includes
250,000 shares of common stock subject to options that are presently
exercisable or exercisable within 60 days after February 28,
2010.
|
(4)
|
Includes
120,000 shares of common stock subject to options that are presently
exercisable or exercisable within 60 days after February 28,
2010.
|
(5)
|
Includes
200,000 shares of common stock subject to options that are presently
exercisable or exercisable within 60 days after February 28,
2010.
|
(6)
|
Includes
100,000 shares of common stock subject to options that are presently
exercisable or exercisable within 60 days after February 28,
2010.
|
Item
13. - Certain Relationships and Related Transactions, and Director
Independence.
Certain
Relationships and Related Transactions
In
connection with its internal use software development costs, we paid fees to an
intellectual property development firm (“Consultant”) of $252,000 and $310,500
in fiscal 2009 and 2008, respectively. All such work performed by the
Consultant is the property of our Company. We hired individuals who
were performing work for us on behalf of the Consultant, and during fiscal 2007,
the Company hired the owner of the Consultant. An officer of our
Company has performed work for the Consultant, including disbursement services,
in which funds that were remitted by us to the Consultant were subsequently
transferred to a company controlled by the officer to distribute such funds to
appropriate vendors. Our officer received fees from the Consultant of
$60,000 in fiscal 2009 and 2008. Total funds paid to the Consultant
resulted in capitalized internal use software and computer equipment of $90,000
in fiscal 2009 and $55,000 in fiscal 2008. The remaining fees of
$162,000 in fiscal 2009 and $255,000 in fiscal 2008 were deemed to be operating
costs. At November 30, 2009, we determined that the value of the
capitalized software had been impaired and recorded an impairment loss
of $535,924. See Note 1 to Notes to Consolidated Financial
Statements.
At
November 30, 2009 total unpaid salary and expenses that were owed to our chief
executive officer was $187,372. Additionally, from December 1, 2009
to March 15, 2010, our chief executive officer has provided short-term loans to
the Company totaling $74,000.
At
November 30, 2009, unpaid salary that is owed to our chief information officer
amounted to $10,000. In fiscal 2010 the Company has been accruing
$10,000 a month in salary payable to the chief information officer and $14,583 a
month payable to the chief executive officer.
31
Director
Independence
Our
common stock is currently quoted on the OTC Bulletin Board and is not listed on
the Nasdaq Stock Market or any other national securities exchange. Accordingly,
we are not currently subject to the Nasdaq continued listing requirements or the
requirements of any other national securities exchange. Nevertheless, in
determining whether a director or nominee for director should be considered
“independent” the board utilizes the definition of independence set forth in
Rule 4200(a)(15) of the Nasdaq Marketplace Rules. Greg M Cooper,
Cherian Mathai and Scott Widham qualify as “independent” under this
rule.
ITEM 14. Principal Accountant Fees and
Services
The
following table presents fees for professional audit services rendered by
Nussbaum Yates Berg Klein & Wolpow LLP for the audit of the Company's annual
financial statements for the years ended November 30, 2009 and 2008, and fees
billed for other services rendered by Nussbaum Yates Berg Klein & Wolpow LLP
during those periods.
2009
|
2008
|
|||||||
Audit
fees
|
$
|
97,500
|
$
|
105,000
|
||||
Audit
related fees
|
−
|
−
|
||||||
Tax
fees
|
15,000
|
20,000
|
||||||
All
other fees
|
1,420
|
−
|
||||||
Total
|
$
|
113,920
|
$
|
125,000
|
In the
above table, in accordance with the SEC’s definitions and rules, “audit fees”
are fees we paid Nussbaum Yates Berg Klein & Wolpow LLP for professional
services for the audit of our annual financial statements and review of
financial statements included in our quarterly reports filed with the SEC, as
well as for work generally only the independent auditor can reasonably be
expected to provide, such as statutory audits and consultation regarding
financial accounting and/or reporting standards; “audit-related fees” are fees
billed by Nussbaum Yates Berg Klein & Wolpow LLP for assurance and related
services that are reasonably related to the performance of the audit or review
of our financial statements; “tax fees” are fees for tax compliance, tax advice
and tax planning; and “all other fees” are fees billed by Nussbaum Yates Berg
Klein & Wolpow LLP for any services not included in the first three
categories.
Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors
Consistent
with SEC policies regarding auditor independence, the Audit Committee has
responsibility for appointing, setting compensation and overseeing the work of
the independent auditor. In recognition of this responsibility, the Audit
Committee has established a policy to pre-approve all audit and permissible
non-audit services provided by the independent auditor.
Prior to
engagement of the independent auditor for the next year's audit, management will
submit an aggregate of services expected to be rendered during that year for
each of four categories of services to the Audit Committee for
approval.
1. Audit
services include audit work performed in the preparation of financial
statements, as well as work that generally only the independent auditor can
reasonably be expected to provide, including comfort letters and reviews of our
financials statements included in our Quarterly Reports on Form 10-Q or
10-QSB.
32
2. Audit-Related
services are for assurance and related services that are traditionally performed
by the independent auditor, including due diligence related to mergers and
acquisitions, employee benefit plan audits, and special procedures required to
meet certain regulatory requirements.
3. Tax
services include all services performed by the independent auditor's tax
personnel except those services specifically related to the audit of the
financial statements, and includes fees in the areas of tax compliance, tax
planning, and tax advice.
4. Other
services are those associated with services not captured in the other
categories. The Company generally does not request such services from the
independent auditor.
Prior to
engagement, the Audit Committee pre-approves these services by category of
service. The Audit Committee may delegate pre-approval authority to one or more
of its members. The member to whom such authority is delegated must report, for
informational purposes only, any pre-approval decisions to the Audit Committee
at its next scheduled meeting.
Item
15. – Exhibits and Financial Statement Schedules
(a)
Documents filed as part of this report:
(1)
|
Report
of Independent Registered Public Accounting
Firm
|
Financial
Statements covered by the Report of Independent Registered Public
Accounting Firm
|
Consolidated
Balance Sheet as of November 30, 2009 and
2008
|
Consolidated
Statements of Loss for the Years ended November 30, 2009 and
2008
|
Consolidated
Statements of Stockholders’ Equity Deficiency and Comprehensive
Loss for the years ended November 30, 2009 and
2008
|
Consolidated
statements of Cash Flows for the years ended November 30, 2009 and
2008
|
Notes
to Consolidated Financial Statements for the years ended November
30, 2009 and 2008
|
(b)
Exhibits
(10) Material
Contracts
|
(a)
|
1995
Stock Option Plan, incorporated by reference to Exhibit 10(I) to our
Annual Report on Form 10-K for the year ended November 30, 1995, as
amended.
|
|
(b)
|
1996
Restricted Stock Award Plan, incorporated by reference to Exhibit A to our
Proxy Statement dated October 24,
1996.
|
|
(c)
|
Non-Employee
Director Stock Option Plan, dated March 30, 2001, incorporated by
reference to Exhibit 10(c) to our Annual Report on Form 10-KSB for the
year ended November 30, 2003.
|
|
(d)
|
2004
Equity Incentive Plan, incorporated by reference to Annex A to our Proxy
Statement dated April 12, 2005.
|
|
(e)
|
Securities
Purchase Agreement, dated as of February 8, 2005, between our Company and
Laurus Master Fund, Ltd., incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K dated February 8,
2005.
|
|
(f)
|
Master
Security Agreement, dated as of February 8, 2005, among us, New Rochelle
Telephone Corp., Telecarrier Services, Inc., Vox Communications Corp.,
Line One, Inc., AVI Holding Corp. and TelcoSoftware.com Corp. in favor of
Laurus Master Fund, Ltd., incorporated by reference to Exhibit 10.3 to our
Current Report on Form 8-K dated February 8,
2005.
|
33
(g)
|
Stock
Pledge Agreement, dated as of February 8, 2005, executed by our Company in
favor of Laurus Master Fund, Ltd., incorporated by reference to Exhibit
10.4 to our Current Report on Form 8-K dated February 8,
2005.
|
|
(h)
|
Subsidiary
Guaranty, dated as of February 8, 2005, executed by New Rochelle Telephone
Corp., Telecarrier Services, Inc., Vox Communications Corp., Line One,
Inc., AVI Holding Corp. and TelcoSoftware.com Corp., incorporated by
reference to Exhibit 10.5 to our Current Report on Form 8-K dated February
8, 2005.
|
|
(i)
|
Registration
Rights Agreement, dated as of February 8, 2005, between our Company and
Laurus Master Fund, Ltd., incorporated by reference to Exhibit 10.6 to our
Current Report on Form 8-K dated February 8, 2005.
|
|
(j)
|
Common
Stock Purchase Warrant, dated as of February 8, 2005, between our Company
and Laurus Master Fund, Ltd., incorporated by reference to Exhibit 10.7 to
our Current Report on Form 8-K dated February 8, 2005.
|
|
(k)
|
Form
of Common Stock Purchase Warrant, dated as of February 8, 2005, issued by
our Company to or on the order of Source Capital Group, Inc., incorporated
by reference to Exhibit 10.8 to our Current Report on Form 8-K dated
February 8, 2005.
|
|
(l)
|
Securities
Purchase Agreement, dated as of November 30, 2005, our Company and Laurus
Master Fund, Ltd., incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K dated November 30, 2005.
|
|
(m)
|
Reaffirmation
and Ratification Agreement, dated as of November 30, 2005, executed by our
Company, New Rochelle Telephone Corp., Telecarrier Services, Inc., Vox
Communications Corp., Line One, Inc., AVI Holding Corp. and
TelcoSoftware.com Corp. incorporated by reference to Exhibit 10.3 to our
Current Report on Form 8-K dated November 30, 2005.
|
|
(n)
|
Registration
Rights Agreement, dated as of November 30, 2005, between our Company and
Laurus Master Fund, Ltd., incorporated by reference to Exhibit 10.4 to our
Current Report on Form 8-K dated November 30, 2005.
|
|
(o)
|
Common
Stock Purchase Warrant, dated as of November 30, 2005, between our Company
and Laurus Master Fund, Ltd., incorporated by reference to Exhibit 10.5 to
our Current Report on Form 8-K dated November 30, 2005.
|
|
(p)
|
Form
of Common Stock Purchase Warrant, dated as of November 30, 2005, issued by
our Company to or on the order of Source Capital Group, Inc., incorporated
by reference to Exhibit 10.6 to our Current Report on Form 8-K dated
November 30, 2005.
|
|
(q)
|
Securities
Purchase Agreement, dated as of May 31, 2006, between our Company and
Laurus Master Fund, Ltd., incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K dated May31, 2006.
|
|
(r)
|
Reaffirmation
and Ratification Agreement, dated as of May 31, 2006, executed by our
Company, New Rochelle Telephone Corp., Telecarrier Services, Inc., Vox
Communications Corp., Line One, Inc., AVI Holding Corp. and
TelcoSoftware.com Corp. incorporated by reference to Exhibit 10.3 to our
Current Report on Form 8-K dated May 31, 2006.
|
|
(s)
|
Funds
Escrow Agreement, dated as of May 31, 2006, between our Company and Laurus
Master Fund, Ltd., incorporated by reference to Exhibit 10.4 to our
Current Report on Form 8-K dated May 31, 2006.
|
|
(t)
|
Restricted
Account Agreement, dated as of May 31, 2006, between our Company and
Laurus Master Fund, Ltd., incorporated by reference to Exhibit 10.5 to our
Current Report on Form 8-K dated May 31, 2006.
|
|
(u)
|
Common
Stock Purchase Warrant, dated as of May 31, 2006, between our Company and
Laurus Master Fund, Ltd., incorporated by reference to Exhibit 10.7 to our
Current Report on Form 8-K dated May 31,
2006.
|
34
(v)
|
Form
of Common Stock Purchase Warrant, dated as of May 31, 2006, issued by our
Company to or on the order of Source Capital Group, Inc., incorporated by
reference to Exhibit 10.8 to our Current Report on Form 8-K dated May 31,
2006.
|
|
(w)
|
Stock
Purchase Agreement dated as of December 14, 2006 by and among our Company,
CYBD Acquisition, Inc. and Cyber Digital, Inc., with respect to the
capital stock of New Rochelle Telephone Corp., incorporated by reference
to Exhibit 10.1 to our Current Report on Form 8-K dated December 14,
2006.
|
|
(x)
|
Stock
Purchase Agreement dated as of December 14, 2006 by and among our Company,
CYBD Acquisition II, Inc. and Cyber Digital, Inc., with respect to the
capital stock of Telecarrier Services, Inc., incorporated by reference to
Exhibit 10.2 to our Current Report on Form 8-K dated December 14,
2006.
|
|
(y)
|
2007
Equity Incentive Plan, incorporated by reference to Annex B to our Proxy
Statement dated May 15, 2007.
|
|
(z)
|
Securities
Purchase Agreement dated as of September 28, 2007, among our Company, LV
Administrative Services, Inc., Calliope Capital Corporation and Valens
Offshore SPV II, Corp., incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K dated October 4, 2007.
|
|
(aa)
|
Secured
Term Note, dated as of September 28, 2007, of our Company to Calliope
Capital Corporation, incorporated by reference to Exhibit 10.2 to our
Current Report on Form 8-K dated October 4, 2007.
|
|
(bb)
|
Secured
Term Note, dated as of September 28, 2007, of our Company to Valens
Offshore SPV II, Corp., incorporated by reference to Exhibit 10.3 to our
Current Report on Form 8-K dated October 4, 2007.
|
|
(cc)
|
Funds
Escrow Agreement, dated as of September 28, 2007, among our Company, Loeb
& Loeb LLP and LV Administrative Services, Inc., as agent,
incorporated by reference to Exhibit 10.4 to our Current Report on Form
8-K dated October 4, 2007.
|
|
(dd)
|
Form
of Common Stock Purchase Warrant, dated as of September 28, 2007 of our
Company, incorporated by reference to Exhibit 10.5 to our Current Report
on Form 8-K dated October 4, 2007.
|
|
(ee)
|
Third
Amended and Restated Secured Term Note, dated as of September 28, 2007 of
our Company to Laurus Master Fund, Ltd., incorporated by reference to
Exhibit 10.6 to our Current Report on Form 8-K dated October 4,
2007.
|
|
(ff)
|
Amended
and Restated Secured Term Note, dated as of September 28, 2007 of our
Company to Laurus Master Fund, Ltd., incorporated by reference to Exhibit
10.7 to our Current Report on Form 8-K dated October 4,
2007.
|
|
(gg)
|
Reaffirmation
and Ratification Agreement, dated as of September 28, 2007, executed among
our Company, Vox Communications Corp., Line One, Inc. AVI Holding Corp.
and TelcoSoftware.com Corp., incorporated by reference to Exhibit 10.8 to
our Current Report on Form 8-K dated October 4, 2007.
|
|
(hh)
|
Subsidiary
Guarantee dated as of September 28, 2007 by Vox Communications Corp., AVI
Holding Corp., Telcosoftware.com Corp. and Line One, Inc., incorporated by
reference to Exhibit 10.9 to our Current Report on Form 8-K dated October
4, 2007.
|
|
(ii)
|
Restricted
Account Agreement, dated as of September 28, 2007 by and among North Fork
Bank, our Company and LV Administrative Services, Inc., as agent,
incorporated by reference to Exhibit 10.10 to our Current Report on Form
8-K dated October 4, 2007.
|
|
(jj)
|
Master
Security Agreement dated as of September 28, 2007 among our Company, Vox
Communications Corp., Line One, Inc., AVI Holding Corp., TelcoSoftware.com
Corp. and LV Administrative Services Inc., as agent, incorporated by
reference to Exhibit 10.11 to our Current Report on Form 8-K dated October
4, 2007.
|
35
(kk)
|
Stock
Pledge Agreement dated as of September 28, 2007 among LV Administrative
Services Inc., as agent, our Company., Vox Communications Corp., Line One,
Inc., AVI Holding Corp. and TelcoSoftware.com Corp., incorporated by
reference to Exhibit 10.12 to our Current Report on Form 8-K dated October
4, 2007.
|
|
(ll)
|
2007
Contingent Option Plan, as amended, incorporated by reference to Exhibit
10 (ll) to our Annual Report on Form 10-KSB for the year ended November
30, 2007.
|
|
(mm)
|
Securities
Purchase Agreement dated as of May 28, 2008, among Pervasip Corp., LV
Administrative Services, Inc. and the Purchasers listed therein,
incorporated by reference to Exhibit 10.1 to our Current Report on Form
8-K dated May 28, 2008.
|
|
(nn)
|
Secured
Term Note, dated as of May 28, 2008, of Pervasip Corp. to Valens Offshore
SPV II, Corp., incorporated by reference to Exhibit 10.2 to our Current
Report on Form 8-K dated May 28, 2008.
|
|
(oo)
|
Amended
and Restated Secured Term Note, dated as of May 28, 2008, of Pervasip
Corp. to Valens Offshore SPV I, Corp., incorporated by reference to
Exhibit 10.3 to our Current Report on Form 8-K dated May 28,
2008.
|
|
(pp)
|
Amended
and Restated Secured Term Note, dated as of May 28, 2008, of Pervasip
Corp. to Valens Offshore SPV II, Corp., incorporated by reference to
Exhibit 10.4 to our Current Report on Form 8-K dated May 28,
2008.
|
|
(qq)
|
Fourth
Amended and Restated Secured Term Note, dated as of May 28, 2008 of
Pervasip Corp. to Valens Offshore SPV I, Ltd., incorporated by reference
to Exhibit 10.6 to our Current Report on Form 8-K dated May 28,
2008.
|
|
(rr)
|
Second
Amended and Restated Secured Term Note, dated as of May 28, 2008 of
Pervasip Corp. to Valens Offshore SPV I, Ltd., incorporated by reference
to Exhibit 10.7 to our Current Report on Form 8-K dated May 28,
2008.
|
|
(ss)
|
Reaffirmation
and Ratification Agreement, dated as of May 28, 2008, executed among
Pervasip Corp., Vox Communications Corp., Line One, Inc., AVI Holding
Corp., TelcoSoftware.com Corp. and Valens Offshore SPVI, Ltd.,
incorporated by reference to Exhibit 10.7 to our Current Report on Form
8-K dated May 28, 2008, incorporated by reference to Exhibit 10.8 to our
Current Report on Form 8-K dated May 28, 2008.
|
|
(tt)
|
Reaffirmation
and Ratification Agreement, dated as of May 28, 2008, executed among
Pervasip Corp., Vox Communications Corp., Line One, Inc., AVI Holding
Corp., TelcoSoftware.com Corp. and Valens Offshore SPV II, Corp.,
incorporated by reference to Exhibit 10.9 to our Current Report on Form
8-K dated May 28, 2008.
|
|
(uu)
|
Subsidiary
Guarantee dated as of May 28, 2008 by Vox Communications Corp., AVI
Holding Corp., Telcosoftware.com Corp. and Line One, Inc., incorporated by
reference to Exhibit 10.10 to our Current Report on Form 8-K dated May 28,
2008.
|
|
(vv)
|
Letter
to Amend Warrants dated as of May 28, 2008, executed among Pervasip Corp.,
LV Administrative Services, Inc., as agent, Calliope Capital Corporation,
Valens Offshore SPV II, Corp., Laurus Master Fund, Ltd., Valens, U.S. SPV
I, LLC, and Psource Structured Debt Limited, incorporated by reference to
Exhibit 10.11 to our Current Report on Form 8-K dated May 28,
2008.
|
|
(ww)
|
Master
Security Agreement dated as of May 28, 2008 among Pervasip Corp., Vox
Communications Corp., Line One, Inc., AVI Holding Corp., TelcoSoftware.com
Corp. and LV Administrative Services Inc., as agent, incorporated by
reference to Exhibit 10.12 to our Current Report on Form 8-K dated May 28,
2008.
|
|
(xx)
|
Stock
Pledge Agreement dated as of May 28, 2008 among LV Administrative Services
Inc., as agent, Pervasip Corp., Vox Communications Corp., Line One, Inc.,
AVI Holding Corp. and TelcoSoftware.com Corp., incorporated by reference
to Exhibit 10.13 to our Current Report on Form 8-K dated May 28,
2008.
|
36
(yy)
|
Amendment
to September 28, 2007 Securities Purchase Agreement dated May 28, 2008,
executed among Pervasip Corp., LV Administrative Services, Inc., as agent,
Valens Offshore SPV I, Ltd. and Valens Offshore SPV II, Corp.,
incorporated by reference to Exhibit 10.13 to our Current Report on Form
8-K dated May 28, 2008.
|
|
(zz)
|
Letter
Agreement dated as of October 15, 2008, among Pervasip Corp., LV
Administrative Services, Inc. and Valens Offshore SPV I, Ltd.,
incorporated by reference to Exhibit 10.1 to our Current Report on Form
8-K dated October 15, 2008.
|
|
(aaa)
|
Secured
Term Note, dated as of October 15, 2008, of Pervasip Corp. to Valens
Offshore SPV I, Corp., incorporated by reference to Exhibit 10.2 to our
Current Report on Form 8-K dated October 15, 2008.
|
|
(bbb)
|
Letter
Agreement dated as of December 12, 2008, among Pervasip Corp., LV
Administrative Services, Inc. and Valens Offshore SPV I, Ltd.,
incorporated by reference to Exhibit 10.1 to our Current Report on Form
8-K dated December 12, 2008.
|
|
(ccc)
|
Second
Amended and Restated Secured Term Note, dated as of December 12, 2008, of
Pervasip Corp. to Valens Offshore SPV I, Corp., incorporated by reference
to Exhibit 10.2 to our Current Report on Form 8-K dated December 12,
2008.
|
|
(ddd)
|
Letter
Agreement dated as of February 18, 2009 among Pervasip Corp., LV
Administrative Services, Inc. and Valens Offshore SPV I, Ltd.,
incorporated by reference to Exhibit 10.1 to our Current Report on Form
8-K dated February 18, 2009.
|
|
(eee)
|
Secured
Term Note, dated as of February 18, 2009, of Pervasip Corp. to Valens
Offshore SPV I, Corp., incorporated by reference to Exhibit 10.2 to our
Current Report on Form 8-K dated February 18, 2009.
|
|
(fff)
|
Secured
Term Note, dated as of February 18, 2009, of Pervasip Corp. to Valens
Offshore SPV I, Corp., incorporated by reference to Exhibit 10.3 to our
Current Report on Form 8-K dated February 18, 2009.
|
|
(ggg)
|
2009
Equity Incentive Plan, incorporated by reference to Annex A to our Proxy
Statement dated April 9, 2009.
|
|
(hhh)
|
Demand
note dated November 5, 2009, incorporated by reference to Exhibit 10.1 to
our Current Report on Form 8-K dated November 5, 2009.
|
|
(iii)
|
Warrant
cancellation agreement dated February 11, 2010, incorporated by reference
to Exhibit 10.1 to our Current Report on Form 8-K dated February 11,
2010.
|
(22) Subsidiaries
- The significant wholly-owned subsidiary is as follows:
Name |
|
Jurisdiction of
Organization
|
VoX
Communications Corp.
|
|
Delaware
|
(23) Consent
of Nussbaum Yates Berg Klein & Wolpow, LLP
(31.1)
|
Certification
of our Chief Executive Officer and Chief Financial Officer, Paul
H. Riss, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
(32.1)
|
Certification
of our Chief Executive Officer and Chief Financial Officer, Paul
H. Riss, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
37
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, we have duly caused this Report to be signed on our behalf by the
undersigned, thereunto duly authorized on the 15th day of March
2010.
PERVASIP
CORP.
|
|||
(Company) | |||
|
By:
|
/s/ Paul H. Riss | |
Paul H. Riss | |||
Chief Executive Officer | |||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
/s/ Paul H. Riss
|
Chairman
of the Board of Directors
|
March
15, 2010
|
||
Paul
H. Riss
|
Chief
Executive Officer
|
|||
Chief
Financial Officer
|
||||
(Principal
Accounting Officer)
|
||||
/s/ Greg M. Cooper
|
Director
|
March
15, 2010
|
||
Greg
M Cooper
|
||||
/s/ Cherian Mathai
|
Director
|
March
15, 2010
|
||
Cherian
Mathai
|
||||
/s/ Mark Richards
|
Director
|
March
15, 2010
|
||
Mark
Richards
|
||||
/s/ Scott Widham
|
Director
|
March
15, 2010
|
||
Scott
Widham
|
38
PERVASIP
CORP. AND SUBSIDIARIES
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
CONSOLIDATED
FINANCIAL STATEMENTS AND
REPORT
OF INDEPENDENT
REGISTERED
PUBLIC ACCOUNTING FIRM
PERVASIP
CORP. AND SUBSIDIARIES
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Page
Number
|
||
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Financial Statements
|
||
Balance Sheets
|
F-2
|
|
Statements of
Loss
|
F-3
|
|
Statements of Stockholders’
Equity Deficiency and Comprehensive Loss
|
F-4
|
|
Statements of Cash
Flows
|
F-5
|
|
Notes to Financial
Statements
|
F-6
– F-32
|
|
Report of Independent
Registered Public Accounting Firm
The Board
of Directors
Pervasip
Corp.
White
Plains, New York
We have
audited the accompanying consolidated balance sheets of Pervasip Corp. and
subsidiaries as of November 30, 2009 and 2008 and the related consolidated
statements of loss, stockholders’ equity deficiency and comprehensive loss, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on the financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pervasip Corp.
and subsidiaries as of November 30, 2009 and 2008, and the consolidated results
of their operations and cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As further discussed in
Note 2 to the financial statements, the Company, among other matters, has
negative working capital, a stockholders’ equity deficiency, has suffered
recurring losses from operations and is unable to meet its obligations as they
become due which raises substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in regard to these
matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
NUSSBAUM YATES BERG KLEIN &
WOLPOW, LLP
Melville,
New York
March 15,
2010
F-1
PERVASIP
CORP. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
NOVEMBER
30, 2009 AND 2008
ASSETS
2009
|
2008
|
|||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 35,993 | $ | 130,338 | ||||
Restricted
cash
|
- | 7,085 | ||||||
Accounts
receivable, net of allowance of $214,413 in 2009 and $69,388 in
2008
|
184,840 | 205,294 | ||||||
Prepaid
expenses and other current assets
|
50,393 | 459,511 | ||||||
Total
current assets
|
271,226 | 802,228 | ||||||
Property
and equipment, net
|
- | 610,606 | ||||||
Deferred
finance costs, net
|
- | 547,940 | ||||||
Other
assets
|
116,143 | 192,659 | ||||||
Total
assets
|
$ | 387,369 | $ | 2,153,433 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY DEFICIENCY
Current
liabilities:
|
||||||||
Current
portion of long-term debt and capital lease obligations
|
$ | 12,377,252 | $ | 93,549 | ||||
Accounts
payable and accrued expenses
|
2,273,681 | 2,083,182 | ||||||
Total
current liabilities
|
14,650,933 | 2,176,731 | ||||||
Long-term
debt and capital lease obligations, less current
maturities
|
- | 4,341,369 | ||||||
Warrant
liabilities
|
- | 5,621,070 | ||||||
Accrued
pension obligation
|
1,266,885 | 882,332 | ||||||
Total
liabilities
|
15,917,818 | 13,021,502 | ||||||
Stockholders’
equity deficiency:
|
||||||||
Preferred
stock, $.10 par value; 1,000,000 shares authorized, none issued and
outstanding
|
- | - | ||||||
Common
stock, $.10 par value; 250,000,000 shares
|
||||||||
authorized;
28,488,379 and 26,026,172 shares issued and outstanding in 2009 and
2008
|
2,848,838 | 2,602,617 | ||||||
Capital
in excess of par value
|
28,562,726 | 28,461,538 | ||||||
Accumulated
other comprehensive income (loss)
|
1,578 | (2,616 | ) | |||||
Deficit
|
(46,943,591 | ) | (41,929,608 | ) | ||||
Total
stockholders’ equity deficiency
|
(15,530,449 | ) | (10,868,069 | ) | ||||
Total
liabilities and stockholders’ equity deficiency
|
$ | 387,369 | $ | 2,153,433 |
See
accompanying notes to consolidated financial statements.
F-2
PERVASIP
CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF LOSS
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
2009
|
2008
|
|||||||
Revenues
|
$ | 2,242,330 | $ | 2,093,819 | ||||
Cost
and expenses:
|
||||||||
Costs
of services
|
1,737,468 | 1,985,301 | ||||||
Selling,
general and administrative
|
2,808,502 | 3,743,634 | ||||||
Provision
for bad debts
|
145,611 | 16,756 | ||||||
Impairment
loss
|
784,913 | - | ||||||
Depreciation
and amortization
|
555,020 | 518,211 | ||||||
Total
costs and expenses
|
6,031,514 | 6,263,902 | ||||||
Loss
from operations
|
(3,789,184 | ) | (4,170,083 | ) | ||||
Other
income (expense):
|
||||||||
Interest
expense
|
(7,257,194 | ) | (1,011,272 | ) | ||||
Other,
net
|
2,374 | (9,861 | ) | |||||
Mark
to market adjustment of warrant liabilities
|
6,030,021 | (191,126 | ) | |||||
Total
other expense
|
(1,224,799 | ) | (1,212,259 | ) | ||||
Net
loss
|
$ | (5,013,983 | ) | $ | (5,382,342 | ) | ||
Loss
per share
|
$ | (.19 | ) | $ | (.21 | ) | ||
Weighted
average number of common shares outstanding:
|
26,921,860 | 25,917,384 |
See
accompanying notes to consolidated financial statements.
F-3
PERVASIP
CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY DEFICIENCY AND COMPREHENSIVE
LOSS
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
Accumulated
|
Total
|
|||||||||||||||||||||||
Capital
|
Other
|
Stockholders’
|
||||||||||||||||||||||
Common Stock
|
in
Excess of
|
Comprehensive
|
Equity
|
|||||||||||||||||||||
Shares
|
Amount
|
Par Value
|
Deficit
|
Loss
|
Deficiency
|
|||||||||||||||||||
Balance,
December 1, 2007
|
25,835,458 | $ | 2,583,546 | $ | 27,783,972 | $ | (36,547,266 | ) | $ | - | $ | (6,179,748 | ) | |||||||||||
Net
loss
|
(5,382,342 | ) | (5,382,342 | ) | ||||||||||||||||||||
Foreign
currency translation adjustment
|
(2,616 | ) | (2,616 | ) | ||||||||||||||||||||
Comprehensive
loss
|
(5,384,958 | ) | ||||||||||||||||||||||
Employee
stock based compensation
|
129,113 | 129,113 | ||||||||||||||||||||||
Options
and warrants granted for services
|
527,560 | 527,560 | ||||||||||||||||||||||
Exercise
of stock options
|
190,714 | 19,071 | 20,893 |
|
39,964 | |||||||||||||||||||
Balance,
November 30, 2008
|
26,026,172 | 2,602,617 | 28,461,538 | (41,929,608 | ) | (2,616 | ) | (10,868,069 | ) | |||||||||||||||
Net
loss
|
(5,013,983 | ) | (5,013,983 | ) | ||||||||||||||||||||
Foreign
currency translation adjustment
|
4,194 | 4,194 | ||||||||||||||||||||||
Comprehensive
loss
|
(5,009,789 | ) | ||||||||||||||||||||||
Employee
stock based compensation
|
300,000 | 30,000 | 102,752 | 132,752 | ||||||||||||||||||||
Options
granted for services
|
57,259 | 57,259 | ||||||||||||||||||||||
Common
stock issued for services
|
690,000 | 69,000 | 109,400 | 178,400 | ||||||||||||||||||||
Cancelled
warrants
|
(201,412 | ) | (201,412 | ) | ||||||||||||||||||||
Stock
subscription receivable
|
(34,500 | ) | (34,500 | ) | ||||||||||||||||||||
Exercise
of stock options
|
1,472,207 | 147,221 | 67,689 |
|
214,910 | |||||||||||||||||||
Balance,
November 30, 2009
|
28,488,379 | $ | 2,848,838 | $ | 28,562,726 | $ | (46,943,591 | ) | $ | 1,578 | $ | (15,530,449 | ) |
See
accompanying notes to consolidated financial statements.
F-4
PERVASIP
CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
2009
|
2008
|
|||||||
Operating
activities:
|
||||||||
Net
loss
|
$ | (5,013,983 | ) | $ | (5,382,342 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
555,020 | 518,211 | ||||||
Non-cash
stock based compensation
|
132,752 | 129,113 | ||||||
Common
stock, options and warrants granted for services
|
368,826 | 238,323 | ||||||
Provision
for bad debts
|
145,611 | 16,756 | ||||||
Impairment
loss
|
784,913 | - | ||||||
Amortization
of debt discount
|
7,194,151 | 668,485 | ||||||
Non-cash
write-off of marketable securities
|
- | 25,000 | ||||||
Mark
to market adjustment of warrant liabilities
|
(6,030,021 | ) | 191,126 | |||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
(125,157 | ) | (98,368 | ) | ||||
Prepaid
expenses and other current assets
|
26,539 | 58,643 | ||||||
Other
assets
|
76,516 | (102,122 | ) | |||||
Accounts
payable, accrued expenses and accrued pension obligation
|
607,545 | 352,944 | ||||||
Net
cash used in operating activities
|
(1,277,288 | ) | (3,384,231 | ) | ||||
Investing
activities,
|
||||||||
purchase of property and
equipment
|
(181,247 | ) | (83,208 | ) | ||||
Financing
activities:
|
||||||||
Net
proceeds from short-term borrowing
|
60,000 | - | ||||||
Inflow
from restricted cash account
|
1,165,528 | 3,617,776 | ||||||
Proceeds
from exercise of stock options
|
147,410 | 3,000 | ||||||
Debt
issuance costs paid
|
- | (101,525 | ) | |||||
Payments
of long-term debt
|
(8,748 | ) | (53,552 | ) | ||||
Net
cash provided by financing activities
|
1,364,190 | 3,465,699 | ||||||
Decrease
in cash and cash equivalents
|
(94,345 | ) | (1,740 | ) | ||||
Cash
and cash equivalents at beginning of year
|
130,338 | 132,078 | ||||||
Cash
and cash equivalents at end of year
|
$ | 35,993 | $ | 130,338 | ||||
Cash
paid during the year for:
|
||||||||
Interest
|
$ | 92,573 | $ | 311,231 | ||||
Taxes
|
$ | - | $ | - |
Supplemental
disclosure of non-cash investing and financing
activities:
|
See
Notes 5, 10 and 14 for non-cash investing and financing
activities.
|
See
accompanying notes to consolidated financial statements.
F-5
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
1.
|
Description of
Business and Summary of Accounting
Principles
|
Description
of Business and Concentrations
|
Pervasip
Corp. (“Pervasip” or the “Company”) is a provider of digital telephony
services, products and hosted solutions. The Company offers its
customers high-quality Internet telephone products and services that are a
cost-effective alternative to traditional wireline telephone
services. Most of the Company’s revenues are derived from
customers that are broadband service providers or other telephone service
providers. The Company provides them with a customized private
label Internet protocol (“IP”) telephony service, as well as a back-office
and web suite of services. The Company uses Session Initiation
Protocol technology to provide all the components needed to support its IP
telephony service.
|
|
Principles
of Consolidation
|
The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries after elimination of significant intercompany balances
and transactions.
Property
and Equipment and Depreciation
Property
and equipment are recorded at cost. Depreciation is computed
primarily by use of accelerated and straight-line methods over the estimated
useful lives of the assets. The estimated useful lives are three to
five years for computer equipment and software, and five years for furniture and
fixtures.
Computer
Software Development Costs
Direct
development costs associated with internal-use computer software are accounted
for in accordance with authoritative guidance of the Financial Accounting
Standards Board (“FASB”) and are capitalized. Costs incurred during
the preliminary project stage, as well as for maintenance and training, are
expensed as incurred. Amortization is provided on a straight-line
basis over the shorter of five years or the estimated useful life of the
software. At November 30, 2009 the Company recognized an impairment
loss on its capitalized software and wrote off all previously recorded software
development costs.
Computer
software developed or obtained for internal use is included in property and
equipment at November 30, 2008 and was carried at $867,700, less accumulated
depreciation of $477,291. Depreciation expense was $175,765 and
$169,326, respectively, for the years ended November 30, 2009 and
2008.
F-6
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
1.
|
Description of
Business and Summary of Accounting Principles
(Continued)
|
|
Income
Taxes
|
|
The
Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income and the reversal of
deferred tax liabilities during the period in which related temporary
differences become deductible. A valuation allowances has been
established to eliminate the Company’s deferred tax assets as it is more
likely than not that none of the deferred tax assets will be
realized.
|
|
On
December 1, 2007, the Company adopted certain provisions under ASC 740,
Income Taxes,
relating to uncertainty in tax positions. As a result of
adopting such provisions, the Company recognizes the tax benefit from an
uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based
on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured
based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon settlement with the tax
authorities. Changes in recognition or measurement are
reflected in the period in which the change in judgment
occurs. The Company records interest related to unrecognized
tax benefits in interest expense and penalties in income tax
expense. The Company has determined that it had no significant
uncertain tax positions requiring recognition or
disclosure.
|
Revenue
Recognition
|
Revenues
from voice, data and other telecommunications-related services are
recognized in the period in which subscribers use the related
services. Revenues for carrier interconnection and access are
recognized in the period in which the service is
provided.
|
Collectibility
of Accounts Receivable
Trade
receivables potentially subject the Company to credit risk. The
Company extends credit to its customers and generally requires a deposit to
minimize its credit risk. Once a customer is billed for services, the
Company actively manages the accounts receivable and will generally return the
deposit if the customer has a track record of making timely payments of invoices
for six consecutive months.
F-7
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
1.
|
Description of
Business and Summary of Accounting Principles
(Continued)
|
Collectibility
of Accounts Receivable (Continued)
In order
to record the Company’s accounts receivable at their net realizable value, the
Company must assess their collectibility. A considerable amount of
judgment is required in order to make this assessment, including an analysis of
historical bad debts and other adjustments, a review of the aging of the
Company’s receivables, and the current creditworthiness of the Company’s
customers. Generally, when a customer account reaches a certain level
of delinquency, the Company disconnects the customer’s service and provides an
allowance for the related amount receivable from the customer. The
Company has recorded allowances for receivables that it considered
uncollectible, including amounts for the resolution of potential credit and
other collection issues, such as disputed invoices and pricing
discrepancies. However, depending on how such potential issues are
resolved, or if the financial condition of any of the Company’s customers was to
deteriorate and its ability to make required payments became impaired, increases
in these allowances may be required. The Company writes off the
accounts receivable balance from a customer and the related allowance
established when it believes it has exhausted all reasonable collection
efforts. As of November 30, 2009 and 2008, the Company had zero and
two customers that constituted 32% and 10%, respectively, of its accounts
receivable. For the years ended November 30, 2009 and 2008, one
customer accounted for 34% and 32% of the Company’s revenues and the Company has
recently lost this customer which will have a significant negative impact on the
Company’s operations.
Deferred
Finance Costs
Deferred
finance costs represent costs incurred in connection with securing financing and
are amortized over the loan term.
Earnings
(Loss) Per Share
Basic earnings (loss) per share is
computed by dividing net income (loss) by the weighted-average number of shares
outstanding. To the extent that stock options and warrants are
anti-dilutive, they are excluded from the calculation of diluted earnings (loss)
per share. Diluted earnings per share includes the dilutive effect of
stock options and warrants. For 2009 and 2008, the Company excluded
from its loss per share calculations potentially dilutive securities of
176,785,050 and 153,251,314, respectively, because their effect on loss per
share was anti-dilutive.
Cash
and Cash Equivalents
The Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents. The Company did not have any cash equivalents
during 2009 and 2008.
F-8
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
1.
|
Description of
Business and Summary of Accounting Principles
(Continued)
|
|
Restricted
Cash
|
|
Restricted
cash represented amounts held in an interest bearing account that were
subject to approval by the Company’s secured lender before the cash was
expended.
|
|
Foreign
Currency Translation
|
|
Assets
and liabilities of the Company’s foreign subsidiary are translated at
year-end exchange rates, and income and expenses are translated at average
exchange rates prevailing during the year with the resulting adjustments
accumulated in stockholders’
equity.
|
Impairment
of Long-Lived Assets
The
Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future forecasted net
undiscounted cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair values. For the years ended November 30, 2009 and 2008, the
Company incurred significant operating and cash flow losses. Combined
with a previous history of such losses, as of November 30, 2009 and 2008, the
Company evaluated whether the carrying amount of the long-lived assets of this
business was recoverable. At November 30, 2008, based upon an offer
to purchase such assets and the Company’s ability to utilize the assets as
collateral for additional borrowings, among other factors, the Company
determined that such assets were not impaired. At November 30, 2009,
based upon the inability to further utilize the assets as collateral for
additional borrowings and our long-term debt being callable by the lender, among
other factors, the Company determined its long-lived assets were impaired and
recorded an impairment loss of $784,913.
Use
of Estimates
In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. The
most significant estimates relate to the allowance for doubtful accounts
receivable, income tax valuation allowance, the warrant liability and
conclusions regarding the impairment of long-lived assets. On a
continual basis, management reviews its estimates, utilizing currently available
information, changes in facts and circumstances, historical experience and
reasonable assumptions. After such reviews, and if deemed
appropriate, those estimates are adjusted accordingly. Actual results
could differ from those estimates.
F-9
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
1.
|
Description of
Business and Summary of Accounting Principles
(Continued)
|
Advertising
Advertising
costs are expensed as incurred. There was no cost incurred in 2009
and $103,000 in 2008.
Accounting
for Derivative Instruments
The
Company accounts for derivative instruments under the FASB authoritative
guidance, which establishes accounting and reporting standards for derivative
instruments and hedging activities, including certain derivative instruments
imbedded in other financial instruments or contracts and requires recognition of
all derivatives on the balance sheet at fair value, regardless of the hedging
relationship designation. Accounting for the changes in the fair
value of the derivative instruments depends on whether the derivatives qualify
as hedge relationships and the types of the relationships designated are based
on the exposures hedged. Changes in the fair value of derivatives
designated as fair value hedges are recognized in earnings along with fair value
changes of the hedged item. Changes in the fair value of derivatives
designated as cash flow hedges are recorded in other comprehensive income (loss)
and are recognized in earnings when the hedged item affects
earnings. Changes in the fair value of derivative instruments which
are not designated as hedges are recognized in earnings as other income
(loss). At November 30, 2009 and 2008, the Company did not have any
derivative instruments that were designated as hedges.
Stock Based Compensation
|
The
Company issues stock and stock options to its employees, outside directors
and consultants pursuant to stockholder approved and non-approved stock
option programs.
|
Stock-based
compensation cost is measured at the grant date based on the fair value of the
award and is recognized as expense on a straight-line basis over the requisite
service period. For the years ended November 30, 2009 and 2008, the Company
recorded approximately $133,000 and $129,000 in employee stock-based
compensation expense and approximately $369,000 and $238,000 in consultant
compensation expense, which is included in selling, general and administrative
expenses. As of November 30, 2009 and 2008, there was approximately
$302,000 and $94,000, respectively, of unrecognized stock-compensation expense
for previously granted unvested options that will be recognized over a
three-year period.
The
Company’s 1995 Stock Option Plan (the “1995 Plan”) provides for the grant of up
to 3,400,000 incentive stock options, non-qualified stock options, tandem stock
appreciation rights, and stock appreciation rights of shares of common
stock. Under the 1995 Plan, incentive stock options may be granted at
no less than the fair market value of the Company’s stock on the date of grant,
and in the case of an optionee who owns directly or indirectly more than 10% of
the outstanding voting stock (“an Affilitate”), 110% of the market price on the
date of grant. As of November 30, 2009 and 2008, 165,000 and 310,000
grants for option shares were issued and unexercised. No additional
option grants under the 1995 Plan are available for future
issuance.
F-10
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
1.
|
Description of
Business and Summary of Accounting Principles
(Continued)
|
Stock Based Compensation
(Continued)
|
The
Company’s 2004 Equity Incentive Plan (the “2004 Plan”) provides for the
grant of up to 1,000,000 incentive stock options, non-qualified stock
options, tandem stock appreciation rights, and stock appreciation rights
of shares of common stock. Under the 2004 Plan, incentive stock
options may be granted at no less than the fair market value of the
Company’s stock on the date of grant, and in the case of an optionee who
owns directly or indirectly more than 10% of the outstanding voting stock
(“an Affiliate”), 110% of the market price on the date of
grant. As of November 30, 2009 and 2008, approximately 172,000
and 97,000 option shares remain unissued and are available for future
issuance under the 2004 Plan through April 8,
2014.
|
|
The
Company’s 2007 Equity Incentive Plan (the “2007 Plan”) provides for the
grant of up to 2,000,000 incentive stock options, non-qualified stock
options, tandem stock appreciation rights, and stock appreciation rights
of shares of common stock. Under the 2007 Plan, incentive stock
options may be granted at no less than the fair market value of the
Company’s stock on the date of grant, and in the case of an optionee who
owns directly or indirectly more than 10% of the outstanding voting stock
(“an Affiliate”), 110% of the market price on the date of
grant. As of November 30, 2009 and 2008, approximately
1,145,000 and 1,175,000 option shares remain unissued and are available
for future issuance under the 2007 Plan through April 2,
2017.
|
|
The
Company’s 2007 Contingent Stock Option Plan (the “Contingent Plan”)
provides for the grant of up to 7,893,506 contingent stock
options. Under the Contingent Plan, contingent stock options
may be granted at no less than the fair market value of the Company’s
stock on the date of grant, and in the case of an optionee who owns
directly or indirectly more than 10% of the outstanding voting stock (“an
Affiliate”), 110% of the market price on the date of grant. As
of November 30, 2009 and 2008, all options have been granted under this
plan. The options expire on November 19, 2012. These options
vest when the Company has generated, for three consecutive months,
positive cash flow from operations before interest, taxes, depreciation
and amortization expense. The Company has determined that the
performance condition is not probable of achievement, and accordingly, no
compensation cost has been recognized during the years ended November 30,
2009 and 2008. The Company will reassess at each reporting date
whether achievement of the performance condition is probable and would
begin recognizing compensation cost if and when achievement of the
performance condition becomes
probable.
|
|
The
Company’s 2009 Equity Incentive Plan (the “2009 Plan”) provides for the
grant of up to 5,000,000 incentive stock options, non-qualified stock
options, tandem stock appreciation rights, and stock appreciation rights
of shares of common stock. Under the 2009 Plan, incentive stock
options may be granted at no less than the fair market value of the
Company’s stock on the date of grant, and in the case of an optionee who
owns directly or indirectly more than 10% of the outstanding voting stock
(“an Affiliate”), 110% of the market price on the date of
grant. As of November 30, 2009, approximately 1,389,000 option
shares remain unissued and are available for future issuance under the
2009 Plan through February 27,
2019.
|
F-11
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
1.
|
Description of
Business and Summary of Accounting Principles
(Continued)
|
Stock Based Compensation
(Continued)
|
The
Company’s Non-employee Director Stock Option Plan provides for the grant
of options to purchase 10,000 shares of the Company’s common stock to each
non-employee director on the first business day following each annual
meeting of the shareholders of the Company. Under this Plan,
options may be granted at no less than the fair market value of the
Company’s common stock on the date of
grant.
|
|
For
disclosure purposes, the fair value of each stock option grant is
estimated on the date of grant using the Black Scholes option-pricing
model with the following weighted average assumptions used for stock
options granted in 2009 and 2008, respectively: annual dividends of $-0-
for both years, expected volatility of 178% and 264%, risk-free interest
rate of 1.5% and 2.1%, and expected life of up to five years, depending on
the individual grant. The weighted-average fair value of stock
options granted in 2009 and 2008 was $.18 and $.24,
respectively.
|
As the
stock-based compensation expense recognized on the consolidated statements of
operations is based on awards ultimately expected to vest, such amount has been
reduced for estimated forfeitures. ASC 718, "Compensation—Stock Compensation"
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Forfeitures were estimated based on the Company's historical
experience.
With the
above model as the primary valuation method, the total value of stock options
granted in 2009 and 2008 was approximately $204,000 and $148,000, respectively,
which would be amortized ratably over the related vesting periods, which range
from immediate vesting to five years.
|
Recent
Accounting Pronouncements
|
In June
2009, the FASB issued Statement of Financial Accounting Standard (SFAS)
No. 168, The FASB Accounting Standard Codification and the Hierarchy of the
Generally Accepted Accounting Principles — a replacement of SFAS No. 162
(SFAS 168), now Accounting Standards Codification (ASC) 105, to become the
source of authoritative U.S. generally accepted accounting principles (“GAAP”)
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. The FASB will no longer issue new standards in the form of
Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts;
instead the FASB will issue Accounting Standards Updates. Accounting Standards
Updates will not be authoritative in their own right as they will only serve to
update the Codification. These changes and the Codification itself do not change
GAAP. FASB ASC 105-10 is effective for financial statements issued for interim
and annual periods ending after September 15, 2009. As such, the
Company is required to adopt this standard in the current
period. Adoption of FASB ASC 105-10 did not have a significant effect
on the Company’s consolidated financial statements.
F-12
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
1.
|
Description of
Business and Summary of Accounting Principles
(Continued)
|
Recent
Accounting Pronouncements (Continued)
In
May 2009, the FASB issued Statement No. 165, Subsequent Events (“FAS
165”), now ASC 855. The provisions of ASC 855 set forth the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may have occurred for potential recognition or
disclosure in the financial statements, the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. The
provisions of ASC 855 were applied prospectively and did not have a material
impact on the Company’s consolidated financial statements. The
Company has evaluated subsequent events for recognition or disclosure through
the date these financial statements were issued, March 15, 2010.
In
February 2008, the FASB issued a final Staff Position to allow a one-year
deferral of adoption of ASC 820 for nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. The ASC 820 excludes FASB ASC 840
Leases and its related interpretive accounting pronouncements that address
leasing transactions. We adopted ASC 820 effective December 1, 2008
for nonrecurring fair value measurements of nonfinancial assets and
liabilities.
In August
2009, the FASB issued ASU 2009-05, “Fair Value Measurements and
Disclosures (Topic 820) – Measuring Liabilities at Fair Value,” which
makes amendments to Subtopic 820-10, “Fair Value Measurements and
Disclosures – Overall” for the fair value measurement of liabilities and
provides clarification that in circumstances in which a quoted price in an
active market for the identical liability. The Company adopted this
guidance effective September 1, 2009.
The FASB
issued Accounting Standards Update No. 2010-06 “Fair Value Measurements and
Disclosures (Topic 820) – Improving Disclosures about Fair Value
Instruments” which, among other things, expands disclosures on recurring
fair value measurements, including activity, transfers and reconciliation of
asset and liability classes, using Levels 1, 2 and 3 as defined. The
guidance also clarifies existing disclosures on levels of disaggregation between
such classes and about input and valuation techniques used to measure recurring
and nonrecurring Level 2 or Level 3 fair value measurements. The
guidance is effective for fiscal interim or annual reporting periods beginning
after December 15, 2009. The Company is currently assessing the
impact, if any, adoption may have on its financial statements or
disclosures.
F-13
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
2.
|
Going Concern Matters
and Realization of Assets
|
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the ordinary course of business. However, the Company has
sustained substantial losses from its continuing operations in recent years and
has negative working capital and a stockholders’ equity
deficiency. In addition, the Company is experiencing difficulty in
generating sufficient cash flow to meet its obligations as they become due and
sustain its operations. Further, the Company is having difficulty in
raising capital and borrowing funds and the Company’s long-term debt described
in Note 5 is callable upon demand by the lender. The Company expects
its operating losses and cash deficits from operations to continue through
fiscal 2010. The Company believes that its existing cash resources are not
sufficient to fund its continuing operating losses, capital expenditures, lease
and debt payments and working capital requirements. As a result, the
Company will need to raise additional cash through some combination of
borrowings, sale of equity or debt securities or sale of assets to enable it to
meet its cash requirements.
The
Company may not be able to raise sufficient additional debt, equity or other
cash on acceptable terms, if at all. Failure to generate sufficient
revenues, achieve certain other business plan objectives or raise additional
funds could have a material adverse effect on the Company’s results of
operations, cash flows and financial position, including its ability to continue
as a going concern, and may require it to significantly reduce, reorganize,
discontinue or shut down its operations.
In view
of the matters described above, recoverability of a major portion of the
recorded asset amounts shown in the accompanying balance sheet is dependent upon
continued operations of the Company which, in turn, is dependent upon the
Company’s ability to meet its financing requirements on a continuing basis, and
to succeed in its future operations. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue in its
existence. Management’s plans include:
1.
Seeking to raise $300,000 in new equity capital in the near term from a specific
identified investor group, and additional equity later in the
year. If the Company can accomplish the $300,000 capital raise,
approximately 159 million outstanding warrants with the Company’s principal
lender will be retired, and management believes the improved capital structure
of the business will help to attract additional capital as new products are
launched.
2.
Continuing to develop new uses for the Company’s Mobile VoIP
product. Management plans to increase sales by increasing the number
of devices that its product runs on.
F-14
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
2.
|
Going Concern Matters
and Realization of Assets
(Continued)
|
There can
be no assurance that the Company will be able to achieve its business plan
objectives, raise any capital, fund or that it will achieve or maintain cash
flow positive operating results. If the Company is unable to generate
adequate funds from its operations or raise additional funds, it may not be able
to repay its existing debt, continue to operate its network, respond to
competitive pressures or fund its operations. As a result, the
Company may be required to significantly reduce, reorganize, discontinue or shut
down its operations. The Company’s financial statements do not
include any adjustments that might result from this uncertainty.
3.
|
Property and
Equipment
|
2009
|
2008
|
|||||||
Computer
equipment and software
|
$ | 1,445,861 | $ | 1,332,560 | ||||
Furniture
and fixtures
|
- | 43,646 | ||||||
Leasehold
Improvements
|
- | 2,713 | ||||||
1,445,861 | 1,378,919 | |||||||
Less
accumulated depreciation and amortization
|
1,445,861 | 768,313 | ||||||
$ | - | $ | 610,606 |
At
November 30, 2009, the Company deemed all of its property and equipment impaired
and recorded an impairment loss of $535,924.
4.
|
Deferred Finance
Costs
|
2009
|
2008
|
|||||||
Gross
asset
|
$ | 1,192,041 | $ | 1,192,041 | ||||
Less
accumulated amortization
|
1,192,041 | 644,101 | ||||||
$ | - | $ | 547,940 |
|
Amortization
expense of deferred finance costs for the years ended November 30, 2009
and 2008 was $298,951 and $269,468. At November 30, 2009, the
Company deemed the remaining book value of deferred finance costs to be
impaired since the related debt is callable by its lender and recorded an
impairment loss of $248,989.
|
F-15
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
5.
|
Long-Term Debt and
Capital Lease Obligations
|
|
The
following table summarizes components of long-term debt and capital lease
obligations as of November 30,
2009:
|
2009
|
2008
|
|||||||
Term
note dated November 30, 2005
|
$ | 2,148,125 | $ | 1,670,011 | ||||
Term
note dated May 31, 2006
|
1,559,748 | 1,051,793 | ||||||
Term
note dated September 28, 2007
|
4,697,200 | 182,194 | ||||||
Term
note dated May 28, 2008
|
1,864,895 | 843,774 | ||||||
Term
note dated October 29, 2008
|
1,232,212 | 483,610 | ||||||
Term
note date February 15, 2009
|
672,671 | - | ||||||
Demand
noted dated October 6, 2009
|
10,124 | - | ||||||
Demand
noted dated November, 2009
|
50,190 | - | ||||||
Capital
lease obligations
|
142,087 | 203,536 | ||||||
12,377,252 | 4,434,918 | |||||||
Less
current portion
|
12,377,252 | 93,549 | ||||||
Total
|
$ | - | $ | 4,341,369 |
|
The
Company is in default on some of its capital lease obligations and has
recorded such obligations as current
obligations.
|
|
On
February 8, 2005, the Company entered into a secured financing arrangement
with a lender. The financing consisted of a $2 million secured convertible
term note (the “February 2005 Financing”) and was paid in full by the sale
of two wholly owned subsidiaries, New Rochelle Telephone Corp. and
Telecarrier Services, Inc. effective June 1,
2007.
|
|
In
connection with this financing, the Company issued the lender warrants to
purchase up to 793,650 shares of common stock. The warrants are
exercisable through February 8, 2012 as follows: 264,550 shares at $0.72
per share; 264,550 shares at $0.79 per share; and the balance at $0.95 per
share. The underlying contracts provide for a potential cash
settlement and accordingly, the warrants were classified as
debt. The Company initially recorded discounts aggregating
approximately $1,316,000, of which, approximately $504,000 represented the
value of the warrants using the Black-Scholes method with an interest rate
of 3.1%, volatility of 158%, zero dividends and expected term of seven
years; approximately $706,000 represented the beneficial conversion
feature inherent in the instrument; and approximately $106,000 represented
debt issue costs paid to the lender. Such discounts were being
amortized using the effective interest method over the term of the related
debt. Although the stated interest rate of the convertible note was the
prime rate plus 3%, as a result of the aforementioned discounts, the
effective interest rate of the note, as modified, approximated 40% per
annum. The Company incurred fees to third parties in connection with this
financing aggregating approximately $367,000, including warrants to
purchase up to 253,968 shares of common stock. These warrants were valued
at $150,000 using the Black-Scholes method using the same assumptions
described above and are included in equity. These warrants were
exercisable through February 8, 2009 at $.63 per share and expired
unexercised.
|
F-16
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
5.
|
Long-Term Debt and
Capital Lease Obligations
|
On
November 30, 2005, the Company entered into a second financing arrangement with
the lender (the “November 2005 Financing”). This financing consisted of a $2
million secured term note that matures as modified on September 30,
2010. In connection with this financing, the Company issued the
lender warrants to purchase up to 1,683,928 shares of the Company’s common
stock. The warrants are exercisable at $.10 per share through
November 30, 2020. The underlying contracts provide for a potential cash
settlement, and accordingly, the warrants have been classified as
debt. The Company initially recorded discounts aggregating
approximately $1,093,000, of which, approximately $740,000 represented the value
of the warrants using the Black-Scholes method with an interest rate of 4.3%,
volatility of 152%, zero dividends and expected term of fifteen years;
approximately $268,000 represented the beneficial conversion feature inherent in
the instrument; and approximately $85,000 represented debt issue costs paid to
the lender. Such discounts are being amortized using the effective
interest method over the term of the related debt. Although the stated interest
rate of the note is the prime rate plus 2%, as a result of the aforementioned
discounts, the effective interest rate of the note as modified amounted to
approximately 18% per annum. The Company incurred fees to third parties in
connection with this financing aggregating approximately $273,000, including
warrants to purchase up to 262,296 shares of common stock. These warrants were
valued at approximately $99,000 using the Black-Scholes method using the same
assumptions described above and are included in equity. These
warrants were exercisable through November 30, 2009 at $.63 per share and
expired unexercised. As modified, interest only was payable
monthly at the prime rate plus 2%, and the entire principal is payable on
September 30, 2010.
|
On
May 31, 2006, the Company entered into a third financing arrangement with
the lender (the “May 2006 Financing”). This financing consisted
of a secured term note up to a maximum principal amount of $1,700,000 (the
“Note”), an amended and restated secured term note that amended and
restated the February 2005 Financing (“Amended Note 1”), an amended and
restated secured term note that amended and restated the November 30, 2005
Financing (“Amended Note 2”) and a common stock purchase warrant (the
“Warrant”) that entitles the lender to purchase up to 3,359,856 shares of
the Company’s common stock, par value $.10 per share. The
Warrant grants the lender the right to purchase for cash up to 3,359,856
shares of common stock at an exercise price of $0.10 per
share. The Warrant expires on May 31, 2020. The
Warrant does not contain registration rights and requires the lender to
limit the sale on any trading day of any shares of common stock issued
upon the exercise of the Warrant to a maximum of ten percent (10%) of the
aggregate number of shares of common stock traded on such trading
day. The value of the Warrant was $1,173,762 determined
using the Black-Scholes method with an interest rate of 4.8%, volatility
of 152%, zero dividends and expected term of fourteen
years. The Warrant provides for a potential cash settlement,
and accordingly, is classified as
debt.
|
|
The
value of the Warrant attributable to this financing amounted to $586,881
and is accounted for as a debt discount. Debt issue costs paid
to the lender amounted to $59,400. These discounts are being
amortized using the effective interest method over the term of the related
debt. Although the stated interest rate of the note is the prime rate plus
2%, as a result of the aforementioned discounts, the effective interest
rate is approximately 27% per annum. The Company incurred fees to third
parties in connection with this financing aggregating approximately
$244,000, including warrants to purchase up to 548,571 shares of common
stock. These warrants were valued at approximately $108,000 using the
Black-Scholes method using the same assumptions described above and are
included in equity. As modified, interest only was payable
monthly at the prime rate plus 2%, and the entire principal is payable on
September 30, 2010.
|
F-17
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
5.
|
Long-Term Debt and
Capital Lease Obligations
(Continued)
|
|
On
September 28, 2007, the Company entered into a fourth financing
arrangement with the lender and an affiliate of the lender (the “September
2007 Financing”). This financing consisted of notes totaling $4 million
that mature on September 30, 2010. In connection with this
financing, the Company issued the lenders warrants to purchase up to
126,296,091 shares of the Company’s common stock. The warrants
were exercisable at $.10 per share through September 28, 2017. The
underlying contracts provide for a potential cash settlement, and
accordingly, the warrants have been classified as debt. The
Company initially recorded discounts aggregating approximately $3,979,000,
of which, approximately $3,839,000 represented the value of the warrants
using the Black-Scholes method with an interest rate of 4.6%, volatility
of 100%, zero dividends and expected term of ten years and a dilution
factor of 83.1%; and approximately $140,000 represented debt issue costs
paid to the lender. Such discounts are being amortized using
the effective interest method over the term of the related debt. Although
the stated interest rate of the note is the prime rate plus 2%, subject to
a minimum of 9.75% per annum, as a result of the aforementioned discounts,
the effective interest rate of the note amounted to approximately 189% per
annum. The Company incurred fees to third parties in connection with this
financing aggregating approximately
$70,000.
|
On May
28, 2008, the Company entered into a fifth financing arrangement with the lender
and an affiliate of the lender (the “May 2008 Financing”). This financing
consisted of notes totaling $1.4 million that mature on September 28,
2010. In connection with this financing, the Company extended all
warrants issued to the lenders in the September 2007 Financing from ten-year
term to a fifteen year-term. The warrants are to purchase up to
126,296,091 shares of the Company’s common stock. The warrants are
exercisable at $.10 per share through September 28, 2022. The underlying
contracts provide for a potential cash settlement, and accordingly, the warrants
have been classified as debt. In conjunction with the change in the
life of the warrants, and the elimination of clawback features in a portion of
the warrants, the Company initially recorded discounts aggregating approximately
$731,000, of which, approximately $682,000 represented the increase in the value
of the warrants using the Black-Scholes method with an interest rate of 3.8%,
volatility of 180%, zero dividends and expected term of 14.3 years and a
dilution factor of 83%; and approximately $49,000 represented debt issue costs
paid to the lender. Such discounts are being amortized using the
effective interest method over the term of the related debt. Although the stated
interest rate of the note is 20%, as a result of the aforementioned discounts,
the effective interest rate of the note amounted to approximately 57% per annum.
The Company incurred fees to third parties in connection with this financing
aggregating approximately $65,000. In conjunction with the May 2008
Financing, the Company and its lender amended the three existing term notes such
that all interest payments due on the term notes until May 31, 2009 would be
accrued and added to the principal balances of the notes.
On
October 15, 2008, the Company entered into a sixth financing arrangement with
the lender and an affiliate of the lender (the “October 2008 Financing”). This
financing consisted of a note totaling $500,000 that matures on September 28,
2010. Debt issue costs of $17,000 were paid to the
lender. Interest is (i) calculated on the basis of a 360 day year,
and (ii) payable monthly, in arrears, commencing on November 1, 2008, and on the
first business day of each succeeding month thereafter through and including the
maturity date. Interest accrues at a rate of 15% per
annum. There are no prepayment penalties on the note.
F-18
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
5.
|
Long-Term Debt and
Capital Lease Obligations
(Continued)
|
On
December 12, 2008, the Company amended the October 2008 Financing and borrowed
an additional $600,000 from its lender. This financing consisted of
amending the $500,000 note to a $1,100,000 note that matures on September 28,
2010. Interest is (i) calculated on the basis of a 360 day year, and
(ii) payable monthly, in arrears, commencing on November 1, 2008, and on the
first business day of each succeeding month thereafter through and including the
maturity date. Interest accrues at a rate of 15% per
annum. There are no prepayment penalties on the note.
On
February 18, 2009, the Company entered into a seventh financing arrangement with
the lender (the “February 2009 Financing”). This financing consisted of a
$600,000 secured term note that matures on September 30, 2010. In
connection with this financing, the Company issued the lender warrants to
purchase up to 26,500,000 shares of the Company’s common stock. The
warrants are exercisable at $.10 per share through February 18, 2019. The
underlying contracts provide for a potential cash settlement, and accordingly,
the warrants have been classified as debt. The Company initially
recorded discounts aggregating approximately $430,000 of which, approximately
$409,000 represented the value of the warrants using the Black-Scholes method
with an interest rate of 2.30%, volatility of 292%, zero dividends and expected
term of ten years, and approximately $21,000 represented debt issue costs paid
to the lender. Such discounts are being amortized using the effective
interest method over the term of the related debt. Although the stated interest
rate of the note is 20%, as a result of the aforementioned discounts, the
effective interest rate of the note as modified amounted to approximately 119%
per annum.
On
October 6, 2009 and November 6, 2009, the Company signed demand notes of $10,000
and $50,000 (the “Demand Notes”), respectively, with its
lender. The stated interest rate of the Demand Notes is the
prime rate plus 2%.
Similar
to the other financings entered into with its lender, the February 2009
Financing and the Demand Notes are secured by a blanket lien on substantially
all of the Company’s assets pursuant to a Master Security
Agreement.
The
Company did not make the required principal or interest payments on of the above
notes for substantially the entire year ended November 30, 2009. The
Company’s lender has not demanded repayment, and the entire amount outstanding
is callable by the lender at any time. Since the debt is callable at
the option of the lender, amortization of the remaining debt discount of
$4,256,477 was recorded during the year ended November 30, 2009, so that the
carrying amount of the debt is equal to the face value of the notes plus accrued
interest.
F-19
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
5.
|
Long-Term Debt and
Capital Lease Obligations
(Continued)
|
The
Company determined that the warrants issued to the lender in connection with all
financings represented derivatives. Accordingly, the Company recorded the fair
value of these derivatives as a debt discount and a liability on its
consolidated balance sheet. The discounts are being amortized to interest
expense using the “Effective Interest Method” of amortization over the term of
the related indebtedness. For the year ended November 30, 2008, the
value of the derivatives was increased by $191,126 to the then current fair
value of $5,621,070 with a corresponding charge to other income. For
the year ended November 30, 2009, due to a significant drop in the price of the
Company’s common stock, a lack of trading in the Company’s common stock, the
uncertainty about the Company’s ability to continue in business, its inability
to obtain additional financing, its continued losses and financial position and
other factors, the Company determined the fair value of all warrants issued to
its lender was zero. Fair value for this purpose is the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. At
November 30, 2009, the warrant liability recorded on the Company’s books was
decreased by $6,030,021 to $0 with a corresponding credit to other
income.
As further evidence of the lack of
market value of the warrants, on February 11, 2010, the Company and its lender
signed a warrant cancellation agreement wherein the lender agreed to cancel for
no monetary consideration all of the existing warrants they hold to purchase in
the aggregate 159,052,573 shares of common stock of the Company when the Company
obtains equity financing of $300,000 from an identified investment
group. Under the terms of the agreement, the lender agreed to execute
and deliver a cancellation of warrant notice to the Company upon receipt of
satisfactory evidence that the Company received incremental equity of at least
$50,000. For every $50,000 in equity the Company receives, the lender
has agreed to cancel warrants to purchase an aggregate of 25 million
shares. Upon receipt of $300,000 in total, all of the warrants in the
possession of the lender will be cancelled.
In connection with the financings, the
Company has agreed, so long as 25% of the principal amount of the financings are
outstanding, to certain restrictive covenants, including, among others, that the
Company will not declare or pay any dividends, issue any preferred stock that is
subject to mandatory redemption prior to the one year anniversary of the
maturity date as defined in the agreement, redeem any of its preferred stock or
other equity interests, dissolve, liquidate or merge with any other party
unless, in the case of a merger, the Company is the surviving entity, materially
alter or change the scope of the Company’s business incur any indebtedness
except as defined in the agreement, or assume, guarantee, endorse or otherwise
become directly or contingently liable in connection with any other party’s
obligations.
To secure
the payment of all obligations to the lender, including warrants, the Company
entered into a Master Security Agreement that assigns and grants to the lender a
continuing security interest and first lien on all of the assets of the Company
and its subsidiaries.
F-20
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
6.
|
Fair Value
Measurements
|
The
Company uses fair value measurements to record fair value adjustments to certain
assets and liabilities and to determine fair value disclosures of financial
instruments on a recurring basis.
Fair Value Hierarchy
The Fair
Value Measurements Topic of the FASB Accounting Standards Codification
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to measurements
involving significant unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy are as follows:
|
Level
1
|
inputs
are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access at the measurement
date.
|
|
Level
2
|
inputs
are inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly.
|
|
Level
3
|
inputs
are unobservable inputs for the asset or
liability.
|
Determination of Fair
Value
Under the
Fair Value Measurements Topic of the FASB Accounting Standards Codification, the
Company bases its fair value on the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. It is the Company’s policy to maximize the
use of observable inputs and minimize the use of unobservable inputs when
developing fair value measurements, in accordance with the fair value hierarchy.
Fair value measurements for assets and liabilities where there exists limited or
no observable market data and, therefore, are based primarily upon management’s
own estimates, are often calculated based on current pricing policy, the
economic and competitive environment, the characteristics of the asset or
liability and other such factors. Therefore, the results cannot be determined
with precision and may not be realized in an actual sale or immediate settlement
of the asset or liability. Additionally, there may be inherent weaknesses in any
calculation technique, and changes in the underlying assumptions used, including
discount rates and estimates of future cash flows, that could significantly
affect the results of current or future value.
Following
is a description of valuation methodologies used for assets and liabilities
recorded at fair value and for estimating fair value for financial instruments
not recorded at fair value (disclosures required by the Fair Value Measurements
Topic of the FASB Accounting Standards Codification).
Cash
and cash equivalents, accounts receivable, accounts payable, capital lease
obligations
The
carrying amounts approximate fair value because of the short maturity of these
instruments.
F-21
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
6.
|
Fair Value
Measurements (Continued)
|
Long-term debt
At
November 30, 2008 long-term debt was carried at amortized cost. At November 30,
2009, long-term debt was carried at its face value plus accrued interest due to
the fact that the debt is fully callable by the lender and as such the remaining
unamortized debt discount was fully expensed as interest. Based on
the financial condition of the Company it is impracticable for the Company to
estimate the fair value of the long-term debt.
Warrant Liabilities
At
November 30, 2008, management determined the fair value of the Company’s warrant
liability using an externally developed model, which was based in part on market
observable inputs including the current trade price of the Company’s stock,
accordingly, classified the fair value measurement of the warrant liability at
Level 2.
At
November 30, 2009, management determined that such model was no longer
appropriate due to the circumstances surrounding the Company’s financial
condition. The Company, based on the various factors listed in Note
5, determined that the value of the warrant liability was $0 at November 30,
2009. As many of the factors used to determine the fair value are
based on unobservable inputs, the Company accordingly, classified the fair value
measurement of the warrant liability at Level 3 at November 30,
2009.
The Company has no instruments with
significant off balance sheet risk.
Liabilities Measured and Recognized at
Fair Value on a Recurring Basis
The table
below presents the amounts of liabilities measured at fair value on a recurring
basis as of November 30, 2008 and 2009:
Total
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
November 30,
2008
|
||||||||||||||||
Warrant
liabilities
|
$ | 5,621,070 | - | $ | 5,621,070 | - | ||||||||||
November
30, 2009
|
||||||||||||||||
Warrant
liabilities
|
- | - | - | - |
Changes in Level 3 Instruments for the
Year Ended November 30, 2009
The table below summarizes the activity
for liabilities measured at fair value on a recurring basis using significant
Level 3 inputs for the year ended November 30, 2009:
December
1, 2009
|
$ | - | ||
Net
realized/unrealized gains included in income
|
(6,030,021 | ) | ||
Purchases,
sales, issuances and settlements
|
408,951 | |||
Transfers
in and/or out of Level 3
|
5,621,070 | |||
November
30, 2009
|
$ | - |
F-22
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
7.
|
Income
Taxes
|
|
At
November 30, 2009, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $32,400,000 expiring in the
years 2009 through 2029. There is an annual limitation of
approximately $187,000 on the utilization of approximately $1,800,000 of
such net operating loss carryforwards under the provisions of Internal
Revenue Code Section 382.
|
|
Deferred
income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
purposes. Significant components of the Company’s deferred tax
assets and liabilities as of November 30, 2009 were as
follows:
|
Deferred
tax assets, net:
|
||||
Net operating loss
carryforwards
|
$ | 11,000,000 | ||
Allowance for doubtful
accounts
|
70,000 | |||
Stock
based compensation
|
150,000 | |||
Accrued pension
|
430,000 | |||
Property, plant and
equipment
|
110,000 | |||
Deferred finance
costs
|
40,000 | |||
Interest
|
550,000 | |||
Other
|
150,000 | |||
12,500,000 | ||||
Valuation
allowance
|
(12,500,000 | ) | ||
Net
deferred assets
|
$ | - |
The
valuation allowance increased to $12,500,000 at November 30, 2009 from
$10,000,000 at November 30, 2008.
The
following is a reconciliation of the tax provisions for the years ended November
30, 2009 and 2008 with the statutory Federal income tax rates:
Percentage
of Pre-Tax Income
|
||||||||
2009
|
2008
|
|||||||
Statutory
Federal income tax rate
|
(34.0 | )% | (34.0 | )% | ||||
Loss
generating no tax benefit
|
34.0 | 33.6 | ||||||
Permanent
differences
|
- | .4 | ||||||
- | - |
The
Company did not have any material unrecognized tax benefits as of November
30, 2009 and 2008. The Company does not expect the unrecognized tax benefits to
significantly increase or decrease within the next twelve months. The
Company recorded no interest and penalties relating to unrecognized tax benefits
as of and during the years ended November 30, 2009 and 2008. The Company is
subject to U.S. federal income tax, as well as taxes by various state
jurisdictions. The Company is currently open to audit under the
statute of limitations by the federal and state jurisdictions for the years
ending November 30, 2006 through 2008.
F-23
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
8.
|
Pension
Plans
|
The
Company sponsors a defined benefit plan covering approximately 40 former
employees. The Company’s funding policy with respect to the defined
benefit plan is to contribute annually not less than the minimum required by
applicable law and regulation to cover the normal cost and to fund supplemental
costs, if any, from the date each supplemental cost was
incurred. Contributions are intended to provide not only for benefits
attributed to service to date, but also for those expected to be earned in the
future. Plan assets consist primarily of investments in conservative
equity and debt securities. The Company uses a November 30
measurement date for its pension plan.
Effective
June 30, 1995, the plan was frozen, ceasing all benefit accruals and resulting
in a plan curtailment. As a result of the curtailment, it has been
the Company’s policy to recognize the unfunded status of the Plan as of the end
of the fiscal year with a corresponding charge or credit to earnings for the
change in the unfunded liability. Pension expense amounted to
$426,553 and $206,727 for the years ended November 30, 2009 and
2008.
Obligations
and Funded Status at November 30:
Pension
Benefits
|
2009
|
2008
|
||||||
Change
in benefit obligation:
|
||||||||
Benefit obligation at
beginning of year
|
$ | (990,846 | ) | $ | (1,140,142 | ) | ||
Interest cost
|
(75,983 | ) | (71,279 | ) | ||||
Actuarial gain
(loss)
|
(324,836 | ) | 163,429 | |||||
Benefits paid
|
46,053 | 57,146 | ||||||
Benefit obligation at end of
year
|
$ | (1,345,612 | ) | $ | (990,846 | ) | ||
Change
in plan assets:
|
||||||||
Fair
value of plan assets at beginning
of year
|
$ | 108,514 | $ | 362,892 | ||||
Actual return on plan
assets
|
(25,734 | ) | (298,877 | ) | ||||
Employer
contribution
|
42,000 | 101,645 | ||||||
Benefits paid
|
(46,053 | ) | (57,146 | ) | ||||
Fair value of plan assets at
end of year
|
$ | 78,727 | $ | 108,514 |
Funded
status
|
$ | (1,266,885 | ) | $ | (882,332 | ) | ||
Net
amount recognized
|
$ | (1,266,885 | ) | $ | (882,332 | ) |
Amounts
recognized in the statement of financial position consist of:
2009
|
2008
|
|||||||
Accrued benefit
cost
|
$ | (1,266,885 | ) | $ | (882,332 | ) | ||
Net amount
recognized
|
$ | (1,266,885 | ) | $ | (882,332 | ) |
F-24
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
8.
|
Pension Plans
(Continued)
|
The
accumulated benefit obligation for the Company’s defined benefit pension plan
was $1,345,612 and $990,846 at November 30, 2009 and 2008,
respectively.
Information required for pension plan
with an accumulated benefit obligation in excess of plan assets:
November
30
|
||||||||
2009
|
2008
|
|||||||
Projected
benefit obligation
|
$ | (1,345,612 | ) | $ | (990,846 | ) | ||
Accumulated
benefit obligation
|
(1,345,612 | ) | (990,846 | ) | ||||
Fair
value of plan assets
|
78,727 | 108,514 | ||||||
Components
of net periodic benefit cost:
|
2009
|
2008
|
|||||||
Interest
cost
|
$ | 75,983 | $ | 71,279 | ||||
Expected
return on plan assets
|
(8,410 | ) | (29,122 | ) | ||||
Amortization
of net loss
|
42,924 | 37,311 | ||||||
Net
periodic benefit cost
|
$ | 110,497 | $ | 79,468 |
Assumptions
|
||||||||
Weighted-average assumptions
used
to determine net periodic
benefit
cost as of November
30:
|
||||||||
2009
|
2008 | |||||||
Discount rate
|
5.58 | % | 7.63 | % | ||||
Expected long-term return on
plan assets
|
8.00 | % | 8.00 | % |
The
expected return on Plan assets should remain constant from year to year since
the long-term expectation should not change significantly based on a single
year’s experience. A rate of 8% was adopted for this
purpose.
F-25
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
8.
|
Pension Plans
(Continued)
|
Plan
Assets
The
Company’s pension plan weighted-average asset allocations at November 30, 2009
and 2008, by asset category are as follows:
November
30
|
||||||||
2009
|
2008
|
|||||||
Asset
Category
|
||||||||
Equity
securities
|
7.0 | % | 34.7 | % | ||||
Other – cash
|
93.0 | % | 65.3 | % | ||||
Total
|
100.0 | % | 100.0 | % |
The
current investment policy for pension plan assets is to reduce exposure to
equity market risks. The current strategy for Plan assets is to
invest in conservative equity securities and to hold cash until the turbulence
in the equity markets has diminished.
Equity
securities include the Company’s common stock in the amounts of approximately
$5,779 and $-0- (7.3% of plan assets) at November 30, 2009 and
2008.
Cash
flows – Contributions
The
Company does not expect to make the required quarterly contributions to its
defined benefit plan in fiscal 2010 and plans to report to the Pension Benefit
Guarantee Corporation that it was unable to pay all the required quarterly
contributions in fiscal 2009.
Estimated
Future Benefit Payments
The
following pension benefit payments are expected to be paid:
Years
ended
November
30,
|
||||
2010
|
$ | 52,082 | ||
2011
|
51,274 | |||
2012
|
51,006 | |||
2013
|
59,936 | |||
2014
|
69,621 | |||
2015-2019
|
456,900 | |||
$ | 740,819 |
Defined
Contribution Plan
The
Company has a 401(k) profit sharing plan for the benefit of all eligible
employees, as defined. The plan provides for voluntary contributions
not to exceed the statutory limitation provided by the Internal Revenue
Code. The Company may make discretionary
contributions. There were no contributions made for the years ended
November 30, 2009 and 2008.
F-26
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
9.
|
Commitments and
Contingencies
|
Operating
Leases
The
Company leases facilities under noncancelable operating lease agreements that
expire through 2010.
Rent
expense was approximately $147,000 and $149,000 in fiscal 2009 and 2008,
respectively. In addition to the annual rent, the Company pays real
estate taxes, insurance and other occupancy costs on its leased
facilities.
Capital
Lease Obligations
The
Company leases certain equipment under capital leases with lease terms through
2011. Obligations under capital leases have been recorded in the
accompanying financial statements at the present value of future minimum lease
payments, discounted at interest rates ranging from 11.7% to 25.4% (see Note
5).
Litigation
The
Company is subject to legal proceedings and claims that arise in the ordinary
course of its business. In the opinion of management, the amount of
ultimate liability, if any, is not likely to have a material effect on the
financial condition, results of operations or liquidity of the
Company. However, as the outcome of litigation or legal claims is
difficult to predict, significant changes in the estimated exposures could
occur.
In 2008,
the Company provided an international vendor with a $300,000 deposit as part of
an agreement to supply the Company with favorable international calling rates.
The Company is no longer doing business with this vendor. To
facilitate the transaction and to provide the Company with additional assurance
that the deposit would be returned, the agreement was signed by a New York
investment banking firm and included a limited personal guarantee from a
principal of that firm. After requesting that our deposit be
returned, and without success, the Company commenced an action against the
investment banking firm and the principal for $300,000 plus other associated
costs. The Company filed a claim for breach of contract and related
claims for fraud and conversion. The Company and its legal counsel
believe that it will obtain a favorable outcome in the form of a judgment
against the investment banking firm and the individual and the Company plans to
continue to vigorously pursue the matter in the courts. However, the
Company is concerned that the defendants have financial troubles and may have
difficulty in paying any judgment that is rendered. Accordingly, the
Company has recorded a $300,000 reserve on its books.
10.
|
Stockholders’
Equity
|
The
Company is authorized to issue 1,000,000 shares of preferred stock, par value
$.10 per share, with rights and privileges to be determined by the Board of
Directors. The Company has 250,000,000 authorized shares of its
common stock. The authorized shares were increased by a shareholder
vote on May 13, 2009 to accommodate the Company’s lender, who holds warrants
that are exercisable for 159,052,573 shares of common stock. The
lender has signed an agreement with the Company that it will cancel all
159,052,573 warrants if the Company raises additional equity of
$300,000. As of the date of this Report, all of the lender’s warrants
are outstanding.
F-27
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
10.
|
Stockholders’ Equity
(Continued)
|
On May
13, 2009, the shareholders of the Company approved a proposed amendment to the
Certificate of Incorporation of the Company to effect a reverse split of the
Company’s common stock and authorized the Board of Directors (“Board”) to file
the amendment at any time prior to the next annual meeting. On
February 4, 2010, the Board authorized a reverse split of the common stock on a
1-for-10 basis, whereby the Company shall issue to each of its stockholders one
share of common stock for every 10 shares of common stock held by such
stockholder, as it was a requirement of the investors who are seeking to inject
new equity of $300,000. As of March 15, 2010, the date of the reverse
split has not been determined.
The
following is a summary of outstanding options:
Number
of
Shares
|
Exercise
Price
Per
Share
|
Weighted-Average
Exercise
Price
|
||||||||||
Outstanding
December 1, 2007
|
11,806,506 | $0.10 - $0.58 | $ | 0.21 | ||||||||
Granted
during year ended November
30, 2008
|
10,673,182 | $0.17 - $0.30 | $ | 0.24 | ||||||||
Exercised/canceled
during year ended November 30, 2008
|
(9,798,182 | ) | $0.17 - $0.30 | $ | 0.24 | |||||||
Outstanding
November 30, 2008
|
12,681,506 | $0.16 - $0.58 | $ | 0.25 | ||||||||
Granted
during year ended November
30, 2009
|
6,790,000 | $0.10 - $0.34 | $ | 0.18 | ||||||||
Exercised/canceled
during year ended November 30, 2009
|
(6,130,000 | ) | $0.10 - $0.36 | $ | 0.13 | |||||||
Outstanding
November 30, 2009
|
13,341,506 | $0.10 - $0.58 | $ | 0.23 | ||||||||
Options
exercisable, November
30, 2009
|
2,178,000 | $0.10 - $0.58 | $ | 0.25 |
The
following table summarizes information about the options outstanding at November
30, 2009:
Options Outstanding
|
Options Exercisable
|
|||||||||
Weighted-
|
||||||||||
Average
|
Weighted-
|
Weighted-
|
||||||||
Range
of
|
Remaining
|
Average
|
Average
|
|||||||
Exercise
|
Number
|
Contractual
|
Exercise
|
Number
|
Exercise
|
|||||
Prices
|
Outstanding
|
Life (Years)
|
Price
|
Outstanding
|
Price
|
|||||
$0.10
- $0.58
|
13,341,506
|
1.92
|
$0.23
|
2,178,000
|
$0.25
|
F-28
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
10.
|
Stockholders’ Equity
(Continued)
|
On
October 24, 1996, the shareholders of the Company adopted the eLEC
Communications Corp. 1996 Restricted Stock Award Plan (the “Restricted Stock
Award Plan”). An aggregate of 400,000 shares of common stock of the
Company have been reserved for issuance in connections with awards granted under
the Restricted Stock Award Plan. Such shares may be awarded from
either authorized and unissued shares or treasury shares. The maximum
number of shares that may be awarded under the Restricted Stock Award Plan to
any individual officer or key employee is 100,000. No shares were
awarded during fiscal 2009 and 2008.
As of
November 30, 2009 and 2008, warrants were outstanding to purchase up to
163,443,544 and 140,569,808 shares of the Company’s common stock at prices
ranging from $.10 to $.95. The warrants expire through September
2022. 159,052.573 of such warrants are eligible for possible
cancellation pursuant to a warrant cancellation agreement signed on February 11,
2010 (see Note 5).
On May
27, 2009, the Company issued 40,000 shares of restricted common stock to a
company in conjunction with a contractual obligation for investor relation
services. The stock was valued at its fair market value of $0.235 a
share, or $9,400, on the date that services began and was amortized over a
one-month period.
On June
16, 2009, the company issued 200,000 free-trading shares of stock to its lender
in conjunction with a cashless exercise of a warrant.
The
Company issued stock options for various services in fiscal 2009 in lieu of
making a cash payment. Options for legal, bookkeeping and marketing
services provided to VoX Communications were exercised for a total of 1,261,000
shares of common stock. The Company did not receive full payment for
one of the exercises, and consequently the Company has a subscription receivable
for $34,500, which has been recorded as a reduction in paid in capital at
November 30, 2009.
During
fiscal 2009, the Company also issued 200,000 shares of common stock in exchange
for consulting services and 150,000 shares in exchange for bookkeeping
services.
On
September 10, 2009 the Company’s board of directors approved a private placement
of common stock at $0.10 per share. Shares can be issued for a cash
payment or in exchange for salary that was earned but not paid for in
cash. The Company’s Chief Information Officer and Chief Executive
Officer were issued 200,000 and 100,000 shares, respectively, in exchange for
unpaid wages, and the Chief Executive Officer also purchased 100,000 shares with
a cash payment.
F-29
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
10.
|
Stockholders’ Equity
(Continued)
|
During
the second quarter of fiscal 2009, a board member exercised options to purchase
25,000 shares of stock by surrendering free-trading shares of our common stock
to pay for the exercise price of such options, resulting in a net issuance of
11,207 shares of common stock.
On June
15, 2008 the Company contracted with Nationwide Solutions, Inc. “Nationwide” to
perform consulting, financing and acquisition services. In addition
to a monthly cash fee, Nationwide was granted warrants to purchase up to 2
million shares of the Company’s common stock. The warrants were exercisable
through April 30, 2012 at a price of $0.25 per share. The Company
valued the warrants at $243,000 using the Black-Scholes method with an interest
rate of 2.29%, volatility of 165%, zero dividends and expected term of 3.8
years. The Company is amortizing the consulting expense over the life
of the contact, and recorded expense of $28,699 in fiscal 2008. The
remaining value of $214,301 is recorded as a prepaid expense at November 30,
2008. Effective February 20, 2009, Nationwide returned the warrants
to the Company, and such warrants were expunged from the Company’s books,
resulting in a reduction in prepaid expenses and equity of the remaining book
balance of the warrants at such date of $201,412.
On May
31, 2008 the Company signed a contract with Investor Relations International
(“IRI”) to provide investor relations services for the Company. In conjunction
with such service, IRI was issued warrants to purchase up to 1.5 million shares
of common stock. The warrants are exercisable through May 27, 2010 as
follows: 250,000 shares at $0.30 per share; 250,000 shares at $0.45 per shares;
250,000 shares at $0.60 per share; 250,000 shares at $0.75 per share; 250,000 at
$0.90 per share; and 250,000 at $1.00 per share. The warrants were
valued at $284,560 using the Black-Scholes method with an interest rate of
2.29%, volatility of 179%, zero dividends and expected term of 2 years. IRI was
also issued 300,000 shares of common stock in December 2008 valued at the market
price at May 31, 2008 of $0.27 per share, amounting to $81,000. Amortization
expense related to the above equity transactions with IRI amounted to
approximately $184,000 in fiscal 2008.
During
the year ended November 30, 2008, a former employee and director was allowed to
exercise 160,714 options held by him for common stock in satisfaction of amounts
due him by the Company.
F-30
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
11.
|
Earnings (Loss) Per
Common Share
|
Earnings (loss) per common share data
was computed as follows:
2009
|
2008
|
|||||||
Net
loss
|
$ | (5,013,983 | ) | $ | (5,382,342 | ) | ||
Weighted
average common shares
outstanding
|
26,921,860 | 25,917,384 | ||||||
Effect
of dilutive securities, stock options
and preferred stock
|
- | - | ||||||
Weighted
average dilutive common
shares outstanding
|
26,921,860 | 25,917,384 | ||||||
Loss
per common share – basic
|
$ | (.19 | ) | $ | (.21 | ) | ||
Loss
per common share – diluted
|
$ | (.19 | ) | $ | (.21 | ) |
12.
|
Risks and
Uncertainties
|
The
Company has created a proprietary IP telephony network and has transitioned from
a reseller of traditional wireline telephone services into a facilities-based
broadband service provider to take advantage of the network cost savings that
are inherent in an IP network. Although the IP telephony business
continues to grow, the Company faces strong competition. The Company
has built its IP telephony business with significantly less financial resources
than many of its competitors. The survival of the business is
currently dependent upon the success of the IP operations. Future
results of operations involve a number of risks and
uncertainties. Factors that could affect future operating results and
cash flows and cause actual results to vary materially from historical results
include, but are not limited to:
|
·
|
The
availability of additional funds to successfully pursue our business
plan;
|
|
·
|
The
cooperation of our lender who has waived non-payment defaults on monthly
basis and has not accelerated our
debt;
|
|
·
|
Our
ability to market our services to current and new customers and generate
customer demand for our products and services in the geographical areas in
which we operate;
|
|
·
|
The
cooperation of industry service partners that have signed agreements with
us;
|
|
·
|
The
availability of additional funds to successfully pursue our business
plan;
|
|
·
|
The
impact of changes the Federal Communications Commission or State Public
Service Commissions may make to existing telecommunication laws and
regulations, including laws dealing with Internet
telephony;
|
|
·
|
The
ability to comply with provisions of our financing
agreements;
|
|
·
|
The
highly competitive nature of our
industry;
|
|
·
|
The
acceptance of telephone calls over the Internet by mainstream
consumers;
|
|
·
|
Our
ability to retain key personnel;
|
|
·
|
Our
ability to maintain adequate customer care and manage our churn
rate;
|
F-31
PERVASIP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS
ENDED NOVEMBER 30, 2009 AND 2008
12.
|
Risks and
Uncertainties (Continued)
|
|
·
|
Our
ability to maintain, attract and integrate internal management, technical
information and management information
systems;
|
|
·
|
Our
ability to manage rapid growth while maintaining adequate controls and
procedures;
|
|
·
|
The
availability and maintenance of suitable vendor relationships, in a timely
manner, at reasonable cost;
|
|
·
|
The
decrease in telecommunications prices to
consumers;
|
|
·
|
General
economic conditions.
|
13.
|
Accounts Payable and
Accrued Expenses
|
2009
|
2008
|
|||||||
Trade
payables
|
$ | 875,030 | $ | 762,741 | ||||
Payable
from sale of subsidiaries
|
796,499 | 796,499 | ||||||
Customer
deposits
|
147,600 | 113,100 | ||||||
Other,
individually less than 5% of
current
liabilities
|
454,552 | 410,842 | ||||||
$ | 2,273,681 | $ | 2,083,182 |
When the
Company sold certain subsidiaries in December 2006, the Company agreed to
reimburse the purchaser for certain disputed claims on the books of the
subsidiaries, if the sold subsidiaries were required to pay such
claims. At November 30, 2009 and 2008, the Company has recorded a
payable of $796,499 in conjunction with the sale of the
subsidiaries. If claims are reduced or eliminated by the
subsidiaries, and the purchaser provides the Company with appropriate
documentation that the Company’s liability has been reduced, such reduction will
be reflected on the books of the Company.
14.
|
Related Party
Transactions
|
In
connection with its internal use software development costs, the Company paid
fees to an intellectual property development firm (“Consultant”) of $252,000 and
$310,500 in fiscal 2008 and 2007, respectively. All such work
performed by the Consultant is the property of the Company. The
Company has hired individuals who were performing work for the Company on behalf
of the Consultant, and during fiscal 2007, the Company hired the owner of the
Consultant. An officer of the Company has performed work for the
Consultant, including disbursement services, in which funds that were remitted
by the Company to the Consultant were subsequently transferred to a company
controlled by the officer to distribute such funds to appropriate
vendors. The Company officer received fees from the Consultant of
$60,000 in fiscal 2009 and 2008. Total funds paid to the Consultant
resulted in capitalized internal use software and computer equipment of $90,000
in fiscal 2009 and $55,000 in fiscal 2008. The remaining fees of
$162,000 in fiscal 2009 and $255,000 in fiscal 2008 were deemed to be operating
costs.
At
November 30, 2009 total unpaid salary and expenses that is owed to our chief
executive officer was $187,372. Additionally, from December 1, 2009
to March 15, 2010, our chief executive officer has provided unsecured short term
loans to the Company totaling $74,000.
F-32