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.
The number of shares of stock outstanding at August 12, 2008: 33,529,813
shares of Common Stock; par value $.006666 per share.
Note 1. Basis of Presentation
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended June 30, 2008 are
not necessarily indicative of the results that may be expected for the year
ending March 31, 2009. For further information, refer to the financial
statements and footnotes thereto included in the Company's Form 10-KSB, for the
year ended March 31, 2008.
Note 2. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 "Business Combinations"
("SFAS 141") which requires the Company to account for business combinations
using the purchase method. The statements of operations for the period ended
June 30, 2008, includes indirect and general expenses related to business
acquisitions that have been expensed as required by SFAS 141.
In December 2007, the FASB issued SFAS 141R, which replaces SFAS 141. SFAS
141R retains the fundamental requirements of SFAS 41 but broadens its scope and
better defines the acquirer in business combinations. This statement retains the
guidance in SFAS 141 for identifying and recognizing intangible assets. The
Company believes this statement will impact any future acquisitions the Company
is contemplating.
In June 2006, the FASB issued interpretation No. 48 ("FIN 48")
"Accounting for Uncertainty in Income Taxes" which clarifies the accounting for
uncertainties in income taxes. FIN48 establishes recognition thresholds for tax
positions that may or may not be sustained by the relevant tax authorities and
their recognition in the financial statements. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company is evaluating the effect of
adopting FIN 48 and does not expect it to have a material effect on the
Company's financial statements.
In June 2006, the Emerging Issues Task Force issued EITF issue
06-3, "How Taxes Collected from Customers and Remitted to Governmental
Authorities Should be Presented in the Income Statement." A company may present
taxes either gross or net basis, however, the amount of taxes collected on the
gross basis must be disclosed. The Company presents revenue net of taxes
collected. EITF 06-3 will not impact the Company's financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (as amended). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurement. SFAS No. 157 is effective for periods beginning after November 15,
2007. The Company is currently evaluating the effects, if any, on the Company's
financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities -
including an amendment of FASB Statement No. 115" (SFAS 159). SFAS 159 gives the
Company the irrevocable option to carry most financial assets and liabilities at
fair value, with changes in fair value recognized in earnings. SFAS 159 is
effective for the Company's 2009 fiscal year, although early adoption is
permitted. The Company is currently assessing the potential effect of SFAS 159
on its financial statements.
Note 3. Marketable Securities
At June 30, 2008, marketable securities consist of 808,000 shares of Pervasip
Corp. received as part of the acquisition of NRT and TSI. The shares have been
classified as available for sale in accordance.
PART 1
ITEM 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
Statements contained in this Report on Form 10-QSB that are not
historical facts are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, including without
limitation, statements regarding industry trends, strategic business
development, pursuit of new markets, competition, results from operations, and
are subject to the safe harbor provisions created by that statute. A
forward-looking statement may contain words such as "intends", "plans",
"anticipates", "believes", "expect to", or words of similar import. Management
cautions that forward-looking statements are subject to risks and uncertainties
that could cause the Company's actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to,
marketing success, product development, production, technological difficulties,
manufacturing costs, changes in economic conditions, competition, the ability to
obtain financing on acceptable terms, future profitability, future profitability
of acquired businesses or product lines, and those included in our company's
Annual Report of Form 10KSB for the fiscal year ended March 31, 2008. Our
company undertakes no obligation to release revisions to forward-looking
statements to reflect subsequent events, changed circumstances, or the
occurrence of unanticipated events.
Overview
We are a designer, software developer and manufacturer of a
range of unique distributed digital-voice-switching and Internet Protocol (IP)
broadband infrastructure equipment as well as a communications service provider
through our subsidiaries. Our technology division produces Class 5 local digital
central office switches, Class 4 regional tandem digital central office
switches, IP soft-switches, routers, gateways, firewalls, voice-over IP (VoIP)
and virtual private network (VPN) systems for public-switched-telephone-network
(PSTN) operators and Internet Service Providers (ISP) worldwide. Our
communication service provider subsidiaries provide services to small businesses
and residential subscribers in the states of New York, New Jersey and
Pennsylvania.
On June 1, 2007, we acquired two CLECs, New Rochelle Telephone
Corp., ("NRT") and Telecarrier Services, Inc. ("TSI"), based in White Plains,
New York. These acquisitions have allowed us to expand our market presence in
New York, New Jersey and Pennsylvania, and have also allowed us to become a
facilities based provider of voice and data services as we build our network by
deploying our proprietary network equipment. Upon migrating these customers to
our network, we will significantly improve profitability through operating
synergies.
Results of Operations
For Three Months Ended June 30, 2008
Net sales
Net sales for the quarter ended June 30, 2008 was $889,757 as
compared to $445,049 for the quarter ended June 30, 2007. Net sales consist of
local and long distance telephone service provided by our subsidiaries, NRT and
TSI. Revenues are generated on a recurring monthly basis from services provided
to both small businesses and residential customers. The average revenue per user
(ARPU) is approximately $43 per month. We are in early stages of developing the
alternative local voice and data switching services market in the U.S. due to
the recent creation of the market opportunity. We were waiting for the FCC's
deregulation policies on local voice and data switching in order to enter this
lucrative market with our systems. Our overall strategy is to grow through
acquisitions of profitable non-facilities based CLECs in the post FCC
deregulation.
Cost of Sales
Cost of sales for the quarter ended June 30, 2008 was $603,724
as compared to $281,411 for the quarter ended June 30, 2007. Cost of sales
predominantly consists of purchasing communication services from Verizon and
Qwest on a resale basis. We also include in our cost of sales the materials and
labor used, subcontractor costs and overhead incurred in the manufacture of our
systems as well as any change in the valuation of our inventory, which was $0
for both quarters ended June 30, 2008 and 2007.
Gross Profit
Gross profit for the quarter ended June 30, 2008 was $286,033
as compared to $163,638 for the same quarter ended June 30, 2007. Gross profit
as a percentage of sales was 32% for the quarter ended June 30, 2008 as compared
to 37% for the same quarter ended June 30, 2007.
Selling, general and administrative
Selling, general and administrative expenses increased from
$200,924 in quarter ended June 30, 2007 to $466,858 in quarter ended June 30,
2008, representing an increase of $265,934 or approximately 132%, principally
due to selling, general and administrative expenses of NRT and TSI. The stock
based compensation expense in quarter ended June 30, 2008 was $6,150 as compared
to $0 for the same quarter ended June 30, 2007.
Research and development
Research and development expenses increased from $5,769 in
quarter ended June 30, 2007 to $10,769 in quarter ended June 30, 2008,
representing an increase of $5,000 or approximately 87%. All development costs
are expensed in the period incurred.
Net Income (loss) from operations
Loss from operations in quarter ended June 30, 2008 was
$(437,853) or $(.013) per share as compared with a loss of $(145,708) or $(.004)
per share in the quarter ended June 30, 2007.
Net income (loss) available to Common Stockholders
Preferred stock dividend was $3,125 and $3,125 in the quarters
ended June 30, 2008 and 2007, respectively. As a result of the foregoing, the
net loss available to common stockholders in the quarter ended June 30, 2008 was
$(440,978) or $(.013) per share as compared to a net loss of $(148,833) or
$(.004) per share in the quarter ended June 30, 2007.
Liquidity and Capital Resources
Our ability to generate cash adequate to meet our needs results
primarily from sale of preferred and common stock, cash flow from operations,
issuance of debt, and cash advances in the form of loan from our Chief Executive
Officer and a shareholder. We believe that our current sources of liquidity
pursuant to the acquisitions of New Rochelle Telephone Corp. and Telecarrier
Services, Inc., as of June 1, 2007, are sufficient to meet our near-term growth
needs. However, we need additional capital to pursue more acquisitions to
support our future growth needs. We have no off-balance sheet arrangements.
Cash and cash equivalents were $513,820 and $63,867 for the
quarters ended June 30, 2008 and 2007, respectively.
Marketable securities were $161,600 and $275,000 for the
quarters ended June 30, 2008 and 2007, respectively.
Net cash provided by (used in) operating activities were
$324,799 and $(218,506) for the quarters ended June 30, 2008 and 2007,
respectively.
Net cash provided by (used in) investing activities were
$(2,393) and $175,547 during the quarters ended June 30, 2008 and 2007,
respectively.
Net cash provided by (used in) financing activities were
$(120,578) and $73,320 for the quarters ended June 30, 2008 and 2007,
respectively.
As of the quarters ended June 30, 2008 and 2007, our company
has received cash advances of $1,256,300 and $1,256,300, respectively, from our
Chief Executive Officer. These cash advances in the form of a note are secured
by all assets of the Company. As of the quarters ended June 30, 2008 and 2007,
our company has received cash advances of $350,000 and $350,000 from a
shareholder, respectively.
Effective June 1, 2007, we acquired two telephone companies,
NRT and TSI, from eLEC. These companies were acquired on cashless basis through
the issuance of secured convertible note in the principal amount of
approximately $1.3 million with an accredited institutional investor. The note
is due July 1, 2010 and bears interest at prime plus 2% but no less than 9%. All
or portion of the outstanding principal and interest due under the note may be
converted into shares of our common stock upon satisfaction of specified
conditions. The note is convertible into shares of our common stock at a fixed
price of $0.50 per share, provided however, (i) the average closing price of our
common stock for the 5 trading days prior to conversion is greater than or equal
to $0.58, and (ii) specified trading volume conditions are met. Otherwise, we
must make the monthly principal and interest payments in cash. The note is
secured by a lien on substantially all our assets, other than intellectual
property assets. In connection with the note, we entered into a Registration
Rights Agreement with the institutional investor to register the shares of our
common stock issuable upon conversion of the note. The Registration Rights
Agreement was declared effective by Securities Exchange Commission on October
18, 2007 for the issuance of up to 3,200,000 shares of our common stock pursuant
to terms of the convertible note. In addition to our purchase agreement, we also
received 808,000 restricted shares of common stock of eLEC Communications Corp.,
which is included as marketable securities for the fiscal year 2008.
In December 2007, it came to our attention that NRT evidently
had not been receiving telephone usage data from Verizon for the immediately
preceding seven months, depriving NRT of the ability to bill its customers
accordingly. Under our Wholesale Advantage Services Agreement with Verizon, we
believe Verizon is obligated to provide this billing data. We also believe,
among other things, that we had overpaid Verizon with respect to some of the
months prior to that seven-month period, that Verizon failed to correctly apply
current payments to current charges and instead continued to apply payments to
past disputed amounts prior to 2007, that Verizon wrongly billed us for late
charges, that Verizon billed NRT for usage with respect to which NRT was never
provided the corresponding data , and that Verizon improperly charged us for
ISP-bound traffic pursuant to FCC rules set forth in 16 FCC Red 9151 (2001). We
have been discussing the foregoing matters with Verizon and believe we can reach
an amicable resolution with Verizon of each of these disputes. However, there
can be no assurance that these disputes will be resolved amicably or, if and
when resolved, that they will be resolved in our favor, although if these
disputes are not resolved in our favor, we believe eLEC may, in certain
circumstances, be obligated to indemnify us for our resulting damages pursuant
to the terms of the stock purchase agreement between us and eLEC pursuant to
which we agreed to acquire NRT. However, there can be no assurance that eLEC
will provide any such indemnification to us, and any adverse resolution of one
or more of these disputes with Verizon could have a material and adverse effect
on our company.
Although the acquisitions of NRT and TSI have provided
reasonable revenues and positive cash flow, additional financing will be needed
to support our plans to grow by acquiring additional CLECs. We are in
negotiations with a number of other profitable non-facilities based CLECs for
potential acquisitions, although there can be no assurance that we will
consummate these or any other acquisitions or, if consummated, that those
acquisitions will be successful.
Impact of Inflation
Inflation has historically not had a material effect on our
operations.
ITEM 3. Controls and Procedures
Our management, with the participation of our principal
executive officer and principal financial officer, has evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this Quarterly Report. Based on such evaluation, our principal
executive officer and principal financial officer have concluded that, as of the
end of such period, our disclosure controls and procedures were designed to
ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in applicable SEC rules and forms. In
addition, based on this evaluation, our principal executive officer and our
principal financial officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this Quarterly
Report on Form 10-QSB.
PART II
ITEM 1 - Legal Proceedings
The Company is subject to legal proceedings and claims that
arise in the ordinary course of business. In the opinion, of management, the
amount of any liability is not likely to have a material effect on the financial
statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits
31.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
B) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended
June 30, 2008.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.