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 November 10, 2008: 33,529,813 shares of Common Stock; par value $.006666 per share.
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 six months ended September 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.
At September 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.
The Company has classified the marketable securities it received as part of its acquisition of NRT and TSI as available for sale. In accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" unrealized holding gains and losses are excluded from earnings. Under SFAS No. 130, Reporting Comprehensive Income, unrealized holding gains and losses on the Company's available for sale equity securities are to be reported as components of comprehensive income.
The Company estimates its liabilities for certain state and local taxes as well as other trade liabilities. In september 2008, the Company determined these estimates to be in excess of the amounts required to settle these liabilities. The Company has recorded other income of $533,754 for the quarter ended September 30, 2008 as a result of the reduction of these estimated liabilities. This change in estimate will not affect future periods.
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R (SFAS No. 123R) which requires that stock options and warrants issued for compensation or services be recorded at their estimated fair value using option pricing models. The Company uses the Black-Scholes model to value its stock option and warrants. The Company used an interest rate of 4.31% and expected volatility of 4.6% in valuing its stock options.
On September 23, 2008, New Rochelle Telephone Co. ("NRT" or the "debtor"), a wholly owned subsidiary, filed a petition for relief under Chapter 11 of the federal bankruptcy laws in the eastern district of New York. Under Chapter 11, certain claims against the Debtor in existence prior to the filing of the petition under the federal bankruptcy laws are stayed while the Debtor continues business operations as Debtor-in-possession. These claims are reflected in the September 30, 2008, balance sheet of NRT as "Liabilities subject to compromise." Additional claims (liabilities subject to compromise) may arise subsequent to the filing date from determination by the court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts. Claims secured against the Debtor's assets ("secured claims") also are stayed, although the holders of such claims have the right to move the court for relief from the stay. Secured claims are secured by liens on all of the Company's assets, excluding intellectual property.
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 should allow us to become a facilities based provider of voice and data services when 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 September 30, 2008
Net sales
Net sales for the quarter ended September 30, 2008 was $816,858 as compared to $1,237,685 for the quarter ended September 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 $46 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 September 30, 2008 was $421,383 as compared to $725,460 for the quarter ended September 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 September 30, 2008 and 2007. There were no manufacturing costs for the periods.
Gross Profit
Gross profit for the quarter ended September 30, 2008 was $395,475 as compared to $512,225 for the same quarter ended September 30, 2007. Gross profit as a percentage of sales was 48% for the quarter ended September 30, 2008 as compared to 41% for the same quarter ended September 30, 2007.
Selling, general and administrative
Selling, general and administrative expenses for the quarter ended September 30, 2008 was $544,550 as compared to $598,555 for the same quarter ended September 30, 2007. The decrease is primarily due to substantial reductions in the number of employees including both management and customer service employees of the subsidiaries. The stock based compensation expense in the quarter ended September 30, 2008 was $6,218 as compared to $0 for the same quarter ended September 30, 2007.
Research and development
Research and development expenses increased from $6,731 in the quarter ended September 30, 2007 to $9,231 in the quarter ended September 30, 2008, representing an increase of $2,500 or approximately 37%. All development costs are expensed in the period incurred.
Net Income (loss) from operations
Income from operations in the quarter ended September 30, 2008 was $117,022 or $0.003 per share as compared with a loss of $(301,337) or $(0.009) per share in the quarter ended September 30, 2007.
Net income (loss) available to Common Stockholders
Preferred stock dividend was $3,125 and $3,125 in the quarters ended September 30, 2008 and 2007, respectively. As a result of the foregoing, the net income (loss) available to common stockholders in the quarter ended September 30, 2008 was $113,897 or $0.003 per share as compared to a net loss of $(304,462) or $(0.009) per share in the quarter ended September 30, 2007.
For Six Months Ended September 30, 2008
Net sales
Net sales for the period ended September 30, 2008 was $1,706,615 as compared to $1,682,735 for the period ended September 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 $46 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 period ended September 30, 2008 was $1,025,107 as compared to $1,006,872 for the period ended September 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 periods ended September 30, 2008 and 2007. There were no manufacturing costs for the periods.
Gross Profit
Gross profit for the period ended September 30, 2008 was $681,508 as compared to $675,863 for the same period ended September 30, 2007. Gross profit as a percentage of sales was 40% for the period ended September 30, 2008 as compared to 40% for the same period ended September 30, 2007.
Selling, general and administrative
Selling, general and administrative expenses for the period ended September 30, 2008 was $1,011,408 as compared to $809,930 for the same period ended September 30, 2007. The stock based compensation expense in the period ended September 30, 2008 was $12,368 as compared to $0 for the same period ended September 30, 2007.
Research and development
Research and development expenses increased from $12,500 in the period ended September 30, 2007 to $20,000 in the period ended September 30, 2008, representing an increase of $7,500 or approximately 60%. All development costs are expensed in the period incurred.
Net Income (loss) from operations
Loss from operations in the period ended September 30, 2008 was $(320,831) or $(0.01) per share as compared with a loss of $(447,048) or $(0.013) per share in the period ended September 30, 2007.
Net income (loss) available to Common Stockholders
Preferred stock dividend was $6,250 and $6,250 in the periods ended September 30, 2008 and 2007, respectively. As a result of the foregoing, the net income (loss) available to common stockholders in the period ended September 30, 2008 was $(327,081) or $(0.01) per share as compared to a net loss of $(453,298) or $(0.013) per share in the period ended September 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 $300,131 and $48,935 for the periods ended September 30, 2008 and 2007, respectively.
Marketable securities were $274,720 and $177,760 for the periods ended September 30, 2008 and 2007, respectively.
Net cash provided by (used in) operating activities were $423,589 and $(231,734) for the periods ended September 30, 2008 and 2007, respectively.
Net cash provided by (used in) investing activities were $(2,393) and $175,547 during the periods ended September 30, 2008 and 2007, respectively.
Net cash provided by (used in) financing activities were $(433,057) and $71,616 for the periods ended September 30, 2008 and 2007, respectively.
As of the periods ended September 30, 2008 and 2007, our company has received cash advances of $1,214,700 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 periods ended September 30, 2008 and 2007, our company has received cash advances of $315,000 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.
On or about July 28, 2008, Verizon imposed a services embargo on all service requests from NRT except for disconnects. This disallows NRT to add new customers. Hence on September 23, 2008, NRT filed a voluntary petition for relief under Chapter 11 of Title 11 of the U.S. Code before the U.S. Bankruptcy Court, Eastern District of New York. The filing is intended to facilitate an orderly process to re-organize NRT's pre-petition debts, reduce costs and buy out the outstanding amount of $835,490 owed to the accredited institutional investor.
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. However, one of the Company's subsidiary, NRT filed a voluntary petition for relief under Chapter 11 of Title 11 of the U.S. Code before the U.S. Bankruptcy Court, Eastern District of New York. The filing is intended to facilitate an orderly process to re-organize NRT's pre-petition debts, reduce costs and buy out the outstanding amount of $835,490 owed to an accredited institutional investor.
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
On October 13, 2008, the Registrant filed a report on Form 8-K.
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.