UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ý QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: May 31, 2014

 

OR

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 000-04465

 

PERVASIP CORP.
(Exact name of registrant as specified in its charter)

 

New York   13-2511270
(State or other jurisdiction of incorporation or organization)  

(I.R.S. Employer

Identification No.)

 

430 North Street

White Plains, New York 10605

(Address of principal executive offices)

 

(914) 750-9339
(Registrant’s telephone number, including area code)

 

Indicate by check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 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 ý No ¨

 

Indicate by check mark 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer  ☐ Accelerated filer  ☐ Non-accelerated filer  ☐ Smaller reporting company  ý

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

 

As of September 3, 2014, the Company had 1,007,549,997 shares of its common stock, par value $0.00001 per share, issued and outstanding.

 

 

 
 


TABLE OF CONTENTS

 

  Page
PART I—FINANCIAL INFORMATION
   
Item 1. Financial Statements. 3
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 17
   
Item 3. Quantitative and Qualitative disclosures about Market Risk. 21
   
Item 4. Controls and Procedures. 21
   
PART II—OTHER INFORMATION
   
Item 1. Legal Proceedings. 23
   
Item1A. Risk Factors. 23
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 23
   
Item 3. Defaults Upon Senior Securities. 23
   
Item 4. Mine Safety Disclosures 23
   
Item 5. Other Information. 23
   
Item 6. Exhibits. 23
   
Signatures 24

 

 

 

2

 
 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Pervasip Corp. and Subsidiaries

Consolidated Balance Sheets

Unaudited

 

   May 31, 2014  November 30, 2013
ASSETS      
       
Current assets:      
Cash and cash equivalents  $25,225   $17,242 
Accounts receivable, net   74,193    67,919 
Prepaid expenses and other current assets   20,212    26,123 
Total current assets   119,630    111,284 
           
Other assets   81,508    90,108 
Total assets  $201,138   $201,392 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Current liabilities:          
Current portion of long-term debt  $3,978,363   $3,766,468 
Accounts payable and other accrued liabilities   2,151,466    2,409,194 
Accounts payable and other accrued liabilities – related party   353,107    303,454 
Due to Pension Benefit Guaranty Corporation   1,962,486    1,914,392 
Related party debt   748,754    634,756 
Derivative liabilities – current portion   1,558,323    362,389 
Total current liabilities   10,752,499    9,390,653 
           
Long-term debt less current portion   2,209    13,660 
Derivative liabilities – long term portion   —      1,309,955 
Total liabilities   10,754,708    10,714,268 
           
Stockholders’ deficit:          
Preferred stock, $0.00001 par value; 21,000,010 shares authorized, 51 shares issued and outstanding   —      —   
Common stock, $0.00001 par value at May 31, 2014; $0.001 par value at November 30, 2014; 8,978,999,990 shares authorized, 1,007,549,997 and 799,549,997 shares issued and outstanding in 2014 and 2013, respectively    10,076    799,550 
Capital in excess of par value   41,515,287    40,424,222 
Accumulated deficit   (52,080,116)   (51,737,831)
Accumulated other comprehensive income   1,183    1,183 
Total stockholders’ deficit   (10,553,570)   (10,512,876)
Total liabilities and stockholders’ deficit  $201,138   $201,392 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3

 
 

 

 

Pervasip Corp. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

 

 

   For the Six Months Ended    For the Three Months Ended 
   May 31, 2014  May 31, 2013  May 31, 2014  May 31, 2013
      Restated     Restated
             
Revenues  $451,015   $469,892   $237,353   $231,327 
                     
Costs and expenses:                    
 Cost of services   237,489    211,072    113,455    100,201 
 Selling, general and administrative   722,063    816,380    344,637    435,831 
              Total costs and expenses   959,552    1,027,452    458,092    536,032 
                     
Loss from operations   (508,537)   (557,560)   (220,739)   (304,705)
                     
Other income (expense):                    
 Interest expense   (818,552)   (1,676,586)   (299,701)   (560,157)
 Gain on troubled debt restructuring   —      2,714,461    —      —   
 Gain on sale of subsidiary   640,180    —      —      —   
 Gain on settlement of liabilities   300,686    1,344,326    —      1,128,098 
 Gain (loss) on change in derivative liabilities   43,938    (148,955)   (241,539)   3,287,164 
          Total other income (expense)   166,252    2,233,246    (541,240)   3,855,105 
                     
Net income (loss)  $(342,285)  $1,675,686   $(761,979)  $3,550,400 
                     
Basic earnings (loss) per share  $(0.00)  $0.00   $(0.00)  $0.00 
Diluted earnings (loss) per share  $(0.00)  $0.00   $(0.00)  $0.00 
                     
Weighted average number of common shares outstanding:                    
Basic   946,116,664    469,613,225    1,007,499,997    583,632,393 
Diluted   946,116,664    1,146,212,042    1,007,499,997    1,260,231,210 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4

 
 

Pervasip Corp. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

 

   For the Six Months Ended   For the Three Months Ended 
   May 31, 2014  May 31, 2013  May 31, 2014  May 31, 2013
             
Net income (loss)  $(342,285)  $1,675,686   $(761,979)  $3,550,400 
Other Comprehensive income (loss):                    
 Foreign currency translation adjustment   —      —      —      —   
Comprehensive income (loss)  $(342,285)  $1,675,686   $(761,979)  $3,550,400 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5

 
 

 

Pervasip Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

   For the Six Months Ended 
   May 31, 2014  May 31, 2013
Operating activities:     Restated
Net income (loss)  $(342,285)  $1,675,686 
Adjustments to reconcile net income (loss) to net cash used in operating activities:          
Stock-based compensation   13,291    13,441 
Provision for bad debts   (731)   3,660 
Amortization of debt discount   529,375    1,575,019 
Gain on troubled debt restructuring   —      (2,714,461)
Gain on sale of subsidiary   (640,180)   —   
Gain on settlement of liabilities   (300,686)   (1,344,326)
Change in fair value of derivative liabilities   (43,938)   148,955 
Changes in operating assets and liabilities:          
Accounts receivable   (5,544)   648 
Prepaid expenses and other current assets   5,228    (4,839)
Other assets   44,733    (1,931)
Accounts payable, other accrued liabilities and pension related
liabilities		   573,436    197,325 
Net cash used in operating activities:   (167,301)   (450,823)
Cash flows from financing activities:          
 Principal payments of debt   (101,216)   (7,333)
 Proceeds from borrowings   276,500    448,000 
Net cash provided by financing activities   175,284    440,667 
           
Increase (decrease) in cash and cash equivalents   7,983    (10,156)
Cash and cash equivalents at beginning of period   17,242    12,366 
Cash and cash equivalents at the end of period  $25,225   $2,210 
Supplemental disclosure of cash flow information:          
Cash paid during the period for:          
Income Taxes  $—     $—    
Interest  $52,899   $11,702 
Non-cash financing transactions:          
Fair value of derivative liabilities  $230,837   $2,208,952 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

6

 
 

PERVASIP CORP.

 

Notes To Consolidated Financial Statements

Unaudited

 

Note 1– Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission for quarterly reports on Form 10-Q. 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-month period ended May 31, 2014, are not necessarily indicative of the results that may be expected for the year ended November 30, 2014. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended November 30, 2013.

 

During the six months ended May 31, 2014, the Company sold a non-operating subsidiary for $100. In connection with the sale, the Company recorded a gain of $640,180, which represented the difference of the proceeds received and the net liabilities of the subsidiary that was sold.

 

Note 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 as of May 31, 2014, the Company has negative working capital of $10,632,869 and a stockholders’ deficit of $10,553,570. In addition, the Company is unable to meet its obligations as they become due and sustain its operations. 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.

 

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.Seek to raise debt or equity for working capital purposes and to pay off existing debt agreements. With sufficient additional cash available to the Company, it can begin to cover monthly cash losses and allocate funds toward marketing its products to achieve additional sales and consequently cut monthly operating losses.

 

2.Continue to create new variations of our mobile VoIP app to obtain new subscribers. The Company’s mobile VoIP application allows for low-cost calling to any landline or cell phone in the world. The Company recently added the ability for a subscriber to buy telephone numbers from dozens of countries and download the number to his or her smart phone or tablet. This feature allows people who do not use the VoIP application to call VoIP application user for the cost of a local call, even when he or she is overseas, and receiving calls on a mobile phone.

 

3.Continue to develop new uses and distribution channels for its mobile VoIP service. The Company’s mobile VoIP application allows for low-cost calling to any landline or cell phone in the world. In addition to ad words marketing initiatives, the Company is negotiating with cable television companies to resell its mobile app products via a white-labeled solution.

 

7

 
 

There can be no assurance that the Company will be able to achieve its business plan objectives or be able to achieve or maintain cash-flow-positive operating results. If the Company is unable to generate adequate funds from operations or raise sufficient additional funds, the Company 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 financial statements do not include any adjustments that might result from this uncertainty.

 

Note 3 – Recent Accounting Pronouncements

 

There were no recent accounting pronouncements that have had a material effect on the Company’s financial position or results of operations

 

Note 4 – Major Customers

 

As of May 31, 2014 and November 30, 2013, one customer constituted 34% and 57%, respectively, of our accounts receivable.

 

During the six-month and three-month periods ended May 31, 2014, two customers accounted for approximately 32% and 27%, respectively, and approximately 27% and 34%, respectively, of our revenues.

 

During the six-month period ended May 31, 2013, one customer accounted for approximately 38%, respectively of our revenues, while during the three-month period ended May 31, 2013, two customers accounted for approximately 39% and 10%, respectively, of our revenues.

 

Note 5 – Net Income (Loss) Per Common Share

 

Basic net income (loss) per share is computed by dividing net income available to common stockholders (numerator) by the weighted average number of vested, common shares outstanding during the period (denominator). Diluted net income (loss) per share is computed on the basis of the weighted average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the if-converted method. Dilutive potential common shares include shares issuable upon exercise of outstanding stock options, warrants and convertible debt agreements.

 

   Six Months Ended  Six Months Ended  Three Months Ended  Three Months Ended
   May 31, 2014  May 31, 2013  May 31, 2014  May 31, 2013
             
Net income (loss) – numerator basic  $(342,285)  $1,675,686   $(761,979)  $3,550,400 
Interest expense attributable to convertible notes, net   —      290,072    —      190,142 
Net income (loss) plus interest expense attributable to convertible notes, net – numerator diluted  $(342,285)  $1,965,758   $(761,979)  $3,740,542 
                     
Weighted average common shares outstanding – denominator basic   946,116,664    469,613,225    1,007,499,997    583,632,393 
Effect of dilutive securities   —      676,598,817    —      676,598,817 
Weighted average dilutive common shares outstanding – denominator diluted   946,116,664    1,146,212,042    1,007,499,997    1,260,231,210 
                     
Earnings (loss) per common share – basic  $0.00   $0.00   $0.00   $0.01 
                     
Earnings (loss) per common share – diluted  $0.00   $0.00   $0.00   $0.00 

 

8

 
 

Approximately 1,475,706,000 and 22,103,000 shares of common stock issuable upon the exercise of our outstanding stock options, warrants or convertible debt were excluded from the calculation of net income (loss) per share for the six-month periods ended May 31, 2014 and May 31, 2013, respectively, because the effect would be anti-dilutive. Approximately 1,485,708,000 and 680,472,000 shares of common stock issuable upon the exercise of our outstanding stock options, warrants or convertible debt were excluded from the calculation of net income (loss) per share for the three-month periods ended May 31, 2014 and May 31, 2013, respectively, because the effect would be anti-dilutive.

 

Note 6 – Stock-Based Compensation Plans

 

The Company issues stock options to its employees, consultants and outside directors pursuant to stockholder-approved and non-approved stock option programs and records the applicable expense in accordance with the authoritative guidance of the Financial Accounting Standards Board. This expense is a non-cash expense and it derives from the issuance of stock options, stock purchase warrants and restricted stock. For the six-month periods ended May 31, 2014 and 2013, the Company recorded $13,291 and $13,441, respectively, in stock-based compensation expense. As of May 31, 2014, there was $12,575 of unrecognized employee stock-compensation expense for previously granted unvested options that will be recognized over a two-year period.

 

Note 7 – Accounts Payable and Accrued Expenses

 

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 May 31, 2014 and November 30, 2013, the Company has recorded a payable of $796,499 in conjunction with the sale of the subsidiaries. The subsidiary filed for bankruptcy on September 23, 2008, which is still ongoing. 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.

 

Note 8 – Defined Benefit Plan

 

The Company received a letter dated July 27, 2011 from the Pension Benefit Guaranty Corporation, (“PBGC”), stating that the Company’s defined benefit pension plan (the “Plan”) was terminated as of September 30, 2010, and the PBGC was appointed trustee of the Plan. Pursuant to the agreement, the PBGC has a claim to the Company for the total amount of the unfunded benefit liabilities of the Plan plus accrued interest. The PBGC has notified the Company that the liability is due and payable as of the termination date, and interest accrues on the unpaid balance at the applicable rate provided under Section 6621(a) of the Internal Revenue Code. The total amount outstanding to the PBGC at May 31, 2014 and November 30, 2013 was $1,962,486 and $1,914,392, respectively, including accrued interest, which is recorded as a current liability. The Company made no payments to the Plan in the six-month periods ended May 31, 2014 and 2013.  The Plan covers approximately 40 former employees.

 

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.  There was no pension expense recorded in the six or three-month periods ended May 31, 2014 and 2013.  

 

Note 9 – Debt

 

   May 31, 2014  November 30, 2013
Debt due to Laurus  $2,186,201   $2,108,498 
Convertible debt due to Factor Fund   1,945,190    2,182,690 
Convertible debt due to various lenders   395,750    243,250 
Other short-term debt due to various lenders   157,772    248,592 
Total debt   4,684,913    4,783,030 
Less: current portion of long-term debt   3,978,363    3,766,468 
Less: discount on debt   704,341    1,002,902 
Total long-term debt  $2,209   $13,660 

 

9

 
 

 

Debt due to Laurus

 

As of May 31, 2014 and November 30, 2013, the Company owed a third party lender, LV Administrative Services, Ltd., as agent for Laurus Master Fund, Ltd. and various affiliates thereof (“Laurus”), $2,186,201 and $2,108,498, respectively.  All of such debt became due by its terms on September 28, 2010.  Pursuant to two assignment agreements, in which the Company and Laurus agreed to assign the debt to a third party, the interest rate on the debt was changed to zero percent from January 31, 2012 to April 12, 2013. Beginning on April 12, 2013, the interest rate on the Laurus debt reverted to the rate charged in the original note agreements, which ranges from 5.25% to 20% per annum. The Company has not made payments of principal or interest when due, and is not in compliance with its agreements with Laurus. Laurus has not issued a default notice and has signed an agreement, on two separate occasions, to sell all of its debt at a discount to a third party, however the third parties have not fulfilled all of their terms of the agreements and $2,186,201 and $2,108,498 of debt remains due to Laurus at May 31, 2014 and November 30, 2013, respectively.

 

During the six months ended May 31, 2013, the Company recorded a troubled debt restructuring gain of $2,714,461. The Company recorded this troubled debt restructuring gain as a result of debt forgiveness by Laurus in exchange for repayments of reduced amounts from other lenders.

 

Convertible debt due to Factor Fund

 

In March 2013, 112359 Factor Fund, LLC (the “Fund”), was assigned the $6,368,078 of outstanding debt owed to LV, which the Fund could satisfy in full by making certain payments to LV. At November 30, 2013, the Fund still owed LV $100,000 in connection with the assignment agreement. After the Fund makes the last $100,000 payment owed to the LV, the existing liens on the Company’s assets will be transferred from LV to the Fund, and the remaining obligation the Company owes LV ($2,186,201 at May 31, 2014) will be reduced to $0.

 

During February 2013, the Company entered into a securities purchase agreement with the Fund pursuant to which the Company issued to the Fund (i) an amended convertible debenture in the principal amount of $1,000,000 (“Amended Note 1”) and (ii) a second amended convertible debenture in the principal balance of $1,000,000 (“Amended Note 2” and together with Amended Note 1, the “Amended Notes”).  The Amended Notes were sold to the Fund by the Company in exchange for the Fund’s assumption and payment of the LV assignment agreement (which required the Fund to make certain payments to LV), payment to the Company of $150,000, and the agreement to purchase and cancel an existing convertible debenture in the amount of approximately $35,000.

 

Absent earlier redemption the Amended Notes mature on December 31, 2014.  Interest accrues on the unpaid principal and interest on the notes at a rate per annum equal to 6% for Amended Note 1 and 2% for Amended Note 2.

 

Principal and interest payments on Amended Note 1 can be made at any time by the Company, with a 30% prepayment premium, or the Fund can elect at any time to convert any portion of Amended Note 1 into shares of common stock of the Company at 100% of the average of the five lowest days’ volume weighted average price of the common stock for the 30 trading days immediately prior to the conversion date.  During the six-month periods ending May 31, 2014 and 2013, the Fund converted $277,500 and $317,289 of principal into 203,000,000 and 145,389,865 shares of common stock of the Company, respectively.

 

The conversion price of Amended Note 1 is based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 - 40. The fair value of the note was recognized as a derivative instrument at the issuance date and was measured at fair value at each reporting period.

 

Amended Note 2 converts into shares of common stock of the Company in an amount equal to the lesser of the outstanding balance of Amended Note 2 divided by $0.01. Any principal or interest amount can be paid in cash.

 

During the year ended November 30, 2013, the Fund loaned the Company amounts of $50,000, $35,000 and $12,000 (the “Bridge Notes”). In June 2013, the Fund refinanced the Bridge Notes with additional funding into another note of $665,000 (the “New Note”). The additional funding under the New Note also provided cash to purchase two outstanding convertible debentures for an aggregate price of $99,360; cash for operations of $60,000; and $40,000 in cash each month for the months of July 2013 through December 2013. The Company incurred $68,640 in finder fees and legal fees in connection with the New Note, and a $100,000 original issuance discount. The New Note bears interest at 6% per annum and is due December 31, 2014. The Fund can elect at any time to convert any portion of the New Note into shares of common stock of the Company at 60% of the lowest volume weighted average price of the common stock for the 20 trading days immediately prior to the conversion date. The Company received an aggregate of $300,000 in cash in the months of June through December 2013 under the New Note.

 

10

 
 

The conversion price of the $665,000 of variable conversion price note is based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 - 40. The fair value of the note was recognized as a derivative instrument at the issuance date and is measured at fair value at each reporting period. The Company determined that the fair value of the conversion feature was $67,123 at the issuance date. Debt discount was recorded up to the $40,000 face amount of the note and is amortized to interest expense over the term of the note. The fair value of the conversion feature in excess of the principal amount allocated to the notes was $27,123 and was recognized immediately as interest expense.

 

In conjunction with the New Note, the Company agreed to implement a salary deferral plan to reduce the cash expenditures for personnel, to limit its cash expenditures to certain pre-approved items, and to accrue an additional fee to the Fund of $150,000, which is included in other income (expense) and has been added to the principal balance of Amended Note 1.   The Fund agreed to limit its sales of the Company’s common stock, to not engage in any short transactions involving the Company’s common stock, and to not require the Company to increase its authorized shares of common stock for a certain time period, even though the Financing documents require the Company to reserve authorized shares for issuance to the Fund, if the Fund desires to convert existing debt into shares of common stock.

 

The Amended Notes and New Note are secured by a blanket lien on substantially all of the Company’s assets pursuant to the terms of security agreements executed by the Company and its subsidiaries in favor of the Fund.  In addition, the Company’s chief executive officer and chief information officer pledged their combined voting control of the Company pursuant to a stock pledge agreement executed by the two officers in favor of the Fund, to further secure the Company’s obligations under the Amended Notes.  If an event of default occurs under the security agreement, the stock pledge agreement, the Amended Notes or the New Note, the secured parties have the right to accelerate payments under such promissory notes and, in addition to any other remedies available to them, to foreclose upon the assets securing such promissory notes.

 

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, 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.

 

During the six-month periods ending May 31, 2014 and 2013, the Fund converted $277,500 and $317,289 of principal into 203,000,000 and 145,389,865 shares of common stock of the Company, respectively.

 

As of May 31, 2014 and November 30, 2013, the Company owed the Fund $1,945,190 and $2,182,690, respectively.  

 

Convertible Debt due to various lenders

 

At May 31, 2014, convertible debt due to various lenders consists of notes for $120,000, $98,000, $67,750, $40,000, $37,500 and $32,500, for a total of $395,750. Four of these six notes were outstanding at November 30, 2013. The $120,000 and the $32,500 notes were issued in the first quarter of fiscal 2014.

 

Convertible debt with a fixed conversion rate

 

At May 31, 2014 and November 30, 2013, the Company owed a lender $138,000 in connection two notes that are past due, are in default, bear a default interest rate of 18% per annum, and are convertible at prices of $0.015 and $0.02 cents per share.

 

During the six-month period ended May 31, 2013, two were assigned an aggregate of $31,000 preciously owed to the CEO of the Company which was modified to be convertible debt with a conversion rate of $0.001 and $0.005 per common share and a 0% to 24% interest rate. The $31,000 of debt was converted into 11,000,000 shares of common stock of the Company. No conversions of debt with a fixed conversion rate occurred in the six-months ended May 31, 2014.

 

11

 
 

Convertible debt with a variable conversion rate issued for cash

 

During the six months ended May 31, 2014, the Company received  a total of $152,500 in cash from lenders for convertible debt. The convertible debt bears interest at 8% and is due between September and October 2104. The lenders can elect at any time to convert any portion of such debt into shares of common stock of the Company at discounts ranging from 30% to 42% of the market price of the common stock as defined in the agreements.

 

The conversion price of the $152,500 notes is based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 - 40. The fair value of the notes was recognized as a derivative instrument at the issuance date and is measured at fair value at each reporting period. The Company determined that the fair value of the notes was $163,714 at the issuance dates. The debt was recorded a debt discount of $152,102 and is amortized to interest expense over the term of the note. The variance to the fair value of $11,612 was recognized as an initial loss and recorded to change in fair value of derivative liabilities

 

During the six month period ended May 31, 2013, the Company received $60,000 in cash from a lender for convertible debt. The convertible debt bears interest at 8% and was due between September and October 2013. The lender can elect at any time to convert any portion of the debt into shares of common stock of the Company at a price discount of 42% of the market price of the Company’s common stock, as defined in the agreement.

 

The conversion price of the $60,000 notes was based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 - 40. The fair value of the notes was recognized as a derivative instrument at the issuance date and is measured at fair value at each reporting period. 

 

Convertible debt with a variable conversion rate assigned to lenders

 

During the six month periods ended May 31, 2014 and 2013, no other debt with a variable conversion rate was assigned to lender. At May 31, 2014 and November 30, 2014, the Company owes one lender $67,750 as a result of an assignment is fiscal 2012. The convertible debt bears interest at 0% and is past due. The lender can elect at any time to convert any portion of the debt into shares of common stock of the Company at a price discount of 55% of the market price of the Company’s common stock as defined in the agreements.

 

Other short-term debt due to various lenders

 

During the six months ended May 31, 2014 and 2013, the Company received $50,000 and $0, respectively from lenders in exchange for notes payable.

 

At May 31, 2014 and November 30, 2013, the Company owed various lenders $157,772 and $248,592, respectively. Cash payments of $68,486 were made during the quarter ended February 28, 2014 on these notes. Other short-term debt carriers an interest rate of approximately 35% to 120% over the term of the loans. Certain of these notes are secured by assets of the Company. These notes are currently in default.

 

During the six months ended May 31, 2014 and 2013, the Company recorded a gain on the settlement of liabilities of $300,686 and $1,344,326, respectively.

 

Note 10 - Derivative Liabilities

 

The Company evaluated their convertible note agreements pursuant to ASC 815 and due to there being no minimum or fixed conversion price resulting in an indeterminate number of shares to be issued in the future, the Company determined an embedded derivative existed and ASC 815 applied for their convertible notes. The Company valued the embedded derivatives using the Black-Scholes valuation model.  

  

Convertible debt with a variable conversion feature

 

In 2014, the Company estimated the fair value of the derivatives using the Black-Scholes valuation method with assumptions including: (1) term of 0 to 1.25 years; (2) a computed volatility rate of 201% (3) a discount rate of 1% and (4) zero dividends. Upon settlement the valuation of this embedded derivative was recorded as gain/loss on derivative liability.

 

In 2013, the Company estimated the fair value of the derivatives using the Black-Scholes valuation method with assumptions including: (1) term of 0.7 to 3 years; (2) a computed volatility rate of 229 to 283% (3) a discount rate of 0.13 to 0.25% and (4) zero dividends.  Upon settlement the valuation of this embedded derivative was recorded as gain/loss on derivative liability.

 

12

 
 

Tainted conventional convertible debt

 

In 2014, the Company estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 0 to 1.75 years; (2) a computed volatility rate of 201% (3) a discount rate of 1% and (4) zero dividends. The valuation of this embedded derivative was recorded with an offsetting gain/loss on derivative liability.

 

In 2013, the Company estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 0 to 1.0 years; (2) a computed volatility rate of 232 to 243% (3) a discount rate of 1% and (4) zero dividends.  The valuation of this embedded derivative was recorded with an offsetting gain/loss on derivative liability.

 

Tainted stock options and warrants

 

The Company also evaluated all outstanding warrants and options to determine whether these instruments may be tainted. All warrants outstanding were considered tainted as a result of the tainted equity environment and potential inability of the Company to settle the instruments with shares of the Company’s stock as the number of shares issuable cannot be estimated and could exceed that amount of authorized shares available to be issued by the Company. The Company valued the embedded derivatives within the stock options and warrants using the Black-Scholes valuation model.  

 

In 2014, the Company estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 0 to 8.0 years; (2) a computed volatility rate of 172% (3) a discount rate of 1% and (4) zero dividends. The valuation of this embedded derivative was recorded with an offsetting gain/loss on derivative liability.

 

In 2013, the Company estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 1.0 to 7.5 years; (2) a computed volatility rate of 232% (3) a discount rate of 1% and (4) zero dividends. The valuation of this embedded derivative was recorded with an offsetting gain/loss on derivative liability.

  

Activity for embedded derivative instruments during the six months ended May 31, 2014 was as follows:

 

          Initial valuation                          
          of derivative                          
          liabilities upon     Change in      Exercise               
    Balance at     issuance of new      fair value of     of stock     Conversion     Balance at   
    November 30,     securities during     derivative     options/     of debt       May 31,  
    2013     the period     liabilities     warrants     to equity     2014  
Variable convertible debt   $ 1,467,182     $ 230,837     $ 145,427     $ -     $ (300,920 )    $ 1,542,526  
Tainted convertible debt     139,953       -       (136,600 )      -       -       3,353  
Tainted stock options     30,343       -       (23,510 )      -       -       6,833  
Tainted warrants     34,866       -       (29,255 )       -       -       5,611  
    $ 1,672,344     $ 230,837     $ (43,938 )    $ -     $ (300,920 )    $ 1,558,323  

 

 

Activity for embedded derivative instruments during the six months ended May 31, 2013 was as follows:

 

          Initial valuation                          
          of derivative                          
          liabilities upon     Change in      Exercise               
    Balance at     issuance of new     fair value of     of stock     Conversion     Balance at  
    November 30,     securities during     derivative     options/     of debt     May 31,  
    2012     the period     liabilities     warrants     to equity     2013  
Variable convertible debt   $ 361,760     $ 2,208,952     $ (8,728 )    $ -     $ (1,401,042 )    $ 1,160,942  
Tainted convertible debt     264,189        -       183,182       -       (225,680 )      221,691  
Tainted stock options     49,488        -       (30,801 )      -       -       18,687  
Tainted warrants     27,973        -       5,302       -       -       33,275  
    $ 703,410     $ 2,208,952     $ 148,955     $ -     $ (1,626,722)     $ 1,434,595  

 

 

13

 
 

 

Note 11 – Income Taxes

 

At November 30, 2013, the Company had net operating loss carryforwards for federal income tax purposes of approximately $28,000,000 that expire in the years 2014 through 2032. The Company has provided an allowance for the full value of the related deferred tax asset since it is more likely than not that none of such benefit will be realized. Utilization of the net operating losses may be subject to annual limitations provided by Section 382 of the Internal Revenue Code and similar state provisions.

 

Under Section 108(a) of the Internal Revenue Code, the gain of approximately $2,714,000 for the six-month period ended May 31, 2013, that is attributable to debt forgiveness is not included in taxable income to the Company as the Company is deemed insolvent for tax purposes.  Consequently, the Company has recorded no income tax expense for this six-month period. No such gain was reported in the six-month period ended May 31, 2014.

 

Note 12 – Stockholders’ Equity

 

As discussed in Note 9, we entered into various transactions where we issued convertible notes to third parties in exchange for existing notes payable with various lenders. Such convertible notes allowed the new debt holders to convert outstanding debt principal into shares of the Company’s common stock at a discount to the trading price of the common stock. To the extent, if any, that there was a beneficial conversion feature associated with these debts, the beneficial conversion feature was bifurcated from the host instrument and accounted for as a freestanding derivative. As a result of such conversions, in the six-month period ended May 31, 2014, $277,500 of principal was converted into 203,000,000 shares of common stock, which was valued at $278,800 at the time of conversion,. Also during the first quarter of 2014, the Company’s CEO settled an outstanding debt payable of $10,565 for 5,000,000 shares of common stock, which was valued at $9,500 at the time of the conversion, resulting in a gain of $1,065.

 

Note 13 – Related Party Transactions

 

In connection with software development costs, we paid fees to a third-party intellectual property development firm (the “Consultant”) for the six-month periods ended May 31, 2014 and 2013, of $96,000 and $95,500, respectively and $48,000 for the three-month periods ended May 31, 2014 and 2013. One of our officers performed work for the Consultant, including the function of distributing such funds to appropriate vendors, for which he was not compensated. The fees for software development services performed by the Consultant were deemed to be operating costs.

 

During the six months ended May 31, 2014, the Company borrowed $36,000 from its Chief Executive Officer. The debt id payable on demand and bears an annual interest rate of 24%.

 

At May 31, 2014 and November 30, 2013, we owed our chief executive officer $1,101,861 and $938,210, respectively, for loans he provided to the Company, unpaid salary and unpaid business expenses. During the first half of fiscal 2014, the chief executive officer settled an outstanding debt payable of $10,565 for 5,000,000 shares of common stock, which was valued at $9,500 at the time of the conversion, resulting in a gain of $1,065. No such transaction occurred during the first half of fiscal 2013.

 

Note 14 – Fair Value

 

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:

 

 

 

14

 
 

Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, we base 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 our 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.

 

Derivative Liability

 

The table below presents the amounts of liabilities measured at fair value on a recurring basis as of May 31, 2014 and November 30, 2013.

 

The fair value of the derivatives that are traded in less active over-the counter markets are generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value of hierarchy.

 

 

   Total  (Level 1)  (Level 2)  (Level 3)
May 31, 2014            
             
Derivative liability  $1,558,323    —     $1,558,323    —   
                     
November 30, 2013                     
                     
Derivative liability  $1,672,344    —     $1,672,344    —   

 

Note 15 – Restatement

 

During 2014, the Company determined that it should have recorded and valued tainted derivatives that had not previously been identified as derivatives. As a result, the Company has restated its previously issued financial statements for the six and three-month periods ended May 31, 2013. The restatement resulted in a gain of $1,675,686 for the six month period ended May 31, 2013, or a decrease of $200,547, as compared to a gain of $1,876,233 that had previously been reported, and a gain of $3,550,400 for the three-month period ended May 31, 2013, or an increase $3,986,766, as compared to a loss of $436,366 that had previously been reported.

 

The Company restated its consolidated financial statements as of and for the six months ended May 31, 2013 as follows:

 

   Six Months Ended May 31, 2013
   As Originally       
   Reported  Adjustments   As Restated
Debt payable   4,343,495    483,818  (1)  3,859,677 
Interest expense   406,334    1,270,252  (1)  1,676,586 
Derivative liabilities   453,419    (981,176) (2)  1,434,595 
Capital in excess of par value   40,158,941    124,385  (2)  40,034,556 
Accumulated deficit   (49,750,525)   372,973  (2)  (50,123,498)
(Gain) loss on settlement of liabilities        (1,344,326) (3)  (1,344,326)
(Gain) loss on value of derivative liabilities   (125,666)   274,621  (2)  148,955 

 

Adjustments to consolidated financial statements:

(1)To record debt discount on convertible debentures.
(2)To record derivative liabilities for tainted options and warrants.
(3)To adjust gain on conversion of derivative liabilities to common stock.

 

15

 
 

The Company restated its consolidated financial statements as of and for the three months ended May 31, 2013 as follows:

 

    Three Months Ended May 31, 2013
    As Originally        
    Reported   Adjustments   As Restated
Interest expense     242,763       317,393   (1)   560,156  
(Gain) loss on settlement of liabilities             (1,196,848 ) (3)   (1,196,848 )
(Gain) loss on value of derivative liabilities     179,753       (3,107,411 ) (2)   3,287,164  

 

Adjustments to consolidated financial statements:

(1)To record debt discount on convertible debentures.
(2)To record derivative liabilities for tainted options and warrants.
(3)To adjust gain on conversion of derivative liabilities to common stock.

 

Note 16 - Subsequent Events

 

In June of 2014, the Company borrowed $40,000 from a working capital lender. The term is approximately six months and the interest rate is 34%.

 

 

 

 

16

 
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the U.S. Securities and Exchange Commission (collectively, the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

 

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.

 

Overview

 

We are a provider of video and voice over Internet Protocol, or VoIP, telephony services.  The nature of our technology is cloud-based computing, and therefore our target market is not limited to our physical presence in the United States.  In particular, we have transformed our VoIP service to a downloadable digital product, which coupled with our fully-automated back office, allows us to sell our voice, video and messaging services instantly to a large variety of mobile devices around the world.  We sell under the brand name of VoX Communications, VoX or VoX Mobile.

 

The continued growth in both mobile telephone services and video telephone services has resulted in a rapidly growing mobile VoIP market that allows subscribers to make inexpensive calls from their mobile phones or tablets instead of using costly airtime minutes.  We offer our mobile VoIP service to Android and Apple devices as a download from the app stores for Android or Apple users. We offer a free trial that allows subscribers to call up to 60 countries for 60 minutes with a temporary phone number.

 

A paid subscriber is able to download, over an Internet connection, a real telephone number from VoX that allows the subscriber to make or receive a low-cost mobile telephone call to any person on the public switched telephone network (the “PSTN”). We currently offer telephone numbers from 57 countries to be downloaded to a subscriber’s Android phone or tablet, and no other company offers as diverse a choice of telephone numbers as we offer. Since June 2014, we have been selling a private labeled version of our mobile VoIP app so that other companies can sell our product under their own brand name.

 

Our mobile VoIP app also allows video calling and text messaging to other subscribers. Adding video calling to mobile devices provides corporate managers the ability to see their mobile employees, agents or customers when a telephone call is made, and provides families with the ability to see loved ones who are otherwise inaccessible to visual contact.  Our VoIP platform enables a user to access and utilize our voice, video and messaging services and features regardless of how they are connected to the Internet, including connections over the 3G, 4G, WiFi, cable, DSL or satellite broadband networks.

 

We are able to provide our services at a cost per user that is generally lower than that charged by traditional service providers because we minimize our network costs by using efficient packet-switched technology and interconnecting to a wide variety of termination options, which allows us to benefit from pricing differences between vendors to the same termination points.

 

17

 
 

Having built a fully-automated and scalable VoIP and video calling platform, which began as a wholesale platform for broadband carriers, our growth initiative is mobile services.  

 

 

Plan of Operation

 

We are focused on growth in three primary areas that target existing revenue streams with significant addressable markets.

 

Services to mobile and other connected devices. We are developing next-generation services to meet the increasing demand for VoIP telephony and messaging services by users of smart phones, tablets and other connected devices.  We believe that we can capitalize on favorable trends in the mobile Internet market, including the worldwide proliferation of low cost 3G and 4G services and low or no-cost WiFi broadband, and the accelerating rate of smart phone and tablet adoption.  We offer VoX Mobile, our mobile VoIP application, with free, high quality voice and video calling and messaging between users who have this application, as well as low-cost international calling to more than 200 countries to any other phone. Recent data from the research firm ComScore shows that the Android operating system is currently outselling other operating systems with a 51.7 percent share and that Apple’s iOS has a 41.6 percent share. The VoX Mobile app can be downloaded to either of these operating systems, representing more than 93% of the worldwide mobile phones in circulation. In January 2014 the analyst firm Gartner, Inc. estimated that Android will have 1.9 billion installed devices (smart phones, tablets and laptops) in 2014, compared with 682 million Apple devices, giving an addressable market of more than 2.5 million devices for the VoX Mobile app.

 

 

International long distance calling.  The markets for international long distance are large and growing and we plan to leverage our VoIP network by offering consumers a low-cost and convenient alternative to the international services offered by telephone and cable companies and international calling cards.  Industry data estimates the international long distance calling market to be $80 billion annually, with up to 15% of such calling originating in the United States, using a mix of home and mobile phones.  We are focusing on serving the rapidly growing ethnic segments in the United States and we are offering a mobile VoIP product that no other company currently offers. For a fee of $9.95 per month, a user can download from the VoX Mobile app on the Google Play store, a phone number from a choice of 57 countries. People in the United States, or in any other country, are able to choose a phone number that is local to their friends and family, in any of 57 countries, so that when their friends and family call them, and they are overseas, the cost of the international call to a mobile phone is recorded as a local call, and charged a local calling rate, which frequently is free.

 

Although we have a limited marketing budget, to increase the visibility of our international telephone numbers and calling plans, we have shifted a portion of our marketing budget to target attractive segments of the international long distance market. 

 

We are also negotiating with foreign companies to sell our app to their subscribers. Given our ability to instantly provide a foreign phone number on a download to an Android device, we are negotiating with an IPTV company in Mexico and Colombia, to install our Android app on their Android set-top box so that they can offer a triple-play solution to their customer base; a mobile wallet company in South Africa to sell our app to its subscribers and others; and an Eastern European VoIP provider that is seeking to offer our app to its subscribers and others in Eastern Europe.

 

Low-end domestic.  While our primary emphasis remains mobile calling, the domestic-only calling segment, with more than 40 million broadband households, is a sizeable opportunity that we target with Android-based home phones.  We currently support this segment with an analog telephone adapter device that we sell with our monthly VoIP service plan, similar to many of our competitors, and with a cordless Android home-phone that runs on the household’s WiFi connection.  We believe this segment represents a large incremental market opportunity for light users who want to keep their home phone number, but no longer want to pay a monthly recurring line fee for the benefit of having a landline or a VoIP line in their home.  By using our Pay and Go application, these users can pay for calls as they make them, from an Android-based cordless phone, port their existing phone number to our VoIP platform, and not have to pay the monthly recurring line charges that subscription-based plans require of users.

 

Our approach to VoIP does not require expensive network equipment to provide telephony services. Instead we rely on our proprietary software and a “server cluster” or “server farm” architecture. Unlike the typical telecom model where one large expensive machine performs almost every task, we have a server farm comprised of a cluster of Dell servers and Cisco routers, which have a carrying value on our books of $-0-, where each machine performs a different task and has from one to three backup machines to ensure that services never go down. By not relying on the equipment and related software of telecom equipment vendors, we are able to control our own destiny and scale without the limitations and delays associated with equipment financing, installation and the integration of new machines and source code updates that equipment vendors impose on VoIP carriers.

.

18

 
 

Results of Operations

 

For the Six Months Ended May 31, 2014 Compared to the Six Months Ended May 31, 2013

 

Our revenue for the six-month period ended May 31, 2013 decreased by $18,877, or 4%, to $451,015, as compared to $468,892 reported for the six-month period ended May 31, 2013. The decrease in revenues was mainly due to the loss of wholesale business during the first half of 2014, which we consider less desirable than our mobile VoIP product.  Given the large addressable market for mobile apps and the advantages that our app offers consumers for low-cost calling, and free text messaging, voice and video calls to other app users, our sales representatives and our advertising are only focused on the growth of our mobile app product. Monthly revenue from our wholesale customers has been more volatile in recent months and we anticipate significant decreases in our wholesale business in the remainder of fiscal 2014. To accelerate the growth of our mobile app we are negotiating with other companies to resell our app to their existing subscriber base.

 

For the six-month period ended May 31, 2014, our gross profit amounted to $213,526, which was a decrease of $45,294 from the gross profit of $258,820 reported in the six-month period ended May 31, 2013. The reduction in gross profit is attributable to the reduction of revenue for the period. Our gross margin percentage for the six-month periods ended May 31, 2014 and 2013 decreased to 47% from 55%. To attract retail customers, we offer calling rates that are steeply discounted in comparison to wireless carriers and we offer several calling plans with free minutes or a free month of service. Consequently, we anticipate that any growth in retail customers will not increase our gross margin percentage.

 

Selling, general and administrative expenses decreased by $94,318, or 12%, to $722,062 for the six-month period ended May 31, 2014 from $816,380 reported in the same prior-year fiscal period. The decrease was primarily due to a reduction in personnel cost of approximately $71,000, a reduction in professional fees of approximately $72,000, a reduction in insurance costs of approximately $11,000 and a reduction in stockholder expenses of approximately $7,000, offset by an increase in marketing costs and finance fees of approximately $48,000 and $30,000, respectively.

 

As a result of the reduction in our selling, general and administrative expenses, our loss from operations for the six-month period ended May 31, 2014 decreased by $49,024 to $508,537 from $557,560 reported in the prior fiscal period. However, significant non-operating income and expenses impact our results, thus:

 

 

 

 

 

19

 
 

Our net result for the six-month period ended May 31, 2014, then, was a net loss of $342,285, compared to net income of $1,675,686 recorded in the prior-year fiscal period. In fiscal 2013, the net income occurred only because the gain we realized through the restructuring and settlement of our debt exceeded the losses we incurred from the remainder of our business.

 

For the Three Months Ended May 31, 2014 Compared to the Three Months Ended May 31, 2014

 

Our revenue for the three-month period ended May 31, 2014 increased by $6,026, or 4%, to $237,353, as compared to $231,327 reported for the three-month period ended May 31, 2013. The increase in revenues was mainly due to one of our wholesale customers who had an unusual amount of international traffic on our platform. Traffic from our wholesale customers has been more erratic than in prior years and we anticipate that our wholesale revenues will see a significant decrease in the remainder of fiscal 2014. We believe that the wholesale business is less desirable than our mobile VoIP product.  Given the large addressable market for mobile apps and the advantages that our app offers consumers for low-cost calling, and free text messaging, voice and video calls to other app users, our sales representatives and our advertising are only focused on the growth of our mobile app product. To accelerate the growth of our mobile app we are negotiating with other companies to resell our app to their existing subscriber base.

 

For the three-month period ended May 31, 2014, our gross profit amounted to $123,898, which was a decrease of $7,228 from the gross profit of $131,126 reported in the three-month period ended May 31, 2013. The reduction in gross profit is attributable to the low profit margin on international traffic for the period. Our gross margin percentage for the three-month periods ended May 31, 2014 and 2013 decreased to 52% from 57%. To attract retail customers, we offer calling rates that are steeply discounted in comparison to wireless carriers and we offer several calling plans with free minutes or a free month of service. Consequently, we anticipate that any growth in retail customers will not increase our gross margin percentage.

 

Selling, general and administrative expenses decreased by $91,194, or 21%, to $344,637 for the three-month period ended May 31, 2014 from $435,831 reported in the same prior-year fiscal period. The decrease was primarily due to a reduction in personnel cost of approximately $62,000, a reduction in professional fees of approximately $39,000,

a reduction in insurance costs of approximately $10,000 and a reduction in stockholder expenses of approximately $6,000, offset by an increase in marketing costs and finance fees of approximately $15,000 and $15,000, respectively.

 

 

As a result of the reduction in our selling, general and administrative expenses, our loss from operations for the three-month period ended May 31, 2014 decreased by $83,966 to $220,739 from $304,705 reported in the prior-year fiscal period. However, significant non-operating income and expenses reversed those results, thus:

 

 

 

20

 
 

Our net result for the three-month period ended May 31, 2014, was a net loss of $761,979, compared to a net income of $3,550,400 recorded in the prior-year fiscal period. In fiscal 2013, however, the net income occurred because of the gains we realized when we settled debt with creditors and when our derivative liabilities decreased in market value, exceeded the losses we incurred from the remainder of our business.

 

Liquidity and Capital Resources

 

At May 31, 2014, we had cash and cash equivalents of $25,225 and negative working capital of $10,632,869.

 

Operating activities for the six months ended May 31, 2014 used $167,301 of cash, consisting principally of operating losses of $508,536 and interest payments of $52,899, offset by approximately $55,000 in non-cash income statement charges and approximately $522,000 in changes in operating assets and liabilities. Operating results for the six months ended May 31, 2013 used $450,823 of cash, consisting principally of net income of $1,675,686 and non-cash interest expense of $1,575,019, offset by approximately $1,344,000 in gains on debt settlements and a gain on troubled debt restructuring of approximately $2,700,000.

 

Net cash provided by financing activities aggregated $175,284 and $440,667 in the six-month periods ended May 31, 2014 and 2013, respectively. In fiscal 2014, cash provided by financing activities resulted from proceeds from short-term borrowing of $276,500, less repayments of debt of $101,216. In fiscal 2013, cash provided by financing activities resulted from proceeds from short-term borrowing of $448,000, less repayments of debt of $7,333.

 

For the six months ended May 31, 2014 and 2013, we had no capital expenditures. We do not expect to make equipment purchases in the remainder of fiscal 2014.

 

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of our company as a going concern.  However, we have sustained net losses from operations during the last several years, and we have very limited liquidity.  Our operating losses have been funded through the issuance of equity securities and borrowings. Management anticipates that we will be dependent, for the near future, on our ability to obtain additional capital to fund our operating expenses and anticipated growth. The report of our independent registered public accounting firm, included in our From 10-K for the year ended November 30, 2013 expresses doubt about our ability to continue as a going concern.  Our operating losses have been funded through the issuance of equity securities and borrowings.

 

Although we have significantly improved our balance sheet with transactions to settle our debt, we continue to have liabilities in excess of our assets.  We are working to settle our remaining liabilities and to raise cash to support our operating loss, and we continually consider a variety of possible sources.  In the current economic environment, the procurement of outside funding is extremely difficult and there can be no assurance that such financing will be available, or, if available, that such financing will be at a price that will be acceptable to us.  If we are unable to generate sufficient revenues or raise additional capital, our operations will terminate.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide information under this item.

 

Item 4. Controls and Procedures.

 

(a) Disclosure Controls and Procedures.

 

The Company’s management, with the participation of the Company’s principal executive officer (“PEO”) / principal financial officer (“PFO”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated 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 this evaluation, the PEO / PFO concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective to ensure that information that is required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the PEO / PFO, as appropriate, to allow timely decisions regarding required disclosure. The material weaknesses in our disclosure controls and procedures consisted of:

 

21

 
 

● There is a lack of accounting personnel with the requisite knowledge of Generally Accepted Accounting Principles in the US (“GAAP”), telecom taxation requirements and the financial reporting requirements of the SEC;

 

● There are insufficient written policies and procedures to insure the correct application of accounting and financial reporting with respect to the current requirements of GAAP and SEC disclosure requirements; and

 

● There is a lack of segregation of duties, in that we only had one person performing all accounting-related duties.

 

(b) Changes in 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 our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 

 

 

 

 

 

22

 
 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 1A. Risk Factors.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide information under this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

Item 3. Defaults Upon Senior Securities.

 

Except for matters described in Note 9, there have been no defaults in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information.

 

None

 

Item 6. Exhibits.

 

Exhibit No.   Document
     
31   Rule 13a-14(a) Certification
     
32   Rule 13a-14(b) Certification
     
101.INS   XBRL Instance
     
101.SCH   XBRL Schema
     
101.CAL   XBRL Calculation
     
101.DEF   XBRL Definition
     
101.LAB   XBRL Label
     
101.PRE   XBRL Presentation

 

 

 

 

23

 
 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

      PERVASIP CORP.
           
           
Date: September 3, 2014   By:  /s/ Paul H. Riss  
        Name: Paul H. Riss  
       

Title: Chief Executive Officer

(Principal Executive Officer)

(Principal Financial and

Accounting Officer)

  

 

 

 

 

 

 

24