U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
COMMISSION FILE NUMBER: 001-15665
UC HUB GROUP, INC.
(Name of small business issuer in our charter)
NEVADA 88-0389393
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10390 COMMERCE CENTER DRIVE, SUITE 250 91730
RANCHO CUCAMONGA, CALIFORNIA (Zip Code)
(Address of principal executive offices)
(909) 945-8563
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of January 31, 2005, the
issuer had 6,188,020 shares of common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . 2
Item 1. Financial Statements (Unaudited). . . . . . . . . . . . . . . 2
Item 2. Management's Discussion and Analysis or Plan of Operation . . 11
Item 3. Controls and Procedures . . . . . . . . . . . . . . . . . . . 13
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 14
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds . 14
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 15
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
UC HUB GROUP, INC.
Consolidated Balance Sheet
(Unaudited)
January 31,
2005
-------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 95,243
Accounts Receivable, net of allowance of $57,053 669,279
Inventory 2,492
Other current assets 7,125
-------------
Total current assets 774,139
Property and equipment, net of accumulated
depreciation of $40,864 67,795
-------------
Total assets $ 841,934
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,391,187
Notes payable 506,635
-------------
Total current liabilities 2,897,822
-------------
Total Liabilities 2,897,822
Stockholders' deficit
Convertible Preferred stock, 5,000,000 shares authorized, $0.001 par value
per share; 3,063,082 shares issued and outstanding at January 31, 2005 3,063
Common stock, .001 par value 50,000,000 shares authorized,
6,188,020 shares issued and outstanding at January 31, 2005 6,188
Stock subscription receivable 93,900
Deferred compensation (149,795)
Additional paid-in capital 14,020,238
Accumulated (deficit) (16,029,482)
Total stockholder's deficit (2,055,888)
-------------
Total liabilities and stockholders' deficit $ 841,934
=============
The accompanying notes are an integral part of these financial statements.
2
UC HUB GROUP, INC.
Consolidated Statement of Losses
(Unaudited)
For the Three Months Ended For the Six Months Ended
January 31, January 31,
2005 2004 2005 2004
--------------- -------------- --------------- -------------
Revenues $ 747,100 $ 561,713 $ 1,448,884 $ 1,102,908
Cost of Sales 590,700 485,442 1,124,643 948,398
--------------- -------------- --------------- -------------
Gross Profit 156,400 76,271 324,241 154,510
Selling, general, and administrative expenses 220,879 212,062 723,493 561,834
Sales taxes and fees 319,659 - 319,659 -
Acquisition costs - - 33,474
--------------- -------------- --------------- -------------
Total operating expenses 540,538 212,062 1,076,626 561,834
--------------- -------------- --------------- -------------
Loss before other income and expense (384,138) (135,791) (752,385) (407,324)
Other income (expense):
Interest income (expense) (58,542) (133) (70,667) (12,056)
--------------- -------------- --------------- -------------
Income (loss) before income taxes (442,680) (135,924) (823,052) (419,380)
Income tax benefit - -
--------------- -------------- --------------- -------------
Net Loss $ (442,680) $ (135,924) $ (823,052) $ (419,380)
=============== ============== =============== =============
NET LOSS PER COMMON SHARE
Profit (Loss) from operations
Loss from discontinued operations
Net loss $ (0.08) $ (0.07) $ (0.16) $ (0.21)
=============== ============== =============== =============
PER SHARE INFORMATION -
BASIC AND FULLY DILUTED
Weighted average shares outstanding 5,720,545 1,987,734 5,213,239 1,987,734
=============== ============== =============== =============
The accompanying notes are an integral part of these financial statements.
3
UC HUB GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
January 31,
2005 2004
---------- ----------
OPERATING ACTIVITIES
Net loss $(823,052) $(419,380)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation 16,503 7,514
Acquisition costs 33,474
Interest expense 70,667
Allowance for bad debt 200,757 35,000
Changes in:
Accounts receivable (588,349) 304,797
Inventory (2,492) -
Other current assets (425) (11,587)
Deposits - -
Accounts payable 904,340 (196,536)
---------- ----------
Net cash used in operating activities (188,577) (280,192)
---------- ----------
FINANCING ACTIVITIES
Issuance of notes payable 108,500 -
Proceeds of short-term borrowing 56,000 -
Sale of common stock for cash - 180,000
Common stock subscribed for cash 75,000 100,000
---------- ----------
Net cash provided by financing activities 239,500 280,000
---------- ----------
Net increase (decrease) in cash 50,923 (192)
CASH AT BEGINNING OF YEAR 44,320 130,559
---------- ----------
CASH AT END OF YEAR $ 95,243 $ 130,367
========== ==========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash for paid for:
Interest $ - $ -
========== ==========
Income taxes $ - $ -
========== ==========
SUPPLEMENTAL DISCLOSURE OF
NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of stock and warrants for asset acquisition
and related costs assigned to property and equipment $ 37,500 $ -
========== ==========
Issuance of stock and warrants for asset acquisition,
amount charge to acquisition costs $ 33,474 $ -
========== ==========
Issuance of shares as inducement for loan $ 3,900 $ -
========== ==========
Exchange of 327,970 shares of preferred stock for
983,910 shares of common stock $ 656 $ -
========== ==========
Fair value of warrants issued with promissory note $ 17,011 $ -
========== ==========
Beneficial conversion feature of convertible note $ 24,656 $ -
========== ==========
Convert note payable to common stock subscribed $ 25,000 $ -
========== ==========
Value of options issued to the Company's president $ 150,000 $ -
========== ==========
4
NOTE A - SUMMARY OF ACCOUNTING POLICIES
GENERAL
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions to Form 10-QSB, and therefore, do not include
all the information necessary for a fair presentation of financial position,
results of operations and cash flows in conformity with accounting principles
generally accepted in the United States of America for a complete set of
financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results from operations for the three-month and six-month periods ended January
31, 2005 are not necessarily indicative of the results that may be expected for
the year ended July 31, 2005. The unaudited condensed consolidated financial
statements should be read in conjunction with the July 31, 2004 financial
statements and footnotes thereto included in the Company's Securities and
Exchange Commission Form 10-KSB.
BUSINESS AND BASIS OF PRESENTATION
- ----------------------------------
UC Hub Group Inc. ("Company" or "UC Hub") was formed on February 22, 1999 under
the laws of the State of California.
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiaries, AllCom USA, Inc and eSAFE, Inc. Significant
inter-company transactions have been eliminated in consolidation.
UC Hub is a communications software development and distribution company with
primary interests in digital communications and digitally based products and
services necessary to support the corporate vision of the "Digital City." At
January 31, 2005, we had two wholly owned subsidiaries and a software division:
- - AllCom USA, Inc., a licensed and web centric telecommunications services
provider with Wi-Fi and VoIP offerings, a wholly owned subsidiary;
- - eSAFE, Inc., a developer and distributor of bank sponsored debit and payroll
cards and related services, a wholly owned subsidiary; and
- - OurTown2, a municipal government software application designed to manage the
interface between a municipal government and its constituents or e-citizens.
RECLASSIFICATION
Certain reclassifications have been made to conform to prior periods' data to
the current presentation. These reclassifications had no effect on reported
losses.
LIQUIDITY
As shown in the accompanying financial statements, the Company incurred a net
loss of $442,680 and $135,924 during the three months ended January 31, 2005 and
2004, respectively. The Company's current liabilities exceeded its current
assets by $2,123,683 as of January 31, 2005 (see Note E).
STOCK BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the Company's stock at the date of the grant over the exercise price of the
related option. The Company has adopted the annual disclosure provisions of SFAS
No. 148 in its financial reports for the year ended December 31, 2002 and for
the subsequent periods.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting period. The Company's pro forma
information was as follows:
5
Three months ended January 31, Six months ended January 31,
------------------------------------ ----------------------------------
2005 2004 2005 2004
---------------- ------------------ ---------------- ----------------
Net loss, as reported $ (442,680) $ (135,924) $ (823,052) $ (419,380)
Compensation recognized under
APB No. 25 205 0 205 0
Compensation recognized under
SFAS 123 (485) 0 (485) 0
---------------- ------------------ ---------------- ----------------
Pro forma net loss $ (442,960) $ (135,924) $ (823,332) $ (419,380)
================ ================== ================ ================
Pro forma loss per share $ (0.08) $ (0.07) $ (0.16) $ (0.21)
================ ================== ================ ================
AMOUNT DUE TO OFFICER
The CEO and President of the Company continues to invest his personal capital
into the company by making loans. In addition to these loans the CEO has not
drawn down his full salary according to his employment agreement. As of January
31, 2005, the Company owes Mr. Wilcox a net amount of $601,375.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at January 31, 2005 consist of the
following:
Accounts Payable 1,003,992
Due to Chief Executive 601,375
Sales taxes and fees 360,387
Accrued payroll and related 210,848
Other accrued liabilities 149,447
Accrued interest 65,138
---------
2,391,187
=========
NOTE A - NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
151, Inventory Costs--an amendment of ARB No. 43, Chapter 4. This Statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
previously stated that "under some circumstances, items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs may be so
abnormal as to require treatment as current period charges" This Statement
requires that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal." In addition, this Statement
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. This
Statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Management does not believe the adoption of this
Statement will have any immediate material impact on the Company.
In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate
Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS
152) The amendments made by Statement 152 This Statement amends FASB Statement
No. 66, Accounting for Sales of Real Estate, to reference the financial
accounting and reporting guidance for real estate time-sharing transactions that
is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real
Estate Time-Sharing Transactions. This Statement also amends FASB Statement No.
67, Accounting for Costs and Initial Rental Operations of Real Estate Projects,
to state that the guidance for (a) incidental operations and (b) costs incurred
to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to the
guidance in SOP 04-2. This Statement is effective for financial statements for
fiscal years beginning after June 15, 2005. with earlier application encouraged.
The Company does not anticipate that the implementation of this standard will
have a material impact on its financial position, results of operations or cash
flows.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock Warrants, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions of SFAS
123R are effective as of the first interim period that begins after June 15,
2005. Accordingly, the Company will implement the revised standard in the third
quarter of fiscal year 2005. Currently, the Company accounts for its share-based
payment transactions under the provisions of APB 25, which does not necessarily
require the recognition of compensation cost in the financial statements.
Management is assessing the implications of this revised standard, which may
materially impact the Company's results of operations in the third quarter of
fiscal year 2005 and thereafter.
On December 16, 2004, FASB issued Statement of Financial Accounting Standards
No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,
Accounting for Nonmonetary Transactions (" SFAS 153"). This statement amends APB
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. Under SFAS 153, if a
nonmonetary exchange of similar productive assets meets a commercial-substance
criterion and fair value is determinable, the transaction must be accounted for
at fair value resulting in recognition of any gain or loss. SFAS 153 is
effective for nonmonetary transactions in fiscal periods that begin after June
15, 2005. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results of
operations or cash flows.
NOTE B - SEGMENT INFORMATION
The Company currently operates in two business segments: (1) reselling long
distance and related services through its subsidiary AllCom USA Inc.; (2)
telecommunications hardware sales and installation, a segment which was entered
during the three months ended October 31, 2004 when the Company purchased
certain assets of Integrated Communications (See Note B). Intercompany
receivables and payables are subtracted from total assets and liabilities for
the segments, which are eliminated in consolidation and therefore do not
themselves impact consolidated results.
Three months ended Six months ended
January 31, January 31,
2005 2004 2005 2004
--------- --------- ---------- ----------
Sales to external customers:
Service 374,421 561,713 886,883 1,102,908
Systems 372,679 - 562,001 -
--------- --------- ---------- ----------
Total sales to external customers 747,100 561,713 1,448,884 1,102,908
========= ========= ========== ==========
Cost of goods sold:
Service 309,491 485,442 719,762 948,398
Systems 281,209 - 404,881 -
--------- --------- ---------- ----------
Total cost of goods sold 590,700 485,442 1,124,643 948,398
========= ========= ========== ==========
General and administrative expenses,
Including sales taxes and fees:
Service 198,979 212,062 651,759 561,834
Systems 21,900 - 71,734 -
--------- --------- ---------- ----------
Total general and administrative 220,879 212,062 723,493 561,834
========= ========= ========== ==========
Sales Taxes and Fees:
Service 319,659 - 319,659 -
Systems - - - -
Total sales taxes and fees 319,659 - 319,659 -
--------- --------- ---------- ----------
Acquisition costs:
Service - - - -
Systems - - 33,474 -
--------- --------- ---------- ----------
Total depreciation and amortization - - 33,474 -
========= ========= ========== ==========
Capital expenditures:
Service - - - -
Systems - - 37,500 -
--------- --------- ---------- ----------
Total capital expenditures - - 37,500 -
========= ========= ========== ==========
Operating income (loss):
Service (453,708) (135,791) (804,297) (407,324)
Systems 69,570 - 51,912 -
--------- --------- ---------- ----------
Total operating income (loss) (384,138) (135,791) (752,385) (407,324)
========= ========= ========== ==========
Segment assets:
Service 376,527
Systems 465,407 -
--------- ---------
Total segment assets 841,934 436,608
========= =========
6
NOTE C - SALES TAXES AND FEES
During the three months ended January 31, 2005, the Company determined that
there is a liability for sales taxes and fees collected on telephone services
sold. At January 31, 2005, the Company estimates the amount of this liability to
be approximately $319,659. There may be additional penalties which will apply to
this amount. $319,659 has been charged to operations during the three months
ended January 31, 2005.
NOTE D - CHANGES IN PRIOR PERIOD REVENUE CUTOFF
During the three months ended January 31, 2005, the Company became aware of a
cutoff error in the accounting for revenue and related cost of sales between the
three months ended October 31, 2003 and the three months ended March 31, 2004.
This error resulted in overstating revenue and cost of sales for the three
months ended October 31, 2003 by $291,688 and $235,911, respectively; this error
also resulted in understating revenue and cost of sales for the three months
ended January
7
31, 2004 by the same amounts, or $291,688 and $235,911, respectively. There was
no cumulative effect to income due to this error.
The net effects of this adjustment for the periods effected are as follows:
As originally
stated
3 months Adjustment Adjustment Restated
ended for for sales Total 3 m/e
1/31/2004 Sales Cutoff taxes/fees Adjust 1/31/2004
------------------------------------------------------------------
Revenues inc (decrease) 912,051 (291,688) (58,650) (350,338) 561,713
Cost of Sales inc (decrease) 722,236 (235,911) (883) (236,794) 485,442
Net Loss inc (decrease) (22,380) (55,777) (57,767) (113,544) (135,924)
Net loss per common share,
basic and diluted inc (decrease) $ (0.01) $ (0.03) $ (0.03) $ (0.06) $ (0.07)
As originally
stated
6 months Adjustment Adjustment Restated
ended for for sales Total 6 m/e
1/31/2004 Sales Cutoff taxes/fees Adjust 1/31/2004
------------------------------------------------------------------
Revenues inc (decrease) 1,228,290 - (125,382) (125,382) 1,102,908
Cost of Sales inc (decrease) 965,384 - (16,986) (16,986) 948,398
Net Loss inc (decrease) (310,984) - (108,396) (108,396) (419,380)
Net loss per common share,
basic and diluted inc (decrease) $ (0.16) $ (0.06) $ (0.06) $ 0.21
8
NOTE E - NOTES PAYABLE
In December 2004, we issued a note payable in the amount of $50,000. As
incentive for making this loan to the Company we also provided the lender with
15,000 shares of restricted stock with a value of $3,900. This amount is charged
to interest expense and credited to common stock subscribed during the three
months ended January 31, 2005.
NOTE F - CAPITAL STOCK
ETI transaction and preferred stock exchanged for common stock
- --------------------------------------------------------------
On March 5, 2004, the Company entered into an Agreement and Plan of Merger
('Agreement") with Expertise Technology Innovation, Inc("ETI") an inactive
publicly registered shell corporation with no significant assets or operations.
In accordance with SFAS No. 141, the Company was the acquiring entity. While the
transaction is accounted for using the purchase method of accounting, in
substance the Agreement is a recapitalization of the Company's capital structure
For accounting purposes, the Company has accounted for the transaction as a
reverse acquisition and the Company shall be the surviving entity. The total
purchase price was the fair value of the shares held by the ETI shareholders, or
$865,164. This amount was charged to operations during the twelve months ended
July 31, 2004. The Company did not recognize goodwill or any intangible assets
in connection with the transaction.
Effective with the Agreement, all previously outstanding common stock, preferred
stock, options and warrants owned by the Company's shareholders were exchanged
for an aggregate of 4,269,844 shares of ETI's convertible preferred stock (the
"ETI Preferred Stock"). The value of the ETI Preferred Stock that was issued was
the historical cost of the ETI's net tangible assets, which did not differ
materially from their fair value. In addition, holders of the Company's options
and warrants to acquire common stock exchanged their options for options to
acquire the ETI's common stock. The ETI Preferred Stock was exchangeable at the
option of the stockholder into shares of ETI Common Stock at the rate of one
share of ETI Preferred Stock for three shares of common stock. The exchange of
ETI Preferred Stock to common stock was restricted to one-twelfth of the total
number of shares held by each shareholder per month, beginning in January 2004.
During the three months ended January 31, 2004, 327,970 shares of ETI Preferred
Stock were exchanged for 983,910 shares of common stock. At January 31, 2004, a
cumulative total of 1,206,762 shares of ETI Preferred Stock had been exchanged
for 3,620,286 shares of common stock, and 3,063,082 shares of ETI Preferred
Stock exchangeable for 9,189,246 shares of common stock remained outstanding.
Common Stock Subscribed
- -----------------------
In December 2004, a note payable previously issued in the amount of $25,000
converted to common stock at 50% of the market price, or $0.15. We calculated
the intrinsic value of the beneficial conversion feature of the note to be
$24,656, and charged that amount to operations during the three months ended
January 31, 2005. The amount of $25,000 is shown as Common Stock Subscribed in
the accompanying financial statements for the period ended January 31, 2005.
Stock Options
- -------------
In January 2005, the Company's Chief Executive Officer received options to
purchase 1,500,000 shares of the Company's stock at a price of $0.16. These
options vest over a three-year period, and have a term of ten years. The 946,875
options previously held by the Chief Executive Officer were cancelled. The
Company valued the options at $150,000 and charged this amount to deferred
compensation during the three months ended January 31, 2005. This amount will be
amortized over the vesting period of the options, or 3 years. During the 3
months ended January 31, 2005, the Company amortized the amount of $205.
9
NOTE G - GOING CONCERN
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 normal course of business. As shown in the accompanying
financial statements, the Company incurred a net loss of $442,680 and $135,924
during the three months ended January 31, 2005 and 2004, respectively. The
Company's current liabilities exceeded its current assets by $2,123,683 as of
January 31, 2005. These factors among others may indicate that the Company will
be unable to continue as a going concern for a reasonable period of time.
The Company's existence is dependent upon management's ability to develop
profitable operations. The accompanying statements do not include any
adjustments that might result should the Company be unable to continue as a
going concern.
In order to improve the Company's liquidity, the Company's management is
actively pursing additional equity financing through discussions with investment
bankers and private investors. There can be no assurance the Company will be
successful in its effort to secure additional equity financing.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING INFORMATION
Much of the discussion in this Item is "forward looking" as that term is used in
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934. Actual operations and results may materially differ from present plans
and projections due to changes in economic conditions, new business
opportunities, changed business conditions, and other developments. Other
factors that could cause results to differ materially are described in our
filings with the Securities and Exchange Commission.
The following are factors that could cause actual results or events to differ
materially from those anticipated, and include, but are not limited to general
economic, financial and business conditions, changes in and compliance with
governmental laws and regulations, including various state and federal
environmental regulations, our ability to obtain additional financing from
outside investors and/or bank and mezzanine lenders; and our ability to generate
sufficient revenues to cover operating losses and position us to achieve
positive cash flow.
Readers are cautioned not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. We believe
the information contained in this Form 10-QSB to be accurate as of the date
hereof. Changes may occur after that date. We will not update that information
except as required by law in the normal course of our public disclosure
practices.
Additionally, the following discussion regarding our financial condition and
results of operations should be read in conjunction with the financial
statements and related notes contained in Item 1 of Part I of this Form 10-QSB,
as well as the financial statements in Item 7 of Part II of our Form 10-KSB for
the fiscal year ended July 31, 2004.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements requires our management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and revenue and expenses
during the applicable period. Future events and their effects cannot be
determined with certainty; therefore, the determination of estimates requires
the exercise of judgment. Actual results inevitably will differ from those
estimates, and such differences may be material to our financial statements. Our
management continually evaluates its estimates and assumptions, which are based
on historical experience and other factors that we believe to be reasonable
under the circumstances. These estimates and our actual results are subject to
known and unknown risks and uncertainties. There have been no material changes
in our critical accounting estimates or our application of these estimates in
2005.
COMPARISON OF THE THREE MONTHS ENDED JANUARY 31, 2005 TO THE THREE MONTHS ENDED
JANUARY 31, 2004
REVENUE. Our total revenue was $747,100 for the three month period ended January
31, 2005, an increase of $185,387 or approximately 33 percent compared to
$561,713 for the three month period ended January 31, 2004. Our wholly owned
subsidiary, AllCom USA, Inc., continued implementing the AllCom Systems in this
quarter and its sales and servicing efforts produced an increase in our total
revenue. AllCom Systems offers VoIP, Wi-Fi, engineering, cabling and telephone
systems to businesses and Digital Cities. We believe that having the flexibility
and engineering capability in this very competitive communications marketplace
will accelerate our market penetration and assist us in our overall Digital City
vision.
GROSS PROFIT. Our gross profit was $156,400 or approximately 21 percent of sales
for the three months ended January 31, 2005, compared to a gross profit of
$76,271 or approximately 14 percent of sales for the three months ended January
31, 2004. The increase in gross profit as a percent of sales and the increase in
gross profit in dollars during the period both resulted from the increase in
sales from AllCom and the elimination of marginal business, and improved results
from ongoing business of the unit.
COSTS AND EXPENSES. Selling, general and administrative ("SG&A") expenses for
the three-month period ended January 31, 2005 were $220,879, an increase of
$8,817or approximately 4 percent compared to SG&A expenses of $212,062 during
the three month period ended January 31, 2004. The decrease is attributable to
the inclusion of the Costs and expenses of AllCom Systems offset by head office
cost reductions.
SALES TAXES AND FEES. During the three months ended January 31, 2005, the
Company determined that there is a liability for sales taxes and fees collected
on telephone services sold. At January 31, 2005, the Company estimates the
amount of this liability to be approximately $319,659. There may be additional
penalties which will apply to this amount. $319,659 has been charged to
operations during the three months ended January 31, 2005.
INTEREST EXPENSE. We incurred interest expense of $58,542 during the three
months ended January 31, 2005 versus $133 during the three
11
months ended January 31, 2004, which is an increase of $58,409. The increase is
a result of the amortization of the discounts on notes payable resulting from
beneficial conversion features and warrants offered as an inducement to the
lender. The increase is also a result of an increase in the amount of debt
outstanding during the three months ended January 31, 2005.
NET LOSS. For the above reasons, our net loss for the three months ended January
31, 2005 was $442,680, an increase of $306,756 or approximately 226 percent
compared to a net loss of $135,924 for the three months ended January 31, 2004.
Our net loss per common share (basic and diluted) was $0.08 for the three months
January 31, 2005 compared to a net loss per common share of $0.07 for the three
months ended January 31, 2004.
The weighted average number of outstanding shares was 5,720,545 and 1,987,734
for the three months ended January 31, 2005 and 2004, respectively.
COMPARISON OF THE SIX MONTHS ENDED JANUARY 31, 2005 TO THE SIX MONTHS ENDED
JANUARY 31, 2004
REVENUE. Our total revenue was $1,448,884 for the six-month period ended January
31, 2005, an increase of $345,976 or approximately 31 percent compared to
$1,102,908 for the six months ended January 31, 2004. Our wholly owned
subsidiary, AllCom USA, Inc., began implementing the AllCom Systems in this half
year and its sales and servicing efforts produced an increase in our total
revenue. AllCom Systems offers VoIP, Wi-Fi, engineering, cabling and telephone
systems to businesses and Digital Cities. We believe that having the flexibility
and engineering capability in this very competitive communications marketplace
will accelerate our market penetration and assist us in our overall Digital City
vision.
GROSS PROFIT. Our gross profit was $324,238 or approximately 22 percent of sales
for the six months ended January 31, 2005, compared to a gross profit of
$154,510 or approximately 14 percent of sales for the six months ended January
31, 2004. The increase in both gross profit as a percent of sales and in gross
profit in dollars during the period resulted from the increase in sales from
AllCom and the elimination of marginal business, and improved results from
ongoing business of the unit.
COSTS AND EXPENSES. Selling, general and administrative ("SG&A") expenses for
the six month period ended January 31, 2005 were $723,493, an increase of
$161,659 or approximately 29 percent compared to SG&A expenses of $561,834
during the six month period ended January 31, 2004. The increase is attributable
to the inclusion of the Costs and expenses of AllCom Systems, a reserve for bad
debts of $200,757, together partially offset by head office cost reductions.
ACQUISITION COSTS. Acquisition costs were $33,474 during the six months ended
January 31, 2005 due to acquiring some of the assets of Integrated
Communications for our AllCom Systems division. There were no acquisition costs
during the comparable period of the prior year.
SALES TAXES AND FEES. During the six months ended January 31, 2005, the Company
determined that there is a liability for sales taxes and fees collected on
telephone services sold. At January 31, 2005, the Company estimates the amount
of this liability to be approximately $319,659. There may be additional
penalties which will apply to this amount. $319,659 has been charged to
operations during the six months ended January 31, 2005.
INTEREST EXPENSE. We incurred interest expense of $70,667 during the six months
ended January 31, 2005 compared to $12,056 during the six months ended January
31, 2004, which is an increase of $58,409. The increase is a result of the
amortization of the discounts on notes payable resulting from beneficial
conversion features and warrants offered as an inducement to the lender. The
increase is also a result of a large amount of debt outstanding during the six
months ended January 31, 2005.
NET LOSS. For the above reasons, our net loss for the six months ended January
31, 2005 was $823,052, an increase of $403,672 or approximately 96 percent
compared to a net loss of $419,380 for the six months ended January 31, 2004.
Our net loss per common share (basic and diluted) was $0.16 for the six months
ended January 31, 2005 compared to a net loss per common share of $0.21 for the
six months ended January 31, 2004.
The weighted average number of outstanding shares was 5,213,239 and 1,987,734
for the three months ended January 31, 2005 and 2004, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2005, we had a working capital deficit of $2,123,683. We used
cash in operating activities of $188,577 during the six month period ended
January 31, 2005. The cash used in operating activities is largely attributable
to our net loss of $823,052 adjusted for bad debt expense of $200,757 and
changes in the components of working capital amounting to a source of cash of
$313,074.
We met our cash requirements during the period through proceeds from the
issuance of notes payable for cash of $108,500, short term borrowing of $56,000,
and the sale of our common stock in the amount of $75,000.
While we have raised capital to meet our working capital and financing needs in
the past, additional financing is required in order to meet our current and
projected cash flow deficits from operations and development. We are seeking
financing in the form of equity in order to provide the necessary working
capital. We currently have no commitments for financing. There is no guarantee
that we will be successful in raising the funds required.
12
By adjusting our operations and development to the level of capitalization, we
believe we have sufficient capital resources to meet projected cash flow
deficits through the next 12 months. However, if thereafter we are not
successful in generating sufficient liquidity from operations or in raising
sufficient capital resources, on terms acceptable to us, this could have a
material adverse effect on our business, results of operations, liquidity and
financial condition. Our net loss for the six months ended January 31, 2005 was
$823,052, an increase of $403,672 or approximately 96 percent compared to a net
loss of $419,380 for the six months ended January 31, 2004. The increased loss
is largely the result of the reserve for bad debts of $200,757 and the $319,659
charge taken for sales taxes and fees, partially offset by the contributions of
AllCom Systems and the cost reduction exercise.
The effect of inflation on our revenue and operating results was not
significant. Our operations are located in North America and there are no
seasonal aspects that would have a material effect on our financial condition or
results of operations.
Our independent certified public accountants have stated in their report
included in our July 31, 2004 Form 10-KSB, that we have incurred operating
losses in the last two years, and that we are dependent upon management's
ability to develop profitable operations. These factors among others may raise
substantial doubt about our ability to continue as a going concern.
RECENT DEVELOPMENTS
eSAFE is in the final rounds of completing the legal agreement between First
Federal Bank whereby they will be the issuer of a MasterCard flagged product for
eSAFE.
eSAFE has hired three additional people to assist in the training and roll out
of the cash card program. This program has begun with PowerFuel in Houston Texas
and Independent Sales Organizations in Hawaii.
eSAFE has also signed a preliminary agreement with the National Indoor Football
League to assist on a combination of software and loyalty membership basis.
UC Hub has signed an interim binding Memorandum of Understanding with Source to
utilize exclusively the Digital City Loyalty Program.
AllCom has signed a master sales agreement with the Canadian firm, PRESINET and
has begun training on the bandwidth management and security systems that have
elaborate management reporting capability.
OT2, our municipal government division, has interest from three new cities to
buy the software package to run their respective cities. These cities will now
begin a 30 day pilot program which may expand.
OT2 has begun its direct mail campaign with Tier II and Tier III Cities and is
receiving a positive market response to the mail piece.
AllCom Systems has completed the majority of the engineering and communications
system installations in St. Mary's Health Network located in Reno, Nevada.
AllCom Systems is planning to expand it's operations from Nevada to Southern
California by mid year, whereby ALLCOM should see an increase in revenue and
residual service costs.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
ITEM 3. CONTROLS AND PROCEDURES.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act is accumulated and communicated to our management, including our
principal executive and financial officers, as appropriate to allow timely
decisions regarding required disclosure.
Evaluation of Disclosure and Controls and Procedures. As of the end of the
period covered by this Quarterly Report, we conducted an evaluation, under the
supervision and with the participation of our chief executive officer and chief
financial officer, of our disclosure controls and procedures (as defined in
Rules 13a-15(e) of the Exchange Act). Based on this evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective 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 Securities and Exchange Commission rules and forms.
Changes in Internal Controls Over Financial Reporting. There was no change in
our internal controls, which are included within disclosure controls and
procedures, during our most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
controls.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In the ordinary course of business, we may be involved in legal proceedings from
time to time. Although occasional adverse decisions or settlements may occur, we
believe that the final disposition of such matters will not have material
adverse effect on our financial position, results of operations or liquidity. We
will seek to minimize disputes with our customers but recognize the
inevitability of legal action in today's business environment as an unfortunate
price of conducting business.
On May, 25, 2004, in Cause No. 04-0553, at the American Arbitration Association
located in Denver, Colorado, we reached a favorable settlement of the litigation
with Qwest Communications, Inc. and the disposition of the claimed $1,070,000
obligation to Qwest. This settlement required us to pay a $50,000 settlement
fee, which has been paid. We recorded a gain of $1,022,238 on legal settlement
as a result of this ruling during the 12 months ended July 31, 2004. As part of
the same settlement, our wholly owned subsidiary, AllCom USA, agreed to pay
Qwest the sum of $130,477.17 representing previously incurred debt pursuant to a
promissory note which was due on November 24, 2004. Although we have not paid
the AllCom note, Qwest has agreed verbally to extend the terms of the AllCom
note for a period of up to 180 days. As of the date of this report, we have
verbally agreed with Qwest to pay the note over the next three months by making
payments in March, April and May of 2005. As of the date of this report, we have
made the first payment. The amount of each payment is at our discretion, as long
as the note is repaid in full by the end of May of 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended January 31, 2005, 983,910 shares of our common
stock were issued in exchange for 327,970 shares of our preferred stock in
connection with the Agreement and Plan of Merger dated May 28, 2003, whereby New
ETI, Inc., a California corporation, and a wholly owned subsidiary of Expertise
Technology Innovation, Inc., merged with and into United Communications Hub,
Inc., a California corporation, with United Communications Hub continuing as the
surviving corporation and as our wholly owned subsidiary.
In December 2004, a note payable previously issued in the amount of $25,000
converted to common stock at 50% of the market price, or $0.15. We calculated
the intrinsic value of the beneficial conversion feature of the note to be
$24,656, and charged that amount to operations during the three months ended
January 31, 2005. The amount of $25,000 is shown as Common Stock Subscribed in
the accompanying financial statements for the period ended January 31, 2005.
In December 2004, we issued our note payable in the amount of $50,000. As an
incentive for making this loan to the Company we also provided the lender with
15,000 shares of restricted stock with a value of $3,900. This amount is charged
to interest expense and to common stock subscribed during the period ended
January 31, 2005.
The issuance of all shares of our common stock was pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act and related
state private offering exemptions. All of the investors took their shares for
investment purposes without a view to distribution and had access to information
concerning UC Hub Group and our business prospects, as required by the
Securities Act.
In addition, there was no general solicitation or advertising for the purchase
of our shares. Our securities were sold only to persons with whom we had a
direct personal preexisting relationship, and after a thorough discussion.
Further, our securities were sold to less than 35 Non-Accredited Investors. All
certificates for our shares contained a restrictive legend. Finally, our stock
transfer agent has been instructed not to transfer any of such shares, unless
such shares are registered for resale or there is an exemption with respect to
their transfer.
(c) The following table provides information about purchases by us and our
affiliated purchasers during the quarter ended January 31, 2005 of equity
securities that are registered by us pursuant to Section 12 of the Securities
Exchange Act of 1934:
ISSUER PURCHASES OF EQUITY SECURITIES
Period (a) (b) (c) (d)
Total Number of Average Price Total Number of Shares (or Maximum Number (or Approximate Dollar
Shares (or Units) Paid per Share Units) Purchased as Part of Value) of Shares (or Units) that May Yet
Purchased) (or Unit) Publicly Announced Plans or Be Purchased Under the Plans or Programs
Programs (1) (1)
08/01/04- 0 $ 0 0 0
08/31/04
09/01/04- 0 $ 0 0 0
09/30/04
10/01/04- 0 $ 0 0 0
10/31/04
(1) We have not entered into any plans or programs under which we may
repurchase our common stock.
14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
On November 19, 2004, an "E" was appended to our trading symbol due to our
failure to timely file our Annual Report on Form 10-KSB for the period ended
July 31, 2004. On January 12, 2004, we filed our Annual Report on Form 10-KSB
for the period ended July 31, 2004 with the SEC. Effective January 24, 2005, the
"E" was removed from our trading symbol.
ITEM 6. EXHIBITS
(a) Exhibits.
EXHIBIT IDENTIFICATION OF EXHIBIT
NO.
2.1* Agreement and Plan of Merger, dated March 23, 2003 and incorporated by reference from the Company's
Form 8-K, filed with the SEC on March 9, 2003.
2.2* Amendment to the Agreement and Plan of Merger dated January 12, 2004 and incorporated by reference
from the Company's Form 8-K, filed with the SEC on March 9, 2004.
2.3* Second Amendment to the Agreement and Plan of Merger, dated January 21, 2004 and incorporated by
reference from the Company's Form 8-K, filed with the SEC on March 9, 2004.
3.1* Articles of Incorporation of Make It Happen Management, filed with the Nevada Secretary of State on
March 23, 1998 and incorporated by reference from the Company's Form 10SB12B, filed with the SEC
on February 4, 2000.
3.2* Certificate of Amendment to the Articles of Incorporation, filed on June 13, 2000, changing the corporate
name from Make It Happen Management to "E-Channels, Inc.," incorporated by reference from the
Company's Form 10-KSB/A, filed with the SEC on April 10, 2001.
3.3* Certificate of Amendment to the Articles of Incorporation, filed on April 25, 2003, changing the corporate
name from "E-Channels, Inc." to "Expertise Technology Innovation, Inc." and increasing authorized
stock, incorporated by reference from the Company's Form 10-KSB, filed with the SEC on April 17,
2003.
15
3.4* Certificate of Amendment to the Articles of Incorporation, filed on January 16, 2004, increasing
authorized stock, incorporated by reference from the Company's Form 10-KSB, filed with the SEC on
February 5, 2004.
3.5* Certificate of Designation designating 4,250,000 shares as Series A preferred stock, filed on January 30,
2004.
3.6* Certificate of Amendment to the Articles of Incorporation, filed on June 2, 2004, changing corporate
name from "Expertise Technology Innovation, Inc." to "UC HUB Group, Inc.", filed with the
registrant's Form 10-KSB on January 12, 2005.
3.7* Bylaws, incorporated by reference from the Company's Form 10SB12B, filed with the SEC on February
4, 2000.
10.1** Employment Agreement dated as of February 1, 2002 with Larry Wilcox.
10.2* Employment Agreement dated as of June 1, 2004 with Alice Kong, filed with the registrant's
Form 10-KSB on January 12, 2005.
10.3* Employment Agreement dated as of February 1, 2003 with John Cheney, filed with the registrant's
Form 10-KSB on January 12, 2005.
10.4* Standard Office Lease dated November 27, 2001, by and between Arden Realty Limited Partnership and
AllCom USA, Inc., filed with the registrant's Form 10-KSB on January 12, 2005.
10.5* Amendment to the Standard Office Lease, dated May 22, 2002, filed with the registrant's Form 10-KSB
on January 12, 2005.
10.6* UC HUB Group, Inc. 2003 Stock Plan, filed with the registrant's Form 10-KSB on January 12, 2005.
10.7* Form of Assignment of intellectual property, dated March 14, 2002, filed with the registrant's
Form 10-KSB on January 12, 2005.
10.8* Promissory Note in the principal amount of $35,000.00, dated April 4, 2002 in favor of Buck
Kumphausen, filed with the registrant's Form 10-KSB on January 12, 2005.
10.9* Promissory Note in the principal amount of $75,000.00, dated April 5, 2004 in favor of Alice Kong,
filed with the registrant's Form 10-KSB on January 12, 2005.
10.10** Promissory Note in the principal amount of $65,000.00, dated August 2, 2004 in favor of Keith Webb
and John Arnone, filed with the registrant's Form 10-KSB on January 12, 2005 and refilled herewith
to correct a mistake.
10.11* Promissory Note in the principal amount of $25,000.00, dated September 17, 2004 in favor of William A.
Mueller, filed with the registrant's Form 10-KSB on January 12, 2005.
10.12* Promissory Note in the principal amount of $50,000.00, dated October 9, 2004 in favor of Bonnie K.
Farnsworth, filed with the registrant's Form 10-KSB on January 12, 2005.
10.13* Promissory Note in the principal amount of $50,000.00, dated December 30, 2004 in favor of Bonnie
Farnsworth, filed with the registrant's Form 10-KSB on January 12, 2005.
10.14* Binding Deal Memorandum between UC Hub Group, Inc. and eCelerity, dated May 20, 2004, filed with the
registrant's Form 10-KSB on January 12, 2005.
10.15* Deal Memorandum between National Merchant Center and eSAFE, Inc., dated October 15, 2004, filed with
the registrant's Form 10-KSB on January 12, 2005.
10.16* Binding Deal Memorandum between UC Hub Group, Inc. and Integrated Communications, dated August
12, 2004, effective as of August 21, 2004, filed with the registrant's Form 10-KSB on
January 12, 2005.
10.17* Negotiable Promissory Note and Agreement dated June 2004, between United Communications Hub, Inc.
and Qwest Communications Corporation in the amount of $50,000 due December 31, 2004, filed with the
registrant's Form 10-KSB on January 12, 2005.
10.18** Negotiable Promissory Note and Agreement dated June 2004, between AllCom USA, Inc. and Qwest
Communications Corporation in the amount of $130,477.17 due November 24, 2004.
10.19** Promissory Note in the principal amount of $25,000.00, dated November 1, 2004 in favor of Stephen F.
Owens.
14* Code of Ethics, file d with the registrant's Form 10-KSB on January 12, 2005.
31.1** Certification of Larry Wilcox, Chief Executive Officer and Chief Financial Officer of UC Hub Group, Inc.,
pursuant to 18 U.S.C. Sec.1350, as adopted pursuant to Sec.302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification of Larry Wilcox, Chief Executive Officer and Chief Financial Officer of UC Hub Group, Inc.,
pursuant to 18 U.S.C Sec.1350, as adopted pursuant to Sec.906 of the Sarbanes-Oxley Act of 2002.
* Previously Filed ** Filed Herewith
16
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on our behalf by the undersigned, thereunto duly
authorized.
DATED MARCH 25, 2005.
UC HUB GROUP, INC.
By /s/ Larry Wilcox
----------------------------------------
Larry Wilcox,
Chief Executive Officer and Chief Financial Officer
17