UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 011-15489
EPIXTAR CORP.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 65-0722193
- ------------------------------------ --------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
11900 BISCAYNE BOULEVARD, SUITE 700
MIAMI, FLORIDA 33181
- ------------------------------------------ ---------------------------------
(Address of principal executive offices) (Zip Code)
305-503-8600
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section l3 or l5 (d) of the Securities Exchange Act of l934
during the preceding l2 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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| NO |X|
The number of shares of the registrant's common stock, $0.001 par value,
outstanding as of October 6, 2005, was 12,465,353 shares.
Epixtar Corp.Form 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 4-5
Notes to Consolidated Financial Statements 6-18
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19-24
Item 3. Quantitative and Qualitative Disclosures About Market Risk33 24-26
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26-27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 5. Other Information 27
Item 6. Exhibits 28
Signatures 29
Exhibits Index
Forward-Looking Statements
This report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. All forward-looking statements
which may be contained in this Quarterly Report on Form 10-Q, are made as of the
date that such statements are originally published or made, and the Company
undertakes no obligation to update any such forward-looking statements. No undue
reliance should be placed on forward-looking statements, which reflect
management's opinions only as of the date made. Forward-looking statements are
made in reliance upon the safe harbor provisions of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and the Private Securities
Litigation Reform Act of 1995.
Such forward looking statements are subject to various known and unknown risks
and uncertainties, as well as assumptions that, if they do not materialize or
prove correct, could cause the Company's results to differ materially from those
expressed or implied by such forward-looking statements. All statements other
than statements of historical fact are statements that could be deemed
forward-looking statements, including, but not limited to, statements: of the
Company's plans, strategies and objectives for future operations;.
Forward-looking statements may be identified by their use of forward-looking
terminology, such as "believes," "expects," "may," "should," "would," "will,"
"intends," "plans," "estimates," "anticipates" or similar words. The Company's
consolidated results and the forward-looking statements could be affected by
many factors, including: For examples of such risks and uncertainties, please
see the cautionary statements contained in "Risk Factors Relating to
Reorganization" in "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations".
1
ITEM 1. FINANCIAL STATEMENTS
EPIXTAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2005 2004
--------------------- ---------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents (includes amounts held in escrow of
$209,360 at September 30, 2005 and $1,110,000 at December 31, 2004 ) $ 606,640 $ 1,530,052
Restricted cash 175,000 175,000
Accounts receivable, net 6,367,041 4,454,152
Deferred loan costs, current portion 1,252,547 423,777
Prepaid expenses and other current assets 399,362 201,045
Deferred billing costs 63,973 70,454
--------------------- ---------------------
Total current assets 6,854,480
8,864,563
Property and Equipment, net 7,993,654 5,103,409
Other Assets:
Note receivable - 900,000
Goodwill 3,360,272 3,360,272
Intangibles 4,855,780 -
Deferred loan costs, net of current portion - 540,886
Deposits and other 3,326,157 1,289,668
--------------------- ---------------------
Total other assets 11,542,209 6,090,826
--------------------- ---------------------
Total assets $ 28,400,426 $ 18,048,715
===================== =====================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $ 3,527,809 $ 2,666,713
Accounts payable, related party 3,065,000 975,000
Deferred revenue 616,766 722,328
Accrued expenses and other liabilities 3,807,570 1,277,565
Accrued interest 873,836 460,104
Current portion of debt and capital leases 21,868,822 6,312,758
Note payable, stockholder 2,474,000 2,474,000
--------------------- ---------------------
Total current liabilities 36,233,803 14,888,468
Long-Term Liabilities:
Debt and capital leases, net of current portion 4,074,312 3,893,470
--------------------- ---------------------
Total liabilities 40,308,115 18,781,938
--------------------- ---------------------
Commitments and Contingencies
- -
Stockholders' Deficiency:
Convertible preferred stock, $.001 par value;
10,000,000 shares authorized; 14,800 and 16,500 shares issued and
outstanding (liquidation preference of $2,960,000 and $3,300,000) 15 17
Common stock, $.001 par value, 50,000,000 shares authorized;
12,465,353 and 11,544,219 shares issued and outstanding 12,465 11,544
Additional paid-in capital 26,485,590 22,114,353
Accumulated deficit (38,256,144) (22,838,853)
Accumulated other comprehensive loss (149,615) (20,284)
--------------------- ---------------------
Total stockholders' deficiency (11,907,689) (733,223)
--------------------- ---------------------
Total liabilities and stockholders' deficiency $ 28,400,426 $ 18,048,715
===================== =====================
See Notes to Consolidated Financial Statements.
BECAUSE OF ITS FINANCIAL CONDITION AND THE AMOUNT OWED TO ITS AUDITORS THE
FINANCIAL STATEMENTS HEREIN HAVE NOT BEEN REVIEWED BY THE COMPANY'S AUDITORS
AND DO NOT MEET THE TECHNICAL REQUIREMENTS OF FORM 10Q .
2
EPIXTAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
2005 2004 2005 2004
---------------- ---------------- ---------------- ---------------
Revenues $ 9,648,758 $ 4,366,286 $ 27,828,163 $ 13,529,770
---------------- ---------------- ---------------- ---------------
Cost of production employees 3,583,604 477,304 10,890,793 907,168
Billing cost 204,033 397,352 772,436 2,039,096
Other costs of revenue 1,080,848 457,281 3,186,954 923,103
---------------- ---------------- ---------------- ---------------
Total costs of revenue 4,868,485 1,331,937 14,850,183 3,869,367
---------------- ---------------- ---------------- ---------------
Gross profit 4,780,273 3,034,349 12,977,980 9,660,403
---------------- ---------------- ---------------- ---------------
Expenses:
Compensation and benefits 2,765,536 2,021,798 10,208,357 5,627,207
Other selling, general and administrative 2,139,364 1,899,306 7,346,839 4,897,746
Consulting fees and reimbursements - related party 900,000 675,945 4,026,250 2,025,945
Provision for doubtful accounts 11,253 24,400 173,288 318,078
Depreciation and amortization 334,416 417,231 1,756,568 788,895
Amortization of intangible assets 364,287 - 1,110,787 -
---------------- ---------------- ---------------- ---------------
Total operating expenses 6,514,856 5,038,680 24,622,089 13,657,871
---------------- ---------------- ---------------- ---------------
Loss from operations (1,734,583) (2,004,331) (11,644,109) (3,997,468)
Other Income (Expense):
Other income (expense) (17,299) 6,515 12,295 (7,813)
Gain on extinguishment (loss on settlement) of debt (86,306) 859,287 (30,040) 1,140,537
Factoring fees on accounts receivable (48,448) - (198,550) (371,003)
Interest expense (420,117) (78,576) (982,436) (412,721)
Amortization, debt discounts (190,834) (157,371) (525,584) (600,288)
Amortization, cost of borrowings (155,863) (127,794) (446,166) (362,608)
Warrants issued in lieu of finance charges (365) - (1,170,170) -
Amortization of beneficial conversion feature
of convertible stock (14,036) (400,150) (42,106) (1,812,434)
Other finance charges (348,270) (2,960) (448,270) (4,931)
---------------- ---------------- ---------------- ---------------
Other income (expense), net (1,281,538) 98,951 (3,831,027) (2,431,261)
---------------- ---------------- ---------------- ---------------
Loss before income taxes (3,016,121) (1,905,380) (15,475,136) (6,428,729)
Provision for income taxes - - - -
Net loss $ (3,016,121) $ (1,905,380) $(15,475,136) $ (6,428,729)
Cumulative dividends on preferred stock (58,008) (88,792) (143,823) (176,852)
---------------- ---------------- ---------------- ---------------
Loss Assignable to Common Stockholders $ (3,074,129) $ (1,994,172) $(15,618,959) $ (6,605,581)
================ ================ ================ ===============
Loss per common share:
Basic and Diluted $ (0.25) $ (0.17) $ (1.29) $ (0.60)
================ ================ ================ ===============
See Notes to Consolidated Financial Statements.
BECAUSE OF ITS FINANCIAL CONDITION AND THE AMOUNT OWED TO ITS AUDITORS THE
FINANCIAL STATEMENTS HEREIN HAVE NOT BEEN REVIEWED BY THE COMPANY'S AUDITORS
AND DO NOT MEET THE TECHNICAL REQUIREMENTS OF FORM 10Q
3
EPIXTAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
2005 2004
------------------ ------------------
OPERATING ACTIVITIES:
Net income (loss) $ (15,475,136) $ (6,428,729)
Adjustments to reconcile net loss to net cash and cash equivalents
used in operating activities:
Depreciation and amortization 1,756,568 788,895
Provision for doubtful accounts 173,288 318,078
Stock-based compensation 1,086,800 158,208
Warrants issued in lieu of finance charges 1,170,170 -
Amortization of beneficial conversion feature of convertible stock 42,106 1,812,434
Amortization of discount on convertible debt 525,584 600,288
Amortization of cost of borrowings 446,166 362,608
Amortization of discount on stockholder loan - 78,488
Amortization of intangible assets 1,110,787 -
Gain on extinguishment (loss on settlement) of debt 30,040 (1,140,537)
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable (921,966) 1,077,802
Prepaid expenses and other (179,534) (54,987)
Deferred billing costs 6,481 203,224
Deposits and other 43,759 (130,207)
Increase (decrease) in:
Accounts payable (3,375,620) 229,128
Accounts payable - related party 2,088,008 975,000
Accrued expenses and other liabilities 3,863,754 -
Accrued interest payable 413,731 -
Deferred revenues (105,563) (674,908)
------------------ ------------------
Net cash and cash equivalents used in
operating activities (7,300,577) (1,825,215)
------------------ ------------------
INVESTING ACTIVITIES:
Cash paid for acquisition of IMS (50,000) -
Cash paid for acquisition of property and equipment (1,924,530) (2,810,039)
Investment in note receivable - (600,000)
Release of cash restricted by governmental agency - 241,721
------------------ ------------------
Net cash and cash equivalents used in
investing activities (1,974,530) (3,168,318)
------------------ ------------------
FINANCING ACTIVITIES:
Proceeds from the issuance of debt, net of loan costs 20,649,429 6,671,499
Repayment of notes payable and capital lease obligations (12,168,403) (1,298,143)
------------------ ------------------
Net cash and cash equivalents provided by
financing activities 8,481,026 5,373,356
------------------ ------------------
Net effect of exchange rates on cash (129,331) 1,296
------------------ ------------------
Net Increase (Decrease) in Cash and Cash Equivalents (923,412) 381,119
Cash and Cash Equivalents, beginning of the period 1,530,052 1,342,186
------------------ ------------------
Cash and Cash Equivalents, ending of the period $ 606,640 $ 1,723,305
================== ==================
4
EPIXTAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Cont.)
Nine Months Ended September 30,
2005 2004
---------------- ----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income Tax Paid $ - $ -
================ ================
Interest Paid $ 568,705 $ 220,543
================ ================
NON CASH TRANSACTIONS
Issuance of 550,290 shares of common stock as part of guaranteed agreement related to the
Company's acquisition of IMS $ 385,000 $ -
Conversion of 3,700 shares of preferred stock into
414,557 shares of common stock 294,000 -
Purchase commitment of equipment secured by promissory note 3,070,000 -
Equipment purchased under capital leases 247,832 339,476
See Notes to Consolidated Financial Statements.
BECAUSE OF ITS FINANCIAL CONDITION AND THE AMOUNT OWED TO ITS AUDITORS THE
FINANCIAL STATEMENTS HEREIN HAVE NOT BEEN REVIEWED BY THE COMPANY'S AUDITORS
AND DO NOT MEET THE TECHNICAL REQUIREMENTS OF FORM 10Q .
5
EPIXTAR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Epixtar Corp. (Epixtar) was incorporated in Florida in June 1994 and was
previously known as Global Asset Holdings, Inc. (Global). Epixtar and its
subsidiaries are collectively known as the "Company". Epixtar, through its
subsidiaries, operates primarily in two lines of business: business process
outsourcing and contact center services (BPO) and internet service provider
services (ISP).
Significant Accounting Policies
We have prepared these unaudited Consolidated Financial Statements on a going
concern basis, which contemplates continuity of operations, realization of
assets and satisfaction of liabilities in the ordinary course of business.
Accordingly, our Condensed Consolidated Financial Statements do not include any
adjustments relating to the recoverability of assets and classification of
liabilities that might be necessary should we be unable to continue as a going
concern.
As discussed in Note 2, on October 6, 2005, the Company and all of its domestic
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code, in the United States Bankruptcy Court for the
Southern District of Florida (Case Nos. 05-42040-BKC-AJC through
05-42049-BKC-AJC). The Debtors are seeking to jointly administer under the
caption "In re Epixtar Corp., et al., Case No. 05-42040-BKC-AJC." The Debtors
intend to continue to operate their business as "debtors-in-possession" under
the jurisdiction of the Court and in accordance with the applicable provisions
of the Bankruptcy Code and orders of the Court. Accordingly future financial
statements during the reorganization period will be prepared in accordance with
the American Institute of Certified Public Accountants Statement of Position
90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy
Code ("SOP 90-7"), and on a going concern basis, which contemplates continuity
of operations, realization of assets and liquidation of post-petition
liabilities in the ordinary course of business. In accordance with SOP 90-7, the
financial statements for the periods to be presented distinguish transactions
and events that are directly associated with the reorganization from the ongoing
operations of the Company.
Basis of Consolidation
The Company's basis of consolidation is to include in the consolidated financial
statements all of the accounts of its wholly-owned subsidiaries and those of its
more-than-50%-owned subsidiaries. All significant intercompany transactions and
account balances have been eliminated.
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company as
of and for the periods ended September 30, 2005 and 2004 have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the rules and regulations of the
Securities and Exchange Commission (SEC). Accordingly, they do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and changes in cash flows in accordance with
accounting principles generally accepted in the United States of America. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In the opinion of management, all adjustments (consisting of normal recurring
entries) considered necessary for a fair presentation have been included. These
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 2004, filed with the SEC in April
2005. Operating results for the three and nine months ended September 30, 2005,
are not necessarily indicative of the results expected for the year ending
December 31, 2005.
6
Stock-Based Compensation
In accordance with Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees", the Company currently uses the
intrinsic-value method of accounting for its employee and board of director
stock options and, accordingly, does not recognize compensation expense for
stock option awards in the Consolidated Statement of Operations, as all option
exercise prices are 100 percent of market value on the date the options are
granted. See Recent Accounting Pronouncements below.
The following table illustrates the pro forma effect on net loss and loss per
share assuming we had applied the fair value recognition provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" to all previously granted stock-based awards after giving
consideration to potential forfeitures. The fair value of each option grant is
estimated at the grant date using the Black-Scholes option-pricing model.
Reference is made to "Note 15: Stock Option Plan" in the Company's Annual Report
on Form 10-K for Fiscal 2004, for the assumptions used in the Black-Scholes
option-pricing model. The estimated fair value of options granted is amortized
to expense over their vesting period, which is generally 3 years.
Three Months Ended Nine Months Ended
--------------- --------------- --------------- ----------------
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
--------------- --------------- --------------- ----------------
Net loss assignable to common shareholders $(3,074,129) $(1,994,172) $(15,618,959) $ (6,605,581)
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of related tax effects (315,538) (975,574) (1,630,842) (2,903,577)
--------------- --------------- --------------- ----------------
Pro forma net loss $(3,389,667) $(2,969,746) $ (17,249,801) $ (9,509,158)
=============== =============== =============== ================
Loss per share:
Basic and Diluted
As reported $(0.25) $(0.17) $(1.29) $(0.60)
=============== =============== =============== ================
Pro forma $(0.27) $(0.26) $(1.42) $(0.86)
=============== =============== =============== ================
Recent Accounting Pronouncements
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R), "Share-Based Payment" (SFAS 123R), which requires all companies to
measure compensation cost for all share-based payments (including employee stock
options) at fair value and to recognize cost over the vesting period. In April
2005, the SEC announced that companies may implement SFAS 123R at the beginning
of their next fiscal year starting after June 15, 2005 (or December 15, 2005 for
small business issuers). This new rule moves the Company's implementation date
for SFAS 123R to the first quarter of 2006.
An illustration of the impact on the Company's net loss and loss per share is
presented under "Stock-Based Compensation" in this Note, assuming the Company
had applied the fair value recognition provisions of SFAS 123R using the
Black-Scholes methodology. The Company has not yet determined whether it will
use the Black-Scholes method upon adoption of Statement 123R. Also, the Company
is unable to estimate the future impact that SFAS 123R will have on its
financial position, results of operations or cash flows due to unknown events,
such as the type and number of share-based payments that will be granted, their
terms, and their vesting periods.
7
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections" (SFAS No. 154), which is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. SFAS 154 replaces APB Opinion No. 20,
"Accounting Changes," and FASB Statement No. 3, "Reporting Accounting Changes in
Interim Financial Statements," and changes the requirements for the accounting
for and reporting of a change in accounting principle. SFAS 154 requires
retrospective application to prior periods' financial statements of changes in
accounting principle, unless it is impracticable to do so, in which case other
alternatives are required. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005, or
for the Company's fiscal 2006. The Company is evaluating the effect that the
adoption of SFAS No. 154 will have on its results of operations and financial
position, but does not believe it will have a material impact.
In April 2005, the SEC announced that companies may implement SFAS 123R at the
beginning of their next fiscal year. In March 2005, the SEC released SEC Staff
Accounting Bulletin No. 107, "Share-Based Payment" (SAB 107). SAB 107 provides
the SEC staff's position regarding the application of SFAS 123R, which contains
interpretive guidance related to the interaction between SFAS 123R and certain
SEC rules and regulations, and also provides the staff's views regarding the
valuation of share-based payment arrangements for public companies. SAB 107
highlights the importance of disclosures made related to the accounting for
share-based payment transactions. The Company is currently reviewing the effect
of SAB 107, but it does not believe SAB 107 will have a material impact on its
financial position, results of operations or cash flows.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"), which clarifies the term
"conditional asset retirement obligations" as used in FASB Statement No. 143,
"Accounting for Asset Retirement Obligations." FASB Statement No. 143 refers to
an entity's legal obligation to perform an asset retirement activity in which
the timing and/or method of settlement are conditional on a future event that
may or may not be within the control of the entity. If an entity can reasonably
estimate a liability for the fair value of a conditional asset retirement
obligation, the entity is required to recognize the fair value of the liability
when incurred. A company normally incurs this liability upon acquisition,
construction, or development of the asset at issue. FIN 47 is effective for
fiscal years ending after December 15, 2005. The Company is currently reviewing
FIN 47, and at the current time it does not believe that FIN 47 will have a
material impact on its financial position, results of operations or cash flows.
Reclassifications
Certain reclassifications have been made in the 2004 financial statements herein
to conform to the 2005 presentation.
NOTE 2. VOLUNTARY REORGANIZATION UNDER CHAPTER 11
After the end of the third quarter on October 6, 2005, the Company and all of
its domestic subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code, in the United States Bankruptcy
Court for the Southern District of Florida (Case Nos. 05-42040-BKC-AJC through
05-42049-BKC-AJC) ("Reorganization Proceeding"). The Debtor cases are being
jointly administered under the caption "In re Epixtar Corp., et al., Case No.
05-42040-BKC-AJC." The Debtors intend to continue to operate their business as
"debtors-in-possession" under the jurisdiction of the Court and in accordance
with the applicable provisions of the Bankruptcy Code and orders of the Court.
At about the same time, on October 7, 2005 Epixtar Philippines IT Enabled
Services Corporation, an indirect subsidiary of Epixtar Corp., also filed a
petition for Rehabilitation under Philippine law ("Philippine Proceeding").
Under prior management, the Company expanded its BPO infrastructure in the
Philippines and elsewhere prior to the time the Company had the revenues to
support this infrastructure. This included the hiring of surplus employees and
the lease of offices that required extensive build out and which were not
revenue producing. As a result the Company had recurring losses and negative
cash flow. Because it was unable to meet its obligation it was compelled to seek
additional financing. Consequently, in July 2005 the company entered into a loan
transaction with Laurus Master Fund under unfavorable conditions. Under the
terms of that Loan Arrangement, Laurus' permission (or that of an entity we were
required by Laurus to retain) was required to make any payments of indebtedness.
The loan arrangement required us to repay the loan in full by mid October. While
we attempted to both reduce our indebtedness and obtain substitute financing
prior to mid October 2005, we were unsuccessful in both instances. The fees
charged and terms of the "workout specialist" that the Company was required to
retain thwarted our efforts to reduce indebtedness and substantially contributed
to our inability to obtain the required financing on a timely basis. The Company
was therefore compelled to seek the protection afforded by a Chapter 11
proceeding.
8
In order to exit Chapter 11 successfully, the Company must propose, and obtain
confirmation by the Bankruptcy Court of, a plan of reorganization that satisfies
the requirements of the Bankruptcy Code. A plan of reorganization would resolve,
among other things, the Debtors' pre-petition obligations and set forth the
revised capital structure of the newly reorganized entity. The Debtors have the
exclusive right for 120 days from the Petition Date to file a plan of
reorganization and, if they do so, 60 additional days to obtain necessary
acceptance of the plan. These deadlines may be extended by the Bankruptcy Court.
The Company intends to use the provisions of Chapter 11 to reorganize its
business on a sustainable basis. The Chapter 11 process will allow the Company
to realize three major goals essential to its transformation: first, a
competitive cost structure; second, a more efficient business model that will
allow the Company to continue to deliver superior choice and service to its
customers; and third, a strengthened balance sheet with debt and equity levels
consistent with long-term profitability.
As required by the Bankruptcy Code, the United States Trustee for the Southern
District of Florida appointed an official committee of unsecured creditors (the
"Creditors' Committee"). The Creditors' Committee and its legal representatives
have a right to be heard on all matters that come before the Bankruptcy Court
concerning the reorganization. There can be no assurance that the Creditors'
Committee will support the Company's positions, or plan of reorganization.
The Company continues to operate the business as "debtor-in-possession" under
the jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and
applicable court orders. In general, as debtor-in-possession, the Company is
authorized under Chapter 11 to continue to operate as an ongoing business, but
may not engage in transactions outside the ordinary course of business without
the prior approval of the Bankruptcy Court. In conjunction with the commencement
of the Chapter 11 case, the Debtors sought and obtained several orders from the
Bankruptcy Court that were intended to enable the Debtors to operate in the
normal course of business during the Chapter 11 case.
The bankruptcy filing triggered defaults on substantially all the Company's debt
and lease obligations pursuant to the terms thereof, but such default provisions
are generally not enforceable under the Bankruptcy Code. Under Section 362 of
the Bankruptcy Code, the filing of a bankruptcy petition automatically stays
most actions against a debtor, including most actions to collect pre-petition
indebtedness or to exercise control over the property of a debtor's estate.
Absent an order of the Bankruptcy Court, substantially all pre-petition
liabilities are subject to settlement under the plan of reorganization.
Under Section 365 of the Bankruptcy Code, debtors may assume, assume and assign,
or reject certain executory contracts and unexpired leases, including leases of
real property, personal property and executory contracts, subject to the
approval of the Bankruptcy Court and other conditions. In general, rejection of
an unexpired lease or executory contract is treated as a pre-petition breach of
the lease or contract in question. Subject to certain exceptions, this rejection
relieves debtors of performing their future obligations under that lease or
contract but entitles the lessor or contract counterparty to a pre-petition
general unsecured claim for damages caused by the deemed breach.
Counterparties to these rejected contracts or leases may file proofs of claim
against the Debtors' estate for such damages, if any. Due to the uncertain
nature of many of the potential rejection and abandonment related claims, the
Company is unable to project the magnitude of these claims with any degree of
certainty at this time.
9
Accordingly, any description of an executory contract or unexpired lease
elsewhere in these Notes, including where applicable our express termination
rights or a quantification of our obligations, must be read in conjunction with,
and is qualified by, any overriding rejection rights we have under Section 365
of the Bankruptcy Code.
Under the priority scheme established by the Bankruptcy Code, unless creditors
agree otherwise, pre-petition liabilities and post-petition liabilities must be
satisfied in full before shareowners are entitled to receive any distribution or
retain any property under a plan of reorganization.
NOTE 3. ACQUISITION
In November 2004, the Company entered into an agreement to purchase all of the
outstanding common shares of Innovative Marketing Strategies, Inc. (IMS), a
privately-held Florida corporation with six years experience providing business
process outsourcing and contact center services to the financial services
market. IMS customers include banks, credit card companies and mortgage
companies. These services are delivered from three call center facilities
located in the U.S. and one facility located in the Philippines. Select
operational functions are conducted from its network operations center (NOC) in
North Carolina.
In July 2004, the Company had advanced IMS $600,000 and advanced an additional
$300,000 in November 2004. On January 3, 2005, the Company completed the
purchase of all of the outstanding common shares of IMS. This acquisition has
been accounted for under the purchase method of accounting and accordingly, the
results of operations of IMS have been included in the Company's consolidated
financial statements since the date of acquisition. IMS is a wholly-owned
subsidiary of Voxx Corporation, a majority-owned subsidiary of the Company, and
is being operated within its BPO business segment. The purchase price of
approximately $6.5 million, excluding net liabilities assumed of approximately
$1.1 million, is calculated as follows:
Cash consideration paid $1,017,000
Non-interest bearing Collateral Promissory Note, payable over 24 months 5,104,000
Acquisition costs 375,000
-------------
$6,497,000
=============
On August 4, 2005, the IMS shareholders agreed to reduce the outstanding balance
of the Collateral Promissory Note by 50% to $2,296,914 payable $225,388 in
August 2005, with the balance payable in weekly installments of $28,172
beginning September 5, 2005, until paid in full January 29, 200.At September 30,
2005, the principal amount of the note was $1,995,226. Because of the Company's
financial position it was unable to make certain payments to the IMS
stockholders and is in breach of the compromise. This breach, subject to any
bankruptcy defense, if any, may result in the reinstatement of the old
arrangement. The purchase price allocation of the IMS acquisition initially
resulted in goodwill of approximately $1.0 million and identifiable intangible
assets of $6.1 million. When the Company entered into the reduced note with the
IMS shareholders it eliminated all goodwill and $ 128,4322 of the identifiable
intangible assets and $ 1,231,384 of property and equipment associated with the
IMS acquisition. If the old note amount were to be reinstated as an obligation
the Company would have to restate the financial statements herein.
10
The IMS balance sheet as of acquisition date, January 3, 2005, was as follows:
ASSETS
Accounts Receivable - Net $ 1,164,000
Prepaid Expenses and Other Current Assets 68,000
---------------------
Total current assets 1,232,000
Property and Equipment - Net 2,401,000
Goodwill 915,000
Intangible Assets 6,095,000
Other Assets 42,000
---------------------
Total Assets $ 10,685,000
=====================
LIABILITIES
Accounts Payable $ 2,025,000
Accrued Expenses and Other Liabilities 1,385,000
Amounts due Epixtar and Voxx 1,050,000
Debt - Current 3,278,000
---------------------
Total current liabilities 7,738,000
Debt - Long Term 2,947,000
---------------------
Total Liabilities $ 10,685,000
=====================
Pro Forma Results
The following summary, prepared on a pro forma basis, presents unaudited
consolidated results of operations as if IMS had been acquired as of January 1,
2004, after including the impact of adjustments such as amortization of
intangibles. This pro forma presentation does not include any impact of
acquisition synergies.
Three Months Ended Nine Months Ended
September 30, 2004 September 30, 2004
----------------------------- -------------------------
Revenue - as reported $ 4,366,286 $ 13,529,770
Revenue - pro forma $ 9,445,474 $ 27,333,690
Net loss - as reported $ (1,905,380) $ (6,428,729)
Net loss - pro forma $ (1,616,126) $ (7,867,359)
Net loss per diluted common share - as reported $ (0.17) $ (0.60)
Net loss per diluted common share - pro forma $ (0.14) $ (0.70)
The pro forma results are not necessarily indicative of the Company's results of
operations had it owned IMS during the entire period presented.
11
NOTE 4. DEBT AND CAPITAL LEASE.
At September 30, 2005, debt and capital leases consisted of the following.
September 30,
2005
-----------------------------
Principal Discount
Non-interest bearing collateral promissory note due January
2007, payable in monthly installments $ 1,995,226 $ 95,521
7% secured convertible notes due on demand, secured by
accounts receivable 425,000 -
6% Notes due on demand, secured by equipment 475,000 -
Secured convertible term note due November 15, 2005, bearing
annual interest at 10% per annum, collateralized by the
assets of the Company 12,715,747 395,768
Secured convertible term note due April 2008, payable in
monthly installments commencing November 2005, bearing annual
interest at 2% over prime, collateralized by the assets of
the Company 3,552,140 1,354,825
5% unsecured joint and several subordinated convertible
promissory notes, due May 2007 3,715,000 86,949
Non-interest bearing note payable, due June 2006, payable in
monthly installments 127,487 -
Non-interest bearing assumption of equipment financing on
acquisition of call center, payable through 2005 137,996 -
11.9% promissory notes due August 2007, secured by
automobiles, payable in monthly installments 57,685 -
Non-interest bearing note pursuant to asset purchase
agreement, payable on demand 88,692 -
11% equipment financing agreement, with maturities from
September 2005 through March 2006 116,638 -
10% Note due August 2009, payable in monthly installments 259,622 -
Non-interest bearing Promissory Note, payable over 18 months,
secured by certain equipment 3,248,800 -
Non-interest bearing equipment financing due March 2006,
payable in monthly installments 358,723 -
Equipment financing Note due March 2007, bearing annual
interest at 3.25% over prime 23,791 -
4% West Virginia Economic Development Note due April 2008,
secured by certain assets, as defined in security agreement 153,481 -
5% Ohio Valley Industrial and Business Development Note due
January 2013, secured by certain assets, as defined in
security agreement 134,790 -
Non-interest bearing guarantee agreement for commissions due
DDM Consulting by IMS 48,151 1,529
Capitals leases, at interest rates ranging from 9.0% to 11%
in 2005 and 7% to 14% in 2004 243,757 -
--------------- -------------
27,877,726 1,934,592
Less current portion 23,779,673 1,910,851
--------------- -------------
$ 4,098,053 $ 23,741
=============== =============
12
See Note 3 for information concerning this Note which was issued in connection
with the IMS transaction.
In December 2003, the Company issued 7% Secured Convertible Notes in the amount
of $500,000 to accredited investors. During 2004, $50,000 was repaid and the
remaining notes amounting to $450,000, matured in December 2004. In October
2004, in connection with the purchase of equipment related to the contact center
business, the Company issued 6% Notes maturing in December 2004, in the amount
of $500,000 to the same accredited investors. The Company obtained from these
lenders extensions to the 7% Secured Convertible Notes and the 6% Notes through
April 29, 2005. As consideration for the extension, on April 22, 2005, a related
party to the Company transferred to the lender detachable warrants it held to
purchase 200,000 shares of the Company's common stock for $0.50 per share,
exercisable at any time over a five year period from the date of issuance. Using
the Black-Scholes model the Company estimated the fair value of the 200,000
warrants and allocated $173,314, or $0.87 per common share to the warrants,
which was recognized as expense on the accompanying Consolidated Statement of
Operations for the nine months ended September 30, 2005. Additionally, as part
of the extension, the Company issued 145,000 shares of common stock, in Voxx, a
majority-owned subsidiary of the Company for no additional consideration. The
Company estimated the fair value of the 145,000 Voxx shares at $88,530, or $0.61
per common share, which was expenses during the three months ended September 30,
2005. The extension to the Notes matured on April 29, 2005,
On May 14, 2004, the Company issued a Secured Convertible Term Note in the
amount of $5,000,000 at 2.5% over prime (not to exceed 8%) to an accredited
institutional investor. As part of the convertible term note, the Company issued
detachable warrants to purchase 492,827 shares of the Company's common stock
exercisable at any time over a seven-year period from the date of issuance. In
connection with the financing facility entered into with Laurus Master Fund, Ltd
and affiliates of Laidlaw & Company (UK) Ltd., on April 29, 2005 the warrants
became exercisable at $1.00 per share. The Company entered in to a registration
rights agreement with the lender associated with the issuance of the convertible
term note. Under the terms of the agreement, the Company was required to pay the
lender $100,000 for each 30 day period after 120 days from the original issuance
of the note if a registration statement filed with the Securities and Exchange
Commission (SEC) covering the common stock underlying the convertible term note
and detachable warrants was not declared effective (Liquidated Damages).
Additionally, in accordance with the terms of the agreement, at December 31,
2004, approximately $1,110,000 of the principal amount of the note was held in a
restricted account to be released upon the effectiveness of a registration
statement filed with the SEC. On February 28, 2005, the Company entered into an
Amendment and Waiver agreement with the lender, resulting in the waiver of the
Liquidated Damages under the agreement and the authorization to release the
$1,110,000 held in the restricted account at December 31, 2004. As consideration
for the waiver, the Company issued to the lender warrants to purchase 1,900,000
shares of the Company's common stock at an exercise price of $2.15 per share,
exercisable at any time over a seven-year period. Using the Black-Scholes model
the Company estimated the fair value of the 1,900,000 warrants and allocated
$1,101,049, or $0.58 per common share to the warrants. This amount, net of
$193,333 of previously accrued Liquidated Damages was recognized as expense on
the accompanying Consolidated Statement of Operations for the nine months ended
September 30, 2005.
On April 29, 2005, the Company, and its majority-owned subsidiary, Voxx
Corporation, entered into a financing facility with Laurus Master Fund, Ltd and
affiliates of Laidlaw & Company (UK) Ltd., pursuant to which the Company and
Voxx borrowed $7,000,000 represented by Senior Secured Convertible Notes (the
Notes) that mature on April 29, 2008, and bear annual interest at 2% over prime.
Interest payments began June 1, 2005, and principal payments begin on October
29, 2005 at the monthly rate of $166,667 plus accrued but unpaid interest.
Payments may, in certain circumstances, be made in shares of the Company and/or
Voxx common stock, and the Notes may be prepaid at any time at 130% of the then
outstanding principal balance due at the time of prepayment. The Notes are
secured by all of the assets of Voxx Corporation and its subsidiaries, the
Company's shareholdings in Voxx Corporation and significantly all of its other
subsidiaries, by a pledge of the Company and Voxx's contract revenues from
certain sources and by certain other assets of the Company and its subsidiaries.
The Notes significantly restrict the ability of Epixtar, Voxx and their
subsidiaries from borrowing additional monies without the consent of the
lenders.
13
The Notes are convertible into the common stock of Epixtar at $1.00 per share
and/or into the common stock of Voxx in the event Voxx conducts an initial
public offering of its own securities at a 15% discount to the IPO price. As
additional consideration for the making of the loan, the lenders received
options to purchase 31% or 4,167,028 shares of Voxx Corporation common stock
computed on a fully diluted basis at the time of closing at a price of $.001 per
share, warrants to purchase 556,596 shares of Voxx common stock at a price,
generally, equal to the IPO price, and payments and reimbursements to the
lenders and related parties of approximately $640,000. The options and warrants
both provide the holder with anti-dilution protection in the event of stock
splits, stock dividends and other extraordinary corporate events. Using the
Black-Scholes model the Company estimated the fair value of the 4,167,028
options to purchase stock and allocated $1,573,345, or $0.49 per common share,
which was recorded as a discount on the convertible notes, and is being
amortized over the life of the Note. Prior to the Voxx IPO date, the warrants
are exercisable at price per share equal to capitalization of Voxx, divided by
the aggregate number of shares of Voxx common stock issued and outstanding on
the date of exercise, calculated on a fully diluted basis. Based on this
calculation, at September 30, 2005, the 556,596 warrants are estimated to be
exercisable at $3.35 per share. As a condition of the making of this loan, the
Company was also required to (1) amend the terms of its existing $5,000,000 loan
facility with Laurus to reprice to $1.00 per common share approximately
3,148,144 of previously issued warrants originally issued at prices ranging from
$2.15 to $4.66 per share, including 1.9 million warrants issued for the
Company's common stock on February 28, 2005 in connection with the Amendment and
Waiver agreement of the facility, and (2) to further secure the facility with
certain additional contract revenues from the Company's ISP business. At
September 30, 2005, approximately $1,357,200 of ISP contract revenue was being
held in escrow. Because of the default provisions and the lock box requirements
contained in the agreement, the outstanding principal balance at September 30,
2005 is classified as current on the Consolidated Balance Sheet.
Commencing October 15, 2004 through December 31, 2004, the Company and its
wholly-owned subsidiary, Voxx Corporation (Voxx), sold to accredited investors,
in a private placement, an aggregate of $2,947,500 principal amount of 5% Joint
Unsecured Subordinated Convertible Promissory Notes due May 2007 to accredited
investors. Pursuant to the notes, in the event Voxx becomes a public company,
the then outstanding notes are immediately converted into shares of Voxx common
stock. The rate of interest will be increased to an annual rate of 10% if Voxx
does not become a public corporation after one year. Until Voxx is a public
company a holder may convert his entire note into shares of the Company's Common
Stock for one year at a fixed conversion price related to market but not less
than $2.25. Thereafter the exercise price will be the lesser of $1.00 or the
average market price for a period preceding the one-year anniversary of the
notes, as specified in the agreement. The notes are subordinate in all respects
to the senior debt. In addition to the note each unit also consists of the right
to receive in the future (i) warrants to purchase the Company's Common Stock
and/or (ii) warrants to purchase Voxx's common stock. Based on the terms of the
conversion associated with the notes, there was an intrinsic value associated
with the beneficial conversion feature estimated at $118,996 as of December 31,
2004, which was recorded as deferred interest and presented as a discount on the
convertible debenture, net of amortization to be taken over the terms of the
notes. . During the three months ended March 31, 2005, an additional $767,500
principal amount of 5% Joint Unsecured Subordinated Convertible Promissory Notes
due May 2007. were sold, There was an intrinsic value associated with the
beneficial conversion feature of the additional $767,500 principal amount issued
during the March 2005 quarter estimated at $12,153, which was recorded as
deferred interest and presented as a discount on the convertible notes, net of
amortization to be taken over the terms of the notes. At September 30, 2005 and
December 31, 2004, these notes amounted to $3,628,051 and $2,835,601,
respectively, net of unamortized discount of $86,949 and $111,899, respectively,
resulting from the intrinsic value of the beneficial conversion feature. Because
of the default provisions contained in the agreement, the outstanding principal
balance at September 30, 2005 is classified as current on the Consolidated
Balance Sheet.
On June 23, 2005, the Company entered into an agreement with SER Solutions, Inc.
(SER) that provides for the purchase by the Company of $3,070,000 of dialer
equipment for its call centers over the next 18 months. In connection with the
agreement, the Company has executed a non-interest bearing Promissory Note in
the amount of $3,423,000, representing the purchase commitment of $3,070,000 and
$353,000 due on prior note for dialer equipment. See Note 9.
14
On July 15, 2005, the Company entered into a Securities Purchase Agreement (the
"Purchase Agreement") and certain related agreements with Laurus Master Fund,
Ltd. (Laurus) providing for the issuance to Laurus by the Company of a Secured
Convertible Term Note in the aggregate principal amount of $6,200,000 (the
"Note"). On August 15, 2005, the parties mutually amended the Purchase Agreement
and increased the principal amount of the Note to $14,200,000. At September 30,
2005, Laurus and its affiliates held approximately $14,768,000 of outstanding
convertible debt of the Company. Laurus may advance up to $6,200,000
($14,200,200, as amended -to the Company for use by the Company for working
capital and to continue the build out of its Philippine-based call center
business. All advances under the Note are subject to the satisfaction of certain
conditions. The note bears interest at the rate of 10% per annum. The Note may
be prepaid at any time at 100% of the then outstanding principal balance at the
time of prepayment plus accrued interest. The outstanding principal due under
the Note is convertible into common stock of the Company at a conversion price
of $1.00 per share, subject to adjustment for stock splits, stock dividends or
other similar transactions or if new rights to acquire common stock of the
Company are issued at a price less than the then existing conversion price under
the Note. Laurus has certain rights to require the Company to register the sale
of the shares of common stock into which the principal of the Note is
convertible under federal and state securities laws. In connection with the
issuance of the Note, the Company has placed into escrow resignations from its
existing directors and proxies in favor of Laurus from the holders of a majority
of the Company's presently outstanding common stock. Such instruments are to be
released to Laurus from escrow and may be exercised by Laurus in the event of a
default by the Company under the Purchase Agreement or the Note or under any
other agreement of the Company or its subsidiaries with Laurus. The effect of
such instruments would be to allow Laurus to replace the board of directors of
the Company with persons selected by it. The Note is secured by all of the
assets of Voxx Corporation, a subsidiary of the Company, and the subsidiaries of
Voxx Corporation, the Company's shareholdings in Voxx Corporation and
significantly all of its other subsidiaries, by a pledge of the Company's
contract revenues and those of its subsidiaries from all sources and by certain
other assets of the Company and its subsidiaries. The Note significantly
restricts the ability of the Company and its subsidiaries from borrowing
additional monies without the consent of the Laurus. The Company is presently
obligated to place all revenues from its internet service provider businesses
into a lock box, which revenues may be used by the Company only with the prior
approval for payment of expenses approved by Laurus and its affiliates. In
connection with the Purchase Agreement and the Note, the Company and its
subsidiaries have agreed to place all revenues from its call center business in
a lock box as well and have agreed that such revenues may only be withdrawn from
the lock box for payment of expenses approved by Laurus.
NOTE 5. CAPITAL STOCK
Conversion of Preferred Stock
During the three months ended September 30, 2005, a holder of the Company's
preferred stock converted 1,650 shares of preferred stock into 165,000 shares of
the Company's common stock. The holder of the preferred stock originally
purchased the shares for $165,000, or $100 per share During the three months
ended June 30, 2005, 1,050 shares of preferred stock were converted into 121,287
shares of the Company's common stock. These shares were originally purchased for
$105,000, or $100 per share. Pursuant to the provisions of the Company's Amended
Certificate of Incorporation relating to the preferred stock, cumulative
dividends were added to the original purchase price and the adjusted value was
converted into common stock using a conversion price of $1.00 per share.
Common Stock
On February 28, 2005, the Company issued 550,290 shares of common stock pursuant
to its acquisition of IMS in January 2005. As part of the acquisition of IMS,
the Company guaranteed an agreement for approximately $770,000 due an IMS
shareholder for commissions, and issued the 550,290 shares of common stock as
payment for $385,000 of the amount guaranteed. The valuation assigned to the
common stock was based on the average volume and price of the Company's stock
for the month of November 2004, as provided in the acquisition agreement. For
information with respect to additional issuances of equity securities reference
is made to the footnotes to Note 4.
15
NOTE 6. RELATED PARTY TRANSACTIONS
In October 2001, the Company entered into an agreement with Trans Voice
Investments Inc., whereby Trans Voice Investments received payments for services
in 2001 related to the development of the Company's internet service provider
business. The Company incurred expenses of $900,000 and $2,700,000 during the
three and nine months ended September 30, 2005, respectively, and $275,000 and
$1,175,000, respectively, during the three and nine months ended September 30,
2004, for payments under this agreement as amended.
As of April 2003, the Company entered into an agreement with Trans Voice
Investments whereby Trans Voice Investments provides consulting services related
to the development of marketing and telemarketing aspects of the Company. Trans
Voice Investments Inc. is not compensated for its services but is reimbursed for
payments made to a related party subcontractor performing services associated
with the agreement. The subcontractor is 100% owned, indirectly, or directly, by
a previous executive of the Company. The Company incurred expenses of $225,000
and $400,000, respectively, for the three and nine months ended September 30,
2005, and $225,000 and $450,000, respectively, for the three and nine months
ended September 30, 2004 for services under this agreement. At September 30,
2005 and December 31, 2004, $325,000 and $225,000 remained unpaid and is
included in accounts payable-related party.
On June 30, 2005, the board of directors of the Company granted an aggregate of
1,500,000 shares of Voxx Corporation common stock owned by the Company (the
"Restricted Shares") to TransVoice LLC, an affiliate of and a consultant to the
Company which grant is evidenced by a Restricted Stock Agreement between the
Company and the grantee. The grant wasmade in exchange for consulting services
performed and to be performed by TransVoice for Epixtar and Voxx. Voxx
Corporation is a subsidiary of the Company.
NOTE 7. EARNINGS (LOSS) PER SHARE
The Company presents both basic and diluted EPS. Basic EPS is calculated by
dividing net income or loss by the weighted average number of common shares
outstanding during the period. Diluted EPS is based upon the weighted average
number of common and common equivalent shares outstanding during the period
which is calculated using the treasury stock method for stock options and
warrants, and assumes conversion of the Company's convertible notes. Common
equivalent shares are excluded from the computation in periods in which they
have an anti-dilutive effect. Stock options for which the exercise price exceeds
the average market price over the period have an anti-dilutive effect on EPS
and, accordingly, are excluded from the calculation. Weighted average number of
shares used to compute basic and diluted loss per share for the three and nine
months ended September 30, 2005 and 2004 is the same, since the effects of the
preferred stock, common stock options, warrants and convertible debt were
anti-dilutive.
16
A reconciliation of net loss and the weighted average number of common and
common equivalent shares outstanding for calculating diluted earnings per share
is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- -----------------------------------
2005 2004 2005 2004
---------------- --------------- ----------------- ----------------
Net loss $ (3,016,121) $(1,905,375) $(15,475,136) $(6,428,729)
Preferred stock dividends (58,008) (88,792) (143,823) (176,852)
---------------- --------------- ----------------- ----------------
Net loss for basic and diluted EPS calculations $ (3,074,129) $(1,994,176) $(15,618,959) $(6,605,581)
================ =============== ================= ================
Weighted average number of shares for basic and
diluted EPS 12,397,975 11,443,198 12,129,877 11,006,346
Loss per share
Basic and Diluted $ (0.25) $ (0.17) $ (1.29) $ (0.60)
================ =============== ================= ================
NOTE 8. BUSINESS SEGMENTS
The Company operates primarily in two segments: business process outsourcing and
contact center operations (BPO) and internet service provider services (ISP).
Information concerning the revenues and operating income for the three and nine
months ended September 30, 2005 and 2004, and the identifiable assets for the
two segments in which the Company operates are shown in the following table:
BPO ISP Consolidated
--- --- ------------
OPERATING REVENUE - SEGMENT (1)
Quarter - September 2005 $7,335,544 $2,313,214 $9,648,758
Quarter - September 2004 878,554 3,487,732 4,366,286
Nine Months - September 2005 19,897,249 7,930,914 27,828,163
Nine Months - September 2004 1,019,295 12,510,475 13,529,770
INCOME (LOSS) FROM OPERATIONS
Quarter - September 2005 (2,900,957) 1,166,374 (1,734,583)
Quarter - September 2004 (2,857,913) 853,582 (2,004,331)
Nine Months - September 2005 (15,789,318) 4,145,209 (11,644,109)
Nine Months - September 2004 (6,863,221) 2,865,753 (3,997,468)
DEPRECIATION AND AMORTIZATION
Quarter - September 2005 328,856 5,560 334,416
Quarter - September 2004 397,522 19,709 417,231
Nine Months - September 2005 1,692,288 64,280 1,756,568
Nine Months - September 2004 640,916 147,979 788,895
CAPITAL EXPENDITURES (2)
Quarter - September 2005 2,250,056 - 2,250,056
Quarter - September 2004 1,647,195 72,560 1,719,755
Nine Months - September 2005 5,669,749 140,827 5,810,576
Nine Months - September 2004 4,139,373 251,930 4,391,303
IDENTIFIABLE ASSETS
At September 30, 2005 19,335,816 9,064,610 28,400,426
At December 31, 2004 11,963,124 6,085,591 18,048,715
(1) The Company allocates its geographic revenue based on customer location.
All of the Company's customers are U.S based companies. Services performed
for call center customers are performed in the Philippines and three call
centers in the U.S.
(2) The nine months ended September 30, 2005, includes capital assets of
$1,231,384 acquired as a result of the IMS acquisition.
17
NOTE 9. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The proceedings currently outstanding have been stayed automatically in
connection with the Reorganization Proceeding. While no action have been
brought, the Company faces the possibility of significant claims against it,
arising from its financial positions and resulting cost cutting efforts. These
include potential claims by Lessors of property upon which we cancelled leases.
It is contemplated that these proceedings will be brought in Bankruptcy Court in
Florida pursuant to the Reorganization Proceeding or the Philippines pursuant to
the Philippines Proceeding.
Purchase and Other Commitments
The following commitments are all subject to the Reorganization Proceeding
On June 23, 2005, the Company entered into an agreement with SER Solutions, Inc.
(SER) that provides for the purchase by the Company of $3,070,000 of dialer
equipment for its call centers over the next 18 months. The agreement also
resolved certain licensing and payment disputes between the parties related to
previous purchases by the Company from SER. In connection with the agreement,
the Company has executed a promissory note in the amount of $3,423,000 to SER,
representing the purchase commitment of $3,070,000 and $353,000 due on prior
purchases of dialer equipment. See Note 4.
On January 3, 2005, as part of the IMS acquisition, the Company guaranteed
commissions payable owed by IMS under consulting agreement with DDM Consulting,
Inc ("DDM"). On August 4, 2005, this agreement pursuant to which DDM agreed to
reduce the outstanding balance by 50% to $96,301, The Company paid $32,100
toward this amount in August 2005, and was obligated to pay the balance in
monthly installments of $16,050 from September 5, 2005,through December 5,
2005.On August 1, 2005, the Company entered into a new Broker Agreement with DDM
whereby the service fee and commission structures were re-defined. As part of
the new agreement, on August 4, 2005, DDM agreed to reduce the outstanding
balance of commissions due by 50% to $314,587. Under certain conditions DDM was
to receive an additional lump sum in the amount of $314,587 but these conditions
are unlikely to be met. The reduced broker amount was payable in weekly
installments of $50,000 . Through August 12, 2005, the Company paid DDM $100,000
toward this amount. The Company has not paid installmentssubsequent to August
2005.
On July 20, 2005, the Company entered into an agreement with Realization
Services, Inc. ("RSI"), a consulting firm. RSI was been retained to develop a
plan that will attempt to bring the Company's activities in the United States
and the Philippines to a cash break-even level within three months and on an
overall operating and non-operating basis by the end of 2005. The Company was
among other things obligated to pay a daily fee for various named personnel of
RSI: pay a bonus of up to approximately $524,000 and possible equity issuance if
the agreement was extended beyond its initial 3 month term. The agreement also
required the Company to place in escrow an amount equal to twice the daily fees
to insure payment of the bonus. The agreement has been terminated. The
disposition of the escrow is subject to the Reorganization Proceeding.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis (MD&A) is intended to help
the reader understand Epixtar. The MD&A is provided as a supplement to, should
be read in conjunction with and is qualified in its entirety by reference to,
the Company's Consolidated Financial Statements and related Notes to
Consolidated Financial Statements (Notes) appearing under Item 1 in this report.
In addition, reference is made to the Company's audited Consolidated Financial
Statements and related Notes thereto and related MD&A included in its Annual
Report on Form 10-K for Fiscal 2004. Except for the historical information
contained herein, the discussions in MD&A contain forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed under
"Forward-Looking Statements" .
When multiple factors are provided as the explanation for business results, we
quantify the approximate effect of each factor to the extent that it is
practical for us to do so.
PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
We recorded an unaudited consolidated net loss of approximately $15.5 million
for the nine months ended September 30, 2005. During December 31, 2004, we
reported an aggregate consolidated net loss of approximately 9.7million. The
loss resulted ,in large part, because, prior management, expanded the Company's
BPO infrastructure in the Philippines and elsewhere prior to the time the
Company had the revenues to support this infrastructure. This included the
hiring of surplus employees and the lease of offices that required extensive
build out and which were not revenue producing. As a result, the Company had
recurring losses and negative cash flow. Since June 2005 substantially all prior
senior management have either been terminated or resigned, including the Chief
Executive Officer and Chief Operating Officers, Philippine Country Manager and
others. In June 2005 new management immediately took steps to limit expenditures
of the Company. New management curtailed or cancelled several lease or potential
lease projects and related build outs in the Philippines and over a period of
time reduced personnel. This program achieved approximately $600,000 per month
in salary expense reductions and approximately $200,000 per month in selling,
general and administrative cost reductions. Because it was unable to meet its
obligations before completing further planned reductions the Company was
compelled to seek additional financing. Consequently, in July 2005, it entered
into a loan transaction with Laurus Master Fund under unfavorable terms and
conditions. The Company required the permission of Laurus (or a workout
specialist we were required by Laurus to retain) to make any payments of
indebtedness. The loan arrangement required us to repay the loan in full by mid
October 2005. While we attempted both to reduce our indebtedness and obtain
substitute financing prior to mid October 2005, we were unsuccessful in both
instances. The fees charged and terms of the "workout specialist" that the
Company was required to retain by Laurus thwarted our efforts to reduce
indebtedness and substantially contributed to our inability to obtain the
required financing on a timely basis. The Company was therefore compelled to
seek the protection afforded by a Chapter 11 proceeding.
The Debtors will operate as "debtors-in-possession" under the jurisdiction of
the Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code and orders of the Bankruptcy Court. In general, as
debtors-in-possession, we and the other Debtors are authorized under Chapter 11
to continue to operate as an ongoing business, but may not engage in
transactions outside the ordinary course of business without the prior approval
of the Bankruptcy Court. In connection with the Chapter 11 proceedings, we are
seeking to obtain post-petition debttor-in-possession financing. We also intend
to pursue our cost cutting program The ultimate object is to formulate a plan
subject to confirmation which would repay all debt, preserve our equity
interests and enable the Company to implement its plans on a sound financial
footing.
19
The matters described in the MDA to the extent that they relate to future events
or expectations, may be significantly affected by the Company's Chapter 11
filing. The Chapter 11 proceedings will involve, or may result in, various
restrictions on the Company's activities, limitations on financing, the need to
obtain Bankruptcy Court and Creditors' Committee approval for various matters
and uncertainty as to relationships with vendors, suppliers, customers and
others with whom the Company may conduct or seek to conduct business.
BUSINESS SEGMENTS
The Company engages in two primary lines of business: business process
outsourcing concentrating on contact center activities (BPO) and internet
service provider services (ISP). Through 2004, the Company's revenues were
primarily derived from its ISP business, which provides Internet services,
including unlimited Internet access and email, to small business subscribers. As
a result of the ISP's ongoing business interaction with the contact center
industry, combined with extensive analysis of the contact center industry,
management made the strategic decision to focus the Company's energies and
resources in developing and operating offshore contact centers. The Company does
not market its ISP services but continues to maintain and service its declining
ISP customer base while concentrating the Company's efforts in growing the
business process outsourcing and contact center services business.
Outsourcing and Contact Center Business
The Company began developing its contact center business in the latter part of
2003 and now has approximately 1,052 enabled seats in the Philippines and the
United States, including approximately 384 seats added through the Company's
acquisition of IMS, which service several major clients, and encompasses
supporting personnel. This number is somewhat below that reported in one or more
prior periods because current management has elected to take a much more
conservative view of what, in fact, constitutes an "enabled seat." Seats that
now require any additional amount of investment to become fully operational, no
matter how insignificant, are no longer categorized as "enabled."
Revenues from contact center operations are derived from telemarketing,
tele-verification, and customer support services provided to clients based on
individual business requirements. Depending on the contract under which services
are provided, the company may earn revenues on a commission basis, a performance
basis, an hourly basis, or a blend of the three.
Cost of generating revenue consists of direct payroll costs, recruitment and
training of personnel and communication costs. On an ongoing basis, the most
significant expense of the Company's contact center business will be labor costs
for agents, supervisors and administrators as well as commissions paid to
brokers, and rental expense for leased facilities.
The Company for internal purposes treats the BPO domestic and the Philippines
BPO operations as separate subsegments. The Philippine segment is developing and
has not fully completed its infrastructure and has derived minimal revenue. The
domestic segment was acquired when we acquired the shares of IMS in January
2005. It has three United States contact centers, a fully developed
infrastructure and over 800 employees, including experienced management and
supervisors. The domestic call centers have been deriving revenue continually
over the last several years (prior to acquisition).
20
Set forth below is comparison of Domestic and Philippine Call Center Subsegments
Domestic Philippines
- -----------------------------------------------------------------------------
Quarter 9/30/05
- -----------------------------------------------------------------------------
Revenue 5,705,614 1,631,430
- -----------------------------------------------------------------------------
Cost of sales 3,165,873 1,492,234
- -----------------------------------------------------------------------------
Gross profit 2,539,741 139,196
- -----------------------------------------------------------------------------
Operating expenses* 1,767,073 1,251,392
- -----------------------------------------------------------------------------
Operating income (loss) 772,668 (1,112,197)
- -----------------------------------------------------------------------------
*exclusive of unallocated
overhead and amortization
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
YTD 9/30/05
- -----------------------------------------------------------------------------
Revenue 15,241,057 4,656,192
- -----------------------------------------------------------------------------
Cost of sales 9,861,942 4,197,075
- -----------------------------------------------------------------------------
Gross profit 5,379,115 459,117
- -----------------------------------------------------------------------------
Operating expenses** 5,862,262 4,967,471
- -----------------------------------------------------------------------------
Operating income (loss) (483,147) (4,508,353)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
** exclusive of unallocated overhead and amortization
ISP Business
The Company in 2004 made a decision not to market its ISP services but only
services its existing base. The ISP business may be likened to a depleting asset
in the mining business. The asset is the customer base which is steadily but
slowly declining but a source of revenue. At some point the revenues will not
equal the small expenses associated with this business and eventually there will
be no customer base. ISP revenues are derived from monthly fees charged
customers for value-added internet services. The costs of generating revenue
associated with ISP operations include the costs of maintaining the Company's
customer base including customer care and telecommunication costs for Internet
access.
Current Trends
The trend of the Company's revenue and income over the next several quarters
depends upon several variables, some of which cannot at this time be ascertained
definitively. Revenue from ISP sources will decline as a result of suspended ISP
marketing activity and a declining customer base. In January 2005, the Company
acquired IMS to increase its contact center penetration. BPO revenues and
overall revenue should continue to increase as a result of this acquisition. The
Company will continue to incur losses as a result of costs associated with
contact center operations without sufficient revenues to cover such costs, the
Company believes revenue from its contact centers will increase, offsetting
declining ISP revenues in the future. The foregoing may be effected by the
bankruptcy proceeding.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2005 Compared With Three and Nine
Months Ended September 30, 2004
Set forth below are comparisons of financial results of operations for the three
months and nine months ended September 30, 2005 and 2004. These comparisons are
intended to aid in the discussion that follows. This discussion and analysis
should be read in conjunction with the Consolidated Financial Statements and
accompanying Notes, which appear in Item 1. Financial Statements, in this
Quarterly Report on Form 10-Q.
21
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------ -------------------------------------------------
Variance Variance
2005 2004 $ % 2005 2004 $ %
------------------------------------------------ -------------------------------------------------
Revenue $9,648,758 $4,366,286 $5,282,472 120.98% $27,828,163 $13,529,770 $14,298,393 105.68%
Cost of revenue 4,868,485 1,331,937 3,536,548 265.52% 14,850,183 3,869,367 10,980,816 283.79%
------------------------------------------------ -------------------------------------------------
Gross profit 4,780,273 3,034,349 1,745,924 57.54% 12,977,980 9,660,403 3,317,577 34.34%
------------------------------------------------ -------------------------------------------------
Operating expenses
(exclusive of
depreciation, and
amortization of
intangibles) (5,816,153) (4,621,449) (1,194,704) 25.85% (21,754,734) (12,868,976) (8,885,758) 69.05%
Depreciation, and
amortization of
intangibles (698,703) (417,231) (281,472) 67.46% (2,867,355) (788,895) (2,078,460) 263.46%
Other non operating (1,281,538) 98,951 (1,380,489) -1395.12% (3,831,027) (2,431,261) (1,399,766) 57.57%
income (expenses), net
------------------------------------------------ -------------------------------------------------
Net loss ($3,016,121)($1,905,380) ($1,110,741) 58.29% ($15,475,136) ($6,428,729) ($9,046,407) 140.72%
------------------------------------------------ -------------------------------------------------
Net loss per share ($0.25) ($0.17) ($1.29) ($0.60)
========================= ==========================
On a pro forma basis, assuming the acquisition of IMS had been in January 2004,
the Company would have reported a net losses of $4,477,100, or $0.39 per basic
and diluted common share, and $6,251,233, or $0.56 per share, respectively,
during the three and nine months ended September 30, 2004. IMS' gross profit
margin for the three and nine months period of 2004 were approximately
$2,151,881, or 51.8%, and $3,975,182, or 45.6%, respectively; however, high
administrative expenses resulted in a loss from operations of approximately
$299,000 and $700,000, respectively, during the three and nine month ended
September 30, 2004.
Revenue for the third quarter of 2005 increased to $9,648,758 in from $4,366,286
in the comparable quarter of 2004, or 121%. The Company's BPO operations
contributed $6,456,990 to the increase, partially offset by a decline of
approximately $1,174,518 in revenue from ISP operations. For the nine month
period of 2005, revenue increased to $27,828,163 in the comparable quarter of
2004, from $13,529,770, or 106%. The Company's BPO operations provided
$18,877,954 of the increase, partially offset by a decline of approximately
$4,579,561, or 37%, in revenue from ISP operations. The increases for the three
and nine month periods of 2005 were primarily attributable to Epixtar Marketing
Corp ("EMC") which continues the domestic outsourcing operations 0f IMS which
the Company's acquired in the first quarter of 2005. EMC contributed
approximately $6,605,372 and $17,735,086 of revenues, respectively, during these
periods. The decline in ISP revenue reflects attrition in the ISP customer base
because the Company is no longer marketing its ISP servicesto obtain new
customers. The Company expects a gradual continued decline of revenues from its
ISP operations offset by growth in its BPO business revenue.
Cost of revenue for the third quarter of 2005 increased to $4,868,485 i from
$1,331,937 in the comparable quarter of 2004, or a 266% increase. The increase
in the cost of revenue is due primarily to a $4,007,553 increase in costs
associated with BPO operations, offset in part by reduced ISP costs of
approximately $471,005. For the nine month period of 2005 cost of revenue
increased to $14,850,183 from $3,869,367 in the comparable quarter of 2004, or a
284% increase. The increase was mainly due to costs associated with BPO
operations, which increased by $13,224,748, partially offset by a $2,243,932
decline in ISP costs. For the three and nine months ended September 30, 2005,
EMC's operations contributed $4,159,731 and $12,724,368, respectively, towards
the increase in cost of revenue. primarily due to the costs associated with EMC
production personnelwhich were not incurred in the comparable quarter of 2004.
Gross profit for the third quarter of 2005 was $4,780,273 compared with
$3,034,349 in the comparable quarter of 2004, or an increase of 58%. For the
nine month period of 2005, gross profit was $12,977,980 compared with $9,660,403
in the comparable quarter of 2004,, or an increase of 34%. BPO gross profit
increased approximately $2,449,437, of which $2,445,641 was attributable to EMC
during the third quarter of 2005, and $5,653,206 during the nine month period of
2005, of which $5,010,718 was contributed by EMC. The gross profit margin for
ISP declined during the three and nine months ended September 30, 2005,
approximately $703,513 and $2,335,629, respectively, as a result of lower sales
and fixed direct costs associated with the operations.
22
Operating expenses, exclusive of depreciation, and amortization of intangibles,
were $5,816,153, or a 26% increase for the third quarter of 2005 compared with
$4,621,449 in the comparable quarter of 2004,. For the nine months ended
September 30, 2005, operating expenses, excluding depreciation, and amortization
of intangibles, were $21,754,733 or a 69% increase for compared with $8,885,757
in the same period of 2004. Compensation and employees benefits increased
$743,738, or 37%, to $2,765,536 during the September 2005 quarter, compared with
$2,021,798, for the same period in 2004. For the nine months of 2005,
compensation and employees benefits increased $4,581,150 or 81%, to $10,208,357,
compared with $5,627,207, for the same period in 2004. These increases were
primarily the result of a higher number of BPO sales, marketing and
administrative employees, including 384 EMC employees added in 2005 through the
Company's acquisition of IMS. Consulting fees and payments to-related party
increased $224,055 and $2,000,305, respectively, during the three and nine
months ended September 30, 2005. On April 20, 2005, Transvoice, a related party,
was granted an aggregate of 1,500,000 shares of Voxx Corporation common stock.
The Company estimated the fair value of these shares at $926,250, or $0.62 per
share, which was recognized as consulting fees. Occupancy, advertising and
marketing, travel and professional fees contributed to the increases in other
selling, general and administrative expenses during the September 2005 quarter
and the nine month period. The increases in these costs are reflective of the
Company's expansion of its BPO operations in the Philippines and domestically
after the IMS acquisition.
Depreciation and amortization expense decreased $82,815, or 20%, and increased
$967,673, or 123%, respectively, during the three and nine months ended
September 30, 2005 from such expenses in the comparable periods of 2004,. The
increases reflect the significant acquisitions of property and equipment related
to the development of call centers in the Philippines in 2004 and through the
first quarter of 2005, and the property and equipment owned by IMS acquired in
2005.
Amortization of intangibles resulting from the valuation of IMS amounted to
$364,287 and $1,110,787 for the three and nine months ended September 30, 2005.
This represents the amortization of identifiable intangible assets, which
include customer relationships, non-compete contracts and the value of call
center locations.
Non-operating expenses, net, are primarily comprised of expenses associated with
the issuance of equity and debt securities during the first nine months of 2005
and 2004. Warrants issued in lieu of finances charges amounted to $365 and
$1,170,170 during the three and nine months ended September 30, 2005,
respectively. Amortization of debt discounts was $157,371 and $600,288 for the
three and nine months ended September 30, 2004, respectively. On April 22, 2005,
as consideration for the extension of certain debt agreements, warrants to
purchase 200,000 shares of the Company's common stock for $0.50 per share, where
given to the lender. The Company estimated the fair value of the 200,000
warrants at $173,314, or $0.87 per common share to the warrants, which was
recognized as expense during the September 2005 quarter. Additionally, as part
of the extension, the Company issued 145,000 shares of common stock, in Voxx, a
majority-owned subsidiary of the Company for no additional consideration. The
Company estimated the fair value of the 145,000 Voxx shares at $88,530, or $0.61
per common share, which was recognized as expense during the September 2005
quarter. On February 28, 2005, the Company entered into an Amendment and Waiver
agreement with a lender. As consideration for this agreement, the Company issued
to the lender warrants to purchase 1,900,000 shares of the Company's common
stock at an exercise price of $2.15 per share. In connection with the financing
facility entered into with Laurus Master Fund, Ltd and affiliates of Laidlaw &
Company (UK) Ltd., on April 29, 2005 the warrants became exercisable at $1.00
per share. The fair value of these warrants were estimated to be approximately
$1,101,049, or $0.58 per share. This amount, net of $193,333 of previously
accrued Liquidated Damages was recognized as expense during the nine months
ended September 30, 2005. During the third quarter of 2004, the Company entered
into three convertible debt agreements. Purchasers of the convertible debt also
received warrants to purchase 630,576 shares of the Company's common stock. The
amortization of the beneficial conversion feature was $1,812,434, which was
charged to expense in the third quarter of 2004.
23
The Company reported a net loss of $3,016,121 or $0.25 per basic and diluted
common share, for the three months ended September 30, 2005, compared with a net
loss of $1,905,380, or $0.17 per basic and diluted common share for the
comparable period in 2004. For the nine month period of 2005, the Company
reported a net loss of $15,475,136, or $1.29 per basic and diluted common share,
compared with a net loss of $6,428,729, or $0.60 per basic and diluted common
share for the comparable period in 2004. The increase in the losses for the
three and nine month periods on quarter compared with the same periods in 2004
was due to the Company's expansion during 2004 and the first quarter of 2005 of
its business process outsourcing and contact center services operations without
sufficient revenues, and a decline of approximately 25% in the gross profit of
its internet service provider services operations (ISP) during the nine month
period of 2005, as a result of a declining customer base.
LIQUIDITY AND CAPITAL RESOURCES
See "Proceedings Under Chapter 11 of the Bankruptcy Code--Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
information concerning the Company's current liquidity problems leading to the
Company to seek the protection afforded by a Chapter 11 proceeding. We continue
to have substantial liquidity needs in the operation of our business and face
significant challenges Accordingly, we believe that our cash and cash
equivalents and short-term investments will be under extreme pressure during the
remainder of 2005 and early 2006 unless we obtain Debtor in Possession
Financing. There is no assurance we will be able to do so.
CASH SOURCES AND USES
The primary sources of cash for the Company have been proceeds from the issuance
of long-term debt and equity securities. The primary uses of cash have been
working capital, and capital expenditures.
OPERATIONS
The Company's cash and cash equivalents as of September 30, 2005 were $606,640
compared with $1,530,052 at December 31, 2004. Amounts held in escrow at
September 30, 2005 and December 31, 2004, were $209,310 and $1,100,000,
respectively. The working capital deficit was approximately $29,275,165 as of
September 30, 2005, compared with $8,033,988 at December 31, 2004, a 264%
increase. During the nine months ended September 30, 2005, the Company used
$7,300,577 of cash for operations compared with $1,825,215 used during the
comparable period of 2004. The increase in negative cash flow from operations
for 2005 was primarily the result of a $15,475,136 loss from operations compared
with a loss of $6,428,729 in 2004, a change of $9,046,407, which included
increases in non-cash charges of $967,674, $1,170,170, and $1,110,787 relating
depreciation and amortization expense, to the issuances of warrants and
restricted stock, and to the amortization of intangibles, respectively.
INVESTING ACTIVITIES
Net cash used for investing activities during the nine months ended September
30, 2005, was $1,974,530 compared to $3,168,318 in 2004. The reduction in
capital spending in 2005, compared to 2004 reflects the Company's intent to
curtail costs and limit spending.
FINANCING ACTIVITIES
Net cash provided by financing activities during the nine months ended September
30, 2005, was $8,481,026 compared with $5,373,356 in 2004.
24
RISK FACTORS RELATING TO REORGANIZATION
For the duration of our Chapter 11 proceedings, our operations, are subject to
the risks and uncertainties associated with bankruptcy. Risks and uncertainties
associated with our Chapter 11 proceedings include the following:
o the actions and decisions of our creditors and other third parties
with interests in our Chapter 11 proceedings, which may be
inconsistent with our plans;
o our ability to obtain court approval with respect to motions in the
Chapter 11 proceedings prosecuted from time to time;
o our ability to develop, prosecute, confirm and consummate a plan of
reorganization with respect to the Chapter 11 proceedings;
o risks associated with third parties seeking and obtaining court
approval to terminate or shorten the exclusivity period for us to
propose and confirm a plan of reorganization, to appoint a Chapter
11 trustee or to convert the cases to Chapter 7 cases;
o our ability to obtain and maintain normal terms with vendors and
service providers; and
o our ability to attract and retain clients.
Under the priority scheme established by the Bankruptcy Code, unless creditors
agree otherwise, pre-petition liabilities and post-petition liabilities must be
satisfied in full before shareholders may be entitled to receive any
distribution or retain any property under a plan of reorganization. The ultimate
recovery to creditors and/or shareholders, if any, will not be determined until
confirmation of a plan or plans of reorganization. No assurance can be given as
to what values, if any, will be ascribed in the Chapter 11 cases to each of
these constituencies or what types or amounts of distributions, if any, they
would receive. A plan of reorganization could result in holders of our
liabilities and/or securities, including our preferred and common stock
receiving no distribution on account of their interests and cancellation of
their holdings. If the requirements of Section 1129(b) of the Bankruptcy Code
are met, a plan of reorganization can be confirmed notwithstanding its rejection
by the holders of our stock and notwithstanding the fact that such holders do
not receive or retain any property on account of their equity interests under
the plan. Because of such possibilities, the value of our liabilities and
securities, including our stock is highly speculative. We urge that appropriate
caution be exercised with respect to existing and future investments in any of
the liabilities and/or securities of the Debtors.
These risks and uncertainties could affect our business and operations in
various ways. For example, negative events or publicity associated with our
Chapter 11 proceedings could adversely affect our relationship with customers,
vendors and employees, which in turn could adversely affect our operations and
financial condition, particularly if the Chapter 11 proceedings are protracted.
Also, transactions outside the ordinary course of business are subject to the
prior approval of the Bankruptcy Court, which may limit our ability to respond
timely to certain events or take advantage of certain opportunities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Sensitivity - At September 30, 2005, the Company had cash, cash
equivalents totaling $606,640, of which $209,360 were held in escrow. These
amounts were invested primarily in money market funds. The unrestricted cash and
cash equivalents are held for working capital requirements, general corporate
purposes and potential acquisition of assets. The Company does not enter into
financial instrument transactions for trading or speculative purposes. Some of
the Company's borrowings are through floating rate debt, subject to changes in
the prime rate. Accordingly, the Company's interest expense will increase with
any future increase in prime rates. The Company however, believes that it has no
material exposure to changes in interest rates.
25
Effect of Changing Prices - The principal effect of inflation on the Company's
operating results is to increase costs. The Philippines has historically
experienced periods of high inflation but the inflation rate has been below 10%
since 1999. For the nine months ended September 30, 2005, inflation averaged
7.9% and we anticipate this inflation trend to continue the remainder of 2005
The high inflation rates experienced in the Philippines have historically been
offset the deflationary force on wages due to the fast growing population, high
unemployment rate and high number of college graduates entering a market that
can not absorb them. A reversal of this trend could result in increased costs
that could harm the Company's operating results. However, subject to normal
competitive market conditions, the Company believes it has the ability to raise
selling prices to offset cost increases over time. In recent years the general
rate of inflation has not had a significant adverse impact on the Company.
Foreign Currency Exchange Risk - The Company's results of operations and cash
flows are subject to fluctuations due to changes in foreign currency exchange
rates, particularly changes in the Philippine peso. The Company generates
expenses in the Philippines, primarily in Philippine pesos and derives all of
its revenues in U.S. dollars. An increase in the value of the U.S. dollar
relative to the Philippine peso would reduce the expenses associated with the
Company's Philippine operations, and conversely a decrease in the relative value
of the U.S. dollar would increase the cost associated with these operations.
Expenses relating to the Company's operations outside the United States have
increased since June 30, 2004 due to increased costs associated with higher
revenue generation and customer management services partially offset by the
increase in the value of the U.S. dollar relative to the Philippine peso. The
Company funds its Philippine operations through U.S. dollar denominated accounts
held in the Philippines. Payments for employee-related costs, facilities
management, other operational expenses and capital expenditures are converted
into Philippine pesos on an as-needed basis. To date, the Company has not
entered into any hedging contracts. Historically, the Company have benefited
from the ongoing decline in the Philippine peso against the U.S. dollar.
ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As of September 30,
2005, management performed an evaluation under the supervision and with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer of the effectiveness of the design and operation of the Company's
disclosure controls and procedures covered in this Quarterly Report on Form
10-Q. Based on that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in alerting them in a timely manner to material
information required to be disclosed in the Company's periodic reports filed
with the SEC as of the end of such period.
CHANGES IN INTERNAL CONTROL. There was no change in the Company's internal
control over financial reporting that occurred during the Company's fiscal third
quarter ended September 30, 2005 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting. As discussed above, on October 6, 2005, we and substantially all our
domestic subsidiaries filed voluntary petitions for reorganization under Chapter
11 of the Bankruptcy Code. The Chapter 11 proceedings have had a significant
impact on our business processes and related internal controls over financial
reporting to ensure the proper separation and payment of pre-petition and
post-petition obligations, and to prepare consolidated financial statements
reflecting the changes brought about as a result of the Chapter 11 proceedings.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
While no action have been brought the Company faces the possibility of
significant claims against it, arising from its financial positions and
resulting cost cutting efforts. These include potential claims by Lessors of
property upon which we cancelled leases. It is contemplated that these
proceedings will be brought as claims or proceedings in connection with the
Reorganization Proceeding.
26
Set forth below are current proceeding not previously reported all of which are
subject to the automatic stay in connection with the Reorganization Proceeding.
The foregoing does not include any proceeding brought and settled or terminated
in the quarter.
EPIXTAR PHILIPPINES IT ENABLED SERVICES, INC. V. TECHNION
COMMUNICATIONS CORP., CASE NO. 2005-13341-CA-01, IN THE CIRCUIT COURT IN AND FOR
ELEVENTH JUDICIAL CIRCUIT, IN AND FOR MIAMI-DADE COUNTY, FLORIDA. Lawsuit by
Epixtar Philippines IT Enabled Services, Inc. for breach by defendant of a
license agreement for the use of an Epixtar call center located in Metro Manila,
Philippines. Technion owes the Company approximately $192,181 in accrued license
fees and charges for expenses.
DIGITAL COMMUNICATION WAREHOUSE, INC. V. INNOVATIVE MARKETING
STRATEGIES, INC. (N/K/A EPIXTAR MARKETING CORP.) AND COONAN, INC., CASE NO.
05-18149, IN THE COURT OF COMMON PLEAS OF MONTGOMERY COUNTY, PENNSYLVANIA. IMS
was corporate guarantor on promissory note, Plaintiff sues on the note in the
sum of $358,723.02. This matter is pre-discovery; however, management has been
informed by the former principals of IMS that there are defenses available to
mitigate the liability set forth above, and, the matter is in settlement
negotiations. Epixtar had obtained a 90 day stay of discovery. Rasmussen has
estimated the liability at a significantly lower amount.
EPERFORMAX CONTACT CENTERS, INC. V. B2B ADVANTAGE, INC., VOXX CORP.,
EPIXTAR CORP. AND his employment with. KENNETH VAN VRANKEN, CASE NO. CH-05-9076
DIV. 03, CHANCERY COURT OF SHELBY COUNTY, TENNESSEE, IN THE THIRTEENTH JUDICIAL
CIRCUIT AT MEMPHIS. Lawsuit by former customer for alleged breach of an employee
nonsolicitation provision and related tort claims. Opposing counsel has claimed
that its primary focus is obtaining injunctive relief. The main thrust of their
action was to remove Ken Van Vranken from employment with the Company.
(Plaintiff does, however, allege that the Company hired lower level employees in
the Philippines in violation of a contractual non-solicitation provision.) Mr.
Van Vranken has resigned.
THERESA BERRY AND JOHN BERRY V. EPIXTAR MARKETING CO. AND DENNIS
PROCHASKA, CASE NO, 05-C-428W, IN THE CIRCUIT COURT OF OHIO COUNTY, WEST
VIRGINIA. Claim of alleged wrongful discharge. It is not possible to accurately
assess this matter at this juncture; however, preliminary review indicates
termination for cause and no readily apparent liability.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As the result of our filing of voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code, we are in technical default on substantially
all of our debt obligations. These default provisons are generally unenforceable
in connection with the Reorganization Proceeding.
ITEM 5. OTHER INFORMATION
During the third quarter, The Company elected Brad Yeater as its Chief Opeating
Officer. Mr. Yeater was an exexcutive officer with IMS (now EMC) before and
after its acquisition by the Company.
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See "NOTE 9. COMMITMENTS AND CONTINGENCIES-- Purchase and Other Commitments" and
Item 1. Legal Proceedings for addition items which were not disclosed in a Form
8k.
ITEM 6. EXHIBITS
(a) Exhibits:
The following exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
11 Statement re Computation of Per Share Earnings is incorporated
by reference to Part I., Item 1. Financial Statements, Note 7,
Earnings (Loss) Per Share.
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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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 thereunto duly authorized.
EPIXTAR CORP.
(Registrant)
Dated: By: /s/ Irving Greenman
December 8, 2005 Irving Greenman,
-------------------------------------
President and Chief Financial Officer
29