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EPIXTAR CORP.
(FORMERLY GLOBAL ASSET HOLDINGS, INC.)
United States
Securities and Exchange Commission
Washington, DC 20549
Form 10Q
X Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act --- of 1934 for the period ending March 31, 2004
- --- 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 011-15499
Epixtar Corp.
(Exact name of issuer as specified in its Charter)
Florida 65-0722193
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
11900 Biscayne Blvd. Suite 262, Miami, FL 33181
(Address of Principal executive office)
305-503-8600
(Telephone)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes __x__ No ____
Table of Contents
Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 2004 and December 31, 2003 F-1
Consolidated Statements of Operations for the three months ended March 31, 2004
and 2003 F-2
Consolidated Statements of Cash Flow for the three months ended March 31, 2004 F-3
and March 31, 2003
Notes to Consolidated Financial Statements
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Item 3. Quantities and Qualitative - Disclosure about Market Risks
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
Part I: Financial Information
EPIXTAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31 December 31
2004 2003
(Unaudited)
------------- -------------
Current Assets:
Cash and cash equivalents $ 146,014 $ 1,342,186
Restricted cash 416,721 416,721
Accounts receivable - net 4,749,768 5,609,675
Prepaid expenses and other current assets 313,014 227,203
Deferred billing costs 172,833 271,256
------------ -------------
Total current assets 5,798,350 7,867,041
------------ -------------
Property and Equipment, Net 2,123,506 1,263,844
------------ -------------
Other Assets:
Goodwill 3,360,272 3,360,272
Deposits & other 467,827 491,637
------------ -------------
Total other assets 3,828,099 3,851,909
------------ -------------
Total assets $ 11,749,955 $ 12,982,794
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt, current portion $ 274,844 $ 121,513
Accounts payable 2,608,482 3,009,932
Accrued Interest 227,087 175,185
Accrued expenses and taxes 348,684 146,566
Deferred revenue 873,505 1,459,657
Note payable - stockholder 2,395,513
------------ -------------
Total current liabilities 6,728,115 4,912,853
------------ -------------
Long-Term Liabilities:
Note payable - stockholder 2,369,350
Debt, net of current portion 50,031 23,603
Common stock to be issued 424,375 279,000
------------ -------------
Total long-term liabilities 474,406 2,671,953
------------ -------------
Stockholders' Equity:
Convertible Preferred stock, $.001 par value per share, 10,000,000
shares authorized and 23,510 shares issued and outstanding
(liquidation preference $ 4,702,000) 24 24
Common stock, $.001 par value per share, 50,000,000
shares authorized and 10,677,067 & 10,643,734 as of March
31, 2004 & 2003 Respectivly issued and outstanding 10,677 10,644
Additional paid in capital 18,451,362 18,442,395
Accumulated deficit (13,914,629) (13,055,075)
------------ ------------
Total stockholders' equity 4,547,434 5,397,988
$ 11,749,955 12,982,794
Total liabilities and stockholders' equity ------------ ------------
See accompanying note to consolidated financial statement
Part I - Financial Information
F-1
3
EPIXTAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
UNAUDITED
2004 2003
Restated
--------
Revenues $4,876,148 $12,366,775
Cost of sales 1,304,354 5,983,628
---------- ---------
Gross profit 3,571,794 6,383,147
---------- ---------
Expenses
Selling, general and administrative 3,348,633 1,931,523
Consulting fees, & reimbursements - related party 675,000 790,835
Provision for doubtful accounts 86,913 1,002,347
Depreciation 100,994 35,999
---------- ---------
Total Expenses 4,211,540 3,760,704
---------- ---------
Income (Loss) from operations (639,746) 2,622,443
---------- ---------
Other Expense:
Interest expense (215,887) (165,893)
Other expenses (3,922) 0
---------- ---------
Total other expenses (219,804) (165,893)
---------- ---------
Income(loss) before Income Taxes (859,555) 2,456,550
Provision for Income Taxes 0 480,000
---------- ---------
Net Income (Loss) (859,555) 1,976,550
========== =========
Net Income (Loss) per Share:
Basic
Diluted $ (.08) $ .19
$ (.08) $ .14
See accompanying notes to consolidated financial statements
Part I- Financial Information
F-2
EPIXTAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
UNAUDITED
2004 2003
Cash Flows from Operating Activities:
Net (loss) Income $ (859,954) $ 1,976,550
Adjustments to Reconcile Net Income(Loss) to Net Cash
Used in Operating Activities:
Depreciation and amortization 100,994 35,999
Provision of bad debt 86,913 1.002.347
Stock to be issued for consulting agreement 159,375 -
Amortization of discount on Note Payable-Stockholder 26,163 26,163
Amortization of beneficial conversion feature 81,654
Amortization of discount on convertible debenture 43,344 -
Changes in Assets and Liabilities:
(Increase) Decrease in accounts receivable 772,996 (1,526,231)
(Increase) Decrease in prepaid expenses and other (85,811) 48,344
(Increase) Decrease in deferred billing costs 98,423 (123,063)
(Increase) Decrease in deposits 23,810 (58,385)
Increase (Decrease) in accounts payable and accrued expenses (174,067) (546,308)
Increase in corporation income tax payable - 480,000
Increase (Decrease) in deferred revenues (586,152) (1,670,165)
----------- ------------
Net cash used in provided by operating activities (312,312) (354,749)
----------- ------------
Cash Flows from Investing Activities:
Acquisition of fixed assets (797,859) (77,384)
----------- ------------
Net cash used in investing activities (797,859) (77,384)
----------- ------------
Cash Flows from Financing Activities:
Repayment of notes payable and capital lease obligations (81,489) (48,322)
-
----------- ------------
Net cash used in financing activities (81,489) (48,322)
----------- ------------
Effect of exchange rate changes on cash (4,512)
-----------
Net Decrease in cash (1,196,572) (480,465)
Cash and all cash equivalents beginning of period 1,342,186 722,674
----------- ------------
Cash and all cash equivalents end of period $ 146,014 $ 242,209
=========== ============
Supplement Tax Disclosure of Cash Flow information:
Interest Paid $ 16,743 $ 86,101
=========== ============
Supplemental disclosure of non-cash investing and financing activities:
Purchase of equipment through capital leases
$ 136,250 -
=========== ============
F-3
Notes to Financial Statements
Note 1 - Basis of Presentation:
The accompanying unaudited consolidated financial statements at March
31, 2004 have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial
information on Form 10-Q and reflect all adjustment which, in the
opinion of management, are necessary for a fair presentation of the
financial position as of March 31, 2004 and results of operations for
the three months ended March 31, 2004 and 2003 and cash flows for the
three months ended March 31, 2004 and 2003. All such adjustments are
of a normal recurring nature.
The results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year. The
statements should be read in conjunction with the audited
consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2003.
On March 31, 2004, the Financial Accounting Standards Board (FASB)
issued its Exposure Draft, "Share-Based Payment," which is a proposed
amendment to FASB Statement No. 123, "Accounting for Stock-Based
Compensation." The Exposure Draft would require all share-based
payments to employees, including grants of employee stock options, to
be recognized in the income statement based on their fair values.
FASB expects that a final standard will be effective for public
companies for fiscal years beginning after December 15, 2004. The
Company does not intend to adopt a fair-value based method of
accounting for stock-based employee compensation until a final
standard is issued by the FASB that requires this accounting.
Note 2 - Principle of Consolidation:
The consolidated financial statements include the accounts of Epixtar
Corp. and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
F-4
NOTE 3. RESTATEMENT OF PRIOR CONSOLIDATED FINANCIAL STATEMENTS
The prior consolidated financial statements of the Company have been restated as
a result of management re-evaluating the accounting treatment of three
previously recorded transactions. Those transactions are as follows:
Savon LLC Acquisition
In November 2000, the Company exchanged 2,000,000 shares of Company common stock
for 80% of the outstanding member interests of Savon LLC. Transvoice Investments
Ltd., the seller, received 33% of the outstanding common stock of the Company
through this acquisition. Pursuant to SEC Staff Accounting Bulletin No. 48, this
acquisition should have been recorded at historical cost of Savon because of the
significance of the ownership interest that the Transvoice stockholder interests
had following this acquisition. However, the Company recorded the transaction at
the fair value of the Company common stock exchanged for the interest and, as a
result, goodwill was recorded in connection with this acquisition which should
not have been recorded. The Company has restated the prior consolidated
financial statements to record this acquisition at historical cost of Savon at
the date of purchase and, consequently, removed all goodwill, goodwill
amortization and impairment charges previously recorded relating to this
transaction.
National OnLine Acquisition
On March 31, 2001, the Company acquired 100% of the outstanding equity interests
of National OnLine, in a transaction involving two payments, for a total of
4,500,000 shares of Company common stock. Due to the fact that Trans Voice
Investments Ltd. owned 80% of National On Line prior to the acquisition and 56%
of the outstanding Company common stock following the acquisition, the purchase
of the 80% interest should have been recorded at historical cost of National On
Line, pursuant to the guidelines of SEC Staff Accounting Bulletin No. 48. Rather
than record the 20% interest at fair value and the 80% interest at historical
cost, the Company recorded the entire acquisition at the fair value of the
4,500,000 shares of Company common stock exchanged. As a result, goodwill was
recorded in connection with the purchase of the 80% which should not have been
recorded. The Company has restated the prior consolidated financial statements
to reflect the acquisition of the 80% interest at historical cost of National On
Line at the date of purchase and, consequently, removed the goodwill and
goodwill amortization related thereto.
Loss on Extinguishment of Debt
On October 31, 2001, the Company entered into a loan agreement to borrow up to
$5,000,000 from a then unrelated entity. The note provided for interest at 7%,
was collateralized by accounts receivable and was due on demand. In August and
September 2002,the creditor became a stockholder of the Company when the entity
acquired a total of 770,000 common shares. In November 2002, the Company entered
into an agreement, which was executed on December 6, 2002 and amended on March
3, 2003, whereby the creditor released the collateral and agreed not to demand
payment before January 2005 in exchange for certain consideration. That
consideration consisted of warrants to purchase 4,000,000 shares of Company
common stock at an exercise price of $.50 per share for a term of three years
beginning in May 2003. Pursuant to EITF 96-19, management has determined that
the transaction should have been treated as an extinguishment of the original
instrument and an execution of a new note at December 6, 2002. The fair value of
the warrants, determined on the grant date (March 3, 2003), should have been
treated as a component of the calculation of the loss associated with that
extinguishment and should have been recognized in the statement of operations in
December 2002. In addition, the new note should have been recorded at fair value
on the date that it was entered into (December 6, 2002).
In 2002, the Company recorded the fair value of the warrants at the date the
agreement was negotiated (November 2002) as deferred financing costs and began
amortizing those costs over the new life of the loan (two years). The 2002
consolidated financial statements have been restated to reflect the loss on debt
extinguishment in 2002, measured by the fair value of the warrants on the date
of grant, reduced by the discount on the note required to reflect that note at
fair value at the date it was executed. The discount is being amortized over the
life of the new note, approximately two years. The fair value of both the
warrants and the note payable was determined by appraisal.
7
NOTE 4. LIQUIDITY
We had a deficit working capital of $929,766 as of March 31, 2004 compared to a
working capital on December 31, 2003 of approximately $2,954,188. We had
negative cash flow from operations in the first quarter 2004 and 2003. The
working capital change was due in part to the note payable due stockholder being
classified as current in 2004 due to the fact that payment can be demanded
anytime after January 5, 2005. In addition, approximately $1,200,000 during the
first quarter 2004 in connection with operations including the requirements of
commencing our contact center business.
Historical Liquidity Issues of ISP Business
We have historically experienced liquidity problems due in part to the gap in
time between collection of revenue and the payment of related expenses.
Primarily this is because of the time involved in collection of accounts
receivable through local telephone companies that receive billing information
from third party billing companies. There was a lag of as much as ninety (90)
days between the time services to our customers were initiated and when we
collected the related revenue. This long collection cycle was further prolonged
by the one month free service provided to the customer. While a lag existed in
receipt of funds due in part to the date services for which we bill commence,
there was no corresponding lag in our required payments for services including
telemarketing fees, communications costs and other costs of obtaining and
maintaining those customers. For example, telemarketing fees were due shortly
after a customer was signed. In addition, the liquidity issue was exacerbated by
the reserves and holdbacks required by the billing companies relating in part to
uncollectible receivables. The reserves and holdbacks are a higher percentage of
collections than our actual bad debt experience. As a result the billing
companies maintain cash on our behalf which is ultimately remitted to us once
the billing cycles are settled. The size of the initial customer base was not
sufficient to overcome the foregoing and therefore we had a substantial negative
cash flow from this operation.
NOTE 5. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
State Proceedings and Inquiries Relating to ISP Business
As previously discussed, the Company uses telemarketing services to obtain
customers. During the normal course of business, the Company has received
inquiries or complaints from regulatory agencies. Despite its attempts to
minimize complaints, certain states have issued fines or temporary restraining
orders. While the ultimate outcome of these matters cannot be ascertained, the
Company believes that there will not be a material adverse effect on the
Company's financial position, results of operations or cash flows.
Federal Trade Commission Relating to ISP Business
During 2003, the Company was the subject of a proceeding by the Federal Trade
Commission ("FTC"). The FTC complaint brought in the United States District
Court for the Southern District of Florida alleged that the Company was
misleading potential customers of their internet service businesses through the
use of third party telemarketers. Specifically, the FTC alleged that the Company
was signing up customers for free thirty day trial periods without appropriate
consent and failing to inform these customers that unless the service is
cancelled before the end of the thirty day trial period, the customers would be
billed through their local phone companies. As part of the proceeding, the
Company was subject to a temporary restraining order, asset freeze, order
permitting expedited discovery, order appointing temporary receiver, and order
to show cause as part of the proceeding. In November 2003, without any finding
of wrongdoing, the Company entered into a preliminary injunction with the FTC.
As a result, the Company was allowed to resume its business and the asset freeze
was partially lifted. As part of the agreement, the Company was required to
establish an escrow account for the payment of future customer refunds and
amounts subject to further resolution of the dispute with the FTC into which
$1,701,684 of collections were deposited. As of December 31, 2003, the total
amount held in escrow was $ 855,502 and the total amount of cash still
restricted totaled $416,721. During 2003, $771,182 was returned to the Company
and $75,000 was charged to the Company as fees and fines. In the first quarter
of 2004 the Company is in the process of negotiation a permanent settlement.
8
NOTE 6. EARNINGS (LOSS) PER COMMON SHARE
The Company has adopted SFAS Statement No. 128, "Earnings per Share". The
statement establishes standards for computing and presenting earnings per share
(EPS). It requires dual presentation of basic and diluted EPS on the face of the
income statement. There is no presentation of diluted loss per share in 2004 as
the effects of stock options, warrants and convertible debt amounts were
antidilutive.
The following table sets forth the reconciliation of the numerator and
denominator of the basic and diluted EPS computations:
2004 2003
(Restated)
Numerator:
Net (loss) Income $ (859,554) 1,976,550
Preferred Stock Dividends 47,019 -
----------- -----------
Numerator for Basic income (loss) per share-
Income (loss)available to common stockholders (812,535) 1,976,550
Effect of dilutive securities:
Interest on convertible debt - -
----------- -----------
Numerator for diluted income (loss) per share-
Income available to common stockholders
After assumed conversions (812,535) 1,976,550
=========== ===========
Denominator:
Denominator for basic income (loss) per
Share-weighed average shares 10,671,939 10,503,000
Effect of diluitive securities:
Stock Options 546,449
Warrants 3,352,751
----------- -----------
Diluitive potential common shares:
Denominator for diluted income (loss) per
Share-adjusted weighed-average shares
Shares and assumed conversions 10,671,939 14,402,200
=========== ===========
Basic Income (loss) per share (.08) .19
=========== ===========
-
-
Diluted income (loss) per share (.08) .14
=========== ===========
9
NOTE 7. - PHILIPPINE OPERATIONS
In the fourth quarter of 2003, the Company began operating a contact center
located in the Philippines. In accordance with the terms of an Asset Purchase
Agreement (the "Agreement") dated March 2, 2004, a subsidiary of the Company,
Epixtar Philippines IT-Enabled Services Corporation (EPISC), agreed to acquire
certain assets and assume certain liabilities this call center from I-Call
Global Services Corporation at a purchase price of $821,000. We completed the
acquisition in April 2004.. The Company paid $55,000 upon execution of the
Agreement; $150,000 at closing plus $196,000 in installments at various times
up to sixty days after closing date. The balance of the purchase price was paid
by the issuance of 65,035 shares of our common stock.
The acquisition of I-Call is not considered by the Company to be a significant
acquisition
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
INTRODUCTION
In March 2001, we acquired National Online Services, Inc. ("NOL"), which
developed and marketed internet provider services ("ISP") for small businesses.
The operations of NOL commenced during 2001. We continued and expanded the
operations of NOL as well as other ISP subsidiaries operating similar businesses
primarily with funds generated from operations, making considerable expenditures
for staffing and infrastructure.
Substantially all our revenue has been derived from our ISP operations. In the
fourth quarter of 2003, we determined to concentrate our efforts on implementing
the change in direction of our business.We are now in the process of becomimg a
contact center company providing services for third parties using facilities we
operate or will develop or acquire. Today, our contact center business
represents only a small percentage of our revenue, but this business represents
a significant focus of management and capital. The effect of this transition on
our revenues, income and capital requirements is discussed below.
ACCOUNTING ISSUES
Accounting Policies and Procedures
On an on-going basis, management evaluates its estimates and judgments,
including those related to revenue recognition, allowance for uncollectible
amounts, impairments of intangible assets, recognition of deferred income tax
items and stock based compensation, bad debts and intangible assets. Management
bases its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements.
10
Revenue recognition
Our revenues are derived primarily from our ISP business through fees for
providing small businesses with Internet access, websites and e-mail addresses
through reselling dial-up access. Customers are billed monthly, following a
thirty day free trial, and the revenue is recorded over the period in which the
services are provided. Deferred revenue represents the unearned, billed revenue
at the end of an accounting period. We contract with external entities for
billing and collection services. Those entities require certain holdbacks and
reserves be maintained to allow for the possibility that amounts will not be
collected, refunds will be made or adjustments to customer accounts will be
allowed. These holdbacks and reserves are included in accounts receivable. We
provide an allowance for lack of collectibility of these amounts approximately
equal to fifty percent of the amounts held or reserved. This allowance is
estimated and adjusted quarterly based on historical experience.
Impairment of intangible assets
In connection with the acquisition of a minority interest in National Online we
recorded goodwill. SFAS No. 142 "Goodwill and Other Intangible Assets" requires
that goodwill no longer be amortized, but rather be evaluated for possible
impairment at least annually. Our policy calls for the assessment of any
potential impairment whenever events or changes in circumstances indicate that
the carrying value may not be recoverable or at least annually. If an evaluation
of undiscounted cash flows indicates impairment, the asset is written down to
its estimated fair value which is based on discounted cash flows. We did not
recognize any impairment charges for goodwill in the periods ended March 31,
2004 and 2003.
POSSIBLE IMPACT OF CERTAIN EVENTS UPON RESULTS OF OPERATIONS AND LIQUIDITY
Recent Federal Trade Commission Proceeding Relating to ISP Business
On October 30, 2003, the Federal Trade Commission instituted an injunction
action in federal district court against us and certain of our subsidiaries. The
action sought to enjoin alleged failures by certain of our ISP subsidiaries to
comply with regulations relating to the conversion of a trial customer to a
paying customer. In connection with the action the Commission obtained an ex
parte temporary restraining order, a freeze on our assets, and the appointment
of a temporary receiver. This ex-parte order prevented us from marketing and
billing our ISP services and deprived us of substantial assets. We therefore
experienced significant business disruption, incurred substantial expenses and
experienced a reduction of our working capital. While we believed we complied
with the law and the proceeding was unwarranted, on November 21, 2003 we entered
into a stipulated preliminary injunction, without any admission or finding of
wrongdoing. As a result, we were able to resume business subject to procedures
set forth in the stipulation (substantially all of which we had already
followed) and the oversight of a monitor. The receiver was terminated and
replaced by a monitor and the asset freeze was lifted except that a portion of
our assets are held in escrow against future customer refunds. Most of this
amount has been returned. In February 2004 we received over $750,000 of the
escrow money and contemplated the lifting of restriction on over $400,000
relating to our foreign subsidiary. It is impossible, at this time, to determine
the full impact of this action. The proceeding has caused a reduction of our
revenue and income in the fourth quarter of 2003 and first quarter of 2004 and
resulted in substantial legal expenses. The asset freeze and escrow resulted in
significantly reduced working capital and delayed certain implementation our new
business direction and compelled us to initiate certain cost cutting measures.
We are presently negotiating the terms of a final permanent injunction. We
cannot predict the terms of the final order or when the terms will be finalized.
11
New Business Direction
In 2003 we determined to change the direction of our business to that of a
contact center company providing services for third parties using facilities we
operate or will develop or acquire. In the fourth quarter 2003, management
determined that our efforts and capital should be focused on implementing this
change. We have hired additional executives and personnel for the development
and management of contact centers and to obtain sales for new services. We also
are incurring costs for due diligence, acquisition and physical improvements to
contact centers, as well as professional fees and travel in conjunction with the
establishment of these contact centers. In September 2003 we began to operate a
call center ,located in the Metro Manila town of Alabang in the
Philippines.which we acquired in 2004. We also have begun operations at our
Eastwood facility in the Spring of 2004. We have entered into and will explore
entering into new real estate and equipment leases for these and other centers
of contact center operations. We will have additional expenses for the
development of these contact centers The establishment of these operations will
require the hiring of a substantial number of employees and other operating
expenses. Our general and administrative expenses should increase substantially
once these operations commence. While we will continue to operate our ISP
business we will devote less resources to marketing this business- - at times
suspending marketing -as we transition to the contact center business,. This,
among other factors, has resulted in a reduction in revenue from the ISP
business which has not been immediately replaced by revenues from our new
business Therefore if we do not have substantial revenues generated by new
contact centers, we will incur losses.
Comparison of 1st Quarter 2004 to 1st Quarter 2003
General
Set forth below are comparisons of financial results for the quarters ended
March 31, 2004 and 2003. These comparisons are intended to aid in the discussion
that follows. This discussion and analysis should be read in conjunction with
the financial statements and related notes contained elsewhere in this report.
March 31, 2004 March 31,2003 Changes % of Changes
-------------- ------------- ------- ------------
(Restated)
Item
Revenue 4,876,148 12,366,775 (7,490,627) (60.6)
Cost of Sales 1,304,354 5,983,628 (4,679,274) (78.2)
Gross Profit 3,571,794 6,383,147 (2,811,353) (44.0)
Expense (exclusive of 4,110,546 3,724,705 385,841 10.4
Depreciation)
Depreciation 100,994 35,999 64,995 180.6
Interest Expense (215,887) (165,893) (49,994) 130.1
Net Income (Loss) (859,555) 1,876,550 (2,836,105) (13.5)
Cash, Accounts Receivable & prepaid
Expense, etc. 5,798,350 4,857,324 941,026 19.4
Property and Equipment 2,123,506 448,356 1,675,150 373.6
(Net of Depreciation)
Our revenues decreased from $ 12,366,775 in the first quarter 2003 to $
4,876,148 in the first quarter 2004. There is a correlation between the
marketing of our ISP services and future revenues (after the trial period) for
customers obtained during the marketing effort. Our telemarketing efforts for
the latter part of 2003 were reduced (particularly after the FTC proceeding) and
this caused a decrease in our revenue in subsequent periods including this first
quarter. There was a minimum of marketing for the first quarter of 2004 and
therefore we do not expect increased revenues in the second quarter 2004.
Our cost of sales include: (1) the direct costs of acquiring a new customer such
as telemarketing and fulfillment costs and (2) the costs of maintaining our
customer base including customer care costs and telecommunication costs for our
internet provider services. The telemarketing and fulfillment costs are one time
charges incurred when a customer signs up and represent the most significant
component of cost of sales. Conversely, the costs of maintaining our customer
base represent a much smaller component of cost of sales but are an on going
cost. Our costs of sales in the first quarter of 2004 were approximately $
4,679,274 lower than costs in the first quarter 2003. This decrease resulted
because of a decline in telemarketing efforts due to our emphasis on our new
business direction as well as the effects of the FTC proceedings. The cost of
sales of 2003 reflects high telemarketing costs resulting form increased ISP
marketing efforts in the first quarter of 2003.
12
Our gross profit was $3,571,794 in the first quarter 2004 compared to
$6,383,147 in the first quarter 2003. The decrease in gross profit resulted from
lower sales not withstanding a reduction in costs Notwithstanding the decrease
in gross profit our gross profit margins increased substantially from 51.6 % in
the 1st quarter of 2003 to 73.3% for the first quarter of 2004 due to reduced
marketing expenses. The greater the percentage of revenues from existing
customers; with no current marketing costs the greater the profit margin.
Total expense (exclusive of depreciation) increased from $3,724,705 in the first
quarter 2003 to $4,110,546 in the first quarter 2004. Included in these expenses
is an increase of $1,417,110 in selling, general and administrative expenses.
resulting from increased salary, travel and professional fees for our contact
center business. This was in part offset by a substantial decline in expense for
allowance for doubtful accounts. The allowance deceased by over 90%. The amount
of the allowance is based upon the amount of the holdback and reserves of our
billing houses which is a function of the amount of billing of our ISP business.
As a result of the foregoing we had a loss from operations of $639,745 in the
first quarter 2004 compared to income from operations of 2,622,443 in the first
quarter of 2003.
We did not have any tax expenses in 2004 because of the operating loss carry.
The liability for the first quarter 2003 was $ 480,000.
As a result of all of the foregoing, we had loss of $859,555 for the first
quarter 2004 compared to net income for the first quarter 2003 of $1,976,550.
Trends
The trend of our 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 result of low and/or
suspended ISP marketing activity. Based on the current rate of attrition of ISP
customers we expect to derive significant revenues from our ISP business. We
expect future ISP revenues to have a gross profit margin consistent with this
quarter's results as there are low marketing costs and only a maintenance
customer service cost associated with this revenue
Our contact center business revenue will increase with increasing seat
development, and business development efforts. The delay in revenue production
from the time a set of seats is completed is due to a number of factors,
including but not limited to; contracting with an appropriate customer to
utilize the seats, as well as the selection and training of qualified personnel.
Both are processes that take time and care for effective implementation.
During our initial phase of contact center operations we will incur development
and startup losses. Depending on obtaining new contracts and implementing
existing ones, we believe revenue from our contact centers will increase thereby
off setting lost ISP revenues in the future. We believe this will most likely
happen during the fourth quarter of this year to the first quarter of next year.
Because of the variables involved we can give no assurance that our projected
result will be met within the foregoing time frame or if at all.
Segment Reporting
ISP & OTHERS CONTACT CENTERS TOTAL
------------ --------------- -----
Revenues $ 4,691,022 $ 185,126 $ 4,876,148
Operating Expenses 3,095,747 1,115,793 4,211,540
Net Income (Loss) 141,400 (1,000,954) (859,554)
Fixed Assets 72,186 888,884 961,070
Total Assets 9,017,104 2,732,850 11,749,954
------------ ------------ ------------
LIQUIDITY
Immediate Liquidity Issues
Prior to the FTC Proceeding, we believed we would be able to continue to meet
our obligations arising from our existing business through cash flow from
operations. As a result of the proceeding we were deprived of substantial cash
due to the asset freeze and escrow. We also incurred substantial expenses and
interruption of revenue and billing. As consequence we were unable to pay all
our expenses in the normal course. We therefore were compelled to take several
measures including the reduction of personnel, temporary reduction of executive
salaries and postponement of most activity relating to our contact center
business initiative. Notwithstanding modifications of the temporary restraining
order through the stipulated preliminary injunction, resumption of marketing and
billing, and release of substantial amounts of escrow funds, our operational
liquidity problems continued until we received additional financing described
below. Our contact center business direction. required increased capital costs
and operating expenses in excess of cash flow. While we had determined to
proceed with our plan irrespective of financing, we would only be able to do so,
on an timely basis with additional financing. We believe the financing described
below will be adequate for this purpose as well as for our operational needs.
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Recent capital Transactions
We have recently received gross proceeds 0f $7,500,000 from financings. One
investor provided $5 million of financing to us pursuant to a secured
convertible term note, of which $1,930,000 is to be held in a restricted cash
account and may be released upon the fulfillment of certain conditions agreed to
by us and the investor. The term note is convertible at a fixed conversion price
of $2.96. In connection with the issuance of the convertible term note, we also
issued warrants to purchase up to 493,827 shares of our common stock. .The
remaining $2.5 million was raised through the private sale of convertible notes
and common stock purchase warrants to accredited investors. Notes in the
principal amount of $1,000,000 are convertible at a price of $2.37 per share and
are secured. The holders of the remaining $1.5 million of convertible notes have
the right to convert their notes into shares of our common stock at a price of
$2.96 per share or receive the repayment of their principal amount, plus
interest. In addition, the holders of the notes received warrants to purchase an
aggregate of 136,073 shares of our common stock.
COMPARISON OF CASH FLOW OF 1st QUARTER 2004 WITH 2003
Our cash and cash equivalents as of March 31, 2004 were $146,014 compared to
$242,209 as of March 31, 2003. This was offset by negative cash flow from
investing activities and operating activities.
The decrease in cash was the result of acquisition of furniture and equipment
for our expansion in Manila along with a decrease in our accounts payable.
ITEM 3. QUANTITIES AND QUANTITIVE -- DISCLOSURE ABOUT MARKET RISKS
Foreign Currency Risk
We are exposed to market risk associated primarily with changes in foreign
currency exchange rates. We have operations in the Philippines; however, both
revenue and expenses of those operations are typically denominated in the
currency of the country of operations, providing a natural hedge.
Our financial statements are presented in U.S. dollars and can be impacted by
foreign exchange fluctuations through both (i) translation risk, which is the
risk that the financial statements for a particular period or as of a certain
date depend on the prevailing exchange rates of the various currencies against
the U.S. dollar, and (ii)transaction risk, which is the risk that the functional
currency of cost and liabilities fluctuates in relation to the currency of our
revenue and assets, which fluctuation may adversely affect operating margins.
With respect to translation risk, even though the fluctuations of currencies
against the U.S. dollar can be substantial and therefore significantly impact
comparisons with prior periods, the translation impact is recorded as a
component of stockholders equity and does not affect the underlying results of
operations.
ITEM 4. CONTROLS AND PROCEDURES
This section of the report contains information concerning the evaluation of
disclosure controls and controls over financial reporting as required by Section
302 of the Sarbanes-Oxley Act of 2002. The information contained herein should
be read in conjunction with the Certification filed with this report.
Controls are designed with the objective of ensuring that assets are
safeguarded, transactions are authorized, and financial reports are prepared on
a timely basis in accordance with generally accepted accounting principals in
the United States. The disclosure procedures are designed to comply with the
regulations established by the Securities and Exchange Commission. It is
management's responsibility for establishing and maintaining adequate internal
control over our financial reporting.
Controls, no matter how designed, have limitations. While our chief executive
officer is not aware of any material weaknesses in the issuer's control over
financial reporting, it is the Company's intent that the controls be conceived
to provide adequate, but not absolute, assurance that the objectives of the
controls are met on a consistent basis. Management plans to continue its review
of internal controls and disclosure procedures on an ongoing basis.
Our chief executive officer, after supervising and participating in an
evaluation of the effectiveness of our controls and procedures subsequent to the
first quarter ended March 31, 2004, has concluded that as of the evaluation
date, the Company's internal and disclosure controls and procedures were
effective.
There were no significant changes in our internal and disclosure controls or in
other factors that could significantly affect such internal and disclosure
controls subsequent to the dates of their evaluation.
PART II
Item 1: LEGAL PROCEEDINGS
ETelecare International commenced an arbitration proceeding pursuant to an
agreement amended from time to time to provide call center services to us.E
telecare has claimed that we have failed to pay for the service rendered. We
have denied liability and will counterclaim for the return of $3,293,038.36 paid
to eTelecare alleging eTelecare engaged in systemic fraudulent activity that
caused us damage.
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LAWSTAR, INC. commenced an arbitration proceeding to recover 1,000,000 in
connection with an agreement to provide a legal service access plan, marketed in
a private label environment to B2B Advantage, Inc.'s small business customer.
Lawstar has claimed that B2B has breached the contract and failed to pay for the
services rendered. B2B denies liability because the contract was terminated and
claimant was fully paid pursuant to the terms of the contract.
ITEM 2. CHANGES IN SECURITIES
In March 2004, we issued 75,000 shares of our common stock in connection with an
agreement to retain an investment advisor. The investor signed an agreement
containing an investment representation. The issuance of these shares was exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31. Certification
Exhibit 32. Section 1350 Certification
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Epixtar Corp.
-------------------------
(Registrant)
Date May 24th, 2004 David Srour
------------------------ -------------------------
(Signature)*
Date May 24th, 2004 Irving Greenman
-------------------------
(Signature)*
*Print the name and title of each signing officer under his signature
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