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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM L0-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION L3 OR L5(D)
OF THE SECURITIES EXCHANGE ACT OF L934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 of incorporation or (I.R.S. Employer Identification No.)
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 May 1, 2005, was 12,150,356 shares.
1
EPIXTAR CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 17
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 - 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 - 27
Item 4. Controls and Procedures 27 - 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 30
Item 6. Exhibits 30
Signatures 31
Exhibits Index 32
2
PART I. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
EPIXTAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2005 2004
--------------- ----------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents (includes amounts held in escrow
of $1,110,000 at December 31, 2004) $ 495,991 $ 1,530,052
Restricted cash 175,000 175,000
Accounts receivable, net 5,549,825 4,454,152
Deferred loan costs, current portion 416,328 423,777
Prepaid expenses and other current assets 211,232 201,045
Deferred billing costs 104,293 70,454
--------------- ----------------
Total current assets 6,952,669 6,854,480
Property and Equipment, net 7,305,187 5,103,409
Other Assets:
Note receivable -- 900,000
Goodwill 4,392,991 3,360,272
Intangible assets 5,721,750 --
Deferred loan costs, net of current portion 494,432 540,886
Deposits and other 1,329,091 1,289,668
--------------- ----------------
Total other assets 11,938,264 6,090,826
--------------- ----------------
Total assets $ 26,196,120 $ 18,048,715
=============== ================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $ 4,637,187 $ 2,666,713
Accounts payable, related party 1,876,992 975,000
Deferred revenue 654,820 722,328
Accrued expenses and other liabilities 4,075,165 1,277,565
Accrued interest 568,936 460,104
Current portion of borrowings 7,374,370 6,312,758
Note payable, stockholder 2,474,000 2,474,000
--------------- ----------------
Total current liabilities 21,661,470 14,888,468
Long-Term Liabilities:
Borrowings, net of current portion 9,311,109 3,893,470
--------------- ----------------
Total liabilities 30,972,579 18,781,938
--------------- ----------------
Commitments and Contingencies -- --
Stockholders' Deficiency:
Convertible preferred stock, $.001 par value; 10,000,000 shares
authorized; 15,500 and 23,510 shares issued and outstanding;
(liquidation preference of $3,100,000 and $4,702,000) 16 17
Common stock, $.001 par value, 50,000,000 shares authorized;
12,150,356 and 11,544,219 shares issued and outstanding 12,150 11,544
Additional paid-in capital 23,582,863 22,114,353
Accumulated deficiency (28,452,443) (22,838,853)
Accumulated other comprehensive income (loss) 80,955 (20,284)
--------------- ----------------
Total stockholders' deficiency (4,776,459) (733,223)
--------------- ----------------
Total liabilities and stockholders' deficiency $ 26,196,120 $ 18,048,715
=============== ================
See Notes to Consolidated Financial Statements.
3
EPIXTAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31,
2005 2004
----------------- --------------
Revenues $ 9,080,074 $ 4,876,148
----------------- --------------
Cost of production employees 3,250,501 170,287
Billing cost 276,816 936,359
Other costs of revenue 666,864 197,708
----------------- --------------
Total costs of revenue 4,194,181 1,304,354
----------------- --------------
Gross profit 4,885,893 3,571,794
----------------- --------------
Expenses:
Compensation and benefits 3,426,329 1,654,770
Other selling, general and administrative 3,098,810 1,569,608
Consulting fees and reimbursements - related party 1,125,000 675,000
Provision for doubtful accounts 187,900 86,913
Depreciation and amortization 784,384 100,994
Amortization of intangible assets 373,250 --
----------------- --------------
Total operating expenses 8,995,673 4,087,285
----------------- --------------
Loss from operations (4,109,780) (515,491)
Other Income (Expense):
Other income (expense) 41,913 (8,826)
Factoring fees on accounts receivable (53,623) (119,351)
Interest expense (220,864) (215,887)
Amortization, debt discounts (151,648) --
Amortization, cost of borrowings (145,153) --
Warrants issued in lieu of finance charges (866,732) --
Other finance charges (100,000) --
----------------- --------------
Other income (expense), net (1,496,107) (344,064)
----------------- --------------
Loss from continuing operations (5,605,887) (859,555)
Provision for income taxes (benefit) -- --
----------------- --------------
Net loss $ (5,605,887) $ (859,555)
Cumulative dividends on preferred stock (44,694) (47,020)
----------------- --------------
Loss Assignable to Common Stockholders $ (5,650,581) $ (906,575)
================= ==============
Loss per common share:
Basic $ (0.48) $ (0.08)
================= ==============
Diluted $ (0.48) $ (0.08)
================= ==============
See Notes to Consolidated Financial Statements.
4
EPIXTAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
2005 2004
---------------- ----------------
OPERATING ACTIVITIES:
Net loss $ (5,605,887) $ (859,555)
Adjustments to reconcile net income (loss) to net cash and
cash equivalents provided by (used in) operating
activities:
Depreciation and amortization 784,384 100,994
Provision for doubtful accounts 187,900 86,913
Stock-based compensation -- 159,375
Warrants issued in lieu of finance charges 866,732 81,654
Amortization of discount on convertible debt 151,648 43,344
Amortization of cost of borrowings 145,153 --
Amortization of discount on stockholder loan -- 26,163
Amortization of intangible assets 373,250 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (119,362) 772,996
Prepaid expenses and other 8,597 (85,811)
Deferred billing costs (33,840) 98,423
Deposits and other 2,025 23,810
Increase (decrease) in:
Accounts payable, accrued expenses and other
liabilities 1,775,592 (1,149,466)
Accounts payable - related party 900,000 975,000
Accrued interest payable 108,831 --
Deferred revenues (67,508) (586,152)
---------------- ----------------
Net cash used in operating activities (522,485) (312,312)
---------------- ----------------
INVESTING ACTIVITIES:
Cash paid for acquisition (50,000) --
Additions to property and equipment (602,494) (797,859)
---------------- ----------------
Net cash used in investing activities (652,494) (797,859)
---------------- ----------------
FINANCING ACTIVITIES:
Proceeds from the issuance of debt, net of loan costs 676,251 --
Repayment of notes payable and capital lease obligations (636,572) (81,489)
---------------- ----------------
Net cash provided by (used in)financing
activities 39, 679 (81,489)
---------------- ----------------
Net effect of exchange rates on cash 101,239 (4,512)
---------------- ----------------
Net Decrease in Cash and Cash Equivalents (1,034,061) (1,196,172)
Cash and Cash Equivalents, beginning of year 1,530,052 1,342,186
---------------- ----------------
Cash and Cash Equivalents, end of period $ 495,991 $ 146,014
================ ================
Supplemental Disclosure of Cash Flow Information:
Income Tax Paid $ -- $ --
================ ================
Interest Paid $ 195,562 $ 16,743
================ ================
Non Cash Transactions
Conversion of 1,000 shares of preferred stock into
55,847 shares of common stock, $ 100,000 $ --
================ ================
Equipment purchased under capital leases 136,250
================
See Notes to Consolidated Financial Statements.
5
EPIXTAR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 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 Corp. 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).
Basis of Presentation
The accompanying unaudited consolidated financial statements of Epixtar Corp.
(the Company) as of and for the periods ended March 31, 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 unaudited consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated. 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 on April 15, 2004. Operating results for the three
months ended March 31, 2005, are not necessarily indicative of the results
expected for the year ending December 31, 2005. See Note 2.
Significant Accounting Policies
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.
6
Three Months Ended March 31,
2005 2004
------------------- -------------------
Net income (loss) available to common shareholders $ (5,650,581) $ (906,575)
Deduct: Total stock-based compensation expense determined under fair
value based method for all awards, net of related tax effects (779,087) (958,216)
------------------- -------------------
Pro forma net loss $ (6,429,668) $ (1,864,791)
=================== ===================
Income (loss) per share:
Basic:
As reported $(0.48) $(0.08)
=================== ===================
Pro forma $(0.55) $(0.17)
=================== ===================
Diluted:
As reported $(0.48) $(0.08)
=================== ===================
Pro forma $(0.55) $(0.17)
=================== ===================
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. The
adoption of SFAS 123R is not expected to have a significant effect on the
Company's financial position or cash flows, but will impact its results of
operations. 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.
In April 2005, the SEC announced that companies may implement SFAS 123R at the
beginning of their next fiscal year (instead of their next reporting period)
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. The SEC's new rule does not change the accounting required by
Statement 123R; it changes only the dates for compliance.
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 October 2004, the FASB ratified Emerging Issues Task Force Issue No. 04-8,
"The Effect of Contingently Convertible Debt on Diluted Earnings per Share"
(EITF 04-8). EITF 04-8 requires that shares underlying contingently convertible
debt be included in diluted earnings per share computations using the
if-converted method regardless of whether the market price trigger (or other
contingent features) has been met. The effective date for EITF 04-8 is for
reporting periods ending after December 15, 2004. EITF 04-8 also requires
restatement of earnings per share amounts for prior periods presented during
which the convertible instrument was outstanding. The Company does not currently
have contingently convertible debt and accordingly, adoption of EITF 04-8 is not
expected to have a significant effect on the Company's financial position or
cash flows, or results of operations.
7
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 to
conform to the 2005 presentation.
NOTE 2. GOING CONCERN CONSIDERATIONS
At March 31, 2005, the Company reflected an accumulated deficit of approximately
$28,452,443 as a result of net losses in each period of operation except
calendar year 2003. The Company had negative cash flows from operations for the
three months ended March 31, 2005 and 2004. The Company reported a net loss of
$5,605,887 for the three months ended March 31, 2005 and $859,555 during the
same period in 2004. The Company continues to experience certain liquidity
issues primarily as a result of the Company's costs associated with the
execution of its BPO operations business plan. All these factors raise
significant concern about the Company's ability to continue as a going concern.
In order to achieve profitability, the Company needs to be able to retain its
ISP customers as well as continue to expand its customer base in its business
outsourcing and call center segment. Management believes that the steps it has
taken during 2004 and 2005 to implement and grow its BPO operations will allow
the Company to achieve profitability. During 2004 and continuing into 2005, the
Company (1) hired additional management personnel with call center experience,
(2) entered into agreements for outsourcing services and (3) obtained additional
debt financing. See Notes 5 and 11.
The realization of assets and satisfaction of liabilities in the normal course
of business is dependent upon the Company's generating additional operating
capital and ultimately reaching profitable operations. No assurances can be
given that the Company will be successful in these activities. Should any of
these events not occur, the Company's financial condition and results of
operations would be materially adversely affected. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
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 four call center facilities located
in 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 wholly-owned subsidiary of the Company, and is
being operated within its BPO business segment. The purchase price of
approximately $6.5 million, excluding guaranteed liabilities of approximately
$1.1 million, is calculated as follows:
8
Cash consideration paid $ 1,017,290
Non-interest bearing Collateral Promissory Note,
payable over 24 months 5,104,594
Acquisition costs 375,000
------------
$ 6,496,884
============
The amount of consideration to the former shareholders of IMS amounted to
$6,121,884, including $50,000 paid at closing. The purchase price allocation of
the IMS acquisition resulted in goodwill of approximately $1.0 million and
identifiable intangible assets of $6.1 million. The identifiable intangible
assets include customer relationships of approximately $4.0 million, non-compete
contracts of approximately $1.7 million and approximately $375,000 and these are
being amortized on a straight-line basis over 5 and 3 years, respectively.
The IMS balance sheet as of acquisition date, January 3, 2005, is as follows:
ASSETS
Accounts Receivable - Net $ 1,164,000
Prepaid Expenses and Other Current Assets 17,000
-----------------
Total Current Assets 1,181,000
Property and Equipment - Net 2,402,000
Goodwill 966,000
Intangible Assets 6,095,000
Other Assets 41,000
-----------------
Total Assets $ 10,685,000
=================
LIABILITIES
Accounts Payable $ 2,010,000
Accrued Expenses and Other Liabilities 1,385,000
Amounts due Expixtar and Voxx 1,117,000
Debt - Current 845,000
-----------------
Total current assets 5,357,000
Debt - Long Term 5,328,000
-----------------
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 the
beginning of the period presented, 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
March 31, 2004
------------------
Revenue - as reported $ 4,876,148
Revenue- pro forma $ 9,446,338
Net loss - as reported $ (859,555)
Net loss - pro forma $ (1,721,132)
Net income (loss) per diluted common share - as reported $ (0.08)
Net income (loss) per diluted common share - pro forma $ (0.16)
9
The pro forma results are not necessarily indicative of the Company's results of
operations had it owned IMS during the entire period presented.
NOTE 4. ACCOUNTS RECEIVABLE
Accounts receivable, net, amounted to $5,549,825 and $4,454,152 at March 31,
2005 and December 31, 2004, respectively. At March 31, 2005, $1,160,160 of the
accounts receivable relates to IMS.
The Company's accounts receivables serve as collateral for certain debt of the
Company (see Note 5).
NOTE 5. DEBT AND CAPITAL LEASES
At March 31, 2005 and December 31, 2004, debt and capital leases consisted of
the following:
March 31, December 31,
2005 2004
---------------- -----------------
Non-interest bearing collateral promissory note due January 2007,
payable in monthly installments, net of unamortized discount of
$267,458 $4,622,764 $ --
7% secured convertible notes due on demand, secured by accounts
receivable 450,000 450,000
6% Notes due on demand, secured by equipment 500,000 500,000
8% unsecured convertible promissory notes, due April 2005, net of
unamortized discount of $8,822 and $46,631 991,178 953,369
Secured convertible term note due May 2007, payable in monthly
installments of $90,909 commencing October 2004, bearing annual interest
at 2.5% over prime, not to exceed 8%, collateralized by the assets of the
Company, net of unamortized discount of $489,829 and $546,860 4,055,626 4,271,322
5% unsecured joint and several subordinated convertible promissory
notes, due May 2007, net of unamortized discount of $110,568 and
$111,899 3,604,432 2,835,601
Non-interest bearing note payable, due June 2006, payable in monthly
installments of $6,374 127,487 127,487
Non-interest bearing promissory note, due September 2005, payable in
monthly installments of $40,435 364,328 404,762
Non-interest bearing assumption of equipment financing on acquisition
of call center, payable through 2005 158,301 158,301
11.9% promissory notes due August 2007, secured by automobiles,
payable in monthly installments of $3,008 72,597 77,738
Non-interest bearing note pursuant to asset purchase agreement,
payable on demand 88,692 88,692
11% equipment financing agreement, with maturities from September 2005
through March 2006 124,248 124,248
Notes assumed in IMS acquisition:
10% Note due August 2009, payable in monthly installments 325,000 --
8.8% Note due November 2005, secured by certain equipment, payable
in monthly installments of $36,613 382,742 --
Non-interest bearing equipment financing due March 2006, payable in
monthly installments of $6,348 206,715 --
Equipment financing Note due March 2007, bearing annual interest at
3.25% over prime 33,630 --
4.0% West Virginia Development Note due April 2008, secured by certain
assets as defined in a security agreement 189,556 --
(Continued)
10
Debt and Capital Leases, Continued
March 31, December 31,
2005 2004
---------------- -----------------
5% Ohio Valley Industrial and Business Development Note due January 137,247 --
2013, secured by certain assets, as defined in security agreement
Non-interest bearing promissory note from the Kansas Department of
Commerce & Housing due May 2005, forgiven if defined job creation
requirements are met 65,702 --
Capitals leases, at interest rates ranging from 9.0% to 11% in 2004
and 7% to 14% in 2003 185,234 214,708
---------------- -----------------
16,685,479 10,206,228
Less current portion 7,374,370 6,312,758
---------------- -----------------
$ 9,311,109 $ 3,893,470
================ =================
On January 3, 2005, the Company completed its purchase of all of the outstanding
common shares of IMS. As part of the acquisition, the Company issued a
$5,104,594 non-interest bearing Collateral Promissory Note payable to the IMS
shareholders. This note is payable monthly over two years. At March 31, 2005,
the note amounted to $4,622,724, net of unamortized discount of $267,458.
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.
Additionally, as part of the extension, on April 21, 2005 the Company issued
145,000 shares of common stock, in Voxx, a wholly-owned subsidiary of the
Company. The extension to the Notes matured on April 29, 2005, and the Company
is currently negotiating with the lenders to obtain another extension of the
maturity date.
In May 2004, the Company issued 8% Unsecured Convertible Promissory Notes in the
amount of $1,000,000 to accredited investors. As part of the issuance of the
convertible notes, the Company issued detachable warrants to purchase 132,722
shares of the Company's common stock exercisable at any time over a five year
period from the date of issuance. As of March 31, 2005 these warrants were
exercisable at $2.15 per share. At March 31, 2005 and December 31, 2004, these
notes amounted to $991,178 and $953,369, respectively, net of unamortized
discount of $8,822 and $46,631, respectively, resulting from the issuance of the
warrants. On April 29, 2005, the Company repaid these notes, including interest
of $82,789.
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. As
of March 31, 2005 these warrants were exercisable at $2.15 per share. In
connection with the issuance of the convertible term note, the Company entered
in to a registration rights agreement with the lender. 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 $1,060,065, or $0.56 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 three months ended March 31, 2005. At March 31,
2005 and December 31, 2004, these notes amounted to $4,055,626 and $4,271,322,
respectively, net of unamortized discount of $489,829 and $546,860,
respectively, resulting from the issuance of warrants. See Note 11.
11
During the three months ended March 31, 2005, the Company and its wholly-owned
subsidiary, Voxx Corporation (Voxx), sold to accredited investors, in a private
placement, an additional $767,500 principal amount of 5% Joint Unsecured
Subordinated Convertible Promissory Notes due May 2007. 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 on or before October 15, 2006. 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 $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 March 31, 2005 and December 31, 2004,
these notes amounted to $3,604,432 and $2,835,601, respectively, net of
unamortized discount of $110,568 and $111,899, respectively, resulting from the
issuance of warrants.
NOTE 6. COMMON STOCK
CONVERSION OF PREFERRED STOCK
During the three months ended March 31, 2005, a holder of the Company's
preferred stock converted 1,000 shares of preferred stock into 55,847 shares of
the Company's common stock. The holder of the preferred stock originally
purchased the shares for $100,000, 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 $2.00
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.
WARRANTS
On February 28, 2005, the Company issued 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. The Company estimated the
value of the warrants, using the Black-Scholes model, to be $1,060,065, or $0.56
per common share. This amount, net of $193,333 of previously accrued fees was
charged to earnings on the accompanying Consolidated Statement of Operations for
the three months ended March 31, 2005.
12
NOTE 7. RELATED PARTY TRANSACTIONS
On October 31, 2001, the Company issued a 7% note in the amount of $2,474,000,
collateralized by accounts receivable, to a then unrelated entity. In August
2002, the creditor became a stockholder of the Company and in. November 2002,
the Company entered into an agreement whereby the stockholder agreed to release
its security interest in the Company's accounts receivable to the extent
required to secure additional debt financing and agreed not to demand payment
before January 2005 in exchange for certain consideration. Except for the demand
deferral and the release of the security interest, all other terms of the note
stayed in effect. The consideration given consisted of warrants to purchase
4,000,000 shares of Company common stock at an exercise price of $0.50 per share
for a term of three years beginning in May 2003. At March 31, 2005 and December
31, 2004, the outstanding principal balance of the Note was $2,474,000.
In October 2001, the Company entered into an agreement with Transvoice, whereby
Transvoice provided certain services related to the development of the Company's
internet service provider business. The Company incurred expenses of $900,000
and $450,000 during the three months ended March 31, 2005 and 2004,
respectively, for services under this agreement. At March 31, 2005 and December
31, 2004, $1,500,000 and $750,000, respectively of these amounts remained unpaid
and are included in accounts payable-related party.
In April 2003, the Company entered into an agreement with Transvoice, whereby
Transvoice provides consulting services related to the development of marketing
and telemarketing aspects of the Company. The Company incurred expenses of
$225,000 under this agreement in each of the three months ended March 31, 2005
and 2004. At March 31, 2005 and December 31, 2004, $375,000 and $225,000
remained unpaid and are included in accounts payable - related party.
NOTE 8. 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 months
ended March 31, 2005 and 2004 is the same, since the effects of the preferred
stock, common stock options, warrants and convertible debt were anti-dilutive.
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:
See following page.
13
Three Months Ended March 31,
--------------------------------------
2005 2004
----------------- -----------------
Net loss $ (5,605,887) $(859,555)
Preferred stock dividends (44,694) (47,020)
----------------- -----------------
Net loss for basic and diluted EPS calculations $ (5,650,581) $(906,575)
----------------- -----------------
WEIGHTED AVERAGE NUMBER OF SHARES FOR BASIC AND DILUTED
EPS 11,752,909 10,677,067
LOSS PER SHARE
Basic $ (0.48) $ (0.08)
================= =================
Diluted $ (0.48) $ (0.08)
================= =================
NOTE 9. 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 months
ended March 31, 2005 and 2004, and the identifiable assets for the two segments
in which the Company operates are shown in the following tables:
During the Three Months Ended March 31,
--------------------------------------------
2005 2004
-------------------- --------------------
OPERATING REVENUE - SEGMENT
- ISP $ 3,099,559 $ 4,687,927
- BPO 5,980,515 188,221
-------------------- --------------------
Consolidated totals $ 9,080,074 $ 4,876,148
==================== ====================
OPERATING REVENUE - GEOGRAPHIC (1)
U.S. $ 9,080,074 $ 4,876,148
Philippines -- --
-------------------- --------------------
Consolidated totals $ 9,080,074 $ 4,876,148
==================== ====================
INCOME (LOSS) FROM OPERATIONS
- ISP $ 1,580,456 $ 1,319,013
- BPO (5,690,236) (1,834,504)
-------------------- --------------------
Consolidated totals $ (4,109,780) $ (515,491)
==================== ====================
DEPRECIATION AND AMORTIZATION
- ISP $ 28,751 $ 64,152
- BPO 755,633 36,842
-------------------- --------------------
Consolidated totals $ 784,384 $ 100,994
==================== ====================
CAPITAL EXPENDITURES (2)
- ISP $ -- $ --
- BPO 3,015,215 797,859
-------------------- --------------------
Consolidated totals $ 3,015,215 $ 797, 859
==================== ====================
(Continued)
14
-------------------- ---------------
At December 31,
At March 31, 2005 2004
-------------------- ---------------
IDENTIFIABLE ASSETS
- ISP $ 4,317,797 $ 6,085,591
- BPO 21,878,323 11,963,123
-------------------- ---------------
Consolidated totals $ 26,196,120 $ 18,048,714
==================== ===============
(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 three months ended March 31, 2005, includes capital assets of
$2,401,415 acquired as a result of the IMS acquisition.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
All the Company's current significant legal proceedings arise out of its ISP
business. The Company believes the proceedings and their settlement will not
have a significant effect on its operations since the Company no longer actively
markets its ISP business and the Company believes it is in substantial
compliance with the law.
Private Action
On January 30, 2004 Dixon Aviation, Inc. commenced an action in the Circuit
Court of Alabama for Barbour County against an officer, the Company and two of
its subsidiaries, a billing house and a LEC. This litigation was brought as a
class action complaint for declaratory and injunctive relief, alleging that the
Defendants engaged in cramming. During the second week of May 2005, the Company
settled the matter for $5,000.
In addition to the legal proceeding discussed above, the Company is exposed,
from time to time, to other claims, legal actions, and regulatory actions in the
normal course of business, some of which are initiated by the Company.
Management believes that any such additional outstanding issues will be resolved
without impairing the financial condition of the Company.
NOTE 11. SUBSEQUENT EVENTS
1. On April 20, 2005, the board of directors of Epixtar Corp. (the "Company")
granted and conveyed an aggregate of 2,000,000 shares of Voxx Corporation
common stock owned by the Company (the "Restricted Shares") to certain
employees and consultants of the Company, each of which grants is evidenced
by a Restricted Stock Agreement between the Company and the grantee. Voxx
Corporation is a subsidiary of the Company.
The Restricted Period for the Restricted Shares commenced on the date of
grant and will end on the date of any initial public offering of Voxx
common stock. During the Restricted Period, the grantee may not sell,
assign, transfer or encumber the Restricted Shares, the right to vote the
Restricted Shares or the right to receive dividends on the Restricted
Shares (collectively, the "Restrictions"), provided that the grantee shall
have all other rights of a stockholder of Voxx which the Company previously
had with respect to the shares, including, without limitation, the right to
receive dividends on and the right to vote the shares. The Restricted
Shares shall vest upon any initial public offering of Voxx common stock, at
which time the Restrictions shall lapse with respect to such shares. The
Restricted Stock Agreement provides that all rights to the Restricted
Shares shall be forfeited to the Company without consideration in the event
that an initial public offering of Voxx common stock does not occur prior
to July 31, 2006.
15
Each grantee, as a condition of the grant, is required to elect, within 30
days of the date of grant, and upon written notice delivered to the
Internal Revenue Service with a copy delivered to the Company, to recognize
income for federal income tax purposes equal to the Fair Market Value of
the shares as of the date the shares are transferred to the grantee,
regardless of the Restrictions and the vesting schedule. If the grantee
timely makes this required election and otherwise complies with the
provisions of the Restricted Stock Agreement relating to such election,
then on December 31, 2005, the Company will pay to each grantee, as an
additional incentive payment, an amount equal to $0.30 per Restricted Share
granted to such grantee. At the request of the Company, Voxx or any
representative of the underwriters in connection with an initial public
offering of Voxx common stock, each grantee shall be subject to a lock-up
period in connection with such initial public offering with respect to the
shares granted under the Restricted Stock Agreement, whether vested or
still restricted.
On April 20, 2005, Voxx Corporation ("Voxx"), a wholly-owned subsidiary of
Epixtar Corp., adopted the Voxx Corporation 2005 Stock Incentive Plan (the
"Incentive Plan") which permits the granting of awards of non-statutory
stock options, incentive stock options, stock appreciation rights,
restricted stock and performance shares with respect to Voxx common stock.
The Incentive Plan was approved by Epixtar Corp. (the "Company") as the
sole stockholder of Voxx. Awards under the Incentive Plan may be granted or
awarded to employees of Voxx or its Affiliates (including the Company),
persons who are hired to be employees of Voxx or its Affiliates,
non-employee directors of Voxx or any of its Affiliates, and consultants
and independent contractors who render key services to Voxx or its
Affiliates. The maximum number of shares of common stock of Voxx that may
be issued under the Incentive Plan or pursuant to awards made under the
plan is 2,375,000 shares, subject to adjustment in the event of a change in
corporate capitalization of Voxx. The Incentive Plan will be administered
by the Board of Directors of Voxx (the "Voxx Board") unless and until the
Voxx Board delegates administration to a committee of members of the Voxx
Board (such committee and the Voxx Board herein collectively referred to as
the "Administrator").
On April 20, 2005, the Voxx Board granted options with respect to an
aggregate of 2,000,000 shares of Voxx common stock to certain employees of
Voxx and its affiliates pursuant to the Incentive Plan, which options are
all designated as incentive stock options to the extent permitted. The Voxx
Board also granted non-qualified stock options with respect to an aggregate
of 375,000 shares of Voxx common stock to certain non-employee directors
pursuant to the Incentive Plan. Voxx has entered into Stock Option
Agreements, pursuant to the terms of the Incentive Plan, with each
optionee.
The exercise price for each option that was granted is $3.00 per share. All
of the granted options are exercisable immediately and will remain
exercisable for a period of ten years unless the recipient's rights under
the option agreement terminate earlier in accordance with the terms of the
Stock Option Agreement or the terms of the Incentive Plan.
2. On April 22, 2005, the Company issued an 8% Promissory Note in the amount
of $250,000 to an accredited investor. The note is payable on demand. In
the event the Company is unable to repay the note upon written demand, the
interest rate on the unpaid amount will increase to 18% per annum.
3. 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, bear interest
at the rate of prime + 2% per year, and are payable beginning 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. 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.
16
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.
The remaining proceeds of the loan were used by the Company to repay
$1,100,000 of outstanding debt with the balance reserved to continue the
build out of Voxx Corporation's Philippine-based contact center facilities
and for general corporate purposes.
As a condition of the making of this loan, the Company was also required to
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 to further secure the facility with certain additional
contract revenues from the Company's ISP business.
The Notes provide that it is an "event of default" in the event of, among
other things, non-payment, a breach of a covenant or any other agreement
made by the borrowers in the note purchase agreements, the appointment of a
receiver, an unsatisfied money judgment against one of the borrowers or any
of their subsidiaries in excess of $150,000 for more than 30 days, a change
in control of the Company or Voxx (other than in connection with a Voxx
IPO), the institution of a government regulatory proceeding which prevents
the borrowers from utilizing a substantial portion of their assets , or the
occurrence of an "event of default" in certain other agreements to which
the borrowers are parties. If an "event of default" should occur and
continue beyond any applicable grace period, 110% of the then outstanding
principal balance of the Notes plus accrued but unpaid interest becomes
immediately due and payable.
The $7,000,000 loan is convertible into the Company's common stock at $1.00
per share or Voxx common stock at a price equal to 85% of the IPO price and
included the issuance of options and warrants to acquire shares of the
Company's principal subsidiary, Voxx Corporation, at $0.001 per share and
the IPO price, respectively. All of these securities were issued and sold
pursuant to Section 4(2) of the Securities Act of 1933, as amended, as
securities sold by an issuer in a transaction "not involving any public
offering." The transaction was privately negotiated with representatives of
accredited investors with whom the Company had pre-existing business
relationships only and did not involve any general solicitation or
advertising.
As a result of the transaction described above, certain rights to acquire,
or to convert certain debt obligations of Epixtar Corp. and Voxx
Corporation into, shares of common stock of Epixtar Corp. and/or Voxx
Corporation that were outstanding at the time of such transaction will be
modified by (i) increasing the number of such shares which may be acquired
upon the exercise of such rights or the conversion of such obligations and
(ii) reducing the price of such shares at which such acquisition or
conversion is effected.
The dilutive effect of the issuance of Epixtar Corp. equity securities and
the re-pricing of certain previously issued securities, as per this
agreement, could, if all of the debt was converted and all of the warrants
were exercised, result in an increase in the Company's issued and
outstanding common stock by 9,915,726, shares or an increase of 81.6% of
the number of common shares outstanding as of May 1, 2005. This dilutive
effect includes the effects from re-pricing other equity securities, but it
excludes the potential dilutive effect on the Company's percentage
ownership of its Voxx subsidiary as a result of equity securities held by
the lender to purchase Voxx common stock.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following Management's Discussion and Analysis (MD&A) is intended to help
the reader understand Epixtar. 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" and "Risk Factors that May Affect Future Results."
The following are the sections of MD&A contained in this report, together with
the Company's perspective on the contents of these sections of MD&A, which it
hopes will make reading these pages and understanding of the Company's
operations more beneficial.
Recent Events - description of acquisition of IMS, Voxx new stock options plan
and options granted, and financing obtained on April 29, 2005.
Operations Review - an analysis of the Company's consolidated results of
operations and of the results in each of our two operating segments, to the
extent the operating segment results are material to an understanding of the
Company's business as a whole, for the periods presented in its Consolidated
Financial Statements.
Liquidity and Capital Resources - an analysis of cash flows, capital structure
and resources, off-balance sheet arrangements, commercial commitments and
contractual obligations.
Discussion of Critical Accounting Policies and New Accounting Pronouncements - a
discussion of accounting policies that require critical judgments and estimates,
and of accounting pronouncements that have been issued but not yet implemented
by the Company and their potential impact.
Forward-Looking Statements - cautionary information about forward-looking
statements.
RECENT EVENTS
On January 3, 2005, the Company completed its 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 four call center facilities located in U.S. and one
facility located in the Philippines. Select operational functions are conducted
from its network operations center (NOC) in North Carolina.
On April 20, 2005, the board of directors of Epixtar Corp. (the "Company")
granted and conveyed an aggregate of 2,000,000 shares of Voxx Corporation common
stock owned by the Company (the "Restricted Shares") to certain employees and
consultants of the Company, each of which grants is evidenced by a Restricted
Stock Agreement between the Company and the grantee. Voxx Corporation is a
subsidiary of the Company.
The Restricted Period for the Restricted Shares commenced on the date of grant
and will end on the date of any initial public offering of Voxx common stock.
During the Restricted Period, the grantee may not sell, assign, transfer or
encumber the Restricted Shares, the right to vote the Restricted Shares or the
right to receive dividends on the Restricted Shares (collectively, the
"Restrictions"), provided that the grantee shall have all other rights of a
stockholder of Voxx which the Company previously had with respect to the shares,
including, without limitation, the right to receive dividends on and the right
to vote the shares. The Restricted Shares shall vest upon any initial public
offering of Voxx common stock, at which time the Restrictions shall lapse with
respect to such shares. The Restricted Stock Agreement provides that all rights
to the Restricted Shares shall be forfeited to the Company without consideration
in the event that an initial public offering of Voxx common stock does not occur
prior to July 31, 2006.
18
Each grantee, as a condition of the grant, is required to elect, within 30 days
of the date of grant, and upon written notice delivered to the Internal Revenue
Service with a copy delivered to the Company, to recognize income for federal
income tax purposes equal to the Fair Market Value of the shares as of the date
the shares are transferred to the grantee, regardless of the Restrictions and
the vesting schedule. If the grantee timely makes this required election and
otherwise complies with the provisions of the Restricted Stock Agreement
relating to such election, then on December 31, 2005, the Company will pay to
each grantee, as an additional incentive payment, an amount equal to $0.30 per
Restricted Share granted to such grantee. At the request of the Company, Voxx or
any representative of the underwriters in connection with an initial public
offering of Voxx common stock, each grantee shall be subject to a lock-up period
in connection with such initial public offering with respect to the shares
granted under the Restricted Stock Agreement, whether vested or still
restricted.
On April 20, 2005, Voxx Corporation ("Voxx"), a wholly-owned subsidiary of
Epixtar Corp., adopted the Voxx Corporation 2005 Stock Incentive Plan (the
"Incentive Plan") which permits the granting of awards of non-statutory stock
options, incentive stock options, stock appreciation rights, restricted stock
and performance shares with respect to Voxx common stock. The Incentive Plan was
approved by Epixtar Corp. (the "Company") as the sole stockholder of Voxx.
Awards under the Incentive Plan may be granted or awarded to employees of Voxx
or its Affiliates (including the Company), persons who are hired to be employees
of Voxx or its Affiliates, non-employee directors of Voxx or any of its
Affiliates, and consultants and independent contractors who render key services
to Voxx or its Affiliates. The maximum number of shares of common stock of Voxx
that may be issued under the Incentive Plan or pursuant to awards made under the
plan is 2,375,000 shares, subject to adjustment in the event of a change in
corporate capitalization of Voxx. The Incentive Plan will be administered by the
Board of Directors of Voxx (the "Voxx Board") unless and until the Voxx Board
delegates administration to a committee of members of the Voxx Board (such
committee and the Voxx Board herein collectively referred to as the
"Administrator").
On April 20, 2005, the Voxx Board granted options with respect to an aggregate
of 2,000,000 shares of Voxx common stock to certain employees of Voxx and its
affiliates pursuant to the Incentive Plan, which options are all designated as
incentive stock options to the extent permitted. The Voxx Board also granted
non-qualified stock options with respect to an aggregate of 375,000 shares of
Voxx common stock to certain non-employee directors pursuant to the Incentive
Plan. Voxx has entered into Stock Option Agreements, pursuant to the terms of
the Incentive Plan, with each optionee.
The exercise price for each option that was granted is $3.00 per share. All of
the granted options are exercisable immediately and will remain exercisable for
a period of ten years unless the recipient's rights under the option agreement
terminate earlier in accordance with the terms of the Stock Option Agreement or
the terms of the Incentive Plan.
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, bear interest at the rate of prime + 2%
per year, and are payable beginning 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. 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.
19
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.
The remaining proceeds of the loan were used by the Company to repay $1,100,000
of outstanding debt with the balance reserved to continue the build out of Voxx
Corporation's Philippine-based contact center facilities and for general
corporate purposes.
As a condition of the making of this loan, the Company was also required to
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 to
further secure the facility with certain additional contract revenues from the
Company's ISP business.
The Notes provide that it is an "event of default" in the event of, among other
things, non-payment, a breach of a covenant or any other agreement made by the
borrowers in the note purchase agreements, the appointment of a receiver, an
unsatisfied money judgment against one of the borrowers or any of their
subsidiaries in excess of $150,000 for more than 30 days, a change in control of
the Company or Voxx (other than in connection with a Voxx IPO), the institution
of a government regulatory proceeding which prevents the borrowers from
utilizing a substantial portion of their assets , or the occurrence of an "event
of default" in certain other agreements to which the borrowers are parties. If
an "event of default" should occur and continue beyond any applicable grace
period, 110% of the then outstanding principal balance of the Notes plus accrued
but unpaid interest becomes immediately due and payable.
The $7,000,000 loan is convertible into the Company's common stock at $1.00 per
share or Voxx common stock at a price equal to 85% of the IPO price and included
the issuance of options and warrants to acquire shares of the Company's
principal subsidiary, Voxx Corporation, at $0.001 per share and the IPO price,
respectively. All of these securities were issued and sold pursuant to Section
4(2) of the Securities Act of 1933, as amended, as securities sold by an issuer
in a transaction "not involving any public offering." The transaction was
privately negotiated with representatives of accredited investors with whom the
Company had pre-existing business relationships only and did not involve any
general solicitation or advertising.
As a result of the transaction described above, certain rights to acquire, or to
convert certain debt obligations of Epixtar Corp. and Voxx Corporation into,
shares of common stock of Epixtar Corp. and/or Voxx Corporation that were
outstanding at the time of such transaction will be modified by (i) increasing
the number of such shares which may be acquired upon the exercise of such rights
or the conversion of such obligations and (ii) reducing the price of such shares
at which such acquisition or conversion is effected.
The dilutive effect of the issuance of Epixtar Corp. equity securities and the
re-pricing of certain previously issued securities, as per this agreement,
could, if all of the debt was converted and all of the warrants were exercised,
result in an increase in the Company's issued and outstanding common stock by
9,915,726, shares or an increase of 81.6% of the number of common shares
outstanding as of May 1, 2005. This dilutive effect includes the effects from
re-pricing other equity securities, but it excludes the potential dilutive
effect on the Company's percentage ownership of its Voxx subsidiary as a result
of equity securities held by the lender to purchase Voxx common stock.
20
OPERATIONS REVIEW
Highlights
Operations highlights for the first quarter of fiscal 2005 include:
Revenues increased 86.2% to $9,080,074 in the first quarter of fiscal 2005, from
$4,876,148 in the first quarter of fiscal 2004.
Loss from continuing operations increased $4,746,332, to $5,605,887, in the
first quarter of fiscal 2005, from $859,555 in the first quarter of fiscal 2004;
BPO segment achieved revenue growth of $5,792,294. The Company's new IMS
acquisition contributed $5,156,998 to the increase. Operating income declined
$3,855,732, compared to the first quarter of fiscal 2004 primarily as a result
of the Company's expansion of its BPO operations in 2004 and continuing in 2005.
ISP segment revenue declined $1,588,368 as a result of its declining customer
base. Operating income increased $448,194, or 33.9%, compared to the first
quarter of fiscal 2004 primarily due to lower direct and administrative costs as
the Company has suspended its marketing efforts.
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 2003, 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. BPO services
complement the ISP business and consequently, the Company continues to maintain
and service its ISP business customers while concentrating the Company's efforts
in growing the business process outsourcing and contact center services
business.
Business Processing Outsourcing and Contact Center Business
The Company began developing its contact center business in the latter part of
2003 and continued throughout 2004 and now has approximately 1,525 operational
seats in the Philippines and the United States, including approximately 500
seats added through the Company's acquisition of IMS, supporting several major
clients. The Company is actively marketing its contact center services and,
depending on financing, will continue to build out infrastructure and hire
additional personnel. See Recent Events, above for a description of financing
obtained in April 2005.
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, as well as rental expense for leased facilities.
ISP Business
While the Company is not presently marketing its ISP business, it is continuing
to service its existing customer base. The Company's ISP operations consisted
essentially of the marketing of value-added internet service provider services,
primarily through third party facilities. The Company does not operate its own
network but uses third parties to obtain access to the Internet for its clients.
Prior to 2004 when the Company suspended its marketing efforts, the customer
base kept growing as a direct result of the marketing efforts. ISP revenues are
derived from monthly fees charged customers for value-added internet services.
21
Cost 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. Because the Company is not
marketing the ISP business, cost of revenue has and should continue to decline
thereby increasing gross profit margins for this business. The ISP customer base
now consists of seasoned customers and based on current attrition rates the
Company believes it will continue to derive revenues on a declining basis for
several years.
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. The Company will continue to
incur losses as a result of development costs associated with contact center
operations. In January 2005, the Company acquired IMS to increase its contact
center penetration. BPO revenues and overall revenue should increase as a result
of this acquisition; however, since IMS has been incurring losses, there is no
assurance we will be able to operate this new subsidiary profitably. As a result
of the IMS acquisition, and depending on obtaining additional new contracts and
implementing existing ones, the Company believes revenue from its contact
centers will increase, offsetting declining ISP revenues in the future. Because
the Company has elected to proceed with the expansion of its contact center
business, it will have a need for substantial capital during the next several
quarters.
Results of Operations
The Company reported a net loss of $5,605,887, or $0.48 per basic and diluted
common share, for the three months ended March 31, 2005, compared with a net
loss of $859,555, or $0.08 per basic and diluted common share for the comparable
period in 2004. The increase in the loss for the March 2005 quarter compared
with the same period in 2004 was due to the Company's expansion during 2004 and
2005 into business process outsourcing and contact center services operations
(BPO), including its acquisition of IMS in January 2005, a decline of
approximately 21.6% in the gross profit of its internet service provider
services operations (ISP) as a result of a declining customer base, and
approximately $900,000 of expense associated with the valuation of 1.9 million
warrants issued by the Company to a lender during the March 2005 quarter as
consideration for the release of escrowed funds and the waiver of registration
rights.
On a pro forma basis, assuming the acquisition of IMS had been in January 2004,
the Company would have reported a net loss of $1,721,132, or $0.16 per basic and
diluted common share, for the three months ended March 31, 2004. IMS' gross
profit margin for the period was approximately $1,832,000, or 40%; however, high
administrative expenses resulted in a loss from operations of approximately
$400,000.
Set forth below are comparisons of financial results of operations for the three
months ended March 31, 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.
See following page.
22
THREE MONTHS ENDED MARCH 31, 2005 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2004
-----------------------------------------------------------
Variance
2005 2004 $ %
--------------- --------------- -------------- ------------
Revenue $ 9,080,074 $4,876,148 $4,203,926 86.2%
Cost of revenue 4,194,181 1,304,354 2,889,827 221.6
--------------- --------------- --------------
Gross profit 4,885,893 3,571,794 1,314,099 36.8
--------------- --------------- --------------
Operating expenses (exclusive of depreciation, and
amortization of intangibles) 7,838,039 3,986,291 3,851,748 96.6
Depreciation, and amortization of intangibles 1,157,634 100,994 1,056,640 1046.2
Other non operating expenses, net 1,496,107 344,064 1,152,043 334.8
--------------- --------------- --------------
Net loss $(5,605,887) $(859,555) $(4,746,332) (552.2)
=============== =============== ==============
Net loss per share $ (0.48) ($0.08)
=============== ===============
Revenue for the first quarter of 2005 increased to $9,080,074 in 2005 from
$4,876,148, or 86.2%. The Company's BPO operations contributed $5,792,294 to the
increase, including $5,156,998 from its new IMS acquisition, partially offset by
a decline of approximately $1,588,368 in revenue from ISP operations. Since the
Company is focusing its resources solely on its contact center business and the
Company and is no longer marketing its ISP services, there is no growth in the
ISP customer base. 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 first quarter of 2005 increased to $4,194,181 in 2005
from $1,304,354 in 2004, or 221.6%. The increase in the cost or revenue is due
primarily to a $3,650,698 increase in costs associated with BPO operations,
including $3,672,604 from IMS, offset in part by reduced ISP costs of
approximately $760,870. Cost of BPO production personnel contributed
approximately $3,045,484 to the increase, as a result of the Company's expansion
of its BPO business. The number of BPO production employees increased by
approximately 1,260, to 1,325, from 65 at March 31, 2004. IMS accounted for an
increase of 650 in the number of production employees.
Gross profit for the first quarter of 2005 was $4,885,893 compared with
$3,571,794 in 2004, or an increase of 36.8%. BPO gross profit increased
approximately $2,141,596, of which $1,484,394 was attributable to IMS. The gross
profit margin for ISP decreased approximately $827,498 as a result of lower
sales and fixed direct costs associated with the operations.
Operating expenses, exclusive of depreciation, and amortization of intangibles,
were $7,838,039, or a 96.6% increase for the first quarter of 2005 compared with
$3,986,291 in 2004. Compensation and employees benefits increased $1,771,559, to
$3,426,329, or 107.1% for the first quarter of 2005, compared with $1,654,770,
for the same period in 2004. This increase was primarily the result of an
increase in the number of BPO sales, marketing and administrative employees, to
360 at March 31, 2005 from 60 in 2004. Occupancy, advertising and marketing,
travel and professional fees were also higher during the first quarter of 2005.
The increases in these costs are reflective of the Company's expansion of its
BPO operations in the Philippines and its acquisition of three call centers in
the U.S.
Depreciation and amortization expense for the first quarter of 2005 was $784,384
compared to $100,994 in 2004. This increase was due to depreciation of
significant acquisitions of property and equipment related to the development of
call centers in the Philippines in 2004 and 2005, and the acquisition of
property and equipment on the IMS purchase.
Amortization of intangibles resulting from the valuation of IMS acquired assets
and liabilities was $373,250 for the first quarter of 2005.
23
The increase in non-operating expenses, net, was due primarily to expenses
associated with the issuance of equity and debt securities during the second
half of 2004 and the first quarter of 2005. Amortization of debt discounts and
costs associated with borrowings amounted to approximately $396,801 in 2005.
Interest expense of $220,864 was recognized during the first quarter of 2005
compared to $219,804 in 2004. 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,
exercisable at any time over a seven-year period. The fair value of these
warrants were estimated to be approximately $1,060,065, or $0.56 per common
share. This amount, net of $193,333 of previously accrued debt fees was
recognized as expense during the March 2005 quarter.
Liquidity and Capital Resources
Historical Cause of Liquidity Issues
Prior to the FTC proceeding in October 2003, the Company expected it would
continue to meet its obligations arising from its existing ISP business through
cash flow from operations but would require additional financing to fund its
entry to the business outsourcing process and contact center business. As a
result of the FTC proceeding the Company was deprived of substantial cash
because of the asset freeze and escrow imposed by the FTC, and incurred
substantial expenses and interruption of services to customers, and therefore of
revenue. As a consequence the Company was unable to pay all of its expenses in
the normal course of business. The Company was therefore compelled to take
several measures including the reduction of personnel, temporary reduction of
executive salaries, and postponement of most activity relating to its start-up
of its BPO operations. The Company's liquidity problems have continued
particularly as it determined to proceed with its contact center business. This
direction required increased capital expenditures and operating expenses in
excess of cash flow. In 2004 the Company received additional financing which
enabled it to proceed with the implementation of its BPO operations. The Company
has continued to proceed with the implementation of its call center business, in
the belief that financing would be available and commitments have been made
based on that belief. Since some obligations became due ahead of financing
receipts the Company has experienced significant cash flow problems.
Indebtedness aggregating approximately $20,036,000 was outstanding at March 31,
2005, excluding related party financing of $2,474,000. See Recent Events.
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 March 31, 2005 were $495,991
compared with $1,530,052 at December 31, 2004. The working capital deficit was
approximately $14,708,801 as of March 31, 2005, compared with $8,033,988 at
December 31, 2004, an 83.1% increase. During the first quarter of 2005 the
Company used $522,485 of cash for operations compared with $312,312 used during
the comparable period of 2004. The increase in negative cash flow from
operations for 2005 was primarily the result of a $5,605,887 loss from
operations compared with a loss of $859,555 in 2004, a change of $4,746,332.
Increases in accounts receivable and accounts payable and accrued expenses of
$892,358 and $2,925,058, respectively, as well as a decrease of approximately
$518,664 in deferred revenue, partially offset the decline in cash resources
during the quarter.
INVESTING ACTIVITIES
Net cash used for investing activities during the first quarter of 2005 was
$652,494 compared to $797,859 in 2004. This capital spending was the result of
the continued development of the Company's contact center business in the
Philippines and the acquisition of IMS.
24
FINANCING ACTIVITIES
Net cash provided by financing activities for the first quarter of 2005 was
$39,679 compared with a use of cash of $81,489 in 2004. During the first quarter
of 2005 the Company sold to accredited investors, in a private placement, an
additional $767,500 principal amount of 5% Joint Unsecured Subordinated
Convertible Promissory Notes due May 2007 and repaid approximately $602,000 of
notes and capital leases.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements, investments in
special purpose entities or undisclosed borrowings or debt. In addition, the
Company has not entered into any derivative contracts.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS
- ----------------------------------------------------------------------------
Critical Accounting Policies
The Company has made a number of estimates and assumptions relating to the
reporting of results of operations and financial position in the preparation of
its financial statements in conformity with accounting principles generally
accepted in the United States of America. Actual results could differ
significantly from those estimates under different assumptions and conditions.
The Company included in its Annual Report on Form 10-K for the year ended
December 31, 2004 a discussion of the Company's most critical accounting
policies, which are those that are most important to the portrayal of the
Company's financial condition and results of operations and require management's
most difficult, subjective and complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain.
The Company has not made changes in any critical accounting policies during the
first quarter of 2005. Any changes in critical accounting policies and estimates
are discussed with the Audit Committee of the Board of Directors of the Company
during the quarter in which a change is made.
New 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. The
adoption of SFAS 123R is not expected to have a significant effect on the
Company's financial position or cash flows, but will impact its results of
operations.
In April 2005, the SEC announced that companies may implement SFAS 123R at the
beginning of their next fiscal year (instead of their next reporting period)
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. The SEC's new rule does not change the accounting required by
Statement 123R; it changes only the dates for compliance.
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 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.
25
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; concerning new
products, services or developments; regarding future economic conditions,
performance or outlook, including statements relating to the outcome of
contingencies; as to the value of Company contract awards and programs; of
expected cash flows or capital expenditures; of belief or expectation; and of
assumptions underlying any of the foregoing. 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:
o the ability to achieve growth in markets that are highly competitive
where the Company may be unable to compete with businesses that have
greater resources;
o the ability to raise capital, when needed;
o participation in markets that are often subject to uncertain economic
conditions, which makes it difficult to estimate growth in the Company's
markets and, as a result, future income and expenditures;
o the consequences of future geo-political events, which may affect
adversely the markets in which the Company operates, its ability to
insure against risks, to protect its operations and profitability;
o strategic acquisitions and the risks and uncertainties related thereto,
including the Company's ability to manage and integrate acquired
businesses and
o customer credit risk;
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to certain market risks that arise in the ordinary course
of business. A discussion of the Company's primary market risk exposure and
interest rate risk is presented below.
Interest Rate Sensitivity - At March 31, 2005, the Company had cash, cash
equivalents totaling $495,991. 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.
26
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 and we anticipate that this trend will continue in 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 March 31, 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.
a. Evaluation of disclosure controls and procedures:
The Company maintains "disclosure controls and procedures," as such term is as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Exchange
Act) pursuant to Rule 13a-15 of the Exchange Act that are designed to ensure
that information required to be disclosed in reports that are filed or submitted
under the Exchange Act are recorded, processed, summarized, and reported within
the time periods specified by the SEC rules and forms, and that such information
is accumulated and communicated to the Company's management, including its Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to
allow timely decisions regarding required disclosure.
The Company's internal control over financial reporting is a process designed
under the supervision of the Company's principal executive and principal
financial officers to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Company's consolidated financial
statements for external purposes in accordance with accounting principles
generally accepted in the United States of America.
In designing internal control over financial reporting and evaluating the
Company's disclosure controls and procedures, management recognizes that
disclosure controls and procedures, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met. There are inherent limitations to
the effectiveness of any system of disclosure controls and procedures, including
the possibility of human error and the circumvention or overriding of the
controls and procedures. Accordingly, even effective disclosure controls and
procedures can provide only reasonable assurance of achieving their control
objectives, and management is required to use its judgment in evaluating the
cost-benefit relationship of possible controls and procedures Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate due
to changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
27
As required by Rule 13a-15(e) of the Exchange Act, as of the end of the March
31, 2005 quarter, management of the Company carried out an evaluation, with the
participation of the Company's CEO and CFO, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures. Based upon
that evaluation, the Company's CEO and CFO concluded that, as of the end of the
period covered by this Quarterly Report on Form 10-Q, the Company's disclosure
controls and procedures are adequate and effective, at a reasonable assurance
level.
b. Changes in Internal Control over Financial Reporting
The Company is currently reviewing its internal control over financial reporting
as part of its on going efforts to ensure compliance with the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002. In addition, the Company
routinely reviews its system of internal control over financial reporting to
identify potential changes to its processes and systems that may improve
controls and increase efficiency, while ensuring that it maintains an effective
internal control environment. Changes may include such activities as
implementing new, more efficient systems, consolidating the activities of
acquired business units, formalizing policies and procedures, improving
segregation of duties, and adding additional monitoring controls. In addition,
when the Company acquires new businesses, it incorporates its controls and
procedures into the acquired business as part of the Company's integration
activities. There have been no changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in the Company's internal
control over financial reporting during the quarter ended March 31, 2005, that
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
All the Company's current significant legal proceedings arise out of its ISP
business. While the results of these proceedings cannot be predicted with
certainty, management believes that the final outcome of these proceedings and
their settlement will not have a material adverse effect on the Company's
consolidated financial statements, results of operations or cash flows, as the
Company no longer actively markets its ISP business and the Company believes it
is in substantial compliance with the law.
The Dixon Aviation action disclosed in Item 3, Legal Proceedings on the
Company's Annual Report on Form 10-K for the year ended December 31, 2004 has
been settled in return for a cash payment of $5,000.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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 shares of common stock as payment for
$385,000 of the amount guaranteed. All of these securities were issued pursuant
to Section 4 (2) of the Securities Act of 1933, as amended, as securities sold
by an issuer in a transaction "not involving any public offering". This
transaction was privately negotiated with accredited investors only and did not
involve any general solicitation or advertising. 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.
Also refer to Form 8-K filed with the Securities and Exchange Commission on May
5, 2005, which is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As reported on the Company's Form 10-K for the year ended December 31, 2004,
filed with the Securities and Exchange Commission on April 15, 2005, the Company
held a Special Meeting for 2004 (in lieu of an Annual Meeting) on February 15,
2005. The following matters were voted upon, with the following results:
Election of Directors: The nominees listed below were elected directors for a
one-year term or until their successors are elected and qualified, with the
respective votes set forth opposite their names
For Against Abstain
--------- ------- -------
Ilene Kaminsky 6,406,000 0 0
David Srour 6,406,000 0 0
Irving Greenman 6,406,000 0 0
David Berman 6,406,000 0 0
John W. Cooney 6,406,000 0 0
Kenneth Elan 6,406,000 0 0
Sheldon Goldstein 6,406,000 0 0
Robert Palmer 6,406,000 0 0
Ratification of Amendment to Stock Option Plan: The shareholders ratified an
amendment to the Company's 2001 Stock Option Plan to change the number of shares
subject to the Plan from 4,000,000 shares of the Company's common stock to
6,000,000 shares by the following vote:
For Against Abstain
--- ------- -------
6,406,000 0 0
29
There were no other matters submitted to a vote of security holders during the
quarter ended March 31, 2005.
ITEM 5. OTHER INFORMATION
During the three months ended March 31, 2005, the Company filed with the
Securities and Exchange Commission Current Reports on Form 8-K on January 13 and
March 23, 2005.
ITEM 6. EXHIBITS
(a) Exhibits:
The following exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION OF DOCUMENT
10.15 Epixtar Corp. Restricted Stock Agreement
10.16 Voxx Corporation 2005 Stock Incentive Plan
10.16(a) Voxx Corporation 2005 Stock Incentive Plan - Form of Stock Option Agreement
10.17 Collateral Promissory Note
11 Statement re Computation of Per Share Earnings is incorporated by reference to Part I., Item 1.
Financial Statements, Note 8, 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
30
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/ Ilene Kaminsky
May 20, 2005 ----------------------------
Ilene Kaminsky
Chief Executive Officer
Dated: By: /s/ Irving Greenman
May 20 2005 Irving Greenman,
----------------------------
Chief Financial Officer
and Chief Accounting Officer
31
EXHIBITS
TABLE OF CONTENTS
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
10.15 Epixtar Corp. Restricted Stock Agreement
10.16 Voxx Corporation 2005 Stock Incentive Plan
10.16(a) Voxx Corporation 2005 Stock Incentive Plan - Form of Stock Option Agreement
10.17 Collateral Promissory Note
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
32