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EPAZZ INC - 10-Q/A - MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q (THIS "FORM 10-Q"),
CONSTITUTE "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995 (COLLECTIVELY, THE "REFORM ACT"). CERTAIN, BUT NOT NECESSARILY ALL,
OF SUCH FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES", "EXPECTS", "MAY", "SHOULD", OR
"ANTICIPATES", OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES.
SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS OF EPAZZ, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES DESK FLEX, INC.
("DFI") AND PROFESSIONAL RESOURCE MANAGEMENT, INC. ("PRMI")(COLLECTIVELY, "THE
COMPANY", "EPAZZ", "WE", "US" OR "OUR") TO BE MATERIALLY DIFFERENT FROM ANY
FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-Q, UNLESS ANOTHER DATE IS
STATED, ARE TO MARCH 31, 2010.
Business Overview
The Company was incorporated in the State of Illinois on March 23, 2000, to
create software to help college students organize their college information and
resources. The idea behind the Company was that if the information and resources
provided by colleges and universities was better organized and targeted toward
each individual, the students would encounter a personal experience with the
college or university that could lead to a lifetime relationship with the
institution. This concept is already used by business software designed to
retain relationships with clients, employees, vendors and partners.
The Company developed a web portal infrastructure operating system product
called BoxesOS v3.0. BoxesOS provides a web portal infrastructure operating
system designed to increase the satisfaction of key stakeholders (students,
faculty, alumni, employees, and clients) by enhancing the organizational
experience through the use of enterprise web-based applications to organize
their relationships and improve the lines of communication. BoxesOS decreases an
organization's operating expenses by providing development tools to create
advanced web applications. The applications can be created by non-technical
staff members of each institution. BoxesOS creates sources of revenue for Alumni
Associations and Non-Profit organizations through utilizing a web platform to
conduct e-commerce and provides e-commerce tools for small businesses to easily
create "my accounts" for their customers. It further reduces administrative
costs, by combining technology applications into one package, providing an
alternative solution to enterprise resource planner ("ERP") modules and showing
a return on investment for institutions by reducing the need for 3rd party
applications license fees. BoxesOS can also link a college or university's
resources with the business community by allowing businesses to better train
their employees by utilizing courseware development from higher education
institutions.
On or about June 18, 2008, the Company entered into a Stock Purchase Agreement
(the "Purchase Agreement") with Desk Flex, Inc., an Illinois corporation
("DFI"), Professional Resource Management, Inc., an Illinois corporation ("PRMI"
and collectively with DFI, the "Target Companies") and Arthur A. Goes, an
individual and the sole stockholder of the Target Companies. The Purchase
Agreement consummated the transactions contemplated by the February 25, 2008,
non-binding letter of intent (the "Letter of Intent") the Company entered into,
to acquire 100% of the outstanding shares of the Target Companies. Pursuant to
the Purchase Agreement, the Company agreed to purchase 100% of the outstanding
shares of the Target Companies for an aggregate purchase price of $445,000 (the
"Purchase Price"). The Purchase Price was payable as follows:
(a) Mr. Goes retained the $10,000 originally paid by the Company in
connection with the parties' entry into the Letter of Intent;
(b) The Company paid Mr. Goes $210,000 in cash (the "Cash Consideration") at
the Closing (as defined below) of the Purchase Agreement; and
(c) The Company provided Mr. Goes with a 7% Promissory Note in the amount of
$225,000 (the "Note"), described in greater detail below.
Additionally, the Company agreed to assume an aggregate of approximately $15,475
in outstanding liabilities of DFI and PRMI in connection with the Closing.
The Purchase Agreement closed on June 18, 2008 ("Closing"), at which time Mr.
Goes delivered to the Company, 2,000 shares of DFI stock, representing 100% of
the issued and outstanding shares of DFI, and 1,000 shares of PRMI stock,
representing 100% of the issued and outstanding shares of PRMI. Also at Closing,
the Company delivered the Cash Consideration and the Note to Mr. Goes. As a
result of the Closing, DFI and PRMI became wholly-owned subsidiaries of the
Company.
The Note bears interest at the rate of seven percent (7%) per annum, and all
past due principal and interest (which failure to pay such amounts after a
fifteen (15) day cure period, shall be defined herein as an "Event of Default")
bear interest at the rate of twelve percent (12%) per annum until paid in
full. The Note, however, additionally provides that the Company shall have two
additional fifteen (15) day cure periods during the term of the Note resulting
in two thirty (30) day cure periods before an Event of Default occurs. The
principal amount of the Note is due on June 18, 2011. The Note is payable in
monthly installments of $6,947.35 (each a "Monthly Payment"), with the first
such Monthly Payment due on September 18, 2008, until such time as this Note is
paid in full. Provided, however, that if the total amount due under the Note is
less than any Monthly Payment, the Company shall only be obligated to pay the
remaining balance of the Note. The Note may be prepaid at any time without
penalty. As of the date of this report, the Company is current with all of its
required Monthly Payments.
Additionally, the Company agreed to secure the payment of the Note with a
Uniform Commercial Code Security Interest filing, which the Company agreed to
file, but which filing has not occurred to date, at Mr. Goes' request, at the
Company's expense, to grant Mr. Goes a security interest over all of the Target
Companies' tangible and intangible assets, and the outstanding stock of both of
the Target Companies until the Note is repaid. Pursuant to such requirement of
the Note, at the Closing, the Company entered into a Security Agreement with Mr.
Goes, whereby the Company granted Mr. Goes a security interest in all inventory,
equipment, appliances, furnishings and fixtures, stock certificates and
intellectual property now or hereafter owned by the Target Companies. Pursuant
to the Security Agreement, the Company also assigned to Mr. Goes a security
interest in all of its right, title, and interest to any trademarks, trade
names, contract rights, and leasehold interests in which it now has or hereafter
acquires to secure repayment of the Note.
Professional Resource Management, Inc. and Desk Flex, Inc. Business Overview
Professional Resource Management, Inc. was incorporated under the laws of
Illinois in June 1985. On or around December 31, 1997, Professional Resource
Management, Inc. established a wholly-owned subsidiary, PRM Transfer Corp. On or
around December 31, 1997, Professional Resource Management, Inc., PRM Transfer
Corp. and Arthur Goes entered into a Reorganization Agreement, whereby
Professional Resource Management, Inc. transferred all of its assets and
liabilities to PRM Transfer Corp., with the exception of those assets pertaining
to its proprietary source code or software product, Desk/Flex. Also pursuant to
the Reorganization Agreement, Professional Resource Management, Inc. amended its
corporate charter to change its name to Desk Flex, Inc. ("DFI"), and PRM
Transfer Corp. amended its charter to change its name to Professional Resources
Management, Inc. ("PRMI"). The transfer was effected in an effort by Mr. Goes to
better promote the Desk/Flex product.
PRMI and DFI are separate legal entities, but operate in conjunction. PRMI and
DFI share office space and certain employees. DFI's main source of revenue comes
from the "Desk/Flex Software" product, which it owns, and PRMI's main source of
revenue comes from the "Agent Power" product line, which it owns. PRMI also acts
as the general agent for DFI; however, there is no formal agency agreement
between the two companies.
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Recent Events
Effective February 1, 2010, the Company entered into a Software Product Asset
Purchase Agreement (the "Software Rights Agreement") with Igenti, Inc., a
Florida corporation ("Igenti") to acquire the rights to Igenti's AutoHire
software, domain names, permits, customers, contracts, know-how, equipment,
software programs, receivables totaling approximately $10,000 and the
intellectual property of Igenti associated therewith (the "AutoHire Software").
The Company did not purchase or assume any of Igenti's liabilities in
connection with the Software Rights Agreement. The purchase price for the
AutoHire Software was $170,000 payable as follows:
1) $120,000 in cash at the closing (which occurred February 1, 2010); and
2) $50,000 in the form of a promissory note (the "Igenti Note).
The Igenti Note does not bear interest and is payable in monthly installments of
$416.67 per month beginning May 5, 2010, and ending May 5, 2012 (the "Maturity
Date"), at which time the remaining amount of the Igenti Note, $39,999.92 is due
and payable. The payment of the Igenti Note is secured by all of the
subscription agreements of customers relating to the AutoHire Software entered
into prior to February 1, 2010. Igenti has also guaranteed the Company that the
Company will receive at least $173,700 (the "Guaranteed Amount") in subscription
cash receipts from the AutoHire Software during the year ending February 1,
2011. The purchase price payable to Igenti is subject to reduction on a
dollar-for-dollar basis in the event the subscription cash receipts from the
AutoHire Software during the year ending February 1, 2011 are less than the
Guaranteed Amount.
In connection with the Software Rights Agreement, the Company also entered into
a Consulting Agreement and Non-Compete Agreement (the "Consulting Agreement")
with the owner of Igenti, Jim McArdle. Pursuant to the Consulting Agreement, we
agreed to engage Mr. McArdle as a consultant in connection with the AutoHire
Software for a period of six months following the closing of the Software Rights
Agreement at the rate of $2,962.70 per month, and Mr. McArdle agreed to provide
consulting services for us. We terminated the Consulting Agreement prior to the
expiration of six months from the effective date of the Software Rights
Agreement, which agreement can be cancelled for any reason, we agreed to pay Mr.
McArdle $5,925.40 in one lump sum. Pursuant to the Consulting Agreement, Mr.
McArdle agreed to not compete with the Company or our products anywhere in the
nation for a period of two years following the closing of the Software Rights
Agreement.
On July 28, 2010, the Company initiated a 10 for 1 stock split. The result was
$5,448,294 shares of common stock issued and outstanding.
On July 28, 2010 the Company issued 20,000,000 shares of .01 par common stock to
Shaun Passley for prepaid compensation. Shaun Passley will begin to earn these
shares on January 15, 2011.
On July 28, 2010 the Company issued 2,500,000 shares of .01 par common stock to
Vivienne Passley for prepaid interest. Shaun Passley will begin to earn these
shares on January 15, 2011.
On July 28, 2010 the Company issued 2,500,000 shares of .01 par common stock to
Fay Passley for prepaid interest. Shaun Passley will begin to earn these shares
on January 15, 2011.
As a result of the above mentioned stock split and stock issuances the resulting
outstanding shares of common stock as of March 31, 2011 was 30,448,294.
On September 30, 2010, Epazz, Inc. acquired 100% of the voting rights and net
assets of IntelliSys, Inc. for $155,816. The purchase was made with a cash
payment of $125,000 and a $30,816 6% 10 year seller note payable. The purchase
resulted in goodwill of $53,588. The reason for the acquisition was to expand
Epazz, Inc.'s operations. According to the purchase method of accounting the
acquisition was recorded as follows:
Fair Value Fair Value
Cash 319 Accounts Payable 49,838
Account Receivable 15,362 Notes Payable 25,000
Fixed Assets, net 5,137 Accrued Expenses 14,932
Goodwill 53,588 Deferred Revenue 28,820
Intangible Asset - Software 200,000 Cash 125,000
Note payable 30,816
Total Assets 274,406 Total Liabilities and Equity 274,406
The following table presents the unaudited proforma results of continuing
operations for the three and six months ended June 30, 2010 as if the retained
acquisition had been consummated at the beginning of the year. The proforma
results of continuing operations are prepared for comparative purposes only and
do not necessarily reflect the results that would have occurred had the
acquisition occurred at the beginning of the year presented or the results which
may occur in the future.
Three Six
Months Months
Ending Ending
6/30/2010 6/30/2010
Revenue $196,825 $309,528
Operating Expenses
General and Administrative 129,056 298,260
Depreciation and Amortization 19,505 29,189
Total Operating Expense 148,561 327,449
Operating Income (Loss) 48,264 (17,921)
Other Income and Expense
Interest Income 45 45
Interest Expense (8,047) (12,525)
Total Other Income and Expense 8,002 (12,480)
Net Income (Loss) $40,262 $(30,401)
Our Products
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After the acquisition of the Target Companies which are now wholly-owned
subsidiaries of the Company (described in detail above), the Company offers
three primary product lines under three different Company names. The EPAZZ
BoxesOS v3.0 product is offered through EPAZZ, Inc., the Desk/Flex Software
product is offered through Desk Flex, Inc. and the Agent Power product is
offered through Professional Resource Management, Inc.
EPAZZ BoxesOS v3.0
EPAZZ BoxesOS v3.0 (Web Infrastructure Operating System) is the Company's
flagship product. It is the core package of EPAZZ, Inc.'s products and services.
EPAZZ BoxesOS integrates with each organization's back-end systems and provides
a customizable personal information system for each stakeholder.
Services include:
· Single sign-on: Provides a powerful single-sign-on with security procedure to
product users' information and identity.
· Course Management System: Manage distance, traditional courses and Calendar.
· Enterprise Web Site Content Management: Manage public sites with multi
contributors.
· · Integration Management Services: Integrated into Enterprise Resource
Planning ("ERP") and Mainframes.
· Email Management: Email server and web client.
· Instant Messenger Services: Instant messaging and alerts.
· Customer Relationship Management: Prospective students and alumni.
· Calendar/Scheduler Management: Event directory, groupware, and personal
calendar.
· Administrative Support Services: Online payment services.
· Business Services: Facility Management and Online Bookstore.
BoxesOS software provides:
Web Portal Component
BoxesOS Web Portal Component is a gateway to all of an organization's online
services and information resources. The Web Portal Component provides a Personal
Information System, which refers to the user's entire online environment - the
user's resources, information, graphics, color, layout, and organization. All
resources are customizable. The Web Portal Component simplifies organizations'
ability to create and deploy custom web applications with a common graphic user
interface and connectivity to the back-end systems.
Administrative Content Management
BoxesOS Content Management Component provides an organization with enterprise
level tools for creating, managing, organizing, archiving and sharing content.
Content can be delivered in many forms such as web pages, emails, polls,
documents, web forms, rich site summaries ("RSS"), and "hot news." The Content
Management Component enables staff members with little technical skills to
create web pages and processes without having any programming skills.
Work Hub
Work Hub provides a host of applications that can empower an organization to
increase productivity while decreasing costs. Work Hub helps to manage work flow
throughout an organization. Senior management is able to view a document for
approval before it is sent out to a client. A company can view all projects of
the enterprise in one page. Some of the applications in Work Hub are
products/services management, project management, invoice management, time
management, content management and sales management. Work Hub has clear graphic
charts with detail reports on many areas.
Central Repository
BoxesOS Central Knowledge Repository is a collection and indexing of shareable
content. Central Knowledge Repository installs a server index application on the
Windows 2003 platform to identify an organization's current knowledge assets.
All knowledge assets will be imported into a storage device. The server index
application will import the knowledge assets into a temporary folder before
moving into a main folder. The server index application will prompt the
organization's administrators to add detailed information about the knowledge
assets into the database by using a web form. These forms will allow the
administrators to add custom fields; therefore, allowing the organization to add
custom information to the database in the present and at a future date. The
organization would be able to group their knowledge objects by program, course,
subject, topic, users, content, or date.
ViewPoint
ViewPoint is BoxesOS central communication hub, calendaring, contact management
and scheduling system. ViewPoint works with or can be used as an alternative to
MS Outlook/MS Exchange Server. The web applications provide the institution with
an extensive range of options including communication system email web client
and an email server. Email applications provide features you would find on
popular web-based e-mail providers. ViewPoint provides robust threaded
discussion boards and a "chatting" environment. ViewPoint provides each user
with a personal calendar, which notifies users of scheduling conflicts and
appointments priorities. ViewPoint makes it easy to create group calendars and
public calendars. With the ViewPoint scheduling system users are able to
schedule group meetings together. The scheduling system will view each user's
calendar to see the next available time and date the group can meet.
Learning Management System
BoxesOS My Courses is an extensive application for learning management, and
e-learning. My Courses is an effective means for managing traditional courses,
distance learning courses, and self-paced courses. My Courses is a powerful
communication tool that can be effectively used by students, instructors,
employees and corporate trainers to make information flow easily, clearly and
faster. My Courses provides a robust grade book, powerful authoring content
tools, easy to use drop box, sharable folders, wide-ranging course calendar and
many more features all designed to provide customization to key stakeholders.
Organizations will be able to train their employees on systems using My Courses
self-paced settings, as well as test candidates on their skill sets before they
are hired.
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Single Sign-on
Single Sign-on provides organizations the ability to log into multiple systems
with a single unique username and password. The username and password
authenticates the user's credentials to make sure the person who is accessing
the data is authorized to. BoxesOS uses Microsoft Active Directory Identity
Management to accomplish single sign on. Microsoft Active Directory allows
institutions to centrally manage and share user information. Active Directory
also acts as the single sign on point for bringing systems and applications
together. BoxesOS user management integrates with Active Directory.
Pathways Real-time Integration
EPAZZ Pathways is an integration suite enabling real-time connectivity with ERP
and Legacy systems. Pathways integration suite allows organizations to retrieve
data from ERPs and write data back to ERPs in real-time.
AutoHire Software
The AutoHire system provides a tool to power career centers, post job ads to
sites and job boards, and to collect resumes online. The online processes
supported by the system provide the mechanism to comply with the record keeping
requirements of Title VII of the Civil Rights Act of 1964, which apply to
organizations employing 15 or more persons.
One of the most useful features of the AutoHire system is the interactive
question and online screening and ranking system. The interactive question
system provides a means for the client to maintain their own library of
questions and to attach selected questions to job opportunities posted.
Responses obtained can be used to screen and rank candidates to permit hiring
managers to focus their attention on only the most suitable candidates. We
believe that result can have a substantial impact on the cost of recruiting and
the quality of candidates selected.
By attaching interactive questions to job opportunities posted clients can
collect information not typically presented in a resume. The additional
information can often replace the initial interview process. Questions can be
multiple choice or narrative.
Desk Flex Software
DFI developed the Desk/Flex Software ("Desk/Flex") to enhance the value of
businesses' real estate investments and modernize their office space. Desk/Flex
lets businesses make better use of office space restrictions by enabling
employees to instantly access their workstation tools from multiple areas in and
outside of the office. Desk/Flex lets employees reserve space in advance or
claim space instantly. It adjusts the telephone switch (Private Branch Exchange
or "PBX") so that calls ring at the 'desk du jour', or go directly to voice mail
when a worker is not checked in.
Key Features of Desk/Flex include:
Quick and Easy Check-In - Check-in and Check-out to a workstation takes less
than 8 seconds, and advance reservations take only a few seconds more.
Point-and-Click Floor Maps - Desks that are available are identified by green
dots. Those that are in use are identified by red. An employee needs only to
click or touch (using an optional touch-screen) a green dot to select his or her
desk.
PBX Interaction - Desk/Flex connects to an employee's Nortel, Avaya or Cisco PBX
to ensure that the employee has phone access at his or her desk; the message
waiting light becomes operational; outside calls can be made only after checking
in; and an employee is automatically checked out overnight if he or she leaves a
workstation without checking out.
Web Browser and Local "Kiosk" Access - On site, the Desk/Flex kiosk(s) makes it
easy to select a vacant desk near a co-worker or centrally located at the
office. Even before leaving home a worker with access to the company intranet
can reserve a desk or locate a co-worker at any desk in the company's office via
a web browser.
Advance Reservations - Workers can easily choose and reserve workspaces ahead of
time for a particular date or range of dates.
Occupancy Reports - Management reports allow accurate measures of occupancy in
total or by type of desk so the total number or mix of desks can be adjusted to
meet client demand and save more office space expense in future months.
Desk/Flex is responsive to office size and needs, servicing small to large
businesses. Desk/Flex can be configured to administer a single site or multiple
sites locally or remotely. Desk/Flex has full integration capabilities with both
Nortel and Avaya, which combined represent the majority of the
telecommunications and inbound automatic call distributor ("ACD") market.
Agent Power Software
Agent Power Software ("Agent Power") is PRMI's proprietary software line. PRMI
believes Agent Power provides vital information and tools for call centers to
help improve their workforce management. Historical, real-time, and forecast
information is available at the touch of a button to plan, control, and monitor
a business's call center. Coordinated stand-alone modules allow a company to
develop employee schedules, track queue and agent performance, communicate this
information with the company's agents and improve workforce management.
Agent Power is a suite of six (6) applications. Each can operate on a
stand-alone basis, or can work in conjunction with the other applications. The
applications feature the following workforce management components:
· Planning and Scheduling;
· Agent Adherence;
· Agent Performance;
· ACD Group Performance;
· Real-Time Agent Status; and
· Info Screen.
All modules of Agent Power have full integration capabilities with Nortel,
Avaya, and ROLM ACDs, and the Planning and Scheduling module works with any
modern ACD system.
PLAN OF OPERATION
During the next twelve months, we plan to further develop our BoxesOS software,
and hope to expand our customer base for our Desk/Flex and Agent Power software
packages, funding permitting. We believe we can satisfy our cash requirements
for the next three months with our current cash on hand and revenues generated
from our operations. As such, continuing operations and completion of our plan
of operation, including making the Monthly Payments on our Note with Mr. Goes
and the Igenti Note, as described above, are subject to generating adequate
revenue. We cannot assure investors that adequate revenues will be generated. In
the absence of our projected revenues, we may be unable to proceed with our plan
of operations. Even without significant revenues within the next several months,
we still anticipate being able to continue with our present activities, but we
may require financing to potentially achieve our goal of profit, revenue and
growth.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2011, AS COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 2010
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For the three months ended June 30, 2011 we had revenue of $235,707 compared to
revenue of $131,382 for the three months ended June 30, 2010, an increase of
$104,325 or 79% from the prior period. The increase in revenues is mainly
attributable to the sales generated by the Company which were deferred that are
now being recognized in accordance with the Company's revenue recognition policy
and from the sales generated by the company's newly acquired companies.
General and administrative expenses increased by $108,791 or 158% to $177,438
for the three months ended June 30, 2011 compared to general and administrative
expense of $68,647 for the three months ended June 30, 2010. The increase in
general and administrative expense is due mainly to the increase in cost
associated with the company's newly acquired companies.
We had depreciation and amortization expense of $32,604 for the three months
ended June 30, 2011 compared to $19,505 for the three months ended June 30,
2010, a increase of $13,099 or 67% from the prior period. This increase is due
the recent asset purchases related to the purchase of the company's newly
acquired subsidiaries.
Total operating expenses for the three months ended June 30, 2011 were $210,042,
compared to $88,152 for the three months ended June 30, 2010, an increase of
$121,890 or 138% from the prior period.
We had operating income of $25,665 for the three months ended June 30, 2011
compared to operating income of $43,230 for the three months ended June 30,
2010, a decrease of $17,565 or 41% from the prior period. The decrease in
operating income was mainly due to the increased operating cost associated with
the newly acquired subsidiaries.
Interest expense was $13,882 for the three months ended June 30, 2011 compared
to $7,772 for the three months ended June 30, 2010, an increase of $6,110 or 79%
from the prior period. Interest expense increased for the three months ended
June 30, 2011 due to the increase in loans payable at June 30, 2011 as compared
to June 30, 2010.
We had a net income of $11,795 for the three months ended June 30, 2011 compared
to a net income of $35,503 for the three months ended June 30, 2010, a decrease
of $23,708 or 67% from the prior period. The decrease in net income is mainly
attributable to the increase in operating cost associated with the newly
acquired subsidiaries as well as the deferral of revenues in accordance with the
Company's revenue recognition policy
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2011, AS COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 2010
For the six months ended June 30, 2011 we had revenue of $450,290 compared to
revenue of $182,142 for the six months ended June 30, 2010, an increase of
$268,148 or 147% from the prior period. The increase in revenues is mainly
attributable to the sales generated by the Company which were deferred that are
now being recognized in accordance with the Company's revenue recognition policy
and from the sales generated by the company's newly acquired companies.
General and administrative expenses increased by $181,053 or 121% to $330,933
for the six months ended June 30, 2011 compared to general and administrative
expense of $149,885 for the six months ended June 30, 2010. The increase in
general and administrative expense is due mainly to the increase in cost
associated with the company's newly acquired companies.
We had depreciation and amortization expense of $59,644 for the six months ended
June 30, 2011 compared to $29,189 for the six months ended June 30, 2010, a
increase of $30,455 or 104% from the prior period. This increase is due the
recent asset purchases related to the purchase of the company's newly acquired
subsidiaries.
Total operating expenses for the six months ended June 30, 2011 were $390,577,
compared to $179,074 for the six months ended June 30, 2010, an increase of
$211,503 or 118% from the prior period.
We had operating income of $59,713 for the six months ended June 30, 2011
compared to operating income of $3,068 for the six months ended June 30, 2010,
an increase of $56,645 or 1846% from the prior period. The increase in
operating income was mainly due to the sales generated by the Company which were
deferred that are now being recognized in accordance with the Company's revenue
recognition policy and sales generated by the company's newly acquired
subsidiaries.
Interest expense was $18,594 for the six months ended June 30, 2011 compared to
$11,887 for the six months ended June 30, 2010, an increase of $6,707 or 56%
from the prior period. Interest expense increased for the six months ended June
30, 2011 due to the increase in loans payable at June 30, 2011 as compared to
June 30, 2010.
We had a net income of $41,146 for the six months ended June 30, 2011 compared
to a net loss of $8,774 for the six months ended June 30, 2010, an increase in
net income of $49,920 or 569% from the prior period. The increase in net income
is mainly attributable to the sales generated by the Company which were deferred
that are now being recognized in accordance with the Company's revenue
recognition policy and from the sales generated by the company's newly acquired
companies.
LIQUIDITY AND CAPITAL RESOURCES
We had total current assets of $303,002 as of June 30, 2011, consisting of cash
of $90,458, accounts receivable of $201,950, other current assets (security
deposit) of $8,252 and current deferred financing costs of $2342.
We had non-current assets of $813,054 as of June 30, 2011, consisting of
property and equipment, net of accumulated depreciation of $204,288; intangible
assets, net of accumulated amortization of $545,179, and goodwill resulting from
the purchase of IntelliSys, Inc. of $53,588.
We had total current liabilities of $433,894 as of June 30, 2011, consisting of
$116,594 of accounts payable and accrued liabilities, $204,928 of deferred
revenues, $50,641 of the current portion of capitalized leases and $61,731 of
the current portion of notes payable in connection with payments due on Notes in
connection with the Company's acquisition of Igenti and InteliSys, Inc.
We had negative working capital of $130,892 and a total accumulated deficit of
$1,830,059 as of June 30, 2011.
We had total liabilities of $1,338,273 as of June 30, 2011, which included total
current liabilities of $433,894 and long-term note payable, net of current
portion of $294,067, which represented payments due on the Note, described
below; long-term related party debt of $296,103 which represented amounts
payable to Star Financial as described below, $261,914 of other related party
debt, and long-term portion of capitalized leases of $52,295.
We had net cash provided by operating activities of $93,626 for the six months
ended June 30, 2011, which was mainly due to $41,146 of net income,$92,587 in
changes form accounts receivable, $61,963 in changes to deferred revenue and
$37,787 in changes in current liabilities offset by $59,643 of depreciation and
amortization expense.
We had no net cash used in investing activities for the six months ended June
30, 2011.
We had $43,781 of net cash used for financing activities during the six months
ended June 30, 2011, which represented the $72,541 repayment of long term debt
and capital leases; $74,601 repayment of related party loans payable, proceeds
from long term debt and capital leases of $36,831 and $66,530 of proceeds from
related party loans.
On June 5, 2007, Epazz obtained a line of credit of $100,000 from a bank. The
outstanding balance on the line of credit bears interest at prime plus 4.5%
(9.5% at December 31, 2008) and expires on July 5, 2010. On June 5, 2010 this
line of credit was converted to a unsecured term loan which bears interest at 7%
and has a maturity date of June 5, 2014. Payments of $1,050 are due monthly.
At June 30, 2011 the balance on this unsecured loan was $93,559.
We also borrow from our Chief Executive Officer, Shaun Passley and other related
parties periodically under verbal agreements. The related party loans bear no
interest and are being repaid as funds become available. During the six months
ended June 30, 2011, we borrowed an additional $66,530 from Mr. Passley and
other related parties. During the six months ended June 30, 2011 we also repaid
$74,601 to Mr. Passley and other related parties. At June 30, 2011, the total
principal outstanding was $261,914. All previously accrued interest associated
with these related party loans have been forgiven as of December 31, 2009;
accordingly no additional interest has been accrued as of June 30, 2011.
In June 2008, the Company provided Arthur A. Goes a promissory note in the
amount of $225,000 (the "Note") in connection with the Stock Purchase Agreement
entered into with Desk Flex, Inc., Professional Resource Management, Inc. and
Mr. Goes. The Note bears interest at the rate of seven percent (7%) per annum,
and all past due principal and interest (which failure to pay such amounts after
a fifteen (15) day cure period, shall be defined herein as an "Event of
Default") bear interest at the rate of twelve percent (12%) per annum until paid
in full. The Note, however, additionally provides that the Company shall have
two additional fifteen (15) day cure periods during the term of the Note
resulting in two thirty (30) day cure periods before an Event of Default
occurs. The principal amount of the Note is due on June 18, 2011. The Note is
payable in monthly installments of $6,947.35, with the first such monthly
payment due on September 18, 2008, until such time as this Note is paid in
full. Provided, however, that if the total amount due under the Note is less
than any monthly payment, the Company shall only be obligated to pay the
remaining balance of the Note. The Note may be prepaid at any time without
penalty. As of the date of this report, the Company is current with all such
monthly payments; however, the Company is currently in a dispute with Mr. Goes
regarding who is the responsible party for the payment of certain accounting
fees associated with the audit and review of the financial statements of DFI and
PRMI
On June 4, 2008, the Company issued a note payable in the amount of $296,100 due
to Star Financial Corporation, which is owned by Fay Passley, the mother of our
Chief Executive Officer, Shaun Passley, which has since been amended (the "June
2008 Note", as amended from time to time). The loan is unsecured and bears
interest at 10%, with annual payments of principal and interest in the amount of
$106,951, originally due and payable beginning on December 1, 2009 and a
maturity date of June 4, 2013, which has since been extended and which repayment
terms have since been amended as provided below. In connection with the loan,
the Company paid $14,100 (5%) in financing costs that are being amortized over
the life of the loan using the effective interest method. The majority of the
funds borrowed pursuant to the June 2008 Note were used to pay the seller the
$210,000 payment in connection with the purchase of DFI and PRMI, as described
above. In April 2010, Star Financial, agreed to modify the repayment terms of
the June 2008 Note to provide for $100,000 to be due on August 1, 2011, $100,000
to be due on August 1, 2012, and the remaining balance of the June 2008 Note to
be due on August 1, 2013 in return for junior lien on the Company's assets.
--------------------------------------------------------------------------------
In May 2009, the Company issued 2,500,000 shares of the Company's Series A
Common Stock to Vivienne Passley, the aunt of Shaun Passley, our sole Director
and Chief Executive Officer, in connection with Ms. Passley's conversion of her
$6,000 note payable to shares of the Company's Series A Common Stock in
forgiveness of the note payable.
In May 2009, the Company issued 1,600,000 shares of the Company's Series A
Common Stock to L&F Lawn Services, Inc., a company own by Lloyd Passley the
father of Shaun Passley, as an interest payment on a loan payable due to L&F
Lawn Services, Inc. These shares were valued at $12,800.
In May 2009 the Company issued 2,400,000 shares of the Company's Series A Common
Stock to Vivienne Passley, the aunt of Shaun Passley, as an interest payment on
a loan payable due to Vivienne Passley. These shares were valued at $19,200.
Effective February 1, 2010, the Company entered into a Software Product Asset
Purchase Agreement (the "Software Rights Agreement") with Igenti, Inc., a
Florida corporation ("Igenti") to acquire the rights to Igenti's AutoHire
software, domain names, permits, customers, contracts, know-how, equipment,
software programs, receivables totaling approximately $10,000 and the
intellectual property of Igenti associated therewith (the "AutoHire Software").
The $170,000 purchase price included $50,000 in the form of a promissory note
(the "Igenti Note).
The Igenti Note does not bear interest and is payable in monthly installments of
$416.67 per month beginning May 5, 2010, and ending May 5, 2012 (the "Maturity
Date"), at which time the remaining amount of the Igenti Note, $39,999.92 is due
and payable. The payment of the Igenti Note is secured by all of the
subscription agreements of customers relating to the AutoHire Software entered
into prior to February 1, 2010. Igenti has also guaranteed the Company that the
Company will receive at least $173,700 (the "Guaranteed Amount") in subscription
cash receipts from the AutoHire Software during the year ending February 1,
2011. The purchase price payable to Igenti is subject to reduction on a
dollar-for-dollar basis in the event the subscription cash receipts from the
AutoHire Software during the year ending February 1, 2011 are less than the
Guaranteed Amount.
We have no current commitment from our officers and Directors or any of our
shareholders to supplement our operations or provide us with financing in the
future. If we are unable to raise additional capital from conventional sources
and/or additional sales of stock in the future, we may be forced to curtail or
cease our operations. Even if we are able to continue our operations, the
failure to obtain financing could have a substantial adverse effect on our
business and financial results.
In the future, we may be required to seek additional capital by selling debt or
equity securities, selling assets, or otherwise be required to bring cash flows
in balance when we approach a condition of cash insufficiency. The sale of
additional equity or debt securities, if accomplished, may result in dilution to
our then shareholders. We provide no assurance that financing will be available
in amounts or on terms acceptable to us, or at all.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
is based upon our unaudited financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of any contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to
uncollectible receivable, investment values, income taxes, the recapitalization
and contingencies. We base our estimates on various assumptions that we believe
to be reasonable under the circumstances, the results of which form the basis
for making judgments about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Recently issued accounting pronouncements. The Company does not expect the
adoption of any recently issued accounting pronouncements to have a significant
impact on the Company's results of operations, financial position or cash flows.
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