Form 10KSB for EPICUS COMMUNICATIONS GROUP INC
12-Sep-2007
Annual Report
Item 6 - Management's Discussion and Analysis or Plan of Operation
Bankruptcy Filing
On October 25, 2004 (Petition Date), Epicus Communications Group, Inc. (Epicus Communications or Company, for purposes of identification in discussing the bankruptcy situation) and its wholly-owned subsidiary, Epicus, Inc. (Epicus for purposes of identification in discussing the bankruptcy situation), (collectively, Debtors) filed voluntary petitions in the United States Bankruptcy Court for the Southern District of Florida (Bankruptcy Court) seeking reorganization relief under the provisions of Chapter 11 of Title 11 of the United States Code (Bankruptcy Code). These actions were assigned case numbers 04- 34915, 04-34916, respectively (collectively, Cases).
The Company submitted a Plan of Reorganization (Plan) for consideration by the Bankruptcy Court and the affected creditors. On September 30, 2005, the Company received approval of the Plan of Reorganization and it was funded
and became effective on December 8, 2005. Upon confirmation by the Bankruptcy Court and became binding upon all Claimants and Interest holders.
Overview
With the effectiveness of the Plan of Reorganization, the Company transferred all operations into Epicus Communications Group, Inc. The Company had no operations in any subsidiary entity as of December 8, 2005.
As a result of the Company's initial filing of the Bankruptcy Action, the Company virtually eliminated all marketing activities. Management believes that it has identified the service areas which afford the best potential profitability and customer quality. With the December 8, 2005 settlement of the Bankruptcy Action, the Company reinstated various marketing efforts, including telemarketing activities, directed towards prospective customers with the highest likelihood of long-term retention and profitability.
Management, utilizing the tools available under the respective tariffs within the Company's geographic operating boundaries, began to more stringently evaluate the creditworthiness of prospective customers and terminate relationships with customers that were less than responsible in fulfilling their payment obligations. Further, within the limitations imposed by the Company's operating tariffs, management is evaluating the availability of rate increases as soon as practicable. As practicable, the Company, during future periods, as circumstances and situations warrant, will continue to pursue its efforts to add additional subsidiaries or become involved in attractive joint ventures, primarily in the telecommunications industry. The Company intends to continue its strategic acquisition activities to promote the products and the growth of Epicus as its primary subsidiary.
Results of Operations
Epicus Communications Group, Inc. (Company or Epicus Group) operates in the telecommunications industry; however, we may become involved in any venture which management believes would be in the best interest of the Company and its shareholders.
For the period from June 1, 2006 through May 31, 2007, the Company reported net revenues of approximately $8,013,044 with gross profit of approximately $2,084,942 (approximately 26%). These revenues were solely derived from telecommunication service sales. We have experienced deteriorations in gross margins as a result of various statutory changes and U. S. Congressional legislation allowing the primary telecommunication carriers, which provide the Company's backbone service, to raise rates and diminish pricing margins on CLEC carriers, such as the Company. Future tariff and pricing, as well as potential increases in rates from our primary telecommunication carriers will have an impact on our future revenues and gross profit levels, which at this time are unpredictable.
The Company incurred selling and marketing expenses of approximately $26,507 and general and administrative expenses of approximately $2,782,403 for the period from June 1, 2006 through May 31, 2007.
As a result of the 2004 bankruptcy filing, the Company disbanded its in-house marketing operations. The Company is also experiencing a negative impact from this action in replacing customers lost through normal attrition in the telecommunications industry. As a result of the December 2005 approval and funding of the Company's Plan of Reorganization, management undertook steps to rebuild it's marketing efforts and realized additions to the customer base as a result of these actions. However, the stability of the customer base and the addition of new customers is not deemed to be either predictable or reliable as the Company continues to evaluate it's service areas, tariffs and creditworthiness of it's customers.
Management is of the opinion that the cost levels experienced during the 4th quarter of Fiscal 2006 should be reflective of future periods. However, due to the uncertainty of the bankruptcy action, the need for adding personnel and other unpredictable factors, the actual cost levels in future periods may experience significant fluctuations. As a result of the bankruptcy action, management is evaluating all possible areas of personnel and expenditure savings, and in some areas has enacted the utilization of third-party service providers for customer service, billing, cash management and carrier billing review. The ultimate impact, if any, of these items being considered is unknown at this time; however, management is of the opinion that only actions with a positive impact on the Company's operations and profitability will be undertaken.
The Company experienced a net loss of approximately $(3,062,714) for the period from June 1, 2006 through May 31, 2007. A significant component of the net loss for this period was the charge to operations for the recognition of bad debts of approximately $1,216,450 and the recognition of interest expense on the convertible notes and debentures of approximately $621,962. Concurrent with the Company's filing of a Petition for Relief under Chapter 11, the Company adopted the policy of recording a net accounts receivable balance equal to the actual cash collected during the 30-day period subsequent to any reporting period. Any differential between the Company's actual accounts receivable and the actual subsequent cash collections is recorded as bad debt expense in the respective reporting period.
Also continuing to contribute to our operating loss during the period are the expenses associated with continuing to operate and maintain Epicus Group's offices, professional fees, including legal and accounting plus other expenses associated with being a reporting public company.
Liquidity and Capital Resources
As of May 31, 2007, we had approximately $118,031 in cash in our operating accounts. To assist us in our cash flow requirements we may determine, depending upon the prevailing stock price of our shares, to seek subscriptions from the sale of securities to private investors, although there can be no assurance that we will be successful in securing any investment from private investors at terms and conditions satisfactory to us, if at all.
As of this filing, the Company does not anticipate future capital resource demands for new equipment or furnishings.
Competition
We have many competitors ranging from the very large like AT&T,(formerly BellSouth Corporation), McLeod Communications, Verizon, ICG Communications as well as smaller competitors that may be better capitalized, have better name recognition or longer track records of providing telecommunications services. The Company believes that the competitive factors affecting its markets include features such as functionality, adaptability, ease of use, quality, performance, price, customer service and support, effectiveness of sales and marketing efforts and Company reputation. Although the Company believes that it currently competes favorably with respect to such factors, there can be no assurance that the Company can maintain its competitive position against current and potential competitors, especially those with greater financial marketing support and other resources than the Company.
We believe that our "Alternative Sales" approach of using utility companies gives us a distinct marketing identity, as does our almost total automation in provisioning of new services and all of our billing, which is very rare for a CLEC. These factors we believe, give us the competitive edge we need to continue our growth. However, there can be no assurance that we can maintain our competitive position against current and potential competitors, especially those with greater financial resources than we have.
Risks related to our business
Our auditors have expressed doubt about our ability to continue as a
going concern.
Our independent auditors have issued their report dated September 11, 2007 on our consolidated financial statements as of May 31, 2007, which includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. We have minimal working capital and we continue to experience cash flow difficulties in matching our contractual payment obligations, principally to BellSouth Corp. and Global Crossing, to our revenue billing cycles.
These conditions raise substantial doubt about our ability continue as a going concern. We have a history of operating losses and may continue to incur operating losses. We will most likely require additional financing and, if we are unable to raise such funds, our operations may be adversely affected.
Based upon our present liquid resources, our present operating expenses, and the commitment of our executive officers to continue to defer most or all of their salaries, and if no increased revenues are generated from operations or other sources, we believe we will be able to operate for a minimum of an additional twelve months.
We continue to be dependant upon private sales of stock in the form of convertible debentures to supplement our cash flow for operations and the acquisition of new customers.
If additional funds are required, but cannot be raised, it will have an adverse effect upon our operations. To the extent that additional funds are obtained by the sale of equity securities, our stockholders may sustain significant dilution.
