8-K 1 epazz8k12152010.htm EPAZZ, INC. FORM 8-K DATE OF REPORT: DECEMBER 15, 2010
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 15, 2010
EPAZZ, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ILLINOIS 333-139117 36-4313571
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(STATE OR OTHER (COMMISSION (IRS EMPLOYER
JURISDICTION FILE NUMBER) IDENTIFICATION
OF NUMBER)
INCORPORATION)
309 W. WASHINGTON ST. SUITE 1225
CHICAGO, IL 60606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 955-8161
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant
under any of the following provisions:
[_] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[_] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[_] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[_] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
On September 2, 2010, the Registrant entered into the Stock Purchase Agreement
and related agreements described below under Item 2.01.
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ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS.
On or about September 2, 2010, Epazz, Inc. (the "Company", "we" and "us")
entered into a Stock Purchase Agreement (the "Purchase Agreement") with
Intellisys, Inc., a Wisconsin corporation ("Target Company") and Paul Prahl, an
individual and the sole stockholder of the Target Company. The Purchase
Agreement consummated the transactions contemplated by the May 4, 2010,
non-binding letter of intent (the "Letter of Intent") the Company entered into,
to acquire 100% of the outstanding shares of the Target Company. Pursuant to the
Purchase Agreement, the Company agreed to purchase 100% of the outstanding
shares of the Target Company for an aggregate purchase price of $175,000 (the
"Purchase Price"). The Purchase Price was payable as follows:
(a) The Company paid Mr. Prahl $125,000 in cash (the "Cash
Consideration") at the Closing (as defined below) of the Purchase
Agreement; and
(b) The Company provided Mr. Prahl with a 6% Promissory Note in the
amount of $50,000 (the "Note"), described in greater detail below.
Additionally, the Company agreed to assume an aggregate of approximately
$28,137.76 in outstanding liabilities of Target Company in connection with the
Closing.
The Purchase Agreement closed on September 30, 2010 ("Closing"), at which time
Mr. Prahl delivered to the Company, 85 shares of Intellisys stock, representing
100% of the issued and outstanding shares of Target Company. Also at Closing,
the Company delivered the Cash Consideration and the Note to Mr. Prahl. As a
result of the Closing, Target Company became wholly-owned subsidiary of the
Company.
The Note bears interest at the rate of six percent (6%) 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 September 18, 2015. The Note is payable
in monthly installments of the greater of $555.10 (each a "Monthly Payment"),
with the first such Monthly Payment due on September 15, 2010, 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.
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, at Mr. Prahl request, at the Company's expense, to grant Mr. Prahl a
security interest over all of the Target Company' tangible and intangible
assets, and the outstanding stock of both of the Target Company until the Note
is repaid.
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INTELLISYS, INC. BUSINESS OVERVIEW
Intellisys, Inc. was incorporated under the laws of Wisconsin in November 1990.
Intellisys' main source of revenue comes from the "Integrated Plant Management
and Control Software" product, which it owns,
Intellisys Software
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Intellisys developed the IPMC Software ("IPMC") Integrated Plant Management
Control, is a software system design for water and wastewater facility
management. IPMC is the technology-based strategy for optimizing operations by
automatically collecting, managing, organizing and disseminating information for
the operations, management, laboratory, maintenance, and engineering functions.
SYSTEMVIEW
SystemView displays the system processes and lets you control the ystem in real
time. It displays alarms, equipment status, summary accumulated and trend data.
FEATURES
o The Alarm/Event Journal records all alarms and status changes and has
the flexibility to query history based on tag names and time ranges
o Smart Server provides communication with process control and automatic
collections of data. It is designed to normalize data, accumulate and
summarize statistics for the plant management and maintenance systems.
o Rapid application development tools dramatically reduce system
development time. Development tools are included with all applications.
MAINTENANCEVIEW
MaintenanceView provides the traditional functional functionality of a
comprehensive maintenance management system including:
o Fixed asst and rotating equipment
o Preventive scheduling and predictive reports and charts
o Work order management
o Inventory and purchasing
o Manufacture and vendor records
o Parts inventory
FEATURES
o Track your maintenance costs by center, department, location, etc.
o Create customized user interface sorting by location, equipment type,
department, cost center, manufacture or vendor.
o Customized reports using on MS Excel compatible spreadsheets to
accommodate your specfic needs.
REPORTVIEW
ReportView provides you with a historic picture of the operation of your plant
through centralized storage of data. Realistic graphics can be constructed to
assist the user in managing, accessing and analyzing real-time and manually
entered process or laboratory data. The NEW application consists of the data
importservice -Historic Data and the main application's Display Client,
Spreadsheet Client and Chart Client. FEATURES
o Stores your real-time and laboratory data in a secure open database.
o Time-based compression stores process information and manually
collected data efficiently.
o Flexible rapid application development tools allow creation of input
displays, reports and charts and navigation menus.
o Using MS Excel compatible spreadsheet, ReportView combines the
user-friendly features of familiar spreadsheet functios with the
security of an expandable database.
o Reporting tools provide easy access to retrieve summarized or raw data
for your process-efficiency and compliance reports.
o Creates 2D and 3D presentations-quality charts in minutes.
o An efficient decision support system and dashboard development tools
for operations, maintenance, management and engineering.
EnergyView
EnergyView is an automated energy management dashboard tools. EnergyView
provides smart energy metering and power measurement technology to accurately
measure, store, track and analyze energy data. The energy metering and
submetering systems can link to SCADA or any PC to collect crucial energy data.
In addition manual data on other energy sources can be managed as part of the
same energy management application. The combination of hardware and software is
designed to provide an end-to-end solution from measurement to billing audits.
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The objective of the EnergyView application is to improve the speed and quality
of energy measurement information, so that facility managers will be able to
make better management decisions, conserve energy and reduce operating costs.
Features
oCollect usage data manually and automatically
oNormalize energy variables create benchmarking variables
oProvides comparisons of hourly usage to previous days
oCalculates operating cost and savings by day, month and year-to-date
oForecasts and alarm peak demands
oSend alarms via local annunciation, email or pagers
oBenchmarking
oLocal Factor Analysis
oAutomate Energy Billing Audit
oDetermining Changes in Energy Usage Patterns
oSetting Saving Targets and Tracking Your Progress
Intellisys Customer Base
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Intellisys customers include state and local governments throughout the United
States.
Material Agreements
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Research and Development
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During the last three years, Intellisys have spent approximately $42,000 on
research and development, collectively. Moving forward we expect to pay
additional research and development costs in connection with the IPMC product
line.
Employees
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As of September 30, 2010, Intellisys employed two (2) full-time employees and
one (1) employee. One employee has entered into binding employment agreements.
Another employee has entered into a consulting agreement which includes a
non-disclosure and non-compete agreement. One (1) full time employee receive
health benefits. None of these employees are covered by a collective bargaining
agreement.
Competition
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DFI's primary competitor for Desk/Flex is the product line sold by Wonderware
Corporation ("Wonderware") who has a substantial market share among companies
utilizing IPMC. To our knowledge Wonderware is the only competitor that offers a
product line with the same applications as Wonderware. We also believe our team
approach to customers, our superior customer service and our smaller size (which
allows us to have a more flexible approach to the product modification needs of
customers) will provide us with a competitive advantage over our competitors.
Patents, Trademarks and Licenses
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Intellisys does not currently holds a trademark for "Intellisys."
Need For Government Approval
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Intellisys is not subject to the requirement to obtain any government approval
for their business operations or products, other than state business licenses
and annual report requirements due to the State of Wisconsin.
Description of Property
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The executive offices of Intellisys was located at N78 W31401 Kilbourne Road,
North Lake, Wisconsin. The executive offices represent approximately 1,500
square feet. Intellisys occupy this space under a lease agreement between
Intellisys and Virgil Weber. which has a month to month term that began on June
1. The monthly rent under the lease is $560.00. The Company has assumed
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Intellisys's obligations under the lease in connection with the Closing. The
lease may be cancelled by the landlord or tenant with 60 days written notice.
Epazz terminated the lease on October 6, 2010.
RISKS RELATED TO THE BUSINESS OF DESK FLEX AND PRMI
DESK FLEX AND PRMI HAVE A HISTORY OF LOSSES AND WE ANTICIPATE THAT THEY WILL
LIKELY EXPERIENCE CONTINUED LOSSES IN THE NEAR FUTURE AND MAY NOT EVER ACHIEVE
OR MAINTAIN PROFITABILITY.
Intellisys (the "Target Companies") had a net loss of $41,032 for the year ended
December 31, 2009, and a net loss of $32,886 for the year ended December 31,
2008. We expect to continue to incur operating losses in the future until such
time as the Intellisysare able to build relationships with future customers,
build a distribution channel for their products, continue design and development
projects, and increase administrative activities to support planned growth. The
extent of the Intellisysfuture operating losses and the timing of profitability
are highly uncertain, and such Intellisysmay never generate sufficient revenues
to achieve or sustain profitability.
THE INTELLISYS INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS INDICATE THAT THE
INTELLISYS HAVE CONDITIONS THAT RAISE SUBSTANTIAL DOUBTS THAT THEY CAN CONTINUE
AS A GOING CONCERN, WHICH MAY NEGATIVELY AFFECT THEIR ABILITY TO RAISE
ADDITIONAL FUNDS AND OTHERWISE OPERATE THEIR BUSINESS. IF THE INTELLISYS FAIL TO
RAISE SUFFICIENT CAPITAL, THEY WILL NOT BE ABLE TO IMPLEMENT THEIR BUSINESS
PLAN, MAY HAVE TO LIQUIDATE THEIR BUSINESS, AND YOU MAY LOSE YOUR INVESTMENT.
Lake & Associates our independent registered public accountants, has added an
explanatory paragraph to their audit opinion issued in connection with the
financial statements of the Intellisys indicating that it has substantial doubt
about the Intellisys ability to continue as a going concern given their
recurring losses from operations and deficiencies in working capital and equity.
If we and the Intellisys fail to raise sufficient capital, we will not be able
to implement our business plan, we may have to liquidate our business, including
the Intellisys and you may lose your investment. You should consider our
independent registered public accountants' comments when determining if an
investment in us is suitable.
THE NOTE PAYABLE TO THE SELLER OF THE INTELLISYSIS SECURED BY A SECURITY
INTEREST IN SUBSTANTIALLY ALL OF THE ASSETS OF THE TARGET COMPANIES.
We provided Mr. Prahl the seller of the Intellisys with a 6% Promissory Note in
the amount of $50,000 (the "Note") in connection with the Closing of the
purchase of the Intellisys. The Note bears interest at the rate of six percent
(6%) per annum, and all past-due principal and interest (which failure to pay
such amounts after a thirty (30) 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 principal amount of the Note is due on September 18,
2015. The Note is payable in monthly installments of $650 (each a "Monthly
Payment"), with the first such Monthly Payment due on October 30, 2010, until
such time as this Note is paid in full. We agreed to secure the payment of the
Note with a Uniform Commercial Code Security Interest filing, which we agreed to
file, at Mr. Goes request, at our expense, to grant Mr. Prahl a junior security
interest over all of the Intellisys tangible and intangible assets, and the
outstanding stock of both of the Intellisys until the Note is repaid. Pursuant
to such requirement of the Note, at the Closing, we entered into a Security
Agreement with Mr. Prahl whereby we granted Mr. Prahl a security interest in all
inventory, equipment, appliances, furnishings and fixtures, stock certificates
and intellectual property now or hereafter owned by the Intellisys Pursuant to
the Security Agreement, we also assigned to Mr. Prahl a security interest in all
of our right, title, and interest to any trademarks, trade names, contract
rights, and leasehold interests in which we now have or hereafter acquire to
secure repayment of the Note. If we default on the repayment of the Note, Mr.
Prahl may enforce his security interest over the assets of the Intellisys and
our assets which secure the repayment of the Note, and we could be forced to
curtail or abandon our current business plans and operations. If that were to
happen, any investment in the Company could become worthless.
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OUR SUCCESS AND THE SUCCESS OF THE INTELLISYS DEPEND IN PART UPON OUR ABILITY TO
DEVELOP NEW PRODUCTS AND ENHANCE OUR EXISTING PRODUCTS. FAILURE TO SUCCESSFULLY
INTRODUCE NEW OR ENHANCED PRODUCTS TO THE MARKET MAY ADVERSELY AFFECT OUR
BUSINESS.
We may not be successful in achieving market acceptance of our products,
including the products of the Intellisys any failure or delay in diversifying
our existing product offerings could harm our business, results of operations
and financial condition.
Our future success depends in part on our ability to develop enhancements to our
existing products and to introduce new products that keep pace with rapid
technological developments. We must continue to modify and enhance our products
to keep pace with changes in technologies. We may not be successful in
developing these modifications and enhancements or in bringing them to market in
a timely manner. In addition, uncertainties about the timing and nature of new
technologies and platforms or modifications to existing platforms or
technologies, could increase our research and development expenses. Any failure
of our products to operate effectively with future network platforms and
technologies could reduce the demand for our products, result in customer
dissatisfaction and harm our business. Additionally, accelerated product
introductions and short product life cycles require high levels of expenditures
for research and development that could adversely affect our operating results.
THE OPERATING RESULTS OF THE INTELLISYS IS DIFFICULT TO PREDICT AND FLUCTUATE
SUBSTANTIALLY FROM QUARTER TO QUARTER AND YEAR TO YEAR, WHICH MAY INCREASE THE
DIFFICULTY OF FINANCIAL PLANNING AND FORECASTING AND MAY RESULT IN DECLINES IN
OUR STOCK PRICE.
Intellisys future operating results may vary from past operating results, are
difficult to predict and may vary from year to year due to a number of factors.
Many of these factors are beyond our control. These factors include:
o the potential delay in recognizing revenue from transactions due to
revenue recognition rules which we must follow;
o customer decisions to delay implementation of our products;
o any seasonality of technology purchases;
o demand for our products, which may fluctuate significantly;
o the timing of new product introductions and product enhancements by
both us and our competitors;
(black circle) changes in our pricing policy; and
(black circle) the publication of opinions concerning us, our products
or technology by industry analysts.
As a result of these and other factors, the operating results of the Intellisys
for any fiscal quarter or year will be subject to significant variation, and we
believe that period-to-period comparisons of such results of operations are not
necessarily meaningful in terms of their relation to future performance. You
should not rely upon these comparisons as indications of future performance. It
is likely that our future quarterly and annual operating results from time to
time will not meet the expectations of public market analysts or investors,
which could cause a drop in the price of our common stock.
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DEFECTS OR ERRORS IN THE INTELLISYS'S SOFTWARE COULD ADVERSELY AFFECT OUR
REPUTATION, RESULT IN SIGNIFICANT COSTS TO US AND IMPAIR OUR ABILITY TO SELL OUR
SOFTWARE.
If the Target Companies' software is determined to contain defects or errors,
our reputation could be materially adversely affected, which could result in
significant costs to us and impair our ability to sell our software in the
future. The costs we would incur to correct product defects or errors may be
substantial and would materially adversely affect our operating results. After
the release of new software, defects or errors may be identified from time to
time by our internal team and by our clients. Such defects or errors may occur
in the future.
Any defects in the applications of the Target Companies, or defects that cause
other applications to malfunction or fail, could result in:
o lost or delayed market acceptance and sales of our software;
o loss of clients;
o product liability suits against us;
o diversion of development resources;
o injury to our reputation; and
o increased maintenance and warranty costs.
INTELLISYS MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND IF WE FAIL TO
CONTINUALLY ENHANCE OUR PRODUCTS AND SERVICES IN A TIMELY MANNER, OUR REVENUE
AND BUSINESS WOULD BE HARMED.
We must continue to enhance and improve the performance, functionality and
reliability of our products and those of the Intellisys in a timely manner. The
software industry is characterized by rapid technological change, changes in
user requirements and preferences, frequent new product and services
introductions embodying new technologies, and the emergence of new industry
standards and practices that could render our products and services obsolete.
Our failure to continually enhance our products and services in a timely manner
would adversely impact our business and prospects. Our success will depend, in
part, on our ability to internally develop and license leading technologies to
enhance our existing products and services, to develop new products and services
that address the increasingly sophisticated and varied needs of our future
customers, and to respond to technological advances and emerging industry
standards and practices on a cost-effective and timely basis. Our product
development efforts are expected to continue to require substantial investments,
and we may not have sufficient resources to make the necessary investments. If
we are unable to adapt our products and services to changing market conditions,
customer requirements or emerging industry standards, we may not be able to
maintain or increase our revenue and expand our business.
OUR MANAGEMENT HAS NO SENIOR MANAGEMENT EXPERIENCE IN THE SOFTWARE INDUSTRY
WHICH MAY HINDER OUR ABILITY TO MANAGE OUR OPERATIONS.
Our Company is a new software company and our management has limited experience
managing in our industry and our management and employees have limited
experience developing and selling software such as the software developing and
selling the software of the Intellisys the lack of experience in software design
and sales may make it difficult to compete against companies that have more
senior management and design experience. We expect to add additional key
personnel in the future. Our failure to attract and fully integrate our new
employees into our operations or successfully manage such employees could have a
material adverse effect on our business, financial condition and results of
operations.
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SIGNIFICANT UNAUTHORIZED USE OF OUR PRODUCTS AND THOSE OF THE INTELLISYS WOULD
RESULT IN MATERIAL LOSS OF POTENTIAL REVENUES AND OUR PURSUIT OF PROTECTION FOR
OUR INTELLECTUAL PROPERTY RIGHTS COULD RESULT IN SUBSTANTIAL COSTS TO US.
Our software, including the software of the Intellisys is planned to be licensed
to customers under license agreements, which license may include provisions
prohibiting the unauthorized use, copying and transfer of the licensed program.
Policing unauthorized use of our products will likely be difficult and, while we
are unable to determine the extent to which piracy of our software products
exists, any significant piracy of our products could materially and adversely
affect our business, results of operations and financial condition. In addition,
the laws of some foreign countries do not protect the proprietary rights to as
great an extent as do the laws of the United States and our means of protecting
our proprietary rights may not be adequate.
WE MAY FACE PRODUCT LIABILITY CLAIMS FROM OUR FUTURE CUSTOMERS WHICH COULD LEAD
TO ADDITIONAL COSTS AND LOSSES TO THE COMPANY.
Our license agreements with our future customers will contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in the
license agreements may not be effective under the laws of some jurisdictions. A
successful product liability claim brought against us could result in payment by
us of substantial damages, which would harm our business, operating results and
financial condition and cause the price of our common stock to fall.
WE MAY NOT BE ABLE TO RESPOND TO TECHNOLOGICAL CHANGES WITH NEW SOFTWARE
APPLICATIONS, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR SALES AND
PROFITABILITY.
The markets for our software applications including those of the Intellisys is
characterized by rapid technological changes, changing customer needs, frequent
introduction of new software applications and evolving industry standards. The
introduction of software applications that embody new technologies or the
emergence of new industry standards could make our software applications
obsolete or otherwise unmarketable. As a result, we may not be able to
accurately predict the lifecycle of our software applications, which may become
obsolete before we receive any revenue or the amount of revenue that we
anticipate receiving from them. If any of the foregoing events were to occur,
our ability to retain or increase market share could be materially adversely
affected.
To be successful, we need to anticipate, develop and introduce new software
applications on a timely and cost-effective basis that keep pace with
technological developments and emerging industry standards and that address the
increasingly sophisticated needs of our future customers and their budgets. We
may fail to develop or sell software applications that respond to technological
changes or evolving industry standards, experience difficulties that could delay
or prevent the successful development, introduction or sale of these
applications or fail to develop applications that adequately meet the
requirements of the marketplace or achieve market acceptance. Our failure to
develop and market such applications and services on a timely basis, or at all,
could materially adversely affect our sales and profitability.
OUR FAILURE TO OFFER HIGH QUALITY CUSTOMER SUPPORT SERVICES COULD HARM OUR
REPUTATION AND COULD MATERIALLY ADVERSELY AFFECT OUR SALES OF SOFTWARE
APPLICATIONS AND RESULTS OF OPERATIONS.
Our future customers, if any, will depend on us to resolve implementation,
technical or other issues relating to our software, including the software of
the Intellisys. A high level of service is critical for the successful marketing
and sale of our software. If we do not succeed in helping our customers quickly
resolve post-deployment issues, our reputation could be harmed and our ability
to make new sales or increase sales to customers could be damaged.
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OUR BUSINESS COULD BE HARMED IF OUR INDEPENDENT THIRD PARTY CONTRACTORS VIOLATE
LABOR OR OTHER LAWS.
Once we are able to retain them, our independent contract third party
contractors may not operate in compliance with applicable United States and
foreign laws and regulations, including labor practices. If one of any of our
possible future independent contractors violates labor or other laws or diverges
from those labor practices generally accepted as ethical in the United States,
it could result in adverse publicity for us, damage our reputation in the United
States or render our conduct of business in a particular foreign country
undesirable or impractical, any of which could harm our business.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RESPOND TO CHANGING CUSTOMER
DEMANDS, IDENTIFY AND INTERPRET TRENDS AND SUCCESSFULLY MARKET NEW PRODUCTS.
The software industry is subject to rapidly changing customer demands,
particularly in the "enterprise" market in which we will market the products of
the IntellisysAccordingly, we must identify and interpret trends and respond in
a timely manner. Demand for and market acceptance of new products are uncertain
and achieving market acceptance for new products generally requires substantial
product development and marketing efforts and expenditures. If we do not meet
changing customer demands or are unable to develop products that appeal to
current customer demands, our results of operations will be negatively impacted.
In addition, we will have to make decisions about product development and
marketing expenditures in advance of the time when customer acceptance can be
determined. If we fail to anticipate, identify or react appropriately to changes
and trends or are not successful in marketing our products, we could experience
excess inventories, higher than normal markdowns or an inability to sell our
products once and if the products are available.
OUR BUSINESS AND THAT OF THE INTELLISYS COULD BE HARMED IF WE ARE UNABLE TO
ESTABLISH AND MAINTAIN A BRAND IMAGE.
We believe that establishing a brand is critical to achieving acceptance of our
software products and to establishing key strategic relationships. As a new
company with a new brand, we believe that we have little to no brand recognition
with the public. We may experience difficulty in establishing a brand name that
is well-known and regarded, and any brand image that we may be able to create
may be quickly impaired. The importance of brand recognition will increase when
and if our competitors create products that are similar to our products. Even if
we are able to establish a brand image and react appropriately to changes in
customer preferences, customers may consider our brand image to be less
prestigious or trustworthy than those of our larger competitors. Our results of
operations may be affected in the future should our products even be
successfully launched.
WE WILL FACE INTENSE COMPETITION, INCLUDING COMPETITION FROM COMPANIES WITH
SIGNIFICANTLY GREATER RESOURCES THAN OURS, AND IF WE ARE UNABLE TO COMPETE
EFFECTIVELY WITH THESE COMPANIES, OUR BUSINESS COULD BE HARMED.
We will face intense competition in the software industry from other established
companies in connection with the software created by the IntellisysAlmost all of
our competitors have significantly greater financial, technological,
engineering, manufacturing, marketing and distribution resources than we do.
Their greater capabilities in these areas will enable them to better withstand
periodic downturns in the software industry, compete more effectively on the
basis of price and production and more quickly develop new products. In
addition, new companies may enter the markets in which we expect to compete,
further increasing competition in the software industry.
We believe that our ability to compete successfully will depend on a number of
factors, including the functionality of our products once marketed and the
strength of our brand, once established, as well as many factors beyond our
control. We may not be able to compete successfully in the future, and increased
competition may result in price reductions, reduced profit margins, loss of
market share and an inability to generate cash flows that are sufficient to
maintain or expand our development and marketing of new products.
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PROTECTION OF OUR INTELLECTUAL PROPERTY, INCLUDING THE INTELLECTUAL PROPERTY OF
THE INTELLISYSI S LIMITED, AND ANY MISUSE OF OUR INTELLECTUAL PROPERTY BY OTHERS
COULD MATERIALLY ADVERSELY AFFECT OUR SALES AND RESULTS OF OPERATIONS.
Proprietary technology in our software is important to our success. To protect
our proprietary rights, we plan to rely on a combination of patents, copyrights,
trademarks, trade secrets, confidentiality procedures and contractual
provisions. We do not own any issued patents and we have not emphasized patents
as a source of significant competitive advantage. Furthermore, neither of the
Intellisys has any patents on their products. We have sought to protect our
proprietary technology under laws affording protection for trade secrets,
copyright and trademark protection of our software, products and developments
where available and appropriate. In the event we are issued patents, our issued
patents may not provide us with any competitive advantages or may be challenged
by third parties, and the patents of others may seriously impede our ability to
conduct our business. Further, any patents issued to us may not be timely or
broad enough to protect our proprietary rights.
Protection of trade secrets and other intellectual property rights in the
markets in which we operate and compete is highly uncertain and may involve
complex legal and scientific questions. The laws of countries in which we
operate may afford little or no protection to our trade secrets and other
intellectual property rights. Policing unauthorized use of our trade secret
technologies and proving misappropriation of our technologies is particularly
difficult, and we expect software piracy to continue to be a persistent problem.
Piracy of our products represents a loss of revenue to us. Furthermore, any
changes in, or unexpected interpretations of, the trade secret and other
intellectual property laws in any country in which we operate may adversely
affect our ability to enforce our trade secret and intellectual property rights.
Costly and time-consuming litigation could be necessary to enforce and determine
the scope of our confidential information and trade secret protection. If we are
unable to protect our proprietary rights or if third-parties independently
develop or gain access to our or similar technologies, our competitive position
and revenue could suffer.
WE MAY INCUR SIGNIFICANT LITIGATION EXPENSES PROTECTING OUR INTELLECTUAL
PROPERTY OR DEFENDING OUR USE OF INTELLECTUAL PROPERTY, WHICH MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR CASH FLOW AND RESULTS OF OPERATIONS.
If our efforts to protect our intellectual property rights are inadequate to
prevent imitation of our products by others or to prevent others from seeking to
block sales of our products as a violation of the intellectual property rights
of others, we could incur substantial significant legal expenses in resolving
such disputes.
OUR COMPETITORS MAY DEVELOP SIMILAR, NON-INFRINGING PRODUCTS THAT ADVERSELY
AFFECT OUR ABILITY TO GENERATE REVENUES.
Our competitors may be able to produce a software product that is similar to our
products without infringing on our intellectual property rights. Since we have
yet to establish any significant brand recognition for our products, we could
lose a substantial amount of business due to competitors developing products
similar to our software products. As a result, our future growth and ability to
generate revenues from the sale of our products could suffer a material adverse
effect.
CLAIMS THAT WE MISUSE THE INTELLECTUAL PROPERTY OF OTHERS COULD SUBJECT US TO
SIGNIFICANT LIABILITY AND DISRUPT OUR BUSINESS, WHICH COULD MATERIALLY ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Because of the nature of our business, we may become subject to material claims
of infringement by competitors and other third-parties with respect to current
or future software applications, trademarks or other proprietary rights. Our
competitors, some of which may have substantially greater resources than us and
have made significant investments in competing technologies or products, may
have, or seek to apply for and obtain, patents that will prevent, limit or
interfere with our ability to make, use and sell our current and future
products, and we may not be successful in defending allegations of infringement
of these patents. Further, we may not be aware of all of the patents and other
intellectual property rights owned by third-parties that may be potentially
adverse to our interests. We may need to resort to litigation to enforce our
proprietary rights or to determine the scope and validity of a third party's
patents or other proprietary rights, including whether any of our products or
processes infringe on the patents or other proprietary rights of third-parties.
The outcome of any such proceedings is uncertain and, if unfavorable, could
-11-
significantly harm our business. If we do not prevail in this type of
litigation, we may be required to:
o pay damages, including actual monetary damages, royalties, lost
profits or other damages and third-party's attorneys' fees, which may be
substantial;
o expend significant time and resources to modify or redesign the
affected products or procedures so that they do not infringe a
third-party's patents or other intellectual property rights; further,
there can be no assurance that we will be successful in modifying or
redesigning the affected products or procedures;
o expend significant time and resources to modify or redesign the
affected products or procedures so that they do not infringe a
third-party's patents or other intellectual property rights; further,
there can be no assurance that we will be successful in modifying or
redesigning the affected products or procedures;
o obtain a license in order to continue manufacturing or marketing the
affected products or processes, and pay license fees and royalties; if
we are able to obtain such a license, it may be non-exclusive, giving
our competitors access to the same intellectual property, or the patent
owner may require that we grant a cross-license to part of our
proprietary technologies; or
o stop the development, manufacture, use, marketing or sale of the
affected products through a court-ordered sanction called an injunction,
if a license is not available on acceptable terms, or not available at
all, or our attempts to redesign the affected products are unsuccessful.
Any of these events could adversely affect our business strategy and the value
of our business. In addition, the defense and prosecution of intellectual
property suits, interferences, oppositions and related legal and administrative
proceedings in the United States and elsewhere, even if resolved in our favor,
could be expensive, time consuming, generate negative publicity and could divert
financial and managerial resources.
We expect that software developers will increasingly be subject to infringement
claims as the number of software applications and competitors in our industry
segment grows and the functionality of software applications in different
industry segments overlaps. Thus, we could be subject to additional patent
infringement claims in the future. There can be no assurance that the claims
that may arise in the future can be amicably disposed of, and it is possible
that litigation could ensue.
Intellectual property litigation can be complex, costly and protracted. As a
result, any intellectual property litigation to which we are subject could
disrupt our business operations, require us to incur substantial costs and
subject us to significant liabilities, each of which could severely harm our
business.
Plaintiffs in intellectual property cases often seek injunctive relief. Any
intellectual property litigation commenced against us could force us to take
actions that could be harmful to our business, including the following:
o stop selling our products or using the technology that contains the
allegedly infringing intellectual property;
o stop selling our products or using the technology that contains the
allegedly infringing intellectual property;
o attempt to obtain a license to use the relevant intellectual property,
which may not be available on reasonable terms or at all; and
o attempt to redesign the products that allegedly infringed upon the
intellectual property.
-12-
If we are forced to take any of the foregoing actions, our business, financial
position and operating results could be harmed. We may not be able to develop,
license or acquire non-infringing technology under reasonable terms, if at all.
These developments would result in an inability to compete for customers and
would adversely affect our ability to increase our revenue. The measure of
damages in intellectual property litigation can be complex, and is often
subjective or uncertain. If we were to be found liable for the infringement of a
third party's proprietary rights, the amount of damages we might have to pay
could be substantial and would be difficult to predict.
OUR BUSINESS INCLUDING THAT OF THE INTELLISYS MAY BE NEGATIVELY IMPACTED AS A
RESULT OF CHANGES IN THE ECONOMY AND CORPORATE AND INSTITUTIONAL SPENDING.
Our business, including the business of the Target Companies, will depend on the
general economic environment and levels of corporate and institutional spending.
Purchases of software may decline in periods of recession or uncertainty
regarding future economic prospects. During periods of recession or economic
uncertainty, we may not be able to maintain or increase our sales to customers,
maintain sales levels, establish operations on a profitable basis or create
earnings from operations as a percentage of net sales. As a result, our
operating results may be adversely and materially affected by downward trends in
the economy or the occurrence of events that adversely affect the economy in
general. Our operating results and margins will be adversely impacted if we do
not grow as anticipated.
WE MAY BE UNABLE TO SCALE OUR OPERATIONS AND THOSE OF THE INTELLISYS
SUCCESSFULLY AND FAIL TO ATTAIN OUR PLANNED GROWTH.
Our plan is to grow our business, including the business of the Target
Companies, rapidly. Our growth, if it occurs as planned, will place significant
demands on our management, as well as our financial, administrative and other
resources. We will need to hire highly skilled personnel to effectuate our
planned growth. There is no guarantee that we will be able to locate and retain
qualified personnel for such positions, which would likely hinder our ability to
manage operations. Furthermore, we cannot guarantee that any of the systems,
procedures and controls we put in place will be adequate to support the
commercialization of our products or other operations. Our operating results
will depend substantially on the ability of our officers and key employees to
manage changing business conditions and to implement and improve our financial,
administrative and other resources. If we are unable to respond to and manage
changing business conditions, or the scale of our products, services and
operations, then the quality of our services, our ability to retain key
personnel and our business could be harmed.
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR DESK FLEX, INC. AND PROFESSIONAL
-------------------------------------------------------------------------
RESOURCE MANAGEMENT, INC.
-------------------------
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009 COMPARED TO
THE FISCAL YEAR ENDED DECEMBER 31, 2008
Intellisys had revenue of $348,497 for the year ended December 31, 2009,
compared to revenue of $357,882 for the year ended December 31, 2008, a decrease
in revenue of $9,385 or 2.6% from the prior year. The decrease in revenue was
due to a decrease service contracts in January 2008, which service contracts
were not represented during the year ended December 31, 2009. The revenues of
Intellisys tend to vary widely from quarter to quarter.
Intellisys had cost of sales of $26,476 for the year ended December 31, 2009,
compared to cost of sales of $45,936 for the year ended December 31, 2009, a
decrease in cost of sales of $19,460 or 42.4%. The decrease in cost of sales was
a direct result of the decrease in sales revenue during the year ended December
31, 2009, compared to the year ended December 31, 2008. Additionally, during the
year ended December 31, 2008, it was the practice of the Intellisys to purchase
computer equipment and hardware on behalf of clients and then to resell those
components to the clients at cost, which practice stopped during the year ended
December 31, 2009, and attributed to the decrease in cost of goods sold during
the same period.
Intellisys cost of sales as a percentage of revenue was 7.6% for the year ended
-13-
December 31, 2009, compared to cost of revenue as a percentage of revenue of
12.8% for the year ended December 31, 2008, a decrease in cost of sales as a
percentage of revenue of 5.2%.
Intellisys had total operating expenses of $351,818 for the year ended December
31, 2009, compared to total operating expenses of $305,588 for the year ended
December 31, 2008, an increase in total operating expenses of $46,230 or 15.1%
from the prior period. The main reason for the increase in operating expenses
was increase payroll expenses.
Intellisys had general and administrative of $339,436 for the year ended
December 31, 2009, compared to $292,054 for the year ended December 31, 2008,
and a $47,382 or 16% increase in other general and administrative expenses. The
8.5% decrease in depreciation and amortization expenses is due to a car,
compared to the year ended December 31, 2008.
Intellisys had a loss from operations of $29,797 for the year ended December 31,
2009, compared to a gain from operations of $6,358 for the year ended December
31, 2008, an increase in loss from operations of $36,155 or 5.7% from the prior
period. This increase in loss from operations was mainly caused by the decrease
in revenue as described above.
Intellisys had total other expense of $739 for the year ended December 31, 2009,
compared to total other expense of $430 for the year ended December 31, 2008, a
decrease in total other expense of $309 or 71.9% from the prior period.
Intellisys had a net loss of $30,536 for the year ended December 31, 2009,
compared to net income of $5,928 for the year ended December 31, 2008, an
increase in net loss of $36,464 or 620% from the prior period.
LIQUIDITY AND CAPITAL RESOURCES
Intellisys had total assets of $47,055 as of December 31, 2009, which included
current assets of $41,918, consisting of cash on hand of $10,431 and accounts
receivable of $29,887, and other current assets of $1,600, and non-current
assets of $5,137, consisting of property and equipment.
Intellisys had total liabilities of $95,158 as of December 31, 2009, consisting
solely of current liabilities, consisting only of deferred revenue.
Intellisys had negative working capital of $48,103, and total accumulated
deficit of $165,953 as of December 31, 2009.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired:
99.1* Audited Financial Statements of Intellisys, Inc ..
99.2* Pro Forma Financial Information
* Filed herewith.
-14-
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 hereunto duly authorized.
EPAZZ, INC.
Date: December 15, 2010
By: /s/ Shaun Passley
---------------------
Shaun Passley
Chief Executive Officer
-15-
INFORMATION SYSTEMS ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
PAGE
Report of Independent Registered Public Accounting Firm 1
Balance Sheet 2
Statements of Operations 3
Statements of Stockholders' Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6 to 7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Intellisys, Inc.
We have audited the accompanying balance sheets of Intellisys, Inc. as of
December 31, 2009 and 2008, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the two-year
period ended December 31, 2009. Intellisys Inc.'s management is responsible for
these financial statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Intellisys, Inc. as of December
31, 2009 and 2008, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Lake & Associates, CPA's LLC
Lake & Associates, CPA's LLC
Schaumburg, Illinois
December 13, 2010
-Fin 1-
IntelliSys, Inc.
BALANCE SHEET
As of December 31, 2009 and 2008
December 31, December 31,
2009 2008
------------------------- ------------------
ASSETS
Current Assets
Cash $ 10,431 $ 247
Accounts receivable 29,887 31,373
Other current assets 1,600 1,600
----------------------------- ----------------------
Total Current Assets 41,918 33,220
----------------------------- ----------------------
Covenant not to compete - 7,550
Property and equipment, net 5,137 7,148
----------------------------- ----------------------
TOTAL ASSETS $ 47,055 $ 47,918
============================= ======================
LIABILITIES
Accounts payable and accrued liabilities $ 36,600 $ 17,160
Deferred revenue 39,058 38,000
----------------------------- ----------------------
Total Current Liabilities 75,658 55,160
----------------------------- ----------------------
Commercial Loan 19,500 -
----------------------------- ----------------------
Total Liabilities 95,158 55,160
----------------------------- ----------------------
STOCKHOLDER'S (DEFICIT)
Common Stock 5,000 5,000
Paid in Capital 112,850 123,175
Retained Earnings (165,953) (135,417)
----------------------------- ----------------------
Total Stockholder's Deficit (48,103) (7,242)
----------------------------- ----------------------
----------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDER'S (DEFICIT) $ 47,055 $ 47,918
======================= =====================
-Fin 2-
IntelliSys, Inc.
STATEMENT OF OPERATIONS
For the period ending December 31, 2009 and 2008
December 31, December 31,
2009 2008
------------------------------ ------------------------------
SALES $ 348,497 $ 357,882
COST OF SALES (26,476) (45,936)
------------------------------ ------------------------------
GROSS PROFIT 322,021 311,946
------------------------------ ------------------------------
OPERATING EXPENSE
General and Administrative 339,436 292,054
Depreciation and Amortization Expense 12,382 13,534
------------------------------ ------------------------------
Total Operating Expense 351,818 305,588
------------------------------ ------------------------------
Operating Income / (Loss) (29,797) 6,358
OTHER INCOME AND EXPENSE
Interest Expense (739) (430)
------------------------------ ------------------------------
Total Other Income and Expense (739) (430)
------------------------------ ------------------------------
------------------------------ ------------------------------
NET INCOME / (LOSS) $ (30,536) $ 5,928
============================== ==============================
-Fin 3-
IntelliSys, Inc.
STATEMENT OF STOCKHOLDER'S EQUITY
For the period ending December 31, 2009 and 2008
Common Stock Additional Accumulated Total
-----------------------
Shares Amount Paid in Capital Deficit Equity
-------- ----------- ------------------ --------------------- -------------------
Balance at December
31, 2007 85 $ 5,000 $ 134,221 $ (141,345) $ (2,124)
Return of Capital (11,046) (11,046)
Net Income 5,928 5,928
-------- ----------- ------------------ --------------------- -------------------
Balance at December
31, 2008 85 5,000 123,175 (135,417) (7,242)
-------- ----------- ------------------ --------------------- -------------------
Return of Capital (10,325) (10,325)
Net Loss (30,536) (30,536)
-------- ----------- ------------------ --------------------- -------------------
Balance at December 85 $ 5,000 $ 112,850 $ (165,953) $ (48,103)
31, 2009
======== =========== ================== ===================== ===================
-Fin 4-
IntelliSys, Inc.
STATEMENT OF CASH FLOWS
For the period ending December 31, 2009 and 2008
December 31, December 31,
2009 2008
---------------------------- ---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (30,536) $ 5,928
Adjustments to reconcile net loss to cash used in
operating activities
Depreciation and amortization 12,382 13,534
Changes in accounts receivable 1,486 (8,906)
Change in deferred revenue 1,058 1,400
Change in accounts payable and accrued liabilities 19,440 (10,922)
---------------------------- ---------------------------
Net cash used in operating activities 3,830 1,034
---------------------------- ---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (2,821) (1,946)
---------------------------- ---------------------------
Net cash used investing activities (2,821) (1,946)
---------------------------- ---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from commercial loan 19,500 -
Adjustments to additional paid in capital (10,325) (11,046)
Repayment of longterm notes payable - (6,346)
---------------------------- ---------------------------
Net cash provided by financing activities 9,175 (17,392)
---------------------------- ---------------------------
NET CHANGE IN CASH 10,184 (18,304)
CASH AT BEGINNING OF PERIOD 247 18,551
---------------------------- ---------------------------
CASH AT END OF PERIOD $ 10,431 $ 247
============================ ===========================
-Fin 5-
IntelliSys, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
Note 1 - Summary of Significant Accounting Policies
Nature of Business
Intellisys, Inc. was established as a Corporation in the State of Wisconsin on
June 6, 2006. IntelliSys, Inc. offers integrated software applications that
process the monitoring, information and maintenance management of multiple
systems. Intellisys optimizes water and wastewater facility management by
automatically collecting, managing, organizing and disseminating information for
the operations, management, laboratory, maintenance, and engineering functions.
Basis of Presentation
The financial statements have been prepared using the accrual basis of
accounting. Under this method, income is recognized when earned and expenses are
recognized when incurred.
Cash Equivalents
Cash equivalents are defined as short-term, highly liquid investments with
original maturities of 90 days or less.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Reporting Period
The Company operates on a calendar year beginning January 1 and ending December
31.
Accounts Receivable
Accounts receivable consist of trade receivables due from the Corporation's
customers. As of December 31, 2009 and 2008, all receivables are deemed
collectible. Thus, no allowance for doubtful accounts has been established.
Property and Equipment
Property and equipment are carried at cost. Depreciation of property and
equipment is provided using the straight-line method for financial statement
purposes over the estimated useful life of the assets, currently ranging from
three to five years. Expenditures that materially extend the life of the asset
are capitalized; normal repairs and maintenance are charged to expense. At
December 31, 2009 and 2008 fixed assets consisted of the following:
-Fin 6-
Property and Equipment - (continued)
------------------------------------
2009 2008
----------------- ------------------
Automobiles $26,899 $26,899
Equipment 30,504 29,488
Software 2,326 520
----------------- ------------------
59,729 56,907
Less: Accumulated depreciation (54,592) (49,759)
----------------- ------------------
Property and equipment, net $5,137 $7,148
================= ==================
Revenue Recognition
-------------------
Revenue is generated through the sale of maintenance contracts for custom
programming services. IntelliSys, Inc. recognizes revenues as they are earned
over the duration of the maintenance contract. Deferred revenue represents the
unearned portion of payments received in advance. As of December 31, 2009 and
2008 IntelliSys, Inc. had unearned income of $39,058 and 38,000 respectively.
Note 2 - Commercial Loan Payable
Commercial loan payable consist of a line of credit payable to M & I Bank. The
line of credit was established on March 2, 2009. At December 31, 2009 the
outstanding balance on this line of credit was $19,500.
Note 3 - Subsequent Events
On September 2, 2010 the company entered into a stock purchase agreement with
Epazz, Inc. Epazz, Inc. closed the transaction on September 30, 2010 by
acquiring 100% of the stock of the company.
-Fin 7-
