UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JANUARY 31, 2004
COMMISSION FILE NO. 000-27619
iBIZ TECHNOLOGY CORP.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 86-0933890
- ---------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2238 West Lone Cactus, Phoenix, Arizona 85027
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (623) 492-9200
--------------------
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Class Outstanding at March 15, 2004
----- -----------------------------
Common stock, $0.001 par value 2,565,805,769
TABLE OF CONTENTS
-----------------
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)................................................................... F-1 - F-5
BALANCE SHEETS .................................................................................... F-1
STATEMENTS OF OPERATIONS........................................................................... F-2
STATEMENT OF CASH FLOWS............................................................................ F-5
NOTES TO FINANCIAL STATEMENTS...................................................................... F-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 1-7
ITEM 3. CONTROLS AND PROCEDURES............................................................................ 8
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................................. 8
ITEM 2. CHANGES IN SECURITIES.............................................................................. 8
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 9
ITEM 5. OTHER INFORMATION.................................................................................. 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................... 9
iBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JANUARY 31, 2004
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 262,670
Cash, pledged for letter of credit 10,000
Accounts receivable, net 48,995
Inventories 62,228
Prepaid expenses 129,128
------------
Total current assets 513,021
------------
PROPERTY AND EQUIPMENT, Net of accumulated depreciation 59,851
------------
OTHER ASSETS:
Technology and patents 1,200,000
Intellectual Properties Rights, net 55,455
Note receivable, officer 373,159
Less allowance for doubtful collection (373,159)
Deposits 2,500
------------
Total other assets 1,257,955
------------
TOTAL ASSETS $ 1,830,827
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 668,052
Loan payable, Enterprise Capital AG 99,990
Accrued wages 403,363
Accrued interest 685,195
Taxes payable 218,900
Deferred income 3,113
Convertible debentures, current portion 2,152,297
------------
Total current liabilities 4,230,910
------------
LONG-TERM LIABILITIES - Convertible debentures
payable, net of current portion 467,000
------------
STOCKHOLDERS' DEFICIT:
Preferred stock - authorized, 50,000,000 shares,
par value $.001 per share; issued and outstanding,
-0- shares 0
Common stock - authorized, 5,000,000,000 shares,
par value $.001 per share; issued and outstanding,
2,273,572,909 shares; reserved for issuance of
options, 23,050,000 shares 2,273,573
Common stock to be issued for Synosphere, LLC,
30,000,000 shares 1,200,000
Additional paid-in capital 23,580,291
Accumulated deficit (29,920,947)
------------
Total stockholders' deficit (2,867,083)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,830,827
============
See accompanying notes to financial statements.
F-1
iBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
REVENUES:
Product sales $ 152,216 $ 65,879
Maintenance Agreements 9,733 9,431
------------ -----------
Total revenues 161,949 75,310
COST OF REVENUES 121,745 91,735
------------ -----------
GROSS INCOME (LOSS) 40,204 (16,425)
------------ -----------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 379,906 441,229
CONSULTING FEES PAID BY STOCK OPTIONS (4,770,000) 0
------------ -----------
LOSS FROM OPERATIONS (5,109,702) (457,654)
------------ -----------
OTHER INCOME (EXPENSE):
Cancellation of interest by
debenture holders 62,728 0
Interest expense (102,280) (82,352)
Interest expense - convertible debentures -
beneficial conversion feature 0 (837,998)
Other income 24,639 0
Gain on sale of fixed asset 2,000 0
------------ -----------
Total other expense, net (12,913) (920,350)
------------ -----------
LOSS BEFORE INCOME TAXES (5,122,615) (1,378,004)
INCOME TAXES 0 0
------------ -----------
NET LOSS $ (5,122,615) $(1,378,004)
============ ===========
NET LOSS PER COMMON SHARE - Basic
and diluted $ (0.00) $ (0.02)
============ ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - Basic and
diluted 1,405,453,312 59,250,249
============= ===========
See accompanying notes to financial statements.
F-2
iBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED JANUARY 31, 2004
(UNAUDITED)
Common Stock
Preferred Stock Common Stock To Be Issued
------------------ ------------------------- ----------------------
Shares Amount Shares Amount Shares Amount
------ ------ ----------- ------ ------ ------
BALANCE, OCTOBER 31, 2003 0 $ 0 649,893,721 $ 649,894 0 $ 0
CONVERSION OF DEBENTURES
FOR COMMON STOCK:
Principal 0 0 984,925,693 984,926 0 0
Interest 0 0 51,074,695 51,074 0 0
FEES AND COSTS FOR ISSUANCE
OF CONVERTIBLE DEBENTURES 0 0 0 0 0 0
ISSUANCE OF COMMON STOCK FOR:
Consulting fees 0 0 81,000,000 81,000 0 0
Legal fees 0 0 10,000,000 10,000 0 0
Miscellaneous expenses 0 0 1,533,784 1,534 0 0
Accrued employee bonuses 0 0 398,620,692 398,621 0 0
Accrued expenses and payables 0 0 9,574,324 9,574 0 0
Cash by stock options 0 0 86,950,000 86,950 0 0
Acquisition of Synosphere, LLC 0 0 0 0 30,000,000 1,200,000
CONSULTING FEES EXPENSED BY STOCK 0 0 0 0 0 0
NET LOSS 0 0 0 0 0 0
----- ----- ------------- ---------- ---------- ----------
BALANCE, JANUARY 31, 2004 0 $ 0 2,273,572,909 $2,273,573 30,000,000 $1,200,000
===== ===== ============= ========== ========== ==========
(Continued)
F-3
iBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT (CONTINUED)
FOR THE THREE MONTHS ENDED JANUARY 31, 2004
(UNAUDITED)
Additional
Paid-in Accumulated
Capital Deficit Total
----------- ------------ -----------
BALANCE, OCTOBER 31, 2003 $17,431,753 $(24,798,332) $(6,716,685)
CONVERSION OF DEBENTURES FOR COMMON STOCK:
Principal 437,867 0 1,422,793
Interest 37,717 0 88,791
FEES AND COSTS FOR ISSUANCE OF
CONVERTIBLE DEBENTURES (26,250) 0 (26,250)
ISSUANCE OF COMMON STOCK FOR:
Consulting fees 45,360 0 126,360
Legal fees 27,000 0 37,000
Miscellaneous expenses 4,141 0 5,675
Accrued employee bonuses 179,379 0 578,000
Accrued expenses and payables 25,551 0 35,426
Cash 647,473 0 734,423
Acquisition of Synosphere, LLC 0 0 1,200,000
CONSULTING FEES PAID WITH OPTIONS 4,770,000 0 4,770,000
NET LOSS 0 (5,122,615) (5,122,615)
----------- ------------ -----------
BALANCE, JANUARY 31, 2004 $23,580,291 $(29,920,947) $(2,867,083)
=========== ============ ===========
See accompanying notes to financial statements.
F-4
iBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,122,615) $(1,378,004)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 3,478 2,968
Amortization 5,545 2,500
Consulting fees expensed by stock options 4,770,000 0
Interest expense - convertible debentures
debentures - beneficial conversion
feature 0 837,998
Common stock issued for expenses 61,205 123,768
Provision (adjustment) for uncollectible
accounts (31,138) 3,100
Provision (adjustment) for obsolete
inventory (23,100) 0
Changes in operating assets and
liabilities:
Accounts receivable 105,894 (21,078)
Inventories 4,714 (37,070)
Prepaid expenses 5,785 (18,000)
Accounts payable (21,085) 55,577
Accrued liabilities and taxes (235,189) 206,635
Deferred income (2,457) (3,733)
----------- -----------
Net cash used in operating activities (478,963) (225,339)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock
by stock options 734,423 0
Net proceeds from issuance of convertible
debentures payable 0 360,000
Net proceeds from loan payable 9,990 0
Repayment of note payable, other (4,920) (419)
----------- -----------
Net cash provided by financing activities 262,670 359,581
----------- -----------
NET INCREASE IN CASH 260,530 134,242
CASH, BEGINNING OF PERIOD 2,140 948
------------ -----------
CASH, END OF PERIOD $ 262,670 $ 135,190
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 9,987 $ 2,334
============ ===========
Taxes $ 0 $ 0
============ ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for convertible
debentures, net of fees and costs $ 1,396,540 $ 58,681
============ ===========
Issuance of common stock for fees, services
and expenses $ 169,035 $ 123,768
============ ===========
Issuance of common stock for accounts
payable and accrued expenses $ 121,193 $ 1,870
============ ===========
Issuance of common stock for accrued
employee bonuses $ 578,000 $ 0
============ ===========
Interest expense - convertible debentures -
beneficial conversion feature $ 0 $ 837,998
============ ===========
Consulting fees expensed by stock options $ 4,770,000 $ 0
============ ===========
See accompanying notes to financial statements.
F-5
iBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - iBIZ Technology Corp. (hereinafter referred to as
"Ibiz" or the "Company") was organized on April 6, 1994, under the laws
of the State of Florida. The Company operates as a holding company for
subsidiary acquisitions.
iBIZ, Inc. designs, manufactures (through subcontractors), and
distributes a line of accessories for the PDA and handheld computer
market which are distributed through large retail chain stores and
e-commerce sites.
Synoshere, LLC is a Plano, Texas based corporation specializing in the
development of innovative handheld computer technologies.
Invnsys Technology Corporation (hereinafter referred to as "Invnsys")
is an inactive entity.
Qhost, Inc. is an inactive entity.
PRESENTATION - The interim consolidated financial statements of the
Company are condensed and do not include some of the information
necessary to obtain a complete understanding of the financial data.
Management believes that all adjustments necessary for a fair
presentation of results have been included in the unaudited
consolidated financial statements for the interim periods presented.
Operating results for the three month period ended January 31, 2004 are
not necessarily indicative of the results that may be expected for the
year ended October 31, 2004. Accordingly, your attention is directed to
footnote disclosures found in the October 31, 2003 Annual Report and
particularly to Note 1 which includes a summary of significant
accounting policies.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of iBIZ Technology Corp. and its wholly-owned
subsidiaries - iBIZ, Inc., Invnsys Technology Corporation, Qhost, Inc.
and Synosphere, LLC.
All material inter-company accounts and transactions have been
eliminated.
F-6
CASH EQUIVALENTS - For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
CASH PLEDGED FOR LETTER OF CREDIT - The Company has pledged $10,000 of
its cash to secure a letter of credit for a customer to guarantee
payment of rebates. The letter of credit expires in June 2004.
ACCOUNTS RECEIVABLE - Accounts receivable are reported at the
customers' outstanding balances less any allowance for doubtful
accounts and provision for returned merchandise. Our terms for
repayment range from 30 days to 60 days. Interest is not accrued on
overdue accounts receivable.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND PROVISION FOR RETURNED MERCHANDISE
- The allowance for doubtful accounts on accounts receivable and
provision for returned merchandise is charged to income in amounts
sufficient to maintain the allowance for uncollectible accounts at a
level management believes is adequate to cover any probable losses.
Management determines the adequacy of the allowance based on historical
write-off percentages and information collected from individual
customers. Accounts receivable are charged off against the allowance
when collectibility is determined to be permanently impaired
(bankruptcy, lack of contact, age of account balance, etc.). A
provision for returned merchandise is also recorded based on our
history of returns as a percentage of sales.
INVENTORIES - Inventories are stated at the lower of cost (determined
principally by average cost) or market. The inventories are comprised
of finished products at January 31, 2004.
PREPAID EXPENSE - The Company's prepaid expenses are being amortized
over a one year period
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Major renewals and improvements are charged to the asset accounts while
replacements, maintenance and repairs, which do not improve or extend
the lives of the respective assets, are expensed. At the time property
and equipment are retired or otherwise disposed of, the asset and
related accumulated depreciation accounts are relieved of the
applicable amounts. Gains or losses from retirements or sales are
credited or charged to income.
F-7
The Companies depreciate their property and equipment for financial
reporting purposes using the straight-line method based upon the
following useful lives of the assets:
Tooling 3 Years
Machinery and equipment 10 Years
Office furniture and equipment 5-10 Years
Vehicles 5 Years
Molds 5 Years
LONG-LIVED ASSETS - Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment and Disposal of Long-Lived Assets."
requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the historical
cost-carrying value of an asset may no longer be appropriate. The
Company assesses the recoverability of the carrying value of an asset
by estimating the future undiscounted net cash flows expected to result
from the asset, including eventual disposition. If the future net cash
flows are less than the carrying value of the asset, an impairment loss
is recorded equal to the difference between the asset's carrying value
and fair value. Fair value is determined based on discounted cash
flows, appraised values or management's estimates, depending on the
nature of the assets.
ACCOUNTING FOR CONVERTIBLE DEBT SECURITIES - The Company has issued
convertible debt securities with non-detachable conversion features.
The Company accounts for such securities in accordance with Emerging
Issues Task Force 98-5. The Company has recorded the fair value of the
beneficial conversion features as interest expense and an increase to
Additional Paid in Capital.
ACCOUNTING FOR CONSULTING FEES PAID BY STOCK OPTIONS - The Company has
issued stock options which entitle the grantee to exercise the options
at fair market value less an agreed upon discount. The Company has
recorded the fair market value as "consulting fees paid by stock
options" and an increase to additional paid-in capital (see Notes 13
and 15).
TECHNOLOGY AND PATENTS - Technology and patents represents the fair
market value of the common stock issued to acquire Synosphere, LLC. The
Company will amortize the asset over the estimated useful life once the
patents are approved and the products are developed and ready for
market.
F-8
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company has
financial instruments, none of which are held for trading purposes. The
Company estimates that the fair value of all financial instruments at
January 31, 2004, as defined in FASB 107, does not differ materially
from the aggregate carrying values of its financial instruments
recorded in the accompanying balance sheet. The estimated fair value
amounts have been determined by the Company using available market
information and appropriate valuation methodologies. Considerable
judgment is required in interpreting market data to develop the
estimates of fair value, and accordingly, the estimates are not
necessarily indicative of the amounts that the Company could realize in
a current market exchange.
COMMON STOCK ISSUED FOR NON-CASH TRANSACTIONS - It is the Company's
policy to value stock issued for non-cash transactions at the stock
closing price at the date the transaction is finalized or the value of
the services, whichever is more readily determinable.
AMENDMENT OF ARTICLES OF INCORPORATION - The Articles of Incorporation
were amended in November 2002 to increase the number of authorized
shares of common stock from 450,000,000 to 5 billion and authorized the
creation of 50,000,000 shares of blank check preferred stock.
REVENUE RECOGNITION - The Company recognizes revenue when persuasive
evidence of an arrangement exists, title transfer has occurred, the
price is fixed or readily determinable, and collectibility is probable.
Sales are recorded net of sales discounts. The Company recognizes
revenue in accordance with Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," (SAB 101). Our revenues are
recorded under two categories:
Product Sales - When the goods are shipped and title passes to the
customer. The Company provides a reserve for sales returns based on its
history of returns as a percentage to sales.
The Company will periodically provide rebates on selected products for
a limited sale period, normally 7 days. They contract with a company to
process and track the rebates. The Company provides a reserve for
outstanding rebates based on its history of rebates submitted as a
percentage of applicable sales.
F-9
Maintenance Agreements - Income from maintenance agreements is being
recognized on a straight-line basis over the life of the service
contracts, which range from 3 months to 1 year. The unearned portion
received is recorded as deferred income. The Company is not actively
pursuing this area of business and does not expect this to be
significant in subsequent periods.
SHIPPING AND HANDLING COSTS - The Company's policy is to classify
shipping and handling costs as part of cost of goods sold in the
statement of operations.
ADVERTISING - All direct advertising costs are expensed as incurred.
The Company charged to operations $35,538 and $4,481 in advertising
costs for the three months ended January 31, 2004 and 2003,
respectively.
RESEARCH AND DEVELOPMENT - The Company expenses research and
development costs as incurred.
INCOME TAXES - Provisions for income taxes are based on taxes payable
or refundable for the current year and deferred taxes on temporary
differences between the amount of taxable income and pretax financial
income and between the tax bases of assets and liabilities and their
reported amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the deferred
tax assets and liabilities are expected to be realized or settled as
prescribed in FASB Statement No.109, Accounting for Income Taxes. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
NET (LOSS) PER SHARE - The Company adopted Statement of Financial
Accounting Standards No. 128 that requires the reporting of both basic
and diluted loss per share. Basic loss per share is computed by
dividing net loss available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted
loss per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. In accordance with FASB Statement No. 128,
any anti-dilutive effects on net loss per share are excluded.
F-10
CONCENTRATION OF RISK
Industry - The Company's products are intended for the computer and
technology-related industry. This industry experiences a high degree of
obsolescence and changes in buying patterns. The Company must expend
funds for research and development and identification of new products
in order to stay competitive.
Financial Instruments - Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of
trade accounts receivable.
Concentrations of credit risk with respect to trade receivables are
normally limited due to the number of customers comprising the
Company's customer base and their dispersion across different
geographic areas. Recently the Company has focused its sales efforts to
large retailers which can increase the credit risk. The Company
routinely assesses the financial strength of its customers. The Company
normally does not require a deposit to support large customer orders.
At January 31, 2004, one customer accounted for 73% of net receivables.
Purchases - The Company relies primarily on three suppliers for its
products. The loss of a supplier could have a material impact on the
Company's operations. Purchases from these suppliers for the three
months ended January 31, 2004 totaled 67%, 19% and 12%.
Revenues - For the three months ended January 31, 2004, the Company had
one customer whose sales were 59% of total revenues.
Pervasiveness of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-11
Recent Accounting Pronouncements - In April 2003, the FASB issued 145
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This Statement rescinds
SFAS 4, Reporting Gains and Losses from Extinguishment of Debt and an
amendment of that statement, SFAS 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. The rescission of these Statements
alters the financial reporting requirements from gains and losses
resulting from the extinguishments of debt. These gains or losses
should now be reported before extraordinary items, unless the two
requirements for extraordinary items are met. This statement also
rescinds SFAS 44, Accounting for Intangible Assets of Motor Carriers
and amends SFAS 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. The provisions of this statement related to the rescission
of Statement 4 shall be applied in fiscal years beginning after May 15,
2002. Any gain or loss on extinguishments of debt that was classified
as an extraordinary item in prior periods presented that does not meet
the criteria in Opinion 30 for classification as an extraordinary shall
be reclassified. The provision of this Statement related to Statement
13 shall be effective for transactions occurring after May 15, 2002.
In June of 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which nullifies EITF
Issue 94-3. SFAS 146 is effective for exit and disposal activities that
are initiated after December 31, 2002 and requires that a liability for
a cost associated with an exit or disposal activity be recognized when
the liability is incurred, in contrast to the date of an entity's
commitment to an exit plan, as required by EITF Issue 94-3. The Company
adopted the provisions of SFAS 146 effective January 1, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". This Statement
amends SFAS No. 123, "Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. The alternative methods of transition of SFAS 148 are
effective for fiscal year ending after December 15, 2002. The Company
follows APB 25 in accounting for its employee stock options. The
disclosure provision of SFAS 148 is effective for years ending after
December 15, 2002 and has been incorporated into these consolidated
financial statements and accompanying footnotes.
F-12
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement establishes standards for how an issuer of debt
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify certain financial instruments as a liability (or an
asset in some circumstances) instead of equity. The Statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company adopted this
Statement on July 1, 2003.
The Company does not believe that any of these recent accounting
pronouncements will have a material impact on their financial position
or results of operations.
2. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS AND PROVISION
FOR RETURNED MERCHANDISE
A summary of accounts receivable and allowance for doubtful accounts is
as follows:
Accounts receivable $ 72,095
Allowance for doubtful accounts and
provision for returned merchandise 23,100
--------
Net accounts receivable $ 48,995
========
Allowance for doubtful accounts and provision
for return merchandise:
Balance, November 1, 2003 $ 50,738
Reduction in estimate of provision for
Returned merchandise (31,138)
Recovery of uncollectible accounts 3,500
---------
Balance, January 31, 2004 $ 23,100
=========
F-13
3. PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation at January 31, 2004
consists of:
Tooling $ 68,100
Machinery and equipment 37,641
Office furniture and equipment 81,027
Vehicle 3,140
Molds 25,000
---------
Total property and equipment 214,908
Less accumulated depreciation (155,057)
---------
Property and equipment, net $ 59,851
=========
4. INTELLECTUAL PROPERTY RIGHTS AND RELATED ROYALTY AGREEMENT
On July 11, 2002, the Company purchased the Xela Case Keyboard and all
related Intellectual Property and Resale Rights from ttools, LLC for
$200,000. The Company is obligated to pay a royalty of $2.00 per unit
sold on the first one million units. In accordance with FASB 142, the
Company will amortize the Intellectual Property Rights over its
estimated useful life of three years from the date the products are
fully developed and ready for sale. As of October 31, 2003, the Company
has written off 50% of the intellectual property rights due to
impairment.
Estimated Amortization Expense:
For the year ended October 31, 2004 $ 22,182
For the year ended October 31, 2005 22,182
For the year ended October 31, 2006 16,636
--------
Total estimated amortization expense $ 61,000
========
5. NOTE RECEIVABLE, OFFICER
INVNSYS TECHNOLOGY CORPORATION
A note due from the president of the Company, which is payable on
demand and accrues interest at 6%. Management believes the note is
uncollectible since iBIZ no longer has collateral for the note. The
Company elected to write-off the loan as uncollectible by establishing
an allowance for doubtful collections for the total amount due on the
note.
F-14
Total amount of note $ 373,159
Less allowance for doubtful collection (373,159)
---------
Note receivable, net $ 0
=========
6. ACQUISITION OF SYNOSPHERE, LLC
On January 20, 2004, the Company acquired 100% of the 5,000,000
interests of Synosphere, LLC. The results of Synosphere's operation
from January 20, 2004 to January 31, 2004 were immaterial for this
period.
Synosphere is developing and plans to manufacture and distribute
Docking Stations (IDS), such as the "Blue Dock", for Personal Digital
Assistants (PDAs) that enable these handheld computers to give
value-added solutions and to operate as a primary computing platform in
a workplace environment with capabilities similar to conventional
desktop workstations.
The aggregate purchase price was $1,200,000, payable in 30,000,000
shares of common stock which was valued at the market value of the
stock at the date of acquisition. The purchase price was allocated to
technology and patents as Synosphere did not own any tangible assets
and its only assets were pending patents and technology.
7. NOTE PAYABLE, GAMMAGE AND BURNHAM
In July 2001, the Company issued a note to Gammage and Burnham, PLC for
the payment of $80,000 of legal fees previously recorded in accounts
payable. The note was paid in full November 4, 2003, in exchange for
8,108,108 shares of common stock.
8. LOAN PAYABLE, ENTERPRISE CAPITAL AG
The loan from Enterprise Capital AG totaling $99,990 is unsecured,
bears no interest and has no due date.
9. TAXES PAYABLE
Taxes payable consists of the following:
Payroll taxes payable, current and deferred $ 199,872
California income tax payable 19,028
----------
$ 218,900
F-15
10. INCOME TAXES
Deferred Taxes
The components of deferred tax assets are as follows:
Net operating loss carryforwards $2,976,000
Accrued expenses and miscellaneous 10,000
----------
2,986,000
Less valuation allowance 2,986,000
----------
Net deferred tax asset $ 0
==========
A reconciliation of the valuation allowance is as follows:
Balance, November 1, 2003 $2,909,300
Addition for the period 76,700
----------
Balance, January 31, 2004 $2,986,000
==========
Tax Carryforwards
The Company had the following tax carryforwards at October 31, 2003:
Net operating loss
October 31, 1995 $ 2,500 October 31, 2010
October 31, 1997 253,686 October 31, 2012
October 31, 1998 71,681 October 31, 2013
October 31, 1999 842,906 October 31, 2019
October 31, 2000 3,574,086 October 31, 2020
October 31, 2001 5,051,232 October 31, 2021
October 31, 2002 1,838,129 October 31, 2022
October 31, 2003 2,890,718 October 31, 2023
January 31, 2004 352,614 October 31, 2024
-----------
$14,877,552
===========
F-16
11. CONVERTIBLE DEBENTURES
Unsecured Convertible Debentures
Lites Trading Company - $1,600,000 Debenture $ 467,000
On March 27, 2000, the Company issued $1,600,000 of 7%
convertible debentures under the following terms and
conditions:
1. Due date - March 27, 2005.
2. Interest only on May 1 and December 1 of each year
commencing May 1, 2000.
3. Default interest rate - 18%.
4. Warrants to purchase 37,500 shares of common stock
at $14.50 per share.
5. Conversion terms - The debenture holder shall have the
right to convert all or a portion of the outstanding
principal amount of this debenture plus any accrued
interest into such number of shares of common stock
as shall equal the quotient obtained by dividing the
principal amount of this debenture by the applicable
conversion price.
6. Conversion price - Lesser of (i) $14.50 (fixed price)
or (ii) the product obtained by multiplying the average
closing price by .80.
7. Average closing price - The debenture holder shall
have the election to choose any three trading days
out of twenty trading days immediately preceding the
date on which the holder gives the Company a written
notice of the holder's election to convert outstanding
principal of this debenture.
8. Redemption by Company - If there is a change in control
of the Company, the holder of the debenture can request
that the debenture be redeemed at a price equal to 125%
of the aggregate principal and accrued interest
outstanding under this debenture.
9. The debentures are unsecured.
10. Any further issuance of common stock or debentures must
be approved by the debenture holders.
11. Debenture holders have an eighteen month right of first
refusal on future disposition of stock by the Company.
12. Restriction on payment of dividends, retirement of stock
or issuance of new securities.
During February 2004, the debenture was converted into
common stock and paid-in-full.
F-17
Various Convertible Debentures 1,376,446
On October 31, 2001, the Company issued 8% convertible
debentures as follows:
1. Due date - October 31, 2003.
2. Interest payable quarterly from January 1, 2001.
3. Default interest rate - 20%.
4. On the first $1,000,000 of financing, the Company
issued warrants to purchase 50,000 shares of stock
at $ 4.80 per share. The Company reserved an
additional 124,000 shares for future borrowing on
this debenture line.
5. Put note purchase price - $4,000,000.
6. Fees and costs - 7% - 10% of cash received for
debentures and warrants plus legal fees.
7. The Company must reserve a number of common shares
equal to, but not less then, 200% of the amount of
common shares necessary to allow the debenture and
warrant holder to be able to convert all such
outstanding notes and put notes to common stock.
8. Conversion price for put notes. The initial 50% of
the put notes shall be the lesser of: (i) 80% of the
average of the three lowest closing bid prices for
the stock for twenty two days or (ii) 80% of the
average of the five lowest closing bid prices for the
stock for sixty days. The conversion price of the
balance of the put notes shall be 86% of the average
of the three lowest closing bid prices for ten days.
9. The debentures have penalty clauses if the common
stock is not issued when required by the debenture
holder.
10. The debentures are unsecured.
11. The Company's right to exercise the put commences
on the actual effective date of the SEC Registration
Statement and expires three years after the effective
date.
12. Right of first refusal - The debenture holders have
the right to purchase a proportionate amount of
new issued shares in order to maintain their
ownership interest percentage.
During January 2001, portions of these debentures
were renegotiated with Enterprise Capital AG. The
remaining balances are currently being converted
to common stock and paid in full.
F-18
Laurus Master Fund, Ltd. 307,701
In April and July 2001, the Company issued $500,000
and $150,000 of 8% convertible debentures under the
following terms and conditions:
1. Due date - October 31, 2003.
2. Interest on September 30, 2001 and quarterly
thereafter.
3. Default interest rate - 20%.
4. On the first financing, the Company issued warrants
to purchase 150,000 shares of common stock at the
lesser of $1.23 per share or an amount equal to the
average of the three lowest closing prices for a
ten day trading period. The Company may redeem
the warrants for $6.67 per share. On the second
financing, the Company issued warrants to purchase
150,000 shares of common stock at the lesser of
$0.48 or an amount equal to 105% of the average
of the three lowest closing bid prices for the
common stock for the ten trading days prior to,
but not including, the date the warrants are
exercised.
5. Conversion terms - The debenture holder shall
have the right to convert all or a portion of
the outstanding principal amount of this
debenture plus any accrued interest into such
number of shares of common stock as shall equal
the quotient obtained by dividing the principal
amount of this debenture by the applicable
conversion price.
6. Conversion price - Lower of eighty percent of
the average of the three lowest closing bid
prices for a specified three day or twenty-two
day period.
7. Prepayment - The debenture may not be paid
prior to the maturity date without the consent
of the holder.
During January 2004, portions of these debentures
were renegotiated with Enterprise Capital AG. The
remaining balances are currently being converted
to common stock and paid in full.
F-19
Alpha Capital 155,000
In January and April 2002, the Company issued an 8%
convertible debenture as follows:
1. Due dates- January 30, 2004 and April 25, 2004.
2. Interest payable quarterly from March 31, 2002.
3. Default interest rate - 20%.
4. Warrants to purchase 800,000 shares of common
stock at $.60 per share.
5. Fees and costs - 7% - 10% of cash received for
debentures and warrants plus legal fees.
6. Conversion price - (i) 80% of the average of the
three lowest closing bid prices for the stock for
twenty two days or (ii) 80% of the average of the
three lowest closing bid prices for the stock for
sixty days.
7. The debentures are unsecured.
In February 2004, an additional $65,000 of the
debenture was converted into common stock with
a conversion for the balance of $90,000 requested
in March 2004.
Total unsecured convertible debenture 2,306,147
----------
Secured Convertible Debentures
AJW Entities 313,150
----------
In August and October 2002, the Company issued 12%
secured convertible debentures as follows:
1. Due dates - August 15, 2003 and October 9, 2003.
2. Interest payable quarterly.
3. Default interest rate - 15%.
4. Warrants to purchase 180,000 shares of common
stock at $0.05 per share.
5. Conversion Price - (i) 50% of the average of
the three lowest closing bid prices for the
stock for twenty days or (ii) Fixed conversion
price of $0.05.
6. The convertible debentures are secured by all
the assets of the Company.
F-20
During January 2004, the agreement was
renegotiated and subsequently converted into
common stock and paid-in-full through internal
conversions that are expected to be completed
March 31, 2004.
Total Secured Convertible Debentures 313,150
----------
Total Debentures $2,619,297
==========
Maturities of convertible debentures are as follows:
2004 $2,152,297
2005 467,000
----------
Total $2,619,297
==========
See Note 18 for conversion of debentures subsequent to January 31,
2004.
12. CANCELLATION OF INTEREST BY DEBENTURE HOLDERS
During January 2004, the Company renegotiated their debenture balances
with the AJW entities and the AJW entities cancelled $62,728 of
interest the Company had previously accrued on the debenture balances.
13. STOCK OPTIONS ISSUED FOR CONSULTING SERVICES
During the three months ending January 31, 2004, the Company granted
stock options to individuals in exchange for consulting services. The
stock options call for the following exercise prices: The average
closing price for three days prior to exercise less a 40% discount,
market value at the date of exercise less a 15% discount, or market
value at the date of exercise less a 50% discount.
The Company has valued the options granted using the Black-Sholes stock
option pricing model, based on the following weighted average
assumptions: dividend yield - -0-, expected volatility - 44%, risk-free
interest rate - 2.25%, expected life - 75 days to 10 years. The total
fair value of the options granted during the three months ending
January 31, 2004 was $4,770,000 (see Note 15).
F-21
14. COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company leases its office and warehouse facilities in Phoenix,
Arizona from a third party under the following terms and conditions:
1. Term - Three years from February 1, 2002 to January 31, 2005
2. Size of facility - 4,343 square feet
3. Base rent - Monthly rentals plus taxes and common area operating
expenses
4. Base rental schedule -
Months Rent
------ ----
1 - 12 $2,172
13 - 24 $3,692
25 - 36 $4,343
Future minimum lease payments excluding taxes and expenses, are as
follows:
October 31, 2004 $50,163
October 31, 2005 13,029
-------
$63,192
=======
Rent expense for the three months ended January 31, 2004 and 2003 was
$11,075 and $10,442, respectively.
Payroll Taxes
The Company is negotiating a settlement regarding delinquent payroll
taxes of approximately $68,000. Interest is being accrued on the
outstanding balance. No amounts have been accrued for any penalties.
Workers' Compensation Insurance
Through January 2004, the Company did not carry general liability or
workers' compensation coverage, nor was it self-insured. The Company
accrues liabilities when it is probable that future costs will be
incurred and such costs can be reasonably estimated. As of
F-21
January 31, 2004, there were no known liability claims. No amounts have
been accrued for any penalties which may be assessed by the State of
Arizona for non-compliance with the laws and regulations applicable to
workers' compensation insurance.
Legal
The Company is the defendant in one lawsuit for unpaid wages.
Management has recorded a liability in the amount of $20,000.
The Company is named as a counter defendant in a lawsuit with a former
associate. Although there is a possibility that the Company may be held
liable, an estimated range of potential loss cannot be determined at
this time, but it is not believed to have a material impact on the
financial condition of the Company.
The Company is the defendant in a lawsuit by a former vendor of
connectivity services for breach of contract and failure to pay as
required. The Company sold the connectivity portion of its business in
October 2002 and feels this vendor is billing the contract incorrectly.
The Company plans to vigorously fight this lawsuit and does not
anticipate any material losses.
Officers' Compensation - iBIZ Technology Corp.
As of January 31, 2004, the Company has employment agreements with two
of its corporate officers. The contracts are for three years beginning
July 2001 and provide for the following:
1. Salaries from $150,000 to $250,000 for each officer.
2. Bonuses of 1% of total sales for each officer.
3. Options for 120,000 shares of common stock at $0.20 per share
which will vest and be exercisable
for a period of ten years. None granted.
4. Termination - Termination by the Company without cause - the
employee shall receive six months salary. Change of control -
in the event of change of control, the Company shall pay the
employee a lump sum payment of three years annual salary.
Officers' Compensation - Synosphere, LLC
The Company entered into employment agreements with two of the current
directors/officers of Synosphere. The term of these employee agreements
shall be two years following the closing and transferable in the event
of a sale of Synosphere to another entity or if Synosphere is spun-off.
The employees shall receive annual base salaries of $112,000 and
$102,000 per year with healthcare benefits. Furthermore, the employees
shall receive an Earn Out bonus of common stock in eight payments, each
made quarterly, in the amount of $62,500. A "golden parachute" clause
shall be put in place, such that if either of the employee agreements
are terminated by the Company or any successor, they are payable in
full at the date of their termination. Finally, one of the employees
shall be appointed to the Company's Board of Directors.
F-22
15 COMMON STOCK
Stock Purchase Warrants
As of January 31, 2004, the Company has issued the following common
stock purchase warrants:
December 28, 1999 20,000 5 years $ 9.40
January 10, 2000 28,125 5 years $ 9.90
March 27, 2000 61,500 5 years $ 14.50 - 20.50
August 30, 2000 3,413 5 years $ 9.37
October 31, 2000 50,000 5 years $ 4.76
December 20, 2000 40,000 5 years $ 2.28
December 20, 2000 15,000 5 years $ 2.28
April 26, 2001 150,000 5 years $ 1.23
June 22, 2001 150,000 5 years $ 0.42
July 27, 2001 150,000 5 years $ 0.21
August 21, 2001 52,500 5 years $ 0.39
October 9, 2001 35,000 5 years $ 0.26
January 15, 2002 16,667 5 years 105% of Closing
January 15, 2002 50,000 5 years 105% of Closing
January 30, 2002 500,000 5 years $ 0.06
April 23, 2002 300,000 5 years $ 0.06
August 15, 2002 105,000 5 years $ 0.05
October 9, 2002 75,000 5 years $ 0.05
November 5, 2002 30,000 5 years $ 0.05
January 31, 2003 1500,000 5 years $ 0.01
March 20, 2003 500,000 7 years $ 0.01
May 9, 2003 500,000 7 years $ 0.01
June 12, 2003 750,000 7 years $ 0.01
---------
5,082,204
=========
All warrants are exercisable at January 31, 2004.
F-23
Options
On November 1, 2003, the Company granted an individual the option to
purchase 200,000,000 shares of common stock at the exercise price of
the average closing price for the three days prior to exercise less a
40% discount. The option is exercisable commencing November 1, 2003 and
expires after January 15, 2004. The optionholder exercised 60,000,000
shares of common stock on December 10, 2003 and the Company received
$93,600 cash.
On December 15, 2003, the Company granted an individual the option to
purchase 50,000,000 shares of common stock at the exercise price of
market value at the date of exercise less a 15% discount. The options
expire five years from date of grant. The optionholder exercised
26,956,000 shares of common stock during December 2003 and January 2004
and the Company received $640,823 cash.
On January 28, 2004, the Company granted Pangea Investments GmbH the
option to purchase 100,000,000 shares of common stock at the exercise
price of market value at the date of exercise less a 50% discount. The
option is exercisable commencing January 28, 2004 and expires after
January 29, 2014. No options have been exercised under this agreement.
Total options issued 350,000,000
Less options exercised (86,950,000)
Less options expired (140,000,000)
------------
Options exercisable at January 31, 2004 123,050,000
============
16. PREFERRED STOCK
On December 20, 2001, the Board of Directors authorized the issuance of
3,500,000 shares of preferred stock to three officers and one director
in lieu of their annual bonus and retention incentives. The preferred
stock will have a 10:1 conversion rate from common stock to preferred
stock and will have a "super" voting right of 100:1. As of the date of
this report the preferred stock had not been issued. The Company has
not designated any other rights or dividend policy in regard to the
Preferred Stock.
17. CHANGE IN AUTHORIZED SHARES
On February 24, 2003, the Articles of Incorporation were amended to
increase the number of authorized shares of common stock from
450,000,000 shares to 5,000,000,000 shares.
F-24
18. SUBSEQUENT EVENTS (UNAUDITED)
Spin-Off
On July 20, 2003, the Board of Directors approved the spin-off of iBIZ,
Inc., a wholly owned subsidiary of the Company, into a separate
company. Management estimates that the transaction should be completed
in the second quarter of fiscal, 2004.
The Company proposes to issue without consideration non-restricted
shares of common stock in iBIZ, Inc. pro rata to all shareholders of
the Company as of September 25, 2003 at the ratio of one share of iBIZ,
Inc. for each 500 shares of the Company common stock.
The purpose of the spin-off of iBIZ, Inc. is that it will allow
management of each business to focus solely on that business. In
addition, it should enhance access to financing by allowing the
financial community to focus separately on each business.
iBIZ Technology Corp. will continue to distribute its product line in
North and South America providing sub-licenses for all products to
iBIZ, Inc. for worldwide distribution, excluding North and South
America. iBIZ, Inc. will support iBIZ Technology Corp. in engineering,
production, and business development, through synergetic agreements
using Enterprises Capital AG and its affiliates infrastructure in
Europe and Israel.
Convertible Debentures
During the period from February 1, 2004 through March 9, 2004, the
convertible debenture holders converted $904,893 of principal and
$197,635 of accrued interest for 243,682,486 shares.
Stock Issuances
On February 18 and 20, 2004, the Company issued 2,335,188 shares of
common stock, under the S8 Registration Amendment filed December 5,
2003 to individuals for services rendered.
On March 5, 2004, the Company issued 12,500,000 shares of common stock
under the S8 Registration Amendment filed December 5, 2003 to
individuals for services rendered.
On February 3 and March 3, 2004, the Company issued 12,000,000 shares
of common stock to an individual under the option dated December 15,
2003 and received $448,090 cash.
F-25
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. In consultation with our Board of Directors, we have identified eight
accounting principles that we believe are key to an understanding of our
financial statements. These important accounting policies require management's
most difficult, subjective judgments.
(1) ACCOUNTS RECEIVABLE
Accounts receivable are reported at the customer's outstanding balances
less any allowance for doubtful accounts and provision for returned
merchandise. Our terms for repayment range from 30 days to 60 days. We
do not normally require collateral to support receivables and interest
is not accrued thereon.
(2) ALLOWANCE FOR DOUBTFUL ACCOUNTS AND PROVISION FOR RETURNED MERCHANDISE
The allowance for doubtful accounts on accounts receivables and
provision for returned merchandise is charged to income in amounts
sufficient to maintain the allowance for uncollectible accounts at a
level management believes is adequate to cover any probable losses. We
determine the adequacy of the allowance based on historical write-off
percentages and information collected from individual customers.
Accounts receivable are charged off against the allowance when
collectibility is determined to be permanently impaired (bankruptcy,
lack of contact, age of account balance , etc.). We also provide a
provision for returned merchandise based on our history of returns as a
percentage of sales.
(3) INVENTORIES
Inventories are stated at the lower of cost (determined principally by
average cost) or market.
1
(4) TECHNOLOGY AND PATENTS
We have capitalized the fair market value of stock issued in connection
with the acquisition of Synosphere, LLC. We will amortize the assets
over the estimated useful life once the patents are approved and the
products are developed and ready for market.
(5) ACCOUNTING FOR CONVERTIBLE DEBT SECURITIES
We have issued convertible debt securities with non-detachable
conversion features. We have recorded the fair value of the beneficial
conversion features as interest expense and an increase to Additional
Paid in Capital.
(6) ACCOUNTING FOR CONSULTING FEES PAID BY STOCK OPTIONS
We have issued stock options which entitle the grantee to exercise the
options at fair market value less an agreed upon discount. We have
recorded the fair market value as "consulting fees paid by stock
options" and an increase to additional paid-in capital.
(7) REVENUE RECOGNITION
We recognize revenue when persuasive evidence of an arrangement exists,
title transfer has occurred, the price is fixed or readily
determinable, and collectibility is probable. Sales are recorded net of
sales discounts. We recognize revenue in accordance with Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," (SAB 101). Our revenues are recorded under two categories:
Product Sales - Product Sales represent primarily sales of PDA
accessories to retailers. Revenue is recorded when the goods are
shipped and title passes to the customer. We provide a reserve for
sales returns based on our history of returns as a percentage to sales.
We will periodically provide rebates on selected products for a limited
sale period, normally 7 days. We contract with a company to process and
track the rebates. We provide a reserve for outstanding rebates based
on our history of rebates submitted as a percentage of applicable
sales.
2
Maintenance Agreements - We continue to sell service agreements to
maintain and service computers and printers that were a part of our
product line several years ago. We no longer sell such products but
continue to offer renewals of maintenance agreements. Income from
maintenance agreements is being recognized on a straight-line basis
over the life of the service contracts, which range from 3 months to 1
year. The unearned portion is recorded as deferred income.
(8) CONSULTING AGREEMENTS
We issued common stock for payment of consulting services. The cost of
the consulting services was determined by multiplying the common shares
issued by the market price, for the shares at the inception date of the
agreement.
SELECT FINANCIAL INFORMATION
For the Three Months Ended
01/31/04 01/31/03
(Unaudited) (Unaudited)
----------- -----------
Statement of Operations Data:
Total revenue $ 161,949 $ 75,310
Operating loss $(5,109,702) $ (457,654)
Net loss after tax $(5,122,615) $ 1,378,004
Net loss per share $ (0.00) $ (0.02)
Balance Sheet Data:
Total assets $ 1,830,827 $ 640,942
Total liabilities $ 4,697,910 $ 5,978,411
Stockholders' deficit $(2,867,083) $(5,337,469)
RESULTS OF OPERATIONS
The three months ended January 31, 2004 compared to the three months ended
January 31, 2003.
Revenues - Revenues increased by approximately 115% to $161,949 in the three
months ended January 31, 2004 from $75,310 in the three months ended January 31,
2003. The increase was in product sales resulting from the addition of new
customers, the increase in volume sales to an existing national retailer and
introduction and sales of our new products.
3
$96,345 of revenues for the three months ended January 31, 2004 were to Comp
USA. Our maintenance revenues remained relatively comparable at $9,700 in 2004
and $9,400 in 2003. We are not actively pursuing this area of business and do
not expect this to be significant in subsequent periods.
Cost of Revenues - The cost of revenues of $121,745 (75% of sales) in the three
months ended January 31, 2004 increased from $91,735 (122% of revenues) for the
three months ended January 31, 2003. Cost of revenues in 2004 consists of
$108,117 (67% of revenues) of direct material, packaging and freight, a
reduction in our provision for obsolete inventories totaling $23,100 (14% of
revenues) and $36,728 (23% of revenues) of salaries and employee related costs.
Cost of sales in 2003 consists of $47,059 (62% of revenues) of direct material,
packaging and freight and $44,677 (59% of sales) of salaries and employee
related costs.
Our products experience a high degree of technological obsolescence based on the
rapidly changing market for PDA-related products and the introduction of new
PDAs. We evaluate our inventories based on sales over a rolling six-month period
and industry publications of PDA-related product changes in order to determine
the write-off of slow-moving and obsolete inventories. During the first quarter
of 2004, we made a bulk sale of items which were fully reserved for in our
reserve and, accordingly, the reserve was adjusted.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses decreased approximately 14% to $379,906 in the three
months ended January 31, 2004 from $441,229 in the three months ended January
31, 2003. The main components in these expenses are salaries and wages for its
key employees and officers (2004 - $72,531; 2003 - $145,300), professional fees
(2004 - $128,713; 2003 - $74,155) and travel (2004 - $33,585; 2003 - $1,100).
Consulting Fees - We granted options for services to consultants during the
quarter ended January 31, 2004. We valued the options using the Black-Scholles
formula.
Interest Expense - Interest expense increased 24% to $102,280 in the three
months ended January 31, 2004 from $82,352 in the three months ended January 31,
2003. The increase is a result of additional convertible debentures issued in
the second and third quarters of 2003.
4
Beneficial Interest Expense - We record the excess of the fair value of the
stock price at the date of issuance of convertible debentures over the
conversion price on the same date as interest expense-beneficial conversion
feature. The amount decreased to $0 in 2004 from $837,998 in 2003 due to no
debentures being issued in the three months ending January 31, 2004.
Liquidity and Capital Resources - As of January 31, 2004, we had a working
capital deficit of $3,717,889 as compared to a working capital deficit of
$4,792,658 at January 31, 2004. The decrease in the deficit is primarily due to
approximately $1.4 million in convertible debentures converted into common stock
in 2003. We have $2,152,297 and $467,000 of debt payments related to convertible
debentures due within the next year and next two to five years, respectively.
Subsequent to January 31, 2004, $904,893 of these debt payments were converted
in full to common stock. We are presently in the process of renegotiating the
remaining balance of $1,714,404 to more favorable terms.
Cash Flows from Operations - Our cash flow from operations used $478,963 in 2004
compared to $225,339 in 2003. The increase in cash used is primarily due to
decreased receivables in 2004 versus 2003, partially offset by the decrease in
accounts payable and accrued liabilities and taxes resulting from the ability to
pay these amounts with cash received from the exercise of options. Based on the
initial reception of our new product, the "Virtual Keyboard" (set to be
delivered to retailers in April 2004) and the continued success of our Pocket
Radio product, we are confident that our cash flows will be positive in 2004. We
currently have a backlog of orders totaling $650,000. As with other
technology-related products, our success depends on acceptance of our products
in the market and introduction of new products. If our products do not continue
to receive acceptance in the market, our cash flows can quickly turn negative.
Cash Flows from Investing Activities - Cash used for investing activities was
$-0- in both 2004 and 2003.
Cash Flows from Financing Activities - Cash provided by financing activities
consisted of a $9,990 loan from a foreign company (Enterprise Capital AG) and
the issuance of common stock by stock options. We may need to raise additional
capital through the issuance of common stock options and/or debt, which will be
used to expand our infrastructure and acquire additional product lines and
complimentary businesses.
5
In January 2004 we entered into an agreement to purchase the assets of
Synosphere LLC for 30 million shares of common stock valued at $1.2 million. We
currently have no other material commitments for capital expenditures.
Spin-off - On October 20, 3003, the Board of Directors approved the spin-off of
iBIZ, Inc., a wholly owned subsidiary of the Company, into a separate public
company.
The Company proposes to issue without consideration non-restricted shares of
common stock in iBIZ, Inc. pro rata to all shareholders of the Company as of
September 25, 2003 at the ratio of one share of iBIZ, Inc. for each 500 shares
of the Company common stock.
The purpose of the spin-off of iBIZ, Inc. is that it will allow management of
each business to focus solely on that business. In addition, it should enhance
access to financing by allowing the financial community to focus separately on
each business.
iBIZ Technology Corp. will continue to distribute its product line in North and
South America providing sub-licenses for all products to iBIZ, Inc. for
worldwide distribution with the exception of North and South America. iBIZ, Inc.
and iBIZ Technology Corp. are in the process of negotiating the terms of the
license agreements. It is currently planned that iBIZ, Inc. will support iBIZ
Technology Corp. in engineering, production, and business development, through
synergetic agreements (to be negotiated) using Enterprise Capital and its
affiliates infrastructure in Europe and Israel.
Current funds available to iBIZ will not be adequate for it to be competitive in
the areas in which it intends to operate. iBIZ's continued operations, as well
as the implementation of its business plan, therefore will depend upon its
ability to raise additional funds through bank borrowings, equity or debt
financing. iBIZ estimates that it will need to raise up to approximately
$1,000,000 over the next 12 months for these purposes.
There is no guarantee that these funding sources, or any others, will be
available in the future, or that they will be available on favorable terms. In
addition, this funding amount may not be adequate for iBIZ to fully implement
its business plan. Thus, the ability of iBIZ to continue as a going concern is
dependent on additional sources of capital and the success of iBIZ's business
plan. Regardless of whether iBIZ's cash assets prove to be inadequate to meet
iBIZ's operational needs, iBIZ might seek to compensate providers of services by
issuance of stock in lieu of cash.
6
If funding is insufficient at any time in the future, iBIZ may not be able to
take advantage of business opportunities or respond to competitive pressures,
any of which could have a negative impact on the business, operating results and
financial condition. In addition, if additional shares were issued to obtain
financing, current shareholders may suffer a dilutive effect on their percentage
of stock ownership in iBIZ.
Increase in Cash Subsequent to January 31, 2004 - On February 3 and March 3,
2004, the Company received approximately $448,090 cash as a result of the
Company's Option holders exercising their options to purchase shares of common
stock.
7
ITEM 3. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of our management, including the chief executive officer, or CEO,
and chief financial officer, or CFO, of the effectiveness of the design and
operation of our disclosure procedures. Based on that evaluation, our
management, including the CEO and CFO, concluded that our disclosure controls
and procedures were effective as of January 31, 2004. There have been no
significant changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None for the period ending January 31, 2004.
ITEM 2. CHANGES IN SECURITIES
(c) Recent Sales of Unregistered Securities
The securities described below represent securities of iBIZ sold by
iBIZ during the three month period ended January 31, 2004, that were not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
all of which were issued by the Company pursuant to exemptions under the
Securities Act. Underwriters were not involved in these transactions.
Private Placements of Common Stock and Warrants for Cash
None.
Sales of Debt and Warrants for Cash
None
Option Grants
On November 1, 2003, the Company granted an individual the option to
purchase 200,000,000 shares of common stock at the exercise price of the average
closing price for the three days prior to exercise less a 40% discount. The
option is exercisable commencing November 1, 2003 and expires after January 15,
2004. The option holder exercised 60,000,000 shares of common stock on December
10, 2003 and the Company received $93,600 cash.
On December 15, 2003, the Company granted an individual the option to
purchase 50,000,000 shares of common stock at the exercise price of market value
at the date of exercise less a 15% discount. The options expire five years from
date of grant. The option holder exercised 26,956,000 shares of common stock
during December 2003 and January 2004 and the Company received $640,823 cash.
On January 28, 2004, the Company granted Pangea Investments GmbH the
option to purchase 100,000,000 shares of common stock at the exercise price of
market value at the date of exercise less a 50% discount. The option is
exercisable commencing January 28, 2004 and expires after January 29, 2014. No
options have been exercised under this agreement.
Issuances of Stock for Services or in Satisfaction of Obligations
None
8
The above offerings and sales were deemed to be exempt under Regulation
D and Section 4(2) of the Securities Act. No advertising or general solicitation
was employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were business associates of iBiz or
executive officers and/or directors of iBiz, and transfer was restricted by iBiz
in accordance with the requirements of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification by Chief Executive Officer and Chief Financial
Officer pursuant to Sarbanes-Oxley Section 302, provided herewith.
32.1 Certification by Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S. C. Section 1350, provided herewith.
(b) Reports on Form 8-K.
None.
9
Pursuant to the requirements of Section 12 of the Securities Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated this 15th day of March 2004
iBIZ TECHNOLOGY CORP.
By: /s/ KENNETH W. SCHILLING
---------------------------------------
Kenneth W. Schilling, President,
and acting principal accounting officer