UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A1
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)
BALANCE SHEETS ................................................. F-1
STATEMENTS OF OPERATIONS........................................ F-2
STATEMENTS OF EQUITY............................................ F-3-4
STATEMENT OF CASH FLOWS......................................... F-5
NOTES TO FINANCIAL STATEMENTS................................... F-6-19
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- 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:
Product sales 113,038 86,174
Maintenance Agreements 8,707 5,561
------------ -----------
Total 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 inventories (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 exercise of 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 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 stock for accrued employee bonuses $ 578,000 $ 0
Interest expense 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.
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 During the quarter ended January 31, 2004, the Company issued 81
million shares of common stock valued at $126,360 for consulting services to be
performed in 2004. The agreements consist of retail-channel marketing services
and corporate finance services designed to assist the Company in analyzing
potential acquisition targets and the related financing of such acquisitions.
The agreements are being amortized straight-line over their respective one-year
terms.
F-6
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.
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 (see Note 6). The Company
will amortize the assets over their estimated useful life as follows: Patents,
20 year amortization using the straight-line method; Blue Dock Technology and
other technologies , 3 years amortization using the straight-line method.
Estimated amortization is as follows:
Fiscal Year
2004 $ 289,375
2005 385,833
2006 385,833
2007 98,333
2008 2,500
Thereafter 38,125
------
Total $1,200,000
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.
F-7
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.
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. We did not incur such expenses in 2004 or 2003.
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.
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(
Poto Technology, Prolink and Catronics). 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-8
RECENT ACCOUNTING PRONOUNCEMENTS-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.
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-9
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.
Total amount of note $ 373,159
Less allowance for doubtful collection (373,159)
---------
Note receivable, net $ 0
=========
F-10
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 the following
products:
BLUE DOCK(TM)
The Blue Dock is a PDA Docking Station that enables PDA users to work
productively in a desktop environment with their PDAs without the need for an
additional laptop or desktop computer. The Blue Dock provides a keyboard, mouse,
full-size monitor (optimizing the PDA video at an 800 x 600 resolution), and
dedicated network connection. Synchronization is not required. We expect to
release Blue Dock in the 4th quarter this year.
PDA TRAVEL KEYBOARD
The PDA Travel Keyboard is a unique travel keyboard. The PDA travel keyboard
enables PDA users to dock their PDA in a travel keyboard on the go and use a PC
mouse. In addition, a mouse cursor is placed on the PDA screen (when docked),
such that the user can control their PDA without touching the screen. Also, when
docked in the travel keyboard, the user may charge their PDA.
VISUAL NOTIFICATION DEVICE
The Visual Notification Device represents a system which has lights embedded in
the SD card, such that when a phone call is received or an appointment reminder
occurs, the lights embedded within the card flash. Currently, only tactile
(vibration) and audible (sound) systems exist.
KEYBOARD/MOUSE CRADLE
The Keyboard/Mouse Cradle is a unique PDA cradle that allows a PDA user to use
their PDA with a full size standard PC keyboard and PC mouse. In addition, a
mouse cursor is placed on the screen of the PDA screen (when docked), such that
the user can control their PDA without touching the screen. Also, when docked
the user may use the cradle for synchronization and to charge their PDA.
All of the devices above, with the exception of the PDA Travel Keyboard are
currently Patent-pending. The patent for this device is to be filed by Friday
March 25, 2004.
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 based on
costs to dvelop patents to date (approximately $50,000) and the projected cash
flows from future product sales of the related technologies under development.
The following values have been assigned:
Patents Pending- $50,000
Blue Dock Technology- $806,600
Other Technologies-$343,400
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-11
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-12
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.
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-13
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.
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. 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.
F-14
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 the following consulting services:
November 2003- Options valued at $260,000 to purchase 200 million shares of
common stock (at a 40% discount from market, as defined) were issued to D. Scott
Elliott for general business and financial consulting services to assist the
Company with its expansion plans and entry into other markets.
December 2003- Options valued at $60,000 to purchase 50 million shares of common
stock (at a 15% discount from market, as defined) were issued to Jeffrey
Firestone for providing legal counsel on international issues in mergers and
acquisitions.
January 2004- Options valued at $4,450,000 to purchase 100 million shares of
common stock (at a 50% discount from market, as defined) were issued to Pangea
Investments GmbH for consulting and acquisition services in Europe and Israel.
Sam Elimalech, an officer of Enterprise Capital AG (see Note 8), is also a
member of Pangea Investments Gmbh.
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).
Based on the uncertainty of any future value of these agreements, the Company
expensed the value of the options in the quarter ended January 31, 2004.
F-15
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
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.
F-16
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.
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-17
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
============
COMMON STOCK
During November 2003, the Company issued the following shares of common stock:
(1) 10 million shares valued at $37,000(fair market value on date of grant) for
legal services provided by Greg Sichenzia during the quarter ended January 31,
2004.
(2) 9.6 million shares valued at $35,425 (fair market value on date of grant was
used to determine number of shares to be issued) to various creditors in
satisfaction of their outstanding amounts due.
(3) 0.5 million shares valued at $1,975 (fair market value on date of grant was
used to determine number of shares to be issued) to a company that provided
edgarizing and related services during the quarter ended January 31, 2004.
(4) 1.0 million shares valued at $3,700 (fair market value on date of grant was
used to determine number of shares to be issued) to a company for marketing
services.during the quarter ended January 31, 2004.
During December 2003, the Company issued the following shares of common stock:
(1) 81 million shares valued at $126,360 (fair market value on date of grant) in
accordance with a one year consulting contract. See Note 1, Prepaid Expenses.
(2) 60 million shares issued in connection with the exercise of options at
$0.00156 per share.
During January 2004, the Company issued the following shares of common stock:
(1) 10 million shares issued in connection with the exercise of options at
$0.017 per share.
(2) 11.65 million shares issued in connection with the exercise of options at
$0.026 per share.
(3) 5.3 million shares issued in connection with the exercise of options at
$0.032 per share.
(4) 398 million shares valued at $578,000 (fair market value on date of grant)
for accrued employee bonuses at October 31, 2003 (see 10ksb for the year ended
October 31, 2003).
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-18
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-19
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.
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.
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.
INVENTORIES
Inventories are stated at the lower of cost (determined principally by average
cost) or market.
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.
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.
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.
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.
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.
CONSULTING AGREEMENTS
We issued common stock and options for payment of consulting services. The cost
of the consulting services paid with common stock was determined by multiplying
the common shares issued by the market price, for the shares at the inception
date of the agreement. The cost of the consulting services paid with options was
valued 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. Based on the uncertainty of any future value of these
agreements, the Company expensed the value of the options in the quarter ended
January 31, 2004. A summary of the common stock and options issued is as
follows:
COMMON STOCK
During November 2003, the Company issued the following shares of common stock:
(1) 10 million shares valued at $37,000(fair market value on date of grant) for
legal services provided by Greg Sichenzia during the quarter ended January 31,
2004.
(2) 9.6 million shares valued at $35,425 (fair market value on date of grant was
used to determine number of shares to be issued) to various creditors in
satisfaction of their outstanding amounts due.
(3) 0.5 million shares valued at $1,975 (fair market value on date of grant was
used to determine number of shares to be issued) to a company that provided
edgarizing and related services during the quarter ended January 31, 2004.
(4) 1.0 million shares valued at $3,700 (fair market value on date of grant was
used to determine number of shares to be issued) to a company for marketing
services.during the quarter ended January 31, 2004.
During December 2003, the Company issued the following shares of common stock:
(1) 81 million shares valued at $126,360 (fair market value on date of grant) in
accordance with a one year consulting contracts. The agreements consist of
retail-channel marketing services and corporate finance services designed to
assist the Company in analyzing potential acquisition targets and the related
financing of such acquisitions. The agreements are being amortized straight-line
over their respective one-year terms.
(2) 60 million shares issued in connection with the exercise of options at
$0.00156 per share.
During January 2004, the Company issued the following shares of common stock:
(1) 10 million shares issued in connection with the exercise of options at
$0.017 per share.
(2) 11.65 million shares issued in connection with the exercise of options at
$0.026 per share.
(3) 5.3 million shares issued in connection with the exercise of options at
$0.032 per share.
(4) 398 million shares valued at $578,000 (fair market value on date of grant)
for accrued employee bonuses at October 31, 2003 (see 10ksb for the year ended
October 31, 2003).
STOCK OPTIONS
The Company issued options to purchase350 million shares of common stock as
follows:
November 2003- Options valued at $260,000 to purchase 200 million shares of
common stock (at a 40% discount from market, as defined) were issued to D. Scott
Elliott for general business and financial consulting services to assist the
Company with its expansion plans and entry into other markets.
December 2003- Options valued at $60,000 to purchase 50 million shares of common
stock (at a 15% discount from market, as defined) were issued to Jeffrey
Firestone for providing legal counsel on international issues in mergers and
acquisitions.
January 2004- Options valued at $4,450,000 to purchase 100 million shares of
common stock (at a 50% discount from market, as defined) were issued to Pangea
Investments GmbH for consulting and acquisition services in Europe and Israel.
Sam Elimalech, an officer of Enterprise Capital AG (see Note 8), is also a
member of Pangea Investments Gmbh.
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).
Based on the uncertainty of any future value of these agreements, the Company
expensed the value of the options in the quarter ended January 31, 2004.
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. The majority of our increased sales
came from our FM Radio accessory which increased from approximately $33,000 in
2003 to over $100,000 in 2004
$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- Product Sales in 2004 consists of $104,182 (68% of sales) of
direct material, packaging and freight, a reduction in our provision for
obsolete inventories totaling $23,100 (15% of sales) and $31,956 (21% of sales)
of salaries and employee related costs. Cost of Revenues- Product Sales in 2003
consists of $46,410 (70% of sales) of direct material, packaging and freight and
$39,764 (60% of sales) of salaries and employee related costs.
Cost of Revenues-Maintenance Agreements in 2004 consists of $3,935 of parts and
accessories (40% of revenues) and $4,772 of wages and benefits (49% of
revenues). Cost of Revenues-Maintenance Agreements in 2003 consists of $648 of
parts and accessories (7% of revenues) and $4,913 of wages and benefits (52% of
revenues). Based on the nature of the equipment being serviced and the
applicable age thereof, parts and accessories can fluctuate significantly each
period.
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.
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 An accumulated deficit of $29,920,947 and 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. Based on discussions with the holders of
the remaining balance of $1,714,404, such debentures are expected to be
converted into common stock in the third quarter. Based on the current stock
price, the conversion would result in the issuance of approximately 57 million
shares of common stock, or 2.5% of our outstanding shares at January 2004.
Cash Flows from Operations - Our cash flow from operations used $478,963 in 2004
compared to $225,339 in 2003. Our net loss after adjusting for non-cash items
decreased from $408,000 in 2003 to $337,000 in 2004. Our increased collections
of accounts receivable in 2004 is due to increased sales in the 4th quarter of
fiscal 2003 and the 1st quarter of 2004 which resulted in a positive impact to
cash amounting to $106,000 versus a cash outflow of $21,000 in 2003. Cash used
was primarily due to our ability to pay overdue accounts payable and accrued
wages and expenses based on our proceeds ($734,000) from exercise of stock
options in this quarter. This accounted for a use of cash amounting to $256,000
in 2004 versus an increase in cash in 2003 amounting to $262,000 due to our poor
cash position in 2003 and reduced sales. 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.
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 other than
the completion of the synophere products which is currently estimated at $2.4
million over the next 12 months.
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.
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.
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 9TH DAY OF MAY 2004
IBIZ TECHNOLOGY CORP.
By: /s/ KENNETH W. SCHILLING
---------------------------------------
Kenneth W. Schilling, President,
and acting principal accounting officer