UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL QUARTER ENDED JULY 31, 2004
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
--------------------
IBIZ TECHNOLOGY CORP.
(Exact name of small business registrant as specified in its charter)
COMMISSION FILE NUMBER 000-027619
FLORIDA 86-0933890
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2238 West Lone Cactus Drive, #200, Phoenix, Arizona 85021
(Address of principal executive offices)
(623) 492-9200
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 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
---- ---
As of October 18, 2004, the registrant had 2,997,753,709 shares of its $.001 par
value common stock outstanding.
Transitional Small Business Disclosure Format: YES NO X
--- ----
IBIZ TECHNOLOGY CORP.
INDEX TO
QUARTERLY REPORT ON FORM 10-QSB
FOR THE FISCAL QUARTER ENDED JULY 31, 2004
PART I. FINANCIAL INFORMATION
Page
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Condensed Consolidated Balance Sheets as of July 31, 2004 (Unaudited)
and October 31, 2003 (Audited).......................................................................1
Condensed Consolidated Statements of Loss for the Three and Nine Months Ended
July 31, 2004 and July 31, 2003 (Unaudited)..........................................................2
Condensed Consolidated Statement of Changes in Stockholders' Deficit for the
Nine Months Ended July 31, 2004 (Unaudited)..........................................................3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
July 31, 2004 and July 31, 2003 (Unaudited).........................................................4
Notes to Interim Condensed Consolidated Financial Statements (Unaudited).................................6
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS...........................................................14
ITEM 3. OUR CONTROLS AND PROCEDURES..........................................................................
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................................................
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................................
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................................
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................
ITEM 5. OTHER INFORMATION....................................................................................
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................................................
SIGNATURES....................................................................................................
i
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, OCTOBER 31, 2003
2004 (AUDITED)
(UNAUDITED)
------------------ ------------------
ASSETS
Current assets:
Cash................................................................ $ 5,811 $ 2,140
Restricted cash equivalent.......................................... 10,000 10,000
Accounts receivable, net............................................ 55,634 111,322
Inventories, net (Note 4)........................................... 252,886 43,842
Prepaid expenses.................................................... 269,373 24,057
------------------ ------------------
Total current assets................................................... 593,704 191,361
Property and equipment, net............................................ 44,979 63,329
Patents, net........................................................... 55,596 -
Intellectual property rights, net...................................... - 61,000
License agreement...................................................... 300,000 -
Deposits............................................................... 2,500 2,500
Note receivable from officer, net...................................... - -
------------------ ------------------
Total assets........................................................... $ 996,779 $ 318,190
================== ==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Bank overdraft...................................................... $ 19,922 $ -
Accounts payable.................................................... 570,811 581,637
Accrued liabilities (Note 7)........................................ 1,273,354 2,306,911
Deferred income..................................................... - 5,570
Notes payable....................................................... - 124,920
Advances from officers (Note 8)..................................... 113,000 -
Current maturities of debentures (Note 9)........................... 1,413,675 3,265,837
----------------- ------------------
Total current liabilities.............................................. 3,390,762 6,284,875
Convertible debentures................................................. - 750,000
----------------- ------------------
Total liabilities...................................................... 3,390,762 7,034,875
----------------- ------------------
Commitments and contingencies (Notes 14and 15)
Stockholders' deficit (Note 10):
Preferred stock, $.001 par value; 50,000,000 shares authorized; none
issued or outstanding............................................. - -
Common stock, $.001 par value; 5,000,000,000 shares authorized;
2,866,865,414 and 649,893,721 issued and outstanding, respectively 2,866,865 649,894
Common stock to be issued (Note 5)................................. 34,497 -
Additional paid-in capital.......................................... 32,019,822 17,431,753
Less: Notes receivable.............................................. (1,330,010 ) -
Accumulated deficit................................................. (35,985,157 ) (24,798,332 )
----------------- ------------------
Total stockholders' deficit............................................ (2,393,983 ) (6,716,685 )
----------------- ------------------
Total liabilities and stockholders' deficit............................ $ 996,779 $ 318,190
================= ==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- -------------------------------------
JULY 31, JULY 31, JULY 31, JULY 31,
2004 2003 2004 2003
----------------- ---------------- ----------------- ------------------
(RESTATED)
Revenues:
Net product sales................................ $ 77,116 $ 136,591 $ 301,765 $ 254,949
Maintenance services............................. 2,291 9,854 20,458 27,443
----------------- ---------------- ----------------- ------------------
Total revenues......................................... 79,407 146,445 322,223 282,392
----------------- ---------------- ----------------- ------------------
Cost of revenues:
Cost of product sales............................ 94,663 168,670 361,328 315,034
Cost of maintenance services..................... 25,020 1,306 36,996 3,559
----------------- ---------------- ----------------- ------------------
Total cost of revenues................................. 118,683 169,976 398,324 318,593
----------------- ---------------- ----------------- ------------------
Gross loss............................................. (39,276 ) (23,531 ) (76,101 ) (36,201 )
Operating expenses:
Selling, general and administrative.............. 964,135 448,339 2,283,799 1,205,682
Officer bonuses.................................. - 404,825 -
550,935
Research and development......................... 164,226 - 260,152 -
Acquired in-process research and development
(Notes 4 and 5)................................ - - 1,200,000 -
Consulting fees paid in stock options (Note 10).. 583,000 - 6,969,186 -
Write-off of deposit (Note 11)................... 400,000 - 400,000 -
Asset impairment (Note 11) 52,281 52,281
----------------- ---------------- ----------------- ------------------
Total operating expenses............................... 2,163,642 853,164 11,165,418 1,756,617
----------------- ---------------- ----------------- ------------------
Loss from operations................................... (2,202,918 ) (876,695 ) (11,241,519 ) (1,792,818 )
Non-operating income (expenses):
Interest and miscellaneous income (Note 12)...... 3,049 12,447 226,787 13,259
Interest and financing expenses (Note 13)........ (30,432 ) (489,847 ) (172,093 ) (1,640,499 )
----------------- ---------------- ----------------- ------------------
Total non-operating (expenses) income, net............. (27,383 ) (477,400 ) 54,694 (3,420,058 )
----------------- ---------------- ----------------- ------------------
----------------- ---------------- ----------------- ------------------
Net loss............................................... $ (2,230,301) $ (1,354,095) $ (11,186,825) $ (3,420,058 )
================= ================ ================= ==================
----------------- ---------------- ----------------- ------------------
Net loss per common share - Basic and diluted (Note 3). $ (0.00 ) $ (0.00) $ (0.00) $ (0.02 )
================= ================ ================= ==================
Weighted average number of common shares outstanding -
Basic and diluted (Note 3).......................... 2,823,315,679 361,484,542 2,215,996,929 203,712,366
================= ================ ================= ==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED JULY 31, 2004 (UNAUDITED)
Common Stock Additional
Common Stock To Be Issued Paid-In Accumulated Notes
--------------------------- -----------------
Shares Amount Shares Amount Capital Deficit Receivable Total
------ ------ ------ ------ ------- ------- ---------- -----
BALANCE,
October 31,
2003 649,893,721 $ 649,894 $17,431,753 $(24,798,332) $ (6,716,685)
Common stock
issued upon
exercise of
options 177,802,941 177,803 2,311,694 2,489,497
Common stock
issued for
services
received and
in settlement
of liabilities 211,838,083 211,838 1,975,190 $(1,330,010) 857,018
Common stock
issued to
officers and
other employees
as bonuses 419,133,295 419,133 688,754 1,107,887
Common stock
issued upon
conversion of
debentures and
accrued interest,
net of related
issuance costs 1,379,530,624 1,379,530 1,525,242 2,904,772
Acquisition of
Synosphere, LLC 28,666,750 28,667 1,333,250 $ 53,330 1,118,003 1,200,000
Cash payments to
Synosphere, LLC
members in lieu
of stock (470,833) (18,833) (18,833)
Value assigned to
services
received in
exchange for
options (6,969,186) (6,969,186)
Net loss (11,186,825) (11,134,544)
------------- ---------- --------- -------- ----------- ------------ ----------- ------------
BALANCE,
July 31, 2004 2,866,865,414 $2,866,865 862,417 $ 34,497 $32,019,822 $(35,985,157) $(1,330,010) $ (2,341,702)
============= ========== ========= ======== =========== ============ =========== ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
JULY 31, JULY 31,
2004 2003
---------------- ----------------
(RESTATED)
Cash flows from operating activities:
Net loss............................................................ $ (11,186,825 ) $ (3,420,058 )
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................... 27,069 42,406
Provisions for sales returns, rebates and doubtful accounts...... 17,903 22,696
Asset impairment 52,281
Provisions for inventory obsolescence............................ - 10,000
Acquired in-process research and development (Notes 4 and 5)..... 1,200,000 -
Services received in exchange for common stock (Note 10)......... 1,073,346 854,757
Services received in exchange for common stock options (Note 10). 6,969,186 -
Beneficial conversion feature of convertible debentures.......... - 1,379,077
Gains on settlements of debenture obligations (Note 12) ......... (197,017 ) -
Net changes in assets and liabilities:
Accounts receivable.............................................. 50,215 (36,089 )
Inventories...................................................... (209,044 ) (13,219 )
Prepaid expenses................................................. 18,960 (21,650 )
Accounts payable and accrued liabilities......................... (18,603 ) 507,687
------------------ -------------------
Net cash used in operating activities.................................. (2,202,529 ) (674,393 )
------------------ -------------------
Cash flows from investing activities:
Acquisition of Synosphere, Inc (Note 5)............................. (18,833 ) -
Licensing fees to Virtual Devices, Inc. (Note 6).................... (300,000 ) -
Patent costs........................................................ (2,466 ) -
------------------ -------------------
Net cash used in investing activities.................................. (321,299 ) -
------------------ -------------------
Cash flows from financing activities:
Bank overdraft........................................................ 19,922 298
Net proceeds from officer advances (Note 8)........................... 113,000 -
Net proceeds from issuances of convertible debentures................. - 686,813
Net proceeds from exercises of common stock options................... 2,489,497 -
Principal payments on notes payable................................. (94,920 ) (3,666 )
Restricted cash equivalent.......................................... - (10,000 )
------------------ -------------------
Net cash provided by financing activities.............................. 2,527,499 673,445
------------------ -------------------
Net increase (decrease) in cash and cash equivalents................... 3,671 (948 )
Cash at beginning of period............................................ 2,140 948
------------------ -------------------
Cash at end of period.................................................. $ 5,811 $ -
================== ===================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
NINE MONTHS ENDED
JULY 31, JULY 31,
2004 2003
------------------ ------------------
(RESTATED)
Supplemental schedule of cash activities:
Interest paid in cash................................................. $ 3,928 $ 6,759
Supplemental schedule of non-cash investing and financing activities:
Debenture principal and accrued interest thereon converted to common
stock $ 2,904,772 $ 162,840
..........................................................................
Issuance of common stock in settlement of:
Fees, services and $ 1,312,739 $ 854,759
expenses................................................................
Accounts payable and accrued expenses............................. $ 395,626 $ 70,932
Accrued employee bonuses.......................................... $ 578,000 $ -
Consulting fees paid with common stock options......................... $ 6,969,186 $ -
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS, ORGANIZATIONAL STRUCTURE AND PRINCIPLES OF CONSOLIDATION
iBIZ Technology Corp., together with its wholly-owned subsidiaries (hereinafter
"the Company"), a Florida corporation, headquartered in Phoenix, Arizona,
primarily is a marketer and distributor of various accessories primarily
intended for use with Personal Digital Assistants ("PDAs"). The Company conducts
substantially all of its operations through its wholly-owned subsidiary, iBIZ,
Inc. The Company's other wholly-owned subsidiaries, Invnsys Technology
Corporation and Qhost, Inc. have been inactive since their respective operations
were discontinued in prior fiscal years.
2. SUBSTANTIAL DOUBT REGARDING THE COMPANY'S ABILITY TO CONTINUE AS A GOING
CONCERN
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred substantial operating and net losses, as well as negative operating
cash flows, in recent fiscal years. As a result, the Company has significant
working capital and stockholders' deficits at July 31, 2004. Additionally, the
Company has realized limited sales to date of its PDA accessories which
management primarily attributes to its continued inability to fund the marketing
activities believed necessary to develop broad market awareness and acceptance
of the Company's products. These factors, among others, indicate that the
Company may be unable to continue as a going concern. These condensed
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis, to obtain additional debt or equity financing
as may be required to make up for any shortfalls in operating cash flows, and
ultimately to attain successful operations.
3. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Periods
The Company's fiscal year-end is October 31. References to a fiscal year refer
to the calendar year in which such fiscal year ends.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make certain estimates and assumptions that affect the
reported amounts and timing of revenue and expenses, the reported amounts and
classification of assets and liabilities, and the disclosure of contingent
assets and liabilities. These estimates and assumptions are based on the
Company's historical results as well as management's future expectations. The
Company's actual results could vary materially from management's estimates and
assumptions.
Reclassifications
Certain amounts in the condensed consolidated financial statements for the
comparative prior fiscal periods have been reclassified to be consistent with
the current fiscal period's presentation.
6
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Preparation of Interim Condensed Consolidated Financial Statements
These interim condensed consolidated financial statements for the periods ended
July 31, 2004 have been prepared by the Company's management, without audit, in
accordance with accounting principles generally accepted in the United States of
America and pursuant to the rules and regulations of the United States
Securities and Exchange Commission ("SEC"). In the opinion of management, these
interim condensed consolidated financial statements contain all adjustments
(consisting of only normal recurring adjustments, unless otherwise noted)
necessary to present fairly the Company's consolidated financial position,
results of operations and cash flows for the fiscal periods presented. Certain
information and note disclosures normally included in annual consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted in these
interim consolidated financial statements pursuant to the SEC's rules and
regulations, although the Company's management believes that the disclosures are
adequate to make the information presented not misleading. The consolidated
financial position, results of operations and cash flows for the interim periods
disclosed herein are not necessarily indicative of future financial results.
These interim condensed consolidated financial statements should be read in
conjunction with the annual consolidated financial statements and the notes
thereto included in the Company's most recent Annual Report on Form 10-KSB, as
amended, for the fiscal year ended October 31, 2003.
Net Loss Per Share
Basic and diluted net loss per share has been computed by dividing net loss by
the weighted average number of common shares outstanding during the applicable
fiscal period. At July 31, 2004 and 2003, the Company had outstanding
commitments to issue preferred shares (See Note 10), outstanding debentures for
which the holders have unilateral rights to convert the unpaid principal, and
any accrued interest thereon, into common shares, and outstanding stock purchase
warrants and options for which the holders have unilateral rights to exercise
into common shares. However, as the effect of their inclusion would be
anti-dilutive given the net losses reported herein, these potential additional
common shares have been excluded from the computation of net loss per common
share - diluted. Should the Company report net income in a future fiscal period,
net income per common share -diluted will be separately computed and disclosed
giving effect to the potential dilution that would result if the then committed
and outstanding preferred shares and debentures were converted, and the then
outstanding stock purchase warrants and options were exercised, into common
shares. At July 31, 2004, an aggregate of 35.2 million additional common shares
were potentially issuable pursuant to outstanding financial instruments that
have fixed conversion and exercise prices. However, as the conversion and
exercise prices of certain outstanding financial instruments will not be
established until their respective conversion and exercise dates, if ever, the
maximum aggregate amount of potentially issuable common shares as of July 31,
2004 is not currently determinable.
Segment Reporting
The Company's chief operating decision makers consist of members of senior
management that work together to allocate resources to, and assess the
performance of, the Company's business. Senior management currently manages the
Company's business, assesses its performance, and allocates its resources as a
single operating segment. To date, the Company's products and services have been
principally marketed to customers residing within the United States of America.
Net revenues realized from customers residing in other geographic markets were
less than ten percent of consolidated net revenues for the interim fiscal
periods reported herein.
Recently Issued Accounting Standards Not Yet Adopted
There are no accounting standards with pending adoptions that have any
applicability to the Company.
7
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RESTATEMENTS OF PREVIOUSLY REPORTED FISCAL 2004 INTERIM FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been restated
to correct two errors in the condensed consolidated financial statements that
were included in the Company's Form 10-QSBs for the fiscal 2004 first and second
quarters ended January 31, 2004 and April 30, 2004, respectively, as filed with
the U.S. Securities and Exchange Commission ("SEC"). The details of these two
restatements follow:
The first restatement pertains to the accounting previously applied by the
Company's to its January 20, 2004 acquisition of Synosphere, LLC (See Note 5 for
further details). As previously reported, certain acquired technology-related
assets with an aggregate assigned fair value of $1,200,000 were initially
capitalized and reflected as Patents and Technology on the Company's
post-acquisition interim condensed consolidated balance sheets at January 31,
2004 and April 30, 2004. Subsequently, it was determined by the Company's
management that the technological feasibility of these acquired assets had, in
fact, not been sufficiently established prior to the acquisition date in order
to justify their capitalization. As restated herein, these previously reported
acquired assets have been eliminated from the Company's interim condensed
consolidated balance sheet at July 31, 2004 and instead immediately expensed as
acquired in-process research and development as now reflected in the Company's
interim condensed consolidated statement of loss for the nine months ended July
31, 2004.
The second restatement pertains to the accounting previously applied by the
Company to a multiple-item purchase order it had received via an intermediary
sales agent from a major consumer electronics retailer. During its fiscal 2004
second quarter ended April 30, 2004, the Company recognized $356,940 in product
sales pursuant to this purchase order upon the shipment of certain of the
ordered items. Subsequently in July 2004, when the Company's management advised
the intermediary sales agent of its inability to deliver one of the products
requested in the purchase order (See Note 11), the sales agent correspondingly
advised the Company's management that the retailer interpreted the terms of the
purchase order to be, in effect, on an all-or-nothing basis, and, as a result,
would return any unsold products. The sales agent further advised the Company's
management that its underlying product procurement agreement with the retailer
contained a non-performance provision that would result in the incurrence of a
penalty for which it would seek full indemnification pursuant to its agreement
with the Company. As restated herein, these previously reported product sales,
and related cost of product sales and sales commissions, have been eliminated
from the Company's interim condensed consolidated statement of loss for the nine
months ended July 31, 2004 on the basis that all the prerequisite conditions for
revenue recognition had not, in fact, been sufficiently satisfied during the
Company's fiscal 2004 second quarter. Furthermore, the Company's interim
condensed consolidated balance sheet at July 31, 2004, as presented herein,
reflects the $160,000 in related inventory which is in the process of being
physically returned by the retailer and a liability accrual for the related
$100,000 non-performance penalty incurred by the sales agent for which the
Company is required to provide indemnification. As the Company's management
currently believes that it will be able to resell the products being returned,
it has not established any related valuation allowance.
5. ACQUISITION OF SYNOSPHERE, LLC
On January 20, 2004, the Company acquired all of the outstanding membership
interests in Synosphere, LLC ("Synosphere"), a Texas limited liability company
pursuing the development of certain handheld computer technologies, in exchange
for 30.0 million shares of its common stock with an aggregate value of
$1,200,000 based on the immediately preceding closing bid price of its common
stock (See Note 4 for details regarding the related purchase accounting
applied). A subsequent addendum to the acquisition agreement permitted certain
of Synosphere's shareholders to elect to receive cash in lieu of common shares.
The Company has issued 28,666,750 common shares and paid $18,833 in cash to
Synosphere's former shareholders as of July 31, 2004. At July 31, 2004, the
Company has reserved 862,417 common shares for potential issuance to
Synosphere's remaining former
8
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shareholders. The Company expects to issue the remaining shares or the cash
equivalent in the first quarter of fiscal 2005.
6. LICENSE AGREEMENT WITH VIRTUAL DEVICES, INC.
On July 20, 2004, the Company entered into a licensing agreement with Virtual
Devices, Inc. ("VDI"), a Pennsylvania company which is the owner of various
products, designs and patents relating to accessories for handheld computer
technologies, allowing it to market VDI's products. The agreement required the
Company to make an initial cash payment of $300,000, which has been paid, and
further requires, subject to the prior agreement in an written addendum of
certain performance criteria, the Company to make two $250,000 payments on or
before September 20, 2004 and November 20, 2004, respectively. As the Company
and VDI are continuing to negotiate such performance criteria, the September 20,
2004 payment has been postponed. During the three-year term of the agreement,
the Company will also be required, at its election, to either provide VDI with
$200,000 to fund engineering and project management services or directly provide
VDI with in-kind equivalent services. In the absence of a written termination
election by either party, the above agreement will automatically renew annually.
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
JULY 31, OCTOBER 31,
2004 2003
----------------- ---------------
Accrued wages, benefits and payroll taxes............................$ 563,009 $ 915,040
Accrued interest..................................................... 406,676 741,398
Accrued officer bonuses.............................................. - 578,000
Accrued other employee bonuses....................................... 125,000 -
Accrued vendor penalty............................................... 100,000 -
Accrued sales commissions and vendor royalties....................... 52,016 53,445
Taxes ............................................................... 19,028 19,028
Accrued customer deposits............................................ 7,625 -
----------------- ---------------
Total accrued liabilities............................................$ 1,273,354 $ 2,306,911
================= ===============
The Company remains liable to the U.S. Internal Revenue Service ("IRS") for
approximately $65,000 in unpaid payroll taxes, and subsequently assessed
interest, for certain periods through its first quarter of 1999. The Company has
continued to accrue for this liability in its consolidated financial statements.
It is management's intention to seek a reduced settlement of this liability with
the IRS, if and when, the Company has surplus working capital allowing it to
timely honor any such settlement. As of July 31, 2004, the IRS had not yet
assessed, nor has the Company accrued for, any related penalties.
8. ADVANCES FROM OFFICERS
The officers of the Company advanced $213,000 to the Company in May and July
2004. Approximately $100,000 was repaid to an officer in June 2004. The advances
are non-interest bearing and are payable on demand.
9
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CONVERTIBLE DEBENTURES
The Company's outstanding convertible debentures consist of the following:
JULY 31,
2004
----------------
KCM, LLC. ..................................................... $ 1,150,817
Laurus Master Fund, Ltd........................................... 262,858
----------------
Total debentures outstanding...................................... $ 1,413,675
Current maturities................................................ $ 1,413.675
----------------
Non-current maturities............................................ $ -
================
During the nine-month period ended July 31, 2004, the Company issued
1,379,530,624 shares of its common stock in conversion of $2,602,162 in
principal and $495,135 of accrued interest, net of $26,250 in costs and $197,017
in gains on settlement of the conversion.
In August 2004, the Company issued 100 million shares in conversion of $550,000
in principal ($450,000 to KCM, LLC and $100,000 to Lauras Master Fund, Ltd.) and
$110,000 of accrued interest.
The remaining convertible debentures were due on October 31, 2003. The holders
have made no demand for payment.
10. STOCKHOLDERS DEFICIT
Preferred Stock Committed for Issuance
On December 20, 2001, the Company's Board of Directors authorized the issuance
of 3,500,000 shares of preferred stock to one former director in satisfaction of
a retention incentive and three officers (including one former officer) in
satisfaction of annual bonuses and retention incentives. These preferred shares
have been reserved although not yet issued. If and when issued, each of these
preferred shares will immediately entitle the holder to cast votes equivalent to
one-hundred common shares, or, at their election, to subsequently convert each
preferred share into ten common shares. The Board of Directors has not yet
designated any other rights to these preferred shares, including, but not
limited to, dividend and liquidation rights.
Common Stock Held in Escrow
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
(parent company of Enterprise Capital AG) on January 28, 2004 for consulting and
acquisition services in Europe and Israel. Such services include, but are not
limited to, development of a business plan for marketing existing products in
Europe and Israel and identifying new products and technologies that could be
added to the existing product line. In addition, Pangea would assist in the
negotiation and financing of new products and technologies acquired. Pursuant to
the option agreement, the Company transferred 100 million shares of its common
stock into an escrow account pending payment of the aggregate $1.5 million
exercise price. Through June 4, 2004, 15 million shares were issued upon receipt
of $75,000 and the application of $175,000 to the Deposit for the Virtual
Keyboard product (see Note 11). Subsequently, on June 23, 2004, the Company
cancelled the above stock option in light of non-performance of the required
consulting services and requested that the escrow agent return the above common
shares. The shares are in the process of being returned to the Company.
10
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, options to purchase 5 million shares of common stock are being held
in escrow pursuant to an option agreement with a consultant.
The balance in the Note Receivable classified in the Stockholders' Equity
represents the balance due on the options held in escrow.
Common Stock Issued for Services Received and in Settlement of Liabilities
During the three months ended July 31, 2004, the Company issued shares of its
common stock for services received and in settlement of liabilities as follows:
o On May 4, 2004, the Company issued 1,428,571 shares of its common stock
with an assigned aggregate fair market value of $50,000 to an unrelated
attorney for legal services rendered.
o During May and June 2004, the Company issued 4,500,000 shares of its
common stock with an assigned aggregate fair market value of $80,000 to
an unrelated attorney for legal services rendered.
o During May and June 2004, the Company issued 1,960,783 shares of its
common stock with an assigned aggregate fair market value of $10,140 to
unrelated individuals for various services rendered.
o During May and June 2004, the Company issued 3,000,000 shares of its
common stock with an assigned aggregate fair market value of $30,000 to
two unrelated individuals in retention of SEC filing services over the
subsequent twelve-month period.
o During May and June 2004, the Company issued 5,870,275 shares of its
common stock with an assigned aggregate fair market value of $65,072 to
an unrelated individual in retention of a 2 year facilities lease for
the acquired Synosphere operations (see Note 16).
Common Stock Issued to Officers and Other Employees as Bonuses
During the three months ended July 31, 2004, the Company issued shares of its
common stock to officers and other employees as bonuses as follows:
o During May 2004, the Company issued 8,447,278 shares of its common
stock with an assigned fair market value of $375,000 to officers of its
wholly-owned subsidiary, Synosphere in accordance with their respective
employment contracts.
o During June 2004, the Company issued 1,234,267 shares of its common
stock with an assigned aggregate fair market value of $44,000 as
signing bonuses to new employees of Synosphere.
Stock Options and Warrants
During May 2004, the Company granted options valued at $492,000
(using the Black-Sholes stock option pricing model) to purchase 40,000,000
shares of common stock (at a 7.5% discount from market, as defined) to Steven
Green for financial management, business management and business optimization
through mergers and acquisitions. These consulting services are offered for a
term of three years. Options to purchase 35,000,000 shares were exercised in May
2004 resulting in the receipt of approximately $345,000. The remaining 5,000,000
shares were deposited into an escrow account (see Common Stock Held in Escrow
above). Based on the uncertainty of any future value of these agreements, the
Company expensed the value of the options in the three months ended July 31,
2004.
11
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. WRITE-OFF OF DEPOSIT AND ASSET IMPAIRMENT
Deposit
During its fiscal second quarter ended April 30, 2004, the Company advanced a
$400,000 deposit (consisting of $225,000 in cash and the application of $175,000
from the exercise of an option- see Note 10) to Enterprise Capital AG
("Enterprise") pursuant to an initial purchase order for virtual keyboards. When
Enterprise subsequently failed to perform, the Company's management filed a
lawsuit in Israel against Enterprise, ultimately resulting in the Company
formally terminating its relationship with Enterprise on June 23, 2004. At such
time, the Company requested Enterprise immediately refund the above deposit.
Nevertheless, as it has been unsuccessful in its subsequent efforts to recover
this deposit and significant uncertainties remain, the Company wrote-off the
entire deposit as unrealizable as of July 31, 2004. The Company is continuing to
pursue the recovery of this deposit through its legal counsel in Israel.
Asset Impairment
During the three months ended July 2004, the Company was served with a lawsuit
by Ttools, Inc. alleging breach of contract. The Company has equipment and
intellectual property rights associated with the Ttools product line amounting
to $52,281 at July 31, 2004. Based on this lawsuit, the Company has determined
that the remaining asset value has become impaired and has written-off the
balance at July 31, 2004 (see Note 14).
12. INTEREST AND MISCELLANEOUS INCOME
Interest and miscellaneous income consist of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31, JULY 31, JULY
2004 2003 2004 31,
2003
------------ ----------- ---------- ----------
Gains on settlements of vendor obligations ........$ - $ 11,960 - $ 12,769
Gains on settlements of debenture obligations ..... - - 197,017 -
Other miscellaneous income......................... 3,049 487 29,770 490
------------ ----------- ---------- ----------
Total interest and miscellaneous income............$ 3,049 $ 12,447 $ 226,787 $ 13,259
============ =========== ========== ==========
During the period, the Company renegotiated their debenture balances with the
AJW Entities. As a result of the negotiation, the AJW entities converted in full
the debenture balances which resulted in the cancellation of approximately
$197,017 in principal and interest. The cancellation has been recorded as income
in the Statement of Operations for the three-month period ended July 31, 2004.
13. INTEREST AND FINANCING EXPENSES
Interest and financing expenses consist of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31, JULY 31, JULY 31,
2004 2003 2004 2003
------------ ----------- ---------- ----------
Interest expense.................................. $ 30,432 $ 95,909 $ 172,093 $ 261,422
Beneficial conversion features of
debentures issued............................... - 393,938 - 1,379,077
------------ ----------- ---------- ----------
Total interest and financing expenses............. $ 0,432 $ 489,847 $ 172,093 $ 1,640,499
============ =========== ========== ==========
12
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES
Legal and Administrative Proceedings
The Company, including its subsidiaries, is periodically involved in litigation
and administrative proceedings primarily arising in the normal course of its
business. In the opinion of management, the Company's gross liability, if any,
and without any consideration given to the availability of indemnification or
insurance coverage, under any pending or existing litigation or administrative
proceedings would not materially affect its financial position, results of
operations or cash flows.
On May 13, 2004, Ttools, LLC filed a complaint against iBiz in the Superior
Court of Rhode Island. The complaint alleges breach of contract, conversion, and
unjust enrichment. The plaintiff is seeking damages in the amount of $70,558,
plus interest and legal fees. Management believes that the case is without merit
and does not believe that the ultimate outcome will have a material impact on
the consolidated financial statements.
SEC Investigation
The SEC has commenced a formal investigation into certain specific matters that
may constitute potential violations by the Company, and/or its officers,
directors, employees, and others, of the federal securities laws. The Company
and its officials are fully cooperating with the SEC during its formal
investigation. The Company will publicly disclose the specific nature of any
resulting SEC allegation(s) if and when they become known, subject to any SEC
mandated confidentiality and as permitted by applicable federal securities laws.
Lease Commitment
The Company's wholly-owned subsidiary, Synosphere, entered into an operating
lease for its facility in Austin, Texas. The lease agreement has a term of 2
years beginning August 1, 2004 and requires monthly payments of approximately
$2,500.
15. CANCELLATION OF PREVIOUSLY PROPOSED SPIN-OFF OF IBIZ, INC.
The Company continues to conduct substantially all of its operations through
iBIZ, Inc., a wholly-owned subsidiary. On July 20, 2003, the Company's Board of
Directors and a majority of its stockholders approved a proposed spin-off of
iBIZ, Inc. as a stand-alone, separately-reporting public company. The proposed
spin-off of iBIZ, Inc. was intended to facilitate a contemplated, although not
legally consummated, transaction pursued with Enterprise Capital AG
("Enterprise"), an investment banking firm headquartered in Switzerland. Prior
to any legal consummation of the contemplated transaction with Enterprise, all
of the then assets and liabilities of iBIZ, Inc. would have reverted back to the
Company. As a result, iBIZ, Inc. would, in effect, have become a legal public
shell company. In September, the Company abandoned its efforts to spin-off iBIZ,
Inc. due to problems encountered with Enterprise (see Notes 10 and 11).
16. SUBSEQUENT EVENT
Subsequent to July 31, 2004, the shares issued for the 2 year lease on
Synosphere's Austin, Texas facility were cancelled and returned to the Company
(see Notes 10 and 14).
13
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion includes certain forward-looking statements within
the meaning of the safe harbor protections of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Statements that include words such as "believe," "expect," "should,"
intend," "may," "anticipate," "likely," "contingent," "could," "may," or other
future-oriented statements, are forward-looking statements. Such forward-looking
statements include, but are not limited to, statements regarding our business
plans, strategies and objectives, and, in particular, statements referring to
our expectations regarding our ability to continue as a going concern, generate
increased market awareness of, and demand for, our current products, realize
profitability and positive cash flow, and timely obtain required financing.
These forward-looking statements involve risks and uncertainties that could
cause actual results to differ from anticipated results. The forward-looking
statements are based on our current expectations and what we believe are
reasonable assumptions given our knowledge of the markets; however, our actual
performance, results and achievements could differ materially from those
expressed in, or implied by, these forward-looking statements. Factors, within
and beyond our control, that could cause or contribute to such differences
include, among others, the following: those associated with our marketing of a
relatively new PDA accessories for consumers in an evolving marketplace,
consumer preferences, perceptions and receptiveness with respect to our PDA
accessories, our critical capital raising efforts in an uncertain and volatile
economical environment, our ability to maintain an existing relationships with
critical customers and vendors, including related licensing and marketing
arrangements, our cash-preservation and cost-containment efforts, our ability to
retain key management personnel, our relative inexperience with advertising, our
competition and the potential impact of technological advancements thereon, the
impact of changing economic, political, and geo-political environments on our
business, as well as those factors discussed elsewhere in this Form 10-QSB and
in "Item 1 - Our Business," "Item 6 - Our Management's Discussion and Analysis,"
particularly the discussion under "Risk Factors - Substantial Doubt as to our
Ability to Continue as a Going Concern" and elsewhere in our most recent Form
10-KSB for our fiscal year ended October 31, 2003, as amended, filed with the
United States Securities and Exchange Commission. Readers are urged to carefully
review and consider the various disclosures made by us in this report, in the
aforementioned Form 10-KSB, as amended, and those detailed from time to time in
our reports and filings with the United States Securities and Exchange
Commission that attempt to advise interested parties of the risks and factors
that are likely to affect our business.
Our fiscal year ends on October 31. References to a fiscal year refer to the
calendar year in which such fiscal year ends.
INTRODUCTION
We are a marketer and distributor of various accessories primarily intended for
use with PDAs. Our current line of products principally consists of over eighty
individual accessories for a wide array of PDAs. These accessories range in
complexity and price from simple connector cables with suggested retail prices
starting at $9.99 at the low end to our multi-faceted XELA Keyboard with a
suggested retail price of $69.99 at the high end. However, during the three and
nine months ended July 31, 2004 and 2003, and as reported herein, our product
sales revenues were substantially attributable to the following principal
products (See Item 1. Our Business - Our Principal Products in our most recently
filed Form 10-KSB for the fiscal year ended October 31, 2003, as amended, for
further details):
DATA INPUT DEVICES:
o Our Keysync Keyboard - We introduced our Keysync Keyboard to the
consumer marketplace in November 1998 as a more practicable and
user-friendly alternative to the traditional PDA stylus for inputting
significant amounts of data. Our Keysync Keyboard has a suggested
retail price of $69.00.
o Our XELA Keyboard - We introduced our XELA Keyboard to the consumer
marketplace in March 2003 as another more practicable and user-friendly
alternative to the traditional PDA stylus for inputting significant
amounts of data. Our XELA Keyboard has a suggested retail price of
$69.00.
14
POWER DEVICES:
o Our Travel Kits - We introduced our first Travel Kit to the consumer
marketplace in March 2002. We currently offer fifteen such Travel Kits
to accommodate a wide array of PDAs. Each of our Travel Kits includes
an AC charger, a 12-volt automobile adapter/charger, a USB charging
cable, and a synchronization cable. Our Travel Kits have a suggested
retail price of $39.99.
ENTERTAINMENT DEVICES:
o Our pocketRADIO - We introduced our pocketRADIO to the consumer
marketplace in October 2003. Our pocketRADIO is a FM Stereo card that
allows a PDA user to listen to FM Stereo while simultaneously running
other programs. Our pocketRADIO have a suggested retail price of
$49.99.
With the exception of the free technical support services we provide as part of
the one year parts and labor warranty that accompanies each of our products, the
only other services we performed during the fiscal periods reported herein were
pursuant to maintenance agreements associated with our technical servicing and
support of computer terminals and printers for financial institutions, which
business we no longer actively market or pursue. Our maintenance service
revenues, which constituted 6.5% of our total consolidated revenues for the
fiscal year ended October 31, 2003, will continue to decrease in future fiscal
years.
OUR RECENT SIGNIFICANT DEVELOPMENTS
There are no recent significant developments.
OUR CRITICAL ACCOUNTING POLICIES
The following discussions of our consolidated results of operations and
financial condition, including our liquidity and capital resources, are based
upon our consolidated financial statements as included elsewhere in this filing.
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make certain estimates and assumptions that affect the reported
amounts and timing of revenue and expenses, the reported amounts and
classification of assets and liabilities, and disclosure of contingent assets
and liabilities. Our actual results have differed, and will likely continue to
differ, to some extent from our initial estimates and assumptions. We currently
believe that the following significant accounting policies entail making
particularly difficult, subjective or complex judgments of inherently uncertain
matters that, given any reasonably possible variance therein, would make such
policies particularly critical to a materially accurate portrayal of our
historical or reasonably foreseeable financial condition or results of
operations:
o Revenue Recognition for Product Sales and Related Allowances
for Sales Returns and Rebates. In accordance with SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," we recognize a product sale, including related
shipping and handling income, and the cost of the sale, upon
product shipment provided that all material risks and rewards
of ownership are concurrently transferred from us to our
customer, the price is fixed or readily determinable,
collection of the related receivable by us is reasonably
assured, and we are able to reliably estimate appropriate
allowances for probable sales returns and rebates based on our
relevant historical experience and future expectations. We
unconditionally accept product returns during the initial
thirty days following the date of sale. We periodically offer
promotional rebates of a limited duration, typically one week,
on certain product sales, for which we outsource the
processing and tracking of related customer submissions. The
periodic provisions made by us to establish and maintain
appropriate allowances for sales returns and rebates are
charged to our results of operations via offsets to our gross
product sales. Actual sales returns and rebates realized by us
are charged against the related allowances with any favorable
or unfavorable experience, as compared to our preceding
estimates, having a correspondingly impact on our results of
operations.
15
o Accounts Receivable and Related Allowance for Doubtful
Accounts. In addition to corresponding reductions made for the
allowances for sales returns and rebates, as discussed above,
we further reduce our consolidated accounts receivable by an
appropriate allowance for accounts where doubt exists in our
opinion, based on known specifics or the passage of time, as
to their ultimate collectability. We routinely offer our
customers payment terms that range from 30 to 60 days. We do
not access interest on, nor do we require any securing
collateral of, past due customer balances. The periodic
provisions made by us to establish and maintain an appropriate
allowance for doubtful accounts are charged to our results of
operations via increases to our selling, general and
administrative expenses. Actual collection experience realized
by us on previously designated doubtful accounts, including
final determinations of uncollectability, is charged against
the allowance for doubtful accounts with any favorable or
unfavorable experience, as compared to our preceding
estimates, having a correspondingly impact on our results of
operations.
o Inventories. Our consolidated inventories, which consist
solely of finished products available for sale, are stated at
the lower of average cost or market, reduced by an appropriate
allowance estimated by us for probable obsolescence. We record
an allowance for obsolescence based on our historical
experience and future expectations. The periodic provisions
made by us to establish and maintain an appropriate allowance
for obsolescence are charged to our results of operations via
increases to our cost of goods sold. Actual disposition
experience realized by us on previously designated obsolete
inventory is charged against the allowance for obsolescence
with any favorable or unfavorable experience, as compared to
our preceding estimates, having a corresponding impact our its
results of operations.
o Impairment of Long-Lived Assets. We evaluate, on at least a
quarterly basis, each of our long-lived assets for impairment
by comparing our then estimate of its related future cash
flows, on an undiscounted basis, to its net book value. If
impairment is indicated, we reduce the net book value of the
asset to an amount equal to our estimate of related future
cash flows, on an appropriately discounted basis, with a
corresponding impairment charge to our results of operations.
o Convertible Debt Securities. We have periodically issued
debentures that have non-detachable conversion features. In
those instances where the stated conversion price reflects a
discount from the then prevailing market price for our common
stock, we make, at the date of the debenture issuance, an
estimate as to the fair value of this beneficial conversion
feature. The value assigned to the beneficial conversion
feature is then immediately recognized in our results of
operations via an interest/financing charge with a
corresponding incremental credit to additional paid-in
capital.
16
OUR CONSOLIDATED RESULTS OF OPERATIONS
Our consolidated total revenues for the three months ended July 31, 2004
("fiscal 2004 third quarter") were $79,407, a decrease of $67,038, or 46%, as
compared to $146,445 for the three months ended July 31, 2003 ("fiscal 2003
third quarter"). Our consolidated total revenues for the nine months ended July
31, 2004 ("fiscal 2004 nine month period") were $322,223, an increase of
$39,831, or 14%, as compared to $282,392 for the nine months ended July 31, 2003
("fiscal 2003 nine month period"). Our product sales constituted 97% and 94% of
our consolidated total revenues for the fiscal 2004 third quarter and nine month
period, respectively, as compared to 93% and 90% of our consolidated total
revenues for the fiscal 2003 third quarter and nine month period, respectively.
Our maintenance revenues, which constituted the balance of our consolidated
total revenues for each respective fiscal period, will continue to decrease in
future fiscal periods as we no longer actively market or pursue maintenance
services.
Our product sales were $77,116 for the fiscal 2004 third quarter, a decrease of
$59,475, or 44%, as compared to $136,591 in product sales for the fiscal 2003
third quarter. Our product sales were $301,765 for the fiscal 2004 nine month
period, an increase of $46,816, or 18%, as compared to $254,949 in product sales
for the fiscal 2003 nine month period. We substantially attribute the preceding
increase to sales of our pocketRADIOs, which we began shipping to customers in
late October 2002. Although to a significantly lesser extent, we also realized
incremental fiscal 2003 product sales from our XELA Keyboard, which we began
shipping to customers in March 2003. Partially offsetting the preceding product
sales increases principally were sales decreases of varying degrees realized in
our accessories for non-PDA hand-held computing devices, the marketing of which
we continue to de-emphasize as we focus our currently limited operating and
financial resources on the PDA accessories marketplace. We also realized a
significant decrease in sales of our Keysync Keyboard which we primarily
attribute to the introduction of competing products into the marketplace. Sales
of our Travel Kits also decreased slightly, which we believe generally
corresponded to the overall softening of sales realized by the underlying PDA
manufacturers. Variances in the average prices realized by us on products in
existence during both fiscal periods did not have a significant impact,
favorably or unfavorably, on the overall net increase in our product sales for
fiscal 2004. It must be noted that, absent significant contributions from the
introduction of new products, our future revenues will be materially dependent
upon sales of our pocketRADIOs and, to a significantly lesser extent, our Travel
Kits and XELA Keyboard.
We incurred consolidated gross losses of $39,276 and $76,101 for the fiscal 2004
third quarter and nine month period, respectively, and consolidated gross losses
of $23,531 and $36,201 for the fiscal 2003 third quarter and nine month period,
respectively. In turn, these consolidated gross losses equated to negative gross
margins of 49% and 24% for the fiscal 2004 third quarter and nine month period,
respectively, and negative gross margins of 16% and 13% for the fiscal 2003
third quarter and nine month period, respectively. Our fiscal 2004 consolidated
gross losses and negative gross margins were attributable to gross losses of
$17,547 and $59,563, and resulting negative gross margins of 23% and 20%, on our
product sales during the fiscal 2004 third quarter and nine month period,
respectively. Similarly, Our fiscal 2003 consolidated gross losses and negative
gross margins were attributable to gross losses of $32,079 and $60,085, and
resulting negative gross margins of 23% and 24%, on our product sales during the
fiscal 2003 third quarter and nine month period, respectively. We principally
attribute the preceding gross losses and negative gross margins on our product
sales during each of the above fiscal periods to our inability, given our
continuing modest amount of product sales, to leverage our allocable direct
labor and, to a lesser extent, overhead.
Our consolidated total operating expenses were $2,163,642 for the fiscal 2004
third quarter, an increase of $1,310,478, or 154%, from the $853,164 incurred
during the fiscal 2003 third quarter. Our consolidated total operating expenses
were $11,165,418 for the fiscal 2004 nine month period, an increase of
$9,408,781, or 536%, from the $1,756,617 incurred during the fiscal 2003 nine
month period.
Our consolidated selling, general and administrative ("SG&A") expenses were
$964,135 for the fiscal 2004 third quarter, an increase of $515,796, or 115%,
from the $448,339 incurred during the fiscal 2003 third quarter. Our
consolidated SG&A expenses were $2,283,799 for the fiscal 2004 nine month
period, an increase of $1,078,117, or 89%, from the $1,205,682 incurred during
the fiscal 2003 nine month period. We incurred substantial dollar and percentage
increases in our advertsing expenses and travel expenses as a result of
17
marketing activities associated with the introductions of our pocketRADIOs and
XELA Keyboards, and in our sales expenses as a result of our transitioning to
incrementally more expensive, yet more variable in nature, external commissioned
field sales representatives. We also experienced substantial percentage
increases in our consulting and legal fees as we continue to pay consultants and
attorneys with common stock in order to reduce cash outlays . The expenses for
consultants and attorneys have increased as a result of our efforts to expand
our business and search for new opportunities.
During our fiscal 2004 third quarter, we recognized a $100,000 non-performance
penalty incurred by our sales agent for which the Company is required to provide
indemnification. This penalty relates to the inability to deliver one of the
products requested in the purchase order from a major retailer. (See Note 4 of
our July 31, 2004 financial statements.)
Our consolidated research and development ("R&D") expenses were $164,226 and
$260,152 for the fiscal 2004 third quarter and for the fiscal 2004 nine month
period, respectively. These research and development costs are directly related
to the acquisition of Synosphere and their continuing efforts to develop new
products for introduction in the the PDA marketplace.
During its fiscal second quarter ended April 30, 2004, the Company advanced a
$400,000 deposit (consisting of $225,000 in cash and the application of $175,000
from the exercise of an option- see Note 10) to Enterprise Capital AG
("Enterprise") pursuant to an initial purchase order for virtual keyboards. When
Enterprise subsequently failed to perform, the Company's management filed a
lawsuit in Israel against Enterprise, ultimately resulting in the Company
formally terminating its relationship with Enterprise on June 23, 2004. At such
time, the Company requested Enterprise immediately refund the above deposit.
Nevertheless, as it has been unsuccessful in its subsequent efforts to recover
this deposit and significant uncertainties remain, the Company wrote-off the
entire deposit as unrealizable as of July 31, 2004.
During the three months ended July 2004, the Company was served with a lawsuit
by Ttools, Inc. alleging breach of contract. The Company has equipment and
intellectual property rights associated with the Ttools product line amounting
to $52,281 at July 31, 2004. Based on this lawsuit, the Company has determined
that the remaining asset value has become impaired and has written-off the
balance at July 31, 2004 (see Note 14).
We have incurred substantial costs relating to Consulting fees
during the quarter and nine months ended July 31, 2004. We entered into several
consulting contracts for business and management services for various terms. The
options were granted to consultants at a discount from market and based on the
uncertainty of any future value of these agreements; the Company expensed the
value of the options in the period granted. We used the Black Scholles pricing
model, which resulted in a charge to operations totaling $583,000 and $6,969,186
during the quarter and none months ended July 31, 2004, respectively.
Our resulting losses from operations for the fiscal 2004 third quarter and nine
month period fiscal 2003 were $2,202,918 and $11,241,519, respectively. The
preceding compares to losses from operations for the fiscal 2003 third quarter
and nine month period fiscal 2003 of $876,695and $1,792,818, respectively.
Our non-operating other income and expenses primarily consist of interest
expense, including non-cash charges attributable to the non-detachable
beneficial conversion feature of newly issued debentures, and, to a
significantly lesser extent, gains on settlements of obligations to vendors and
miscellaneous other income. Our interest expense was $30,432 for the fiscal 2004
third quarter, a decrease of $459,415, or 94%, from the $489,847 incurred during
the fiscal 2003 third quarter. Our interest expense was $172,093 for the fiscal
2004 nine month period, a decrease of $1,468,406, or 90%, from the $1,640,499
incurred during the fiscal 2003 nine month period. This decrease is due to
$393,938 and $1,379,077 of beneficial conversion features of debentures issued
during the three and nine months of fiscal 2003, respectively. These charges
were not repeated during fiscal 2004. During the fiscal 2004 nine month period
we realized non-cash aggregate gains of $197,017 on settlements of debenture
obligations. The balance of our non-operating income and expenses items,
including interest income, were inconsequential to our consolidated results of
operations.
18
Primarily as a result of the foregoing, we incurred losses of $2,230,301 ($0.00)
per basic and diluted share) and $11,186,825 ($0.00) per basic and diluted
share) for the fiscal 2004 third quarter and nine month period, respectively.
The preceding compares to losses of $1,354,095 ($0.00) per basic and diluted
share) and $3,420,058 ($0.02) per basic and diluted share) for the fiscal 2003
third quarter and nine month period, respectively.
Our future ability to achieve profitability in any given future fiscal period
remains highly contingent upon our realizing significantly increased product
sales sufficient to leverage our non-variable, likely to be recurring expenses.
For instance, our ability to achieve gross profits and positive gross margins in
any given future fiscal period remains highly contingent upon us being able to
leverage through significant incremental product sales the significant
non-variable direct labor and overhead components of our costs of goods sold.
Similarly, our ability to realize income from operations is further dependent
upon our ability to additionally leverage through significant incremental sales
our SG&A expenses, the majority of which currently are non-variable and
recurring in nature. To the extent that we incur other less frequent or
non-recurring operating expenses, as in fiscal 2004, we will require additional
incremental product sales in order to leverage them. Lastly, our ability to
realize net income and net income per common share remains highly contingent
upon us being able to leverage through incremental product sales any significant
net non-operating expenses, such as charges for the beneficial conversion
features of any issued debentures and our interest expense on any outstanding
debt. Correspondingly, our ability to realize significant incremental product
sales in any given future fiscal period remains highly contingent upon us
obtaining significant equity infusions and/or long-term debt financing
sufficient to fund the increased and sustained campaign of marketing and
advertising activities we believe necessary to build broad consumer awareness
of, and demand for, our PDA accessories. Even if we were to be successful in
procuring such funding, there can be no assurance that we will be successful in
our marketing and advertising efforts, and that we will subsequently realize the
significant incremental product sales we require.
OUR CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
Overview
We have historically sustained our operations through an ongoing combination of
trade credit arrangements, short-term financings, and debt and equity issuances.
As our working capital requirements generally precede the realization of product
sales and related accounts receivable, we routinely draw upon our existing cash
and cash equivalent balances and seek short and long-term financing to fund our
procurement of inventory. We currently have no established credit facilities in
place for future borrowings.
During the course of transitioning our company over the last several years from
our discontinued computer service businesses to our current business of
marketing and distributing various accessories primarily intended for use with
PDAs, we have incurred substantial operating and net losses, as well as negative
operating cash flows. As of our fiscal quarter ended July 31, 2004, our working
capital deficit was $2,797,058 and our stockholders' deficit was $2,341,702.
Such reflects a decrease from our preceding fiscal year ended October 31, 2003
when our working capital deficit was $6,093,514 and our stockholders' deficit
was $6,716,685. We had a nominal unrestricted cash balance of only $5,811 at
July 31, 2004, as compared to $2,140 at October 31, 2003.
We had outstanding convertible debentures with an aggregate principal face
amount of $1,413,675 at July 31, 2004, of which $1,413,675 was to become due and
payable during our fiscal year ending October 31, 2004. During August 2004,
debentures totaling $550,000 were converted into common stock. We had
outstanding convertible debentures with an aggregate principal face amount of
$4,015,837 at October 31, 2003, of which $3,265,837 and $750,000 was to become
due and payable during our fiscal years ending October 31, 2004 and 2005,
respectively.
Our Consolidated Cash Flows
Our operating activities utilized $2,202,529 in cash during the fiscal 2004 nine
month period, an increase of $1,528,136, or 227%, from the $674,393 in cash
utilized during the fiscal 2003 nine month period. Our increased utilization
substantially reflects a $6,781,551, or 294%, net increase in our non-cash
charges, being substantially offset by the $7,714,486 increase in our net loss.
The most significant reductions in our non-cash charges were a $1,379,077
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reduction in the charges associated with the beneficial conversion features of
issued convertible debentures. This reduction is offset by increases of
$1,200,000 and $6,969,186 in our non-cash acquisition of in-process research and
development and services rendered in exchange for common stock options,
respectively. Partially offsetting these non-cash charge items were a $50,215
decrease in accounts receivable, a $209,044 increase in inventories and an
$18,603 decrease in accounts payable.
Our investing activities used a total of $321,299 during the fiscal 2004 nine
month period to fund the acquisition of Synoshere in the amount of $18,833, the
investment in Virtual Devices, $300,000 and the additional patent costs incurred
of $2,466. There was no cash used in investing activities during the fiscal 2003
nine month period.
Our financing activities provided $2,527,499 in cash during the fiscal 2004
third quarter, an increase of $1,854,054, or 275%, from the $673,445 in cash
provided by financing activities during the fiscal 2003 nine month period. Our
fiscal 2004 nine month period reflects cash inflows primarily from our issuances
of common stock options, and, to a significantly lesser extent, the cash we
received from officer loans. The preceding cash inflows were slightly offset by
the cash outflows related to principal repayments made on outstanding notes
payable. In contrast, our fiscal 2003 nine month period 2003 primarily reflects
lower cash inflows from our issuances of convertible debentures. Such were
slightly offset by the cash outflows related to principal repayments made on
outstanding notes payable and the restricted cash equivalent.
Our Planned Capital Expenditures
We had no significant planned capital expenditures, budgeted or otherwise, as of
July 31, 2004.
OUR OTHER MATTERS
Quantitative and Qualitative Disclosures About Market Risk
We currently are not materially exposed to financial market risks from changes
in short or long-term interest rates as substantially all of our financial
instruments, and most notably our remaining outstanding debentures, have fixed
rates of interest. However, should we be successful in procuring the significant
additional funding we currently seek and if such funding were to be
substantially in the form of debt with variable rates of interest, then our
exposure to these market risks would increase, possibly significantly.
We currently are not materially exposed to currency market risks as
substantially all of our business dealings, and most notably our purchases of
inventory from overseas vendors, are denominated in U.S. dollars. However,
should we in the future enter into significant contracts denominated in non-U.S.
dollar currencies, then our exposure to these currency market risks would
increase, possibly significantly.
We have not used, and currently do not contemplate using, any derivative
financial instruments.
Our Legal Contingencies
We as a company, including our subsidiary, are periodically involved in
litigation and administrative proceedings primarily arising in the normal course
of our business. In our opinion, our gross liability, if any, and without any
consideration given to the availability of indemnification or insurance
coverage, under any pending or existing incidental litigation or administrative
proceedings would not materially affect our financial position, results of
operations or cash flows over and beyond any acknowledged liability.
We remain liable to the U.S. Internal Revenue Service ("IRS") for approximately
$65,000 in unpaid payroll taxes, and subsequently assessed interest, for certain
periods through the first quarter of 1999. We have continued to accrue for this
liability in our consolidated financial statements. It is our intention to seek
a reduced settlement of this liability with the IRS if and when we have surplus
working capital allowing us to timely honor any such settlement.
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SEC Order of Formal Investigation
The SEC has commenced a formal investigation into certain specific matters that
may constitute potential violations by the Company, and/or its officers,
directors, employees, and others, of the federal securities laws. The Company
and its officials are fully cooperating with the SEC during its formal
investigation. The Company will publicly disclose the specific nature of any
resulting SEC allegation(s) if and when they become known, subject to any SEC
mandated confidentiality and as permitted by applicable federal securities laws.
Recently Issued Accounting Standards With Pending Adoptions
There currently are no recently issued accounting standards with pending
adoptions that have any applicability to us.
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ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation and Disclosure of Procedures. Regulations under the Securities
and Exchange Act of 1934 require public companies to maintain "disclosure
controls and procedures" which are defined to mean a company's controls and
other procedures that are designed to ensure that information required to be
disclosed in the reports that it files or submits under the Securities and
Exchange Act of 1934 is recorded, processed, summarized and reported, within the
time periods specified in the Commission's rules and forms. Our Chief Executive
Officer, President and Acting Chief Financial Officer carried out an evaluation
of the effectiveness of our disclosure controls and procedures as of the end of
the period covered by this report. Based on those evaluations, as of the
Evaluation Date, our CEO, President and Acting CFO believe:
(i) that our disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports we file under the
Securities and Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and forms
and that such information is accumulated and communicated to our management,
including the CEO, President and CFO, as appropriate to allow timely decisions
regarding the required disclosure; and
(ii) that our disclosure controls and procedures are effective.
(b) Changes in Internal Controls. There were no significant changes in our
internal controls or, to our knowledge, in other factors that could
significantly affect our internal controls subsequent to the Evaluation Date.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Ttools, LLC vs. iBIZ Technology Corp.
On May 13, 2004, Ttools, LLC filed a complaint against iBiz in
the Superior Court of Rhode Island. The complaint alleges breach of contract,
conversion, and unjust enrichment. The plaintiff is seeking damages in the
amount of $70,558, plus interest and legal fees. Management believes that the
case is without merit and does not believe that the ultimate outcome will have a
material impact on the consolidated financial statements.
SEC Investigation
The SEC has commenced a formal investigation into certain specific
matters that may constitute potential violations by the Company, and/or its
officers, directors, employees, and others, of the federal securities laws. The
Company and its officials are fully cooperating with the SEC during its formal
investigation. The Company will publicly disclose the specific nature of any
resulting SEC allegation(s) if and when they become known, subject to any SEC
mandated confidentiality and as permitted by applicable federal securities laws.
ITEM 2. CHANGES IN SECURITIES
(C) RECENT SALES OF UNREGISTERED SECURITIES
The securities described below represent securities of iBIZ sold by
iBIZ during the six month period ended July 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.
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PRIVATE PLACEMENTS OF COMMON STOCK AND WARRANTS FOR CASH
None.
SALES OF DEBT AND WARRANTS FOR CASH
None
OPTION GRANTS
During May 2004, the Company granted options valued at $492,000
(using the Black-Sholes stock option pricing model) to purchase 40,000,000
shares of common stock (at a 7.5% discount from market, as defined) to Steven
Green for financial management, business management and business optimization
through mergers and acquisitions. These consulting services are offered for a
term of three years. Options to purchase 35,000,000 shares were exercised in May
2004 resulting in the receipt of approximately $345,000. The remaining 5,000,000
shares were deposited into an escrow account.
ISSUANCES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS
On May 4, 2004, the Company issued 1,428,571 shares of its common stock
with an assigned aggregate fair market value of $50,000 to an unrelated attorney
for legal services rendered.
During May and June 2004, the Company issued 4,500,000 shares of its
common stock with an assigned aggregate fair market value of $80,000 to an
unrelated attorney for legal services rendered.
During May and June 2004, the Company issued 1,960,783 shares of its
common stock with an assigned aggregate fair market value of $10,140 to
unrelated individuals for various services rendered.
During May and June 2004, the Company issued 3,000,000 shares of its
common stock with an assigned aggregate fair market value of $30,000 to two
unrelated individuals in retention of SEC filing services over the subsequent
twelve-month period.
During May and June 2004, the Company issued 5,870,275 shares of its
common stock with an assigned aggregate fair market value of $65,072 to an
unrelated individual in retention of a 2 year facilities lease for the acquired
Synosphere operations.
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:
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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.
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 19TH DAY OF OCTOBER 2004
IBIZ TECHNOLOGY CORP.
By: /s/ KENNETH W. SCHILLING
- ---------------------------------------
Kenneth W. Schilling, CEO, President,
and acting CFO (principal accounting officer)
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