UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A1
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL QUARTER ENDED APRIL 30, 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 June 21, 2004, the registrant had 2,863,623,373 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 APRIL 30, 2004
PART I. FINANCIAL INFORMATION Page
Item 1. Interim Condensed Consolidated Financial
Statements
Condensed Consolidated Balance Sheets as of April 30, 2004 (Unaudited)
and October 31, 2003 (Audited)...................................................1
Condensed Consolidated Statements of Loss for the Three and Six Months Ended
April 30, 2004 and 2003 (Unaudited)..............................................2
Condensed Consolidated Statement of Changes in Stockholders' Deficit for the
Six Months Ended April 30, 2004 (Unaudited)......................................3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
April 30, 2004 and 2003 (Unaudited).............................................4
Notes to Interim Condensed Consolidated Financial Statements (Unaudited).............7
Item 2. Our Management's Discussion and Analysis.......................................15
Item 3. Our Controls and Procedures....................................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................21
Item 2. Changes in Securities and Use of Proceeds......................................21
Item 3. Defaults Upon Senior Securities................................................21
Item 4. Submission of Matters to a Vote of Security Holders............................21
Item 5. Other Information..............................................................21
Item 6. Exhibits and Reports on Form 8-K...............................................21
Signatures..............................................................................22
i
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30,
2004
(Unaudited and October 31, 2003
Restated) (Audited)
------------ ------------
ASSETS
Current assets:
Cash $ 104,196 $ 2,140
Restricted cash equivalent 10,000 10,000
Accounts receivable, net 32,949 111,322
Inventories, net 287,306 43,842
Deposit for purchase of inventory 400,000
Prepaid expenses 369,155 24,057
------------ ------------
Total current assets 1,203,606 191,361
Property and equipment, net 56,379 63,329
Patents, net 55,596 --
Intellectual property rights, net 49,909 61,000
Deposits 2,500 2,500
Note receivable from officer, net -- --
------------ ------------
Total assets $ 1,367,990 $ 318,190
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 638,582 $ 581,637
Accrued liabilities (Note 5) 1,010,083 2,306,911
Deferred income -- 5,570
Notes payable 30,603 124,920
Current maturities of debentures (Note 6) 1,413,675 3,265,837
------------ ------------
Total current liabilities 3,092,943 6,284,875
Convertible debentures -- 750,000
------------ ------------
Total liabilities 3,092,943 7,034,875
------------ ------------
Commitments and contingencies (Notes 10 and 11)
Stockholders' deficit (Note 7):
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;
2,763,291,274 and 649,893,721 issued and outstanding, respectively 2,763,291 649,894
Common stock to be issued (Notes 4 and 11) 1,556,167 --
Additional paid-in capital 29,210,445 17,431,753
Less: Notes receivable (1,500,000) --
Accumulated deficit (33,754,856) (24,798,332)
------------ ------------
Total stockholders' deficit (1,724,953) (6,716,68)
------------ ------------
Total liabilities and stockholders' deficit $ 1,367,990 $ 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 April 30, Six Months Ended April 30,
2004 2003 2004 2003
(Restated) (Restated)
-------------- -------------- -------------- --------------
Revenues:
Net product sales $ 72,433 $ 52,633 $ 224,649 $ 118,358
Maintenance services 8,434 8,004 18,167 17,589
-------------- -------------- -------------- --------------
Total revenues 80,867 60,637 242,816 135,947
-------------- -------------- -------------- --------------
Cost of revenues:
Cost of product sales 149,220 55,277 262,258 146,364
Cost of maintenance services 8,676 1,605 17,383 2,253
-------------- -------------- -------------- --------------
Total cost of revenues 157,896 56,882 279,641 148,617
-------------- -------------- -------------- --------------
Gross income (loss) (77,029) 3,755 (36,825) (12,670)
-------------- -------------- -------------- --------------
Operating expenses:
Selling, general and administrative 939,757 462,221 1,294,942 903,450
Research and development 71,044 95,926 --
Acquired in-process research and development (Note 4) 1,200,000 --
Consulting fees paid in stock options (Note 7) 1,616,187 6,386,187 --
-------------- -------------- -------------- --------------
Total operating expenses 2,626,988 462,221 8,977,055 903,450
-------------- -------------- -------------- --------------
Loss from operations (2,704,017) (458,466) (9,013,880) (916,120)
-------------- -------------- -------------- --------------
Non-operating income (expenses):
Interest and miscellaneous income (Note 8) 134,371 809 199,017 809
Interest and financing expenses (Note 9) (39,381) (230,302) (141,661) (1,150,652)
-------------- -------------- -------------- --------------
Total non-operating (expenses) income, net 94,990 (229,493) 57,356 (1,149,843)
-------------- -------------- -------------- --------------
Net loss $ (2,609,027) $ (687,959) $ (8,956,524) $ (2,065,963)
-------------- -------------- -------------- --------------
Net loss per common share - Basic and diluted (Note 2) $ (0.00) $ (0.01) $ (0.00) $ (0.02)
-------------- -------------- -------------- --------------
Weighted average number of common shares outstanding -
Basic and diluted (Note 2) 2,612,549,145 124,826,349 2,028,178,674 124,826,511
-------------- -------------- -------------- --------------
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 SIX MONTHS ENDED APRIL 30, 2004 (Unaudited)
Common Stock
Common Stock To Be Issued Additional
----------------------- ------------------ Paid-In Accumulated Note
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 218,302,941 218,303 3,072,134 $(1,500,000) 1,790,437
Common stock
issued for
services received
and in settlement
of liabilities 116,943,296 116,943 615,750 732,693
Common stock
issued to
officers and
other employees
as bonuses 398,620,692 398,621 179,379 578,000
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 30,000,000 $1,200,000 1,200,000
Cash payments to
Synosphere, LLC
members in lieu
of stock (470,833) (18,833) (18,833)
Grant of common
stock as bonuses
to employees of
Synosphere, LLC 8,447,278 375,000 375,000
Value assigned to
services received
in exchange
for options 6,386,187 6,386,187
Net loss (8,956,524) (8,956,524)
------------- ---------- ---------- ---------- ----------- ------------ ----------- -----------
BALANCE,
April 30, 2004 2,763,291,274 $2,763,291 37,976,445 $1,556,167 $29,210,445 $(33,754,856) $(1,500,000) $(1,724,593)
============= ========== ========== ========== =========== ============ =========== ===========
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)
Six Months Ended April 30,
2004 2003
----------- -----------
(Restated)
Cash flows from operating activities:
Net loss $(8,956,524) (2,065,963)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 87,358 23,937
Provisions for sales returns, rebates and doubtful accounts 16,069 4,217
Acquired in-process research and development (Note 4) 1,200,000 --
Services received in exchange for common stock (Note 7) 617,165 308,788
Services received in exchange for common stock options (Note 7) . 6,386,186 --
Beneficial conversion feature of convertible debentures -- 985,139
Gains on settlements of debenture obligations (Note 6) (197,017) --
Net changes in assets and liabilities:
Accounts receivable 105,802 (29,387)
Inventories (243,464) (29,279)
Deposit for purchase of inventory (400,000) --
Prepaid expenses 1,945 (3,450)
Accounts payable and accrued liabilities (220,285) 338,108
----------- -----------
Net cash used in operating activities (1,602,765) (467,890)
----------- -----------
Cash flows from investing activities:
Payments to Synosphere, LLC members in lieu of common stock (18,833) --
Patent costs (2,466) --
----------- -----------
Net cash used in investing activities (21,299) --
----------- -----------
Cash flows from financing activities:
Bank overdraft -- 14,688
Net proceeds from issuances of convertible debentures -- 454,000
Net proceeds from exercises of common stock options 1,790,437 --
Proceeds from note payable -- --
Principal payments on notes payable (64,317) (1,746)
----------- -----------
Net cash provided by financing activities 1,726,120 466,942
----------- -----------
Net increase (decrease) in cash and cash equivalents 102,056 (948)
Cash at beginning of period 2,140 948
----------- -----------
Cash at end of period $ 104,196 --
=========== ===========
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)
Six Months Ended April 30,
2004 2003
---------- ----------
(Restated)
Supplemental schedule of cash activities:
Interest paid in cash $ 2,003 $ 4,602
Supplemental schedule of non-cash investing and financing activities:
Debenture principal and accrued interest thereon converted to common stock $2,904,772 $ 101,441
Issuance of common stock in settlement of:
Fees, services and expenses (including prepaid consulting $1,033,525 $ 308,788
contract)
Accounts payable and accrued expenses $ 395,626 $ 4,661
Accrued employee bonuses $ 578,000 $ --
Consulting fees paid with common stock options $6,386,186 $ --
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. 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.
Preparation of Interim Condensed Consolidated Financial Statements
These interim condensed consolidated financial statements for the periods ended
April 30, 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.
7
iBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Interim Condensed Consolidated Financial Statements (Continued)
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 April 30, 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 April 30, 2004, an aggregate of 35.8 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 April 30,
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.
3. 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 4 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 April 30, 2004 and
8
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Restatements of Previously Reported Fiscal 2004 Interim Financial Statements
(Continued)
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 six months ended April 30, 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, 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
three and six months ended April 30, 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 April 30, 2004, as presented
herein, reflects the $160,000 in related inventory which is in the process of
being physically returned by the retailer. 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.
4. 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 3 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.
5. Accrued Liabilities
Accrued liabilities consist of the following:
April 30, October 31,
2004 2003
---------- ----------
Accrued wages, benefits and payroll taxes $ 563,808 $ 915,040
Accrued interest 376,469 741,398
Accrued officer bonuses -- 578,000
Accrued sales commissions and vendor royalties 40,918 53,445
Taxes 19,274 19,028
Accrued customer deposits 9,615 --
---------- ----------
Total accrued liabilities $1,010,084 $2,306,911
========== ==========
9
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Accrued Liabilities (Continued)
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 April 30, 2004, the IRS had not yet
assessed, nor has the Company accrued for, any related penalties.
6. Convertible Debentures
The Company's outstanding convertible debentures consist of the following at
April 30, 2004:
Debenture Holder Amount
- -------------------------------------- --------------
Keshet L.P. $944,000
Laurus Master Fund 262,858
Keshet Fund L.P. 157,099
Talbiya B. Investments Ltd. 49,719
- -------------------------------------- --------------
Total $1,413,676
- -------------------------------------- --------------
During the six-month period ended April 30, 2004, the Company issued
1,379,530,624 shares of its common stock in conversion of $2,609,562 in
principal and $321,460 of accrued interest, net of $26,250 in costs and $197,017
in gains on settlement of the conversion.
The remaining convertible debentures were due on October 31, 2003. The holders
have made no demand for payment.
7. 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) 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
10
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Stockholders Deficit (Continued)
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 April 2004, 10 million shares were issued upon the application of
$175,000 to the Deposit for the Virtual Keyboard product ("Deposit for Purchase
of Inventory" for $400,000 in the accompanying balance sheet at April 30, 2004).
In addition, options to purchase 5 million shares of common stock are being held
in escrow pursuant to option agreements 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 six months ended April 30, 2004, the Company issued shares of its
common stock for services received and in settlement of liabilities as follows:
November 2003
o 10 million shares valued at $37,000 for legal services provided by
Greg Sichenzia.
o 9.6 million shares valued at $35,425 to various creditors in
satisfaction of their outstanding amounts due.
o 0.5 million shares valued at $1,975 to a company that provided
edgarizing and related services during the quarter ended January 31,
2004.
o 1.0 million shares valued at $3,700 to a company for marketing
services during the quarter ended January 31, 2004.
December 2003
o 81.0 million shares valued at $126,360 in accordance with a one year
consulting contract with D. Scott Elliott for merger and acquisition
services.
February 2004
o 1.0 million shares valued at $40,000 for legal services provided by
Greg Sichenzia.
o 1,335,188 shares to individuals in satisfaction of their outstanding
amounts due ($43,223).
March 2004
o 2.5 million shares valued at $75,000 for legal services provided by
Greg Sichenzia.
April 2004
o 2.0 million shares valued at $80,000 for public relations services.
Common Stock Issued to Officers and Other Employees as Bonuses
December 2003
o 204,482,763 shares valued at $296,500 in partial settlement of
accrued bonuses at October 31, 2003 to officers and employees.
January 2004
o 194,137,931 shares of our common stock in final settlement of
$281,500 in accrued bonus at October 31, 2003.
11
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Stockholders Deficit (Continued)
Stock Options and Warrants
During the six months ending April 30, 2004, the Company granted stock options
to individuals in exchange for the following consulting services:
November 2003
o 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
o 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
o 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, is also a member of Pangea Investments Gmbh.
March 2004
o Options valued at $1,616,186 to purchase 151,045,455 shares of
common stock (at a 20% discount from market, as defined) to D. Scott
Elliott for general business and financial consulting services to
assist the Company with its expansion plans and entry into other
markets.
The Company has valued the options granted using the Black-Sholes stock option
pricing model. The total fair value of the options granted during the six months
ending April 30, 2004 was $6,386,187. Based on the uncertainty of any future
value of these agreements, the Company expensed the value of the options in the
period ended April 30, 2004.
8. Interest and Miscellaneous Income
Interest and miscellaneous income consist of the following:
Three Months Six Months
Ended April Ended April
--------------------- ------------------------
2004 2003 2004 2003
---------- -------- ----------- ----------
Gains on settlements of vendor obligations $ -- $ $ -- $
Gains on settlements of debenture obligations 134,289 197,017
Gain on disposal of fixed asset 2,000
Other miscellaneous income 82 809 809
---------- -------- ----------- ----------
Total interest and miscellaneous income $134,371 $ 809 $ 199,017 $ 809
========== ======== =========== ==========
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
12
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Interest and Miscellaneous Income (Continued)
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 six-month period ended April 30, 2004.
9. Interest and Financing Expenses
Interest and financing expenses consist of the following:
Three Months Ended April Six Months Ended April
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Interest expense $ 39,381 $ 83,161 141,661 $ 165,513
Beneficial conversion features
of debentures issued -- 147,141 -- 985,139
---------- ---------- ---------- ----------
Total interest and financing expenses $ 39,381 $ 230,302 141,661 $1,150,652
========== ========== ========== ==========
10. 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.
11. Subsequent Events
Common Stock Issued for Services Received and in Settlement of Liabilities
Subsequent to April 30, 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.
13
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Subsequent Events (Continued)
o During May and June 2004, the Company issued 427,000 shares of its
common stock with an assigned aggregate fair market value of $10,140
to unrelated individuals for various services rendered.
o During 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 July 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.
Common Stock Issued to Officers and Other Employees as Bonuses
Subsequent to April 30, 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. The amount was reflected in the
accompanying balance sheet at April 30, 2004 as "Common Stock to be
Issued".
o During June 2004, the Company issued 1,234,266 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.
In addition, options valued at $91,000 to purchase 10,000,000 shares of common
stock (at a 15.0% discount from market, as defined) were issued in May 2004 to
Jeffrey Firestone for providing legal counsel on international issues in mergers
and acquisitions. 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.
14
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
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.
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 an FM Stereo card
that allows a PDA user to listen to FM Stereo while simultaneously
running other programs. Our pocketRADIO has 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.
15
OUR RECENT SIGNIFICANT DEVELOPMENTS
On June 15, 2004, we issued a press release describing the delays in our
securing the new Virtual Keyboard product from Enterprise. During April 2004 we
made a $400,000 deposit with Enterprise for the initial shipment of the Virtual
Keyboard. As of June 20, 2004, we are pursuing discussions with Enterprise to
ascertain the timing of deliveries of the Virtual Keyboard product.
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 corresponding impact on our results of operations.
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 corresponding 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
on our 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 April 30, 2004
("fiscal 2004 second quarter") were $80,867, an increase of $20,230, or 33%, as
compared to $60,637 for the three months ended April 30, 2003 ("fiscal 2003
second quarter"). Our consolidated total revenues for the six months ended April
30, 2004 ("fiscal 2004 six month period") were $242,816, an increase of
$106,869, or 79%, as compared to $135,947 for the six months ended April 30,
2003 ("fiscal 2003 six month period"). Our product sales constituted 90% and 93%
of our consolidated total revenues for the fiscal 2004 second quarter and six
month period, respectively, as compared to 87% of our consolidated total
revenues for the fiscal 2003 second quarter and six 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 $72,433 for the fiscal 2004 second quarter, an increase
of $19,770, or 38%, as compared to $52,663 in product sales for the fiscal 2003
second quarter. Our product sales were $224,649 for the fiscal 2004 six month
period, an increase of $106,291, or 90%, as compared to $118,358 in product
sales for the fiscal 2003 six 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 $77,029 and $36,825 for the fiscal 2004
second quarter and six month period, respectively, and a consolidated gross
income of $3,755 and a consolidated gross loss of $12,670 for the fiscal 2003
second quarter and six month period, respectively. In turn, these consolidated
gross losses equated to negative gross margins of 95% and 15% for the fiscal
2004 second quarter and six month period, respectively, and a positive gross
margin of 6% and a negative gross margin of 9% for the fiscal 2003 second
quarter and six month period, respectively. Our fiscal 2004 consolidated gross
losses and negative gross margins were attributable to gross losses of $76,787
and $37,609, and resulting negative gross margins of 106% and 17%, on our
product sales during the fiscal 2004 second quarter and six month period,
respectively. Similarly, in fiscal 2003 we experienced gross losses of $2,644
and $28,006, and resulting negative gross margins of 5% and 24%, on our product
sales during the fiscal 2003 second quarter and six 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. Specifically, as we disclosed in
Note 3 to these financial statements, we have restated the results of our
operations for the quarter and six month periods ended April 30, 2004, to
reflect the reversal of a sale of $357,000 which was subsequently deemed to have
been a consignment sale. The impact of this transaction, after restatement, was
the expense of the related freight costs which the Company remains burdened with
totaling $25,205.
Our consolidated total operating expenses were $2,626,988 for the fiscal 2004
second quarter, an increase of $2,164,767, or 468%, from the $462,221 incurred
during the fiscal 2003 second quarter. Our consolidated total operating expenses
were $8,977,055 for the fiscal 2004 six month period, an increase of $8,073,605,
or 894%, from the $903,450 incurred during the fiscal 2003 six month period.
Our consolidated selling, general and administrative ("SG&A") expenses were
$939,757 for the fiscal 2004 second quarter, an increase of $477,533, or 103%,
from the $462,221 incurred during the fiscal 2003 second quarter. Our
consolidated SG&A expenses were $1,294,942 for the fiscal 2004 six month period,
an increase of $391,492, or 43%, from the $903,450 incurred during the fiscal
2003 six month period. We incurred substantial dollar and percentage increases
in our wages and benefits expense in the second quarter of fiscal 2004 due to
bonuses issued to the officers of Synosphere in accordance with their employment
agreements ($375,000) and the inclusion of Synosphere's operations
(approximately $82,000; primarily other wages) for the same period (there was
minmal activity for Synosphere in the first fiscal quarter ended January 31,
2004) The expenses for accountants, consultants and attorneys have increased as
a result of our efforts to expand our business and search for new opportunities.
Such costs, excluding the consulting fees paid with stock options, amounted to
$340,050 and $502,795 for the three and six months ended April 2004 and $90,019
and $294,655 for the three and six months ended April 2003, respectively.
Our consolidated research and development ("R&D") expenses were $71,044 and
$95,926 for the fiscal 2004 second quarter and for the fiscal 2004 six month
period, respectively. These research and development costs are directly related
to the acquisition of Synosphere and their continuing efforts to develop and
work on products for introduction in the PDA marketplace. As noted in Note 3 to
the April 30, 2004 Condensed Consolidated Financial Statements included in this
filing, we have expensed the cost of our acquisition of Synosphere, $1,200,000,
as Acquired Research and Development costs.
We incurred consulting expenses paid in stock options totaling $1,616,187 and
$6,386,187 in the three and six month periods ended April 2004. This cost
represents the fair value of stock options issued for services to the following
entities:
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.
17
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.
March 2004
Options valued at $1,616,186 to purchase 151,045,455 shares of common stock (at
a 20% 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.
The Company has valued the options granted using the Black-Scholes stock option
pricing model. 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. We expect to continue utilizing our
common stock and options to procure necessary consulting services during this
fiscal year since our financial condition makes the probability of securing
additional capital difficult and costly. Please refer to Notes 7 and 11 to the
Condensed Consolidated Financial Statements included in this filing for further
details of our stock activity.
Our resulting losses from operations for the fiscal 2004 second quarter and six
month period were $2,704,017 and $9,013,880, respectively. The preceding
compares to losses from operations for the fiscal 2003 second quarter and six
month period of $458,466 and $916,120, 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. Our interest expense
was $39,381 for the fiscal 2004 second quarter, a decrease of $190,921, or 83%,
from the $230,302 incurred during the fiscal 2003 second quarter. Our interest
expense was $141,661 for the fiscal 2004 six month period, a decrease of
$1,008,991, or 88%, from the $1,150,652 incurred during the fiscal 2003 six
month period. This decrease is due to $147,141 and $985,139 of beneficial
conversion features of debentures issued during the three and six months of
fiscal 2003, respectively. These charges were not repeated during fiscal 2004.
The remaining decrease in interest expense during the three and six month
periods ended April 2004 versus 2003 directly relates to the conversion of the
debentures which resulted in a lower debt balance. During the fiscal 2004 three
and six month periods we realized non-cash aggregate gains of $134,289 and
$197,017, respectively, 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.
Primarily as a result of the foregoing, we incurred losses of $2,609,027 ($0.00)
per basic and diluted share and $8,956,524 ($0.00) per basic and diluted share
for the fiscal 2004 second quarter and six month period, respectively. The
preceding compares to losses of $687,959 ($0.01) per basic and diluted share and
$2,065,963 ($0.02) per basic and diluted share for the fiscal 2003 second
quarter and six 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
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 April 30, 2004, our working
capital deficit was $1,889,337 and our stockholders' deficit was $1,724,953.
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 an unrestricted cash balance of $104,196 at April 30,
2004, as compared to $2,140 at October 31, 2003.
18
We had outstanding convertible debentures with an aggregate principal face
amount of $1,413,675 at April 30, 2004, of which $1,413,675 was to become due
and payable during our fiscal year ending October 31, 2004. 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. During
the six-month period ended April 30, 2004, the Company issued 1,379,530,624
shares of its common stock in conversion of $2,609,562 in principal and $321,460
of accrued interest, net of $26,250 in costs and $197,017 in gains on settlement
of the conversion.
Our Consolidated Cash Flows
Our operating activities utilized $1,602,765 in cash during the fiscal 2004 six
month period, an increase of $1,134,875, or 243%, from the $467,890 in cash
utilized during the fiscal 2003 six month period. Our increased utilization
substantially reflects a $6,787,680, or 513%, net increase in our net non-cash
charges, being substantially offset by the $6,890,561 increase in our net loss.
The most significant reduction in our non-cash charges was a $985,139 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
$6,386,186 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 $105,802 decrease in
accounts receivable, a $243,464 increase in inventories to meet the order from a
large consumer retailer (see discussion above and in Note 3 to the condensed
consolidated financial statements included herein), a $400,000 increase in
deposit for the purchase of inventory and a $220,285 decrease in accounts
payable. Based on the exercise of stock options in the 2004 period, we were able
to pay certain accounts payable and accrued liabilities to continue our
operations. Cash flows from operations in 2003 reflect the increase in our
accounts payable and accrued liabilities of $338,108 due to our decreased cash
flows experience continuing from late 2002 into 2003.
Our investing activities used a total of $21,299 during the fiscal 2004 six
month period to fund the acquisition of Synoshere in the amount of $18,833, and
the additional patent costs incurred of $2,466. There was no cash used in
investing activities during the fiscal 2003 six month period.
Our financing activities provided $1,726,120 in cash during the fiscal 2004
third quarter, an increase of $1,259,178, or 270%, from the $466,942 in cash
provided by financing activities during the fiscal 2003 six month period. Our
fiscal 2004 six month period reflects cash inflows primarily from the exercise
of common stock options. 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 six 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 bank overdraft.
Our Planned Capital Expenditures
We currently have no material commitments for capital expenditures other than
the completion of the Synosphere products which is currently estimated at $2.4
million over the next 12 months. We estimate that the costs to finalize the Blue
Dock product for market will consist of approximately $1.1 million of product
enhancement and $600,000 of administrative costs. Completion of the Analog TV
Tuner and the Satellite Radio Accessory products for market will consist of
$500,000 of product enhancement and $200,000 of administrative costs. The
significant costs for product enhancement are necessary to engineer the designs
for lower cost components in order to be price-competitive in the PDA market. We
are limited in our current cash availability and, accordingly, such expenditures
will limited the cash flows available during the next 12 months.
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.
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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.
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.
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 April 30, 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None for the period ending April 30, 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 six month period ended April 30, 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
In March 2004, IBIZ issued an option to purchase up to 151,045,455 shares of
common stock (at 20% discount from market, as designed) to D. Scott Elliott for
general business and financial consulting services.
ISSUANCES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS
In March 2004, IBIZ issued 2.5 million shares valued at $75,000 for legal
servicesprovided by Greg Sichenzia
In April 2004, IBIZ issued 2,000,000 shares of restricted common stock to a
company for public relations services.
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.
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 1ST DAY OF DECEMBER 2004
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IBIZ TECHNOLOGY CORP.
By: /s/ KENNETH W. SCHILLING
- ---------------------------------------
Kenneth W. Schilling, President,
and acting principal accounting officer
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