As filed with the Securities and Exchange Commission on March 17, 2005
An Exhibit List can be found on page II-6.
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
IBIZ TECHNOLOGY CORP.
(Name of small business issuer in its charter)
Florida 7379 86-0933890
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer)
incorporation or organization) Classification Code Number) Identification No.
2238 WEST LONE CACTUS DRIVE, #200
PHOENIX, ARIZONA 85201
(623) 492-9200
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
KENNETH SCHILLING, CEO
2238 WEST LONE CACTUS DRIVE, #200
PHOENIX, ARIZONA 85201
(623) 492-9200
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
WITH COPIES TO:
GREGORY SICHENZIA, ESQ.
DARRIN M. OCASIO, ESQ.
SICHENZIA ROSS FRIEDMAN FERENCE LLP
1065 AVENUE OF AMERICAS
NEW YORK, NEW YORK 10018
(212) 930-9700
Fax: (212) 930-9725
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] If this Form is a
post-effective amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering. [
]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
====================================================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
BE REGISTERED REGISTERED PRICE PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value 197,416,408(2) $0.0014 $276,382.97 $32.53
- --------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value 750,000,000(3) $0.0014 $1,050,000.00 $123.59
- --------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value 265,640,510(4) $0.0014 $371,896.71 $43.77
- --------------------------------------------------------------------------------------------------------------------
TOTAL 1,213,056,918 $199.89
====================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of
1933, using the average of the high and low price as reported on the
Over-The-Counter Bulletin Board on March 16, 2005.
(2) Represents 100% of the shares of common stock issued to certain of the
selling stockholders.
(3) Represents 150% of the shares of common stock issuable upon conversion of
a promissory note issued to a selling stockholder.
(4) Represents 100% of the shares of common stock issuable upon exercise of
warrants issued to certain of the selling stockholders.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
2
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED MARCH 17, 2005
iBiz Technology Corp.
1,213,056,918 shares of our common stock
This prospectus relates to the resale by the selling stockholders of an
aggregate of 1,213,056,918 shares of our common stock, par value $.001 per
share, including up to (i) 197,416,408 shares of common stock issued to certain
of the selling stockholders; (ii) 750,000,000 shares of common stock issuable
upon conversion of a promissory note issued to a selling stockholder; and (iii)
265,640,510 shares of common stock issuable upon the exercise of warrants issued
to certain of the selling stockholders. The selling stockholders may sell common
stock from time to time in the principal market on which the stock is traded at
the prevailing market price or in negotiated transactions.
The shares of common stock are being registered to permit the selling
stockholders to sell the shares from time to time in the public market. The
stockholders may sell the shares through ordinary brokerage transactions,
directly to market makers of our shares or through any other means described in
the section entitled "Plan of Distribution". We cannot assure you that the
selling stockholders will sell all or any portion of the shares offered in this
prospectus.
We will pay the expenses of registering these shares. We will not receive any
proceeds from the sale of shares of common stock in this offering. All of the
net proceeds from the sale of our common stock will go to the selling
stockholders. However, we will receive the exercise price of any common stock we
issue to the selling stockholders upon conversion of the promissory note and
exercise of the warrants. We expect to use the proceeds received from the
conversion of the promissory note and exercise of their warrants, if any, for
general working capital purposes.
Our common stock is registered under Section 12(g) of the Securities Exchange
Act of 1934 and is listed on the Over-The-Counter Bulletin Board under the
symbol "IBZT." The last reported sales price per share of our common stock as
reported by the Over-The-Counter Bulletin Board on March 16, 2005 was $0.0014.
Investing in these securities involves significant risks. Investors should not
buy these securities unless they can afford to lose their entire investment.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is March __, 2005.
The information in this prospectus is not complete and may be changed. This
prospectus is included in the registration statement that was filed by iBiz
Technology Corp. with the Securities and Exchange Commission. The Selling
Stockholder may not sell these securities until the registration statement
becomes effective. This prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
3
TABLE OF CONTENTS
Page
------
Prospectus Summary 5
Recent Developments 6
Risk Factors 7
Use of Proceeds 11
Market for Common Equity and Related Stockholder Matters 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Business 20
Description of Property 24
Legal Proceedings 25
Management 26
Executive Compensation 27
Certain Relationships and Related Transactions 28
Security Ownership of Certain Beneficial Owners and Management 29
Description of Securities 30
Indemnification for Securities Act Liabilities 31
Selling Stockholders 32
Plan of Distribution 35
Legal Matters 37
Experts 37
Available Information 39
Index to Consolidated Financial Statements 40
Part II. Information Not Required in Prospectus 76
Indemnification of Directors and Officers 76
Other Expenses of Issuance and Distribution 76
Recent Sales of Unregistered Securities 76
Exhibits 78
Undertakings 80
Signatures 81
4
PROSPECTUS SUMMARY
GENERAL OVERVIEW
We design, manufacture, through subcontractors, and distribute a line of
accessories for personal digital assistants and handheld computer market which
is distributed through large retail chain stores and e-commerce sites. We also
market LCD monitors, OEM notebook computers, third party software, and
general-purpose financial application keyboards.
For the year ended October 31, 2004 and 2003, we had net losses of $(13,389,175)
and $(4,462,182), respectively. We expect to continue to incur significant
expenses. Our operating expenses have been and are expected to continue to
outpace revenues and result in significant losses in the near term. We may never
be able to reduce these losses, which will require us to seek additional debt or
equity financing.
Our principal offices are located at 2238 West Lone Cactus Drive, Suite 200,
Phoenix, Arizona 85021, and our telephone number is (623) 492-9200. Our web site
is located at www.ibizcorp.com. We were formed under the laws of the State of
Florida.
The Offering
Common stock offered by selling stockholders............ Up to 1,213,056,918 shares, including up to
197,416,408 shares of common stock, 750,000,000
shares issuable upon the conversion
of a promissory note, and 265,640,510
shares of common stock issuable upon the
exercise of warrants. This number
represents 25.59% of the total number of
shares to be outstanding following this
offering assuming the exercise of all
securities being registered.
Common stock to be outstanding after the offering........ Up to 4,740,801,332 shares
Use of proceeds.......................................... We will not receive any proceeds from the sale
of the common stock. However, we will receive
the conversion and exercise price of any common stock
we issue to the selling stockholders upon conversion
of the promissory note and exercise of the
warrants. We expect to use the proceeds
received from the conversion of their promissory note
and exercise of their warrants, if any, for general
working capital purposes.
Over-The-Counter Bulletin Board Symbol....................IBZT
The above information regarding common stock to be outstanding after the
offering is based on 3,725,160,822 shares of common stock outstanding as of
March 16, 2005 and assumes the subsequent issuance of common stock to the
selling stockholders, conversion of the promissory note and exercise of warrants
by our selling stockholders.
5
RECENT DEVELOPMENTS
On February 18, 2005, we closed a transaction pursuant to a Subscription
Agreement, dated as of February 18, 2005, with an accredited investor pursuant
to which the accredited investor shall lend an aggregate principal amount of
$700,000 to us in exchange for (i) 8% promissory note in that aggregate
principal amount, and (ii) warrants to purchase shares of our common stock equal
to one warrant for each two shares of our common stock which would be issued on
the closing date of the loan assuming the complete conversion of the promissory
note. The aforementioned securities were issued to the Lender by us pursuant to
Rule 506 of Regulation D as promulgated under the Securities Act of 1933, as
amended (the "Act"), Section 4(2) of the Act and/or Section 4(6) of the Act.
In accordance with the Subscription Agreement, we closed on an initial loan of
$200,000 and will close on the remaining $500,000 of the loan within five
business days after the actual effectiveness of this registration statement
covering the underlying securities.
The promissory note bears interest at 8% per annum and mature one year after
issuance. The promissory note is convertible into shares of our common stock,
par value $.001 per share. As currently in effect, the conversion price of the
promissory note means seventy percent of the lowest closing bid price during the
twenty trading days ending on the trading day before the conversion date.
Each of the warrants is exercisable until five years after its issuance. The per
share exercise price of the warrants are $0.003.
The timely and full fulfillment of our obligation to have a registration
statement on Form SB-2 declared effective by the Securities and Exchange
Commission no later than 90 days from the closing has been personally guaranteed
by Kenneth Schilling, our president who has in addition pledged 101,208,447
shares of our common stock as security for such obligation.
In connection with this financing, we paid a finder's fee in an amount equal to
10% of the loan, a due diligence fee of 2% of the loan and will issue an
aggregate of 20,000,000 warrants at an exercise price of $0.0035.
6
RISK FACTORS
INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CONSIDER THE FOLLOWING DISCUSSION OF RISKS AS WELL AS OTHER INFORMATION IN THIS
PROSPECTUS. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES.
ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY DEEM IMMATERIAL ALSO MAY IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED. IN SUCH CASE, THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES WHICH WILL COMPEL US TO
SEEK ADDITIONAL CAPITAL.
For the fiscal year ended October 31, 2004, we sustained a loss of approximately
$(13,389,175) and for the fiscal year ended October 31, 2003, we sustained a
loss of $(4,462,182). Future losses are anticipated to occur. We continue to
have insufficient cash flow to grow operations and we cannot assure you that we
will be successful in reaching or maintaining profitable operations.
OUR INDEPENDENT AUDITORS HAVE EXPRESSED DOUBT ABOUT OUR ABILITY TO CONTINUE AS A
GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN FUTURE FINANCING.
In their report dated January 21, 2005, except for Note 23, for which the date
is March 10, 2005, our independent auditors stated that our financial statements
for the year ended October 31, 2004 were prepared assuming that we would
continue as a going concern. Our ability to continue as a going concern is an
issue raised as a result of a loss for the year ended October 31, 2004 in the
amount of $(13,389,175) and an accumulated deficit of $38,187,507as of October
31, 2004. We continue to experience net operating losses. Our ability to
continue as a going concern is subject to our ability to generate a profit
and/or obtain necessary funding from outside sources, including obtaining
additional funding from the sale of our securities, increasing sales or
obtaining loans and grants from various financial institutions where possible.
The going concern qualification in the auditor's report increases the difficulty
in meeting such goals and there can be no assurances that such methods will
prove successful.
WE FACE UNCERTAINTY ABOUT ADDITIONAL FINANCING FOR OUR FUTURE CAPITAL NEEDS,
WHICH MAY PREVENT US FROM GROWING OUR BUSINESS.
To achieve our business objectives we will require significant additional
financing for working capital and capital expenditures that we may raise through
public or private sales of our debt and equity securities, joint ventures and
strategic partnerships. No assurance can be given that such additional funds
will be available to us on acceptable terms, if at all. When we raise additional
funds by issuing equity securities, dilution to our existing stockholders will
result. If adequate additional funds are not available to us, we may be required
to significantly curtail the development of one or more of our projects and our
projections and results of operations would be materially and adversely
affected.
WE HAVE A LIMITED PRODUCT RANGE WHICH MUST BE EXPANDED IN ORDER TO EFFECTIVELY
COMPETE.
To effectively compete in our industry, we need to continue to expand our
business and generate greater revenues so that we have the resources to timely
develop new products. We must continue to market our products and services
through our direct sales force and expand our e-commerce distribution channels.
At the present time, we have no other products in the development process. We
cannot assure you that we will be able to grow sufficiently to provide the range
and quality of products and services required to compete.
WE HAVE FEW PROPRIETARY RIGHTS, THE LACK OF WHICH MAY MAKE IT EASIER FOR OUR
COMPETITORS TO COMPETE AGAINST US.
Our products, principal and otherwise, are not covered by any exclusive
proprietary rights. While we have no current knowledge of any of our principal
products being marketed directly by our vendors or indirectly by others, there
can be no assurance as to the prospective absence of significant competition.
OUR CONTINUING INABILITY TO PERFORM MEANINGFUL RESEARCH AND DEVELOPMENT
ACTIVITIES DIRECTED AT ULTIMATELY MARKETING OUR OWN PATENTED PROPRIETARY
PRODUCTS MAKES US HIGHLY SUSCEPTIBLE TO COMPETITION.
Given our currently limited financial and other resources, we currently perform
no research and development activities. Historically, we primarily have relied
upon acquiring or licensing technologies and products from unrelated third
parties. While we have periodically performed limited in-house research and
development in the past, we did not perform any in-house research and
development during the fiscal years ended October 31, 2004 and 2003, as reported
herein. Our continuing inability to perform meaningful research and development
activities directed at ultimately marketing our own patented proprietary
products makes us highly susceptible to competition.
7
RISKS RELATED TO SOME OF OUR OUTSTANDING SECURITIES
THE LARGE NUMBER OF SHARES UNDERLYING THE 8% CONVERTIBLE PROMISSORY NOTE AND
WARRANTS MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of March 16, 2005, we had 3,725,160,822 shares of common stock issued and
outstanding and an obligation to reserve 750,000,000 shares issuable upon
conversion of the promissory note. In addition, we have outstanding options and
warrants to purchase 285,880,510 shares of common stock. Under certain
circumstances described in the next risk factor, the number of shares of common
stock issuable upon conversion of the outstanding promissory note may increase
if the market price of our stock declines. All of the shares, including all of
the shares issuable upon conversion of the promissory note and upon exercise of
our warrants, may be sold without restriction. The sale of these shares may
adversely affect the market price of our common stock.
IF CERTAIN CONDITIONS ARE MET, THE ADJUSTABLE CONVERSION PRICE FEATURE OF THE 8%
CONVERTIBLE PROMISSORY NOTE COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER
NUMBER OF SHARES, WHICH WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Our obligation to issue shares upon conversion of our convertible promissory
note is essentially limitless. The conversion price of the promissory note means
seventy-five percent of the lowest closing price during the twenty trading days
ending on the trading day before the conversion date. The following is an
example of the number of shares of our common stock that are issuable, upon
conversion of the note, based on market prices 25%, 50% and 75% below the
current conversion price of $0.0014.
Percentage of With Number of Shares
% Below Market Price Per Share Discount of 30% Issuable Outstanding Stock
- -------------- --------------- --------------- -------- ----------------
25% $.00105 $.000735 952,380,952 19.05%
50% $.00070 $.000490 1,428,571,429 28.57%
75% $.00035 $.000245 2,857,142,857 57.14%
As illustrated, the number of shares of common stock issuable upon conversion of
our convertible note will increase if the market price of our stock declines,
which will cause dilution to our existing stockholders.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF THE 8% CONVERTIBLE
PROMISSORY NOTE MAY ENCOURAGE INVESTORS TO MAKE SHORT SALES IN OUR COMMON STOCK,
WHICH COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
Upon certain triggering events described above, the promissory note is
convertible into shares of our common stock at a 30% discount to the trading
price of the common stock prior to the conversion. The significant downward
pressure on the price of the common stock as the selling stockholder converts
and sells material amounts of common stock could encourage short sales by
investors. This could place further downward pressure on the price of the common
stock. The selling stockholders could sell common stock into the market in
anticipation of covering the short sale by converting their securities, which
could cause the further downward pressure on the stock price. In addition, even
prior to the time of actual conversions, exercises, and public resales, the
market "overhang" resulting from the mere existence of our obligation to honor
such conversions or exercises could depress the market price of our common
stock.
THE ISSUANCE OF SHARES UPON ANY CONVERSION OF THE 8% CONVERTIBLE PROMISSORY NOTE
OR EXERCISE OF OUTSTANDING WARRANTS WILL CAUSE IMMEDIATE AND SUBSTANTIAL
DILUTION TO OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the promissory note and exercise of
warrants will result in substantial dilution to the interests of other
stockholders since the selling stockholders would likely thereafter sell the
shares issued upon such conversion. Although, pursuant to their terms, each
selling stockholder individually may not convert their note and/or exercise
their warrants if such conversion or exercise would cause them to own more than
4.99% of our outstanding common stock at a given point in time, this restriction
does not prevent each selling stockholder from converting and/or exercising some
of their holdings seriatim. In this way, the selling stockholders could sell
more than the 4.99% limit while never owning at any time more than this limit.
There is no upper limit on the number of shares that may be issued which will
have the effect of further diluting the proportionate equity interest and voting
power of holders of our common stock, including investors in this offering.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY THE 8% CONVERTIBLE PROMISSORY NOTE,
WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR RAISE
ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE NOTE, IF REQUIRED, COULD RESULT IN
LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE OF SUBSTANTIAL ASSETS.
The note is due and payable, with 8% interest, one year from the date of
issuance, unless sooner converted into shares of our common stock. In addition,
any event of default as described in the note could require the early repayment
of the note, including a default interest rate of 15% on the outstanding
8
principal balance of the note if the default is not cured with the specified
grace period. We anticipate that the full amount of the note, together with
accrued interest, will be converted into shares of our common stock, in
accordance with the terms of the note. If we are required to repay the note, we
would be required to use our limited working capital and raise additional funds.
If we were unable to repay the note when required, the note holder could
commence legal action against us and foreclose on all of our assets to recover
the amounts due. Any such action would require us to curtail or cease
operations.
RISKS RELATED TO OUR COMMON STOCK
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13 in order to maintain price
quotation privileges on the OTC Bulletin Board. On February 17, 2005, we
received an "E Symbol" and our common stock may be delisted from the OTC-BB if
we did not file our annual report on Form 10-KSB for the year ended October 31,
2004 on or prior to March 17, 2005. We filed our Form 10-KSB on March 14, 2005
and the "E Symbol" was removed at the open of trading on March 16, 2005.
If we fail to remain current on our reporting requirements, we could be removed
from the OTC Bulletin Board. As a result, the market liquidity for our
securities could be severely affected by limiting the ability of broker-dealers
to sell our securities and the ability of stockholders to sell their securities
in the secondary market.
WE DO NOT INTEND TO PAY CASH DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE
FUTURE.
We currently anticipate that we will retain all future earnings, if any, to
finance the growth and development of our business and do not anticipate paying
cash dividends on our common stock in the foreseeable future. Any payment of
cash dividends will depend upon our financial condition, capital requirements,
earnings and other factors deemed relevant by our board of directors.
THERE MAY BE A VOLATILITY OF OUR STOCK PRICE.
Since our common stock is publicly traded, the market price of the common stock
may fluctuate over a wide range and may continue to do so in the future. The
market price of the common stock could be subject to significant fluctuations in
response to various factors and events, including, among other things, the depth
and liquidity of the trading market of the common stock, quarterly variations in
actual or anticipated operating results, growth rates, changes in estimates by
analysts, market conditions in the industry (including demand for Internet
access), announcements by competitors, regulatory actions and general economic
conditions. In addition, the stock market from time to time experienced
significant price and volume fluctuations, which have particularly affected the
market prices of the stocks of high technology companies, and which may be
unrelated to the operating performance of particular companies. As a result of
the foregoing, our operating results and prospects from time to time may be
below the expectations of public market analysts and investors. Any such event
would likely result in a material adverse effect on the price of the common
stock.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of the
person; and
o make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the suitability
determination; and
9
o that the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
10
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the selling
stockholders. All of the net proceeds from the sale of our common stock will go
to the selling stockholders. We will receive the proceeds from conversion of the
promissory note and the exercise of warrants
We anticipate that any proceeds from the conversion of the promissory note or
exercise of warrants by the selling stockholders will be used for general
corporate purposes, which may include but are not limited to working capital,
capital expenditures, acquisitions and the repayment or refinancing of our
indebtedness.
11
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock currently is traded on the Over-The-Counter Bulletin Board
("OTC-BB") under the symbol "IBZT." Prior to September 30, 2003, OTC-BB symbol
was "IBIZ." The following table sets forth the high and low sales prices, as
quoted by the OTC-BB, for our common stock for each quarter during our two most
recent fiscal years ended October 31, 2004 and subsequent thereto. These
quotations reflect inter-dealers prices, without retail mark-ups, mark-downs or
commissions, and may not represent actual transactions.
Fiscal Quarter Ended High Low
- --------------------------- --------------- ----------------
January 31, 2003 0.035 0.00381
April 30, 2003 0.005 0.0119
July 31, 2003 0.065 0.00313
October 31, 2003 0.0058 0.003
January 31, 2004 0.0695 0.0555
April 30, 2004 0.0366 0.0305
July 31, 2004 0.0091 0.0085
October 31, 2004 0.0033 0.0028
January 31, 2005 0.0028 0.0026
On February 17, 2005, we received an "E Symbol" and our common stock may be
delisted from the OTC-BB if we did not file our annual report on Form 10-KSB for
the year ended October 31, 2004 on or prior to March 17, 2005. We filed our Form
10-KSB on March 14, 2005 and the "E Symbol" was removed at the open of trading
on March 16, 2005.
We currently estimate that there are approximately 299 holders of record of our
common stock. Given our continuing need to retain any earnings to fund our
operations and desired growth, we have not declared or paid, nor do we currently
anticipate declaring or paying for the foreseeable future, any dividends on our
common stock.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Any statements about our expectations, beliefs, plans, objectives, assumptions
or future events or performance are not historical facts and may be
forward-looking. These statements are often, but not always, made through the
use of words or phrases such as "anticipate," "estimate," "plans," "projects,"
"continuing," "ongoing," "expects," "management believes," "we believe," "we
intend" and similar words or phrases. Accordingly, these statements involve
estimates, assumptions and uncertainties, which could cause actual results to
differ materially from those expressed in them.
Because the factors discussed in this prospectus could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us or on behalf of our company, you should not place undue
reliance on any such forward-looking statements. Further, any forward-looking
statement speaks only as of the date on which it is made, and we undertake no
obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events. New factors emerge from time to
time, and it is not possible for us to predict which will arise. In addition, we
cannot assess the impact of each factor on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward- looking statements.
INTRODUCTION
Concurrent with the February 2, 2005 deployment of our new www.GoMoGear.com
e-commerce website, as more fully discussed below, we principally became an
Internet-based retailer of a broad and diversified offering of various consumer
electronics with an emphasis on products that are portable or mobile. Prior
thereto, and since 1998, we were a more narrowly-focused wholesaler and, to a
lesser extent, Internet-based retailer through our www.ibizpda.com e-commerce
website, of various accessories primarily intended for use with Personal Digital
Assistants ("PDAs"). We continue to conduct substantially all of our
non-research and development related activities through our wholly-owned
subsidiary, iBIZ, Inc. (hereinafter, "iBIZ, Inc.").
As a result of our January 20, 2004 acquisition of Synosphere, LLC (hereinafter,
"Synosphere"), as more fully discussed below, we subsequently have engaged in
significant activities directed at, among other efforts, further developing
certain of the acquired technologies. We currently conduct substantially all of
our product research and development activities through Synosphere, now as a
wholly-owned subsidiary of ours.
With the exception of the aforementioned warranty-related technical support
services, the only other services we performed during the fiscal years 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 5.7% of our total consolidated
revenues for the fiscal year ended October 31, 2004, will likely continue to
decrease in future fiscal years.
OUR RECENT SIGNIFICANT DEVELOPMENTS
Business Evolution - On February 2, 2005, we deployed a second e-commerce
website at www.GoMoGear.com.. This website currently features approximately
5,000 consumer electronics products available to us on a non-exclusive basis
through a significant new vendor relationship with DBL Distributing, Inc., a
privately-held, wholesale distributor of consumer electronics based in
Scottsdale, Arizona. This site additionally offers, as does our www.ibizpda.com
website, approximately one-hundred and thirty accessories for PDAs that we
procure on a non-exclusive basis from a number of other vendors. Our product
offerings on www.GoMoGear.com currently range in complexity and price from
disposable batteries with a suggested retail price of $0.99 at the low end to
sophisticated color printers with a suggested retail price of $4,999.95 at the
high-end. Our current product offering on www.GoMoGear.com emphasizes,
consistent with our prior emphasis of PDA accessories, consumer electronics
products and related accessories that are portable or mobile, such as MP3
players, DVD players, digital cameras and GPS devices.
Acquisition of Synosphere - On January 20, 2004, we acquired all of the
outstanding membership interests in Synosphere, a Texas-based limited liability
development-stage company, pursuing the development of certain handheld
computing technologies, in exchange for 30.0 million shares of our common stock.
As the technological feasibility of each of the acquired technologies had yet to
be fully established as of the acquisition date, the aggregate $1.2 million
purchase price, based on the then prevailing market price of our common stock,
was immediately reflected within our results of operations for our fiscal 2004
first quarter ended January 31, 2004. Subsequent to the acquisition, we have
engaged in significant activities directed at further developing certain of the
acquired technologies.
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
13
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 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,
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 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.
o Non-Cash Equity Issuances. We periodically issue shares of our common
stock in exchange for, or in settlement of, services. Our management
values the shares issued in such transactions at either the then market
price of our common stock, after taking into consideration factors such as
the volume of shares issued or trading restrictions, or the value of the
services received, whichever is more readily determinable. We also issue
options, at a discount from market, for services. Our management values
such options using Black Scholes.
OUR CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004 AND
2003
Our consolidated total revenues for the year ended October 31, 2004 ("fiscal
2004 year end") were $368,650, a decrease of $116,732, or 24%, as compared to
$485,382 for the year ended October 31, 2003 ("fiscal 2003 year end"). Our
product sales constituted 94% of our consolidated total revenues for the fiscal
year end as compared to 93% of our consolidated total revenues for the fiscal
year end, 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 $347,544 for the fiscal 2004 year end, a decrease of
$106,253, or 23%, as compared to $453,797 in product sales for the fiscal 2003
year end. We substantially attribute the preceding decrease to sales of our
pocketRADIOs, which we began shipping to customers in late October 2003. The
pocketRADIOs accounted for approximately 38% of our product sales in fiscal 2004
year end and approximately 53% of our product sales in fiscal 2003 year end.
Sales of our Travel Kits represented 10% ($37,045) of our sales in the fiscal
2004 year end and 16%($78,019) of our sales in the fiscal 2003 year end.
Although to a significantly lesser extent, we also realized incremental decrease
14
in product sales from our XELA Keyboard, which we began shipping to customers in
March 2003. Sale of our XELA Keyboard accounted for approximately 6% and 8% of
our sales in fiscal 2004 and 2003 year end, respectively. Offsetting these
decreases was an increase in sales of our KeySync Keyboard. Sales from our
KeySync Keyboards accounted for approximately 9% ($32,942) during the fiscal
2004 year end while they only accounted for approximately 4% ($18,821) of our
sales during the fiscal 2003 year end. 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 the fiscal years ended October 31, 2004 and 2003.
We incurred consolidated gross losses of $335,812 for the fiscal year end and
consolidated gross loss of $33,621 for the fiscal 2003 year end.. In turn, these
consolidated gross losses equated to negative gross margins of 91% for the
fiscal 2004 year end and a negative gross margin of 7% for the fiscal year end.
Our fiscal 2004 consolidated gross loss and negative gross margin were
attributable to gross losses of $324,925, and a resulting negative gross margin
of 93%, on our product sales during the fiscal 2004 year end. Our fiscal 2003
year end consolidated gross loss and negative gross margin was attributable to
gross loss of $43,478 and a resulting negative gross margin of 10%. We
principally attribute the preceding gross losses and negative gross margins on
our product sales to our inability, given our continuing reduction of product
sales, to leverage our allocable direct labor ($179,505 or 25% of Cost of
Revenues in the fiscal 2004 year end). In addition, during 2004 we experienced
an increase cost of revenues due to the write off of obsolete inventory
($139,214, or 20% of Costs of Revenues).
Our consolidated total operating expenses were $13,097,485 for the fiscal 2004
year end, an increase of $10,312,943, or 370%, from the $2,784,542 incurred
during the fiscal 2003 year end. As further detailed below, this overall
increase in our operating expenses primarily was attributable to non-cash
charges incurred for stock-based officer bonuses and the write-down of certain
intellectual property rights and molds.
Our consolidated SG&A expenses were $3,501,397 for the fiscal 2004 year, an
increase of $1,887,142, or 117%, from the $1,614,255 incurred during the fiscal
2003 year. We incurred a 85% increase in our payroll costs from the fiscal year
ended 2003 of $590,505 to $1,287,543. This is a direct result of the inclusion
of Synosphere's operations, including $672,500 (paid in stock) in sign-on and
contractual performance bonuses for the key officers of Synosphere. We also
experienced substantial increases in our consulting and legal fees ($1,192,226
and $281,183 for the fiscal years ended 2004 and 2003, respectively) as we
continue to pay consultants and attorneys with common stock in order to reduce
cash outlays. See discussion below where we have accounted for Consulting Fess
paid with stock options as a separate line item in our Consolidated Statement of
Losses included in this filing. The expenses for consultants and attorneys have
increased as a result of our efforts to expand our business and search for new
opportunities. Our accounting and auditing fees increased due to the additional
work to meet SEC filing requirements and respond to SEC comment letters on our
filings in 2004 ($251,538 and $179,390 for the fiscal years 2004 and 2003,
respectively). We have also accrued $100,000 as a potential penalty for our
failure to fulfill a sales contract in our fiscal quarter ended April 30, 2004.
Our consolidated selling, general and administrative ("SG&A") expenses were
$1,614,255 for fiscal 2003, an increase of $212,192, or 15.1%, from the
$1,402,063 incurred during fiscal 2002.Despite the relatively modest net change
in our SG&A expenses, their composition varied significantly. We incurred
substantial dollar and percentage increases in our accounting and auditing fees
during fiscal 2003 as a result of the proposed spin-off of our iBIZ, Inc.
subsidiary, as previously discussed, and, to a lesser extent, the increased
outsourcing of our accounting and financial functions and the required
implementation of certain provisions of the Sarbanes-Oxley Act of 2002. To a
significantly lesser dollar extent, we incurred a substantial percentage
increase in our depreciation and amortization expenses as a result of our fiscal
2002 purchases of intellectual property rights and property and equipment, in
our advertsing expenses as a result of 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.
Substantially offsetting the preceding were significant dollar and percentage
expense decreases realized primarily as a result of the non-recurrence of
significant fiscal 2002 charges associated with our then outsourcing of billing
and collection functions and various legal consultations made in connection with
certain business ventures then under consideration, certain proposals to settle
then outstanding debt obligations, and the contemplated changes in certain
businesses. As a result of ongoing working capital constraints, our two officers
continued to receive during fiscal 2003 only sporadic payments of salaries which
often were in amounts less that that stipulated for in their respective
employment contracts. Additionally, our other employees periodically experienced
delays in the payment of their salaries or wages due to cash shortfalls. In
recognition of the resulting personal hardships that were imposed and in an
effort to retain these remaining critical employees, particularly given of
minimal staffing, we deemed it critical to award retention bonuses during fiscal
2003. As the retention bonuses paid to our two officers principally took the
form of common stock issuances, $1,045,287, or 82.1%, of the overall $1,273,189
bonus compensation charge to our fiscal 2003 results of operations was non-cash
in nature. We similarly awarded $114,713 in stock-based retention bonuses to our
two officers during fiscal 2002. During our fiscal 2003 fourth quarter, we
recognized a $125,000 impairment charge related to the write-down of molds and
intellectual property rights underlying our XELA Keyboard which we acquired in
July 2002. This impairment was based on our then downwardly revised estimate of
the anticipated cash flows to be derived from future sales of our XELA Keyboard
as a result of lower than anticipated sales. We incurred no such impairment
charges during fiscal 2002.
Our consolidated research and development ("R&D") expenses were $597,121 for the
fiscal 2004 year. 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 PDA marketplace. As noted in Note 14 to the
October 31, 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. In light of our continuing working
capital constraints, we currently do not anticipate performing any product
research and development activities during fiscal 2005. As such, we will remain
materially dependent upon procuring innovative and competitive products from
external vendors. We incurred no research and development expenses during fiscal
2003.
Our consolidated asset impairment expenses were $652,281 for the fiscal 2004
year, an increase of 422% or $527,281 from the $125,000 asset impairment
15
experienced in fiscal 2003. During fiscal 2004, we placed an initial purchase
order with Enterprise AG, ("Enterprise"), for a new virtual keyboard product and
remitted a required $400,000 deposit. When Enterprise subsequently failed to
deliver such keyboards, we filed a lawsuit in Israel against Enterprise for
breach of contract and demanding that the deposit be immediately returned.
However, we have uncertainties regarding our ability to recover this deposit and
deemed the asset as impaired and wrote-off the $400,000 balance in its entirety.
During fiscal 2004 we also entered into a three-year agreement with Virtual
Devices, Inc., ("VDI"), pursuant to which we would be licensed to use certain
patented technologies of VDI applicable to handheld computing devices. We
submitted $200,000 of the required $300,000 payment to VDI in July 2004. Due to
cash constraints we have been unable to fulfill the cash requirements of the
agreement and continue with this agreement. We deemed the licensed intellectual
property rights to be impaired and wrote-off the $200,000 unamortized balance in
its entirety. During fiscal 2004 Ttools, Inc., the licensor and vendor of our
XELA keyboard product filed a lawsuit against us for breach of contract. As a
result we deemed the underlying tooling and intellectual property rights as
impaired and wrote-off the then unamortized balance of $52,281 in its entirety.
Previously, during our fiscal 2003 year, we downwardly revised our estimated
cash flows from the XELA keyboard product and recognized a $125,000 impairment
charge to write-down the underlying tooling and intellectual property rights.
During fiscal 2004, we granted stock options to individuals in exchange for the
following consulting services. We valued the options granted using the
Black-Scholes stock option pricing model. The total fair value of the options
granted during fiscal 2004 was $6,969,186. Based on the uncertainty of any
future value of these agreements, we expensed the value of the options in fiscal
2004.
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 us with
our expansion plans and entry into other markets.
December 2003 - Options valued at $60,000 to purchase 50 million shares of
common stock (at a 15% discount form 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, 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) to D. Scott Elliott for
general business and financial consulting services to assist us with our
expansion plans and entry into other markets.
May 2004 - Options valued at $492,000 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).
May 2004 - Options valued at $91,000 to purchase 10,000,000 shares of common
stock (at a 15% discount from market, as defined) to Jeffrey Firestone for
providing legal counsel on International issues in mergers and acquisitions.
Options to purchase 10,000,000 shares were exercised in May 2004 resulting in
the receipt of approximately $128,000.
During fiscal 2004, we wrote-off $150,000 of a note receivable that we deemed
uncollectible. The original note arose when options 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. Pursuant
to the option agreement, we transferred 100 million shares of our common stock
into an escrow account pending payment of the aggregate $1.5 million exercise
price and note receivable. Through June 4, 2004, 15 million shares were issued
upon receipt of $74,990 and the application of $175,000 to the Deposit for the
Virtual Keyboard product. Subsequently, on June 23, 2004, we 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. We then recorded
a $150,000 expense based on our estimated probable loss relating to the share
recovery.
Our resulting losses from operations for the fiscal year ended 2004 was
$13,433,297. The preceding compares to losses from operations for the fiscal
year ended 2003 of $2,818,163, respectively.
Our non-operating other income primarily consist of gains on settlements of
debenture and vendor obligations and miscellaneous other income. During the
fiscal 2004 year we realized non-cash aggregate gains of $232,583 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. Our non-operating 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 $211,328 for the fiscal 2004 year, a decrease of $1,521,265, or 88%, from
the $1,732,593 incurred during the fiscal 2003 year. This decrease is due to
$1,379,077 of beneficial conversion features of debentures issued during the
fiscal 2003 year. These charges were not repeated during fiscal 2004.
Primarily as a result of the foregoing, we incurred a net loss of $13,389,175
($0.01) per basic and diluted share) in fiscal 2004 as compared to a net loss of
$4,462,182 ($0.02 per basic and diluted share) in fiscal 2003.
Our future ability to achieve profitability in any given future fiscal period
remains highly contingent upon us realizing significantly increased product
16
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 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 2003, 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 FOR THE YEAR ENDED OCTOBER 31,
2004 AND 2003
OUR OVERVIEW
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 year ended October 31, 2004, our working
capital deficit was $3,423,584 and our stockholders' deficit was $3,373,445.
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 $88 at
October 31, 2004, as compared to $2,140 at October 31, 2003.
We had outstanding convertible debentures with an aggregate principal face
amount of $863,675 at October 31, 2004, of which $863,675 is currently due and
payable. During December 2004, the remaining debentures balances and accrued
interest thereon were converted into common stock and, accordingly, are
considered paid in full.
OUR CONSOLIDATED CASH FLOWS
Our operating activities utilized $2,476,216 in cash during the fiscal 2004 year
end, an increase of $1,692,570, or 216%, from the $783,646 in cash utilized
during the fiscal 2003 year end. Our increased utilization substantially
reflects a $7,501,020, or 301%, net increase in our non-cash charges, net, being
substantially offset by the $8,926,993 increase in our net loss. The most
significant reductions in our non-cash charges were a $1,379,077 reduction in
the charges associated with the beneficial conversion features of issued
convertible debentures in 2003. This reduction is offset by increases of
$1,200,000, $1,464,268 and $6,969,186 in our non-cash acquisition of in-process
research and development and services rendered in exchange for common stock and
options, respectively. Partially offsetting these non-cash charge items were a
$34,905 decrease in accounts receivable, a $101,672 increase in inventories, a
$94,211 decrease in prepaid expenses and an $893,244 increase 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 in cash and settle
approximately $1 million through the issuance of common stock, but incurred a
significant increase in liabilities related to our operations of Synosphere and
ongoing administrative and professional fees associated with our recurring
operations in order to continue our operations. Cash flows from operations in
2003 reflect the increase in our accounts payable and accrued liabilities of
$1,363,989 due to our decreased cash flows experience continuing from late 2002
into 2003.
Our investing activities consumed $218,883 during fiscal 2004 to fund the
acquisition of Synoshere in the amount of $18,833 and the investment in a
License Agreement with Virtual Devices, $200,000. We had no investing activities
during the preceding fiscal 2003.
Our financing activities provided $2,692,997 and $784,838 in cash during fiscal
2004 and 2003, respectively. Fiscal 2003 reflects cash inflows primarily from
our issuances of common stock as options were exercised. We also experienced
cash inflows from a bank overdraft and the proceeds from the issuances of notes
payable and advances from our officers. These cash inflows in fiscal 2004 were
offset by the principal payments on notes payable. Fiscal 2003 reflects cash
inflows primarily from our issuances of convertible debentures, and, to a
significantly lesser extent, the incurring of a loan and the issuance of common
stock. The preceding cash inflows were slightly offset by the cash outflows
related to principal repayments made on outstanding notes payable and the
collateralization of a letter of credit.
As a result of the foregoing, our unrestricted cash decreased by $2,052 to $88
at October 31, 2004, as compared with $2,140 at October 31, 2003.
OUR OFF-BALANCE SHEET LIABILITIES AND COMMITMENTS
Our off-balance sheet liabilities principally consist of lease payment
obligations incurred under two operating leases, which are required to be
excluded from our consolidated balance sheet by accounting principles generally
accepted in the United States of America. By far, our most significant operating
leases pertains to our corporate facilities. Our other operating lease pertains
to office equipment. The three operating leases are noncancellable.. We incurred
aggregate rent expense under operating leases of $68,095 and $43,625 during
fiscal years 2004 and 2003, respectively.
17
The future aggregate minimum lease payments under operating lease agreements in
existence at October 31, 2004 are as follows:
FISCAL YEARS ENDING OCTOBER 31,
-------------------------------
2005...................................... $ 70,000
2006...................................... 33,200
2007...................................... 700
2008...................................... --
2009...................................... --
----------
Total minimum operating lease payments.... $ 103,900
==========
We additionally have outstanding commitments related to employment agreements
with Kenneth Schilling and Mark Perkins which became effective July 1, 2001 and
remain in force through June 30, 2004. Mr. Schilling's contract provides for an
annual salary of $150,000, quarterly performance bonuses equal to one percent of
our total revenues, and the granting of an option allowing for his subsequent
purchase of 300,000 shares of our common stock at $0.20 per share. Mr. Perkin's
contract provides for an annual salary of $125,000, quarterly performance
bonuses equal to one percent of our total revenues, and the granting of an
option allowing for his subsequent purchase of 120,000 shares of our common
stock at $0.20 per share. Each stock option vested immediately and is
exercisable for a period of ten years. In the event of their voluntary
resignation, as defined, the officer shall be entitled to six month's salary. In
the event of their involuntary termination by us without cause, as defined, the
officer shall be entitled to one year's salary. In the event of a change in our
control, each officer shall be entitled to a lump sum payment equal to three
year's annual salary.
Furthermore, we recently assumed additional commitments in connection with our
January 20, 2004 acquisition of Synosphere as we concurrently entered into
two-year employment agreements with Bryan Scott and Ramon Pereles, its President
and Chief Marketing Officer, respectively. Pursuant to these agreements, Mssrs.
Scott and Pereles are to receive annual base salaries of $112,000 and $102,000,
respectively. Mssrs. Scott and Pereles are each to additionally receive
retention bonuses of 2,500,000 shares of our common stock. Mssrs. Scott and
Pereles are also each to receive $500,000 earn-out bonuses to be satisfied in
eight successive quarterly issuances of shares of our common stock equal to
$62,500 based upon the then market price of our common stock. A "golden
parachute" clause shall also be put in place such that if either of the employee
agreements are terminated by us or any successor that the above consideration is
payable in full as of the dates of their respective terminations.
OUR PLANNED CAPITAL EXPENDITURES
We had no significant planned capital expenditures, budgeted or otherwise, as of
October 31, 2004.
OUR SUBSEQUENT EVENTS
On December 7, 2004, we reached an agreement with the remaining debenture
holders and converted the outstanding principal balance of $863,675 and accrued
interest of $254,900 into 400,000,000 shares of our common stock. As a result of
this agreement, we will record a total of $390,086 benefit from the settlement
of the debt during the first quarter of fiscal 2005.
During December 2004, Pangea Investments GmbH returned 75 million shares to us
that were originally issued to an escrow account in connection with the original
option to purchase 100 million shares for services issued in January 2004 (see
Note 13).
On February 18, 2005, we closed a transaction pursuant to a Subscription
Agreement, dated as of February 18, 2005, with an accredited investor pursuant
to which the accredited investor lent an aggregate principal amount of $200,000
to us in exchange for (i) 8% promissory note in that aggregate principal amount,
and (ii) warrants to purchase shares of our common stock equal to one warrant
for each share of its common stock which would be issued on the closing date of
the loan assuming the complete conversion of the promissory note. An additional
$500,000 has been committed, subject to the filing of a registration statement.
Additional stock issuances after October 31, 2004:
o 2,566,667 shares of common stock where issued to an individual in exchange
for $7,000 of accounts payable.
o 75,000,000 shares of common stock were issued to an individual under a
private placement. We received approximately $90,000 in cash.
o 75,000,000 shares of common stock were issued to an individual under the
exercise of an option. We received approximately $293,000 in cash.
o 2,806,400 shares of common stock were issued in exchange for $14,032 of
accrued interest.
o 44,744,275 shares of common stock were issued to an individual for legal
services rendered; value $25,372.
o 45,749,741 shares of common stock were issued to an individual for legal
services rendered; value $110,600.
o 1,087,193 shares of common stock were issued to an individual for expenses
incurred on behalf of the Company; value $2,500.
18
o 113,786,170 shares of common stock were issued to two officers of
Synosphere for the quarterly bonuses called for in their employment
contracts; value $250,000.
POTENTIAL SIGNIFICANT DILUTION TO OUR EXISTING OR PROSPECTIVE SHAREHOLDERS
It should be noted by our existing shareholders, as well as potential
prospective shareholders, that you may experience significant dilution in your
respective equity interest and related voting rights from any subsequent
conversions of our remaining outstanding debentures by their holders, any
subsequent exercises of our outstanding stock purchase warrants and options by
their holders, future issuances by us of additional convertible debentures or
common shares, or any future grants by us of additional stock purchase warrants
and/or options. Your exposure to such dilution will increase to the extent that
the market price of our common stock declines below the price at which you
purchased, or converted into, shares of our common stock and we issue or grant
equity or equity-related instruments at the then lower market prices. The
liklihood that the market price of our common stock will decline, and that such
a decline will be significant, will further increase to the extent that any of
our existing shareholders elect to sell large numbers of our shares into the
marketplace, particularly during a short period of time given the limited
trading in our common shares. Given that we remain in need of significant
additional debt and/or equity financing, as previously discussed, and the
historical volatility in the market price of our common stock, our existing and
potential investors must give due consideration to the potential of significant
dilution to their respective equity interest and related voting rights.
OUR OTHER MATTERS
Seasonal and Inflationary Influences
We expect, absent materially adverse economic or counter-acting events, that our
fiscal first quarter ending January 31 will continue to benefit from increased
orders for the holiday shopping season and that our fiscal fourth quarter ending
October 31 will continue to benefit from increased orders for the back-to-school
shopping season. Conversely, we expect that our fiscal second and third quarters
ending April 30 and July 31, respectively, will continue to comparatively
experience softer orders as retailers seek to sell-through any surplus stock
remaining from the aforementioned shopping seasons and return to more normal
inventory levels.
To date, we have not been materially impacted by inflationary influences.
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.
In response to a personal lawsuit initiated by Kenneth W. Schilling, our
Chairman, Chief Executive Officer and President, against Douglas A. Dragoo and
Elizabeth W. Dragoo ("Dragoos") asserting breach of contract in connection with
a commercial office building jointly owned by Mr. Schilling and the Dragoos and
in which we were then tenants, the Dragoos counterclaimed on August 5, 2003 in
the Superior Court of the State of Arizona, County of Maricopa with a lawsuit
against Mr. Schilling and us alleging breach of contract, fraud, negligent
misrepresentation, and seeking compensatory and punitive damages as well as
legal fees. We intend to vigorously contest the counterclaim and do not believe
that we will incur any material liability in connection therewith.
Recently Issued Accounting Standards With Pending Adoptions
There currently are no recently issued accounting standards with pending
adoptions that have any applicability to us.
19
DESCRIPTION OF BUSINESS
GENERAL DESCRIPTION OF OUR CURRENT BUSINESS
Concurrent with the February 2, 2005 deployment of our new www.GoMoGear.com
e-commerce website, as more fully discussed below, we principally became an
Internet-based retailer of a broad and diversified offering of various consumer
electronics with an emphasis on products that are portable or mobile. Prior
thereto, and since 1998, we were a more narrowly-focused wholesaler and, to a
lesser extent, Internet-based retailer through our www.ibizpda.com e-commerce
website, of various accessories primarily intended for use with Personal Digital
Assistants ("PDAs"). We continue to conduct substantially all of our
non-research and development related activities through our wholly-owned
subsidiary, iBIZ, Inc. (hereinafter, "iBIZ, Inc.").
As a result of our January 20, 2004 acquisition of Synosphere, LLC (hereinafter,
"Synosphere"), as more fully discussed below, we subsequently have engaged in
significant activities directed at, among other efforts, further developing
certain of the acquired technologies. We currently conduct substantially all of
our product research and development activities through Synosphere, now as a
wholly-owned subsidiary of ours.
We were incorporated in the State of Florida in April 1994, although our
operations have been headquarted in the State of Arizona since November 1979.
Since February 2002, substantially all of our operations have been conducted
from leased facilities located at 2238 West Lone Cactus, #200, Phoenix, Arizona
85027.
Neither the content of our general corporate website at www.ibizcorp.com, nor of
our e-commerce websites at www.GoMoGear.com and www.ibizpda.com, is not part of
this report.
OUR RECENT SIGNIFICANT DEVELOPMENTS
Business Evolution - On February 2, 2005, we deployed a second e-commerce
website at www.GoMoGear.com. This website currently features approximately 5,000
consumer electronics products available to us on a non-exclusive basis through a
significant new vendor relationship with DBL Distributing, Inc., a
privately-held, wholesale distributor of consumer electronics based in
Scottsdale, Arizona. This site additionally offers, as does our www.ibizpda.com
website, approximately one-hundred and thirty accessories for PDAs that we
procure on a non-exclusive basis from a number of other vendors. Our product
offerings on www.GoMoGear.com currently range in complexity and price from
disposable batteries with a suggested retail price of $0.99 at the low end to
sophisticated color printers with a suggested retail price of $4,999.95 at the
high-end. Our current product offering on www.GoMoGear.com emphasizes,
consistent with our prior emphasis of PDA accessories, consumer electronics
products and related accessories that are portable or mobile, such as MP3
players, DVD players, digital cameras and GPS devices.
Acquisition of Synosphere - On January 20, 2004, we acquired all of the
outstanding membership interests in Synosphere, a Texas-based limited liability
development-stage company, pursuing the development of certain handheld
computing technologies, in exchange for 30.0 million shares of our common stock.
As the technological feasibility of each of the acquired technologies had yet to
be fully established as of the acquisition date, the aggregate $1.2 million
purchase price, based on the then prevailing market price of our common stock,
was immediately reflected within our results of operations for our fiscal 2004
first quarter ended January 31, 2004. Subsequent to the acquisition, we have
engaged in significant activities directed at further developing certain of the
acquired technologies.
OUR CURRENT BUSINESS STRATEGY
For the immediate future, our principal business strategy will be to achieve
revenue growth sufficient to leverage our fixed and semi-fixed basic
infrastructure costs, thereby allowing us to realize positive operating results
and cash flows. It is our hope that our recent decision to significantly broaden
our product offerings, as described above, will facilitate the revenue growth we
desperately need and seek. Absent our obtaining of significant debt and/or
equity financing, our timely realization of the preceding strategy will be a
prerequisite to our ability to continue as a going concern. Over the longer
term, our principal business strategy will be to generate positive operating
cash flow from our retailing of consumer electronics sufficient to fund our
further development of certain technologies we are exploring, including those
that we acquired in our acquisition of Synosphere. Should we be initially
successful at establishing the technological and commercial feasibility of these
technologies and subsequently successful in releasing and marketing a line of
related devices to the general public at large, we believe that such could
provide us with extensive revenue generating opportunities. However, there can
be no assurance that we will ultimately be successful in achieving the preceding
business strategies or that any related successes will be sufficiently lucrative
or timely to ensure that we will be able to continue as a going concern. See
"Managements Discussion and Analysis of Financial Condition and Results of
Operations - Current Uncertainty Regarding Our Ability to Continue as a Going
Concern" for further details.
OUR HISTORICAL PRINCIPAL PRODUCTS
During our fiscal years ended October 31, 2004 and 2003, as reported upon in the
accompanying financial statements, our line of products principally consisted of
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accessories for a wide array of PDAs. These accessories, which we continue to
market, 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
Keysync Keyboard with a suggested retail price of $69.99 at the high end. We
currently expect that the following historical principal products, which
accounted for in descending order the substantial majority of the net product
sales for the fiscal years reported herein, will likely continue to constitute a
significant portion of our net product sales until, if and when, the other newly
added consumer electronics products offered on our new www.GoMoGear.com
e-commerce website begin to contribute significant product sales:
ENTERTAINMENT DEVICES:
o Our pocketRADIO - We introduced our pocketRADIO to the consumer
marketplace in October 2002. Our pocketRADIO is a FM Stereo card that
allows a PDA user to listen to FM Stereo while simultaneously running
other programs. It is available in CF (Compact Flash ) and SD (Secure
Digital) formats for PDAs operating Windows or PALM (TM) operating
systems, respectively. Our pocket RADIO has a AutoScan feature which
allows a PDA user to quickly locate available FM stations within a
particular geographic area and may be programmed to store up to eighteen
FM Station locations for instant recall. Each pocketRADIO is accompanied
by a pair of stereo headphones and is equipped with a jack allowing for
its connection to external speakers. Its automatic power management
feature provides for low power consumption while its "z" button feature
enables a user to turn-off the PDA's screen and backlight so as to further
conserve power. Our pocketRADIO have a suggested retail price of $49.99
and a one-year parts and labor warranty, which includes unlimited
technical support via our toll-free telephone number and www.ibizpda.com
website.
POWER DEVICES:
o Our Travel Kits - We introduced our first Travel Kit to the consumer
marketplace in March 2002. We currently offer thirty-two variations of our
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 and include a one-year parts and labor
warranty, which includes unlimited technical support via our toll-free
telephone number and www.ibizpda.com website.
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's accompanying CD-ROM-based custom
software drivers, which are loadable into a PDA via synchronization with a
personal computer, make it compatible with a wide array of PDAs utilizing
Windows or PALM (TM) operating systems. Our Keysync Keyboard resembles a
smaller-scale version of a conventional computer keyboard and easily
connects to a PDA either directly through a serial cable or indirectly
through the PDA's synchronization cradle. Its durable, lightweight
(approximately ten ounces) and compact design (approximately 10.5" long x
4.5" wide x 1.25" high) and independent power source (i.e., three AAA
batteries, which are included) make it suitable for use both in a
stationary workstation setting and in a temporary mobile work setting. Our
Keysync Keyboard has a suggested retail price of $69.00 and a one-year
parts and labor warranty, which includes unlimited technical support via
our toll-free telephone number and www.ibizpda.com website.
OUR HISTORICAL PRINCIPAL SERVICES
With the exception of the aforementioned warranty-related technical support
services, the only other services we performed during the fiscal years 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 5.7% of our total consolidated
revenues for the fiscal year ended October 31, 2004, will likely continue to
decrease in future fiscal years.
OUR CURRENT PRODUCT PROCUREMENT AND LICENSES
We currently procure all of our consumer electronics products, with the
exception of our historical line of accessories for PDAs, on a non-exclusive,
just-in-time basis from DBL. We are, and expect to remain for the foreseeable
future, materially dependent upon DBL for providing us in a timely manner with
substantially all of the products that are available for purchase by customers
via our www.GoMoGear.com website. Any disruption in our business relationship
with DBL will likely have a material adverse impact upon our business, and, as a
result, on our financial condition, results of operations and cash flows, from
which may not be able to recover.
We continue to procure our historical line of accessories for PDAs on a
non-exclusive basis through various licensing and manufacturing arrangements
with entities located in Taiwan, the People's Republic of China, and the United
States. We are, and expect to remain for the foreseeable future, materially
dependent upon the vendors cited below for providing us on a timely basis with
our historical principal products:
o Our pocketRADIOs - We procure our pocketRADIOs on an as needed, individual
purchase order basis from Prolink Microsystems Corporation ("Prolink"), a
full-service design, engineering and manufacturing entity which is located
in Taiwan. Prolink developed and owns the software embedded on the related
FM stereo card.
21
o Our Travel Kits - We procure our Travel Kits, as well as certain other
currently insignificant PDA cable and charging accessories, on an as
needed, individual purchase order basis from Poto Technology, a
full-service design, engineering and manufacturing entity which is located
in the People's Republic of China.
o Our Keysync Keyboard - We procure our Keysync Keyboard on an as needed,
individual purchase order basis from Datacomp Electronics Corporation, a
full-service design, engineering and manufacturing entity that specializes
in keyboard and data input devices, which is located in Taiwan.
OUR CURRENT MARKETING, SELLING AND DISTRIBUTION
With the exception of our line of accessories for PDAs, all of our products are
marketed solely on our www.GoMoGear.com e-commerce website. We continue to
market our historical line of PDA accessories primarily through national and
regional retailers (e.g., CompUSA, Inc.), third-party e-commerce websites (e.g.,
www.mobileplanet.com, www.pdamart.com and www.outpost.com), and our own
proprietary e-commerce websites (www.ibizpda.com and www.GoMoGear.com). To date,
products sales to customers residing outside of North America have been nominal.
As in recent fiscal years, we continue to substantially outsource our field
sales functions to unrelated commissioned representatives.
For the fiscal year ended October 31, 2004, Comp USA accounted for $100,398
(27.2%) of our consolidated net revenues. For the fiscal year ended October 31,
2003, Comp USA and Synnex accounted for $168,000 (34.6%) and $61,000 (12.6%),
respectively, of our consolidated net revenue. Given our continuing modest and
declining revenue base, the loss of Comp USA as a customer, absent the obtaining
of one or more substantially offsetting new customers, would likely have
materially adverse consequences on our overall business, and, as a result, on
our consolidated financial condition, results of operations and cash flows, from
which we may not be able to recover.
Given our limited financial and other resources, our recent advertising
activities have been, and are anticipated to continue to be, primarily limited
to cooperative advertising with national and regional retailers via their weekly
sales flyers and newspaper inserts, periodic promotions by third-party
e-commerce retailers, periodic direct mail flyers and catalogs, and occasionally
advertisements placed in targeted monthly periodicals. Our continuing inability
to perform significant marketing and advertising activities limits our ability
to grow our product sales and makes us highly susceptible to competition.
We continue to receive fully assembled and packaged products from all of our
vendors at our Phoenix, Arizona facility, from which we, in turn, fulfill and
ship orders to our customers.
OUR CURRENT COMPETITION
The broader consumer electronics marketplace is, as is the more narrowly defined
PDA accessory marketplace, highly diverse and competitive. Through our
www.GoMoGear.com e-commerce website, we directly compete with numerous
multi-channel (i.e., bricks-and-mortar, catalog and/or e-commerce) specialty
retailers of consumer electronics, including, among others, Best Buy, Comp USA
and Circuit City. We also indirectly compete with numerous single or
multi-channel diversified retailers that offer consumer electronics including,
among others, WalMart, Target, Sears and Amazon.com. We believe that the primary
competitive factors in the consumer electronics marketplace would include, among
possible others, selection, price, service and support, and corporate
reputation.
With respect to our historical line of accessories for PDAs in particular, we
directly and indirectly compete through our www.ibizpda.com and www.GoMoGear.com
e-commerce websites with many of the same retailers referenced above as well as
with various designers, assemblers and manufacturers of PDA accessories
including, among others, Palm, Toshiba, Hewitt-Packard and Research In-Motion.
The PDA accessories marketplace is, as is the underlying PDA market itself,
characterized by rapid technological changes in hardware and software, evolving
consumer preferences and demands, and the frequent introduction of new and
innovative products. We believe that the primary competitive factors in the PDA
accessories marketplace would include, among possible others,
price-to-performance characteristics, technological capabilities and
ease-of-use, product quality and reliability, service and support, and corporate
reputation.
The vast majority of our competitors enjoy the advantages of far greater
financial, marketing and technological resources than we currently have or
anticipate having in the foreseeable future. Given our limited financial and
other resources, we currently are unable to perform any significant marketing
and advertising activities which, in turn, severely limits our ability to grow
our sales and makes us highly susceptible to competition.
With respect to the retailing of consumer electronics, we currently believe that
our primary competitive strength would be our commitment to providing excellent
customer service and support through our toll-free telephone numbers and
e-commerce websites. With respect to our marketing of PDA accessories in
particular, we believe that our primary competitive strength would be the unique
and space-saving characteristics of our products. However, as we procure the
vast majority of our PDA accessories on a non-exclusive basis from overseas
vendors, they are highly susceptible to being marketed by others and to
imitation or duplicative designs.
Given the aforementioned risks and uncertainties, there can be no assurance that
we will be able to effectively compete in the future.
22
OUR CURRENT RESEARCH AND DEVELOPMENT
Our continuing research and development efforts principal involve our pursuit of
two technology initiatives. The first initiative involves our continuing pursuit
of an infra-red virtual keyboard technology for utilization primarily with PDAs,
certain cellular phones and portable computing devices. The second initiative
involves our more recent pursuit of certain technologies directed at giving a
PDA or certain cellular phones, via a docking station, the functionality of a
desktop computer. There can no assurance that we either or both of these
technology initiatives will be successful. In the absence of significant
external debt and/or equity financing, we currently anticipate that our related
research and development efforts during the fiscal year ending October 31, 2005
will be sporadic and limited to those that can be conducted by our current, or
subsequently employed, salaried staff.
Our research and development activities during the fiscal year ended October 31,
2004 were substantially limited to those initiatives discussed above, for which
we incurred $597,121 in expenses. Our ongoing initiative involving certain
handheld technologies is a continuation of research and development that had
been previously conducted by Synosphere, which we acquired on January 20, 2004.
As the technological feasibility of Synosphere's research and development
efforts had yet to be established as of the acquisition date, we were required
by U.S. generally accepted accounting principles to recognize a $1.2 million
acquisition-related charge. We did not perform any research and development
activities during the preceding fiscal year ended October 31, 2003.
With respect to our line of accessories for PDAs, we continue to rely upon, as
we have in recent years, on acquiring or licensing technologies and products
from unrelated third-parties.
OUR CURRENT PATENTS AND TRADEMARKS
We are the exclusive holder of rights related to the below patent applications,
each being filed in the U.S. Patents and Trademarks Office. Each patent that is
eventually granted, if any, will expire on the twentieth anniversary from its
original filing date. We hold the rights to the following patent pending utility
applications before the U.S. Patents and Trademarks Office:
o Intelligent docking station for a handheld personal computer (Application
No. 10/053,433 - Feb 1, 2002)
o Method For Integrating An Intelligent Docking Station With A Handheld
Personal Computer (Application No. 10/061,997- Feb 1, 2002)
o System for Intelligent Docking Station For A Handheld Personal Computer
(Application No. 10/051,264- Feb 1, 2002)
o Method For Data Transmission By Using Communication Drivers In An
Intelligent Docking Station/Handheld Personal Computer System (Application
No. 10/093,779 - March 8, 2002)
o Method For Data Transmission By Using Communication Drivers In An
Intelligent Docking Station/Handheld Personal Computer System (PCT
Application No. PCT/US03/6993 - March 7, 2003)
o Systems, Devices, And Methods For Transferring Data Between An Intelligent
Docking Station And A Handheld Personal Computer (Application No.
10/093,921- March 8, 2002)
o Method for video data transmission between an external video device and a
handheld personal computer system (Application No. 10/288,845- Nov 6,
2002)
o Manipulating the position of a horizontal-vertical visual indicator on a
PDA display via a one-hand manual screen horizontal-vertical visual
indicator device (Application No. 10/288,846- Nov 6, 2002)
o Performance Enhancement And Upgrade Attachment For A Handheld Computer
(Application No. 10/291,068- Nov 6, 2002)
o System, device, and method for receiving satellite radio on a handheld
computing device (Application No. 10/801,973 - March 15, 2004)
o Intelligent Docking Station For A Handheld Personal Computer (Application
No. 10/801,974 - March 15, 2004)
o Intelligent docking station integrated within a keyboard form factor for a
handheld computer (Application No. 10/821,433 - April 9, 2004)
We hold the rights to the following provisional patent applications before the
U.S. Patents and Trademarks Office. A provisional application expires one year
from it original filing date, unless a patent application is submitted
containing its subject matter to the U.S. Patents and Trademarks Office.
23
o Analog TV Tuner System & Apparatus For A Handheld Computer, Smart Phone,
or Wireless Phone (Provisional Application No. 60/545,823- Feb 19, 2004)
o Memory Card Light System (Provisional Application No. 60/553,375 - March
15, 2004)
o Memory Card System Having Visual Indicator (Provisional Application No.
60/553,382 - March 15, 2004)
o Memory Card Motor System (Provisional Application No. 60/555,171 - March
22, 2004)
o Satellite Radio (Provisional Application No. 60/576,846 - June 3, 2004)
o In-Stadium Satellite Radio Architecture and Service (Provisional
Application No. 60/627,007 - November 10, 2004)
We hold exclusive rights to the following trademarks registered with the U.S.
Patents and Trademarks Office that may be renewed on the tenth anniversary of
their respective registration dates:
o Keysync (Registration No. 2,470,437 - July 17, 2001)
o Blue Dock (US Serial No. 78,384,586 - March 15, 2004)
While we believe that the above patent applications and trademarks are
collectively important to our business, we currently do not believe that our
business is materially dependent upon any single patent or trademark.
OUR EMPLOYEES
We currently employ eight individuals on a full-time basis in the following
positions: president and chief executive officer, executive vice president, vice
president, president- Synosphere, vice-president of Synosphere, product manager,
technical support specialist, and administrative assistant. Our currently
outsource substantially all of our accounting and financial functions to a local
accounting firm, our information technology support requirements on an as needed
basis to various local firms, and our field sales functions to independent
commissioned sales representatives.
To date, we have not experienced any employee-related work stoppages or
slowdowns. Currently, none of our employees are represented by a labor union or
are subject to a collective bargaining agreement. We currently believe that our
employee relations are satisfactory.
DESCRIPTION OF PROPERTY
On February 1, 2002, we began leasing a 4,343 square foot facility at 2238 West
Lone Cactus, #200, Phoenix, Arizona 85201, which facility continues to encompass
all of our corporate functions and activities, with the exception of the
research and development activities addressed below. On February 1, 2005, upon
the expiration of the original three-year lease, we entered into a new one year,
non-cancelable operating lease for the same premises at a monthly rental of
$2,823.
On January 20, 2004, we acquired all of the outstanding membership interests in
Synosphere, a Texas-based, development-stage limited liability company, pursuing
the development of certain handheld computing technologies. From January 20,
2004 through February 1, 2004, the acquired research and development activities
were conducted from an employee's residence at no cost to us. From February 2,
2004 through May 31, 2004, we leased on a month-to-month basis a 264 square foot
facility in Richardson, Texas at a monthly rental of $1,150 to house these
research and development activities. On June 1, 2004, we relocated these
research and development activities into a 537 square foot facility in Austin,
Texas which we leased on a month-to-month basis through July 31, 2004 at a
monthly rental of $3,481. On August 1, 2004, we began leasing a 1,627 square
foot facility in Austin, Texas to house these research and development
activities. This lease has a non-cancelable, two-year term with monthly rental
payments of $2,441 during the first year and $2,508 during the second year. In
an effort to reduce our prospective operating costs, we vacated this facility on
February 11, 2005, relocated the research and development activities into the
personal residences of certain of our Austin-based employees, and requested that
the lessor release us from this lease. The lessor has informed us that a new
tenant has leased this facility and will take physical possession on or about
April 1, 2005, at which time the lessor will agree to cancel our lease and
release us from any further rent obligations.
We believe that our current Phoenix facility, complemented by the uncompensated
use of employee residences for our current product research and development
activities, will be sufficient for the foreseeable future. We additionally
believe that suitable alternative facilities are readily available for lease in
and around Phoenix and Austin should such become necessary.
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LEGAL PROCEEDINGS
In May 2004, Ttools, LLC (hereinafter, "Ttools"), our the supplier XELA keyboard
product, filed a lawsuit against us asserting breach of contract, conversion,
and unjust enrichment and $70,558 in damages, plus interest and legal fees. We
have counter-claimed asserting misrepresentations by Ttools. Our management
believes that their case is without merit and does not believe that the ultimate
outcome of this matter will have a material impact our consolidated financial
statements.
The United States Securities and Exchange Commission (hereinafter, "SEC")
currently is conducting a formal investigation into certain specific matters
that may constitute potential violations by us of the federal securities laws.
We believe that we have been fully cooperated with the SEC in its investigation
to date. We will publicly disclose the specific nature of any resulting SEC
allegations(s) if and when they become fully known, subject to any SEC mandated
confidentiality and as permitted by applicable federal securities laws.
With respect to the preceding SEC investigation, it should be noted that Kenneth
W. Schilling, the Company's Chairman, Chief Executive Officer and President,
remains the subject to a Cease and Desist Order from the SEC. The cease and
desist order constituted part of a negotiated settlement between Mr. Schilling
and the SEC that was formally entered into on February 28, 2001 pursuant to
which Mr. Schilling, without admitting or denying the SEC's allegations against
him, agreed to the entry of an Order enjoining him from violating Section 10(b)
of the Securities Exchange Act of 1934, as amended, and Rule 10-b5 thereunder,
and ordering him to pay a civil penalty of $20,000. In a related action, the
Company, without admitting or denying any of the SEC's findings, consented to a
cease-and-desist order enjoining it from committing or causing any violation or
any future violations of Section 10(b) of the Securities Exchange Act of 1934,
as amended, and Rule 10-b5 thereunder. The underlying SEC Complaint alleged that
Mr. Schilling provided false financial projections to a purported analyst for
research reports recommending the purchase of the Company's common stock. The
Complaint also stated that from February 1999 through June 1999, Mr. Schilling
placed seventeen press releases on the Company's corporate website which
contained direct hyperlinks to the analyst reports and, as late as February
2000, the Company maintained press releases on its corporate website which
referenced and contained hyperlinks to the analyst reports. The SEC further
alleged that in a February 19, 1999 press release, the Company characterized the
analyst as "independent" even though the Company, through its then investor
relations firm, had agreed to pay the analyst 200,000 shares of its common stock
for the report. The SEC found that Mr. Schilling had reviewed and approved the
press releases posted on the Company's corporate website. The SEC also alleged
that the false financial projections which appeared on the Internet fueled a
rise in both the price and the trading volume of the Company's common stock
Kenneth W. Schilling, our Chairman, Chief Executive Officer and President,
remains the subject to a Cease and Desist Order from the U.S. Securities and
Exchange Commission ("SEC"). The cease and desist order constituted part of a
negotiated settlement between Mr. Schilling and the SEC that was formally
entered into on February 28, 2001 pursuant to which Mr. Schilling, without
admitting or denying the SEC's allegations against him, agreed to the entry of
an Order enjoining him from violating Section 10(b) of the Securities Exchange
Act of 1934, as amended, and Rule 10-b5 thereunder, and ordering him to pay a
civil penalty of $20,000. In a related action, we, as a company, without
admitting or denying any of the SEC's findings, consented to a cease-and-desist
order enjoining us from committing or causing any violation or any future
violations of Section 10(b) of the Securities Exchange Act of 1934, as amended,
and Rule 10-b5 thereunder. The underlying SEC Complaint alleged that Mr.
Schilling provided false financial projections to a purported analyst for
research reports recommending the purchase of our stock. The Complaint also
stated that from February 1999 through June 1999, Mr. Schilling placed seventeen
press releases on our corporate website which contained direct hyperlinks to the
analyst reports and, as late as February 2000, we maintained press releases on
our corporate website which referenced and contained hyperlinks to the analyst
reports. The SEC further alleged that in a February 19, 1999 press release, we
characterized the analyst as "independent" even though we, through our then
investor relations firm, had agreed to pay the analyst 200,000 shares of our
common stock for the report. The SEC found that Mr. Schilling had reviewed and
approved the press releases posted on our corporate website. The SEC also
alleged that the false financial projections which appeared on the Internet
fueled a rise in both the price and the trading volume of our common stock
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 our fiscal 1999 first quarter. We continue to maintain an
accrual for this liability in our consolidated financial statements. It is our
intent to seek a reduced settlement of this liability with the IRS, if and when,
we have sufficient cash so as to enable us to honor any settlement. As of
October 31, 2004, the IRS had not yet assessed, nor have we accrued for, any
related penalties.
25
MANAGEMENT
NAME AGE POSITION
- ---- --- --------
Kenneth W. Schilling 53 President, Chief Executive Officer, Acting
Principal Accounting and Financial Officer,
Chairman of Board of Directors
Mark Perkins 41 Executive Vice President and Director
Our directors serve until the next annual meeting and until their successors are
elected and qualified. Our officers are appointed to serve for one year until
the meeting of the board of directors following the annual meeting of
stockholders and until their successors have been elected and qualified. There
are no family relationships between any of our directors or officers.
Kenneth W. Schilling founded our predecessor, Southwest Financial Systems, in
1979, and has been our President, Chief Executive Officer, and Chairman of the
Board of Directors since our founding. Mr. Schilling studied electrical
engineering at the University of Pittsburgh and the Devry Institute of
Technology and served in the U.S. military. Mr. Schilling remains the subject to
a Cease and Desist Order from the U.S. Securities and Exchange Commission
("SEC"). The cease and desist order constituted part of a negotiated settlement
between Mr. Schilling and the SEC that was formally entered into on February 28,
2001 pursuant to which Mr. Schilling , without admitting or denying the SEC's
allegations against him, agreed to the entry of an Order enjoining him from
violating Section 10(b) of the Securities Exchange Act of 1934, as amended, and
Rule 10-b5 thereunder, and ordering him to pay a civil penalty of $20,000. In a
related action, we, as a company, without admitting or denying any of the SEC's
findings, consented to a cease-and-desist order enjoining us from committing or
causing any violation or any future violations of Section 10(b) of the
Securities Exchange Act of 1934, as amended, and Rule 10-b5 thereunder. The
underlying SEC Complaint alleged that Mr. Schilling provided false financial
projections to a purported analyst for research reports recommending the
purchase of our stock. The Complaint also stated that from February 1999 through
June 1999, Mr. Schilling placed 17 press releases on our corporate website which
contained direct hyperlinks to the analyst reports and, as late as February
2000, we maintained press releases on our corporate website which referenced and
contained hyperlinks to the analyst reports. The SEC further alleged that in a
February 19, 1999 press release, we characterized the analyst as "independent"
even though we, through our then investor relations firm, had agreed to pay the
analyst 200,000 shares of our common stock for the report. The SEC found that
Mr. Schilling had reviewed and approved the press releases posted on our
corporate website. The SEC also alleged that the false financial projections
which appeared on the Internet fueled a rise in both the price and the trading
volume of our common stock
Mark H. Perkins joined us in 1994 and currently serves as our Executive Vice
President. Mr. Perkins was subsequently appointed to our Board of Directors on
March 5, 1999. Prior to his joining us, Mr. Perkins was employed at American
Express as a project manager for major systems implementation, a position he
held for eight years. Mr. Perkins earned a BA degree in business management from
California State University-Sonoma in 1987.
Code of Ethics
We have adopted a Code of Ethics that applies to all of our directors, officers
and employees, including our principal executive officer, principal financial
officer and principal accounting officer. We intend to satisfy the disclosure
requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from,
a provision of our Code of Ethics by filing a Current Report on Form 8-K with
the SEC, disclosing such information.
Committees of the Board of Directors
As of the date of this prospectus, we do not have any committees of our board of
directors.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT, AS AMENDED.
Based solely upon our review of copies of Forms 3, 4 and 5, and any subsequent
amendments thereto, furnished to the Company by our directors, officers and
beneficial owners of more than ten percent of our common stock, we are aware of
the following Forms 3, 4 and/or 5 which certain of our directors, officers or
beneficial owners of more than ten percent of our common stock that, during our
fiscal year ended October 31, 2004, failed to file on a timely basis reports
required by Section 16(a) of the Securities Exchange Act of 1934:
o Forms 4 filed by Mark H. Perkins, the Company's Executive Vice President
and director, on (i) January 8, 2004; (ii) January 20, 2004; (iii)
February 19, 2004; (iv) March 10, 2004; (v) April 1, 2004; and (vi) August
3, 2004.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation paid or accrued by us to
26
certain of our executive officers during our fiscal years ended October 31,
2004, 2003 and 2002.
SUMMARY COMPENSATION TABLE
Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) Awards ($) (#)(1) ($) Compen-sation
- --------------------- --------- ------------ ----------- ------------ -------------- ----------- ------------ --------------
Kenneth W. Schilling, 2004 150,000.00 0 0 0.00 0 0 0
President, CEO, 2003 175,000.00 0 0 523,652.39(1) 0 0 0
Acting Principal 2002 68,750.00 0 0 57,691.82(2) 0 0 0
Accounting Officer,
and Director
- --------------------- --------- ------------ ----------- ------------ -------------- ----------- ------------ --------------
Mark H. Perkins, 2004 125,000.00 0 0 0.00 0 0 0
Executive Vice 2003 150,000.00 0 0 521,634.65(3) 0 0 0
President, Director 2002 69,791.69 0 0 57,021.48(4) 0 0 0
- --------------------- --------- ------------ ----------- ------------ -------------- ----------- ------------ --------------
(1) Represents 272,083,624 shares issued at an average price of $0.002 during
fiscal year 2003.
(2) Represents 57,691,823 restricted shares issued at the market price of
$0.001 on August 22, 2002.
(3) Represents 271,390,292 shares issued at an average price of $0.002 during
fiscal year 2003.
(4) Represents 57,021,476 restricted shares issued at the market price of
$0.001 on August 22, 2002.
OPTIONS/SAR GRANTS IN THE LAST FISCAL YEAR
No individual grants of stock options, whether or not in tandem with stock
appreciation rights ("SARs") and freestanding SARs have been made to any
executive officer or any director during our fiscal year ended October 31, 2004.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
No individual exercises of stock options, whether or not in tandem with stock
appreciation rights ("SARs") and freestanding SARs have been made by executive
officer or any director during our fiscal year ended October 31, 2004.
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
We had no long-term incentive plans and made no stock awards during our fiscal
year ended October 31, 2004.
EMPLOYMENT AGREEMENTS
We have employment agreements with Kenneth Schilling and Mark Perkins which
became effective July 1, 2001 and expired as of June 30, 2004. We intend to
enter into new employment agreements with Messrs. Schilling and Perkins during
the 2005 fiscal year. Mr. Schilling's previous contract provided for an annual
salary of $150,000, quarterly performance bonuses equal to one percent of our
total revenues, and the granting of an option allowing for his subsequent
purchase of 300,000 shares of our common stock at $0.20 per share. Mr. Perkin's
previous contract provided for an annual salary of $125,000, quarterly
performance bonuses equal to one percent of our total revenues, and the granting
of an option allowing for his subsequent purchase of 120,000 shares of our
common stock at $0.20 per share. Each stock option vested immediately and is
exercisable for a period of ten years.
In addition to the foregoing, each of the above employment agreements contain
the following termination provisions:
(a) Termination By Us For Cause: We shall have the right to terminate this
Agreement and to discharge Employee for cause (hereinafter "Cause"), and all
compensation to Employee shall cease to accrue upon discharge of Employee for
Cause. For the purposes of this Agreement, the term "Cause" shall mean (i)
Employee's conviction of a felony; (ii) the alcoholism or drug addiction of
Employee; (iii) gross negligence or willful misconduct of Employee in connection
with his duties hereunder; (iv) the determination by any regulatory or judicial
authority (including any securities self-regulatory organization) that Employee
directly violated, before or after the date hereof, any federal or state
securities law, any rule or regulation adopted thereunder; or (v) the continued
and willful failure by Employee to substantially and materially perform his
material duties hereunder.
(b) Termination By Us Without Cause: In the event Employee's employment
hereunder shall be terminated by us for other than Cause: (1) the Employee shall
thereupon receive as severance in a lump sum payment from us the amount of one
year of Salary in effect at the time of such termination.
27
(c) Resignation: In the event Employee resigns without Reason, he shall receive
any unpaid fixed salary through such resignation date and such benefits to which
he is entitled by law, and shall also receive a lump sum payment from us in the
amount of six months Salary in effect at the time of such resignation.
(d) Change of Control: In the event of a Change in Control, as hereinafter
defined, we shall pay the Employee in a lump sum the amount of three years of
annual Salary in effect at the time of such Change in Control. Such payment and
grant shall be made regardless of the continuation or termination of Employee's
employment with us after a Change of Control, and shall be in addition to, and
not in lieu of, any other payments or issuances due pursuant to the terms of
this agreement. For purposes hereof, a Change in Control shall be deemed to have
occurred (i) if there has occurred a "change in control" as such term is used in
Item 1 (a) of Form 8-K promulgated under the Securities Exchange Act of 1934, as
amended, at the date hereof ("Exchange Act") or (ii) if there has occurred a
change in control as the term "control" is defined in Rule 12b-2 promulgated
under the Exchange Act."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our privately-held predecessor (Southwest Financial) advanced monies to its sole
shareholder, Ken W. Schilling, our President, Chief Executive Officer and
Chairman of the Board of Directors. When we entered into a reverse merger in
January 1999, we executed a note receivable consolidating these past advances
which had a stated interest rate of 6.0% per annum, was collateralized by
personally owned shares of our common stock, and was payable upon demand. As the
collaterizing common stock was subsequently donated to us during fiscal 2001 in
order to facilitate its procurement of certain necessary corporate financing,
the aforementioned note receivable became unsecured. In the absence of any
collateral, given certain other concerns regarding its collectability, our Board
of Directors directed management during fiscal 2001 to establish a full
allowance against the note receivable, thus reducing its then net carrying value
to zero.
In November 2001, we had no additional common shares authorized for issuance. In
order to honor conversion elections by certain debenture holders, Mr. Schilling
donated 928,560 shares of our common stock owned by him to us. Upon obtaining
subsequent shareholder approval to increase our authorized common shares, our
Board of Directors approved the issuance of 1,500,000 restricted shares of our
common stock to Mr. Schilling as reimbursement and compensation for the
previously contributed common shares.
28
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 16, 2005, there were 3,725,160,822 shares of common stock, par value
$0.001 outstanding. The following table sets forth certain information regarding
the beneficial ownership of our common stock as of March 16, 2005:
- - all directors
- - each person who is known by us to be the beneficial owner of more than
five percent (5%) of the outstanding common stock
- - each executive officer named in the Summary Compensation Table
- - all directors and executive officers as a group
The number of shares beneficially owned by each director or executive officer is
determined under rules of the SEC, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under the SEC rules,
beneficial ownership includes any shares as to which the individual has the sole
or shared voting power or investment power. In addition, beneficial ownership
includes any shares that the individual has the right to acquire within 60 days.
Unless otherwise indicated, each person listed below has sole investment and
voting power (or shares such powers with his or her spouse). In certain
instances, the number of shares listed includes (in addition to shares owned
directly), shares held by the spouse or children of the person, or by a trust or
estate of which the person is a trustee or an executor or in which the person
may have a beneficial interest.
Amount of
Name and Address Beneficial Percent of
Title of Class of Beneficial Owner Ownership (1) Class
- -------------- ---------------------------- --------------- -----------
Common Stock Kenneth W. Schilling 257,737,722 6.92%
2238 West Lone Cactus Drive
Suite 200
Phoenix, Arizona 85021
Common Stock Mark H. Perkins 235,831,298 6.33%
2238 West Lone Cactus Drive
Suite 200
Phoenix, Arizona 85021
Common Stock Shares of all directors and 493,569,020 13.25%
executive officers as a
group (2 persons)
29
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 5,000,000,000 shares of common stock, par value
$.001 per share. As of March 16, 2005, there were 3,725,160,822 shares of common
stock outstanding.
The holders of the issued and outstanding shares of our common stock are
entitled to receive dividends if declared by our board of directors out of any
funds lawfully available therefore. The board of directors intends to retain
future earnings to finance the development and expansion of our business and
does not expect to declare any dividends in the foreseeable future. The holders
of the common stock have the right, in the event of liquidation, to receive pro
rata all assets remaining after payment of debts and expenses. The common stock
does not have any preemptive rights and does not have cumulative voting rights.
The issued and outstanding shares of common stock are fully paid and
non-assessable.
Holders of shares of common stock are entitled to vote at all meetings of such
shareholders for the election of directors and for other purposes. Such holders
have one vote per share for each share of common stock held by them.
We have engaged Interwest Stock Transfer as independent transfer agent and
registrar.
PREFERRED STOCK
We are authorized to issue up to 50,000,000 shares of preferred stock, par value
$.001 per share. The shares of preferred stock may be issued in series, and
shall have such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions providing for the issuance
of such stock adopted from time to time by the board of directors. Our board of
directors are expressly vested with the authority to determine and fix in the
resolution or resolutions providing for the issuances of preferred stock the
voting powers, designations, preferences and rights, and the qualifications,
limitations or restrictions thereof, of each such series to the full extent now
or hereafter permitted by the laws of the State of Florida.
30
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Florida law, that our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate the right of us and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believes that the indemnification provisions in our Articles of Incorporation,
as amended, are necessary to attract and retain qualified persons as directors
and officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Securities Act") may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
31
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares of
common stock by the selling stockholders. We will not receive any proceeds from
the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial Beneficial of Common
Issuable Upon Stock, Common Stock Ownership Percentage of Ownership Stock Owned
Conversion of Assuming Included in Before the Common Stock After the After
Name Note Full Prospectus Offering Owned Before Offering Offering
and/or Warrants Conversion (1) (2) Offering (8) (8)
- ---------------------- ------------------ ------------- -------------- ------------ --------------- ------------ --------------
Platinum Partners 995,640,510 26.73% Up to 185,885,525 4.99% -- --
Value Arbitrage 995,640,510
Fund LP(3) shares of
common stock
- ---------------------- ------------------ ------------- -------------- ------------ --------------- ------------ --------------
Bodie Investment 20,000,000 * Up to 20,000,000 * -- --
Group, LLC(4) 20,000,000
shares of
common stock
- ---------------------- ------------------ ------------- -------------- ------------ --------------- ------------ --------------
Steve Thrasher(5) 45,749,741 1.23% Up to 45,749,741 1.23% -- --
45,749,741
shares of
common stock
- ---------------------- ------------------ ------------- -------------- ------------ --------------- ------------ --------------
Beryl Zyskind(6) 116,666,667 3.13% Up to 116,666,667 3.13% -- --
116,666,667
shares of
common stock
- ---------------------- ------------------ ------------- -------------- ------------ --------------- ------------ --------------
Sichenzia Ross
Friedman Ference LLP(5) 35,000,000 * Up to 35,000,000 * -- --
35,000,000
shares of
common stock
- ---------------------- ------------------ ------------- -------------- ------------ --------------- ------------ --------------
* Less than 1%
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the convertible preferred stock is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
(1) Includes 150% of the shares issuable upon conversion of the convertible
promissory note and 100% issuable upon exercise of warrants, based on
current market prices. Because the number of shares of common stock
issuable upon conversion of the convertible promissory note dependent in
part upon the market price of the common stock prior to a conversion, the
actual number of shares of common stock that will be issued upon
conversion will fluctuate daily and cannot be determined at this time.
(2) The selling stockholders have contractually agreed to restrict their
ability to convert the promissory note or exercise their warrants and
receive shares of our common stock such that the number of shares of
common stock held by them and their affiliates after such conversion or
exercise does not exceed 4.99% of the then issued and outstanding shares
of common stock.
(3) Includes (i) 750,000,000 shares of common stock issuable upon the
conversion of the promissory note; and (ii) 245,640,510 shares of common
stock issuable upon exercise of the warrants. Platinum Partners Value
Arbitrage Fund LP is a limited partnership that is owned by its partners
and managed by Mark Nordlicht. Mark Nordlicht has voting and investment
control over these securities. Platinum Partners Value Arbitrage Fund LP
is not affiliated with a broker-dealer.
(4) Includes 20,000,000 shares of common stock issuable upon exercise of
warrants. Bodie Investment Group, LLC is a limited liability company that
is owned by its members and managed by Jack Bodenstein. Jack Bodenstein
has voting and investment control over these securities. Bodie Investment
Group, LLC is not affiliated with a broker-dealer.
(5) Includes shares of common stock issued as compensation for legal services.
32
(6) Includes shares of common stock.
(7) Includes shares of common stock issued as compensation for legal services.
(8) Assumes that all securities registered will be sold.
33
TERMS OF CONVERTIBLE PROMISSORY NOTE
On February 18, 2005, we closed a transaction pursuant to a Subscription
Agreement, dated as of February 18, 2005, with an accredited investor pursuant
to which the accredited investor shall lend an aggregate principal amount of
$700,000 to us in exchange for (i) 8% promissory note in that aggregate
principal amount, and (ii) warrants to purchase shares of our common stock equal
to one warrant for each two shares of our common stock which would be issued on
the closing date of the loan assuming the complete conversion of the promissory
note.
The investors are obligated to provide us with the funds as follows:
- - $200,000 was disbursed on February 18, 2005.
- - $500,000 will be disbursed within five days of the effectiveness of this
prospectus.
The note bears interest at 8%, matures one year from the date of issuance, and
is convertible into our common stock, at the investors' option, at a conversion
price equal to 70% of the lowest bid price for the common stock as reported on
Bloomberg, L.P. for the 20 trading days before but not including the conversion
date. The full principal amount of the convertible note is due upon default
under the terms of the convertible note.
The conversion price of the note and the exercise price of the warrants may be
adjusted in certain circumstances such as if we pay a stock dividend, subdivide
or combine outstanding shares of common stock into a greater or lesser number of
shares, or take such other actions as would otherwise result in dilution of the
selling stockholder's position.
The selling stockholders have contractually agreed to restrict their ability to
convert or exercise their note and warrants and receive shares of our common
stock such that the number of shares of common stock held by them and their
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock.
Sample Conversion Calculation
The number of shares of common stock issuable upon conversion of the note is
determined by dividing that portion of the principal of the note to be converted
and interest, if any, by the conversion price. For example, assuming conversion
of $700,000 of the note on March 17, 2005, a conversion price of $0.0014 per
share, the number of shares issuable upon conversion would be:
$700,000/$0.0014 = 500,000,000 shares
DESCRIPTION OF WARRANTS
The warrants are exercisable until five years from the date of issuance at an
exercise price of $0.003 per share.
The warrants issued to the finder are exercisable until five years from the date
of issuance at an exercise price of $0.0035 per share.
The warrants are subject to exercise price adjustments upon the occurrence of
certain events including stock dividends, stock splits, mergers,
reclassifications of stock or our recapitalization. The exercise price of the
warrants is also subject to reduction if we issue any rights, options or
warrants to purchase shares of our common stock at a price less than the market
price of our shares as quoted on the OTC Bulletin Board.
34
PLAN OF DISTRIBUTION
Each Selling Stockholder (the "Selling Stockholders") of the common stock
("Common Stock") of iBiz Technology Corp., a Florida corporation, and any of
their pledgees, assignees and successors-in-interest may, from time to time,
sell any or all of their shares of Common Stock on the Over-The-Counter Bulletin
Board or any other stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. A Selling Stockholder may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o settlement of short sales;
o broker-dealers may agree with the Selling Stockholders to sell a specified
number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling shareholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
In connection with the sale of our common stock or interests therein, the
Selling Stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Stockholder has informed the
Company that it does not have any agreement or understanding, directly or
indirectly, with any person to distribute the Common Stock.
In order to comply with the securities laws of some states, the Selling
Stockholders must sell the shares in those states only through registered or
licensed brokers or dealers. In addition, in some states the Selling
Stockholders must sell the shares only if we have registered or qualified those
shares for sale in the applicable state or an exemption from the registration or
qualification requirement is available and the selling shareholder complies with
the exemption.
We are required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the Selling Stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by this
prospectus which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under this prospectus. Each Selling
Stockholder has advised us that they have not entered into any agreements,
understandings or arrangements with any underwriter or broker-dealer regarding
the sale of the resale shares. There is no underwriter or coordinating broker
acting in connection with the proposed sale of the resale shares by the Selling
Stockholders.
NASD Notice to Members 88-101 states that in the event a selling shareholder
35
intends to sell any of the shares registered for resale in this Prospectus
through a member of the NASD participating in a distribution of our securities,
such member is responsible for insuring that a timely filing is first made with
the Corporate Finance Department of the NASD and disclosing to the NASD the
following:
o it intends to take possession of the registered securities or to
facilitate the transfer of such certificates;
o the complete details of how the selling shareholders shares are and will
be held, including location of the particular accounts;
o whether the member firm or any direct or indirect affiliates thereof have
entered into, will facilitate or otherwise participate in any type of
payment transaction with the selling shareholders, including details
regarding any such transactions; and
o in the event any of the securities offered by the selling shareholders are
sold, transferred, assigned or hypothecated by any selling shareholder in
a transaction that directly or indirectly involves a member firm of the
NASD or any affiliates thereof, that prior to or at the time of said
transaction the member firm will timely file all relevant documents with
respect to such transaction(s) with the Corporate Finance Department of
the NASD for review.
No persons associated with us or the selling shareholders may participate in the
distribution of the shares to be offered by selling shareholders unless they
meet the safe harbor provisions of the SEC Rule 3a4-1 promulgated under the
Securities Exchange Act of 1934 with respect to exemption from registration as a
broker/dealer.
We agreed to keep this prospectus effective until the earlier of (i) the date on
which the shares may be resold by the Selling Stockholders without registration
and without regard to any volume limitations by reason of Rule 144(e) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to the prospectus or Rule 144 under the Securities Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to our common stock for a period of two
business days prior to the commencement of the distribution. In addition, the
Selling Stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which may
limit the timing of purchases and sales of shares of our common stock by the
Selling Stockholders or any other person. We will make copies of this prospectus
available to the Selling Stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time of
the sale.
Any Selling Stockholder may from time to time pledge or grant a security
interest in some or all of the shares of common stock or warrants owned by them
and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell the shares of common stock from
time to time under this prospectus, or under an amendment to this prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933
amending the list of selling shareholders to include the pledgee, transferee or
other successors in interest as selling shareholders under this prospectus.
The Selling Stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus.
At the time a Selling Stockholder makes a particular offer of shares we will, if
required under applicable rules and regulations, distribute a Prospectus
supplement that will set forth:
o the number of shares that the Selling Stockholder is offering;
o the terms of the offering, including the name of any underwriter, dealer
or agent;
o the purchase price paid by any underwriter;
o any discount, commission and other underwriter compensation;
o any discount, commission or concession allowed or reallowed or paid to any
dealer; and
o the proposed selling price to the public.
We will not receive any proceeds from sales of any shares by the selling
shareholders.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
36
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of the
person; and
o make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the suitability
determination; and
o that the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for the Registrant by Sichenzia Ross Friedman Ference, LLP, 1065 Avenue of the
Americas, 21st Floor, New York, NY 10018.
EXPERTS
The balance sheet and financial statements of iBiz Technology Corp. for the year
ended October 31, 2004 in this registration statement in reliance upon the
reports of Farber and Hass, CPA, independent certified public accountants, and
upon the authority of such firm as experts in accounting and auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On October 11, 2002, we were notified by Moffitt & Company, P.C., ("Moffitt")
that it resigned as our independent auditors effective October 11, 2002. On
October 17, 2002, we engaged Farber and Hass, CPA as our independent auditors
for the fiscal year ending October 31, 2002. The action to engage Farber and
Hass, CPA, was taken upon the unanimous approval of the Audit Committee of our
Board of Directors.
During the fiscal years ended October 31, 2000 and October 31, 2001 and through
October 11, 2002, there were no disagreements between us and Moffitt on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure which, if not resolved to the satisfaction of
Moffitt would have caused Moffitt to make reference to the matter in its reports
on our financial statements. During the fiscal years ended October 31, 2000 and
October 30, 2001 and through October 11, 2002, there were no reportable events
as the term described in Item 304(a)(1)(iv) of Regulation S-B. Moffitt's opinion
in its report on our financial statements for the year ended October 31, 2000
and 2001, expressed substantial doubt with respect to our ability to continue as
a going concern.
During the fiscal years ended October 31, 2000 and October 31, 2001 and through
October 11, 2002, we did not consult with Farber and Hass, CPA, regarding
either:
1. the application of accounting principles to any specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on our financial statements, and neither a written report was
provided to us nor oral advice was provided that Farber and Hass, CPA,
concluded was an important factor considered by us in reaching a decision
as to the accounting, auditing or financial reporting issue; or
2. any matter that was either subject of disagreement or event, as defined in
Item 304(a)(1)(iv)(A) of Regulation S-B and the related instruction to
Item 304 of Regulation S-B, or a reportable event, as that term is
explained in Item 304(a)(1)(iv)(A) of Regulation S-B.
We requested that Moffitt furnish us with a letter addressed to the Securities
37
and Exchange Commission stating whether it agrees with the above statements. A
copy of such letter, dated October 17, 2002, was filed as Exhibit 16.1 to a Form
8-K filed with the Securities and Exchange Commission on October 18, 2002.
38
FORWARD-LOOKING STATEMENTS
This prospectus, any prospectus supplement and the documents incorporated by
reference in this prospectus contain forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events.
In some cases, you can identify forward-looking statements by words such as
"may," "should," "expect," "plan," "could," "anticipate," "intend," "believe,"
"estimate," "predict," "potential," "goal," or "continue" or similar
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks outlined under "Risk
Factors," that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements.
Unless we are required to do so under U.S. federal securities laws or other
applicable laws, we do not intend to update or revise any forward-looking
statements.
AVAILABLE INFORMATION
We filed with the SEC a registration statement on Form SB-2 under the Securities
Act for the common stock to be sold in this offering. This prospectus does not
contain all of the information in the registration statement and the exhibits
and schedules that were filed with the registration statement. For further
information with respect to the common stock and us, we refer you to the
registration statement and the exhibits and schedules that were filed with the
registration statement. Statements made in this prospectus regarding the
contents of any contract, agreement or other document that is filed as an
exhibit to the registration statement are not necessarily complete, and we refer
you to the full text of the contract or other document filed as an exhibit to
the registration statement. A copy of the registration statement and the
exhibits and schedules that were filed with the registration statement may be
inspected without charge at the public reference facilities maintained by the
SEC in Room 1024, 450 Fifth Street, NW, Washington, DC 20549, and at the SEC's
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, Woolworth Building, 233 Broadway New York, New York. Copies of all or any
part of the registration statement may be obtained from the SEC upon payment of
the prescribed fee. Information regarding the operation of the public reference
rooms may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a
web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the site is http://www.sec.gov.
You should rely only on the information contained in this prospectus or to which
we have referred you. We have not authorized anyone to provide you with
information that is different. This prospectus may only be used where it is
legal to sell these securities. The information in this prospectus may only be
accurate on the date of this prospectus.
39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2004
OCTOBER 31, 2003
iBIZ Technology Corp. and Subsidiaries Page
------
Report of Independent Certified Public Accountants.................... F - 1
Consolidated Balance Sheet............................................ F - 2
Consolidated Statements of Loss....................................... F - 3
Consolidated Statements of Changes in Stockholders' Deficit........... F - 4
Consolidated Statements of Cash Flows................................. F - 5
Notes to Consolidated Financial Statements............................ F - 7
40
INDEPENDENT REGISTERED AUDITORS' REPORT
To the Board of Directors and Stockholders
of iBIZ Technology, Inc.:
We have audited the accompanying consolidated balance sheet of iBIZ Technology,
Inc. (the "Company") as of October 31, 2004 and the related consolidated
statements of operations, stockholders' deficit and cash flows for the two years
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amount s and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of the Company at
October 31, 2004 and the results of its operations and its cash flows for the
two years then ended in conformity with accounting principles generally accepted
in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred significant operating losses and
has negative working capital. These conditions raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding these
matters are described in Notes 2 and 23. The consolidated financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
/s/ Farber & Hass LLP
January 21, 2005, except as to
Note 23 for which the date is
March 10, 2005
Camarillo, California
41
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
October 31,
2004
------------
Current Assets:
Cash $ 88
Inventories, net 34,400
Prepaid expenses 86,206
------------
Total Current Assets 120,694
Property and equipment, net 42,758
Deposits 7,381
------------
Total Assets $ 170,833
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Bank overdraft $ 10,420
Accounts payable 1,095,956
Accrued liabilities 1,401,227
Notes payable 50,000
Advances from officers 123,000
Current maturities of convertible debentures 863,675
------------
Total Current Liabilities 3,544,278
------------
Commitments and Contingencies
Stockholders' Deficit:
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; issued and outstanding 3,030,370,376 3,030,370
Common stock to be issued, 495,750 shares 19,830
Additional paid-in capital 32,888,872
Less: note receivable (1,125,010)
Accumulated deficit (38,187,507)
------------
Total Stockholders' Deficit (3,373,445)
------------
Total Liabilities and Stockholders' Deficit $ 170,833
============
The accompanying notes are an integral part of these
consolidated financial statements.
42
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
Fiscal Year Fiscal Year
Ended Ended
October 31, October 31,
2004 2003
------------ ------------
Revenues:
Net product sales $ 347,544 $ 453,797
Maintenance services 21,106 31,585
------------ ------------
Total revenues 368,650 485,382
------------ ------------
Cost of revenues:
Cost of product sales 672,469 497,275
Cost of maintenance services 31,993 21,728
------------ ------------
Total cost of revenues 704,462 519,003
------------ ------------
Gross loss (335,812) (33,621)
------------ ------------
Operating expenses:
Selling, general and administrative expenses,
excluding those items separately disclosed below 3,401,397 1,614,255
Research and development 597,121 --
Acquired in process research and development 1,200,000 --
Asset impairments 652,281 125,000
Consulting fees paid in stock options 6,969,186 --
Loss on note receivable 150,000 --
Dispute settlements 127,500 --
Officer bonuses -- 1,045,287
------------ ------------
Total operating expenses 13,097,485 2,784,542
------------ ------------
Loss from operations (13,433,297) (2,818,163)
------------ ------------
Non-operating income (expenses):
Interest and miscellaneous income 255,500 88,624
Interest and financing expenses (211,328) (1,732,593)
------------ ------------
Total non-operating income (expense), net 44,172 (1,643,969)
------------ ------------
Loss before provision from income taxes (13,389,125) (4,462,132)
Provision for income taxes 50 50
------------ ------------
Net loss $(13,389,175) $ (4,462,182)
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
43
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS (continued)
Fiscal Year Fiscal Year
Ended Ended
October 31, October 31,
2004 2003
---------------- ----------------
Net loss per common share - basic and diluted $ (0.01) $ (0.02)
================ ================
Weighted average number of common shares
outstanding - basic and diluted 2,470,566,495 231,553,359
================ ================
The accompanying notes are an integral part of these
consolidated financial statements.
44
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
Common Stock
Common Stock To Be Issued
------------------------------- --------------------------------
Shares Amount Shares Amount
-------------- -------------- -------------- --------------
Balances as of October 31, 2002 45,000,097 $ 45,000 -- $ --
Common stock issued for cash 36,691,176 36,691 -- --
Common stock issued for services
received and in settlement of accounts
payable 44,161,764 44,162 -- --
Common stock issued to officers and
other employees as retention bonuses 253,063,228 253,063 -- --
Beneficial conversion feature of debentures
issued -- -- -- --
Common stock issued upon conversion of
debentures and accrued interest, net of
related issuance costs 270,977,456 270,978 -- --
Net loss -- -- -- --
-------------- -------------- -------------- --------------
Balance, October 31, 2003 649,893,721 $ 649,894 -- $ --
Common stock issued upon
exercise of options 309,969,608 309,970 -- --
Common stock issued for services received
and in settlement of liabilities 139,679,256 139,679 -- --
Common stock issued to officers and other
employees as bonuses and wages 418,576,051 418,577 -- --
Common stock issued upon conversion
of debentures and accrued interest, net
of related issuance costs 1,479,530,624 1,479,530 -- --
Acquisition of Synosphere, LLC 29,033,417 29,033 966,583 38,663
Cash payments to Synosphere, LLC
members in lieu of stock -- -- (470,833) (18,833)
Additional stock payments to
Synosphere LLC members 3,687,699 3,687 -- --
Value assigned to services received in
exchange for options -- -- -- --
Net loss -- -- -- --
-------------- -------------- -------------- --------------
Balance, October 31, 2004 3,030,370,376 $ 3,030,370 495,750 $ 19,830
============== ============== ============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
45
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (continued)
Additional
Paid in Note Accumulated
Capital Receivable Deficit Total
------------ ------------ ------------ ------------
Balances as of October 31, 2002 $ 15,349,368 $ -- $(20,336,150) $ (4,941,782)
Common stock issued for cash -- -- -- 36,691
Common stock issued for services
received and in settlement of accounts
payable 204,088 -- -- 248,250
Common stock issued to officers and
other employees as retention bonuses
Beneficial conversion feature of debentures 442,125 -- -- 695,188
issued
Common stock issued upon conversion of 1,379,077 -- -- 1,379,077
debentures and accrued interest, net of
related issuance costs 57,095 -- -- 328,073
Net loss -- -- (4,462,182) (4,462,182)
------------ ------------ ------------ ------------
Balance, October 31, 2003 17,431,753 -- (24,798,332) (6,716,685)
Common stock issued upon
exercise of options 3,559,537 (1,125,010) -- 2,744,497
Common stock issued for services received
and in settlement of liabilities 1,079,695 -- -- 1,219,374
Common stock issued to officers and other
employees as bonuses and wages 621,503 -- -- 1,040,080
Common stock issued upon conversion
of debentures and accrued interest, net
of related issuance costs 2,085,241 -- -- 3,564,771
Acquisition of Synosphere, LLC 1,132,304 -- -- 1,200,000
Cash payments to Synosphere, LLC
members in lieu of stock -- -- -- (18,833)
Additional stock payments to
Synosphere LLC members 9,653 -- -- 13,340
Value assigned to services received in
exchange for options 6,969,186 -- -- 6,969,186
Net loss -- -- (13,389,175) (13,389,175)
------------ ------------ ------------ ------------
Balance, October 31, 2004 $ 32,888,872 $ (1,125,010) $(38,187,507) $ (3,373,445)
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
46
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Fiscal Year
Ended Ended
October 31, October 31,
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss $(13,389,175) $ (4,462,182)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment and
amortization of intellectual property rights 29,290 60,875
Asset impairment 252,281 125,000
Provision for sales returns, rebates and
doubtful accounts 76,417 94,731
Provision for inventory obsolescence 111,114 33,100
Acquired in process research and development 1,200,000 --
Gains on settlements of obligations to vendors (22,821) (85,733)
Common stock issued for services received 1,464,268 889,082
Common stock options issued for services received 6,969,186 --
Gains on settlements of debenture obligations (232,583) --
Loss on note receivable 150,000 --
Beneficial conversion feature of debentures -- 1,379,077
Net changes in operating assets and liabilities:
Accounts receivable 34,905 (194,186)
Inventories (101,672) 18,658
Prepaid expenses 94,211 (6,057)
Accounts payable and accrued liabilities 893,244 1,363,989
Deposits (4,881) --
------------ ------------
Net cash used in operating activities (2,476,216) (783,646)
------------ ------------
Cash flows from investing activities:
Acquisition of Synosphere, LLC (18,833) --
Licensing fees to Virtual Devices, Inc. (200,000) --
------------ ------------
Net cash used in investing activities (218,833) --
------------ ------------
Cash flows from financing activities:
Bank overdraft 10,420 --
Proceeds from issuances of note payable 50,000 90,000
Proceeds from advances from officers 123,000 --
Proceeds from issuances of convertible debentures, net -- 686,813
Proceeds from issuances of common stock, net 2,594,497 36,691
Principal payments on notes payable (94,920) (18,666)
Restricted cash equivalent 10,000 (10,000)
------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
47
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Fiscal Year Fiscal Year
Ended Ended
October 31, October 31,
2004 2003
------------ ------------
Net cash provided by financing activities $ 2,692,997 $ 784,838
------------ ------------
Net (decrease) increase in cash and cash equivalents (2,052) 1,192
Cash at beginning of year 2,140 948
------------ ------------
Cash at end of year $ 88 $ 2,140
============ ============
Supplemental schedule of cash activities:
Interest paid in cash $ 5,800 $ 8,566
Taxes paid in cash 50 50
Supplemental schedule of non-cash investing and financing activities:
Debenture principal and accrued interest thereon
converted to common stock $ 3,564,771 $ 328,073
Issuance of common stock for officers and other
employees bonuses and wages $ 1,040,080 $ 695,188
Issuance of common stock for services received
and in settlement of liabilities $ 1,219,374 $ 248,250
Consulting fees paid with common stock options $ 6,969,186
Issuance of common stock for acquired research
and development $ 1,200,000
The accompanying notes are an integral part of these
consolidated financial statements.
48
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS, ORGANIZATIONAL STRUCTURE AND PRINCIPLES OF CONSOLIDATION
Concurrent with the February 2, 2005 deployment of its new www.GoMoGear.com
e-commerce website, iBIZ Technology Corp. (hereinafter, "iBIZ") principally
became an Internet-based retailer of a broad and diversified offering of various
consumer electronics with an emphasis on products that are portable or mobile.
Prior thereto, and since 1998, iBIZ was a more narrowly-focused wholesaler and,
to a lesser extent, Internet-based retailer, through its www.ibizpda.com
e-commerce website, of various accessories primarily intended for use with
Personal Digital Assistants ("PDAs"). iBIZ continues to conduct substantially
all of its non-research and development related activities through its
wholly-owned subsidiary, iBIZ, Inc. (hereinafter, "iBIZ, Inc.").
As a result of its January 20, 2004 acquisition of Synosphere, LLC (hereinafter,
"Synosphere"), iBIZ subsequently has engaged in significant activities directed
at, among other efforts, further developing certain of the acquired
technologies. iBIZ currently conducts substantially all of its product research
and development activities through Synosphere, as a wholly-owned subsidiary.
iBIZ's other wholly-owned subsidiaries, Invnsys Technology Corporation and
Qhost, Inc. have been inactive since their respective operations were
discontinued effective October 31, 2001. iBIZ was incorporated in the State of
Florida in April 1994, although its operations have been headquarted in the
State of Arizona since November 1979.
These consolidated financial statements include the operations of iBIZ and its
wholly-owned subsidiaries (hereinafter collectively, the "Company"). All
material intercompany transactions and balances have been eliminated in
consolidation.
2. SIGNIFICANT UNCERTAINTY REGARDING THE COMPANY'S ABILITY TO CONTINUE AS A
GOING CONCERN AND MANAGEMENT PLANS
The accompanying 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 had significant working capital
and stockholders' deficits at October 31, 2004. Additionally, the Company has in
recent years realized only limited sales from its PDA accessories which
management primarily attributes to its continued inability to fund the marketing
activities it believes are necessary to develop broad market awareness and
acceptance of the Company's products. These factors, among others, indicate that
there is substantial doubt that the Company will be able to continue as a going
concern. The accompanying 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 currently is dependent upon it
timely procuring significant external debt and/or equity financing to fund its
immediate and nearer-term operations, and subsequently realizing operating cash
flows from sales of its products sufficient to sustain its longer-term
operations and growth initiatives, including its desired marketing and product
research and development initiatives. Subsequent to October 31, 2004, management
entered into a financing agreement to secure a maximum of $700,000 of equity
investment (see Note 23). Should management be unable to procure sufficient
additional external debt and/or equity in a timely manner, it could cease
operations prior to October 31, 2005.
49
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year-End
The Company's fiscal year-end is October 31st. References herein 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 disclosures 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 consolidated financial statements for the prior fiscal
year have been reclassified to be consistent with the current fiscal year's
presentation.
Cash and Cash Equivalents
The Company maintains any cash and cash equivalent balances with high quality
financial institutions thereby minimizing any associated credit risks. The
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. The Company did not
have any cash equivalents at October 31, 2004. The Company had a single
restricted cash equivalent at October 31, 2003 that subsequently became
unrestricted and was utilized during fiscal 2004.
Accounts Receivable - Related Allowances for Sales Returns, Customer Rebates and
Doubtful Accounts
The Company's accounts receivable, if any, are reported net of related
allowances for probable sales returns, customer rebates and doubtful accounts.
Management believes that the only concentration of credit associated with the
Company's accounts receivable portfolio is with large national retailers, the
credit worthiness of such it regularly monitors.
The Company unconditionally accepts product returns during the initial thirty
days following the date of sale. Additionally, the Company periodically offers
promotional rebates of a limited duration, typically one week, on certain
product sales for which it outsources the processing and tracking of related
customer submissions. The periodic provisions made by the Company to establish
and maintain appropriate allowances for sales returns and customer rebates are
charged to its results of operations via offsets to its gross product sales.
Such provisions are based on management's
50
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounts Receivable - Related Allowances for Sales Returns, Customer Rebates and
Doubtful Accounts (continued)
estimates of probable sales returns and customer rebates which, in turn, are
based on its relevant historical experience and future expectations. Actual
sales returns and customer rebates realized by the Company are charged against
the related allowances with any favorable or unfavorable experience, as compared
to management's preceding estimates, having a corresponding impact on its
results of operations.
The Company typically offer its customers payment terms that range from 30 to 60
days. The Company does not assess interest on, nor does it require any securing
collateral of, past due customer balances. The periodic provisions made by the
Company to establish and maintain an appropriate allowance for doubtful accounts
are charged to its results of operations via increases to its selling, general
and administrative expenses. Such provisions are based on specifically
identified accounts that management believes to be uncollectible based on facts
then known to it and accounts that are past due beyond a certain date. Actual
collection experience realized by the Company on previously designated doubtful
accounts is charged against the allowance for doubtful accounts with any
favorable or unfavorable experience, as compared to management's preceding
estimates, having a corresponding impact on its results of operations.
Inventories
Inventories, which consist solely of finished goods available for sale, are
stated at the lower of average cost or market, reduced by an appropriate
allowance estimated by management for probable obsolescence. The Company records
an allowance for obsolescence based on its historical experience and future
expectations. The periodic provisions made by the Company to establish and
maintain an appropriate allowance for obsolescence are charged to its results of
operations via increases to its cost of product sales. Actual disposition
experience realized by the Company on previously designated obsolete inventory
is charged against the allowance for obsolescence with any favorable or
unfavorable experience, as compared to management's preceding estimates, having
a corresponding impact on its results of operations.
Prepaid Expenses
The Company amortizes its prepaid expenses on a straight-line basis over the
period during which it receives the underlying services.
Property and Equipment
Property and equipment are recorded at cost. Cost includes expenditures for
major additions and improvements. Maintenance and repairs which do not extend
the useful life of the related property or equipment are charged to operations
as incurred. The provision for related depreciation has been computed using the
straight-line method over the following estimated useful lives: office furniture
51
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and Equipment (continued)
and equipment - five to ten; tooling - three years; machinery and equipment -
ten years; and vehicle - five years. The net book value of property and
equipment sold or retired is removed from the asset and related depreciation
accounts with any resulting net gain or loss included in the determination of
the Company's results of operations.
Impairment of Long-Lived Assets
Management, on at least a quarterly basis, evaluates each of the Company's
long-lived assets for impairment by comparing the related estimated future cash
flows, on an undiscounted basis, to its net book value. If impairment is
indicated, the net book value is reduced to an amount equal to the estimated
future cash flows, on an appropriately discounted basis.
Deferred Financing Costs
Direct costs incurred in connection with the issuance of debt instruments are
initially deferred and subsequently amortized using the interest method over the
term in which the related debt remains outstanding. However, in those cases
where the fair value attributable to any beneficial conversion feature of the
debt instrument indicates that, despite it legal form, the underlying substance
is that of equity, the Company offsets the direct issuance costs incurred
immediately against the fair value allocated to additional paid-in capital.
Deferred Income Taxes
Deferred income tax assets and liabilities are recognized for the expected
future income tax benefits or consequences, based on enacted laws, of temporary
differences between tax and financial statement reporting. Deferred tax assets
are then reduced by a valuation allowance for the amount of any tax benefits
that more likely than not, based on current circumstances, are not expected to
be realized.
Beneficial Conversion Rights
The Company periodically issues debentures that have non-detachable conversion
features. In those instances where the stated conversion price reflects a
discount from the then prevailing market price of the Company's common stock,
management makes, at the date of the 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 the Company's results of
operations via an interest/financing charge with a corresponding credit to
additional paid-in capital.
52
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Non-Cash Equity Issuances
The Company periodically issues shares of its common stock in exchange for, or
in settlement of, services. The Company's management values the shares issued in
such transactions at either the then market price of the Company's common stock,
after taking into consideration factors such as the volume of shares issued or
trading restrictions, or the value of the services received, whichever is more
readily determinable. The Company also issues options, at a discount from
market, for services. The Company's management values such options using Black
Scholes.
Fair Value of Financial Instruments
Management believes that the carrying values reported for the Company's bank
overdraft, accounts payable, accrued expenses, advances from officers, and notes
payable materially approximated their respective fair values at the balance
sheet date due to the immediate or short-term maturity of these financial
instruments. Management also believes that the carrying values reported for the
Company's outstanding debentures materially approximated their respective fair
values at the balance sheet date as the stated rates of interest reflected then
prevailing market rates of interest. The estimated fair value amounts have been
determined by the Company's management using available market information and
appropriate valuation methodologies. Considerable judgment is required in
interpreting market data to develop the estimates of fair value, and
accordingly, the estimates are not necessarily indicative of the amounts that
the Company could realize in a current market exchange.
Revenue Recognition
In accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements," the Company recognizes 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 the Company to its customer, collection of the
related receivable is reasonably assured, and management is able to reliably
estimate appropriate allowances for probable sales returns and customer rebates
based on its relevant historical experience and future expectations. Cost of
sales primarily consists of purchased product cost, direct labor, and overhead,
including freight-in cost, warehousing costs, shipping and handling costs, and
inventory valuation adjustments for obsolescence.
The Company recognizes revenues from maintenance services on a straight-line
basis over the terms of the respective underlying maintenance agreements, which
range from three months to one year in duration. Any prepaid, yet unearned,
portion of a maintenance agreement is recorded as deferred income. The Company
is no longer actively marketing these computer-related maintenance services,
which primarily remain with financial institutions, and, as a result, expects
that the significance of the related revenues will continue to decline in future
fiscal periods.
53
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Major Customers
One customer accounted for approximately 27% of the Company's consolidated net
sales for fiscal 2004. Two different customers individually accounted for
approximately 35% and 13% of the Company's consolidated net sales for fiscal
2003.
Major Vendors
Three vendors individually accounted for approximately 64%, 18% and 15% of the
Company's inventory purchases during fiscal 2004. Two vendors individually
accounted for approximately 24% and 20% of the Company's inventory purchases
during fiscal 2003.
Product Warranties
The Company's PDA accessory products are accompanied by limited liability
warranties of one year durations against defects in material or workmanship. At
the time of each product's sale, management makes an estimate based on the
Company's historical experience and future expectations of the probable future
cost to be incurred in honoring the accompanying warranty and accrues a
corresponding liability. To date, the Company's warranty liabilities, in the
aggregate, have not been material.
Advertising Costs
The Company expenses all advertising costs as incurred. Consolidated selling,
general and administrative expenses include advertising costs of $-0- and
$45,028 for fiscal 2004 and 2003, respectively.
Research and Development
The Company expenses all research and development costs as incurred.
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 fiscal year.
At October 31, 2004 and 2003, the Company had stock warrants outstanding that
could potentially be exercised into 822,204 additional common shares. The
Company additionally had debentures outstanding at October 31, 2004 and 2003,
the conversion price of which will be established as of the date of any
subsequently elected conversion. Thus the number of potentially issuable common
shares pursuant to the terms of these unexercised conversion rights will not be
previously determinable. Such potentially issuable shares are excluded from the
computation of net loss per share since the effect would be anti-dilutive.
Should the Company report net income in a future period, diluted net income per
share will be separately disclosed giving effect to the potential dilution that
could occur if the then outstanding stock warrants were exercised into common
shares.
54
IBIZ TECHNOLOGY CORP. AND
SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 in fiscal 2004 and 2003,
respectively.
Accounting Standards Adopted or Pending Adoption
The Company's required fiscal 2004 adoptions of recently issued accounting
standards did not have any material impacts upon its consolidated financial
statements. Additionally, there are no recently issued accounting standards with
pending adoptions that the Company's management currently anticipates will have
any material impacts upon its consolidated financial statements.
4. ACCOUNTS RECEIVABLE AND ALLOWANCES FOR SALES RETURNS, CUSTOMER REBATES AND
DOUBTFUL ACCOUNTS
The Company's accounts receivable, net, consists of:
October 31,
2004
------------
Accounts receivable, gross $ 51,273
Allowance for sales returns, customer rebates and doubtful accounts (51,273)
------------
Accounts receivable, net $ --
============
The following schedule sets forth the activity in the Company's allowance for
sales returns:
Fiscal Year Fiscal Year
Ended Ended
October 31, October 31,
2004 2003
------------ ------------
Balance, beginning of year $ 27,238 $ 1,600
Provisions 47,171 46,354
Returns (72,309) (20,716)
------------ ------------
Balance, end of year $ 2,100 $ 27,238
============ ============
55
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. ACCOUNTS RECEIVABLE AND ALLOWANCES FOR SALES RETURNS, CUSTOMER REBATES AND
DOUBTFUL ACCOUNTS (continued)
The following schedule set forth the activity in the Company's allowance for
customer rebates:
Fiscal Year Fiscal Year
Ended Ended
October 31, October 31,
2004 2003
------------ ------------
Balance, beginning of year $ 12,429 $ --
Provisions -- 12,429
Returns (12,429) --
------------ ------------
Balance, end of year $ -- $ 12,429
============ ============
The following schedule set forth the activity in the Company's allowance for
doubtful accounts:
Fiscal Year Fiscal Year
Ended Ended
October 31, October 31,
2004 2003
------------ ------------
Balance, beginning of year $ 23,500 $ 56,509
Provisions 29,246 35,948
Returns (3,573) (68,957)
------------ ------------
Balance, end of year $ 49,173 $ 23,500
============ ============
5. INVENTORIES, NET
Inventories, net, consists of the following:
October 31,
2004
------------
Inventories, gross $ 39,400
Less allowance for inventory obsolescence (5,000)
------------
Inventories, net $ 34,400
============
56
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. INVENTORIES, NET (continued)
The following schedule set forth the activity in the Company's allowance for
obsolescence:
Fiscal Year Fiscal Year
Ended Ended
October 31, October 31,
2004 2003
------------ ------------
Balance, beginning of year $ 33,100 $ --
Provisions 111,114 33,100
Write-offs, net of recoveries (139,214) --
------------ ------------
Balance, end of year $ 5,000 $ 33,100
============ ============
6. PREPAID EXPENSES
The Company's prepaid expenses consist of:
October 31,
2004
------------
Consulting agreement $ 66,666
Service agreement 16,250
Membership dues and administration fees 3,290
------------
Prepaid expenses $ 86,206
============
7. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following:
October 31,
2004
------------
Office furniture and equipment $ 81,027
Tooling 68,100
Machinery and equipment 37,641
Vehicle 3,141
------------
Property and equipment, gross 189,909
Less accumulated depreciation, including write-downs (147,151)
------------
Property and equipment, net $ 42,758
============
57
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. DEFERRED TAX ASSETS
Deferred tax assets, net, at October 31, 2004 consist of the following:
October 31,
2004
------------
Net operating loss carry-forwards $ 4,187,700
Accrued expenses and miscellaneous 8,800
------------
Deferred tax assets, gross 4,196,500
Valuation allowance (4,196,500)
------------
Deferred tax assets, net $ --
============
The Company's net operating loss carry-forwards, which aggregated $20,884,400 at
October 31, 2004, expire in varying amounts during calendar years 2010 through
2024.
A reconciliation of the valuation allowance follows:
Fiscal Year
Ended
October 31,
2004
------------
Balance, beginning of year $ 2,909,300
Additions 1,287,200
------------
Balance, end of year $ 4,196,500
============
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
Fiscal Year
Ended
October 31,
2004
------------
Accrued wages $ 481,034
Accrued interest 283,548
Accrued bonuses 250,000
Accrued payroll and taxes 206,526
Accrued dispute settlements 127,500
Accrued sales commissions 49,966
Accrued royalties 2,653
------------
Total accrued liabilities $ 1,401,227
============
58
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. NOTES PAYABLE
During its fiscal 2004 fourth quarter, the Company received an aggregate of
$50,000 in cash via its issuance of two notes payable. These notes are
unsecured, accrue interest at a stated rate of 4.5% per annum and become due and
payable upon demand.
11. ADVANCES FROM OFFICERS
During its fiscal 2004 fourth quarter, the Company received an aggregate of
$123,000 in cash advances from its officers. These advances are unsecured,
accrue interest at a stated rate of 4.5% per annum and become due and payable
upon demand.
12. CONVERTIBLE DEBENTURES
The Company's outstanding convertible debentures consist of the following:
October 31,
2004
------------
KCM, LLC $ 700,817
Laurus Master Fund, Ltd. 162,858
------------
Total principal outstanding $ 863,675
Less: current maturities (863,675)
------------
Non-current maturities $ --
============
The Company's outstanding debentures to KCM, LLC ("KCM") were issued October 31,
2000 through January 15, 2002 in the original aggregate amount of $5,000,000,
are unsecured, accrued interest at 8.0% per annum, with interest only payments
due on the first day of each subsequent calendar quarter beginning January 1,
2001, and became due and payable on October 31, 2003. KCM has the stated
unilateral right to initially convert one-half of any outstanding principal and
accrued interest thereon at any time into shares of the Company's common stock
at the lesser of (1) 80% of the average of the three lowest closing bid prices
over the preceding twenty-two consecutive trading days or (ii) 80% of the
average of the five lowest closing bid prices over the preceding sixty
consecutive trading days. KCM has the stated unilateral right to subsequently
convert the remaining one-half of any outstanding principal and accrued interest
thereon at any time into shares of the Company's common stock at 86% of the
average of the three lowest closing bid prices over the preceding ten
consecutive trading days. The Company is required to reserve twice the number of
its common shares necessary to accommodate the conversion of any then unpaid
principal and accrued interest thereon, plus the exercise of the warrants
described in Note 13, and it will incur certain penalties if any conversion or
exercise shares are not issued within the specified timeframe. KCM also received
anti-dilution rights allowing it to
59
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. CONVERTIBLE DEBENTURES (continued)
participate in any prospective issuances by the Company of shares of its common
stock. As it was unable to redeem the $1,668,702 aggregate principal balance,
and $367,568 aggregate accrued interest thereon, of these outstanding debentures
when they became due and payable on October 31, 2003, the Company became in
default.
The Company's outstanding debentures to Laurus Master Fund, Ltd. ("Laurus") were
issued in April through October 2001 in the original aggregate amount of
$709,723, are unsecured, accrued interest at 8.0% per annum, with interest only
payments due on the last day of each subsequent calendar quarter beginning
September 30, 2001, and became due and payable on October 31, 2003. Laurus has
the stated unilateral right to convert all or a portion of any outstanding
principal and accrued interest thereon at any time into shares of the Company's
common stock at the lesser of (i) 80% of the average closing bid price over any
specified three successive trading days or (ii) 80% of the average closing bid
price over any specified twenty-two successive trading days. As it was unable to
redeem the $323,985 aggregate principal balance, and $60,121 aggregate accrued
interest thereon, of these outstanding debentures when they became due and
payable on October 31, 2003, the Company became in default.
The outstanding debentures and accrued interest thereon were fully converted
into common stock in December 2004 (see Note 23).
13. STOCKHOLDERS' DEFICIT
General
On December 20, 2001, the Company's Board of Directors authorized the issuance
of 3.5 million shares of the Company's preferred stock to one director and three
officers in satisfaction of retention and performance bonuses. Although all of
these preferred shares have been reserved for, their actual issuance was
postponed due to the subsequent downturn in the Company's operations and
departure of two of the officers. If and when ultimately issued, each preferred
share will have a 10:1 conversion rate to common and super voting rights of
100:1. No other rights have yet been designated to these preferred shares,
including, but not limited to, dividend and liquidation rights.
On September 6, 2002, the Company transacted a one-for-ten reverse stock split
of its common stock. This stock split has been retroactively reflected in the
financial statements as if it occurred at the date of the Company's inception.
On February 24, 2003, the Company's Board of Directors approved an amendment to
the Company's Articles of Incorporation to increase its authorized common shares
from 450 million to five billion.
60
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. STOCKHOLDERS' DEFICIT (continued)
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. 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
Company also recorded a $150,000 loss from the note receivable associated with
stock options issued to Pangea. The shares were returned to the Company in
December 2004.
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 Cash
During fiscal 2003, the Company issued an aggregate of 36,691,176 shares of its
common stock to one unrelated individual in exchange for $36,691 in cash.
During fiscal 2004, the Company issued an aggregate of 224,969,608 shares of its
common stock to five unrelated individuals in exchange for $2,594,507 in cash.
Common Stock Issued for Services Received and in Settlement of Accounts Payable
During fiscal 2003, the Company issued an aggregate of 44,161,764 shares of its
common stock to various unrelated individuals in settlement of $248,250 in
services received and accounts payable.
Common Stock Issued for Services Received and In Settlement of Liabilities
During the year ended October 31, 2004, the Company issued shares of its common
stock for services received and in settlement of liabilities as follows:
61
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. STOCKHOLDERS' DEFICIT (continued)
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 $332,300 in accordance with consulting
contracts with four individuals for 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.
o 8.0 million shares valued at $290,000 for consulting services provided by
D. Scott Elliot and Steve Green for merger and acquisition services.
May 2004 and June 2004
o 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 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.
62
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. STOCKHOLDERS' DEFICIT (continued)
o The Company issued 1,661,266 shares of its common stock with an assigned
aggregate fair market value of $54,140 to unrelated individuals for
various services rendered.
o 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 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.
August 2004 and September 2004
o The Company cancelled and received back 5,870,275 shares of its common
stock with an assigned aggregate fair market value of $65,072 from an
unrelated individual. The shares were originally issued in retention of a
two year facilities lease for the acquired Synosphere operations. The
lease deposit and monthly payments were instead paid in cash.
o The Company issued 6,146,123 shares of its common stock with an assigned
aggregate fair market value of $42,000 to Greg Sichenzia for legal
services provided.
Common stock Issued for Services Received and In Settlement of Liabilities
(Continued)
o The Company issued 3,687,699 shares of its common stock with an assigned
aggregate fair market value of $13,340 as additional payment to one member
of Synosphere, LLC for purchase of their interests.
o The Company issued 6,000,000 shares of its common stock with an assigned
aggregate fair market value of $24,600 to two unrelated individuals for
marketing services provided.
Common Stock Issued to Officers and Other Employees as Retention Bonuses
During fiscal 2003, the Company issued an aggregate of 253,063,228 shares of its
common stock to officers and other employees in settlement of $695,188 in
retention 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.
63
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. STOCKHOLDERS' DEFICIT (continued)
January 2004
o 194,137,931 shares of our common stock in final settlement of $281,500 in
accrued bonus at October 31, 2003.
May 2004
o 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.
August 2004
o The Company issued 11,508,081 shares of its common stock with an assigned
aggregate fair value of $87,079 to non-officer employees in payment of
signing bonuses to new employees and performance bonuses to employees of
Synosphere.
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 form market, as defined) were issued to Jeffrey
Firestone for providing legal counsel on International issues in mergers
and acquisitions.
64
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. STOCKHOLDERS' DEFICIT (continued)
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.
May 2004
o Options valued at $492,000 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).
o Options valued at $91,000 to purchase 10,000,000 shares of common stock
(at a 15% discount from market, as defined) to Jeffrey Firestone for
providing legal counsel on International issues in mergers and
acquisitions. Options to purchase 10,000,000 shares were exercised in May
2004 resulting in the receipt of approximately $128,000.
The Company has valued the options granted using the Black-Scholes stock option
pricing model. The total fair value of the options granted during fiscal 2004
was $6,969,187. Based on the uncertainty of any future value of these
agreements, the Company expensed the value of the options in fiscal 2004.
65
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. STOCKHOLDERS' DEFICIT (continued)
Beneficial Conversion Feature of Debentures Issued
The Company recorded $-0- and $1,379,077 in additional paid-in capital during
fiscal years 2004 and 2003, respectively, in recognition of the fair value
attributable to the non-detachable conversion features of debentures issued
whereby the stated conversion price reflected a discount from the then
prevailing market price of the Company's common stock.
Common Stock Issued Upon Conversion of Debentures and Accrued Interest Thereon
The Company issued 1,479,530,624 and 270,977,456 common shares during fiscal
years 2004 and 2003, respectively, to honor conversion elections by certain
debenture holders of related principal and accrued interest thereon.
Stock Options and Warrants
In connection with its original issuance of debentures to KCM, the Company
granted KCM detachable warrants entitling it to subsequently purchase over a
five-year period 371,667 shares of the Company's common stock at exercise prices
ranging from $0.21 to $0.42 per share. These warrants remained unexercised as of
October 31, 2004.
In connection with the April 2001 issuance of debentures to Laurus, the Company
granted Laurus detachable warrants entitling it to subsequently purchase over a
five year period 150,000 shares of the Company's common stock at an exercise
price equal to the lesser of (i ) $1.23 per common shares or (ii) the average of
the three lowest closing bid prices over any subsequent ten successive trading
days. In connection with the July 2001 issuance of debentures, the Company
granted Laurus detachable warrants entitling it to subsequently purchase over a
five year period 100,000 shares of the Company's common stock at an exercise
price equal to the lesser of (i) $0.48 per common shares or (ii) 105% of the
average of the three lowest closing bid prices over any subsequent ten
successive trading days. In connection with the August 2001 issuance of
debentures, the Company granted Laurus detachable warrants entitling it to
subsequently purchase over a five year period 52,500 shares of the Company's
common stock at an exercise price equal to the lesser of (i) $0.39 per common
shares or (ii) 105% of the average of the three lowest closing bid prices over
any subsequent ten successive trading days. In connection with the October 2001
issuance of debentures, the Company granted Laurus detachable warrants entitling
it to subsequently purchase over a five year period 35,000 shares of the
Company's common stock at an exercise price equal to the lesser of ( i ) $0.26
per common shares of ( ii ) 105% of the average of the three lowest closing bid
prices over any subsequent ten successive trading days. These warrants remained
unexercised as of October 31, 2004.
66
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. ACQUISITION OF SYNOSPHERE, LLC
On January 20, 2004, the Company acquired all of the outstanding membership
interest in Synosphere, a Texas-based limited liability development-stage
company pursuing the development of certain hand-held 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. As the technological feasibility of each of the acquired technologies had
yet to be fully established as of the acquisition date, the $1,200,000 purchase
price was immediately reflected within the Company's results of operations for
its fiscal 2004 first quarter ended January 31, 2004.
A subsequent addendum to the acquisition agreement underlying the Company's
acquisition of Synosphere permitted certain of Synosphere's former membership
interest holders to elect to receive a cash payment instead of shares of the
Company's common stock. Through October 31, 2004, the Company had paid $18,833
in cash and issued 29,033,417 shares of its common stock to former membership
interest holders in Synosphere. At October 31, 2004, the Company had reserved
495,750 shares of its common stock for potential issuance to those former
membership interest holders in Synosphere who had not yet made an election.
15. ASSET IMPAIRMENTS
Inventory Deposit
During its fiscal 2004 second quarter ended April 30, 2004, the Company placed
an initial purchase order with Enterprise Capital AG (hereinafter, "Enterprise")
for a new virtual keyboard product and remitted a required $400,000 deposit.
When Enterprise subsequently failed to deliver such keyboards, the Company filed
a lawsuit in Israel on June 23, 2004 against Enterprise for breach of contract
and demanding that the deposit be immediately returned. However, given
significant uncertainties regarding the Company's ultimate ability to recover
this deposit, management deemed this asset as impaired and wrote-off the
$400,000 balance in its entirety during the Company's fiscal 2004 third quarter
ended July 31, 2004.
Tooling and Intellectual Property Rights
During the Company's fiscal 2004 third quarter ended July 31, 2004, Ttools,
Inc., the licensor and vendor of the Company's XELA keyboard product, filed a
lawsuit against the Company asserting breach of contract. As a result of such
lawsuit, the Company's management deemed the underlying tooling and intellectual
property rights as impaired and wrote-off the then unamortized balance of
$52,281 in its entirety during the Company's fiscal 2004 third quarter.
Previously, during its fiscal 2003 fourth quarter ended October 31, 2003, the
Company's management had downwardly revised its estimate of the cash flows to be
derived from future sales of the XELA Keyboard given lower than anticipated
historical sales. As a result, the Company recognized a correspondingly $125,000
impairment charge to write-down the underlying intellectual property rights and
related tooling. The direct costs previously incurred by the Company in
acquiring the intellectual property rights had been capitalized and were being
subsequently amortized into operating results on a straight-line basis over an
estimated useful life of three years.
67
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. ASSET IMPAIRMENTS (continued)
Tooling and Intellectual Property Rights (continued)
On July 20, 2004, the Company entered into a three-year agreement with Virtual
Devices, Inc. ("VDI") pursuant to which the Company would be licensed to use
certain patented technologies of VDI applicable to handheld computing devices.
The agreement required the Company to make an initial $300,000 cash payment, of
which the Company was only able to subsequently remit $200,000 given its cash
constraints. The agreement further stipulated that, if and when, the Company and
VDI mutually agreed upon certain performance criteria in a written addendum, the
Company would then be required to (i) make two $250,000 installment payments and
(ii) at its election, to provide VDI with either $200,000 in cash or equivalent
services to support related engineering activities. In the absence of a written
termination election by either party, the above licensing agreement will
automatically renew annually. As of October 31, 2004, the Company remained
unable to remit the $100,000 balance of required initial payment given its cash
constraints and the Company and VDI had yet to reach mutually acceptable
performance criteria. Given such, the Company's management deemed the licensed
intellectual property rights to be impaired and wrote-off the $200,000
unamortized balance in its entirety during the Company's fiscal 2004 fourth
quarter.
16. DISPUTE SETTLEMENTS
As a result of Enterprise's failure to deliver the new virtual keyboard product
to the Company, as previously discussed in Note 13 above, the Company was
correspondingly unable to fulfill a delivery obligation to a major retailer. As
Mad Dog Multimedia, Inc. (hereinafter, "Mad Dog"), a sales intermediary,
purportedly was assessed a $100,000 non-performance penalty by the retailer, the
Company became obligated under an indemnification clause to reimburse Mad Dog
for such penalty. In recognition of such, the Company recorded a related
$100,000 settlement accrual during its fiscal 2004 third quarter ended July 31,
2004. As of October 31, 2004, the Company remained unable given its cash
constraints to remit the $100,000 payment due to Mad Dog.
In March 2004, Cable & Wireless, plc (hereinafter, "C&W") filed a lawsuit
against the Company asserting breach of contract and damages aggregating
$103,042 in connection with its providing of connectivity services for a
previously discontinued line of business. In August 2004, the Company and C&W
reached a settlement for $19,336 to be paid by the Company in three equal
installments on September 15, October 15 and November 15, 2004, respectively. As
the Company has been subsequently unable to make the required installment
payments, the above matter is being renegotiated by the Company and C&W. As the
Company's management believes that the above matter will ultimately be settled
for a comparable amount, the Company maintains a related $20,000 settlement
accrual at October 31, 2004.
In March 2004, Synnex Corporation (hereinafter, "Synnex"), a wholesale
distributor, advised the Company of its desire to return approximately $32,000
of merchandise that it had previously purchased during fiscal 2003. When the
Company and Synnex could not mutually agree to terms,
68
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. DISPUTE SETTLEMENTS (continued)
including an appropriate restocking penalty, Synnex indicated its intent to
exercise an arbitration provision within its purchase agreement with the
Company. Prior to the commencement of the arbitration proceeding, the Company
and Synnex reached a verbal settlement whereby Synnex agreed to retain the
merchandise in exchange for a $7,500 payment by the Company. The Company
correspondingly recorded a $7,500 settlement accrual during its fiscal 2004
fourth quarter ended October 31, 2004. The Company awaits the written agreement
from Synnex's legal counsel formally documenting the agreed-upon settlement.
17. LOSS CONTINGENCIES
In May 2004, Ttools, LLC (hereinafter, "Ttools"), the supplier of the Company's
XELA keyboard product, filed a lawsuit against the Company asserting breach of
contract, conversion, and unjust enrichment and $70,558 in damages, plus
interest and legal fees. The Company has counter-claimed asserting
misrepresentations by Ttools. The Company's management believes that the case is
without merit and does not believe that the ultimate outcome of this matter will
have a material impact on the Company's consolidated financial statements.
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 fiscal 1999 first quarter. The Company
continues to maintain an accrual for this liability in its consolidated
financial statements. It is the Company's intent to seek a reduced settlement of
this liability with the IRS, if and when, it has sufficient cash so as to enable
it to honor any settlement. As of October 31, 2004, the IRS had not yet
assessed, nor has the Company accrued for, any related penalties.
The United States Securities and Exchange Commission (hereinafter, "SEC")
currently is conducting 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
believes that it and its officers, directors and employees have fully cooperated
with the SEC in its investigation to date. The Company will publicly disclose
the specific nature of any resulting SEC allegations(s) if and when they become
fully known, subject to any SEC mandated confidentiality and as permitted by
applicable federal securities laws.
With respect to the preceding SEC investigation, it should be noted that Kenneth
W. Schilling, the Company's Chairman, Chief Executive Officer and President,
remains the subject to a Cease and Desist Order from the SEC. The cease and
desist order constituted part of a negotiated settlement between Mr. Schilling
and the SEC that was formally entered into on February 28, 2001 pursuant to
which Mr. Schilling, without admitting or denying the SEC's allegations against
him, agreed to the entry of an Order enjoining him from violating Section 10(b)
of the Securities Exchange Act of 1934, as amended, and Rule 10-b5 thereunder,
and ordering him to pay a civil penalty of $20,000. In a related action, the
Company, without admitting or denying any of the SEC's findings, consented to
69
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. LOSS CONTINGENCIES (continued)
a cease-and-desist order enjoining it from committing or causing any violation
or any future violations of Section 10(b) of the Securities Exchange Act of
1934, as amended, and Rule 10-b5 thereunder. The underlying SEC Complaint
alleged that Mr. Schilling provided false financial projections to a purported
analyst for research reports recommending the purchase of the Company's common
stock. The Complaint also stated that from February 1999 through June 1999, Mr.
Schilling placed seventeen press releases on the Company's corporate website
which contained direct hyperlinks to the analyst reports and, as late as
February 2000, the Company maintained press releases on its corporate website
which referenced and contained hyperlinks to the analyst reports. The SEC
further alleged that in a February 19, 1999 press release, the Company
characterized the analyst as "independent" even though the Company, through its
then investor relations firm, had agreed to pay the analyst 200,000 shares of
its common stock for the report. The SEC found that Mr. Schilling had reviewed
and approved the press releases posted on the Company's corporate website. The
SEC also alleged that the false financial projections which appeared on the
Internet fueled a rise in both the price and the trading volume of the Company's
common stock
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, other than those separately addressed above, would not have a
material adverse impact upon the Company's financial statements.
18. INTEREST AND MISCELLANEOUS INCOME
Interest and miscellaneous income consist of the following:
Fiscal Year Fiscal Year
Ended Ended
October 31, October 31,
2004 2003
------------ ------------
Interest income $ 96 $ --
Gains on settlements of
obligations to vendors 22,821 85,733
Gains on settlements of
debenture obligations 232,583 --
Other miscellaneous income 2,891
------------ ------------
Total interest and miscellaneous income $ 255,500 $ 88,624
============ ============
70
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. INTEREST AND MISCELLANEOUS INCOME (continued)
During fiscal 2004, statutes of limitations passed thereby prohibiting certain
former vendors of the Company from further pursuing the collection of $22,821 in
aggregate obligations. As a result, the Company recognized a corresponding gain.
During fiscal 2004, certain debenture holders forgave $232,583 in principal and
accrued interest in connection with conversions into shares of the Company's
common stock. As a result, the Company recognized a corresponding gain.
19. INTEREST AND FINANCING EXPENSES
Fiscal Year Fiscal Year
Ended Ended
October 31, October 31,
2004 2003
------------ ------------
Interest expense $ 211,328 $ 353,516
Beneficial conversion features
of debentures issued -- 1,379,077
------------ ------------
Total interest and financing expenses $ 211,328 $ 1,732,593
============ ============
71
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
20. COMMITMENTS
Operating Leases
The Company leases its corporate facilities as well as a piece of office
equipment under noncancellable operating leases with monthly payments of $2,823
and $716, respectively. The Company's wholly-owned subsidiary, Synosphere,
leases its facility in Austin, Texas under a two year lease agreement beginning
August 1, 2004 with monthly payments of approximately $2,500. The Company
incurred aggregate rent expense under its operating leases of $68,095 and
$43,625 during fiscal years 2004 and 2003, respectively.
The future aggregate minimum lease payments under operating lease agreements in
existence at October 31, 2004 are as follows:
Fiscal years ending October 31,
- -------------------------------
2005 $ 70,000
2006 33,200
2007 700
2008 --
2009 --
------------
Total minimum operating lease payments $ 103,900
============
Officer's Compensation - iBIZ Technology Corp.
As of October 31, 2004, the Company has employment agreements with two of its
corporate officers. The contracts are for three years beginning July 2001 and
provide for the following:
1. Salaries from $150,000 to $125,000 for each officer.
2. Bonuses of 1% of total sales for each officer.
3. Options for 120,000 shares of common stock at $0.20 per share which will
vest and be exercisable for a period of ten years. None granted.
4. Termination - Termination by the Company without cause - the employee
shall receive six months salary. Change of control - in the event of
change of control, the Company shall pay the employee a lump sum payment
of three years annual salary.
72
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. COMMITMENTS (CONTINUED)
Officers' Compensation - Synosphere, Inc.
The Company entered into employment agreements with two of the current
directors/officers of Synosphere. The term of these employee agreements shall be
two years following the closing and transferable in the event of a sale of
Synosphere to another entity or if Synosphere is spun-off. The employees shall
receive annual base salaries of $112,000 and $102,000 per year with healthcare
benefits. Furthermore, the employees shall receive an Earn Out bonus of common
stock in eight payments, each made quarterly, in the amount of $62,500. A
"golden parachute" clause shall be put in place, such that if either of the
employee agreements are terminated by the Company or any successor, they are
payable in full at the date of their termination. Finally, one of the employees
shall be appointed to the Company's Board of Directors.
21. 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.
22. FOURTH QUARTER ADJUSTMENTS
The Company recorded certain adjustments in the fourth quarter that related to
events or transactions in earlier fiscal quarters in 2004. The following
schedule summarizes the adjustments and the revised results of operations in the
applicable quarters:
- --------------------------------------------------------------------------------------------------------------
January 31, 2004 April 30, 2004 July 31, 2004
- --------------------------------------------------------------------------------------------------------------
Net Loss, as previously reported $ (6,347,497) $ (2,609,027) $ (2,230,301)
Fourth quarter adjustments:
Correction of amortization of consulting fees (62,015) (119,301) (25,910)
Impairment of License Agreement (200,000)
Dispute settlements (20,000) (7,500)
Other adjustments (55,596) (30,850) (17,150)
- --------------------------------------------------------------------------------------------------------------
Total fourth quarter adjustments (137,611) (157,651) (243,060)
- --------------------------------------------------------------------------------------------------------------
Net Loss, as adjusted $ (6,485,108) $ (2,766,678) $ (2,473,361)
- --------------------------------------------------------------------------------------------------------------
Net Loss per share, as previously reported $ 0.00 $ 0.00 $ 0.00
Effect of adjustments $ 0.00 $ 0.00 $ 0.00
- --------------------------------------------------------------------------------------------------------------
Net Loss per share, as adjusted $ 0.00 $ 0.00 $ 0.00
- --------------------------------------------------------------------------------------------------------------
73
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. SUBSEQUENT EVENTS (UNAUDITED)
On December 7, 2004, the Company reached an agreement with the remaining
debenture holders and converted the outstanding principal balance of $863,675
and accrued interest of $254,900 into 400,000,000 shares of the Company's common
stock. As a result of this agreement, the Company will record a total of
$390,086 benefit from the settlement of the debt during the first quarter of
fiscal 2005.
During December 2004, Pangea Investments GmbH returned 75 million shares to the
Company that were originally issued to an escrow account in connection with the
original option to purchase 100 million shares for services issued in January
2004 (see Note 13).
On February 18, 2005, the Company closed a transaction pursuant to a
Subscription Agreement, dated as of February 18, 2005, with an accredited
investor pursuant to which the accredited investor lent an aggregate principal
amount of $200,000 to the Company in exchange for (i) 8% promissory note in that
aggregate principal amount, and (ii) warrants to purchase shares of the
Company's common stock equal to one warrant for each share of its common stock
which would be issued on the closing date of the loan assuming the complete
conversion of the promissory note. An additional $500,000 has been committed,
subject to the filing of a registration agreement.
Additional stock issuances after October 31, 2004:
o 2,566,667 shares of common stock where issued to an individual in exchange
for $7,000 of accounts payable.
o 75,000,000 shares of common stock were issued to an individual under a
private placement. The Company received approximately $90,000 in cash.
o 75,000,000 shares of common stock were issued to an individual under the
exercise of an option. The Company received approximately $293,000 in
cash.
o 2,806,400 shares of common stock were issued in exchange for $14,032 of
accrued interest.
o 44,744,275 shares of common stock were issued to an individual for legal
services rendered; value $25,372.
o 45,749,741 shares of common stock were issued to an individual for legal
services rendered; value $110,600.
o 1,087,193 shares of common stock were issued to an individual for expenses
incurred on behalf of the Company; value $2,500.
o 113,786,170 shares of common stock were issued to two officers of
Synosphere for the quarterly bonuses called for in their employment
contracts; value $250,000.
74
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THE
INFORMATION CONTAINED IN THIS PROSPECTUS. THIS DOCUMENT MAY ONLY BE USED WHERE
IT IS LEGAL TO SELL THE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE
ACCURATE ON THE DATE OF THIS DOCUMENT.
UP TO 1,213,056,918 SHARES
OF OUR
OF COMMON STOCK
TABLE OF CONTENTS
Page
Prospectus Summary 5
Recent Developments 6
Risk Factors 7
Use of Proceeds 11 iBiz Technology Corp.
Market For Common Equity And Related Stockholder
Matters 12
Management's Discussion And Analysis or Plan Of
Operation 13
Business 20
Description of Property 24
Legal Proceedings 25
Management 26
Executive Compensation 27
Certain Relationships And Related Transactions 28
Security Ownership Of Certain Beneficial Owners ----------------
And Management 29 PROSPECTUS
----------------
Description of Securities 30
Indemnification for Securities Act Liabilities 31
Selling Stockholders 32
Plan of Distribution 35
Legal Matters 37
Experts 37
Available Information 39
Index To Financial Statements 40 March 17, 2005
75
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Florida law, that our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate the right of us and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believes that the indemnification provisions in our Articles of Incorporation,
as amended, are necessary to attract and retain qualified persons as directors
and officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Securities Act") may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The follow table sets forth the estimated costs and expenses incurred by the
selling security holders in connection with this Offering.
SEC Registration Fee $199.89
Legal Fees and Expenses $40,000.00
Accounting Fees and Expenses $5,000.00
TOTAL(1) 45,199.89
(1) Except for the SEC registration fee, all fees and expenses are estimates.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
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 us with
our expansion plans and entry into other markets.
December 2003 - Options valued at $60,000 to purchase 50 million shares of
common stock (at a 15% discount form 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.
On January 20, 2004, we entered into an acquisition agreement with the
interestholders of Synosphere, LLC, A Texas limited liability company
("Synosphere"). The shareholders are the owners of all the issued and
outstanding membership interests ("Interests") of equity of Synosphere. Under
the terms of this agreement, on the closing date, Synosphere sold to us all
5,000,000 Interests. We in turn sold to the shareholders 6 shares of its common
stock for each Interest (an aggregate of 30,000,000 shares of common stock).
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) to D. Scott Elliott for
general business and financial consulting services to assist us with our
expansion plans and entry into other markets.
May 2004 - Options valued at $492,000 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.
May 2004 - Options valued at $91,000 to purchase 10,000,000 shares of common
stock (at a 15% discount from market, as defined) to Jeffrey Firestone for
providing legal counsel on International issues in mergers and acquisitions.
Options to purchase 10,000,000 shares were exercised in May 2004 resulting in
the receipt of approximately $128,000.
76
Additional stock issuances after October 31, 2004:
o 2,566,667 shares of common stock where issued to an individual in exchange
for $7,000 of accounts payable.
o 75,000,000 shares of common stock were issued to an individual under a
private placement. We received approximately $90,000 in cash.
o 75,000,000 shares of common stock were issued to an individual under the
exercise of an option. We received approximately $293,000 in cash.
o 2,806,400 shares of common stock were issued in exchange for $14,032 of
accrued interest.
o 44,744,275 shares of common stock were issued to an individual for legal
services rendered; value $25,372.
o 45,749,741 shares of common stock were issued to an individual for legal
services rendered; value $110,600.
o 1,087,193 shares of common stock were issued to an individual for expenses
incurred on behalf of the Company; value $2,500.
o 113,786,170 shares of common stock were issued to two officers of
Synosphere for the quarterly bonuses called for in their employment
contracts; value $250,000.
On December 7, 2004, we reached an agreement with the remaining debenture
holders and converted the outstanding principal balance of $863,675 and accrued
interest of $254,900 into 400,000,000 shares of our common stock. As a result of
this agreement, we will record a total of $390,086 benefit from the settlement
of the debt during the first quarter of fiscal 2005.
On February 18, 2005, we closed a transaction pursuant to a Subscription
Agreement, dated as of February 18, 2005, with an accredited investor pursuant
to which the accredited investor lent an aggregate principal amount of $200,000
to us in exchange for (i) 8% promissory note in that aggregate principal amount,
and (ii) warrants to purchase shares of our common stock equal to one warrant
for each share of its common stock which would be issued on the closing date of
the loan assuming the complete conversion of the promissory note. An additional
$500,000 has been committed, subject to the filing of a registration statement.
* All of the above offerings and sales were deemed to be exempt under rule
506 of Regulation D and Section 4(2) of the Securities Act of 1933, as
amended. 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 accredited investors, business associates of
iBiz or executive officers of iBiz, and transfer was restricted by iBiz in
accordance with the requirements of the Securities Act of 1933. In
addition to representations by the above-referenced persons, we have made
independent determinations that all of the above-referenced persons were
accredited or sophisticated investors, and that they were capable of
analyzing the merits and risks of their investment, and that they
understood the speculative nature of their investment. Furthermore, all of
the above-referenced persons were provided with access to our Securities
and Exchange Commission filings.
77
ITEM 27. EXHIBITS.
Exhibit No. DESCRIPTION
- --------------------------------------------------------------------------------
2.01(1) Plan of Reorganization and Stock Exchange Agreement dated
January 1, 1999
3.01(1) Articles of Incorporation, as amended
3.02(1) Bylaws
5.1 Opinion of Sichenzia Ross Friedman Ference LLP (filed herewith)
10.03(1) iBIZ Technology Corp. Stock Option Plan dated January 31, 1999
10.26(6) Modification and Waiver by and among iBIZ Technology and
Subscribers to 8% Convertible debentures Agreement, dated as of
April 17, 2001
10.27(6) Subscription Agreement for Debentures Convertible into Common
Stock of iBIZ Technology Corp., dated as of April 26, 2001
10.28(6) Form of 8% Convertible debentures Due April 26, 2003
10.29(6) Form of Warrant dated April 26, 2001, 2000
10.30(6) Form of Subscription Agreement for Debentures Convertible into
Common Stock of iBIZ Technology Corp., dated as of October 9,
2001
10.31(3) Form of 8% Convertible debentures Due October 9, 2002
10.32(3) Form of Warrant dated October 9, 2001 Form of Subscription
Agreement for Debentures Convertible into Common Stock of iBIZ
10.33(4) Technology Corp., dated as of August 21, 2001 between iBiz
Technology and Laurus Master Fund, Ltd. and Keshet, L.P.
10.34(4) Form of 8% Convertible Debenture Due October August 21, 2002
between iBiz Technology and Laurus Master Fund, Ltd.
10.35(4) Form of Warrant dated August 21, 2001 issued to Laurus Master
Fund, Ltd.
10.36(4) Form of 8% Convertible Debenture Due October August 21, 2002
between iBiz Technology and Keshet, L.P. Form of Subscription
Agreement for Debentures Convertible into Common Stock of iBIZ
10.37(5) Technology Corp., dated as of July 30, 2001 between iBiz
Technology and Laurus Master Fund, Ltd., Esquire Trading &
Finance, Inc. and Celeste Trust Reg.
10.38(5) Form of 8% Convertible Debenture Due October July 30, 2002
between iBiz Technology and Laurus Master Fund, Ltd.
10.39(5) Form of Warrant dated July 30, 2001 issued to Laurus Master
Fund, Ltd.
10.40(5) Form of 8% Convertible Debenture Due October July 30, 2002
between iBiz Technology and Esquire Trading & Finance, Inc..
10.41(5) Form of Warrant dated July 30, 2001 issued to Esquire Trading &
Finance, Inc.
78
Exhibit No. DESCRIPTION
- --------------------------------------------------------------------------------
10.42(5) Form of 8% Convertible Debenture Due October July 30, 2002
between iBiz Technology and Celeste Trust Reg.
10.43(5) Form of Warrant dated July 30, 2001 issued to Celeste Trust Reg.
Form of Subscription Agreement for Debentures Convertible into
Common Stock of iBIZ
10.44(5) Technology Corp., dated as of June 22, 2001 between iBiz
Technology and The Keshet Fund, L.P.
10.45(5) Form of 8% Convertible Debenture Due October June 22, 2002
between iBiz Technology and The Keshet Fund, L.P.
10.46(5) Form of Warrant dated July 30, 2001 issued to The Keshet Fund,
L.P.
10.47(5) Employment Agreement with Bryan Scott.
10.48(5) Employment Agreement with Ramon Perales.
10.49(6) Subscription Agreement dated as of February 18, 2005 by and
between iBiz Technology Corp. and the investor named on the
signature page thereto.
10.50(6) Form of 8% Promissory Note of iBiz Technology Corp.
10.51(6) Form of Class A Common Stock Purchase Warrant of iBiz Technology
Corp. to the investor.
10.52(6) Form of Class A Common Stock Purchase Warrant of iBiz Technology
Corp. to the broker.
10.53(6) Personal Guarantee of Guarantor (Kenneth Schilling).
10.54(6) Security Interest and Pledge Agreement by Kenneth Schilling for
the benefit of iBiz Technology Corp.
23.1 Consent of Independent Public Accountants - Farber & Hass LLP
(filed herewith).
23.2 Consent of Sichenzia Ross Friedman Ference LLP (see Exhibit
5.1).
(1) Incorporated by reference from iBIZ's Form 10-SB, File No. 000-27619,
filed with the SEC on October 13, 1999
(2) Incorporated by reference from iBIZ's Form SB-2, File No. 333-34936, filed
with the SEC on April 17, 2000.
(3) Incorporated by reference from iBIZ's Form SB-2, File No. 333-50564, filed
with the SEC on November 22, 2000.
(4) Incorporated by reference from iBIZ's Form 10-KSB, File No. 000-027619,
filed with the SEC on January 29, 2001.
(5) Incorporated by reference from iBiz's Form SB-2, File No. 333-74496, filed
with the SEC on December 4, 2001.
(6) Incorporated by reference from iBiz's Form 8-K filed with the SEC on
February 23, 2005.
79
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar
value of the securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under
the Securities Act if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement, and
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this registration statement as
of the time it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
80
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of an amendment to a filing on Form SB-2 and authorized this
amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Phoenix, State of Arizona on March 17, 2005.
iBiz TECHNOLOGY CORP.
By: /s/ KENNETH W. SCHILLING
------------------------------------
Kenneth W. Schilling, President,
Acting Principal Accounting Officer,
and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities stated, on March 17, 2005.
By: /s/ KENNETH W. SCHILLING
---------------------------------------
Kenneth W. Schilling, President, Acting
Principal Accounting Officer
Director (Principal executive officer)
By: /s/ MARK H. PERKINS
---------------------------------------
Mark H. Perkins, Vice President of
Operations, Director
81