10KSB/A: IBIZ TECHNOLOGY CORP
3/3/2004 12:26:59 PM
(EDGAR Online via COMTEX) -- ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. In consultation with our Board of Directors, we have identified eight
accounting principles that we believe are key to an understanding of our
financial statements. These important accounting policies require management's
most difficult, subjective judgments.
(1) ACCOUNTS RECEIVABLE
Accounts receivable are reported at the customer's outstanding balances less any allowance for doubtful accounts. The Company does not normally require collateral to support receivables and interest is not accrued thereon.
(2) ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts on accounts receivables is charged to income in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical write-off percentages and information collected from individual customers. Accounts receivable are charged off against the allowance when collectibility is determined to be permanently impaired (bankruptcy, lack of contact, account balance over one year old, etc.).
(3) INVENTORIES
Inventories are stated at the lower of cost (determined principally by average cost) or market.
(4) ACCOUNTING FOR CONVERTIBLE DEBT SECURITIES
The Company has issued convertible debt securities with non-detachable conversion features. The Company has recorded the fair value of the beneficial conversion features as interest expense and an increase to Additional Paid in Capital.
(5) REVENUE RECOGNITION
Product Sales - when the goods are shipped and title passes to the customer.
Maintenance Agreements - Income from maintenance agreements is being recognized on a straight-line basis over the life of the service contracts. The unearned portion is recorded as deferred income.
Service Income - When services are performed.
(6) CONSULTING AGREEMENTS
The Company issued common stock for payment of consulting services. The cost of the consulting services was determined by multiplying the common shares issued by the market price, less an agreed upon discount, for the shares at the inception date of the agreement.
SELECT FINANCIAL INFORMATION
Years Ended
10/31/03 10/31/02
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Statement of Operations Data
Total revenue $ 485,382 $ 356,278
Operating income (loss) (2,818,163) (1,539,938)
Net earnings (loss) after tax (4,462,182) (6,490,465)
Net earnings (loss) per share (0.02) (0.25)
Balance Sheet Data
Total assets 330,619 439,120
Total liabilities 7,047,304 5,380,902
Stockholders' deficit (6,716,685) (4,941,782)
RESULTS OF OPERATIONS
The year ended October 31, 2003 compared to the year months ended October 31,
2002.
Revenues
Sales from continuing operations increased by approximately 36% to $485,382 in the year ended October 31, 2003 from $356,278 in the year ended October 31, 2002. The increase was mainly a result of the addition of new customers, the increase in volume sales to an existing national retailer and introduction of three new products.
Cost of Sales and Gross Loss
The cost of sales of $519,003 (107% of sales) in the year ended October 31, 2003 remained the same from $379,440 (107% of sales) for the year ended October 31, 2002. Cost of sales consists of 354,434 (73% of sales) of direct material, packaging and freight and $164,569 (34% of sales) of salaries and employee related costs for the year ended October 31, 2003. Cost of sales consists of $274,556 (77% of sales) of direct material, packaging and freight and $104,884 (30% of sales) of salaries and employee related costs for the year ended October 31, 2002.
The gross loss of 33,621 ((7)> of sales) in the year ended October 31, 2003 decreased from $23,162 ((7)> of sales) for the year ended October 31, 2002.
Selling, General and Administrative Expenses Selling, general and administrative expenses increased approximately 1% to $1,026,660 in the year ended October 31, 2003 from $1,516,776 in the year ended October 31, 2002.
Officer Bonuses
Officer bonuses increased 100% to $1,132,882 in the year ended October 31, 2003 from $0 in the year ended October 31, 2002. The increase is due to the issuance of stock based bonuses to the officers throughout the year ended October 31, 2003.
Interest Expense
Interest expense increased 41% to $353,516 in the year ended October 31, 2003 from $250,057 in the year ended October 31, 2002. The increase in interest is a result of approximately $1,850,000 new convertible debentures issued at 12% from August 2002 to June 2003.
Interest Expense - Convertible Debentures-Beneficial Conversion Feature
The Company has issued convertible debt securities with a non-detachable convertible feature that were "in-the-money" at the date of issuance. . The Company has recorded the fair value of the beneficial conversion feature as interest expense and an increase in paid-in-capital. Interest expense on the convertible debentures was $1,379,077 and $4,283,930 for the year ended October 31, 2003 and 2002, respectively.
Net Loss From Continuing Operations
Net loss from continuing operations decreased 26% % to 4,462,182 for the year ended October 31, 2003 from a net loss of $6,010,861 for the year ended October 31, 2002. The decrease in net loss was primarily the result of the decrease in beneficial conversion interest of $2,904,853 offset by the increase of officer bonuses in the amount of $1,132,882.
Discontinued Operations
Loss from discontinued operations was $479,554 for year ended October 31, 2002 as a result of management's election to discontinue non-profitable segments of the Company's operations and to focus on profitable business units as of October 31, 2001. The Company completed the discontinuance at October 31, 2002 and incurred no further expenses from that date.
Liquidity
Net cash (used) by operating activities for the year ended October 31, 2003 was $793,646 compared to $671,211 (used) by operating activities for the year ended October 31, 2002. The $122,435 change, net of non-cash transactions was primarily due to:
a. Accounts receivable increased $147,832 in the year ending October 31, 2003 as compared to a decrease of $73,771 in the year ending October 31, 2002. The net use of operating cash in 2003 is a result of the Company's major customers paying on extended terms instead of the original agreed upon terms.
b. Inventories decreased 41,758 in the year ending October 31, 2003 as compared to an decrease of $71,141 in the year ending October 31, 2002. The net operating cash provided in 2003 is a result of the Company's fulfillment of sales orders and the decision to purchase inventory on an as needed basis due to cash flow restrictions.
c. Prepaid expenses increased $6,057 in the year ending October 31, 2003 as compared to a decrease of $36,127 in the year ending October 31, 2002. The net use of operating cash in 2003 is a result of prepaying for services in order to secure their use in the year ending October 31, 2003.
d. Cash, pledged for letter of credit increased $10,000 in the year ending October 31, 2003. The result of this use of operating cash is due to the Company's major customer requiring the establishment of a letter of credit in order to service rebates.
e. Accounts and notes payable increased 91,401 in the year ending October 31, 2003 as compared to a increase of $509,519 in the year ending October 31, 2002. The increase in cash provided in 2003 is a result of the Company's need to purchase items on a cash basis and therefore being unable to reduce accounts and notes payable by any significant amount in the year ending October 31, 2003.
f. Accrued liabilities and taxes increased $1,199,630 in the year ending October 31, 2003 as compared to an increase of $540,671 in the year ending October 31, 2002. The net increase in cash provided in 2003 is the result of the Company's increase of $735.000 of accrued wages and bonuses and the increase of $313,00 in interest due on convertible debentures in the year ending October 31, 2003.
The Company plans to remedy the deficiency of operating cash flows by increasing income from its new product line and obtaining additional equity investment. As of February 11, 2004, the Company has obtained additional equity investment of $1.1 million.
Our investing activities for the year ended October 31, 2003 used no cash, as compared to $201,365, which was used in the year ended October 31, 2002. The primary change was that the Company received cash from the sale of assets in the amount of $48,635, purchased a mold in the amount of $50,000 for a new product line and purchased Intellectual Property Rights in the amount of $200,000 during the year ended October 31, 2002 and had no investing activities in the year ended October 31, 2003.
Our financing activities for the year ended October 31, 2003 provided cash of $794,838 compared to $866,543 for the year ended October 31, 2002. The primary change was that the Company obtained $686,813 of new debenture financing for the year ended October 31, 2003 compared to $848,723 for the year ended October 31, 2002. Net proceeds from the issuance of common stock was $36,691 for the year ended October 31, 2003 as compared to $79,500 for the year ended October 31, 202. The Company also repaid $55,734 on its note payable factor during the year ended October 31, 2002 and $15,000 during the year ended October 31, 2003.
Capital Resources
Working capital is summarized and compared as follows:
October 31, October 31,
2003 2002
----------- -----------
Current assets $ 203,790 $ 126,416
Current liabilities 6,297,304 4,373,436
----------- -----------
Working capital (deficit) $(6,093,514) $(4,247,020)
=========== ===========
This increase in the deficit in working capital was primarily due to the increase in the convertible debentures, current portion, the increase of accrued interest and the increase of accrued wages and bonuses.
At October 31, 2003, stockholders' deficit was 6,716,685 as compared to a stockholders' deficit of $4,941,782 at October 31, 2002. The $1,726,086 change in stockholders' deficit was accounted for as follows:
Increase in Stockholders' Equity
Issuance of common stock $ 980,129
Conversion of convertible
debentures, net of costs 328,073
Interest expense - convertible
debentures - beneficial
conversion feature 1,379,077
Decreases in stockholders'equity
net loss (4,462,182)
-----------
Net Change $(1,774,903)
===========
The Company currently has no material commitments for capital expenditures.
The Company has $3,265,837 and $750,000 of debt payments related to convertible debentures due within the next year and next two to five years, respectively. Subsequent to October 31, 2003, $2,023,150 of these debt payments were converted in full to common stock and the remaining balance of $1,992,687 was renegotiated to more favorable terms.
Spin-off
On October 20, 3003, the Board of Directors approved the spin-off of IBIZ, Inc., a wholly owned subsidiary of the Company, into a separate public company.
The Company proposes to issue without consideration non-restricted shares of common stock in IBIZ, Inc. pro rata to all shareholders of the Company as of September 25, 2003 at the ratio of one share of IBIZ, Inc. for each 500 shares of the Company common stock.
The purpose of the spin-off of IBIZ, Inc. is that it will allow management of each business to focus solely on that business. In addition, it should enhance access to financing by allowing the financial community to focus separately on each business.
IBIZ Technology Corp. will continue to distribute its product line in the United States providing sub-licenses for all products to IBIZ, for worldwide distribution. IBIZ, Inc. will sign distribution agreements with IBIZ Technology Corp. for distribution of its products in the United States. IBIZ will support IBIZ Technology Corp. in engineering, production, and business development, through synergetic agreements using Endeavour Capital and its affiliates infrastructure in Europe and Israel.
Current funds available to IBIZ will not be adequate for it to be competitive in the areas in which it intends to operate. IBIZ's continued operations, as well as the implementation of its business plan, therefore will depend upon its ability to raise additional funds through bank borrowings, equity or debt financing. IBIZ estimates that it will need to raise up to approximately $1,000,000 over the next 12 months for these purposes.
There is no guarantee that these funding sources, or any others, will be available in the future, or that they will be available on favorable terms. In addition, this funding amount may not be adequate for IBIZ to fully implement its business plan. Thus, the ability of IBIZ to continue as a going concern is dependent on additional sources of capital and the success of IBIZ's business plan. Regardless of whether IBIZ's cash assets prove to be inadequate to meet IBIZ's operational needs, IBIZ might seek to compensate providers of services by issuance of stock in lieu of cash.
If funding is insufficient at any time in the future, IBIZ may not be able to take advantage of business opportunities or respond to competitive pressures, any of which could have a negative impact on the business, operating results and financial condition. In addition, if additional shares were issued to obtain financing, current shareholders may suffer a dilutive effect on their percentage of stock ownership in IBIZ.
Acquisition
On February 3, 2004, the Company acquired 5,000,000 Interests, representing all of the Interests, of Synosphere, LLC, ("Synosphere"), in exchange for 30,000,000 shares of common stock. Synosphere is a Plano, Texas based corporation specializing in the development of innovative handheld computer technologies.
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. In addition, each employee shall receive a sign on bonus of 2,500,000 shares of common stock. Furthermore, the employees shall each 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.
Increase in Cash Subsequent to October 31, 2003
On November 1, 2003, the Company granted an individual the option to purchase 200,000,000 shares of common stock at the exercise price of the average closing price for the three days prior to exercise less a 40% discount. The option is exercisable commencing November 1, 2004 and expires after January 15, 2004.
During December 2003, the Company granted an individual the option to purchase 50,000,000 shares of common stock at the exercise price of market value at the date of exercise less a 40% discount.
On January 28, 2004, the Company granted Pangea Investments GmbH the option to purchase 100,000,000 shares of common stock at the exercise price of market value at the date of exercise less a 50% discount. The option is exercisable commencing January 28, 2004 and expires after January 28, 2014.
As of February 4, 2004, the Company has received approximately $1,098,000 cash as a result of the Company's Option holders exercising their options to purchase shares of common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB recently issued the following statements:
FASB 144 - Accounting for the impairment or disposal of long-lived assets FASB 145 - Rescission of FASB statements 4, 44 and 64 and amendment of
FASB 13
FASB 146 - Accounting for costs associated with exit or disposal
activities
FASB 147 - Acquisitions of certain financial institutions
FASB 148 - Accounting for stock based compensation
FASB 150 - Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
These FASB statements did not, or are not expected to, have a material impact on the Company's financial position and results of operations.
Mar 03, 2004
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