Quarterly Report
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operationsare based upon our financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States of America.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses. In consultation with our Board of Directors, we have identified eightaccounting principles that we believe are key to an understanding of ourfinancial statements. These important accounting policies require management'smost difficult, subjective judgments.
ACCOUNTS RECEIVABLE
Accounts receivable are reported at the customer's outstanding balances less anyallowance for doubtful accounts and provision for returned merchandise. Ourterms for repayment range from 30 days to 60 days. We do not normally requirecollateral to support receivables and interest is not accrued thereon.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND PROVISION FOR RETURNED MERCHANDISE
The allowance for doubtful accounts on accounts receivables and provision forreturned merchandise is charged to income in amounts sufficient to maintain theallowance for uncollectible accounts at a level management believes is adequateto cover any probable losses. We determine the adequacy of the allowance basedon historical write-off percentages and information collected from individualcustomers. Accounts receivable are charged off against the allowance whencollectibility is determined to be permanently impaired (bankruptcy, lack ofcontact, age of account balance, etc.). We also provide a provision for returnedmerchandise based on our history of returns as a percentage of sales.
INVENTORIES
Inventories are stated at the lower of cost (determined principally by averagecost) or market.
TECHNOLOGY AND PATENTS
We have capitalized the fair market value of stock issued in connection with theacquisition of Synosphere, LLC. We will amortize the assets over the estimateduseful life once the patents are approved and the products are developed andready for market.
ACCOUNTING FOR CONVERTIBLE DEBT SECURITIES
We have issued convertible debt securities with non-detachable conversionfeatures. We have recorded the fair value of the beneficial conversion featuresas interest expense and an increase to Additional Paid-in Capital.
ACCOUNTING FOR CONSULTING FEES PAID BY STOCK OPTIONS
We have issued stock options which entitle the grantee to exercise the optionsat fair market value less an agreed upon discount. We have recorded the fairmarket value as "consulting fees paid by stock options" and an increase toadditional paid-in capital.
REVENUE RECOGNITION
We recognize revenue when persuasive evidence of an arrangement exists, titletransfer has occurred, the price is fixed or readily determinable, andcollectibility is probable. Sales are recorded net of sales discounts. Werecognize revenue in accordance with Staff Accounting Bulletin No. 101, "RevenueRecognition in Financial Statements", (SAB 101). Our revenues are recorded undertwo categories:
Product Sales - Product Sales represent primarily sales of PDA accessories toretailers. Revenue is recorded when the goods are shipped and title passes tothe customer. We provide a reserve for sales returns based on our history ofreturns as a percentage to sales.
We will periodically provide rebates on selected products for a limited saleperiod, normally 7 days. We contract with a company to process and track therebates. We provide a reserve for outstanding rebates based on our history ofrebates submitted as a percentage of applicable sales.
Maintenance Agreements - We continue to sell service agreements to maintain andservice computers and printers that were a part of our product line severalyears ago. We no longer sell such products but continue to offer renewals ofmaintenance agreements. Income from maintenance agreements is being recognizedon a straight-line basis over the life of the service contracts, which rangefrom 3 months to 1 year. The unearned portion is recorded as deferred income.
CONSULTING AGREEMENTS
We issued common stock and options for payment of consulting services. The costof the consulting services paid with common stock was determined by multiplyingthe common shares issued by the market price, for the shares at the inceptiondate of the agreement. The cost of the consulting services paid with options wasvalued using the Black-Sholes stock option pricing model, based on the followingweighted average assumptions: dividend yield - -0-, expected volatility - 44%,risk-free interest rate - 2.25%, expected life - 75 days to 10 years. The totalfair value of the options granted during the six months ending April 30, 2004was $6,386,187. Based on the uncertainty of any future value of theseagreements, the Company expensed the value of the options in the six monthsended April 30, 2004. A summary of the common stock and options issued is asfollows:
COMMON STOCK
During November 2003, the Company issued the following shares of common stock:
(1) 10 million shares valued at $37,000(fair market value on date of grant) for legal services provided by Greg Sichenzia during the quarter ended April 30, 2004.
(2) 9.6 million shares valued at $35,425 (fair market value on date of grant was used to determine number of shares to be issued) to various creditors in satisfaction of their outstanding amounts due.
(3) 0.5 million shares valued at $1,975 (fair market value on date of grant was used to determine number of shares to be issued) to a company that provided edgarizing and related services during the quarter ended April 30, 2004.
(4) 1.0 million shares valued at $3,700 (fair market value on date of grant was used to determine number of shares to be issued) to a company for marketing services during the quarter ended April 30, 2004.
During December 2003, the Company issued the following shares of common stock:
(1) 81 million shares valued at $126,360 (fair market value on date of grant) in accordance with one-year consulting contracts. The agreements consist of retail-channel marketing services and corporate finance services designed to assist the Company in analyzing potential acquisition targets and the related financing of such acquisitions. The agreements are being amortized straight-line over their respective one-year terms.
(2) 60 million shares issued in connection with the exercise of options at $0.00156 per share.
During January 2004, the Company issued the following shares of common stock:
(1) 10 million shares issued in connection with the exercise of options at $0.017 per share.
(2) 11.65 million shares issued in connection with the exercise of options at $0.026 per share.
(3) 5.3 million shares issued in connection with the exercise of options at $0.032 per share.
(4) 398 million shares valued at $578,000 (fair market value on date of grant) for accrued employee bonuses at October 31, 2003 (see 10ksb for the year ended October 31, 2003).
During February 2004, the Company issued the following shares of common stock:
(1) 1 million shares valued at $40,000 (fair market value on date of grant) for legal services provided by Greg Sichenzia during the month ended February 29, 2004.
(2) 1,085,188 shares valued at $34,726 (value of services rendered) for legal services provided by Steven Thrasher.
(3) 250,000 shares valued at $8,507 (value of services rendered) for legal services provided by Sammy Fleschler.
(4) 10 million shares issued in connection with the exercise of options at $0.0363 per share.
During March 2004, the Company issued the following shares of common stock:
(1) 2.5 million shares valued at $75,000 (fair market value on date of grant) for legal services provided by Greg Sichenzia during the month ended March 31, 2004.
(2) 10 million shares issued in connection with the exercise of options at $0.0175 per share.
(3) 7,352,941 shares issued in connection with the exercise of options at $0.0272 per share.
(4) 2 million shares issued in connection with the exercise of options at $0.0425 per share.
(5) 2 million shares issued in connection with the exercise of options at $0.0415 per share.
During April 2004, the Company issued the following shares of common stock:
(1) 5 million shares valued at $200,000 (fair market value on date of grant) in accordance with a one-year consulting contract. See Note 1, Prepaid Expenses.
(2) 10 million shares issued in connection with the exercise of options at $0.03 per share.
(3) 2 million shares valued at $76,800 (fair market value on date of grant) to a company for public relation services during the six months ending April 30, 2004.
(4) 90 million shares issued in connection with the exercise of options at $0.015 per share.
(5) 3 million shares valued at $90,000 (fair market value on date of grant) to a company for investment banking and financial advising services under a one-year contract. See Note 1, Prepaid Expenses.
STOCK OPTIONS
The Company issued options to purchase 350 million shares of common stock asfollows:
November 2003 - Options valued at $260,000 to purchase 200 million shares ofcommon stock (at a 40% discount from market, as defined) were issued to D. ScottElliott for general business and financial consulting services to assist theCompany with its expansion plans and entry into other markets.
December 2003 - Options valued at $60,000 to purchase 50 million shares ofcommon stock (at a 15% discount from market, as defined) were issued to JeffreyFirestone for providing legal counsel on international issues in mergers andacquisitions.
January 2004 - Options valued at $4,450,000 to purchase 100 million shares ofcommon stock (at a 50% discount from market, as defined) were issued to PangeaInvestments GmbH for consulting and acquisition services in Europe and Israel.Sam Elimalech, an officer of Enterprise Capital AG (see Note 8), is also amember of Pangea Investments Gmbh.
March 2004 - Options valued at $1,616,186 to purchase 151,045,455 shares ofcommon stock (at a 20% discount from market, as defined) were issued to D. ScottElliott for general business and financial consulting services to assist theCompany with its expansion plans and entry into other markets.
The Company has valued the options granted using the Black-Sholes stock optionpricing model, based on the following weighted average assumptions: dividendyield - -0-, expected volatility - 44%, risk-free interest rate - 2.25%,expected life - 75 days to 10 years. The total fair value of the options grantedduring the three months ending April 30, 2004 was $6,386,187 (see Note 15).Based on the uncertainty of any future value of these agreements, the Companyexpensed the value of the options in the six months ended April 30, 2004.
SELECT FINANCIAL INFORMATION
For the Three Months For the Six Months Ended Ended 04/30/2004 04/30/2003 04/30/2004 04/30/2003 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ----------- ----------- ----------- -----------Statement of Operations Data: Total revenue $ 437,807 $ 60,637 $ 599,756 $ 135,947 Operating loss (2,716,316) (458,469) (7,826,018) (916,123) Net loss after tax (2,621,326) (687,959) (7,743,941) (2,065,963) Net loss per share (0.00) (0.01) (0.00) (0.01)
Balance Sheet Data:
Total assets $ 2,655,530 $ 472,134 $ 2,655,530 $ 472,134 Total liabilities 3,167,900 6,131,192 3,167,900 6,131,192 Total stockholders' deficit (512,370) (5,659,058) (512,370) (5,659,058)
RESULTS OF OPERATIONS
The three months ended April 30, 2004 compared to the three months ended April30, 2003.
For the Three Months Ended 04/30/2004 04/30/2003 Increase (Decrease) (Unaudited) (Unaudited) Amount Percentage ----------- ----------- -------- ----------Revenues: Product sales $429,373 $52,633 $376,740 716% Maintenance agreements 8,434 8,004 430 5%Total revenues $437,807 $60,637 $377,170 622%
Revenues - Revenues increased by approximately 622% to $437,807 in the threemonths ended April 30, 2004 from $60,637 in the three months ended April 30,2003. The increase was in product sales resulting from the addition of newcustomers, the increase in volume sales to an existing national retailer andintroduction and sales of our new products. The majority of our increased salescame from our FM Radio accessories and travel kits which increased fromapproximately $26,000 in 2003 to over $380,000 in 2004.
$10,685 and $356,940 of revenues for the three months ended April 30, 2004 werefrom Comp USA and Circuit City, respectively. Our maintenance revenues remainedrelatively comparable at $8,434 in 2004 and $8,004 in 2003. We are not activelypursuing this area of business and do not expect this to be significant insubsequent periods.
For the Three Months Ended Increase (Decrease) 04/30/2004 04/30/2003 Amount Percentage (Unaudited) (Unaudited) ------ ---------- Cost of revenues: ----------- ----------- Product sales $344,651 $ 54,353 $290,298 534% Maintenance agreements 8,995 2,529 6,466 256%Total cost of revenues $353,646 $ 56,882 $296,764 522%
Gross profit:
Product sales - amount $ 84,722 $(1,720) Product sales - percentage 20% (3%) Maintenance agreements - amount (561) 5,475 Maintenance agreements - percentage (7%) 68%Total gross profit $ 84,161 $ 3,755 19% 6%
Cost of Revenues - The cost of revenues of $353,646 (81% of sales) in the threemonths ended April 30, 2004 increased from $56,882 (94% of revenues) for thethree months ended April 30, 2003.
Cost of Revenues - Product Sales in 2004 consists of $295,377 (69% of sales) ofdirect material, packaging and freight and $49,276 (% of sales) of salaries andemployee related costs. Cost of Revenues - Product Sales in 2003 consists of$39,649 (75% of sales) of direct material, packaging and freight and $14,704(28% of sales) of salaries and employee related costs.
Cost of Revenues - Maintenance Agreements in 2004 consists of $8,021 of partsand accessories (95% of revenues) and $974 of wages and benefits (16% ofrevenues). Cost of Revenues - Maintenance Agreements in 2003 consists of $1,605of parts and accessories (20% of revenues) and $924 of wages and benefits (11%of revenues). Based on the nature of the equipment being serviced and theapplicable age thereof, parts and accessories can fluctuate significantly eachperiod.
Our products experience a high degree of technological obsolescence based on therapidly changing market for PDA-related products and the introduction of newPDAs. We evaluate our inventories based on sales over a rolling six-month periodand industry publications of PDA-related product changes in order to determinethe write-off of slow-moving and obsolete inventories. During the six monthsended April 30, 2004, we did not write-off additional inventories and soldapproximately $3,000 of inventory previously written-off.
Research and development expense is directly related to our acquisition ofSynosphere, LLC and the continuing efforts to develop products such as the BlueDock (TM) PDA docking station, the PDA travel keyboard, the Visual NotificationDevice and the Keyboard/Mouse Cradle. See Note 6 of the financial statements forfurther description of these products.
For the Three Months Ended Increase (Decrease) 04/30/2004 04/30/2003 Amount Percentage (Unaudited) (Unaudited) ------ ---------- ----------- -----------Selling, general and administrative expenses: Salaries and wages $118,140 $ 92,400 $ 25,740 28% Bonuses 375,000 207,519 167,481 81% Accounting, legal and professional fees 340,050 90,019 250,031 278% Advertising 15,453 9,615 5,838 61% Commissions to outside sales representatives 79,592 1,509 78,083 5174% Travel 17,209 7,941 9,268 116% Other selling, general and administrative expenses 167,802 53,221 114,581 215%Total selling, general and administrative expenses $1,113,246 $462,224 $651,022 141%
Selling, General and Administrative Expenses - Selling, general andadministrative expenses increased approximately 120% to $1,014,714 in the threemonths ended April 30, 2004 from $462,224 in the three months ended April 30,2003. A description of the major increases follows:
(1) Salaries and wages increased $25,740 or 28% in the three months ended April 30, 2004 due to the addition of Synosphere's employees and the employment agreements signed with the two officers of Synosphere, LLC.
(2) Bonuses increased $167,481 or 81% in the three months ended April 30, 2004 due to the signing bonuses and quarterly bonuses called for in the employment agreements with the two officers of Synosphere, LLC.
(3) Accounting, legal and professional fees dramatically increased in the three months ended April 30, 2004 ($340,050) as compared to the three months ended April 30, 2003 ($90,019) due to increased activity with our SEC filings. We do not anticipate this trend to continue.
(4) Advertising, travel and commissions increased as we actively market our new products and continue to look for new sales channels and representatives.
(5) Other selling, general and administrative expenses includes $98,532 during the quarter related to amortization of the patents and technology of Synosphere.
Consulting Fees - We granted options for services to consultants during thequarter ended April 30, 2004. We valued the options using the Black-Scholesformula. See discussion of Stock Options above.
Cancellation of Principal and Interest - The Company recorded other income of$134,289 related to the cancellation of principal and interest on convertibledebentures that were renegotiated and converted during the period.
Interest Expense - Interest expense decreased 53% to $39,381 in the three monthsended April 30, 2004 from $81,780 in the three months ended April 30, 2003. Thedecrease is a result of convertible debenture debt instruments being paid infull and no longer accruing interest.
Beneficial Interest Expense - We record the excess of the fair value of thestock price at the date of issuance of convertible debentures over theconversion price on the same date as interest expense-beneficial conversionfeature. The amount decreased to $0 in 2004 from $147,141 in 2003 due to nodebentures being issued in the three months ending April 30, 2004.
The six months ended April 30, 2004 compared to the six months ended April 30,2003.
For the Six Months Ended Increase (Decrease) 04/30/2004 04/30/2003 Amount Percentage (Unaudited) (Unaudited) ------ ---------- Revenues: ----------- ---------- Product sales $581,589 $118,358 $463,231 391% Maintenance agreements 18,167 17,589 578 3%Total revenues $599,756 $135,947 $463,809 341%
Revenues - Revenues increased by approximately 341% to $599,756 in the sixmonths ended April 30, 2004 from $135,947 in the six months ended April 30,2003. The increase was in product sales resulting from the addition of newcustomers, the increase in volume sales to an existing national retailer andintroduction and sales of our new products. The majority of our increased salescame from our FM Radio accessories and travel kits which increased fromapproximately $63,000 in 2003 to over $480,000 in 2004.
$107,030 and $356,940 of revenues for the six months ended April 30, 2004 werefrom Comp USA and Circuit City, respectively. Our maintenance revenues remainedrelatively comparable at $18,167 in 2004 and $17,589 in 2003. We are notactively pursuing this area of business and do not expect this to be significantin subsequent periods.
For the Six Months Ended Increase (Decrease) 04/30/2004 04/30/2003 Amount Percentage (Unaudited) (Unaudited) ------ ---------- Cost of revenues: ----------- ----------- Product sales $460,733 $ 144,826 $315,907 218% Maintenance agreements 14,658 3,791 10,867 287%Total cost of revenues $475,391 $ 148,617 $326,774 220%
Gross profit:
Product sales - amount $120,856 $(26,468) Product sales - percentage 21% (22%) Maintenance agreements - amount 3,509 13,798 Maintenance agreements - percentage 19% 78%Total gross profit $124,365 $(12,670) 21% (9%)
Cost of Revenues - The cost of revenues of $475,391 (79% of sales) in the sixmonths ended April 30, 2004 increased from $148,617 (109% of revenues) for thesix months ended April 30, 2003.
Cost of Revenues - Product Sales in 2004 consists of $376,437 (63% of sales) ofdirect material, packaging and freight and $84,296 (14% of sales) of salariesand employee related costs. Cost of Revenues - Product Sales in 2003 consists of$86,060 (63% of sales) of direct material, packaging and freight and $58,766(43% of sales) of salaries and employee related costs.
Cost of Revenues - Maintenance Agreements in 2004 consists of $11,976 of partsand accessories (2% of revenues) and $2,682 of wages and benefits (0% ofrevenues). Cost of Revenues - Maintenance Agreements in 2003 consists of $2,253of parts and accessories (2% of revenues) and $1,538 of wages and benefits (1%of revenues). Based on the nature of the equipment being serviced and theapplicable age thereof, parts and accessories can fluctuate significantly eachperiod.
Our products experience a high degree of technological obsolescence based on therapidly changing market for PDA-related products and the introduction of newPDAs. We evaluate our inventories based on sales over a rolling six-month periodand industry publications of PDA-related product changes in order to determinethe write-off of slow-moving and obsolete inventories. During the six monthsended April 30, 2004, we did not write-off additional inventories and soldapproximately $12,000 of inventory previously written-off.
Research and development expense is directly related to our acquisition ofSynosphere, LLC and the continuing efforts to develop products such as the BlueDock (TM) PDA docking station, the PDA travel keyboard, the Visual NotificationDevice and the Keyboard/Mouse Cradle. See Note 6 of the financial statements forfurther description of these products.
For the Six Months Ended Increase (Decrease) 04/30/2004 04/30/2003 Amount Percentage (Unaudited) (Unaudited) ------ ---------- Selling, general and administrative expenses: ----------- ----------- Salaries and wages $192,149 $248,816 $(56,667) (23%) Bonuses 375,000 209,025 165,975 79% Accounting, legal and professional fees 502,795 294,655 208,140 71% Advertising 50,991 14,096 36,895 262% Commissions to outside sales representatives 101,083 2,764 98,319 3557% Travel 50,797 9,037 41,760 462% Other selling, general and administrative expenses 220,337 125,060 95,277 76%Total selling, general and administrative expenses $1,493,152 $903,453 $589,699 65%
Selling, General and Administrative Expenses - Selling, general andadministrative expenses increased approximately 54% to $1,394,620 in the sixmonths ended April 30, 2004 from $903,453 in the six months ended April 30,2003. A description of the major increases follows:
(1) Salaries and wages decreased $56,667 or 23% in the six months ended April 30, 2004 as a result of reducing employee base in the first three months of the 2004 year as compared to the first three months of the 2003 year offset by the hiring of new employees in the second three months of the 2004 year to manage the increased sales activity and the employment agreements signed with the two officers of Synosphere, LLC.
(2) Bonuses increased $165,975 or 79% in the six months ended April 30, 2004 due to the signing bonuses and quarterly bonuses called for in the employment agreements with the two officers of Synosphere, LLC.
(3) Accounting, legal and professional fees increased in the six months ended April 30, 2004 ($502,795) as compared to the six months ended April 30, 2003 ($294,655) due to increased activity with our SEC filings. We do not anticipate this trend to continue.
(4) Advertising, travel and commissions increased as we actively market our new products and continue to look for new sales channels and representatives.
(5) Other selling, general and administrative expenses includes $98,532 during the six-months related to amortization of the patents and technology of Synosphere.
Consulting Fees - We granted options for services to consultants during the sixmonths ended April 30, 2004. We valued the options using the Black-Scholesformula. See discussion of Stock Options above.
Cancellation of Principal and Interest - The Company recorded other income of$197,017 related to the cancellation of principal and interest on convertibledebentures that were renegotiated and converted during the period.
Interest Expense - Interest expense decreased 14% to $141,661 in the six monthsended April 30, 2004 from $165,513 in the six months ended April 30, 2003. Thedecrease is a result of convertible debenture debt instruments being paid infull and no longer accruing interest.
Beneficial Interest Expense - We record the excess of the fair value of thestock price at the date of issuance of convertible debentures over theconversion price on the same date as interest expense-beneficial conversionfeature. The amount decreased to $0 in 2004 from $985,139 in 2003 due to nodebentures being issued in the six months ending April 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2004, we had an accumulated deficit of $32,542,273 and a workingcapital deficit of $1,803,104 as compared to a working capital deficit of$5,197,825 at April 30, 2003. The decrease in the deficit is primarily due toapproximately $1.4 million in convertible debentures converted into common stockin 2003. We have $1,413,675 of debt payments related to convertible debenturesthat was due October 31, 2003. Based on discussions with the holders, thebalance of these debentures is expected to be converted into common stock in thethird quarter. Based on the current stock price, the conversion would result inthe issuance of approximately 47 million shares of common stock, or 1.7% of ouroutstanding shares at April 2004.
Cash Flows from Operations - Our cash flow from operations used $1,602,768 in2004 compared to $467,890 in 2003. Our net loss after adjusting for non-cashitems decreased from $744,000 in 2003 to $646,000 in 2004. Our increase ofaccounts receivable in 2004 is due to increased sales in the 2nd quarter offiscal 2004. Cash used was primarily due to our ability to purchase inventory,pay overdue accounts payable and accrued wages and expenses based on ourproceeds ($1,790,000) from exercise of stock options in this quarter. Thisaccounted for a use of cash amounting to $681,000 in 2004 versus an increase incash in 2003 amounting to $275,000 due to our poor cash position in 2003 andreduced sales. Based on the initial reception of our new product, the "VirtualKeyboard" (set to be delivered to retailers in third quarter 2004) and thecontinued success of our Pocket Radio product, we are confident that our cashflows will be positive in 2004. We currently have a backlog of orders totaling$650,000. As with other technology-related products, our success depends onacceptance of our products in the market and introduction of new products. Ifour products do not continue to receive acceptance in the market, our cash flowscan quickly turn negative.
Cash Flows from Investing Activities - Cash used for investing activities was$21,296 in 2004 due to cash payments to members of Synosphere, LLC per theacquisition agreement. We had no investing activities in 2003.
Cash Flows from Financing Activities - Cash provided by financing activitiesconsisted of $1,790,000 net proceeds from the exercise of stock options andrepayments of $59,397 of the loan from a foreign company (Enterprise CapitalAG). We may need to raise additional capital through the issuance of commonstock options and/or debt, which will be used to expand our infrastructure andacquire additional product lines and complimentary businesses.
In January 2004 we entered into an agreement to purchase the assets ofSynosphere LLC for 30 million shares of common stock valued at $1.2 million. Wecurrently have no other material commitments for capital expenditures other thanthe completion of the Synosphere products which is currently estimated at $2.4million over the next 12 months.
Backlog - The Company has received orders for the Virtual Keyboards fromnational retailers. The Company paid Enterprise Capital AG $400,000 for thekeyboards necessary to fulfill these orders. Since January 2004, there have beenrecurring production delays. Additional inventory which was to flow as a ratethat would include fulfilling outstanding orders by the end of June, have notyet been delivered, nor do we have any indication from Enterprise Capital AGwhen the Virtual Keyboards will be shipped at this time.
Enterprise Capital AG's inability to meet agreed upon delivery schedules, evenafter prepayment of goods, has forced the Company to pursue other venues in aneffort to safeguard their existing orders as well as fulfill future orders forthe Virtual Keyboard.
The Company has made tremendous advances providing product awareness to theVirtual Keyboard technology. As a result of the overwhelming success the Companyhas experienced in this regard, it is the Company's intent to build a redundantsupply chain that will support their ongoing efforts.
Spin-off - On October 20, 3003, the Board of Directors approved the spin-off ofiBIZ, Inc., a wholly-owned subsidiary of the Company, into a separate publiccompany.
The Company proposes to issue without consideration non-restricted shares ofcommon stock in iBIZ, Inc. pro rata to all shareholders of the Company as ofSeptember 25, 2003 at the ratio of one share of iBIZ, Inc. for each 500 sharesof the Company common stock.
The purpose of the spin-off of iBIZ, Inc. is that it will allow management ofeach business to focus solely on that business. In addition, it should enhanceaccess to financing by allowing the financial community to focus separately oneach business.
iBIZ Technology Corp. will continue to distribute its product line in North andSouth America providing sub-licenses for all products to iBIZ, Inc. forworldwide distribution with the exception of North and South America. iBIZ, Inc.and iBIZ Technology Corp. are in the process of negotiating the terms of thelicense agreements. It is currently planned that iBIZ, Inc. will support iBIZTechnology Corp. in engineering, production, and business development, throughsynergetic agreements (to be negotiated) using Enterprise Capital and itsaffiliates infrastructure in Europe and Israel.
Current funds available to iBIZ will not be adequate for it to be competitive inthe areas in which it intends to operate. iBIZ's continued operations, as wellas the implementation of its business plan, therefore will depend upon itsability to raise additional funds through bank borrowings, equity or debtfinancing. 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 beavailable in the future, or that they will be available on favorable terms. Inaddition, this funding amount may not be adequate for iBIZ to fully implementits business plan. Thus, the ability of iBIZ to continue as a going concern isdependent on additional sources of capital and the success of iBIZ's businessplan. Regardless of whether iBIZ's cash assets prove to be inadequate to meetiBIZ's operational needs, iBIZ might seek to compensate providers of services byissuance of stock in lieu of cash.
If funding is insufficient at any time in the future, iBIZ may not be able totake advantage of business opportunities or respond to competitive pressures,any of which could have a negative impact on the business, operating results andfinancial condition. In addition, if additional shares were issued to obtainfinancing, current shareholders may suffer a dilutive effect on their percentageof stock ownership in iBIZ.
