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 operations are based upon our financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. 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.
ACCOUNTS RECEIVABLE
Accounts receivable are reported at the
customer's outstanding balances less any allowance for doubtful accounts and
provision for returned merchandise. Our terms for repayment range from 30 days
to 60 days. We do not normally require collateral 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 for returned merchandise 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. We determine 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, age of
account balance , etc.). We also provide a provision for returned merchandise
based on our history of returns as a percentage of sales.
INVENTORIES
Inventories are stated at the lower of
cost (determined principally by average cost) or market.
TECHNOLOGY AND PATENTS
We have capitalized the fair market
value of stock issued in connection with the acquisition of Synosphere, LLC. We
will amortize the assets over the estimated useful life once the patents are
approved and the products are developed and ready for market.
ACCOUNTING FOR CONVERTIBLE DEBT SECURITIES
We have issued convertible debt
securities with non-detachable conversion features. We have recorded the fair
value of the beneficial conversion features as 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 options at fair market value less an agreed
upon discount. We have recorded the fair market value as "consulting fees
paid by stock options" and an increase to additional paid-in capital.
REVENUE RECOGNITION
We recognize revenue when persuasive
evidence of an arrangement exists, title transfer has occurred, the price is
fixed or readily determinable, and collectibility is probable. Sales are
recorded net of sales discounts. We recognize revenue in accordance with Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," (SAB 101). Our revenues are recorded under two categories:
Product Sales - Product Sales represent
primarily sales of PDA accessories to retailers. Revenue is recorded when the
goods are shipped and title passes to the customer. We provide a reserve for
sales returns based on our history of returns as a percentage to sales.
We will periodically provide rebates on
selected products for a limited sale period, normally 7 days. We contract with
a company to process and track the rebates. We provide a reserve for
outstanding rebates based on our history of rebates submitted as a percentage
of applicable sales.
Maintenance Agreements - We continue to
sell service agreements to maintain and service computers and printers that
were a part of our product line several years ago. We no longer sell such
products but continue to offer renewals of maintenance agreements. Income from
maintenance agreements is being recognized on a straight-line basis over the
life of the service contracts, which range from 3 months to 1 year. The
unearned portion is recorded as deferred income.
CONSULTING AGREEMENTS
We 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, for the shares at the
inception date of the agreement.
SELECT FINANCIAL INFORMATION
For the Three Months Ended
01/31/04 01/31/03
(Unaudited) (Unaudited)
----------- -----------
Statement of Operations Data:
Total revenue $ 161,949 $ 75,310
Operating loss $(5,109,702) $ (457,654)
Net loss after tax $(5,122,615) $ 1,378,004
Net loss per share $ (0.00) $ (0.02)
Balance Sheet Data:
Total assets $ 1,830,827 $ 640,942
Total liabilities $ 4,697,910 $ 5,978,411
Stockholders' deficit $(2,867,083) $(5,337,469)
RESULTS OF OPERATIONS
The three months ended January 31, 2004
compared to the three months ended January 31, 2003.
Revenues - Revenues increased by
approximately 115% to $161,949 in the three months ended January 31, 2004 from
$75,310 in the three months ended January 31, 2003. The increase was in product
sales resulting from the addition of new customers, the increase in volume
sales to an existing national retailer and introduction and sales of our new
products.
$96,345 of revenues for the three
months ended January 31, 2004 were to Comp USA. Our maintenance revenues
remained relatively comparable at $9,700 in 2004 and $9,400 in 2003. We are not
actively pursuing this area of business and do not expect this to be
significant in subsequent periods.
Cost of Revenues - The cost of revenues
of $121,745 (75% of sales) in the three months ended January 31, 2004 increased
from $91,735 (122% of revenues) for the three months ended January 31, 2003.
Cost of Revenues- Product Sales in 2004
consists of $104,182 (68% of sales) of direct material, packaging and freight,
a reduction in our provision for obsolete inventories totaling $23,100 (15% of
sales) and $31,956 (21% of sales) of salaries and employee related costs. Cost
of Revenues- Product Sales in 2003 consists of $46,410 (70% of sales) of direct
material, packaging and freight and $39,764 (60% of sales) of salaries and
employee related costs.
Cost of Revenues-Maintenance Agreements
in 2004 consists of $3,935 of parts and accessories (40% of revenues) and
$4,772 of wages and benefits (49% of revenues). Cost of Revenues-Maintenance
Agreements in 2003 consists of $648 of parts and accessories (7% of revenues)
and $4,913 of wages and benefits (52% of revenues). Based on the nature of the
equipment being serviced and the applicable age thereof, parts and accessories
can fluctuate significantly each period.
Our products experience a high degree
of technological obsolescence based on the rapidly changing market for
PDA-related products and the introduction of new PDAs. We evaluate our
inventories based on sales over a rolling six-month period and industry
publications of PDA-related product changes in order to determine the write-off
of slow-moving and obsolete inventories. During the first quarter of 2004, we
made a bulk sale of items which were fully reserved for in our reserve and,
accordingly, the reserve was adjusted.
Selling, General and Administrative
Expenses - Selling, general and administrative expenses decreased approximately
14% to $379,906 in the three months ended January 31, 2004 from $441,229 in the
three months ended January 31, 2003. The main components in these expenses are
salaries and wages for its key employees and officers (2004 - $72,531; 2003 -
$145,300), professional fees (2004 - $128,713; 2003 - $74,155) and travel (2004
- $33,585; 2003 - $1,100).
Consulting Fees - We granted options
for services to consultants during the quarter ended January 31, 2004. We
valued the options using the Black-Scholles formula.
Interest Expense - Interest expense
increased 24% to $102,280 in the three months ended January 31, 2004 from
$82,352 in the three months ended January 31, 2003. The increase is a result of
additional convertible debentures issued in the second and third quarters of
2003.
Beneficial Interest Expense - We record
the excess of the fair value of the stock price at the date of issuance of
convertible debentures over the conversion price on the same date as interest
expense-beneficial conversion feature. The amount decreased to $0 in 2004 from
$837,998 in 2003 due to no debentures being issued in the three months ending
January 31, 2004.
Liquidity and Capital Resources - As of
January 31, 2004, we had a working capital deficit of $3,717,889 as compared to
a working capital deficit of $4,792,658 at January 31, 2004. The decrease in
the deficit is primarily due to approximately $1.4 million in convertible
debentures converted into common stock in 2003. We have $2,152,297 and $467,000
of debt payments related to convertible debentures due within the next year and
next two to five years, respectively. Subsequent to January 31, 2004, $904,893
of these debt payments were converted in full to common stock. We are presently
in the process of renegotiating the remaining balance of $1,714,404 to more
favorable terms.
Cash Flows from Operations - Our cash
flow from operations used $478,963 in 2004 compared to $225,339 in 2003. The
increase in cash used is primarily due to decreased receivables in 2004 versus
2003, partially offset by the decrease in accounts payable and accrued
liabilities and taxes resulting from the ability to pay these amounts with cash
received from the exercise of options. Based on the initial reception of our
new product, the "Virtual Keyboard" (set to be delivered to retailers
in April 2004) and the continued success of our Pocket Radio product, we are
confident that our cash flows will be positive in 2004. We currently have a
backlog of orders totaling $650,000. As with other technology-related products,
our success depends on acceptance of our products in the market and
introduction of new products. If our products do not continue to receive
acceptance in the market, our cash flows can quickly turn negative.
Cash Flows from Investing Activities -
Cash used for investing activities was $-0- in both 2004 and 2003.
Cash Flows from Financing Activities -
Cash provided by financing activities consisted of a $9,990 loan from a foreign
company (Enterprise Capital AG) and the issuance of common stock by stock
options. We may need to raise additional capital through the issuance of common
stock options and/or debt, which will be used to expand our infrastructure and
acquire additional product lines and complimentary businesses.
In January 2004 we entered into an
agreement to purchase the assets of Synosphere LLC for 30 million shares of
common stock valued at $1.2 million. We currently have no other material
commitments for capital expenditures.
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 North and South America providing sub-licenses
for all products to iBIZ, Inc. for worldwide distribution with the exception of
North and South America. iBIZ, Inc. and iBIZ Technology Corp. are in the
process of negotiating the terms of the license agreements. It is currently
planned that iBIZ, Inc. will support iBIZ Technology Corp. in engineering,
production, and business development, through synergetic agreements (to be
negotiated) using Enterprise 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.
Increase in Cash Subsequent to January
31, 2004 - On February 3 and March 3, 2004, the Company received approximately
$448,090 cash as a result of the Company's Option holders exercising their
options to purchase shares of common stock.
