UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(MARK ONE)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from
Commission file number 000-33163
ICOWORKS INC.
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 76-0609444
------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Suite 304, 161 C Street
Blaine, Washington 98230
Phone/Fax 360 933 2737
(Address of principal executive offices)
(Issuer's telephone number)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: [ ] Yes [X] No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 17,134,629 SHARES OF $0.001 PAR VALUE
COMMON STOCK OUTSTANDING AS OF JUNE 22, 2004.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT [ ] Yes [X] No
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ICOWORKS, INC
Consolidated Financial Statements
(Unaudited)
March 31, 2004
2
ICOWORKS, INC. AND SUBSIDIARIES
(formerly Paragon Polaris Strategies.com, Inc)
CONSOLIDATED BALANCE SHEETS
==================================================================================
MARCH 31
2004
(unaudited)
-------------------------------------------------------------------- ------------
ASSETS
CURRENT ASSETS
Cash held atbanks. . . . . . . . . . . . . . . . . . . . . . . . . . $ 391,474
Cash held in trust for consignors. . . . . . . . . . . . . . . . . . 3,525,267
Accounts receivable, less allowance for doubtful accounts of $87,130 2,168,104
Income taxes recoverable . . . . . . . . . . . . . . . . . . . . . . 920
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 691,932
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 79,720
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,363
Deferred tax assets less valuation allowance of $1,657,008 . . . . . -
------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 6,858,780
EQUIPMENT, net of accumulated depreciation . . . . . . . . . . . . . 142,437
LAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370,000
GOODWILL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,357,850
DEFERRED FINANCING COSTS, NET. . . . . . . . . . . . . . . . . . . . 203,452
------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,932,519
==================================================================== ============
- CONTINUED -
The accompanying notes are an integral part of these consolidated financial
statements.
3
ICOWORKS, INC. AND SUBSIDIARIES
(formerly Paragon Polaris Strategies.com, Inc)
CONSOLIDATED BALANCE SHEETS
==============================================================================
MARCH 31
* 2004
* (unaudited)
---------------------------------------------------------------- ------------
CONTINUED
LIABILITIES AND DEFICIENCIES IN ASSETS
CURRENT LIABILITIES
Accounts payable and accrued liabilities . . . . . . . . . . . . $ 1,580,515
Trust liabilities. . . . . . . . . . . . . . . . . . . . . . . . 3,970,218
Obligation to issue shares . . . . . . . . . . . . . . . . . . . 536,500
Financial arrangements and guarantees used to acquire inventory. 2,683,967
Due to related parties . . . . . . . . . . . . . . . . . . . . . 188,203
------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . 8,959,403
Promissory notes to related parties. . . . . . . . . . . . . . . 139,000
Preferred shares to be issued. . . . . . . . . . . . . . . . . . 300,000
------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . 9,398,403
------------
MINORITY INTEREST. . . . . . . . . . . . . . . . . . . . . . . . (184,418)
COMMITMENTS AND CONTINGENT LIABILITIES
DEFICIENCY IN ASSETS
Capital stock
Authorized
100,000,000 common shares with a par value of $0.001
10,000,000 preferred shares with a par value of $0.001
Issued and outstanding
17,134,629 common shares. . . . . . . . . . . . . . . 17,134
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 4,165,384
Accumulated other comprehensive loss . . . . . . . . . . . . . . (81,558)
Deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,382,426)
------------
Total deficiency in assets . . . . . . . . . . . . . . . . . . . (281,466)
------------
TOTAL LIABILITIES AND DEFICIENCY IN ASSETS . . . . . . . . . . . $ 8,932,519
================================================================ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
ICOWORKS, INC. AND SUBSIDIARIES
(formerly Paragon Polaris Strategies.com, Inc)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(unaudited)
======================================================================================================================
Three months ended Nine months ended
March 31 March 31
2004 2003 2004 2003
----------- ---------- ------------ ------------
SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,013,983 $ 722,754 $14,227,631 $ 1,397,887
COST OF SALES . . . . . . . . . . . . . . . . . . . . . . . . . . 1,619,277 666,506 10,985,175 1,035,730
----------- ---------- ------------ ------------
NET AUCTION REVENUE . . . . . . . . . . . . . . . . . . . . . . . 1,394,706 56,248 3,242,456 362,157
OTHER REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . 237,658 - 306,993 -
----------- ---------- ------------ ------------
NET REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,632,364 56,248 3,549,449 362,157
EXPENSES
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,796 - 17,796 -
Bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,348 - 94,720 -
Bank charges and interest . . . . . . . . . . . . . . . . . . . . 199,391 - 441,569 -
Consulting. . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,172 - 312,364 -
Depreciation and amortization . . . . . . . . . . . . . . . . . . 7,230 84,028 26,478 222,428
Entertainment and promotion . . . . . . . . . . . . . . . . . . . 32,624 - 62,018 -
Financing fees. . . . . . . . . . . . . . . . . . . . . . . . . . 481,937 - 1,087,585 -
General and administrative. . . . . . . . . . . . . . . . . . . . 661,943 568,380 1,848,464 1,207,726
Office and miscellaneous. . . . . . . . . . . . . . . . . . . . . 224,384 - 658,338 -
Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,126 - 398,700 -
Travel and related. . . . . . . . . . . . . . . . . . . . . . . . (9,057) - 102,099 -
----------- ---------- ------------ ------------
1,885,894 652,408 5,050,131 1,430,154
----------- ---------- ------------ ------------
LOSS BEFORE MINORITY INTEREST IN NET GAIN (LOSS) OF SUBSIDIARIES. (253,530) (596,160) (1,500,682) (1,067,997)
MINORITY INTEREST IN NET GAIN (LOSS) OF SUBSIDIARIES. . . . . . . (123,725) 71,127 (51,058) 71,127
----------- ---------- ------------ ------------
LOSS BEFORE OTHER ITEMS AND INCOME TAXES. . . . . . . . . . . . . (377,255) (525,033) (1,551,740) (996,870)
OTHER ITEMS
Foreign exchange gain (loss). . . . . . . . . . . . . . . . . . . 135,561 (172) 49,321 (172)
Gain on debt settlement . . . . . . . . . . . . . . . . . . . . . 498,333 - 498,333 -
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . 7,790 7,356 14,267 7,858
Net proceeds on insurance claim . . . . . . . . . . . . . . . . . - - 230,515 -
Gain (loss) on sale of assets . . . . . . . . . . . . . . . . . . (1,150) 11,551 (1,224) 7,367
Gain on sale of available-for-sale equity securities. . . . . . . - (8,588) - -
----------- ---------- ------------ ------------
640,534 10,147 791,212 15,053
----------- ---------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . . . . . . . . 263,279 (514,886) (760,528) (981,817)
- CONTINUED -
The accompanying notes are an integral part of these consolidated financial
statements.
5
ICOWORKS, INC. AND SUBSIDIARIES
(formerly Paragon Polaris Strategies.com, Inc)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(unaudited )
===========================================================================================================
Three months ended Nine months ended
March 31 March 31
2004 2003 2004 2003
------------ ----------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (continued) . . . . 263,279 (514,886) (760,528) (981,817)
INCOME TAXES (RECOVERY) . . . . . . . . . . . . . . . - 3,792 - 3,792
------------ ----------- ------------ -----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . 263,279 (511,094) (760,528) (978,025)
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT. . (21,615) (8,677) (39,231) (8,677)
------------ ----------- ------------ -----------
COMPREHENSIVE INCOME (LOSS) . . . . . . . . . . . . . $ 241,664 $ (519,771) $ (799,759) $ (986,702)
============ =========== ============ ===========
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE. $ 0.02 $ (0.05) (0.06) $ (0.14)
===================================================== ============ =========== ============ ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED . . . . . . . . . . . 14,171,527 9,495,064 13,267,125 6,937,219
===================================================== ============ =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
6
ICOWORKS, INC. AND SUBSIDIARIES
(formerly Paragon Polaris Strategies.com, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
=====================================================================================================================
Nine months ended
March 31
2004 2003
------------ ------------
CASH FROM OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (760,528) $ (978,025)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Accrued management fees due to a related party. . . . . . . . . . . . . . . . . . . . . . 51,000 153,000
Amortization of warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486,298 -
Bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,720 -
Compensation cost on options granted. . . . . . . . . . . . . . . . . . . . . . . . . . . 86,000 -
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,478 222,428
Gain on debt settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (498,333) -
Loss on sale of assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,224 -
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,058 (71,127)
Net proceeds on fire insurance claim. . . . . . . . . . . . . . . . . . . . . . . . . . . (230,516) -
Shares issued for consulting services . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000 -
Shares issued for finders fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . (1,678,811) 43,896
Decrease in taxes recoverable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 21,868
(Increase) decrease in inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,062,653 (2,208,631)
Increase in prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,986) (87,002)
Increase in other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (351) -
Increase in trust liabilities, accounts payable and accrued liabilities . . . . . . . . . 4,630,499 2,509,308
Decrease in advances payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,388 -
------------ ------------
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . 4,608,793 (394,285)
------------ ------------
CASH FROM INVESTING ACTIVITIES
Sale of available for sale equity securities. . . . . . . . . . . . . . . . . . . . . . . - 1,229
Purchase of subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,725,000) -
Purchase of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (62,381) (50,010)
------------ ------------
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . (1,787,381) (48,781)
------------ ------------
- CONTINUED -
The accompanying notes are an integral part of these consolidated financial
statements.
7
ICOWORKS, INC. AND SUBSIDIARIES
(formerly Paragon Polaris Strategies.com, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
=================================================================================================
Nine months ended
March 31
2004 2003
------------ ---------
CONTINUED
CASH FROM FINANCING ACTIVITIES
Issuance of common shares, less share issuance costs . . . . . . . . . . - 91,086
Increase (decrease) in due to related parties. . . . . . . . . . . . . . 501,754 350,101
Obligation to issue shares . . . . . . . . . . . . . . . . . . . . . . . 536,000 -
Repayments of financial arrangements . . . . . . . . . . . . . . . . . . (3,513,080) -
Proceeds received from financial arrangements. . . . . . . . . . . . . . 4,932,631 -
Repayments of guarantees used to acquire inventory . . . . . . . . . . . (1,621,698) -
------------ ---------
Net cash provided by (used in) financing activities. . . . . . . . . . . 835,607 441,187
------------ ---------
Effect of foreign exchange on cash and cash equivalents. . . . . . . . . (114,190) -
------------ ---------
CHANGE IN CASH AND CASH EQUIVALENTS DURING THE PERIOD. . . . . . . . . . 3,542,829 (1,879)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD . . . . . . . . . . . 373,912 134,524
------------ ---------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD . . . . . . . . . . . . . . $ 3,916,741 $132,645
======================================================================== ============ =========
CASH AND CASH EQUIVALENTS, END OF THE PERIOD CONSISTS OF THE FOLLOWING:
CASH HELD AT BANKS . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 391,474 $132,645
CASH HELD IN TRUST FOR CONSIGNORS. . . . . . . . . . . . . . . . . . . . 3,525,267 -
------------ ---------
$ 3,916,741 $132,645
============ =========
CASH PAID FOR:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 271,333 $ -
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
======================================================================== ============ =========
SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS (Note 19)
The accompanying notes are an integral part of these consolidated financial
statements.
8
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
1. HISTORY OF THE COMPANY
Icoworks, Inc. (formerly Paragon Polaris Strategies.com Inc.) (the "Company")
was incorporated in the State of Nevada on May 27, 1999. On July 1, 1999, the
Company acquired limited rights to distribute and produce an oxygen enriched
water product for fish farming, aquaculture, mariculture, poultry raising and
for treating animal waste from dairies, feedlots of all kinds and for other
similar uses. The rights to use this technology were subsequently withdrawn by
agreement with the owner. On January 3, 2000, the Company acquired a three-year
license to market and sell vitamins, minerals, and nutritional supplements from
Vitamineralherb.com Inc. The Company abandoned this business in fiscal 2002.
On February 20, 2003, the Company acquired 56% of the issued and outstanding
common stock of Icoworks Holdings, Inc. ("Icoworks Holdings") consisting of
3,593,199 shares from several non-U.S. stockholders. As consideration, the
Company issued 7,186,398 common shares to the former non-U.S. stockholders of
Icoworks Holdings and control of the combined companies passed to the former
non-U.S. stockholders of Icoworks Holdings. The Company accounted for this
acquisition as a business combination (Note 4).
The consolidated statements of operations, stockholders' equity (deficiency in
assets) and cash flows of the Company prior to February 20, 2003, are those of
Icoworks Holdings. The Company's consolidated date of incorporation is
considered to be February 27, 1998, the date of inception of Icoworks Holdings.
Following the acquisition, the Company changed its name from Paragon Polaris
Strategies.com Inc. to Icoworks, Inc.
Icoworks Holdings is a Nevada corporation whose principal business activity
consists of the conduct of customized auctions for corporate assets such as
wholesale and retail inventories, used industrial equipment and other related
goods. During the year ended June 30, 2002, and prior to the acquisition of the
Company, Icoworks Holdings purchased all the issued and outstanding capital
stock of two companies, Icoworks Services Ltd. ("Icoworks Services") and DM
International Appraisals & Consulting Ltd. Icoworks Holdings also has two other
subsidiaries, being Icoworks Eastern Ltd. ("Eastern") and Icoworks Joint Venture
Ltd. Icoworks Joint Venture Ltd. is a bare trustee corporation with no assets
or liabilities, which was formed for the sole purpose of holding assets on
behalf of a number of participants. During the nine-month period ended March
31, 2004, Icoworks Holdings acquired Premier Auctioneers International Inc.,
R.T. Components (acquired for the purposes of liquidating the company) and
Santiago Custom and Classic Car Auctions Inc. (Note 5).
INTERIM REPORTING
The accompanying unaudited consolidated interim financial statements have been
prepared by the Company in accordance with the rules and regulations of
Regulation S-B as promulgated by the Securities and Exchange Commission. In the
opinion of management, the accompanying unaudited consolidated interim financial
statements contain all adjustments necessary (consisting of normal recurring
accruals) to present fairly the financial information contained therein. The
accompanying unaudited interim consolidated financial statements do not include
all disclosures required by generally accepted accounting principles in the
United States of America. The results of operations for the nine
9
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
1. HISTORY OF THE COMPANY (continued)
-month period ended March 31, 2004, are not necessarily indicative of the
results to be expected for the year ending June 30, 2004.
2. GOING CONCERN
These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America with
the assumption that the Company will be able to realize its assets and discharge
its liabilities in the normal course of business rather than through a forced
process of liquidation. However, certain conditions noted below currently exist
which raise substantial doubt about the Company's ability to continue as a going
concern. These consolidated financial statements do not include any adjustments
to the amounts and classifications of assets and liabilities that might be
necessary should the Company be unable to continue as a going concern.
The operations of the Company have primarily been funded by the issuance of
common stock and advances from related parties, shareholders and others.
Continued operations of the Company are dependent on the Company's ability to
complete additional equity financings, obtain continued support from related
parties or generate profitable operations in the future. Management's plan in
this regard is to secure additional funds through future equity financings. Such
financings may not be available or may not be available on reasonable terms.
March 31, 2004
----------------------------------------------
Net loss . . . . . . . . . . $ (760,528)
Accumulated deficit. . . . . (4,382,426)
Working capital (deficiency) (2,100,623)
==============================================
3. BASIS OF PRESENTATION
These interim statements have been completed using the same accounting policies
and measurement criteria as those utilized in the preparation of the Company's
audited financial statements dated June 30, 2003, and should be read in
conjunction with these annual statements, which provide information on the
Company's accounting policies and more comprehensive note disclosures of certain
financial statement line items. Certain comparative figures have been
reclassified to conform to the presentation adopted in the current period.
10
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
4. BUSINESS COMBINATION WITH ICOWORKS HOLDINGS
On November 20, 2002, the Company entered into an agreement to merge with
Icoworks Holdings. On February 20, 2003, the Company acquired a 56% interest in
Icoworks Holdings (subsequently reduced to 50.5% as at March 31, 2004 through
the issuance of 602,273 additional shares of Icoworks Holdings) through the
private acquisition of 3,593,199 shares of Icoworks Holdings from several
non-U.S. stockholders and, accordingly, the Company is considered to be the
legal acquirer. As consideration, the Company issued 7,186,398 common shares to
the former non-U.S. stockholders of Icoworks Holdings and control of the
combined companies passed to the former non-U.S. stockholders of Icoworks
Holdings and therefore, Icoworks Holdings is considered the accounting acquirer.
Consequently, the consolidated statements of operations, stockholders' equity
(deficiency in assets) and cash flows include Icoworks Holdings' results of
operations, deficit and cash flows from February 27, 1998 (date of inception)
and the Company's results of operations and cash flows from February 20, 2003.
The issued number of shares of common stock is that of the Company. The
acquisition was accounted for as a business combination. The Company plans to
complete the merger with Icoworks Holdings as contemplated by the merger
agreement. As the merger was not consummated by May 1, 2003, the terms of the
original merger agreement expired. The Company intends to enter into a new
merger agreement to complete the acquisition of the minority interest of
Icoworks Holdings (Note 21).
Under the terms of the merger agreement, the Company agreed to issue shares of
its common stock to the shareholders of Icoworks Holdings on a two-for-one
basis. The Company anticipates issuing an aggregate of 12,865,920 shares in
order to complete the acquisition of all of the outstanding shares of Icoworks
Holdings, inclusive of the 7,186,398 shares already issued by the Company. In
addition, the Company will issue options and warrants to the current option
holders and warrant holders of Icoworks Holdings on a two-for-one basis if the
new merger agreement is signed.
At the date of acquisition, the fair market value of the net assets of the
Company was as follows:
Cash and cash equivalents. . . . . . . . $ 49
Accounts receivable. . . . . . . . . . . 2,592
Prepaid expenses . . . . . . . . . . . . 10,868
Accounts payable and accrued liabilities (17,066)
Due to related parties . . . . . . . . . (82,892)
---------
Net liabilities assumed. . . . . . . . . $(86,449)
=========
11
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
5. ACQUISITIONS
ACQUISITION OF PREMIER AUCTIONEERS INTERNATIONAL INC.
On August 29, 2003, the Company acquired the business of Premier Auctioneers
International Inc. ("Premier") and certain lands related to Premier's auction
business from Network International ("Network"). The purchase price of the
acquisition was $1,500,000 and agreement to repay certain expenses of Network
that had been incurred to prepare for several auctions that were held in
September 2003. Concurrent with the acquisition of Premier, the Company agreed
to issue a total of 2,700,000 common shares of the Company to three key
employees of Premier. These shares will be issued over a three-year period as
follows: i) 25% on closing of the acquisition which had not been issued as of
March 31, 2004; and ii) 25% on each of the first, second and third anniversary
dates of the closing. The shares will be valued at the fair value based on
market value on the date of closing and the subsequent anniversary dates and the
Company will record a compensation expense equal to the fair value.
The acquisition of Premier has been accounted for using the purchase method and
accordingly, these consolidated financial statements include the results of
operations and cash flows of Premier from the date of acquisition.
The total purchase price of $1,500,000 was allocated as follows:
Land $ 370,000
Office equipment 6,916
Account receivable 21,060
Accounts payable (7,826)
Goodwill 1,109,850
------------
$ 1,500,000
============
ACQUISITION OF SANTIAGO CUSTOM AND CLASSIC CAR AUCTIONS INC.
On September 9, 2003, the Company agreed to purchase the business of Santiago
Custom and Classic Car Auctions Inc. for $225,000 in cash and 50,000 common
shares of the Company. The transaction was completed on January 21, 2004. The
final total purchase price of $248,000, being $225,000 in cash and $23,000 in
common shares of the Company, was allocated to goodwill.
ACQUISITION OF R.T. COMPONENTS
During the nine month period ended March 31, 2004 the Company purchased 100% of
the outstanding shares of R.T. Components for the sole purpose of liquidating
and winding up the Company. The purchase price was $557,333 (CDN$752,623).
12
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
6. CASH HELD IN TRUST FOR CONSIGNORS
The Company is holding cash in trust of $3,525,267 for consignors of auctions
held by Premier prior to March 31, 2004, to discharge the trust liabilities in
the amount of $3,970,218 which includes amounts due to consignors, reimbursable
expenses incurred by the Company and commissions on sales made by the Company.
The difference between the trust liabilities and the cash held in trust
represents cash that belongs to the Company in the cash held in trust account
that has been transferred out by the Company while certain non-trust liabilities
relating to the Company have not been paid off.
7. INVENTORIES
March 31, 2004
--------------------------------------------------------------
Wood products and associated equipment. . . . $ 339,928
Industrial fabrication equipment. . . . . . . 11,135
Books . . . . . . . . . . . . . . . . . . . . 297,044
Miscellaneous and other goods held for resale 43,825
---------------
$ 691,932
==============================================================
During the three-month period ended September 30, 2003, certain associated
equipment held for resale with a book value of $111,285 was destroyed in a fire.
Settlement of the insurance claim under the receiver's insurance coverage
resulted in a reduction of the Company's guarantee to the receiver of $341,800
and a corresponding net gain of $230,515.
8. PROMISSORY NOTES
During the three-month period ended December 31, 2003, the Company received
promissory notes totalling $315,000 as consideration for 900,000 stock options
issued to a consultant of the Company. Prior to December 31, 2003, the 900,000
stock options were exercised (Note 17). On February 13, 2004, the Company sold
these promissory notes to related parties to settle certain of its debts with
these related parties.
13
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
9. EQUIPMENT
March 31, 2004
------------------------------------
Accumulated
Depreciation and Net Book
Cost Amortization Value
-------- ---------------- --------
Auction equipment. . . $ 34,235 $ 13,341 $ 20,894
Automotive equipment . 53,838 25,297 28,541
Computer equipment . . 42,818 26,671 16,147
Computer software. . . 25,247 12,608 12,639
Leasehold improvements 13,104 3,217 9,887
Office equipment . . . 58,701 15,146 43,555
Sign . . . . . . . . . 11,063 3,560 7,503
Tools and equipment. . 13,987 10,716 3,271
-------- ---------------- --------
$252,993 $ 110,556 $142,437
============================================================
10. DEFERRED FINANCING COSTS
During the year ended June 30, 2003, the Company issued 1,531,029 warrants to an
investor group that has made available to the Company funds totaling $2,398,638
(CDN$3,100,000). These warrants were exercisable at $0.71 per warrant and
expire on March 28, 2005. As the warrants were considered to be a separate
financial instrument separate from the debt, the Company reflected $228,054 in
the consolidated balance sheets, being the fair value calculated using the
Black-Scholes option pricing model of $306,000, less accumulated amortization of
$77,946 as at September 30, 2003.
During the three-month period ended December 31, 2003, the Company amended its
agreement with the investor group increasing the number of warrants to 4,018,518
from 1,531,029. These warrants expire on June 30, 2004 and have an exercise
price $0.54 per warrant. The revised fair value of the warrants calculated
using the Black-Scholes option pricing model is $185,000. At March 31, 2004,
the Company has amortized $162,548 and the balance of $22,452 will be amortized
over the remaining life of the warrants, which is three months.
The total amortization charge to operations for the nine-month period ended
March 31, 2004, relating to these warrants is $122,852.
14
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
10. DEFERRED FINANCING COSTS (continued)
The Company used the Black-Scholes option pricing model to compute estimated
fair value, based on the following assumptions:
==========================================================
Risk free interest rate 3.0% - 4.0%
Dividend yield rate 0.0%
Volatility 45.0 - 66.3%
Weighted average expected life of warrants 9 months
==========================================================
11. ADVANCES PAYABLE
Advances payable consist of working capital loans that have been advanced from
time-to-time from third parties. These working capital loans are unsecured,
non-interest bearing and have no fixed terms of repayment other than these
working capital loans are expected to be repaid as cash is available. During
the nine-month period ended March 31, 2004, advances payable were settled as
part of the debt settlement of certain related party balances (Note 14).
12. OBLIGATION TO ISSUE SHARES
On January 2, 2004, a subsidiary of the Company, Icoworks Holdings, executed a
promissory note in exchange for cash received of $500,000 whereby the holder is
entitled to convert the promissory note to approximately 40% of the total common
shares of Icoworks Holdings. This conversion would further reduce the Company's
ownership of Icoworks Holdings from approximately 50.5% as at March 31, 2004 to
15
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
12. OBLIGATION TO ISSUE SHARES (continued)
approximately 32%. Concurrent with the execution of this promissory note, the
holder postponed a prior security interest on certain property held by the
Company to allow the Company to mortgage the property for proceeds of $250,000.
As at March 31, 2004 this mortgage has not been finalized and no proceeds from
any arrangement has been received by the Company.
13. FINANCIAL ARRANGEMENTS AND GUARANTEES USED TO ACQUIRE INVENTORY
March 31, 2004
-----------------------------------------------------
Financial arrangements . . . . . . . $ 1,802,066
Guarantees used to acquire inventory 881,901
---------------
$ 2,683,967
=====================================================
A) FINANCIAL ARRANGEMENTS
CANADIAN FINANCIAL ARRANGEMENT (CDN$3.1 MILLION)
The Company has entered into an arrangement in which it has guaranteed profits
to participants who provide funds (CDN$3.1 million) to the Company that are to
be used to guarantee minimum return to clients who wish to sell assets or to
acquire assets outright to be held for resale. These participants will share in
the profits from these transactions on the basis of 65% of the profits to the
Company and 35% to the participants. The Company has, in turn, guaranteed to
those participants a minimum return of 15% per annum on the funds advanced.
Further, the Company issued warrants to those participants to purchase shares of
restricted common stock up to the value of their participation. Management
believes that the arrangement will yield the participants sufficient return so
that the guarantee will not result in any additional expense to the Company.
The Company would be liable for a minimum of $354,826 (CDN$465,000) on
guaranteed payments in each of the 12-month periods ended June 30, 2004 and 2005
based on $2,365,509 (CDN$3,100,000) being made available by the participants as
at June 30, 2003. Subsequent to March 31, 2004 the Company received
notification of the intent of the participants to reduce the amount of the funds
available by $839,374 (CDN$1,100,000). As at March 31, 2004, these funds were
still available for the use of the Company.
16
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
13. FINANCIAL ARRANGEMENTS AND GUARANTEES USED TO ACQUIRE INVENTORY
(continued)
A) FINANCIAL ARRANGEMENTS (continued)
US FINANCIAL ARRANGEMENT (US$2.0 MILLION)
On August 1, 2003, the Company entered into an arrangement with a group of
participants for bridge financing in the principal amount of $2,000,000. The
loan was made for the following purposes:
- Acquisition of Premier and certain lands related to Premier's auction
business
- Acquisition of Santiago Custom and Classic Car Auctions Inc.
- Fees and ancillary costs of raising the financing
- Working capital
A $60,000 fee is payable to Corporate Mentors Inc. for management of the funds.
The fee is to be paid at $3,000 per month for 20 months, without interest.
The minimum return to the participants will be accrued at a rate of 1.5% per
month commencing the date funds were advanced by the participants and became due
and payable commencing November 15, 2003 and thereafter. A 1.5% management fee
is also chargeable in relation to these funds. At March 31, 2004, charges in
the amount of $430,555 have been made to income. Payments in the amount of
$271,333 net of withholdings have been made as at March 31, 2004.
The financing is documented by a promissory note and secured by proceeds of any
warrants exercised by financial participants, a guarantee of and postponements
of claims from Icoworks Holdings from its subsidiaries, pledge of shares of any
corporation acquired and a mortgage on certain lands held by Premier, which the
participants released from the security arrangement in January 2004 (Note 12).
In addition, advances made by participants under the arrangement may be
converted to common shares by exercise of 5,714,282 warrants at $0.35 any time
up until June 30, 2004. The fair value of the warrants calculated using the
Black-Scholes option pricing model is $543,000. At March 31, 2004, the Company
has amortized $362,000 and the balance of $181,000 will be amortized over the
remaining life of the warrants, which is three months.
The bridge loan was repayable on or before February 28, 2004. During January
2004, the Company extended the maturity date to June 30, 2004 by agreement. The
Company intends to seek additional financing to retire this loan.
17
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
13. FINANCIAL ARRANGEMENTS AND GUARANTEES USED TO ACQUIRE INVENTORY
(continued)
B) GUARANTEES USED TO ACQUIRE INVENTORY
Guarantees arise when the Company provides a consignor with assurance as to the
amount they will receive for consigned goods from the net auction proceeds.
This amount is recorded as a liability and a corresponding amount is recorded as
inventory held for resale. Similarly, when funds are advanced from the
participants, a liability is recorded in the amount of the funds advanced and a
corresponding entry is made to increase the inventory value of goods held for
sale.
14. DUE TO RELATED PARTIES
March 31, 2004
--------------------------------------------------------------------------------
Advances due to directors (current and former), unsecured, non-
interest bearing, no fixed terms of repayment.. . . . . . . . . $ 101,328
Payment due to the former shareholders of Icoworks Services,
unsecured, non-interest bearing, no fixed terms of repayment. . 38,153
Due to shareholders . . . . . . . . . . . . . . . . . . . . . . 48,722
---------------
$ 188,203
================================================================================
During the three month period ended March 31, 2004, certain debts with related
parties were settled with common shares of the Company (Note 17).
18
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
15. PROMISSORY NOTES TO RELATED PARTIES
On January 9, 2004, the Company issued promissory notes to settle certain
of its debts with related parties totalling $139,000. The promissory notes are
due on or before June 30, 2006 and bear interest at a rate of 4% per annum.
16. PREFERRED SHARES TO BE ISSUED
During the year ended June 30, 2003, the Company entered into an agreement to
issue 30,000 Series A preferred shares as part of an offering of 300,000 shares.
Each Series A preferred share has a face value of $10.00 per share, and;
a) Is convertible into shares of the Company's common stock on the basis of
one share of common stock for each $0.75 of Series A preferred shares at the
option of the holder. The minimum amount of Series A preferred shares that may
be converted by a holder is $10,000.
b) Accrue dividends at the rate of 10% per annum. Dividends will be paid
quarterly at the end of each calendar quarter, commencing June 30, 2003.
c) The Company has the right to redeem the Series A preferred shares at any
time after eighteen months from the date of issuance in the event that the
closing price of the Company's common stock is equal to or greater than $1.50
per share for at least twenty consecutive trading days during the three month
period prior to the date of notice of redemption.
d) Each holder will have the right to redeem the Series A preferred shares
at any time subsequent to three years from the date of closing of the purchase
of the Series A preferred shares.
e) Does not have voting rights, other than on matters affecting the Series A
preferred shares, as prescribed by Nevada law.
f) Does not have dividend rights, other than to receive the annual 10%
dividend rate.
The Series A preferred shares result in a quarterly obligation to pay dividends
of $7,500 ($30,000 annually). If converted, the Series A preferred shares, which
are yet to be issued, would have resulted in the issue of 40,000 shares of
common stock. At March 31, 2004, $30,000 has been accrued as dividends payable
and no dividends have been paid to date.
The obligation to issue these shares is shown as a liability on the consolidated
balance sheet at March 31, 2004 (Note 21).
19
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
17. COMMON STOCK
On August 6, 2003, 142,500 common shares of Icoworks Holdings at a price of
$0.75 for each common share, were issued to Panther Industries as compensation
for services rendered in the amount of $107,000 in relation to assistance in
establishing the financial arrangements.
On September 10, 2003, 22,000 common shares of Icoworks Holdings at a price of
$0.50 for each common share were issued to Canberra Financial Services, Inc. as
a bonus in the amount of $11,000 pursuant to an October 31, 2000 financial
services agreement.
On December 3, 2003 and December 11, 2003, 600,000 and 300,000 common shares of
the Company, respectively, were issued upon the exercise of 900,000 stock
options at a price of $0.35 for each common share.
On January 16, 2004 the Company issued 437,773 common shares (285,714 common
shares valued at $0.70 and 152,059 common shares valued at $0.33) of Icoworks
Holdings as finders fees.
On March 15, 2004, management fees owing of $413,086 plus other related party
amounts advanced of $222,882 owing by the Company at December 31, 2003 were
settled for a total consideration of 1,817,052 common shares of the Company at
$0.35 per share. At the time of issue of the shares, the market price of the
shares was $0.23.
On March 15, 2004, the Company settled certain of its debts with related parties
totaling $500,912 through the issuance of 1,431,179 common shares of the Company
at $0.35 per common share. At the time of issue of the shares, the market price
of the shares was $0.23.
WARRANTS
At March 31, 2004, the Company had warrants that were outstanding enabling
holders to acquire the following shares of common stock:
Number of Shares Exercise Price Expiry Date
------------------------------------------------------------
4,018,518 $ 0.54 June 30, 2004
5,714,282 $ 0.35 June 30, 2004
============================================================
At March 31, 2004, Icoworks Holdings had warrants that were outstanding enabling
holders to acquire the following shares of common stock:
Number of Shares Exercise Price Expiry Date
----------------------------------------------------------------
21,000 $ 1.50 December 27, 2004
1,500,000 $ 1.50 January 8, 2005
================================================================
20
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
17. COMMON STOCK (continued)
STOCK OPTIONS
At March 31, 2004, Icoworks Holdings had options that were outstanding enabling
holders to acquire the following shares of common stock:
Number of Shares Exercise Price Expiry Date
----------------------------------------------------------------
200,000 $ 1.00 November 12, 2007
================================================================
Generally, the stock options have a life of five years and vest equally on each
anniversary date over a three year period.
At March 31, 2004, 66,667 stock options had vested, none had expired and 900,000
options were exercised. During the period ended March 31, 2004, the Company
also cancelled 150,000 options.
The Company used the Black-Scholes option pricing model to compute estimated
fair value, based on the following assumptions:
============================================================
Risk free interest rate 3.0%
Dividend yield rate 0.0%
Volatility 66.3%
Weighted average expected life of options 1 year
============================================================
21
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
17. COMMON STOCK (continued)
The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation.
March 31, March 31,
2004 2003
--------------------------------------------------------------- ----------- -----------
Net loss, as reported . . . . . . . . . . . . . . . . . . . . . $ (760,258) $ (978,025)
Add: Total stock-based employee compensation expense
included in loss, as reported determined under APB 25, net of
elated tax effects. . . . . . . . . . . . . . . . . . . . . . . - -
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects . . . . . . . . . . . . . . . . . . . . . . (12,092) -
----------- -----------
Pro-forma net loss. . . . . . . . . . . . . . . . . . . . . . . $ (772,350) $ (978,025)
=========================================================================================
Basic and diluted net loss per share, as reported . . . . . . . $ (0.06) $ (0.14)
=========================================================================================
Basic and diluted net loss per share, pro-forma . . . . . . . . $ (0.06) $ (0.14)
=========================================================================================
18. RELATED PARTY TRANSACTIONS
Unless disclosed elsewhere in these consolidated financial statements, the
Company entered into the following transactions with related parties during the
nine-month period ended March 31, 2004:
a) Paid or accrued management fees of $51,000 (2003 - $150,000) to a company
related by common ownership and a common director.
b) Paid or accrued rent of $92,602 (2003 - $88,081) to a company controlled
by employees who were previously directors of Icoworks Services.
c) Paid or accrued financing fees of $Nil (2003 - $148,000) to a company
related by common ownership and a common director.
d) Paid or accrued consulting expenses of $Nil (2003 - $56,729) to companies
related by common ownership and directors.
22
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
18. RELATED PARTY TRANSACTIONS (continued)
These transactions were in the normal course of operations and were measured at
the exchange value, which represented the amount of consideration established
and agreed to by the related parties.
19 SUPPLEMENTAL DISCLOSURES WITH RESPECT TO CASH FLOWS
The significant non-cash transactions during the nine-month period ended
March 31, 2004, consisted of the following:
a) The Company acquired inventory of $778,288 through the assumption of
guarantees used to acquire inventory of the same amount.
b) The Company received a promissory note of $315,000 for the exercise of
900,000 share purchase options.
c) The Company sold the $315,000 promissory note to related parties to
settle certain of it's debts with these related parties
d) The Company issued 142,500 common shares of it's subsidiary Icoworks
Holdings for settlement of accounts payable of $107,000.
e) The Company issued 3,248,231 common shares to settle amounts owed by the
Company in the amount of $1,136,880.
f) The Company issued promissory notes of $139,000 to settle certain of the
debts with related parties.
g) The Company issued 437,333 Icoworks Holdings on January 16, 2004 for
finders fees.
20. CONTINGENT LIABILITIES
Icoworks Services was named as a defendant in a statement of claim relating to
the purchase of certain equipment Icoworks Services considered to be in poor
condition. Consequently, Icoworks Services accrued a liability of $63,530
relating to this claim in a prior year's financial statements. During the year
ended June 30, 2002, the claim was settled in favor of Icoworks Services,
however the plaintiff appealed the ruling. Management believes the appeal has
no merit and, as a result, the $63,530 contingent liability previously recorded
was reversed during the year ended June 30, 2002. As at March 31, 2004, the
appeal has not been resolved.
Icoworks Services has been named as a defendant in a statement of claim relating
to the termination of two employees in the amount of $80,987 and $50,906
respectively plus related expenses. Further the Company was named as a
defendant in a counter claim related to the acquisition of Premier. No
provision has been made in the books of Icoworks as management believes the
claims have no merit and intends to defend them vigorously.
23
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
21. COMMITMENTS
Unless disclosed elsewhere in these consolidated financial statements, the
Company has the following commitments at March 31, 2004:
a) Pay consulting fees relating to assistance with investor relation
services to a company related by common ownership. The agreement required a
payment of $25,000 upon signing (paid) and a payment of $125,000 upon completion
of all services. At March 31, 2004, $100,000 of the $125,000 of services
remained to be performed.
b) Issue 79,780 shares of common stock to various brokers as compensation
for arranging private placements during the year ended June 30, 2002.
c) Pay minimum lease payments for premises of approximately $99,000 per
annum, including common area costs, under an operating lease expiring February
2008.
d) Pay future annual operating lease payments for equipment and other office
premises as follows:
2004 $ 67,499
2005 $ 64,842
2006 $ 47,919
2007 $ 22,716
2008 $ 11,259
e) Concurrent with the acquisition of Premier, the Company agreed to issue a
total of 2,700,000 common shares of the Company to three key employees of
Premier.
f) On January 2, 2004 the board of directors was changed and as
consideration for undertaking these positions the Company has agreed to issue
800,000 common shares of the Company, being 200,000 common shares to each of the
new directors. The share grant has a vesting schedule of 50,000 common shares
upon signing and the balance vest on the anniversary date equally over the next
three years. As at March 31, 2004, none of these shares has been issued.
Subsequent to March 31, 2004, the directors cancelled the agreement to issue the
800,000 common shares and approved the grant of 800,000 options exercisable at
$.012 per common share, being 200,000 options to each director.
g) On February 4, 2004, the Company agreed to issue 610,000 common shares in
exchange for the 25% of the total common shares of Icoworks Eastern not already
held by Icoworks Holdings. This share exchange agreement remains subject to the
completion of certain conditions.
h) The Company has agreed in principle to issue 600,000 common shares and
600,000 options, exercisable at $0.35 per share, to the Company's president and
chief operating officer. These common shares will be released and the options
will vest at various stages over a three year period from the date an employment
agreement is signed. No definitive agreement has been executed to date.
24
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
21. COMMITMENTS (continued)
Further, the Company intends to enter into a new merger agreement to complete
the acquisition of the minority interest of Icoworks Holdings as the terms of
the original merger agreement expired (Note 4). Based on preliminary
negotiations relating to the proposed merger agreement, the Company intends to
issue commons shares of the Company to the shareholders of Icoworks Holdings,
who would own approximately 66.6% of the total outstanding shares of Icoworks
Holdings at the proposed date of the merger, provided that immediately prior to
the consummation of the merger, certain events are completed including, but not
limited to, the following:
- The counter party of an obligation to issue shares in the amount of
$500,000 converts the promissory note into approximately 40% of the
total common shares of Icoworks Holdings (Note 12).
- The share exchange agreement relating to the acquisition of the
minority interest of Icoworks Eastern is completed (see g) above).
- The preferred shares to be issued in the amount of $300,000 plus
accrued but unpaid dividends in the amount of $30,000 as March 31,
2004 are converted into common shares of the Company (Note 16).
22. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, income taxes recoverable, other assets, bank overdraft,
accounts payable and accrued liabilities, advances payable, financial
arrangements and guarantees issued to acquire inventory, due to related parties
and promissory notes. Unless otherwise noted, it is management's opinion that
the Company is not exposed to significant interest, currency or credit risks
arising from these financial instruments. The fair value of these financial
instruments approximates their carrying values unless otherwise noted.
25
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
22. FINANCIAL INSTRUMENTS (continued)
CONCENTRATIONS OF CREDIT RISK
The Company is exposed to credit risk only with respect to cash and cash
equivalents and uncertainties as to the timing and amount of the collectability
of accounts receivable. The Company mitigates cash and cash equivalents credit
risk by maintaining the majority of its cash balances in reputable financial
institutions in Canada. The Company mitigates accounts receivable credit risk
through standard credit and reference checks and monitoring the financial
condition of its customers to reduce risk of loss. The Company provides an
allowance for doubtful accounts when, in their judgment, future collection is
considered doubtful.
23. SEGMENT INFORMATION
Notwithstanding that the Company may operate certain assets it acquires while it
holds the goods for resale, the Company conducts operations in one reportable
segment, being the conduct of customized auctions, in Canada and the USA. Prior
to August 29, 2003, the Company operated in one geographical segment that being
Canada. During the nine-month period ended March 31, 2004, the Company's
breakdown by geographical segment was as follows:
Geographic Information
----------------------
Canada USA Totals
Revenues. . . . . $12,117,022 $2,110,609 $14,227,631
Long lived assets $ 307,742 $1,765,997 $ 2,073,739
24. SUBSEQUENT EVENTS
The following events occurred subsequent to March 31, 2004:
a) In April 2004, an early withdrawal of $851,130 (Cdn$1,100,000) was made
by certain participants in the Canadian financial arrangement (Note 12) reducing
the funds available to $1,547,508 (Cdn$2,000,000). The Company has been advised
by Icoworks Holdings that further negotiations have been held with the remaining
participants for an orderly liquidation of the Canadian financial arrangement.
Such withdrawal would substantially affect the volume of sales the Company could
generate from the Canadian operation.
26
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
24. SUBSEQUENT EVENTS (continued)
b) In April 2004, the holder of the original convertible note (Note 12)
agreed to return to Icoworks Holdings the conversion rights to 1,500,000 shares
for no consideration with the condition that those rights are to be issued to
new convertible debt lenders on terms not more favourable than those provided to
the original lender. Accordingly, Icoworks Holdings issued a new convertible
note which yielded approximately $162,500 before finder's fees and costs. The
holder of this note was related to a director of the Company at the time of
funding of the convertible promissory note; accordingly the director, Mr. Tom
Butt, resigned from the board of directors of the Company. The holder of the
new convertible note has provided notice of intent and a request for the
conversion of their note to 1,500,000 shares of Icoworks Holdings. This action
will reduce the Company's position in Icoworks Holdings to approximately 41.2%
and could require the Company to change their accounting policy and account for
their interest in Icoworks Holdings on an equity basis. The holder of the
original convertible note, having rights to convert to approximately 3,200,000
shares, has not indicated their intention to convert at this time. If such
conversion occurred, the Company would hold approximately 31% of Icoworks
Holdings common shares.
c) In May 2004, the Company and Icoworks Holdings received an offer by way a
letter agreement for the purchase of the Canadian operations, Icoworks Services
(100% owned by the Company) and Icoworks Eastern (75% owned by the Company).
Mr. Graham Douglas resigned as a director and officer of Icoworks Holdings and
its subsidiaries in order to avoid any conflict of interest with his role as
director and CEO of the Company. Due to the resignation, Icoworks Holdings
remains with one sole director, Mr. Mike Diening, who is also a director of the
Company. This offer was not consummated and the Company and Icoworks Holdings
received notice of withdrawal of the offer.
27
ICOWORKS, INC.
(formerly Paragon Polaris Strategies.com Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
================================================================================
25. OTHER RECENT DEVELOPMENTS
The following events have occurred which have the potential to affect the
continuing business and structure of the Company going forward:
a) Subsequent to the withdrawal of the offer to purchase, Mr. Diening as the
sole director of Icoworks Holdings, provided the Company notice of withdrawal by
Icoworks Holdings from the proposed merger between the Company and Icoworks
Holdings. Mr. Diening has advised the Company that it is the intent of Icoworks
Holdings to dispute some or all of the loans, advances or assignment of debts
held by the Company and due from Icoworks Holdings. These advances represent
direct cash advanced to Icoworks Holdings and its subsidiaries and the
assignment to the Company of certain amounts payable by Icoworks Holdings to
related parties for cash advanced, services preformed and fess accrued. These
latter items were part of the Company's debt settlement completed in February
2004 (Note 17) and for which the Company issued restricted common shares in
payment on the basis of one share for each $0.35 of debt owed. The Company
records indicate that the net amount payable is in excess of $900,000. No basis
for such dispute has been provided.
b) Icoworks Holdings has advised the Company that it will not provide funds
from operations for any additional expenses of the Company. These expenses are
primarily the costs of maintaining the public company, being accounting, audit
and legal expenses. The Company will have to raise the necessary funds for
these expenses through the sale of additional shares or borrowings. There can
be no certainty that the Company will be able to raise the required funds and as
a result the Company may be unable to continue operations. No adjustments to
the amounts and classifications of assets and liabilities have been made that
would be made should the Company be unable to continue as a going concern.
It is the belief of the Company that Icoworks Holdings and its subsidiaries will
have to raise additional funding in order to continue their operations. The
success of Icoworks Holdings is paramount to the value of the investment the
Company has in Icoworks Holdings. There are continuing negotiations between the
parties to resolve these situations and the Company will attempt to clarify and
resolve them on a timely basis and to complete their filings.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD LOOKING STATEMENTS
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties, including statements
regarding our capital needs, business strategy and expectations. Any statements
contained herein that are not statements of historical facts may be deemed to be
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may", "will", "should", "expect", "plan",
"intend", "anticipate", "believe", "estimate", "predict", "potential" or
"continue", the negative of such terms or other comparable terminology. Actual
events or results may differ materially. In evaluating these statements, you
should consider various factors, including the risks outlined below, and, from
time to time, in other reports we file with the SEC including our Annual Report
on Form 10-KSB for the year ended June 30, 2003. These factors may cause our
actual results to differ materially from any forward-looking statement. We
disclaim any obligation to publicly update these statements, or disclose any
difference between our actual results and those reflected in these statements.
The information constitutes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.
OVERVIEW
Icoworks Inc. (formerly Paragon Polaris Strategies.com Inc.) ("We", "Icoworks"
or the "Company") is engaged in the auction and asset realization business
through our investment in 50.5% of the outstanding stock of Icoworks Holdings,
Inc., a Nevada corporation ("Icoworks Holdings").
Icoworks Holdings is engaged in the asset realization business and is a provider
of a full and comprehensive range of auction, liquidation and appraisal services
to the industrial, oilfield, commercial and office markets. Icoworks Holdings'
business operations have historically been based in Calgary, Alberta, Canada and
have recently been expanded to include a subsidiary operation in Oakville,
Ontario, Canada and, subsequent to the end of our fiscal year, Premier Auctions
based in Texas and Oklahoma. Icoworks Holdings plans to expand its business,
both through the expansion of its traditional auction, liquidation and appraisal
services and through the acquisition of other businesses engaged in the asset
realization business that complement Icoworks Holdings' growth strategy.
Icoworks Holdings also plans to enhance its traditional services by the use of
technology, including the use of live internet auctions, online internet
auctions and technology-assisted auctions, in order to expand the scope of
potential purchasers for its asset realization business and to facilitate
auction transactions.
Icoworks Holdings completed the acquisition of Premier Auctions, a Texas and
Oklahoma based auction business specializing in the oil and gas equipment
industry on August 29, 2003. Icoworks Holdings completed the acquisition of
Santiago Classic Car Auctions, an Oklahoma based auction business specializing
in classic automobiles, in January 2004.
We do not have any business or subsidiaries other than our 50.5% interest in
Icoworks Holdings.
PRESENTATION OF FINANCIAL INFORMATION
We completed the acquisition of a 56% interest in Icoworks Holdings effective
February 20, 2003. Our interest in Icoworks Holdings has subsequently been
diluted to a 50.5% interest. Subsequent to March 31, 2004 the Company received
notice from one of the Icoworks Holdings promissory note holders of their
intention to convert into shares of Icoworks Holdings, which will result in
further dilution of the Company's interest to 41.2% in Icoworks Holdings Inc.
Under United States generally accepted accounting principles, our financial
statements have been prepared using reverse-acquisition accounting principles,
which result in Icoworks Holdings acquiring Icoworks for accounting purposes.
Accordingly, Icoworks Holdings is treated as the acquirer for accounting
purposes, even though Icoworks is the legal acquirer. Under United States
generally accepted accounting principles, comparative figures for prior periods
are based on the operating results of Icoworks Holdings, but the type of share
capital and number of issued and outstanding shares continue to reflect those of
Icoworks. Therefore, our consolidated financial statements include the accounts
of Icoworks Holdings and its legal subsidiaries. All significant inter-company
accounts and transactions have been eliminated on consolidation. Comparative
figures reported in our financial statements for the nine months ended March 31,
2003 are for Icoworks Inc. Further adjustments were also required as outlined
in the notes to the financial statements. We have adopted the June 30 year end
29
of Icoworks Holdings to reflect the accounting treatment of the acquisition,
rather than proceeding with our previous December 31 year end. Due to the fact
that we own less than 100% of Icoworks Holdings, our financial statements
account for the minority interest in Icoworks Holdings that we do not own.
We acquired the business of Premier Auctions effective August 29, 2003. The
results of operations of Premier Auctions for the period from August 29, 2003 to
March 31, 2004 are included in our statements of operations and our statement of
cash flows for the periods ended March 31, 2004. Our balance sheet at March 31,
2004 accounts for the acquisition of Premier Auctions.
RECENT CORPORATE DEVELOPMENTS
We have recently taken a number of steps in connection with the reorganization
of our business and our corporate structure. These material corporate
developments are summarized as follows:
1. Termination of Antares Investment Management Contract
----------------------------------------------------------
We entered into an agreement dated January 26, 2004 with Mr. J. Graham Douglas
and Antares Investments Inc., a company controlled by Mr. Douglas. Pursuant to
this agreement, Antares has agreed that its management agreement that provides
for payment of $17,000 per month in consideration for the provision of the
services of Mr. Douglas has been terminated. In addition, Antares agreed to
settle any and all outstanding debts owed to it by Icoworks Holdings and us in
consideration for the issuance by us of shares of our common stock based on a
price of $0.35 per share. Based on this agreement, Antares agreed to assign to
us indebtedness of $413,086 owed to Antares by Icoworks Holdings in
consideration of the issuance by us of 1,180,200 shares of our common stock. In
addition, Antares assigned an additional $222,282 of indebtedness to us in
consideration of our agreement to issue an additional 636,852 shares of our
common stock to Antares. These shares were issues during the three-month period
ended March 31, 2004.
Mr. Douglas has agreed to continue to act as Icoworks Holdings chief executive
officer until the completion of the contemplated merger with Icoworks Inc, at a
total compensation of $5,000 per month, plus reasonable expenses. Mr. Douglas
has also agreed during this time to act as our chief executive officer for
nominal additional consideration.
2. Series A Preferred Stock
---------------------------
In our fourth quarter ended June 30, 2003, we completed a financing with a
non-U.S. investor for proceeds of $300,000 pursuant to which we agreed to issue
30,000 shares of our preferred stock, which was to be designated as "Series A
Preferred Shares". Each Series A Preferred Share was to be issued for each
$10.00 advanced and was to be convertible into shares of our common stock at a
rate of one share for each $0.75 of preferred shares converted. We have entered
into negotiations with the investor who has indicated to us his agreement to
exchange the $300,000 of Series A Preferred Shares to be issued, plus accrued
and unpaid dividends in the amount of $22,500, in consideration of the issuance
by us to the investor of 1,290,000 shares of our common stock. This settlement
is based on an agreed price of $0.25 per share of common stock. To date, no
formal agreement has been executed with the investor and the 1,290,000 shares
have not been issued.
3. Panther Industries
-------------------
Icoworks Holdings entered into a financing agreement with Panther Industries
whereby it agreed to pay a fee equal to 10% of any monies raised by Panther,
which would be available to Icoworks Holdings for a period of one year or more.
This agreement was entered into in April 2003. The fee is payable in shares of
Icoworks Holdings common stock. Pursuant to this agreement, Icoworks Holdings
has issued an aggregate of 665,773 shares in respect of financings obtained by
Icoworks Holdings, which has resulted in dilution of our interest in Icoworks
Holdings to 50.5%. Of these shares, 285,714 and 152,059 shares were issued in
connection with the $2,000,000 bridge loan financing and the $500,000 Ian de Bie
financing, discussed below in Paragraph 6.
30
4. Acquisition of Santiago Sports and Classics Collector Car Auctions
-------------------------------------------------------------------------
Icoworks Holdings completed the acquisition of 100% of Santiago Sports and
Classics Collector Car Auctions in January 2004. The total purchase price paid
$250,000, of which $225,000 was paid in cash and $25,000 will be paid by
delivery of 100,000 shares of our common stock to Mr. Rocky Santiago, the former
owner of Santiago Sports and Classics Collector Car Auctions. These shares have
not been issued to date. The initial $125,000 for this acquisition was advanced
under the $2.0 million bridge loan in November of 2003. The $100,000 necessary
to enable Icoworks Holdings to complete this acquisition was advanced to us as
part of the Ian de Bie financing, as described below. The closing of the
acquisition was effective January 5, 2004.
We have agreed to issue 100,000 shares of our common stock to Icoworks Holdings
in consideration of the issuance of 50,000 shares of Icoworks Holdings common
stock to us. Icoworks Holdings will deliver the 100,000 shares of our common
stock to Mr. Santiago as completion of payment of the purchase price.
5. Icoworks Holdings Convertible Note Financing
------------------------------------------------
Icoworks Holdings entered into a financing arrangement with Mr. Ian de Bie on
January 6, 2004. Under the terms of this agreement, Mr. Ian de Bie has advanced
$500,000 to Icoworks Holdings as a convertible loan. The loan is evidenced by a
promissory note in the principal amount of $500,000. The note is repayable by
Icoworks Holdings on demand of Mr. de Bie. In addition, Mr. de Bie has the
right before demand at any time to convert the principal amount of the
indebtedness into shares of Icoworks Holdings, representing 40% of the
outstanding shares of Icoworks Holdings at the time of conversion. Should, Mr.
de Bie convert the indebtedness under the promissory note into shares of
Icoworks Holdings then upon completion of the contemplated merger of Icoworks
Inc. and Icoworks Holdings, Mr. de Bie will become the largest single
shareholder of Icoworks Inc.
Mr. de Bie agreed to return to the Icoworks Holdings Inc. a portion of the
shares for no consideration, with the condition that they were to be issued to
new convertible debt lenders on terms not more favorable than those provided to
the original lender. Subsequent to March 31, 2004, 1,500,000 shares were
returned and provided for in a new convertible note, which yielded Icoworks
Holdings Inc. approximately US$162,500 before finder's fees and costs. The
investor in this note was related to a Director of the Company at the time of
funding of the convertible promissory note. The Director, Mr. Tom Butt has since
resigned from the Board of Directors of Icoworks, Inc.
The financing arrangement between Icoworks Holdings and Mr. de Bie and Mr. Butt
has the potential to substantially dilute our ownership interest in Icoworks
Holdings. Based on our current ownership of Icoworks Holdings, our interest in
Icoworks Holdings will be diluted to approximately 32% in the event that Mr. de
Bie converts his promissory note.
6. Status of $2.0 Million Bridge Loan
---------------------------------------
The financing with Mr. de Bie was arranged by us to address a shortfall of
operating cash in Icoworks Holdings. Icoworks Holdings was unable to meet its
short term obligations, including payment of all of the interest on the
$2,000,000 bridge loan financing obtained by Icoworks Holdings to enable it to
acquire Premier Auctions in August 2003. The lenders under this bridge loan
financing include private companies controlled by Mr. de Bie and Mr. Butt, one
of our prior directors. This accrued interest outstanding as at March 31, 2004
was $159,222. The maturity date of the bridge loan has been extended from
February 28, 2004 to June 30, 2004 by agreement. Icoworks Holdings Inc. is in
default on interest and guarantee return payments in respect of a US$2,000,000
loan used for the acquisition of Premier Auctioneers International, certain
lands in Odessa, Texas and the acquisition of Santiago Sports and Classic
Auctions. The lender holds the shares of Premier and the business of Santiago
as security for its loan. To date no formal notice of default or demand for
payment has been made, however should such demand be made the Company does not
currently have the resources to meet such demand. The loss of such assets would
have a significant effect on the operations of Icoworks Holdings Inc and thus on
the investment of Icoworks, Inc.
7. Agreement to Acquire Minority Interest of Icoworks Eastern
-----------------------------------------------------------------
We have entered into an agreement with Mel Blackburn, the current owner of 25%
of Icoworks Eastern to acquire Mr. Blackburn's interest in Icoworks Eastern in
exchange for 610,000 shares of our common stock. It is a condition of the
closing of this acquisition that Mr. Blackburn will have entered into an
employment agreement with Icoworks Holdings, which is on acceptable terms to Mr.
Blackburn and us. This acquisition has not completed and no shares of our
common stock have been issued to Mr. Blackburn to date.
31
We have agreed with Icoworks Holdings to exchange the 25% interest in Icoworks
Eastern upon completion of this acquisition from Mr. Blackburn in exchange for
305,000 shares of Icoworks Holdings. This exchange is contingent upon the
completion of the acquisition of the 25% interest in Icoworks Eastern from Mr.
Blackburn.
8. Issuance of Shares to Premier Auctions Management
-------------------------------------------------------
In connection with our acquisition of Premier Auctions, we have agreed to issue
an aggregate of 2,700,000 shares of our common stock to the principal managers
of our Premier Auctions business, Mr. Richie, Mr. Long and Mr. Felker, as part
of their management compensation arrangements, and to other employees of Premier
Auctions. With regards to the compensation arrangements for Mr. Richie, Mr.
Long and Mr. Felker, it is contemplated that an aggregate of 610,000 shares will
be issued to each of Mr. Richie, Mr. Long and Mr. Felker, of which 25% of the
shares will vest up front and the remaining 75% will vest annually over a
three-year period. We are currently in the process of preparing drafts of
employment agreements to be entered into with each of Mr. Richie, Mr. Long and
Mr. Felker, which will be required to give effect to this stock compensation
arrangement. No compensation shares have been issued to any of Mr. Richie, Mr.
Long or Mr. Felker to date.
9. Solara Ventures Inc.
----------------------
We entered into an assignment of indebtedness agreement with Solara Ventures
Inc. on February 11, 2004. Solara Ventures is one of our 10% shareholders. Mr.
Ian Brodie, our former president and director, is deemed to control Solara
Ventures. Under the terms of the assignment of indebtedness agreement, Solara
Ventures has agreed to assign to us indebtedness owed by Icoworks Holdings to
Solara Ventures in the amount of $39,860.91 in consideration of the issuance by
us of 113,888 shares of our common stock to Solara Ventures.
10. Westin Capital Inc.
---------------------
We entered into an assignment of indebtedness agreement with Westin Capital Inc.
on February 11, 2004. Westin Capital is a company controlled by Mr. Ian Brodie,
our former president and director. Under the terms of the assignment of
indebtedness agreement, Westin Capital has agreed to assign to us indebtedness
of $461,051.73 owed by Icoworks Holdings to Westin Capital in consideration of
the issuance by us of 1,317,291 shares of our common stock to Westin Capital.
11. Texas Land Loan
-----------------
The lender under the bridge loan financing has agreed to a postponement of its
security against the land in order to allow Icoworks Holdings to arrange a loan
in the principal amount of $275,000 that will be secured by land in Odessa,
Texas, which was acquired as part of the Premier Auctions acquisition. The
proceeds of this loan will be held in trust upon advance and are intended to be
applied to repayment of interest to be accrued on the $2,000,000 bridge loan
financing arranged for the Premier Auctions acquisition. As at March 31, 2004
this loan has not been finalized and Icoworks Holdings has received no proceeds.
12. Minority Interest in Icoworks Holdings
------------------------------------------
We continue to own the 3,593,199 shares of Icoworks Holdings that we acquired on
February 20, 2003. The total number of issued and outstanding shares of
Icoworks Holdings has increased to 7,118,448 shares. Accordingly, we now own a
50.5% interest in Icoworks Holdings. Icoworks Holdings has agreed to issue to
us an additional 305,000 shares in consideration for the 25% interest in
Icoworks Eastern if this acquisition is completed. Icoworks Holdings has also
agreed to issue to us an additional 50,000 shares of its common stock in
consideration of us issuing the 100,000 shares of our common stock as part of
the Santiago acquisition. In addition, Icoworks Holdings has agreed to issue
additional shares of its common stock to Mr. Ian de Bie representing 40% of the
post-conversion shares of Icoworks Holdings in the event of the conversion of
the promissory note in the amount of $500,000 issued by Icoworks Holdings to Mr.
de Bie. Mr. de Bie has agreed that this dilution will be exclusive of the
305,000 shares to be issued to us in respect of Icoworks Eastern and the 50,000
shares to be issued to us in respect of Santiago. Upon this issuance, and
presuming the issuance of the additional 305,000 shares in respect of Icoworks
Eastern and the 50,000 shares in respect of Santiago, we would own 3,948,199
32
shares of Icoworks Holdings, out of a total of 11,864,080 shares of Icoworks
Holdings outstanding. Accordingly, our ownership interest would be diluted to
33.3%.
Subsequent to March 31, 2004, 1,500,000 shares were returned and provided for in
a new convertible note which yielded Icoworks Holdings Inc. approximately
US$162,500 before finder's fees and costs, This portion of the promissory note
was subsequently converted into 1,500,000 thereby reducing our interest in
Icoworks Holdings to 41.2%.
13. Debt Settlement
----------------
We settled an aggregate of $315,000 owed to certain creditors, including Westin
Capital, in the amount of $315,000 by the transfer to the creditors of
promissory notes totaling $315,000 that had been issued to us.
14. Significant Factors Which Can Or Could Affect the Company's Ongoing
------------------------------------------------------------------------
Operation
---------
Subsequent to the March 31, 2004 a number events occurred which have the
potential to affect the continuing business and structure of the consolidated
company going forward.
- In April, an early withdrawal of $851, 130 (Cdn$1,100,000) was made by
certain participants in the Icoworks Services Ltd "Canadian JV Bought Deal
Fund", reducing the fund to $1,547,508 (Cdn$2,000,000). Icoworks, Inc. has
been advised by Icoworks Holdings Inc. that further negotiations have been
held with the remaining participants for an orderly liquidation of the
Canadian Fund. Such withdrawal would substantially affect the volume of
sales from the Canadian operation.
- On May 3, 2004 Icoworks Holdings Inc. and Icoworks, Inc. received an offer
by way a letter agreement for the Purchase and Sale of the Canadian
operations, Icoworks Services Ltd (100% owned by the Company) and Icoworks
Eastern Ltd. (75% owned by the Company). Mr. Graham Douglas resigned as a
Director and officer of Icoworks Holdings Inc. and its subsidiaries in
order to avoid any conflict of interest with his role as Director and CEO
of Icoworks, Inc. Due to the resignation Icoworks Holdings Inc. remains
with one sole Director, Mr. Mike Diening who is also a Director of
Icoworks, Inc. This offer was not consummated and the Companies received
notice of withdrawal of said offer.
- In January 2004, Icoworks Holdings Inc. entered into a convertible debt
instrument that if converted would reduce Icoworks, Inc's interest in
Icoworks Holdings Inc. to approximately 32%. Subsequent to this advance,
the holder of the convertible note agreed to return to the Icoworks
Holdings Inc. a portion of the shares for no consideration, with the
condition that they are to be issued to new convertible debt lenders on
terms not more favourable than those provided to the original lender.
Subsequent to March 31, 2004, 1,500,000 shares were returned and provided
for in a new convertible note, which yielded Icoworks Holdings Inc.
approximately US$162,500 before finder's fees and costs. The investor in
this note was related to a Director of the Company at the time of funding
of the convertible promissory note; accordingly the director, Mr. Tom Butt
s resigned from the Board of Directors of Icoworks, Inc. on May 21, 2004.
The holder of the new note for US$162,500 has provided notice of intent and
a request for the conversion of their note to 1,500,000 shares of Icoworks
Holdings Inc. This action will reduce Icoworks, Inc. position in Icoworks
Holdings Inc. to approximately 41.2% and would most likely require
Icoworks, Inc. to change their accounting policy and account for their
interest in Icoworks Holdings Inc. on an equity basis. The original note
holder, having rights to convert to approximately 3,200,000 shares, has not
indicated their intention to convert at this time. If such conversion
occurred, Icoworks, Inc. would hold approximately 31% of Icoworks Holdings
Inc. common shares.
- Subsequent to the withdrawal of the Offer to Purchase, Mr. Diening as the
sole Director of Icoworks Holdings Inc. provided Icoworks, Inc. notice of
withdrawal by Icoworks Holdings Inc. from the proposed merger between
Icoworks, Inc. and Icoworks Holdings Inc. Mr. Diening has advised Icoworks,
Inc. that it is the intent of Icoworks Holdings Inc. to dispute some or all
of the loans, advances or assignment of debts held by Icoworks, Inc. and
due from Icoworks Holdings Inc. These advances represent direct cash
advanced to Icoworks Holdings Inc. and its subsidiaries and the assignment
to Icoworks, Inc. of certain amounts payable by Icoworks Holdings Inc. to
related parties for cash advanced, services preformed and fess accrued.
These latter items were part of an Icoworks, Inc. debt settlement completed
in February 2004 and for which Icoworks, Inc. issued restricted common
shares in payment on the basis of one share for each $0.35 of debt owed.
Icoworks Inc. records indicate that the net amount payable is in excess of
$900,000. No basis for such dispute has been provided.
- Icoworks Holdings Inc. has advised Icoworks, Inc. that it will not provide
33
funds from operations for any additional expenses of the Icoworks, Inc.
These expenses are primarily the costs of maintaining the public company,
being accounting, audit and legal. Icoworks, Inc. will have to raise the
necessary funds for these expenses through the sale of additional shares or
borrowings. There can be no certainty that Icoworks will be able to raise
the required funds
- It is the belief of Icoworks, Inc., that Icoworks Holdings Inc. and its
subsidiaries will have to raise additional funding in order to continue its
operations. The success of Icoworks Holdings is paramount to the value of
the investment Icoworks, Inc. has in Icoworks holdings Inc.
- There are continuing negotiations between the parties to resolve these
situations and Icoworks, Inc. will attempt to clarify and resolve them on a
timely basis and to complete their filings.
- Icoworks Holdings is in default on it's interest payments on the $2.0
million bridge loan which is due to be repaid June 30, 2004. If the
Icoworks Holdings is unable to repay the loan or renegotiate repayment
terms and the lender forecloses on their security, it will have a major
impact on the Icoworks Holdings cash flow and future operations.
RESULTS OF OPERATIONS
REVENUES
We earn revenues from two principal activities, namely auction revenues and held
for sale revenues. Auction revenues are comprised of buyers' premiums, being
premiums over and above the purchase prices of items sold, and commissions paid
by consigners of items for auctions. Held-for-sale revenues are comprised of
revenues from items purchased and held for sale and/or liquidation. Revenue is
recognized once the auction or sales are completed and collections reasonably
assured. Other commissions are earned by us when we provide guarantees on the
gross proceeds to be received from sale to a consigner. We conduct our sales
where we temporarily acquire title to goods pending sale. We also enter into
joint venture agreements through our subsidiary, Icoworks Joint Ventures,
whereby goods are purchased for resale on a joint venture basis. When these
activities are conducted on a joint venture basis, the profits are divided
between us and the joint venture party on a negotiated basis. If the actual
proceeds are less than cost, or less than the guaranteed price, then we may be
required to fund any shortfall. The structure of sales varies from sector to
sector, as do the amounts of commissions and buyer's premiums and accordingly;
the nature of our revenues in any period will depend on the mix of sales that
are conducted during the period.
We also earn fees charged for appraisals. Revenue from appraisals is recognized
when work is completed and collection is reasonably assured.
Our sales revenues increased to $14,227,631 for the nine months ended March 31,
2004, compared to $1,397,887 for the nine months ended March 31, 2003. Our
sales revenues increased to $3,013,983 for the quarter ended March 31, 2004,
compared to $722,754 for the quarter ended March 31, 2003. Our increase in
revenues is attributable to the following factors:
1. We have expanded the operations of Icoworks Holdings through the
establishment of Icoworks Eastern in the Province of Ontario and the opening of
a branch office in Surrey, British Columbia in our fiscal year ended June 30,
2003 and the acquisition of Premier Auctions in our fiscal quarter ended
September 30, 2003. Our results of operations for the six months ended December
31, 2002 included only the results of operations of Icoworks Services, whereas
results of operations for the six months ended December 31, 2003 include the
results of operations of Icoworks Services, Icoworks Eastern (a 75% subsidiary
of Icoworks Holdings) and Premier Auctions (for the period from August 29, 2003
to December 31, 2003). During the quarter ended March 31, 2004 we opened
operations in Quebec, Canada and Oregon, WA the results of which have been
included in the financial period March 31, 2004
2. We have expanded the revenue generating operations carried out by
Icoworks Holdings. Our revenues for the nine months ended March 31, 2003 were
comprised primarily of auction revenues attributable to the operations of
Icoworks Services, whereas revenues for the nine months ended March 31, 2004
include auction revenues attributable to the operations of Icoworks Services and
Premier Auctions (for the period from August 29, 2003 to March 31, 2004) and
held-for-sale revenues attributable to bought-deal sales conducted by Icoworks
Eastern.
34
3. The held-for-sale revenues attributable to bought-deal sales conducted by
Icoworks Eastern increased substantially in our first three quarters due to
ongoing auctions, including auctions of wood products and associated equipment
and books, that had been acquired as inventory in our fiscal year ended June 30,
2002. Revenues from Icoworks Eastern comprised approximately 78% of our
revenues for the nine months ended March 31, 2004 compared to nil for the nine
months ended March 31, 2003.
4. The acquisition of Premier Auctions contributed revenue of $2,001,762 for
the nine months ended March 31, 2004.
We experienced a decline in revenues from Icoworks Services for the nine months
ended March 31, 2004 from the nine months ended March 31, 2003.
Variations in our operating results on a quarter by quarter basis may in part be
explained due to the nature of the auction business. Our auction business
involves large sales of items through auctions. The scheduling of these large
auction sales will impact on the timing of revenues earned and will result in
quarter by quarter variations in revenues and consequent operating results.
COST OF SALES
Our cost of sales increased to $10,985,175 for the nine months ended March 31,
2004 from $1,035,730 for the nine months ended March 31, 2003. Our cost of
sales increased to $1,619,277 for the quarter ended March 31, 2004 from $666,506
for the quarter ended March 31, 2003. The increases in our costs of sales were
primarily attributable to increased costs of sales attributable to bought deal
sales conducted by Icoworks Eastern during the first half of our fiscal year.
NET AUCTION REVENUE
Our net auction revenue was $3,242,456 for the nine months ended March 31, 2004,
compared to $362,157 for the nine months ended March 31, 2003. Our net auction
revenue was $1,394,706 for the quarter ended March 31, 2004, compared to $56,248
for the quarter ended March 31, 2003. Net auction revenue as a percentage of
sales decreased to 22.8% for the nine months ended March 31, 2004, compared to
25.9% for the nine months ended March 31, 2003. The decrease in net auction
revenue as a percentage of sales was in part attributable to the shift in our
revenues from auction revenues to held for sale revenues. We experienced lower
net auction revenues with respect to held for sale revenues due to the cost of
acquisition of the inventory that is sold in held for sale revenues.
OTHER REVENUE
Other revenue is comprised of revenues earned from appraisal services. Other
revenues increased to $306,993 for the nine months ended March 31, 2004 from
$51,750 for the nine months ended March 31, 2003. Other revenues increased to
$21,627 for the quarter ended March 31, 2004 from $15,337 for the quarter ended
March 31, 2003. Other revenues for the nine months ended March 31, 2004 were
primarily attributable to Premier Auctions. Other revenues attributable to DM
International Appraisals, a wholly-owned subsidiary of Icoworks Holdings were
minimal for the nine months ended March 31, 2004. We expect that Premier
Auctions will continue to contribute to increased appraisal revenue in the
future, as our previous appraisal revenues were limited to our Alberta
operations.
EXPENSES
Our operating expenses increased to $5,050,131 for the nine months ended March
31, 2004, compared to $1,430,154 for the nine months ended March 31, 2003. Our
operating expenses increased to $1,885,894 for the quarter ended March 31, 2004,
compared to $652,408 for the quarter ended March 31, 2003. The large increase
in operating expenses is attributable to the following factors:
1. The expansion of our operations into Ontario, Canada and British
Columbia, Canada, from our initial base in Calgary, Alberta during our fiscal
year ended June 30, 2003;
35
2. Our acquisition of Premier Auctions during our fiscal quarter ended
September 30, 2003. Accordingly, our expenses for the nine months ended March
31, 2004 include expenses attributable to the operations of Premier Auctions
from August 29, 2003 to March 31, 2004;
As a result of our expansion and acquisitions:
1. Our office and miscellaneous expenses increased to $658,338 for the nine
months ended March 31, 2004 from $468,521 for the nine months ended March 31,
2003. Increased costs are also a result of our becoming a reporting company
under the Securities Exchange Act of 1934;
2. Our general and administrative expenses increased to $1,848,464 for the
nine months ended March 31, 2004 from $1,207,726 for the nine months ended March
31, 2003; and
3. Our rent increased to $398,700 for the nine months ended March 31, 2004
from $153,529 for the nine months ended March 31, 2003.
We incurred financing fees in the amount of $1,087,585 during the nine months
ended March 31, 2004, compared to $108,446 for the nine months ended March 31,
2003. These financing fees were attributable to our arranging financing for the
acquisition of Premier Auctions and financing to acquire assets to be held for
resale.
We anticipate that our operating expenses will continue to increase as the
operations of Premier Auctions are fully incorporated into our operating results
and as we continue our expansion strategy.
NET LOSS
Our net loss decreased to $760,528 for the nine months ended March 31, 2004,
compared to $978,025 for the nine months ended March 31, 2003. The Company had
a gain of $263,279 for the three months ending March 31, 2004, compared to a
loss of $511,094 for the quarter ended March 31, 2003. Our reduced loss is
primarily attributable to additional sales volumes without a proportionate
increase in our operating expenses.
LIQUIDITY AND FINANCIAL CONDITION
CASH AND WORKING CAPITAL
We had cash of $3,916,741 at March 31, 2004, including cash held in trust for
consignors of $3,525,267, compared to cash of $448,404 at June 30, 2003. We had
a working capital deficiency of $2,100,623 at March 31, 2004, compared to a
working capital deficiency of $1,562,863 at June 30, 2003. Our working capital
deficiency is the result of a number of factors including the expansion of
operations and continuing losses. We anticipate that we will require additional
funding in order to achieve profitable operations and to implement our plan of
operations.
FINANCIAL ARRANGEMENTS AND GUARANTEES USED TO ACQUIRE INVENTORY
The amount of financial arrangements and guarantees used to acquire inventory
outstanding was $2,683,967 at March 31, 2004, compared to $2,449,626 at June 30,
2003. This amount at March 31, 2004 included a liability to the participants in
the Icoworks Joint Venture bought deal fund, as discussed below, that was
outstanding in the amount of $683,967 at March 31, 2004 and a liability in the
amount of $2,000,000, plus accrued interest and guaranteed return fees of
$159,222, which is included in accounts payable and accrued liabilities, owed in
respect of the Icoworks US JV bridge loan facility that was obtained to enable
Icoworks Holdings to acquire Premier Auctions. The balance of $881,901 was
comprised of amounts that we had guaranteed to receivers and consignors with
respect to goods to be auctioned by us where we have guaranteed a minimum sales
price to the receivers and consignors. In these arrangements, we are at risk as
to the ultimate sales price of the goods to be sold. Accordingly, the goods
that are the subject of these arrangements are recorded by us as inventory.
CASH FROM OPERATING ACTIVITIES
Cash provided by operating activities was $4,608,793 during the nine months
ended March 31, 2004, compared to cash used in operating activities in the
amount of $394,285 during the nine months ended March 31, 2003. We experienced
a decrease in inventory in the amount of $2,062,653 during the first nine months
of our fiscal year.
36
FINANCING ACTIVITIES
Cash provided by financing activities was $835,607 for the nine months ended
March 31, 2004 compared to cash provided by financing activities in the amount
of $441,187 for the nine months ended March 31, 2003. Cash provided by
financing activities included proceeds of $4,932,631 from financial
arrangements, which included proceeds of $2,000,000 from the Icoworks US JV
bridge loan facility. Cash provided by financing activities included an offset
in respect of the repayment of guarantees in the amount of $1,621,698 and an
offset in respect of repayments to the Icoworks Joint Venture financial
arrangement in the amount of $3,513,080.
We have access to a fund of capital in the amount of $2,365,509 through the
Icoworks Joint Venture financial arrangement, which we anticipate will be used
to finance the acquisition of inventory and assets for resale on a project by
project basis. These joint ventures financial arrangements and our obligations
thereunder are described below under "Icoworks Joint Ventures".
We anticipate that we will require additional financing in the amount of
$500,000 over the next twelve months in order to fund our shortfall in cash used
in operating activities. See discussion below under "Financing Requirements".
ICOWORKS JOINT VENTURES
Icoworks Holdings has incorporated a subsidiary, Icoworks Joint Ventures Inc.
("Icoworks Joint Ventures"), for the purpose of acting as a bare trustee for
participants who advance funds for the purpose of financing and selling bought
deals. The shares of this subsidiary were transferred to Ian de Bie and Paul
McAteer, as trustees, in January 2004. Icoworks Holdings and Icoworks Joint
Ventures have entered into joint venture agreements with several initial
participants. The purpose of the joint venture formed pursuant to the joint
venture agreement is to provide a financing arrangement that will provide
funding to enable us to purchase and resell various types of assets being
liquidated in receiverships and bankruptcy on a "bought deal" basis. Assets
purchased will be resold using the services of Icoworks Holdings. The joint
venture will plan to generate profit by selling these assets at a higher price
than the original purchase cost plus costs of sale. Under the joint venture
agreements, Icoworks Holdings will carry out the purchase and sale of assets for
each bought deal. Icoworks Joint Ventures has agreed to advance to Icoworks
Holdings 3.5% of the gross sale price of the assets to fund the sale costs
relating to the marketing, promotion and resale of the purchased assets. The
gross profit, being the sale price of each completed sale, less acquisition
costs, sale costs and any additional costs, will be distributed as follows:
(1) 65% to Icoworks Holdings, and
(2) 35% to be divided proportionately to each of the joint venture
participants.
Icoworks Holdings has guaranteed a return to each joint venture investor of 15%
per annum. The terms of the joint venture agreements are for a minimum of one
year and a maximum of three years. Icoworks Holdings will report quarterly to
the joint venture participants and distributions will be made on a quarterly
basis of cash available for distribution. The joint venture participants will
have the option to convert their investments in Icoworks Joint Ventures into
shares of our common stock at any time within one year of their initial
investment by the exercise of warrants granted to the participants at an amended
exercise price of $0.54 per share. To date, a total of $2,365,509 has been made
available by participants of which $1,802,066 was outstanding as of March 31,
2004. As at March 31, 2004, we would be liable for $354,826 in each of the
twelve month periods ended June 30, 2004 and 2005 if we are required to pay the
participants based on our guarantee obligation.
Icoworks Joint Ventures was formed during the fourth quarter of fiscal 2003 and
participated in four bought deals during the fourth quarter. Funds advanced by
the joint venture participants are held in trust by Icoworks Joint Ventures for
the joint venture participants until such time as funds are advanced to fund a
bought-deal acquisition.
BRIDGE LOAN FACILITY - ICOWORKS US JV INC.
Icoworks Holdings incorporated Icoworks US JV Inc. in the United States for the
purpose of arranging for bridge loan financing to enable it to acquire the
assets of Premier Auctions and Santiago Classic Car Sales. Icoworks US JV Inc.
was incorporated for the purpose of acting as a bare trustee for the investors
who advanced the bridge loan. The borrower under the bridge loan was Icoworks
Services US and the bridge loan has been guaranteed by Icoworks Holdings. The
bridge loan facility is for a principal amount of $2,000,000. Advances under
the bridge loan facility accrue interest at the rate of 1.5% per month from the
date of advance plus a guaranteed return fee of 1.5% per month. Interest
accrued on the bridge loan is repayable on November 15, 2003 or thereafter at
the demand of the lender. The principal amount of the bridge loan and accrued
interest was originally repayable on or before February 28, 2004. The maturity
37
date of the bridge loan has been extended to June 30, 2004 by agreement. The
bridge loan facility is secured by a promissory note, an assignment of proceeds
from the exercise of warrants issued to the participants in the Icoworks Joint
Venture, a guarantee and postponement of claims by Icoworks Holdings, a pledge
of the shares of any corporation acquired and, at the request of the lender, a
mortgage of any lands acquired. The full amount of the principal advanced under
the bridge loan facility is convertible into shares of Icoworks at a price of
$0.35 per share of common stock.
A total of $2,000,000 was advanced under the bridge loan facility during the six
months ended December 31, 2003. Of the amount advanced, $1,500,000 was used to
acquire the assets of Premier Auctions and the balance was applied to the
acquisition of Santiago Classic Car Sales and to working capital.
COMPLETION OF MERGER WITH ICOWORKS HOLDINGS
The registrant has received notice from the sole director of Icoworks Holdings
Inc. they do not intend to proceed with the merger. Icoworks, Inc. is currently
in discussions with the management of Holdings to resolve concerns regarding the
proposed merger.
FINANCING REQUIREMENTS
We will require additional financing over the next twelve months. We anticipate
that we will require financing in the amount of approximately $500,000 to fund
the shortfall in cash used in operating activities. In addition, we will
require financing in the amount of $2,000,000 plus accrued interest in order to
repay the bridge loan facility obtained through Icoworks US JV. This loan must
be repaid on or before June 30, 2004. We also plan to pursue our acquisition
strategy and anticipate that any future acquisitions will be completed using new
financings that will have to be negotiated and obtained on a transactional
basis.
Our financing requirements are in excess of our current financial resources. We
plan to pursue equity financings involving sales of our common stock or
convertible preferred stock in order to raise financing to fund our ongoing
capital requirements. It is contemplated that funds we raise would be advanced
by us to Icoworks Holdings as a loan pending the completion of the merger with
Icoworks Holdings. We do not have any arrangements for financing currently in
place. There is no assurance that we will be successful in raising the
necessary financing to meet our financing requirements.
We previously announced a private placement of up to 2,000,000 units at a price
of $0.35 per unit. Each unit was to be comprised of one share of our common
stock and one share purchase warrant. No sales of these units were completed.
In the event that we are successful in achieving financing, we anticipate
advancing funds to Icoworks Holdings to fund bought deals and the acquisition
strategy of Icoworks Holdings as a loan pending the completion of the merger of
Icoworks Holdings. These loans may be advanced as secured or unsecured loans.
In the event that we advance funds to Icoworks Holdings, there will be no
assurance that these funds will be repaid by Icoworks Holdings. If the business
of Icoworks Holdings is not successful in generating sufficient funds to repay
these loans, then our financial condition will be adversely affected. In
addition, there is a risk that we will advance substantial funds to Icoworks
Holdings and the merger of Icoworks Holdings will not proceed. In the event
that we are unable to raise additional financing under acceptable terms, then we
may not be able to proceed with our plan of operations or we may be required to
scale back our plan of operations. We also anticipate that we will continue to
incur losses until such time as we are able to generate profits from the
business of Icoworks Holdings and its expansion strategy.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues mainly consist of auction revenues and held-for-sale revenues. Auction
revenues are comprised of buyer's premiums, being premiums over and above the
purchase prices of items sold, and commissions paid by consignors of items for
auction. Held for sale revenues are comprised of revenues from items purchased
and held-for-sale and or liquidation. Revenue is recognized once the auction or
sales are completed and collection is reasonably assured. Other commissions are
earned when we provide guarantees on the gross proceeds to be received from sale
to the consignor.
38
We conduct these sales where we, or in joint venture with others, temporarily
acquire title to the goods. When these activities are conducted, the profits
are divided between us and the joint venture partners on a negotiated basis. If
the actual proceeds are less than cost, or less than the guaranteed price, we
may be required to fund the shortfall, as discussed above.
Revenue is also earned from fees charged for appraisals and is recognized when
the work is completed and collection is reasonably assured.
FOREIGN CURRENCY TRANSLATION
We have determined that the functional currency of certain of our wholly-owned
and partially-owned Canadian subsidiaries is the local currency, the Canadian
dollar. Assets and liabilities denominated in foreign currency are translated
into U.S. dollars at the period end exchange rates. Revenue and expenses are
translated at the rates of exchange prevailing on the dates such items are
recognized in earnings. Related exchange gains and losses are included in a
separate component of shareholders' equity under other comprehensive income.
Exchange gains and losses resulting from foreign currency transactions are
included in income for the period.
INVENTORY
Inventory is stated at the lower of cost or market. Cost is generally
determined on the first-in, first-out basis.
INTANGIBLE ASSETS
The carrying value of intangible assets is re-evaluated for potential permanent
impairment on an ongoing basis at the reporting unit level. In order to
determine whether permanent impairment exists, management considers the
Company's and its subsidiaries' financial condition as well as expected pre-tax
earnings, discounted cash flows or market related values. If the carrying value
of intangible assets of a reporting unit exceeds the fair value of the reporting
unit, the carrying value of intangible assets must be written down to fair value
in the year the impairment is recognized.
39
ITEM 3. CONTROLS AND PROCEDURES.
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the
"Exchange Act"), we carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures as of March 31, 2004
being the date of our most recently completed fiscal quarter. This evaluation
was carried out under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, Mr. J. Graham Douglas. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting management to material information relating to us required to be
included in our periodic SEC filings. There have been no significant changes in
our internal controls or in other factors that could significantly affect
internal controls subsequent to the date we carried out our evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.
During our most recently completed fiscal nine months ended March 31, 2004,
there were no changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to affect, our internal control
over financial reporting.
The term "internal control over financial reporting" is defined as a process
designed by, or under the supervision of, the registrant's principal executive
and principal financial officers, or persons performing similar functions, and
effected by the registrant's board of directors, management and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
(1) Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the assets of
the registrant;
(2) Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
registrant are being made only in accordance with authorizations of management
and directors of the registrant; and
(3) Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
40
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We, and our consolidated subsidiaries, are presently party to the following
legal proceedings:
1. Mr. Michael Hunt has commenced action against Icoworks Services, a wholly
owned subsidiary of Icoworks Holdings, in the Supreme Court of British Columbia
on February 10, 2004. Mr. Hunt claims that Icoworks Services wrongfully
terminated a consultant agreement between Mr. Hunt and Icoworks Services on
December 24, 2003. Mr. Hunt has claimed for judgment in the amount of $105,000
in respect of breach of contract, unpaid expenses in the approximate amount of
$1,000, and the full amount of any bonuses and share options payable and due
under his contract. Icoworks Services filed an Appearance in the Supreme Court
of British Columbia. Icoworks Services maintains that it is not liable to Mr.
Hunt for any breach of contract or otherwise intends to file a Statement of
Defence with the Supreme Court of British Columbia in order to defend this
action.
2. Mr. Guy Gauthier has commenced action against Icoworks Services in the
Supreme Court of British Columbia on February 10, 2004. Mr. Gauthier claims
that Icoworks Services wrongfully terminated a consultant agreement between Mr.
Gauthier and Icoworks Services on December 24, 2003. Mr. Gauthier has claimed
for judgment in the amount of $66,000 in respect of breach of contract, unpaid
expenses in the approximate amount of $1,000, and the full amount of any bonuses
and share options payable and due under his contract. Icoworks Services filed
an Appearance in the Supreme Court of British Columbia. Icoworks Services
maintains that it is not liable to Mr. Gauthier for any breach of contract or
otherwise intends to file a Statement of Defence with the Supreme Court of
British Columbia in order to defend this action.
3. Icoworks Services is also party to the litigation referred to in Note 20
to the March 31, 2004 financial statements which is believed not to be material.
This litigation was resolved in favour of Icoworks Services, but the ruling of
the court has been appealed.
4. Craig Cannon has filed a counterclaim on February 2, 2004 in respect of
the litigation originally commenced by Icoworks Holdings against Network
International Inc., Premier Auctioneers International Inc. and Craig Cannon in
the District Court of Harris County, Texas. The litigation between Icoworks
Holdings and Network International Inc. and Premier Auctioneers International
Inc. was settled in August 2003 and resulted in the transfer of the Premier
Auctions business to Icoworks Holdings. Mr. Cannon has counterclaimed against
Icoworks Holdings and has named James Richie, David Long and Scott Felker as
defendants. Mr. Cannon has alleged tortious interference with a contract
alleged to be between Mr. Cannon and Network International for the sale of
Premier Auctions and has also alleged tortious interference with prospective
business relations. Mr. Cannon has claimed unspecified damages arising from
these alleged tortious acts. Icoworks Holdings has filed a defence denying any
wrongdoing in this matter and will vigorously defend the action.
ITEM 2. CHANGES IN SECURITIES.
We did not complete any sales of our common stock without registration pursuant
to the Securities Act of 1933 (the "1933 Act") during our fiscal quarter ended
March 31, 2004, except as described below:
1. We issued warrants to purchase 5,714,280 shares of our common stock at an
exercise price of $0.35 per share to the lenders who advanced to Icoworks
Holdings the $2,000,000 bridge loan that enabled Icoworks Holdings to acquire
the Premier Auctions business. The warrants were issued pursuant to Regulation
S of the 1933 Act based on the representations of each of the investors that
they are not "U.S. Persons", as defined under Regulation S of the 1933 Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
41
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to our security holders for a vote during our fiscal
quarter ended March 31, 2004.
ITEM 5. OTHER INFORMATION.
A. Principal Executive Offices
------------------------------
We have made a determination to move our corporate offices to Dallas, Texas.
Offices were established and will be closed effective July 1, 2004. Subsequent
to the quarter end this office was closed the Company has established its
mailing address as Suite 304, 161 C Street Blaine, Washington 98230.
B. Changes To Our Officers And Directors
Mr. Ian Brodie, our former president and sole director, resigned as a director
and officer on January 2, 2004. Concurrently with his resignation, Mr. J.
Graham Douglas was appointed as a director and as our chief executive officer
and chief financial officer. Mr. Douglas has been the president and a director
of Icoworks Holdings for several years. In addition, Mr. Michiel Diening was
appointed to our board of directors and has been appointed as our president and
chief operating officer. In addition, Mr. Diening has been appointed as
president and chief operating officer of Icoworks Holdings. Mr. Diening is a
professional engineer and has directed and managed international business units
of several multi-national corporations.
Subsequent to the appointment of Mr. Douglas and Mr. Diening to the board of
directors, Mr. Thomas Butt, Mr. Crawford Shaw, Mr. B.B. Tuley and Mr. Gerry
Lindberg were appointed to the board of directors. Mr. Butt is a health care
management consultant with substantial experience in design, building and
processing management practices. Subsequent to March 31, 2004 Mr. Butt resigned
as a Director of Icoworks Inc. to avoid potential conflicts of interest. Mr.
Shaw is an attorney and a member of the firm of Sonfield and Sonfield, a law
firm based in Houston, Texas, with extensive experience in commercial law,
corporate finance and litigation. Mr. Tuley is a certified public accountant
with experience in managing and consulting with companies in a wide range of
industries. Mr. Lindberg is a seasoned sales executive with experience in a
number of successful start up businesses.
Our board of directors is now comprised of the following individuals:
- J. Graham Douglas
- Michiel Diening
- Crawford Shaw
- B.B. Tuley
- Gerry Lindberg
Our executive officers are now comprised of the following individuals:
- J. Graham Douglas, Chief Executive Officer and Chief Financial Officer
- Michiel Diening, President and Chief Operating Officer
15. Directors Shares and Options
-------------------------------
We have agreed to issue 200,000 shares to each of Mr. Thomas Butt, Mr. Crawford
Shaw, Mr. B.B. Tuley and Mr. Gerry Lindberg in consideration for their acting as
our directors. These shares are to be subject to vesting provisions such that
25% will be issued up-front and 75% will vest annually over a three year period.
No shares have been issued to date. Subsequent to March 31, 2004 the Directors
elected to cancel the shares due to them and grant option agreements for like
amounts exercisable at $0.12 per common share.
We have agreed to issue 600,000 shares and 600,000 options to Michiel Diening,
our president and chief operating officer. Of the shares, 300,000 shares are to
vest upon commencement of his engagement agreement and 300,000 shares are to
vest upon the first anniversary of his engagement agreement. Of the options,
300,000 options are to vest upon the second anniversary of his engagement
agreement and 300,000 options are to vest upon the third anniversary of his
engagement agreement. The options are to be exercisable at a price of $0.35
per share. We have agreed upon these terms with Mr. Diening, but no definitive
agreement has been executed to date.
42
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- -----------------------------------------------------------------------------------------------
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
3.3 Certificate of Amendment to Articles of Incorporation (3)
10.1 Form of share purchase agreement entered into between the registrant and the individual non-
US shareholders of Icoworks, Inc. to acquire the majority interest. (2)
10.2 Management Services Agreement between Icoworks Holdings Inc. and Antares Investments
Ltd. (4)
10.3 Release and Settlement Agreement between Icoworks Holdings Inc. and Network International(4)
10.4 Form of Joint Venture Agreement for Icoworks Joint Ventures (4)
10.5 Promissory Note executed by Icoworks Holdings Inc. in favour of Ian de Bie (5)
10.6 Agreement dated January 26, 2004 between Icoworks Inc., Icoworks Holdings, Icoworks
Services, J. Graham Douglas, Antares Investments and Paul McAteer (5)
---------------------
(1) Filed as an Exhibit to our Form SB-2 Registration Statement originally
filed on March 16, 2000, as amended.
(2) Filed as an Exhibit to our Current Report on Form 8-K filed on March 6,
2003.
(3) Filed as an Exhibit to our Quarterly Report on Form 10-QSB on June 20,
2003.
(4) Filed as an Exhibit to our Annual Report on Form 10-KSB for the year ended
June 30, 2003 filed with the SEC on October 23, 2003.
(5) Filed as an Exhibit to our Quarterly Report on Form 10-QSB on February,
2004.
---------------------
CURRENT REPORTS ON FORM 8-K
We filed the following Current Reports on Form 8-K during our fiscal quarter
ended March 31, 2004:
None
43
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ICOWORKS INC.
Date: June 22 2004
By: /s/ J. Graham Douglas
-------------------------------
J. Graham Douglas, President
Chief Executive Officer
Chief Financial Officer and
Principal Accounting Officer
44