United States
Securities And Exchange Commission
Washington, D.C. 20549
Form 10-QSB
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended July 31, 2001
Commission File No. 027619
iBIZ Technology Corp.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 86-0933890
- ---------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1919 West Lone Cactus, Phoenix, Arizona 85027
- ----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (623) 492-9200
--------------------
Check whether the registrant: (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 ___
Class Outstanding at September 13, 2001
Common stock, $0.001 par value 99,862,248
Table of Contents
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
BALANCE SHEETS ...........................................................................................1
STATEMENTS OF OPERATIONS..................................................................................3
STOCKHOLDERS EQUITY.......................................................................................4
STATEMENT OF CASH FLOWS...................................................................................5
NOTES TO FINANCIAL STATEMENTS.............................................................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................26
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDS............................................................................................30
ITEM 2. CHANGES IN SECURITIES.....................................................................................30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...........................................................................30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................................30
ITEM 5. OTHER INFORMATION.........................................................................................30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..........................................................................31
Item 1. Financial Information
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To The Board of Directors and Stockholders
IBIZ Technology Corp. and Subsidiary
Phoenix, Arizona
We have reviewed the accompanying consolidated balance sheet of IBIZ Technology
Corp. and Subsidiary as of July 31, 2001 and the related consolidated statements
of operations and cash flows for the nine months ended July 31, 2001 and 2000
and the statement of stockholders' equity for the nine months ended July 31,
2001 in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of the
management of IBIZ Technology Corp. and Subsidiary.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have audited, in accordance with auditing standards generally accepted in the
United States of America, the consolidated balance sheet of IBIZ Technology
Corp. and Subsidiary as of October 31, 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended (not presented herein); and in our report dated December 30, 2000 we
expressed an unqualified opinion on those financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
October 31, 2000 is fairly stated in all material respects in relation to the
balance sheet from which it has been derived.
As discussed in Note 30, certain conditions indicate that the company may be
unable to continue as a going concern. The accompanying financial statements do
not include any adjustments to the financial statements that might be necessary
should the company be unable to continue as a going concern.
MOFFITT & COMPANY, P.C.
SCOTTSDALE, ARIZONA
August 13, 2001
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JULY 31, 2001 AND OCTOBER 31, 2000
ASSETS
July 31, October 31,
2001 2000
(Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ 173,073 $ 631,375
Accounts receivable 263,356 432,113
Inventories 378,976 439,582
Prepaid expenses 121,575 104,874
----------------- ------------------
TOTAL CURRENT ASSETS 936,980 1,607,944
----------------- ------------------
PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION 1,909,612 1,948,715
----------------- ------------------
OTHER ASSETS
Notes receivable, officers 367,633 391,332
Customer list, net of accumulated amortization 4,957 7,932
Deposits 65,012 60,959
----------------- ------------------
TOTAL OTHER ASSETS 437,602 460,223
----------------- ------------------
TOTAL ASSETS $ 3,284,194 $ 4,016,882
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
July 31, October 31,
2001 2000
(Unaudited) (Audited)
CURRENT LIABILITIES
Accounts payable $ 634,602 $ 973,894
Customer deposits 9,559 0
Accrued liabilities
Payroll 108,089 96,283
Other 343,660 101,736
Sales and payroll taxes payable 101,234 89,023
Corporation income taxes payable 19,028 19,028
Deferred income 46,694 85,798
Note payable, current portion 5,805 5,335
Convertible debentures payable 1,040,000 0
----------------- ------------------
TOTAL CURRENT LIABILITIES 2,308,671 1,371,097
----------------- ------------------
LONG - TERM LIABILITIES
Convertible debentures payable 1,906,206 1,750,000
Note payable, long-term portion 10,085 14,479
----------------- ------------------
TOTAL LONG - TERM LIABILITIES 1,916,291 1,764,479
----------------- ------------------
STOCKHOLDERS' EQUITY
Common stock
Authorized - 100,000,000 shares, par
value $.001 per shares
Issued and outstanding
July 31, 2001 - 99,862,248 shares 99,862 0
October 31, 2000 - 37,812,424 shares 0 37,813
Paid in capital in excess of par value of stock 9,806,489 7,940,384
Retained earnings (deficit) ( 10,847,119) ( 7,096,891)
----------------- ------------------
TOTAL STOCKHOLDERS' EQUITY ( 940,768) 881,306
----------------- ------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 3,284,194 $ 4,016,882
================= ==================
See Accompanying Notes and Independent Accountants' Review Report.
2
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2001 AND 2000
(UNAUDITED)
Three Months Ended Nine Months Ended
July 31, July 31,
---------------------------- ---------------------------
2000 2000
2001 (Restated) 2001 (Restated)
------------ ------------ ------------ ------------
SALES ............................... $ 566,035 $ 1,142,040 $ 2,175,720 $ 3,207,019
COST OF SALES ....................... 580,463 914,814 2,084,389 2,689,935
------------ ------------ ------------ ------------
GROSS PROFIT (LOSS) .......... (14,428) 227,226 91,331 517,084
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES .......... (771,754) (955,483) (2,626,640) (2,784,039)
SETTLEMENT OF LAWSUIT ............... 0 0 101,369 0
CANCELLATION OF DEBT ................ 0 (12,100) 122,000 (12,100)
OTHER INCOME ........................ 5,253 0 26,215 0
------------ ------------ ------------ ------------
OPERATING (LOSS) ............ (780,929) (740,357) (2,285,725) (2,279,055)
OTHER INCOME (EXPENSE)
Interest income .............. 6,259 13,187 22,638 30,160
Interest expense ............. (76,379) (44,424) (169,703) (73,645)
Interest expense - convertible
debentures-beneficial
conversion feature .......... (506,021) 0 (1,317,438) (1,242,439)
------------ ------------ ------------ ------------
NET (LOSS) .......................... $( 1,357,0$0) (771,594) $( 3,750,22$) (3,564,979)
============ ============ ============ ============
NET (LOSS) PER COMMON SHARE
Basic and diluted ............ $ ( .02) $ (.03) $ (.07) $ (.12)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic and diluted ............ 55,660,810 28,741,267 55,660,810 28,741,267
============ ============ ============ ============
See Accompanying Notes and Independent Accountants' Review Report.
3
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT
OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JULY 31, 2001
(UNAUDITED)
Common Stock
Shares Amount
BALANCE, NOVEMBER 1, 2000 ........... 37,812,424 $ 37,813
CONVERSION OF DEBENTURES FOR
COMMON STOCK ..................... 62,049,824 62,049
FEES AND COSTS FOR ISSUANCE OF
COMMON STOCK AND CONVERTIBLE
DEBENTURES ....................... 0 0
INTEREST EXPENSE - CONVERTIBLE
DEBENTURES - BENEFICIAL CONVERSION
FEATURE .......................... 0 0
NET (LOSS) FOR THE NINE MONTHS ENDED
JULY 31, 2001 .................... 0 0
---------- ----------
BALANCE, JULY 31, 2001 ...... 99,862,248 $ 99,862
========== ==========
See Accompanying Notes and Independent Accountants' Review Report.
4
Paid in
Capital in
Excess of Retained
Par Value Earnings
of Stock (Deficit)
$ 7,940,384 $ ( 7,096,891)
918,637 0
( 369,970) 0
1,317,438 0
0 ( 3,750,228)
---------------------- ----------------------
$ 9,806,489 $ ( 10,847,119)
====================== =======================
See Accompanying Notes and Independent Accountants' Review Report.
4
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 2001 AND 2000
(UNAUDITED)
2000
2001 (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) .............................................$ (3,750,228) $ (3,564,979)
Adjustments to reconcile net (loss) to
net cash (used) by operating activities:
Depreciation and amortization ...................... 204,922 38,643
Issuance of common stock for interest, services
and payroll bonuses .............................. 33,174 349,532
Interest expense - convertible debentures-beneficial
conversion feature ............................... 1,317,438 1,242,439
Changes in operating assets and liabilities:
Accounts receivable ................................ 168,757 (444,547)
Inventories ........................................ 60,606 5,051
Prepaid expenses ................................... (16,701) (3,545)
Deposits ........................................... (4,053) (43,642)
Accounts payable ................................... (339,292) 619,629
Accrued liabilities and taxes ...................... 265,941 68,905
Customer deposits .................................. 9,559 (115,408)
Deferred income .................................... (39,104) 64,022
----------- -----------
NET CASH (USED) BY OPERATING
ACTIVITIES ................................... (2,088,981) (1,783,900)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .................... (144,093) (1,507,284)
Repayment of (proceeds from) loans by related parties .. 23,699 (108,046)
Purchase of customer list .............................. 0 (11,900)
----------- -----------
NET CASH (USED) BY INVESTING
ACTIVITIES .................................... (120,394) (1,627,230)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ............. 0 394,349
Proceeds from issuance of convertible debentures ....... 1,754,997 3,200,000
Repayments on notes payable ............................ (3,924) (66,101)
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES .................................... $ 1,751,073 $ 3,528,248
----------- -----------
See Accompanying Notes and Independent Accountants' Review Report.
5
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED JULY 31, 2001 AND 2000
(UNAUDITED)
2000
2001 (Restated)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ ( 458,302) $ 117,118
CASH AND CASH EQUIVALENTS, AT
BEGINNING OF PERIOD 631,375 25,343
-------------------- --------------------
CASH AND CASH EQUIVALENTS, AT
END OF PERIOD $ 173,073 $ 142,461
==================== ====================
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during period for:
Interest $ 44,795 $ 78,623
==================== ====================
Taxes $ 0 $ 50
==================== ====================
NON CASH INVESTING AND FINANCING
ACTIVITIES
Issuance of common stock for interest, services and
payroll $ 33,174 $ 1,486,712
==================== ====================
Issuance of common stock on stock
subscriptions $ 0 $ 75,000
==================== ====================
Issuance of common stock for accounts payable $ 0 $ 50,000
==================== ====================
Fees paid for issuance of debentures by reduction
of notes receivable, officer $ 25,000 $ 0
==================== ====================
Interest expense - convertible debentures-beneficial
conversion feature $ 1,317,438 $ 1,242,439
==================== ====================
See Accompanying Notes and Independent Accountants' Review Report.
6
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2001
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
IBIZ Technology Corp. (hereinafter referred to as the Company)
was organized on April 6, 1994, under the laws of the State of
Florida. The Company operates as a holding company for
subsidiary acquisitions.
Invnsys Technology Corporation (hereinafter referred to as
Invnsys) is in the business of designing, manufacturing and
distributing desktop computers, monitors, transactional
printers, financial application keyboards, numeric keypads and
related products. Invnsys also provides network integration
services, digital subscriber line high speed internet connection
services, business-to- business sale of software and a
co-location computer data and server facility. Invnsys also
provides repair services and sells maintenance contracts. The
corporation operates a service center in Phoenix, Arizona.
Principles of consolidation
The consolidated financial statements include the accounts of
IBIZ Technology Corp. and its wholly owned subsidiary, Invnsys
Technology Corporation.
All material inter-company accounts and transactions have been
eliminated.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash
equivalents.
Inventories
Inventories are stated at the lower of cost (determined
principally by average cost) or market.
Property and Equipment
Property and equipment are stated at cost. Major renewals and
improvements are charged to the asset accounts while
replacements, maintenance and repairs, which do not improve or
extend the lives of the respective assets, are expensed. At the
time property and equipment are retired or otherwise disposed
of, the asset and related accumulated depreciation accounts are
relieved of the applicable amounts. Gains or losses from
retirements or sales are credited or charged to income.
7
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment (Continued)
Invnsys depreciates its property and equipment for financial
reporting purposes using the straight-line method based upon the
following useful lives of the assets:
Tooling 3 Years
Machinery and equipment 5-10 Years
Office furniture and equipment 5-10 Years
Vehicles 5 Years
Leasehold improvements 5 Years
Computer software 3-5 Years
Co-location
Computer equipment 5 Years
Rack systems 10 Years
Cabling and leasehold improvements 25 Years
Accounting for Convertible Debt Securities
The Company has issued convertible debt securities with a
non-detachable conversion feature that were "in the money" at
the date of issue. The Company accounts for such securities in
accordance with Emerging Issues Task Force Topic 98-5. The
Company has recorded the fair value of the beneficial conversion
feature as interest expense and an increase to Paid in Capital
in Excess of Par Value of Stock.
The beneficial interest is computed by subtracting the stock
conversion price from the market price of the stock times the
number of shares and warrants eligible for conversion.
Customer Lists
The customer list is recorded at cost and is being amortized on
a straight-line basis over three years.
Accounting Estimates
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported revenues and expenses.
Actual results could vary from the estimates that were used.
Revenue Recognition
Invnsys recognizes its revenue as follows:
Products sales - When the goods are shipped and title
passes to the customer.
8
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Maintenance agreements - Income from maintenance
agreements is being recognized on a straight-line
basis over the life of the service contracts. The
unearned portion is recorded as deferred income.
Service income - When services are performed.
Internet sales (DSL and Co-location) - When services
are performed and completed.
Income Taxes
Provisions for income taxes are based on taxes payable or
refundable for the current year and deferred taxes on temporary
differences between the amount of taxable income and pretax
financial income and between the tax basis of assets and
liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included in
the financial statements at currently enacted income tax rates
applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled as prescribed
in FASB Statement No.109, Accounting for Income Taxes. As
changes in tax laws or rates are enacted, deferred tax assets
and liabilities are adjusted through the provision for income
taxes.
Net (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards
No. 128 that requires the reporting of both basic and diluted
(loss) per share. Basic (loss) per share is computed by dividing
net (loss) available to common stockholders by the weighted
average number of common shares outstanding for the period.
Diluted (loss) per share reflects the potential dilution that
could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. In
accordance with FASB 128, any anti-dilutive effects on net
(loss) per share are excluded.
Risks and Uncertainties
Invnsys is in the computer and computer technology industry.
It's products are subject to rapid obsolescence and management
must authorize funds for research and development costs in order
to stay competitive.
Common Stock Issued for Non-Cash Transactions
It is the Company's policy to value stock issued for non-cash
transactions such as accounts payable, payroll or services at
the stock closing price at the date the transaction is
completed.
NOTE 2 DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the fair value of all financial
instruments as of July 31, 2001 and October 31, 2000, as defined
in FASB 107, does not differ materially from the aggregate
carrying values of its financial instruments recorded in the
accompanying balance sheets. The estimated fair value amounts
have been determined by the Company using available market
information and appropriate valuation methodologies.
Considerable judgement is required in interpreting market data
to develop the estimates of fair value, and accordingly, the
estimates are not necessarily indicative of the amounts that the
Company could realize in a current market exchange.
9
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 3 ACCOUNTS RECEIVABLE
A summary of accounts receivable and allowance for doubtful
accounts is as follows:
July 31, October 31,
2001 2000
(Unaudited) (Audited)
Accounts receivable $ 303,356 $ 457,113
Allowance for doubtful accounts ( 40,000) 25,000
----------------- ------------------
Net accounts receivable $ 263,356 $ 432,113
================= ==================
Allowance for doubtful accounts
Balance, beginning of period $ 25,000 $ 2,500
Additions for the period 17,521 97,500
Write-off of uncollectible accounts
for the period ( 2,521) ( 75,000)
----------------- ------------------
Balance, end of period $ 40,000 $ 25,000
================= ==================
NOTE 4 INVENTORIES
The inventories are comprised of the following:
July 31, October 31,
2001 2000
(Unaudited) (Audited)
Finished products $ 323,540 $ 391,479
Demonstration and loaner units 0 4,070
Office 55,436 44,033
----------------- ------------------
$ 378,976 $ 439,582
================= ==================
10
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 5 PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation consists of:
July 31, October 31,
2001 2000
(Unaudited) (Audited)
Co-location
Computer equipment $ 660,247 $ 566,761
Rack Systems 313,583 297,317
Cabling and leasehold improvements 886,931 855,401
Tooling 68,100 68,100
Machinery and equipment 49,855 49,404
Office furniture and equipment 125,669 123,308
Vehicles 39,141 39,141
Leasehold improvements 23,179 23,179
Software 96,857 96,858
----------------- ------------------
2,263,562 2,119,469
Less accumulated depreciation 353,950 170,754
----------------- ------------------
Total property and equipment $ 1,909,612 $ 1,948,715
================= ==================
Depreciation expense for the nine months ended July 31, 2001 and
2000 was $183,197 and $35,667, respectively.
NOTE 6 NOTES RECEIVABLE, OFFICERS
July 31, October 31,
2001 2000
(Unaudited) (Audited)
IBIZ Technology Corp.
Notes to two corporation officers.
The notes are unsecured, bear interest at
6% and are due on January 7, 2002. $ 0 $ 12,079
Invnsys Technology Corporation
A note to an officer of the Company, payable on demand and
accruing interest at 6%. The note is collateralized by
2,000,000 shares of common stock in the Company. However,
in April 2001, the officer pledged the same stock as
collateral for a $500,000 debenture from Laurus Master
Fund, Ltd. (See Note 10). The Company now has a second
position in the 2,000,000 share collateral. In August,
2001, the officer transferred a 35% interest in the
building that the Company leases in full pay-
ment of the note due from the officer. 367,633 379,253
----------------- -------------
Total notes receivable $ 367,633 $ 391,332
================= =============
11
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 7 CUSTOMER LIST
The customer list and accumulated amortization consists of:
July 31, October 31,
2001 2000
(Unaudited) (Audited)
Cost $ 11,900 $ 11,900
Less accumulated amortization 6,943 3,968
----------------- ------------------
Net customer list $ 4,957 $ 7,932
================= ==================
The amortization expense for the nine months ended July 31, 2001
and 2000 was $1,984 for each period.
NOTE 8 INCOME TAXES
July 31,
July 31, 2000
2001 (Unaudited)
(Unaudited) (Restated)
(Loss) from continuing operations
before income taxes $ ( 3,750,228) $ ( 3,564,979)
----------------- ------------------
The provision for income taxes is estimated as follows:
Currently payable $ 0 $ 0
----------------- ------------------
Deferred $ 0 $ 0
----------------- ------------------
Significant components of the Company's deferred tax assets are
as follows:
July 31, October 31,
2001 2000
(Unaudited) (Audited)
Deferred tax assets:
Net operating loss carryforwards $ 1,030,000 $ 1,096,190
Accrued expenses and miscellaneous 8,100 23,651
Tax credit carryforward 38,424 38,424
----------------- ------------------
1,076,524 1,158,265
Less valuation allowance 1,076,524 1,158,265
----------------- ------------------
Net deferred tax asset $ 0 $ 0
================= ==================
12
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 8 INCOME TAXES (CONTINUED)
July 31, October 31,
2001 2000
(Unaudited) (Audited)
A reconciliation of the valuation allowance is as follows:
Balance, beginning of period $ 497,524 $ 356,638
Addition to allowance 579,000 801,627
----------------- ------------------
Balance, end of period $ 1,076,524 $ 1,158,265
================= ==================
NOTE 9 TAX CARRYFORWARDS
The Company has the following tax carryforwards at July 31,
2001:
Expiration
Year Amount Date
Net operating loss
October 31, 1995 $ 2,500 October 31, 2010
October 31, 1997 253,686 October 31, 2012
October 31, 1998 71,681 October 31, 2013
October 31, 1999 842,906 October 31, 2019
October 31, 2000 3,574,086 October 31, 2020
July 31, 2001 2,432,790 October 31, 2021
---------------------
$ 7,177,649
=====================
Capital loss
October 31, 1997 25,600 October 31, 2002
Contribution
October 31, 1997 545 October 31, 2002
October 31, 1999 2,081 October 31, 2004
October 31, 2000 3,008 October 31, 2005
Research tax credits 38,424
13
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 10 CONVERTIBLE DEBENTURES
July 31, October 31,
2001 2000
(Unaudited) (Audited)
Lites Trading Company - $1,600,000 Debenture $ 750,000 $ 750,000
---------------------------------------------
On March 27, 2000, the Company issued $1,600,000 of 7%
convertible debentures under the following terms and conditions:
1. Due date - March 27, 2005.
2. Interest only on May 1 and December 1 of each
year commencing May 1, 2000.
3. Default interest rate - 18%.
4. Warrants to purchase 375,000 shares of common
stock at $1.45 per share.
5. Conversion terms - The debenture holder shall have the right
to convert all or a portion of the outstanding principal
amount of this debenture plus any accrued interest into such
number of shares of common stock as shall equal the quotient
obtained by dividing the principal amount of this debenture
by the applicable conversion price.
6. Conversion price - Lesser of (i) $1.45 (fixed price) or (ii)
the product obtained by multiplying the average closing
price by .80.
7. Average closing price - The debenture holder shall have the
election to choose any three trading days out of twenty
trading days immediately preceding the date on which the
holder gives the Company a written notice of the holder's
election to convert outstanding principal of this debenture.
8. Redemption by Company - If there is a change in control of
the Company, the holder of the debenture can request that
the debenture be redeemed at a price equal to 125% of the
aggregate principal and accrued interest outstanding under
this debenture.
9. The debentures are unsecured.
10. Any further issuance of common stock or debentures
must be approved by debenture holders.
11. Debenture holders have a eighteen month right of first
refusal on future disposition of stock by the Company.
12. Restriction on payment of dividends, retirement of
stock or issuance of new securities.
14
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 10 CONVERTIBLE DEBENTURES (CONTINUED)
July 31, October 31,
2001 2000
(Unaudited) (Audited)
$5,000,000 Convertible Debenture $ 1,841,456 $ 1,000,000
--------------------------------
On October 31, 2000 and June 22, 2001, the Company issued the
following 8% convertible debentures:
1. Due dates - June 22, 2002 and October 30, 2002.
2. Interest payable quarterly from January 1, 2001
and September 30, 2001.
3. Default interest rate - 20%.
4. On the first $ 1,000,000 of financing, the Company issued
warrants to purchase 500,000 shares of stock at $ 0.4755 per
share. On the second investment of $1,100,000, the Company
issued warrants to purchase 550,000 shares of stock at
$0.2275 per share. On the third investment of $325,000, the
Company issued warrants to purchase 1,500,000 shares of
stock at $.042 per share.
5. Put note purchase price - $4,000,000.
6. Fees and costs - 8% - 10% of cash received for
debentures and warrants plus legal fees.
7. The Company must reserve a number of common
shares equal to not less than 200% of the amount of common
shares necessary to allow the debenture and warrant holder
to be able to convert all such outstanding notes and put
notes to common stock.
8. Conversion price for put notes. The initial 50% of the put
notes shall be the lesser of: (i) 80% of the average of the
three lowest closing bid prices for the stock for twenty two
days or (ii) 80% of the average of the five lowest closing
bid prices for the stock for sixty days. The conver- sion
price of the balance of the put notes shall be 86% of the
average of the three lowest closing bid prices for ten days.
9. The debentures have penalty clauses if the common
stock is not issued when required by the debenture
holder.
10. The debentures are unsecured.
11. The Company's right to exercise the put commences
on the actual effective date of the SEC Registration
Statement and expires three years after the effective date.
12. Right of first refusal - The debenture holders have
the right to purchase a proportionate amount of new
issued shares in order to maintain their ownership
interest percentage.
15
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 10 CONVERTIBLE DEBENTURES (CONTINUED)
July 31, October 31,
2001 2000
(Unaudited) (Audited)
Laurus Master Fund, Ltd. $ 354,750 $ 0
------------------------
In April and July 2001, the Company issued $500,000 and $150,000
of 8% convertible debentures under the following terms and
conditions:
1. Due dates - April 2002 and July 2002.
2. Interest on September 30, 2001 and quarterly
thereafter.
3. Default interest rate - 20%.
4. On the first financing, the Company issued warrants to
purchase 1,500,000 shares of common stock at the lesser of
$.1225 per share or an amount equal to the average of the
three lowest closing prices for a ten day trading period.
The Company may redeem the warrants for $.666 per share. On
the second financing, the Company issued warrants to
purchase 1,500,000 shares of common stock at the lesser of
$.048 or an amount equal to 105% of the average of the three
lowest closing bid prices for the common stock for the ten
trading days prior to but not including the date the
warrants are exercised.
5. Conversion terms - The debenture holder shall have the right
to convert all or a portion of the outstanding principal
amount of this debenture plus any accrued interest into such
number of shares of common stock as shall equal the quotient
obtained by dividing the principal amount of this debenture
by the applicable conversion price.
6. Conversion price - Lower of eighty percent of the average of
the three lowest closing bid prices for a specified three
day or twenty-two day period.
7. Prepayment - The debenture may not be paid prior to
the maturity date without the consent of the holder.
8. The debenture is secured by 9,285,600 shares of
common stock owned by an officer of the Company
and the Company paid the officer $50,000 for
pledging these shares.
----------------- -----------------
Total debentures 2,946,206 1,750,000
Less current portion 1,040,000 0
------------------ -----------------
Long-term portion $ 1,906,206 $ 1,750,000
================== ==================
16
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 11 NOTE PAYABLE
July 31, October 31,
2001 2000
(Unaudited) (Audited)
Note payable to Community First National Bank due in monthly
payments of principal and interest of $545 with interest at 7%
until March 7, 2004. The note is secured by an automobile which
costs $36,000 and
has a book value of $2,400. $ 15,890 $ 19,814
Less: current portion 5,805 5,335
----------------- -----------------
Net long-term debt $ 10,085 $ 14,479
================= =================
Maturities of long-term debt are as follows:
2001 $ 5,805 $ 5,476
2002 6,028 5,721
2003 4,057 6,135
2004 0 2,482
----------------- -----------------
$ 15,890 $ 19,814
================= =================
NOTE 12 REAL ESTATE LEASE
On June 1, 1999, Invnsys leased a new facility from a related
entity. The lease commenced on July 1, 1999, requires initial
annual rentals of $153,600 (with annual increases) plus taxes
and operating costs and expires on December 31, 2024. Invnsys
has also guaranteed the mortgage on the premises in the amount
of $931,956 and gave a security interest in all of its assets
(excluding $378,976 of inventory) in the amount of $2,905,218.
Future minimum lease payments, excluding taxes and expenses, are
as follows:
July 31, 2002 $ 170,050
July 31, 2003 178,557
July 31, 2004 187,486
July 31, 2005 196,861
November 1, 2005 - December 31, 2024 6,486,415
------------------
Total $ 7,219,369
==================
Rent expense for the nine months ended July 31, 2001 and 2000
was $126,087 and $116,037 respectively.
See Accompanying Notes and Independent Accountants' Review Report.
17
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 13 ADVERTISING
All direct advertising costs are expensed as incurred. For the
nine months ended July 31, 2001 and 2000 advertising costs were
$71,292 and $74,555, respectively.
NOTE 14 INTEREST
The Company incurred interest expenses for the nine months ended
July 31, 2001 and 2000 as follows:
July 31,
July 31, 2000
2001 (Unaudited)
(Unaudited) (Restated)
For operations $ 169,703 $ 73,645
For convertible debentures-beneficial
conversion feature 1,317,438 1,242,439
------------------ ------------------
Total $ 1,487,141 $ 1,316,084
================== ==================
NOTE 15 PRODUCT WARRANTY PROVISION
Invnsys established a provision for product warranty to cover
any potential warranty costs on computer equipment that are not
covered by the computer manufacturer's warranty.
Warranty summary
July 31, July 31,
2001 2000
(Unaudited) (Unaudited)
Balance, beginning of period $ 20,000 $ 50,000
Reduction for the period 1,654 2,079
----------------- -----------------
Balance, end of period $ 18,346 $ 47,921
================= =================
NOTE 16 RESEARCH AND DEVELOPMENT
Invnsys incurred research and development cost for the nine
months ended July 31, 2001 and 2000 of $6,034 and $5,224,
respectively.
See Accompanying Notes and Independent Accountants' Review Report.
18
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 17 OFFICERS' COMPENSATION
The Company entered into employment agreements with four of its
corporate officers. There contracts are for three years
beginning July 2001 and provide for the following:
1. Salaries from $150,000 to $250,000 for each officer
2. Bonuses of 1% of total sales for each of its four officers
3. Options for 1,200,000 shares of common stock which will
vest and be exercisable for a period of ten years
4. Option price of $.02 a share
5. Termination -
Termination by the Company without cause - the
employee shall receive six months salary Change of
control - in the event of change of control, the
Company shall pay the employee a lump sum payment of
three years annual salary
NOTE 18 ECONOMIC DEPENDENCY
For the nine months ended July 31, 2001, Invnsys had sales of
approximately 30% of its PDA's to one customer.
Invnsys purchased approximately 19% of its PDA's from one
supplier.
NOTE 19 EMPLOYEE STOCK OPTIONS
On January 31, 1999, the corporation adopted a stock option plan
for the purpose of providing an incentive based form of
compensation to the officers, directors, key employees and
service providers of the Company.
The stock subject to the plan and issuable upon exercise of
options granted under the plan are shares of the corporation's
common stock, $.001 par value, which may be either unissued or
treasury shares. The aggregate number of shares of common stock
covered by the plan and issuable upon exercise of all options
granted shall be 5,000,000 shares, which shares shall be
reserved for use upon the exercise of options to be granted from
time to time.
The exercise price is the fair market value of the shares
(average of bid and ask price) at the date of the grant of the
options.
Vesting terms of the options range from immediately to ten
years.
The Company has elected to continue to account for stock-based
compensation under APB Opinion No. 25, under which no
compensation expense has been recognized for stock options
granted to employees at fair market value.
A summary of the option activity for the nine months ended July
31, 2001 and 2000 pursuant to the terms of the plan is as
follows:
19
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 19 EMPLOYEE STOCK OPTIONS (CONTINUED)
Shares Weighted
Under Average
Option Exercise Price
Options outstanding at November 1, 1999 2,350,000 $ 0.75
Granted 1,310,000 1.15
Exercised ( 70,000) .75
Canceled ( 275,000) .75
------------------ ------------------
Options outstanding at July 31, 2000 3,315,000 $ 0.95
================== ==================
Options outstanding at November 1, 2000 3,385,000 $ 0.92
Granted 1,200,000 .02
Exercised 0 .00
Canceled ( 282,500) 1.60
------------------ ------------------
Outstanding at July 31, 2001 4,302,500 $ 0.90
================== ==================
2,932,500 shares are exercisable at July 31, 2001.
Information regarding stock options outstanding as of July 31,
2001 and 2000 is as follows:
2001 2000
------------------- ---------------------
Price range $0.02 - $2.00 $0.75 - $2.00
Weighted average exercise and grant
date prices $0.66 $0.95
Weighted average remaining contractual life 8 years, 6 months 9 years, 0 months
Options exercised
Price range 0 0
Shares 0 0
Weighted average exercise price 0 0
The weighted average fair value of options granted were
estimated as of the date of grant using the Black-Scholes stock
option pricing model, based on the following weighted average
assumptions:
Dividend yield 0 0
Expected volatility 50 % 30 %
Risk free interest rate 5.13% - 6.65 % 6.40 %
Expected life 5 - 10 years 5 - 10 years
20
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 19 EMPLOYEE STOCK OPTIONS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows:
July 31,
July 31, 2000
2001 (Unaudited)
(Unaudited) (Restated)
Net (loss)
As reported $ ( 3,750,228) $ ( 3,564,979)
Pro forma $ ( 4,006,423) $ ( 3,834,077)
(Loss) per share attributable to
common stock
As reported $ ( .07) $ ( .12)
Pro forma $ ( .07) $ ( .13)
NOTE 20 COMMON STOCK PURCHASE WARRANTS
As of July 31, 2001 the Company has issued the following common
stock purchase warrants:
Number Exercise
Date of Shares Term Price
-------------------- ------------------ ------------------ ------------------
May 13, 1999 100,000 3 years $ 1.00
May 7, 1999 80,000 10 years $ 0.75
May 13, 1999 100,000 10 years $ 1.00
November 9, 1999 100,000 4 years $ .94
December 14, 1999 75,000 3 years $ 1.66
December 28, 1999 200,000 4 years $ .94
January 10, 2000 281,250 5 years $ .99
March 27, 2000 615,000 5 years $ 1.45 - 2.05
May 17, 2000 125,000 5 years $ 1.04 - 5.00
August 30, 2000 34,125 5 years $ .937
August 30, 2000 250,000 3 years $ .50
August 30, 2000 250,000 3 years $ .75
August 30, 2000 36,364 3 years $ 1.00
September 3, 2000 109,000 3 years $ 1.00
September 27, 2000 278,750 3 years $ .90
October 31, 2000 500,000 2 years $ .4755
21
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 20 COMMON STOCK PURCHASE WARRANTS (CONTINUED)
Number Exercise
Date of Shares Term Price
-------------------- ------------------ ------------------ ------------------
December 20, 2000 400,000 5 years $ .2275
December 20, 2000 150,000 5 years $ .2275
April 26, 2001 1,500,000 5 years $ .1225
June 22, 2001 1,500,000 5 years $ .042
June 27, 2001 1,500,000 5 years $ .048
------------------
8,184,489
5,184,489 shares are exercisable at July 31, 2001.
NOTE 21 COMMON STOCK AVAILABLE FOR ISSUANCE
The Company has committed to issue shares for employee stock
options, purchase warrants and convertible debentures and if all
of the shares were issued the total shares issued would exceed
the 100 million shares authorized. The Company must receive
approval from the stockholders to increase its authorized shares
in order to eliminate this situation.
NOTE 22 FINANCIAL PROJECT MANAGEMENT AGREEMENTS
In May 2000, the Company entered into a fourteen month agreement
with Silverman Heller Associates to promote financial and
corporate communication activities.
The project manager will be compensated as follows:
1. A monthly fee of $5,500 beginning on May 17, 2000.
2. In connection with the services the project manager
will provide, warrants to purchase 75,000 shares of
common stock at the closing price on May 17, 2000
and an additional 50,000 shares at $5.00 per share.
These warrants and the shares to be issued upon the
exercise of the warrants will vest and be
exercisable as of May 17, 2000 and expire five
years from the issue date. The warrants will be
granted registration rights on the next stock
registration within the five-year term.
The individuals will be compensated as follows:
1. 80,000 shares of common stock valued at $.80 per
share on or before June 15, 2000.
2. 400,000 shares of common stock valued at $.80 per
share on or before June 15, 2000.
22
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 23 CASH IN BANK
The Company has $176,308 deposited in one banking institution.
Only $100,000 of the balance is insured by the Federal Deposit
Insurance Corporation.
NOTE 24 SETTLEMENT OF LAWSUIT
Invnsys settled its lawsuit with Epson America, Inc. for $2,500
which generated $101,369 of income
on the settlement.
NOTE 25 CANCELLATION OF DEBT
The Company negotiated a cancellation of a $122,000 account
payable with a supplier. This cancellation resulted in $122,000
of cancellation of debt income.
NOTE 26 RESTATEMENT OF JULY 31, 2000 NET (LOSS), PAID IN CAPITAL,
RETAINED EARNINGS AND NET (LOSS) PER SHARE
The July 31, 2000 financial statements did not record the
interest expense - convertible debentures - beneficial
conversion feature in the amount of $1,242,439. The statements
are restated as follows:
Net (loss)
As previously reported ............................... $(2,322,540)
Adjustment
Interest expense -convertible debentures- beneficial
conversion feature ............................... (1,242,439)
-----------
As restated .......................................... $(3,564,979)
===========
Paid-in capital
As previously reported ............................... $ 4,050,714
Adjustment
Interest expense -convertible debentures- beneficial
conversion feature ............................... 1,242,439
-----------
As restated .......................................... $ 5,293,153
===========
Retained earnings
As previously reported ............................... $(3,963,703)
Adjustment
Interest expense -convertible debentures- beneficial
conversion feature ............................... (1,242,439)
-----------
As restated .......................................... $(5,206,142)
===========
23
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 26 RESTATEMENT OF JULY 31, 2000 NET (LOSS), PAID IN CAPITAL,
RETAINED EARNINGS AND NET (LOSS) PER SHARE (CONTINUED)
Net (loss) per share
As previously reported ............................... $ (.03)
Adjustment
Interest expense -convertible debentures- beneficial
conversion feature ............................... (.09)
---
As restated .......................................... $ (.12)
===
NOTE 27 SECURITIES AND EXCHANGE PROCEEDING
On February 28, 2001, the Securities and Exchange Commission
commenced an administrative proceeding against the Company. The
Company has negotiated and submitted a settlement offer, which
has been formally approved by the Commission. Pursuant to this
settlement agreement, an administrative order has been issued
which orders the Company to cease and desist from committing or
causing any future violations of Section 10(b) of the Securities
and Exchange Act of 1934 and Rule 10b-5 thereunder. No other
relief against the Company is being sought.
NOTE 28 BUSINESS SEGMENT INFORMATION
The Company has elected to organize its business based
principally upon products and services.
The Company operates in three reportable business segments:
internet sales, product sales and services and other. The
internet sales segment has responsibility for providing
co-location and DSL income. The product sales segment has
responsibility for sales of co-location equipment, software and
licenses, computer equipment and PDA's. The service segment
provides miscellaneous services to Invnsys' customers and
absorbs all general and administrative expenses that are not
allocated to internet sales and product sales.
Summary of business segment for the nine months ended July 31,
2001 is as follows:
Internet Product Services General and
Sales Sales and Other Administrative Consolidated
Sales $ 487,812 $ 1,453,916 $ 233,992 $ 0 $ 2,175,720
Operating (loss) ( 577,056) 49,545 (3,222,717) 0 ( 3,750,228)
Identifiable assets 1,860,768 0 402,803 1,020,623 3,284,194
Depreciation 144,724 0 38,473 0 183,197
Expenditures for long- 141,281 0 2,812 0 144,093
lived assets
24
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
(UNAUDITED)
NOTE 29 UNAUDITED FINANCIAL INFORMATION
The accompanying financial information as of July 31, 2001 is
unaudited. In managements opinion, such information includes all
normal recurring entries necessary to make the financial
information not misleading.
NOTE 30 GOING CONCERN
These financial statements are presented on the basis that the
Company is a going concern. Going concern contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business over a reasonable length of time. The
Company has incurred $3,750,228 of losses for the nine months
ended July 31, 2001, has not realized the sales that it had
anticipated from its large national/regional customers and is
receiving its convertible debenture funding in periodic payments
in lieu of a lump-sum payment. These factors raise doubt as to
the Company's ability to continue as a going concern.
Management's plan to eliminate the going concern situation
include but are not limited to seeking more international sales
for its products, monitoring expenditures and deferring the
payments on officers' compensation.
25
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Through its operating subsidiary, INVNSYS, iBIZ designs, manufacturers,
and distributes an expanding line of accessories for the fast-growing PDA and
handheld computer market which are distributed through large retail chains such
as CompUSA, Staples, and Fry's Electronics as well as numerous e-commerce sites
such as Walmart.com, Mobile Planet and others. iBIZ also provides Web-enabling
services which include Co-location services, Web design and development, and
data center technical management services. Additionally, iBIZ markets LCD
monitors, OEM notebook computers, digital subscriber line services, third party
software, and general purpose financial application keyboards.
Selected Financial Information.
Three Month Period Ended
07/31/2000
07/31/2001 (Restated)
----------
Statement of Operations Data
Net sales $ 566,035 $ 1,142,040
Gross profit $ (14,428) $ 227,226
Operating income (loss) $ (780,929) $ (740,357)
Net earnings (loss) after tax $ (1,357,070) $ (771,594)
Net earnings (loss) per share $ (0.02) $ (0.03)
07/31/2001 10/31/2000
Balance Sheet Data
Total assets $ 3,284,194 $ 4,016,882
Total liabilities $ 4,224,962 $ 3,135,576
Stockholders' equity (deficit) $ (940,768) $ 881,306
Results of Operations.
Three month period ended July 31, 2001, compared to three month period ended
July 31, 2000.
Revenues. Sales decreased by approximately 50% to $566,035 for the three
month period ended July 31, 2001 from $1,142,040 for the three month period
ended July 31, 2000. The decrease was mainly as a result of an industry wide
delay in technology capital spending coupled with the cessation of the
Northpoint Communications DSL Service offering.
Cost of Sales. The cost of sales decreased by approximately 36% to $580,463 in
the three month period ended July 31, 2001 from $914,814 in three month period
ended July 31, 2000. The decrease in cost of sales is attributable primarily to
the decrease in sales for the period.
26
Gross Profit. Gross profit decreased to approximately ($14,428) for the
three month period ended July 31, 2001 from approximately $227,226 for the three
month period ended July 31, 2000. The decrease of approximately 106% resulted
primarily from the decrease in period revenues as compared to the same prior
year period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased approximately 19% to $771,754 from $955,483
for the three month period ended July 31, 2001. The decrease was primarily due
to the elimination of costs associated with operating prior lines of business as
well as a decrease in financing activities as compared to the prior period.
Interest Expense. Interest expenses increased to $76,379 for the three
month period ended July 31, 2001 from $44,424 for the three month period ended
July 31, 2000. Interest accrued is primarily related to the convertible
debentures.
Interest Expense. Convertible Debenture-Beneficial Conversion Feature. The
Company has issued convertible debt securities with a non-detachable conversion
feature that was "in the money" at the date of issue. The Company accounts for
such securities in accordance with Emerging Issues Task Force Topic D-98-5. The
Company has recorded the fair value of the beneficial conversion feature as
interest expense and an increase to Paid-in Capital in Excess of Par Value of
Stock. Interest expense of $506,021 for the three month period ended July 31,
2001, a increase from the interest expense of $0 for the three month period
ended July 31, 2000 was incurred under the Company's convertible
debenture-conversion feature. The increase resulted from the reduction in new
convertible debentures issued as compared to the corresponding period from the
prior year.
Net Earnings. Net losses increased to $1,357,070 for the three month period
ended July 31, 2001 from $771,594 for the three month period ended July 31,
2000. The increase in losses resulted primarily from a decrease in revenue
coupled with an increase in the interest expenses for the Company's convertible
debenture-beneficial conversion feature as well as the addition of fixed costs
associated with the delivery of the company's colocation service offering.
Nine month period ended July 31, 2001, compared to nine month period ended July
31, 2000.
Revenues. Sales decreased by approximately 32% to $2,175,720 for the nine
month period ended July 31, 2001 from $3,207,019 for the nine month period ended
July 31, 2000. The decrease was mainly as a result of an industry wide delay in
technology capital spending coupled with the cessation of the Northpoint
Communications DSL Service offering.
Cost of Sales. The cost of sales decreased by approximately 23% to
$2,084,389 in the nine month period ended July 31, 2001 from $2,689,935 in nine
month period ended July 31, 2000. The decrease in cost of sales is attributable
primarily to an overall reduction in revenues coupled with the sale of products
which have greater relative margins than past products.
Gross Profit. Gross profit decreased to approximately $91,331 for the nine
month period ended July 31, 2001 from approximately $517,084 for the nine month
period ended July 31, 2000. The decrease of approximately 82% resulted primarily
from the overall delay in technology spending and the resultant decrease in
gross revenues. In addition, management contributes the decrease to expenses
related to the development of the company's colocation offering, the expansion
of the PDA accessory product offering and financing activities related to the
convertible debentures.
27
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased approximately 6% to $2,626,640 from $2,784,039
for the nine month period ended July 31, 2001. The decrease was primarily due to
a reduction in support costs associated with expanding the PDA and co-location
product offerings, as well as a reduction in fees paid in connection with
financing activities.
Interest Expense. Interest expense increased to $169,703 for the nine month
period ended July 31, 2001 compared to $73,645 for the nine month period ended
July 31, 2000. Interest accrued primarily related to the convertible debentures.
Interest Expense. Convertible Debenture-Beneficial Conversion Feature. The
Company has issued convertible debt securities with a non-detachable conversion
feature that was "in the money" at the date of issue. The Company accounts for
such securities in accordance with Emerging Issues Task Force Topic D-98-5. The
Company has recorded the fair value of the beneficial conversion feature as
interest expense and an increase to Paid-in Capital in Excess of Par Value of
Stock. Interest expense of $1,317,438 for the nine month period ended July 31,
2001, a increase of 6% from the interest expense of $1,242,439 for the nine
month period ended July 31, 2000 was incurred under the Company's convertible
debenture-conversion feature. The increase resulted from the reduction in new
convertible debentures issued as compared to the corresponding period from the
prior year.
Net Earnings. Net losses increased to $3,750,228 for the nine month period
ended July 31, 2001 from $3,564,979 for the nine month period ended July 31,
2000. The increase in losses resulted primarily from the increase in the
interest expenses for the Company's convertible debenture-beneficial conversion
feature, tooling and selling costs associated with the expansion of the PDA
accessory line, and fixed operating costs associated with bringing the
collocation facility on-line.
Liquidity and Capital Resources.
Historically, IBIZ has had difficulty obtaining sufficient capital to fund
its operations. The Company has been unable to generate sufficient internal cash
flow to fund all of its obligations. The Company has spent substantial funds on
construction and installation of its co-location facility and expansion of its
sales and marketing efforts.
In the three months ended July 312001, the Company issued $540,000 of 8%
convertible notes. The notes are due and payable in the three months ended July
31, 2002, unless converted into common stock of the Company prior to that time.
Certain investors have orally agreed to fund approximately $300,000 through
additional convertible debentures. We believe this should satisfy our funding
requirements for approximately the next 12 months, although there can be no
assurance such funds will be adequate. In the event we do not receive additional
funds within the next three months, we may be required to curtail certain
operations until funds become available.
Management believes that its recent addition of Staples, EURPAC, TMX, and
DaisyTEK as distribution outlets for the company's PDA accessory offering as
well as ongoing additions to its server co-location facility should improve its
liquidity and cash flow. A continuing increase in orders from various PDA retail
and distribution outlets may require greater capital than is presently available
to the Company. The Company has entered into a purchase order and receivables
financing agreement established to insure available funding for anticipated
growth in PDA sales volumes.
28
The Company's server co-location facility was opened in September, 2000. If
the consumer demand that the Company anticipates for the server co-location
facility fails to continue to increase, the Company may need additional funding.
There is no assurance that the sales revenue currently received and high margins
experienced, as well as currently anticipated sales growth from both the PDA
accessory and the co-location facility will continue. Entry of additional
competitors with substantially greater resources than those of the Company could
put downward pressure on the anticipated margins.
29
PART II - Other Information
Item 1. Legal Proceedings
iBIZ has been assessed approximately $62,000 in penalties and interest by
the IRS in connection with payroll taxes due through the first quarter of 1999.
The Company has paid the taxes, interest, and some portion of the penalty, but
has requested an abatement of the remaining penalty imposed. The Company is
awaiting a final disposition by the IRS.
Item 2. Changes in Securities
(c) Recent Sales of Unregistered Securities
The securities described below represent equity securities of iBIZ sold by
iBIZ during the three month period ended July 31, 2001 that were not registered
under the Securities Act of 1933, as amended (the "Securities Act"), all of
which were issued by the Company pursuant to exemptions under the Securities
Act. Underwriters were involved in none of these transactions. In each case, the
securities were sold to accredited investors, as determined by an investor
questionnaire executed in conjunction with the respective subscription
agreements.
In the three months ended July 2001, the Company issued an aggregate of
$540,000 of 8% Convertible Notes (the "Notes"). The conversion price for the
Notes is the lesser of (i) 80% of the average of the three lowest closing bid
prices of the Common Stock on the Principal Market for the twenty-two (22)
trading days prior to the closing Date, or (ii) 80% of the average of the five
lowest closing bid prices of the Common Stock for the 60 trading days prior to
the Conversion Date, as defined in the Note. The maximum share of the Company
that any Subscriber may own after conversion at any given time is 4.99%, unless
the Subscriber gives 75 days prior notice. The Notes mature in the three months
ended July 2002, with interest only payments due quarterly. The Company also
issued warrants to purchase 3,000,000 shares of Common Stock. The warrants give
the holder the right to purchase common stock for the lower of $0.021 for
1,500,000 shares and $0.042 for 1,500,000 shares or the average of the lowest
three closing prices for the Common Stock for the ten trading days prior to
conversion, subject to certain equitable anti-dilution provisions. The warrants
are immediately exercisable.
iBIZ relied on either Regulation D, Rule 506 or Section 4(2) under the
Securities Act with respect to these transactions.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
30
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
None.
B. Reports on Form 8-K
None.
31
Pursuant to the requirements of Section 12 of the Securities Act of 1934,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned thereunto duly authorized.
Dated this 14th day of September, 2001
IBIZ TECHNOLOGY CORP.
By:/s/ KENNETH W. SCHILLING
Kenneth W. Schilling, President
By:/s/ TERRY S. RATLIFF
Terry S. Ratliff, Vice President,
Chief Financial Officer and
Secretary
32