UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL QUARTER ENDED JANUARY 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
iBIZ TECHNOLOGY CORP.
(Exact name of small business registrant as specified in its charter)
COMMISSION FILE NUMBER 000-027619
FLORIDA 86-0933890
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2238 West Lone Cactus Drive, #200, Phoenix, Arizona 85021
---------------------------------------------------------
(Address of principal executive offices)
(623) 492-9200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 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 |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
As of April 21, 2005, the registrant had 3,745,160,822shares of its $.001 par
value common stock outstanding.
Transitional Small Business Disclosure Format: YES |_| NO |X|
iBIZ TECHNOLOGY CORP.
INDEX TO
QUARTERLY REPORT ON FORM 10-QSB
FOR THE FISCAL QUARTER ENDED JANUARY 31, 2005
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of January 31, 2005 (Unaudited) .......F-1
Condensed Consolidated Statements of Loss for the Three Months Ended
January 31, 2005 and January 31, 2004 (Unaudited)...........................F-2
Condensed Consolidated Statement of Changes in Stockholders' Deficit for the
Three Months Ended January 31, 2005 (Unaudited).............................F-4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
January 31, 2005 and January 31, 2004 (Unaudited)..........................F-6
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)........F-8
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................3
ITEM 3. OUR CONTROLS AND PROCEDURES..................................................8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................8
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS..................9
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.............................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................10
ITEM 5. OTHER INFORMATION...........................................................10
ITEM 6. EXHIBITS....................................................................10
SIGNATURES...........................................................................11
2
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
January 31,
2005
------------
Current Assets:
Cash $ 6,954
Accounts receivable, net 14,350
Inventories, net 14,708
Prepaid expenses 25,416
------------
Total Current Assets 61,428
Property and equipment, net 40,648
------------
Total Assets $ 102,076
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 979,172
Accrued liabilities 1,139,831
Notes payable-related parties 50,000
Advances from officers 125,000
------------
Total Current Liabilities 2,294,003
------------
Commitments and Contingencies
Stockholders' Deficit:
Preferred stock, $.001 par value; 50,000,000 shares
authorized; none issued or outstanding --
Common stock, $.001 par value; 5,000,000,000 shares
authorized; issued and outstanding 3,681,505,719 3,681,505
Additional paid-in capital 32,855,010
Accumulated deficit (38,728,442)
------------
Total Stockholders' Deficit (2,191,927)
------------
Total Liabilities and Stockholders' Deficit $ 102,076
============
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
Three Months Three Months
Ended Ended
January 31, January 31,
2005 2004
------------ ------------
Revenues:
Net product sales $ 37,597 $ 152,216
Maintenance services -- 9,733
------------ ------------
Total revenues 37,597 161,949
------------ ------------
Cost of revenues:
Cost of product sales 48,458 113,038
Cost of maintenance services -- 8,707
------------ ------------
Total cost of revenues 48,458 121,745
------------ ------------
Gross income (loss) (10,861) 40,204
------------ ------------
Operating expenses:
Selling, general and administrative expenses,
excluding those items separately disclosed below 665,744 380,149
Research and development -- --
Acquired in process research and development -- 1,200,000
Consulting fees paid-in stock options -- 4,770,000
------------ ------------
Total operating expenses 665,744 6,350,149
------------ ------------
Loss from operations (676,605) (6,309,945)
------------ ------------
Non-operating income (expenses):
Miscellaneous income 394,906 64,728
Interest and miscellaneous expense (259,236) (102,280)
------------ ------------
Total non-operating income (expense), net 135,670 (37,552)
------------ ------------
Loss before provision from income taxes (540,935) (6,347,497)
Provision for income taxes -- --
------------ ------------
Net loss $ (540,935) $ (6,347,497)
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS (continued)
Three Months Three Months
Ended Ended
January 31, January 31,
2005 2004
Net loss per common share - basic and diluted $ (0.00) $ (0.00)
================== ==================
Weighted average number of common shares
outstanding - basic and diluted 3,455,265,164 1,405,453,312
================== ==================
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
Common Stock
Common Stock To Be Issued
-------------------------------- --------------------------------
Shares Amount Shares Amount
-------------- -------------- -------------- --------------
Balances as of October 31, 2004 3,030,370,376 $ 3,030,370 495,750 $ 19,830
Common stock issued for cash
in private placement 75,000,000 75,000 -- --
Common stock issued upon
exercise of options 75,000,000 75,000 -- --
Common stock issued for services received
and in settlement of liabilities 58,455,580 58,456 -- --
Common stock issued to employees
as bonuses and wages 114,873,363 114,873 -- --
Common stock issued upon conversion
of debentures and accrued interest 402,806,400 402,806 -- --
Cash payments to Synosphere, LLC
members in lieu of stock -- -- (495,750) (19,830)
Cancellation of note receivable (75,000,000) (75,000) -- --
Net loss -- -- -- --
-------------- -------------- -------------- --------------
Balance, January 31, 2005 3,681,505,719 $ 3,681,505 -- $ --
============== ============== ============== ==============
The accompanying notes are an integral
part of these consolidated financial statements.
F-4
Additional
Paid in Note Accumulated
Capital Receivable Deficit Total
- ------------ ------------ ------------ ------------
$ 32,888,872 $ (1,125,010) $(38,187,507) $ (3,373,445)
-- -- -- 75,000
218,000 -- -- 293,000
228,688 -- -- 287,144
229,747 -- -- 344,620
339,713 -- -- 742,519
-- -- -- (19,830)
(1,050,010) 1,125,010 -- --
-- -- (540,935) (540,935)
- ------------ ------------ ------------ ------------
$ 32,855,010 $ -- $(38,728,442) $ (2,191,927)
============ ============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Three Months
Ended Ended
January 31, January 31,
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss $ (540,935) $ (6,347,497)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment and
amortization of intellectual property rights 2,110 24,527
Provision for sales returns, rebates and
doubtful accounts 6,227 3,100
Acquired in process research and development -- 1,200,000
Common stock issued for services received 78,219 45,698
Common stock options issued for services received -- 4,770,000
Gains on settlements of debenture obligations (394,906) (62,728)
Loss on debt settlements 246,665 --
Gain on disposal of fixed asset -- (2,000)
Net changes in operating assets and liabilities:
Accounts receivable (20,577) 59,227
Inventories 19,692 (18,386)
Prepaid expenses 60,790 5,785
Accounts payable and accrued liabilities 202,450 (158,710)
Deposits 7,381 --
------------ ------------
Net cash used in operating activities (332,884) (480,984)
------------ ------------
Cash flows from investing activities:
Acquisition of Synosphere, LLC (19,830) --
Proceeds from the sale of fixed assets -- 2,000
------------ ------------
Net cash provided by (used in) investing activities (19,830) 2,000
------------ ------------
Cash flows from financing activities:
Bank overdraft (10,420) --
Proceeds from issuances of note payable -- 9,990
Proceeds from advances from officers 2,000 --
Proceeds from issuances of common stock 75,000 --
Proceeds from exercise of stock options 293,000 734,423
Principal payments on notes payable -- (4,920)
------------ ------------
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Three Months Three Months
Ended Ended
January 31, January 31,
2005 2004
------------ ------------
Net cash provided by financing activities $ 359,580 $ 739,493
------------ ------------
Net increase in cash 6,866 260,509
Cash at beginning of period 88 2,140
------------ ------------
Cash at end of period $ 6,954 $ 262,649
============ ============
Supplemental schedule of cash activities:
Interest paid in cash $ -- $ 9,987
Taxes paid in cash -- --
Supplemental schedule of non-cash investing and financing activities:
Debenture principal and accrued interest thereon
converted to common stock $ 1,137,425 $ 1,482,308
Issuance of common stock for officers and other
employees bonuses and wages 344,620 578,000
Issuance of common stock for services received
and in settlement of liabilities 287,144 293,251
Consulting fees paid with common stock options -- 4,770,000
The accompanying notes are an integral
part of these consolidated financial statements.
F-7
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS, ORGANIZATIONAL STRUCTURE AND PRINCIPLES OF
CONSOLIDATION
Concurrent with the February 2, 2005 deployment of its new
www.GoMoGear.com e-commerce website, iBIZ Technology Corp. (hereinafter,
"iBIZ") principally became an Internet-based retailer of a broad and
diversified offering of various consumer electronics with an emphasis on
products that are portable or mobile. Prior thereto, and since 1998, iBIZ
was a more narrowly-focused wholesaler and, to a lesser extent,
Internet-based retailer, through its www.ibizpda.com e-commerce website,
of various accessories primarily intended for use with Personal Digital
Assistants ("PDAs"). iBIZ continues to conduct substantially all of its
non-research and development related activities through its wholly-owned
subsidiary, iBIZ, Inc. (hereinafter, "iBIZ, Inc.").
As a result of its January 20, 2004 acquisition of Synosphere, LLC
(hereinafter, "Synosphere"), iBIZ subsequently engaged in significant
activities directed at, among other efforts, further developing certain of
the acquired technologies. iBIZ currently conducts substantially all of
its product research and development activities through Synosphere, as a
wholly-owned subsidiary.
Due to recent cash flow constraints, we vacated our Synosphere facility in
February 2005 and we ceased further research and development activities.
The employees of Synosphere consist only of its President and Vice
President.
iBIZ's other wholly-owned subsidiaries, Invnsys Technology Corporation and
Qhost, Inc. have been inactive since their respective operations were
discontinued effective October 31, 2001. iBIZ was incorporated in the
State of Florida in April 1994, although its operations have been
headquarted in the State of Arizona since November 1979.
These consolidated financial statements include the operations of iBIZ and
its wholly-owned subsidiaries (hereinafter collectively, the "Company").
All material intercompany transactions and balances have been eliminated
in consolidation.
2. SIGNIFICANT UNCERTAINTY REGARDING THE COMPANY'S ABILITY TO CONTINUE AS A
GOING CONCERN
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
has incurred substantial operating and net losses, as well as negative
operating cash flows, in recent fiscal years. As a result, the Company had
significant working capital and stockholders' deficits at January 31,
2005. Additionally, the Company has in recent years realized only limited
sales from its PDA accessories which management primarily attributes to
its continued inability to fund the marketing activities it believes are
necessary to develop broad market awareness and acceptance of the
Company's products. These factors, among others, indicate that the Company
may be unable to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
F-8
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SIGNIFICANT UNCERTAINTY REGARDING THE COMPANY'S ABILITY TO CONTINUE AS A
GOING CONCERN (Continued)
The Company's continuation as a going concern currently is dependent upon
it timely procuring significant external debt and/or equity financing to
fund its immediate and nearer-term operations, and subsequently realizing
operating cash flows from sales of its products sufficient to sustain its
longer-term operations and growth initiatives, including its desired
marketing and product research and development initiatives. See Note 9
regarding activity subsequent to January 31, 2005.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year-End
The Company's fiscal year-end is October 31st. References herein to a
fiscal year refer to the calendar year in which such fiscal year ends.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make certain estimates and assumptions that affect
the reported amounts and timing of revenue and expenses, the reported
amounts and classification of assets and liabilities, and disclosures of
contingent assets and liabilities. These estimates and assumptions are
based on the Company's historical results as well as management's future
expectations. The Company's actual results could vary materially from
management's estimates and assumptions.
Preparation of Interim Condensed Consolidated Financial Statements
These interim condensed consolidated financial statements for the periods
ended January 31, 2005 and 2004 have been prepared by the Company's
management, without audit, in accordance with accounting principles
generally accepted in the United States of America and pursuant to the
rules and regulations of the United States Securities and Exchange
Commission ("SEC"). In the opinion of management, these interim condensed
consolidated financial statements contain all adjustments (consisting of
only normal recurring adjustments, unless otherwise noted) necessary to
present fairly the Company's consolidated financial position, results of
operations and cash flows for the fiscal periods presented. Certain
information and note disclosures normally included in annual consolidated
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted in these interim consolidated financial statements pursuant to the
SEC's rules and regulations, although the Company's management believes
that the disclosures are adequate to make the information presented not
misleading. The consolidated financial position, results of operations and
cash flows for the interim periods disclosed herein are not necessarily
indicative of future financial results. These interim condensed
consolidated financial statements should be read in conjunction with the
annual consolidated financial statements and the notes thereto included in
the Company's most recent Annual Report on Form 10-KSB for the fiscal year
ended October 31, 2004.
F-9
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories are stated at the lower of cost (determined principally by
average cost) or market. The inventories are comprised of finished
products at January 31, 2005.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement
exists, title transfer has occurred, the price is fixed or readily
determinable, and collectibility is probable. Sales are recorded net of
sales discounts. The Company recognizes revenue in accordance with Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements", (SAB 101). Revenues are recorded under two categories:
Product Sales - When the goods are shipped and title passes to the
customer. The Company provides a reserve for sales returns based on its
history of returns as a percentage to sales.
The Company will periodically provide rebates on selected products for a
limited sale period, normally 7 days. They contract with a company to
process and track the rebates. The Company provides a reserve for
outstanding rebates based on its history of rebates submitted as a
percentage of applicable sales.
Gomogear.com - The Company acts as an agent or broker for the sales made
through their website www.gomogear.com It does not take title to the
products and has no risks or rewards of ownership from these products.
Accordingly, the Company will report all sales on a net basis.
Net Loss Per Share
Basic and diluted net loss per share has been computed by dividing net
loss by the weighted average number of common shares outstanding during
the fiscal year. Should the Company report net income in a future period,
diluted net income per share will be separately disclosed giving effect to
the potential dilution that could occur if the then outstanding stock
warrants were exercised into common shares.
Segment Reporting
The Company's chief operating decision makers consist of members of senior
management that work together to allocate resources to, and assess the
performance of, the Company's business. Senior management currently
manages the Company's business, assesses its performance, and allocates
its resources as a single operating segment. To date, the Company's
products and services have been principally marketed to customers residing
within the United States of America. Net revenues realized from customers
residing in other geographic markets were less than ten percent of
consolidated net revenues in the three months ending January 31, 2005 and
2004, respectively.
Accounting Standards Adopted or Pending Adoption
The Company's required fiscal 2004 adoptions of recently issued accounting
standards did not have any material impacts upon its consolidated
financial statements. Additionally, there are no recently issued
accounting standards with pending adoptions that the Company's management
currently anticipates will have any material impacts upon its consolidated
financial statements.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
Three Months
Ended
January 31,
2005
----------
Accrued wages $ 596,368
Accrued interest 22,200
Accrued bonuses 125,000
Accrued payroll and income taxes 213,108
Accrued dispute settlements 127,500
Accrued sales commissions 52,892
Accrued royalties 2,763
----------
Total accrued liabilities $1,139,831
==========
F-10
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. NOTES PAYABLE-RELATED PARTIES
During its fiscal 2004 fourth quarter, the Company received an aggregate
of $50,000 in cash via its issuance of two notes payable. These notes are
unsecured, accrue interest at a stated rate of 4.5% per annum and become
due and payable upon demand.
6. ADVANCES FROM OFFICERS
During its fiscal 2004 fourth quarter, the Company received an aggregate
of $123,000 in cash advances from its officers. An additional $2,000 was
received during the three months ended January 31, 2005. These advances
are unsecured, accrue interest at a stated rate of 4.5% per annum and
become due and payable upon demand.
7. STOCKHOLDERS' DEFICIT
Common Stock Issued for Cash in Private Placement
During November 2004, the Company issued an aggregate of 75,000,000 shares
of its common stock to one unrelated individual in exchange for $75,000 in
cash.
Common Stock Issued for Upon the Exercise of Options
During December 2004, the Company issued an aggregate of 75,000,000 shares
of its common stock to D. Scott Elliott upon the exercise of options. The
Company received cash in the amount of $293,000.
Common Stock Issued for Services Received and in Settlement of Liabilities
During November 2004, the Company issued an aggregate of 2,566,667 shares
of its common stock, valued at $7,700, to one unrelated individual in
settlement of $7,000 previously accrued. Accordingly, the Company recorded
a $700 loss on debt settlement during the three months ended January 31,
2005.
During December 2004, the Company issued an aggregate of 10,139,172 shares
of its common stock, valued at $50,695, to Greg Sichenzia, the Company's
securities counsel, for services received during the three month ended
January 31, 2005, in the amount of $15,000. The Company has an agreement
whereby its monthly legal services are satisfied through the issuance of
common stock at a 50% discount from market, as defined. The excess of the
fair market value of shares issued over the fees billed is recorded as a
loss on settlement of debt. Accordingly, the Company recorded a $35,695
loss on settlement of debt during the three months ended January 31, 2005.
During December 2004, the Company issued an aggregate of 45,749,741 shares
of its common stock valued at $228,749 to Steven Thrasher, the Company's
patent attorney. Of the amount issued, $56,885 was in settlement of
amounts previously accrued and $53,715 was for services received during
the three months ended January 31, 2005. Accordingly, the Company recorded
a $118,149 loss on debt settlement during the three months ended January
31, 2005.
F-11
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
Common Stock Issued to Employees for Bonuses and Wages
During November 2004, the Company issued an aggregate of 1,087,193 shares
of its common stock, valued at $3,262, to one employee in payment of a
$2,500 bonus earned during the three months ended January 31, 2005.
Accordingly, the Company recorded a $762 loss on debt settlement during
the three months ended January 31, 2005.
During November 2004, the Company issued an aggregate of 113,786,170
shares of its common stock, valued at $341,359, equally to Bryan Scott and
Ramon Perales, key employees of the Company's wholly-owned subsidiary
Synosphere, for contractual bonuses previously accrued in the amount of
$250,000. The Company amended its original agreement to allow the issuance
of common stock in lieu of bonuses. The shares are issued at a 50%
discount from market, as defined, and the excess of the fair market value
of shares issued over the accrued bonuses is recorded as a loss on
settlement of debt. Accordingly, the Company recorded a $91,359 loss on
settlement of debt in the three months ended January 31, 2005.
Common Stock Issued Upon Conversion of Debentures and Accrued Interest
During December 2004, the Company issued an aggregate of 2,806,400 shares
of its common stock, valued at $14,032, to the AJW entities, previous
holders of the Company's convertible debenture, for previously accrued
interest. The full balance of the accrued interest was $18,850,
accordingly the Company recorded a $4,818 gain on settlement of debenture
obligation during the three months ended January 31, 2005.
During December 2004, the Company reached an agreement with the remaining
debenture holders, KCM, LLC and Laurus Master Fund, Ltd. and converted the
outstanding principal balance of $863,675 and accrued interest of $254,900
into 400,000,000 shares of the Company's common stock. As a result of this
agreement, the Company recorded a $390,088 gain on settlement of debenture
obligation during the three months ended January 31, 2005.
Cash Payments to Synosphere, LLC Members in Lieu of Stock
During December 2004, the two remaining members of Synosphere, LLC,
elected to receive cash payments in lieu of shares of the Company's common
stock, as permitted in the addendum to the acquisition agreement dated
January 2004. As a result, the Company paid a total of $19,830 in cash to
the two unrelated individuals.
F-12
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INTEREST AND MISCELLANEOUS EXPENSE
Interest and miscellaneous expense consist of the following:
Three Months Three Months
Ended Ended
January 31, January 31,
2005 2004
------------ ------------
Loss on debt settlements $ 246,665 $ --
Interest expense 12,571 102,280
------------ ------------
Total interest and miscellaneous income $ 259,236 $ 102,280
============ ============
During the three months ended January 31, 2005, the Company paid certain
services and liabilities through the issuance of the Company's common
stock. The fair market value of the common stock issued was $254,165
greater than the amount of services and liabilities paid. As a result, the
Company recognized a corresponding loss.
9. SUBSEQUENT EVENTS
Additional stock issuances after January 31, 2005
8,752,540 shares of common stock were issued to Sichenzia Ross Friedman
Ference, the Company's securities counsel, for legal services rendered and
accrued during the three months ended January 31, 2005 with an aggregate
fair market value of $26,258. An additional 40,889,650 shares of common
stock were issued to Sichenzia Ross Friedman Ference for legal services
rendered after January 31, 2005 with an aggregate fair market value of
$99,428.
Operating Lease Commitments
On February 1, 2005, the Company signed a new lease for its existing
corporate facilities. The lease is for a term of one year and calls for
monthly rental payments of approximately $2,800 plus taxes.
During February 2005, the Company's wholly-owned subisidary Synosphere,
Inc., vacated its facility in Austin, Texas and terminated the operating
lease on the property.
On February 18, 2005, the Company closed a transaction pursuant to a
Subscription Agreement, dated as of February 18, 2005, with an accredited
investor pursuant to which the accredited investor lent an aggregate
principal amount of $200,000 to the Company in exchange for (i) 8%
promissory note in that aggregate principal amount, and (ii) warrants to
purchase shares of the Company's common stock equal to one warrant for
each share of its common stock which would be issued on the closing date
of the loan assuming the complete conversion of the promissory note.
Additional funding up to $500,000 has been committed, subject to the
filing of a registration agreement.
F-13
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS (CONTINUED)
During February, 2005, the Company obtained operating loans from two
employees, Bryan Scott and Ramon Perales of the Company's subsidiary
Synosphere, in the amount of $26,500 each. The loans call for interest to
accrue at the annual rate of 10% and are due in one lump sum payment April
2005. In connection with these loans, the Company granted both Bryan Scott
and Ramon Perales warrants to purchase up to 5,200 shares of the Company's
common stock, each, at the purchase price of $0.001 for ten years. The
Company also agreed to reimburse Bryan Scott and Ramon Perales up to
$2,500 in legal fees the employees incurred in the preparation of the
loans and warrants.
During April 2005, the Company obtained an operating loan from Mark
Perkins, the Company's Vice President, in the amount of $25,299. The loan
calls for interest to accrue at the annual rate of 10% and is due in one
lump sum payment May 15, 2005. In connection with this loan, the Company
granted Mr. Perkins warrants to purchase up to 5,200 shares of the
Company's common stock at the purchase price of $0.001 for ten years. The
Company also agreed to reimburse Mr. Perkins up to $2,500 in legal fees
incurred in the preparation of the loan and warrant.
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion includes certain forward-looking statements within the
meaning of the safe harbor protections of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Statements that include words such as "believe," "expect," "should,"
intend," "may," "anticipate," "likely," "contingent," "could," "may," or other
future-oriented statements, are forward-looking statements. Such forward-looking
statements include, but are not limited to, statements regarding our business
plans, strategies and objectives, and, in particular, statements referring to
our expectations regarding our ability to continue as a going concern, generate
increased market awareness of, and demand for, our current products, realize
profitability and positive cash flow, and timely obtain required financing.
These forward-looking statements involve risks and uncertainties that could
cause actual results to differ from anticipated results. The forward-looking
statements are based on our current expectations and what we believe are
reasonable assumptions given our knowledge of the markets; however, our actual
performance, results and achievements could differ materially from those
expressed in, or implied by, these forward-looking statements. Factors, within
and beyond our control, that could cause or contribute to such differences
include, among others, the following: those associated with our marketing of a
relatively new PDA accessories for consumers in an evolving marketplace,
consumer preferences, perceptions and receptiveness with respect to our PDA
accessories, our critical capital raising efforts in an uncertain and volatile
economical environment, our ability to maintain an existing relationships with
critical customers and vendors, including related licensing and marketing
arrangements, our cash-preservation and cost-containment efforts, our ability to
retain key management personnel, our relative inexperience with advertising, our
competition and the potential impact of technological advancements thereon, the
impact of changing economic, political, and geo-political environments on our
business, as well as those factors discussed elsewhere in this Form 10-QSB and
in "Item 1 - Our Business," "Item 6 - Our Management's Discussion and Analysis,"
particularly the discussion under "Risk Factors - Substantial Doubt as to our
Ability to Continue as a Going Concern" and elsewhere in our most recent Form
10-KSB for our fiscal year ended October 31, 2004, as amended, filed with the
United States Securities and Exchange Commission. Readers are urged to carefully
review and consider the various disclosures made by us in this report, in the
aforementioned Form 10-KSB, as amended, and those detailed from time to time in
our reports and filings with the United States Securities and Exchange
Commission that attempt to advise interested parties of the risks and factors
that are likely to affect our business.
Our fiscal year ends on October 31. References to a fiscal year refer to the
calendar year in which such fiscal year ends.
INTRODUCTION
Concurrent with the February 2, 2005 deployment of its new www.GoMoGear.com
e-commerce website, iBIZ Technology Corp. (hereinafter, "iBIZ") principally
became an Internet-based retailer of a broad and diversified offering of various
consumer electronics with an emphasis on products that are portable or mobile.
Prior thereto, and since 1998, iBIZ was a more narrowly-focused wholesaler and,
to a lesser extent, Internet-based retailer, through its www.ibizpda.com
e-commerce website, of various accessories primarily intended for use with
Personal Digital Assistants ("PDAs"). iBIZ continues to conduct substantially
all of its non-research and development related activities through its
wholly-owned subsidiary, iBIZ, Inc. (hereinafter, "iBIZ, Inc.").
As a result of its January 20, 2004 acquisition of Synosphere, LLC (hereinafter,
"Synosphere"), iBIZ subsequently engaged in significant activities directed at,
among other efforts, further developing certain of the acquired technologies.
iBIZ currently conducts substantially all of its product research and
development activities through Synosphere, as a wholly-owned subsidiary.
With the exception of the aforementioned warranty-related technical support
services, the only other services we performed during the periods reported
herein were pursuant to maintenance agreements associated with our technical
servicing and support of computer terminals and printers for financial
institutions, which business we no longer actively market or pursue.
OUR RECENT SIGNIFICANT DEVELOPMENTS
Business Evolution - On February 2, 2005, we deployed a second e-commerce
website at www.GoMoGear.com.. This website currently features approximately
5,000 consumer electronics products available to us on a non-exclusive basis
through a significant new vendor relationship with DBL Distributing, Inc., a
privately-held, wholesale distributor of consumer electronics based in
Scottsdale, Arizona. This site additionally offers, as does our www.ibizpda.com
website, approximately one-hundred and thirty accessories for PDAs that we
procure on a non-exclusive basis from a number of other vendors. Our product
offerings on www.GoMoGear.com currently range in complexity and price from
disposable batteries with a suggested retail price of $0.99 at the low end to
sophisticated color printers with a suggested retail price of $4,999.95 at the
high-end. Our current product offering on www.GoMoGear.com emphasizes,
consistent with our prior emphasis of PDA accessories, consumer electronics
products and related accessories that are portable or mobile, such as MP3
players, DVD players, digital cameras and GPS devices.
Acquisition of Synosphere - On January 20, 2004, we acquired all of the
outstanding membership interests in Synosphere, a Texas-based limited liability
company, pursuing the development of certain handheld computing technologies, in
exchange for 30.0 million shares of our common stock. As the technological
feasibility of each of the acquired technologies had yet to be fully established
as of the acquisition date, the aggregate $1.2 million purchase price, based on
the then prevailing market price of our common stock, was immediately reflected
within our results of operations for our fiscal 2004 first quarter ended January
31, 2004. Subsequent to the acquisition, we engaged in significant activities
directed at further developing certain of the acquired technologies. Due to
recent cash flow constraints, we were forced to vacate our Synosphere facility
in February 2005 and we ceased further research and development activities.
3
SIGNIFICANT UNCERTAINTY REGARDING THE COMPANY'S ABILITY TO CONTINUE AS A GOING
CONCERN
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has incurred
substantial operating and net losses, as well as negative operating cash flows,
in recent fiscal years. As a result, the Company had significant working capital
and stockholders' deficits at January 31, 2005. Additionally, the Company has in
recent years realized only limited sales from its PDA accessories which
management primarily attributes to its continued inability to fund the marketing
activities it believes are necessary to develop broad market awareness and
acceptance of the Company's products. These factors, among others, indicate that
the Company may be unable to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern currently is dependent upon it timely procuring significant external
debt and/or equity financing to fund its immediate and nearer-term operations,
and subsequently realizing operating cash flows from sales of its products
sufficient to sustain its longer-term operations and growth initiatives,
including its desired marketing and product research and development
initiatives.
OUR CRITICAL ACCOUNTING POLICIES
o Revenue Recognition for Product Sales and Related Allowances for Sales Returns
and Rebates. In accordance with SEC Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," we recognize a product sale, including
related shipping and handling income, and the cost of the sale, upon product
shipment provided that all material risks and rewards of ownership are
concurrently transferred from us to our customer, collection of the related
receivable by us is reasonably assured, and we are able to reliably estimate
appropriate allowances for probable sales returns and rebates based on our
relevant historical experience and future expectations. We unconditionally
accept product returns during the initial thirty days following the date of
sale. We periodically offer promotional rebates of a limited duration, typically
one week, on certain product sales, for which we outsource the processing and
tracking of related customer submissions. The periodic provisions made by us to
establish and maintain appropriate allowances for sales returns and rebates are
charged to our results of operations via offsets to our gross product sales.
Actual sales returns and rebates realized by us are charged against the related
allowances with any favorable or unfavorable experience, as compared to our
preceding estimates, having a corresponding impact on our results of operations.
Gomogear.com - The Company acts as an agent or broker for the sales made through
their website www.gomogear.com It does not take title to the products and has no
risks or rewards of ownership from these products. Accordingly, the Company will
report all sales on a net basis.
o Accounts Receivable and Related Allowance for Doubtful Accounts. In addition
to corresponding reductions made for the allowances for sales returns and
rebates, as discussed above, we further reduce our consolidated accounts
receivable by an appropriate allowance for accounts where doubt exists in our
opinion, based on known specifics or the passage of time, as to their ultimate
collectability. We routinely offer our customers payment terms that range from
30 to 60 days. We do not access interest on, nor do we require any securing
collateral of, past due customer balances. The periodic provisions made by us to
establish and maintain an appropriate allowance for doubtful accounts are
charged to our results of operations via increases to our selling, general and
administrative expenses. Actual collection experience realized by us on
previously designated doubtful accounts, including final determinations of
uncollectability, is charged against the allowance for doubtful accounts with
any favorable or unfavorable experience, as compared to our preceding estimates,
having a corresponding impact on our results of operations.
o Inventories. Our consolidated inventories, which consist solely of finished
products available for sale, are stated at the lower of average cost or market,
reduced by an appropriate allowance estimated by us for probable obsolescence.
We record an allowance for obsolescence based on our historical experience and
future expectations. The periodic provisions made by us to establish and
maintain an appropriate allowance for obsolescence are charged to our results of
operations via increases to our cost of goods sold. Actual disposition
experience realized by us on previously designated obsolete inventory is charged
against the allowance for obsolescence with any favorable or unfavorable
experience, as compared to our preceding estimates, having a corresponding
impact our its results of operations.
o Impairment of Long-Lived Assets. We evaluate, on at least a quarterly basis,
each of our long-lived assets for impairment by comparing our then estimate of
its related future cash flows, on an undiscounted basis, to its net book value.
If impairment is indicated, we reduce the net book value of the asset to an
amount equal to our estimate of related future cash flows, on an appropriately
discounted basis, with a corresponding impairment charge to our results of
operations.
o Convertible Debt Securities. We have periodically issued debentures that have
non-detachable conversion features. In those instances where the stated
conversion price reflects a discount from the then prevailing market price for
our common stock, we make, at the date of the debenture issuance, an estimate as
to the fair value of this beneficial conversion feature. The value assigned to
the beneficial conversion feature is then immediately recognized in our results
of operations via an interest/financing charge with a corresponding incremental
credit to additional paid-in capital.
o Non-Cash Equity Issuances. We periodically issue shares of our common stock in
exchange for, or in settlement of, services. Our management values the shares
issued in such transactions at either the then market price of our common stock,
after taking into consideration factors such as the volume of shares issued or
trading restrictions, or the value of the services received, whichever is more
readily determinable. We also issue options, at a discount from market, for
services. Our management values such options using Black Scholes.
4
Accounting Standards Adopted or Pending Adoption
The Company's required fiscal 2005 adoptions of recently issued accounting
standards did not have any material impact upon its consolidated financial
statements. Additionally, there are no recently issued accounting standards with
pending adoptions that the Company's management currently anticipates will have
any material impacts upon its consolidated financial statements.
OUR CONDENSED CONSOLIDATED STATEMENTS OF LOSS
Our consolidated total revenues for the three months ended January 31, 2005 were
$37,597, a decrease of $124,352 or 77% as compared to the $161,949 experienced
in the three months ended January 31, 2004. Our product sales constituted 100%
of total revenues in the three months ended January 31, 2005 as compared to 94%
of total revenues in the three months ended January 31, 2004. Our maintenance
services, which constituted the balance of total revenues in the three months
ended January 31, 2004 is a line of service we are no longer actively pursuing.
Our product sales for the three months ended January 31, 2005 were $37,597 as
compared to $152,216 for the three months ended January 31, 2004. This decrease
of $114,619 is the result of fewer sales to our customers plus lower sales
prices on the units sold. In the three months ended January 31, 2005 we sold
approximately 75% fewer Travel Kits at an average price that was approximately
15% less than what we sold in the three months ended January 31, 2004.
Similarly, in the three months ended January 31, 2005 we sold approximately 80%
and 90% fewer XELA Keyboards and KeySync Keyboards, respectively, at average
prices that were approximately 45% and 25% less than what we sold in the three
months ended January 31, 2004, respectively.
During the three months ended January 31, 2005 cost of product sales decreased
$64,580 or 57% to $48,458 as compared to $113,038 during the three months ended
January 31, 2004. Cost of product sales as a percentage of net product sales
increased 55 percentage points from 74% in the three months ended January 31,
2004 to 129% in the three months ended January 31, 2005. This increase of cost
of product sales as a percentage of net product sales is the result of our
decision to sell certain Travel Kits to a major retailer at below cost in order
to bolster relations and generate future sales. We also sold certain Pocket
Radios to our online customers at reduced gross profits or below cost in order
to reduce our inventory carrying levels. Cost of maintenance services, which
constituted the balance of the cost of revenues in the three months ended
January 31, 2004 is a line of service we are no longer actively pursuing.
Our consolidated total operating expenses decreased $5,684,405 or 88% to
$665,744 in the three months ended January 31, 2005 as compared to $6,350,149 in
the three months ended January 31, 2004.
Due to recent cash flow constraints, we were unable to fund our research and
development activities at Synosphere during the quarter ended January 31, 2005.
Subsequently, we vacated our Synosphere facility in February 2005 and we have
ceased further research and development activities until adequate funding is
obtained. We incurred no research and development activity in the quarter ended
January 31, 2004 since the acquisition of Synosphere took place at the end of
the quarter.
Our selling, general and administrative expenses increased $285,595 or 75% to
$665,744 in the three months ended January 31, 2005 as compared to $380,149 in
the three months ended January 31, 2004. This increase is mainly the result of
an increase of $210,839 in employee salaries, taxes and benefits from $94,060 in
the three months ended January 31, 2004 to $304,889 in the three months ended
January 31, 2005 due to the quarterly contractual bonus to Bryan Scott and Ramon
Perales of the Synosphere subsidiary in the aggregate of $125,000 and the
consolidation of the Synosphere subsidiary employees in the three months ended
January 31, 2005 that were not present in the three months ended January 31,
2004. We also experienced an increase of $89,228 of legal fees from $42,122 in
the three months ended January 31, 2004 to $131,350 in the three months ended
January 31, 2005 as the result of additional fees associated with lawsuit
settlements and securities issues. Offsetting these increases were decreases of
$25,900 and $28,465 in advertising and travel expenses, respectively, to $9,639
and $5,124 in the three months ended January 31, 2005. These decreases are the
result of our lack of cash flows to fund activities outside the normal course of
operations.
During the three months ended January 31, 2004 we acquired all of the
outstanding membership interests in Synosphere, LLC in exchange for 30.0 million
shares of our common stock. As the technological feasibility of each of the
acquired technologies had yet to be fully established as of the acquisition
date, the aggregate $1.2 million purchase price, based on the then prevailing
market price of our common stock, was immediately expensed.
During the three months ended January 31, 2004 we granted options to individuals
in exchange for consulting services. We valued the options granted using the
Black-Scholes stock option pricing model and recorded an aggregate of $4,770,000
associated expense.
Our consolidated loss from operations decreased $5,633,340 or 89% to $676,605
during the three months ended January 31, 2005 as compared to $6,309,945 in the
three months ended January 31, 2004. This is the result of the $1,200,000
acquired in process research and development and the $4,770,000 consulting fees
paid with stock options expenses in the three months ended January 31, 2004 that
were not repeated in the three months ended January 31, 2005.
Our consolidated miscellaneous income increased $330,178 or 510% to $394,906 in
the three months ended January 31, 2005 as compared to $64,728 in the three
months ended January 31, 2004. During both periods certain debenture holders
forgave interest and principal in connection with conversions into shares of our
common stock in order to settle and pay the debt in full.
5
Our consolidated interest and miscellaneous expense increased $156,956 or 153%
to $259,236 in the three months ended January 31, 2005 as compared to $102,280
in the three months ended January 31, 2004. During the three months ended
January 31, 2005 we paid certain services and liabilities through the issuance
of our common stock. The fair market value of the common stock issued was
$246,665 greater than the amount of the services and liabilities paid. As a
result, we recorded a corresponding loss. Offsetting the 100% increase in this
loss on debt settlements is the decrease of $89,709 or 88% of interest expense
to $12,571 in the three months ended January 31, 2005 as compared to $102,280 in
the three months ended January 31, 2004. During December 2004, we paid the
remaining debenture balances of $863,675 in full through the issuance of our
common stock and therefore our recognition of interest expense stopped at that
point. At January 31, 2004 we had an aggregate of $2,619,297 of outstanding
debenture balances that called for interest expense at 8% to 12%.
Primarily as a result of the foregoing, we incurred a net loss of $540,935
($0.00 per basic and diluted share) in the three months ended January 31, 2005
as compared to a net loss of $6,347,497 ($0.00 per basic and diluted share) in
the three months ended January 31, 2004.
Our future ability to achieve profitability in any given future fiscal period
remains highly contingent upon us realizing significantly increased product
sales sufficient to leverage our non-variable, likely to be recurring expenses.
For instance, our ability to achieve gross profits and positive gross margins in
any given future fiscal period remains highly contingent upon us being able to
leverage through significant incremental product sales the non-variable direct
labor and overhead components of our costs of goods sold. Similarly, our ability
to realize income from operations is further dependent upon our ability to
additionally leverage through significant incremental sales our SG&A expenses,
the majority of which currently are non-variable and recurring in nature. To the
extent that we incur other less frequent or non-recurring operating expenses, as
in fiscal 2004, we will require additional incremental product sales in order to
leverage them. Lastly, our ability to realize net income and net income per
common share remains highly contingent upon us being able to leverage through
incremental product sales any significant net non-operating expenses, such as
charges for the beneficial conversion features of any issued debentures and our
interest expense on any outstanding debt. Correspondingly, our ability to
realize significant incremental product sales in any given future fiscal period
remains highly contingent upon us obtaining significant equity infusions and/or
long-term debt financing sufficient to fund the increased and sustained campaign
of marketing and advertising activities we believe necessary to build broad
consumer awareness of, and demand for, our PDA accessories. Even if we were to
be successful in procuring such funding, there can be no assurance that we will
be successful in our marketing and advertising efforts, and that we will
subsequently realize the significant incremental product sales we require.
OUR CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
Overview
During the course of transitioning our Company over the last several years from
our discontinued computer service businesses to our current business of
marketing and distributing various accessories primarily intended for use with
PDAs, we have incurred substantial operating and net losses, as well as negative
operating cash flows. As of January 31, 2005, our working capital deficit was
$2,232,575 and our stockholders' deficit was $2,191,927. Such reflects a
decrease from January 31, 2004 when our working capital deficit was $3,795,901
and our stockholders' deficit was $4,091,965. We had a nominal unrestricted cash
balance of only $6,954 at January 31, 2005, as compared to $262,649 at January
31, 2004.
Our Consolidated Cash Flows
Our operating activities utilized $332,884 in cash during the three months ended
January 31, 2005, a decrease of $148,100, or 31%, from the $480,984 in cash
utilized during the three months ended January 31, 2004. Our decreased
utilization substantially reflects a $6,040,282, or 101%, net decrease in our
non-cash charges, net, being substantially offset by the $5,806,562 decrease in
our net loss. The most significant reductions in our non-cash charges were the
$1,200,000 and $4,770,000 in our non-cash acquisition of in-process research and
development and services rendered in exchange for common stock and options,
respectively. During the three months ended January 31, 2005 cash was used by a
$20,577 decrease in accounts receivable and provided by a $19,692 increase in
inventories, a $60,790 decrease in prepaid expenses and an $202,450 increase in
accounts payable.
Our investing activities consumed $19,830 during the three months ended January
31, 2005 to fund the acquisition of Synoshere. We received an aggregate of
$2,000 from the sale of fixed assets in the three months ended January 31, 2004.
Our financing activities provided $359,580 and $739,493 in cash during the three
months ended January 31, 2005 and 2004, respectively. During the three months
ended January 31, 2005 we paid a aggregate of $10,420 to cover a bank overdraft
at October 31, 2004 and we received $2,000 in advances from our officers,
$75,000 resulting from the sale of common stock through a private offering and
$293,000 from the exercise of stock options. During the three months ended
January 31, 2004 we received an aggregate of $9,990 from the issuance of a note
payable, $734,423 from the exercise of stock options and paid $4,920 principal
on notes payable.
As a result of the foregoing, our unrestricted cash increased by $6,866 to
$6,954 at January 31, 2005, as compared to $262,649 at January 31, 2004.
Our Planned Capital Expenditures
6
We had no significant planned capital expenditures, budgeted or otherwise, as of
January 31, 2005.
OUR OTHER MATTERS
Quantitative and Qualitative Disclosures About Market Risk
We currently are not materially exposed to financial market risks from changes
in short or long-term interest rates as substantially all of our financial
instruments, and most notably our remaining outstanding debentures, have fixed
rates of interest. However, should we be successful in procuring the significant
additional funding we currently seek and if such funding were to be
substantially in the form of debt with variable rates of interest, then our
exposure to these market risks would increase, possibly significantly.
We currently are not materially exposed to currency market risks as
substantially all of our business dealings, and most notably our purchases of
inventory from overseas vendors, are denominated in U.S. dollars. However,
should we in the future enter into significant contracts denominated in non-U.S.
dollar currencies, then our exposure to these currency market risks would
increase, possibly significantly.
We have not used, and currently do not contemplate using, any derivative
financial instruments.
Our Legal Contingencies
We as a company, including our subsidiary, are periodically involved in
litigation and administrative proceedings primarily arising in the normal course
of our business. In our opinion, our gross liability, if any, and without any
consideration given to the availability of indemnification or insurance
coverage, under any pending or existing incidental litigation or administrative
proceedings would not materially affect our financial position, results of
operations or cash flows over and beyond any acknowledged liability.
We remain liable to the U.S. Internal Revenue Service ("IRS") for approximately
$65,000 in unpaid payroll taxes, and subsequently assessed interest, for certain
periods through the first quarter of 1999. We have continued to accrue for this
liability in our consolidated financial statements. It is our intention to seek
a reduced settlement of this liability with the IRS if and when we have surplus
working capital allowing us to timely honor any such settlement.
SEC Order of Formal Investigation
The SEC has commenced a formal investigation into certain specific matters that
may constitute potential violations by the Company, and/or its officers,
directors, employees, and others, of the federal securities laws. The Company
and its officials are fully cooperating with the SEC during its formal
investigation. The Company will publicly disclose the specific nature of any
resulting SEC allegation(s) if and when they become known, subject to any SEC
mandated confidentiality and as permitted by applicable federal securities laws.
Recently Issued Accounting Standards With Pending Adoptions
There currently are no recently issued accounting standards with pending
adoptions that have any applicability to us.
7
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation ("Evaluation") of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule
15d-15(e) under the Securities Exchange Act of 1934, as of January 31, 2005 (the
"Evaluation Date"). In the course of the Evaluation, we identified significant
material weaknesses in our internal disclosure controls and procedures.
Farber & Hass LLP has advised our management that in connection with their audit
of our consolidated financial statements for the year ended October 31, 2004,
they noted that the Company does not have a documented system of internal
controls over the processing of information, the recording of transactions or
the reporting of the financial results. In addition, they noted deficiencies in
internal controls relating to: weaknesses in our financial reporting process as
a result of the limited segregation of critical duties, an absence of reviews
and approvals of transactions and accounting entries and a lack of accounting
knowledge and acumen evident in any executive of our company who has an
oversight of the financial accounting and reporting process.
Farber & Hass LLP has recommended that we engage the services of an accounting
firm to design and assist in the implementation of a system of internal controls
and hire a knowledgeable controller or chief accounting officer to provide an
internal control over the propriety of the accounting transactions and entries
and assist is in the reporting of our financial results.
Farber & Hass LLP has advised our management that each of these internal control
deficiencies constitute a material weakness as defined in Statement of Auditing
Standards No. 60. Certain of these internal control weaknesses also constitute
material weaknesses in our disclosure controls. In response, we hired an
independent accounting firm as a consultant to assist us in designing a system
of internal controls and procedures. The Chief Executive Officer and Chief
Financial Officer has concluded that as of the Evaluation Date our disclosure
controls and procedures were not effective to ensure that the information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 are recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Ttools, LLC vs. iBIZ Technology Corp.
On May 13, 2004, Ttools, LLC filed a complaint against iBiz in the Superior
Court of Rhode Island. The complaint alleges breach of contract, conversion, and
unjust enrichment. The plaintiff is seeking damages in the amount of $70,558,
plus interest and legal fees. Management believes that the case is without merit
and does not believe that the ultimate outcome will have a material impact on
the consolidated financial statements.
SEC Investigation
The United States Securities and Exchange Commission (hereinafter, "SEC")
currently is conducting a formal investigation into certain specific matters
that may constitute potential violations by us of the federal securities laws.
We believe that we have been fully cooperated with the SEC in its investigation
to date. We will publicly disclose the specific nature of any resulting SEC
allegations(s) if and when they become fully known, subject to any SEC mandated
confidentiality and as permitted by applicable federal securities laws.
With respect to the preceding SEC investigation, it should be noted that Kenneth
W. Schilling, the Company's Chairman, Chief Executive Officer and President,
remains the subject to a Cease and Desist Order from the SEC. The cease and
desist order constituted part of a negotiated settlement between Mr. Schilling
and the SEC that was formally entered into on February 28, 2001 pursuant to
which Mr. Schilling, without admitting or denying the SEC's allegations against
him, agreed to the entry of an Order enjoining him from violating Section 10(b)
of the Securities Exchange Act of 1934, as amended, and Rule 10-b5 thereunder,
and ordering him to pay a civil penalty of $20,000. In a related action, the
Company, without admitting or denying any of the SEC's findings, consented to a
cease-and-desist order enjoining it from committing or causing any violation or
any future violations of Section 10(b) of the Securities Exchange Act of 1934,
as amended, and Rule 10-b5 thereunder. The underlying SEC Complaint alleged that
Mr. Schilling provided false financial projections to a purported analyst for
research reports recommending the purchase of the Company's common stock. The
Complaint also stated that from February 1999 through June 1999, Mr. Schilling
placed seventeen press releases on the Company's corporate website which
contained direct hyperlinks to the analyst reports and, as late as February
2000, the Company maintained press releases on its corporate website which
referenced and contained hyperlinks to the analyst reports. The SEC further
alleged that in a February 19, 1999 press release, the Company characterized the
analyst as "independent" even though the Company, through its then investor
relations firm, had agreed to pay the analyst 200,000 shares of its common stock
for the report. The SEC found that Mr. Schilling had reviewed and approved the
press releases posted on the Company's corporate website. The SEC also alleged
that the false financial projections which appeared on the Internet fueled a
rise in both the price and the trading volume of the Company's common stock
8
Kenneth W. Schilling, our Chairman, Chief Executive Officer and President,
remains the subject to a Cease and Desist Order from the U.S.Securities and
Exchange Commission ("SEC"). The cease and desist order constituted part of a
negotiated settlement between Mr. Schilling and the SEC that was formally
entered into on February 28, 2001 pursuant to which Mr. Schilling, without
admitting or denying the SEC's allegations against him, agreed to the entry of
an Order enjoining him from violating Section 10(b) of the Securities Exchange
Act of 1934, as amended, and Rule 10-b5 thereunder, and ordering him to pay a
civil penalty of $20,000. In a related action, we, as a company, without
admitting or denying any of the SEC's findings, consented to a cease-and-desist
order enjoining us from committing or causing any violation or any future
violations of Section 10(b) of the Securities Exchange Act of 1934, as amended,
and Rule 10-b5 thereunder. The underlying SEC Complaint alleged that Mr.
Schilling provided false financial projections to a purported analyst for
research reports recommending the purchase of our stock. The Complaint also
stated that from February 1999 through June 1999, Mr. Schilling placed seventeen
press releases on our corporate website which contained direct hyperlinks to the
analyst reports and, as late as February 2000, we maintained press releases on
our corporate website which referenced and contained hyperlinks to the analyst
reports. The SEC further alleged that in a February 19, 1999 press release, we
characterized the analyst as "independent" even though we, through our then
investor relations firm, had agreed to pay the analyst 200,000 shares of our
common stock for the report. The SEC found that Mr. Schilling had reviewed and
approved the press releases posted on our corporate website. The SEC also
alleged that the false financial projections which appeared on the Internet
fueled a rise in both the price and the trading volume of our common stock
We remain liable to the U.S. Internal Revenue Service ("IRS") for approximately
$65,000 in unpaid payroll taxes, and subsequently assessed interest, for certain
periods through our fiscal 1999 first quarter. We continue to maintain an
accrual for this liability in our consolidated financial statements. It is our
intent to seek a reduced settlement of this liability with the IRS, if and when,
we have sufficient cash so as to enable us to honor any settlement. As of
January 31, 2005, the IRS had not yet assessed, nor have we accrued for, any
related penalties.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The securities described below represent securities of iBIZ sold by iBIZ during
the three month period ended January 31, 2005, that were not registered under
the Securities Act of 1933, as amended (the "Securities Act"). The below
offerings and sales were deemed to be exempt under Regulation D and Section 4(2)
of the Securities Act. No advertising or general solicitation was employed in
offering the securities. The offerings and sales were made to a limited number
of persons, all of whom were business associates of iBiz or executive officers
and/or directors of iBiz, and transfer was restricted by iBiz in accordance with
the requirements of the Securities Act.
PRIVATE PLACEMENTS OF COMMON STOCK AND WARRANTS FOR CASH
During November 2004, the Company issued an aggregate of 75,000,000 shares of
its common stock to one unrelated individual in exchange for $75,000 in cash.
During December 2004, the Company issued an aggregate of 75,000,000 shares of
its common stock to D. Scott Elliott upon the exercise of options. The Company
received cash in the amount of $293,000.
SALES OF DEBT AND WARRANTS FOR CASH
During the three months ended January 31, 2005 the Company did not engage in any
sales of debt instruments and warrants to purchase shares of the Company's
common stock.
OPTION GRANTS
During the three months ended January 31, 2005 the Company did not grant any
additional options.
ISSUANCES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS
During November 2004, the Company issued an aggregate of 2,566,667 shares of its
common stock, valued at $7,700, to one unrelated individual in settlement of
$7,000 previously accrued. Accordingly, the Company recorded a $700 loss on debt
settlement during the three months ended January 31, 2005.
During December 2004, the Company issued an aggregate of 10,139,172 shares of
its common stock, valued at $50,695, to Greg Sichenzia, the Company's securities
counsel, for services received during the three month ended January 31, 2005, in
the amount of $15,000. The Company has an agreement whereby its monthly legal
services are satisfied through the issuance of common stock at a 50% discount
from market, as defined. The excess of the fair market value of shares issued
over the fees billed is recorded as a loss on settlement of debt. Accordingly,
the Company recorded a $35,695 loss on settlement of debt during the three
months ended January 31, 2005.
During December 2004, the Company issued an aggregate of 45,749,741 shares of
its common stock valued at $228,749 to Steven Thrasher, the Company's patent
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attorney. Of the amount issued, $56,885 was in settlement of amounts previously
accrued and $53,715 was for services
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received during the three months ended January 31, 2005. Accordingly, the
Company recorded a $118,149 loss on debt settlement during the three months
ended January 31, 2005.
During December 2004, the Company issued an aggregate of 2,806,400 shares of its
common stock, valued at $14,032, to the AJW entities, previous holders of the
Company's convertible debenture, for previously accrued interest. The full
balance of the accrued interest was $18,850, accordingly, the Company recorded a
$4,818 gain on settlement of debenture obligation during the three months ended
January 31, 2005.
During December 2004, the Company reached an agreement with the remaining
debenture holders, KCM, LLC and Laurus Master Fund, Ltd. and converted the
outstanding principal balance of $863,675 and accrued interest of $254,900 into
400,000,000 shares of the Company's common stock. As a result of this agreement,
the Company recorded a $390,088 gain on settlement of debenture obligation
during the three months ended January 31, 2005.
COMMON STOCK ISSUED TO OFFICERS AND OTHER EMPLOYEES AS BONUSES
During November 2004, the Company issued an aggregate of 1,087,193 shares of its
common stock, valued at $3,262, to one employee in payment of a $2,500 bonus
earned during the three months ended January 31, 2005. Accordingly, the Company
recorded a $762 loss on debt settlement during the three months ended January
31, 2005.
During November 2004, the Company issued an aggregate of 113,786,170 shares of
its common stock, valued at $341,359, equally to Bryan Scott and Ramon Perales,
key employees of the Company's wholly-owned subsidiary Synosphere, for
contractual bonuses previously accrued in the amount of $250,000. The Company
amended its original agreement to allow the issuance of common stock in lieu of
bonuses. The shares are issued at a 50% discount form market, as defined, and
the excess of the fair market value of shares issued over the accrued bonuses is
recorded as a loss on settlement of debt. Accordingly, the Company recorded a
$91,359 loss on settlement of debt in the three months ended January 31, 2005.
The above offerings and sales were deemed to be exempt under Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were business associates of iBiz or
executive officers and/or directors of iBiz, and transfer was restricted by iBiz
in accordance with the requirements of the Securities Act.
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.
ITEM 6. EXHIBITS
(a) Exhibits:
31.1 Certification by Chief Executive Officer and Chief Financial Officer
pursuant to Sarbanes-Oxley Section 302, provided herewith.
32.1 Certification by Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S. C. Section 1350, provided herewith.
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SIGNATURES
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 25th DAY OF APRIL
iBIZ TECHNOLOGY CORP.
By: /s/ KENNETH W. SCHILLING
-------------------------------------
Kenneth W. Schilling, CEO, President,
and acting CFO (principal accounting
officer)
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