10QSB 1 ibiz_10q-013103.txt 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 JANUARY 31, 2003 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.) 2238 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 March 10, 2003 ----- ----------------------------- Common stock, $0.001 par value 185,235,832 TABLE OF CONTENTS ----------------- PART I. - FINANCIAL INFORMATION.............................................1 ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).....................................1 CONSOLIDATED BALANCE SHEET...........................................1 CONSOLIDATED STATEMENTS OF OPERATIONS................................2 CONSOLIDATED STATEMENTS OF CASH FLOWS................................3 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT)...................4 NOTES TO FINANCIAL STATEMENTS........................................7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................................19 PART II. - OTHER INFORMATION................................................22 ITEM 1. LEGAL PROCEEDINGS....................................................22 ITEM 2. CHANGES IN SECURITIES................................................22 ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................23 ITEM 5. OTHER INFORMATION....................................................23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................23 PART I ------ Item 1. Financial Information IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JANUARY 31, 2003 (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 135,190 Accounts receivable, net 29,845 Inventories 132,671 Prepaid expenses 36,000 ---------- TOTAL CURRENT ASSETS $ 333,706 PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 104,736 OTHER ASSETS Intellectual Properties Rights 200,000 Note receivable, officer $ 373,159 Less allowance for doubtful accounts 373,159 0 ---------- Deposits 2,500 --------- TOTAL OTHER ASSETS 202,500 ---------- TOTAL ASSETS $ 640,942 ========== LIABILITIES AND STOCKHOLDERS' (DEFICIT) CURRENT LIABILITIES Accounts payable $ 620,292 Note payable, Gammage and Burnham 30,000 Accrued wages and bonuses 556,513 Accrued interest 507,714 Other accrued expenses 102,012 Taxes payable 177,603 Deferred income 2,183 Convertible debentures, current portion 3,108,927 Note payable, factor 15,000 Note payable, other, current portion 6,120 ----------- TOTAL CURRENT LIABILITIES $ 5,126,364 LONG-TERM LIABILITIES Convertible debentures payable, long-term portion 850,000 Note payable, other, long-term portion 2,047 ----------- TOTAL LONG -TERM LIABILITIES 852,047 STOCKHOLDERS' ( DEFICIT) Preferred stock Authorized - 50,000,000 shares, par value $.001 per share Issued and outstanding -0- shares 3,500,000 shares reserved Common stock 0 Authorized - 450,000,000 shares, par value $.001 per share Issued and outstanding - 74,228,725 shares 74,228 Additional paid in capital 16,302,457 Accumulated deficit (21,714,154) ------------- TOTAL STOCKHOLDERS' (DEFICIT) (5,337,469) ------------- TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 640,942 ============= 1 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2003 AND 2002 (UNAUDITED)
2003 2002 ------------ ------------ SALES $ 75,310 $ 135,737 COST OF SALES 91,735 83,516 ------------ ------------ GROSS PROFIT (LOSS) (16,425) 52,221 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 441,229 449,278 ------------ ------------ OPERATING (LOSS) (457,654) (397,057) ------------ ------------ OTHER INCOME (EXPENSE) Cancellation of debt 0 42,031 Interest expense (82,352) (85,753) Interest expense - convertible debentures -beneficial conversion feature (837,998) (116,214) ------------ ------------ TOTAL OTHER INCOME (EXPENSE) (920,350) (159,936) ------------ ------------ (LOSS) FROM CONTINUING OPERATIONS (1,378,004) (556,993) DISCONTINUED OPERATIONS (Loss) from operations of discontinued business segments 0 (240,847) ------------ ------------ NET (LOSS) $(1,378,004) $ (797,840) ============ ============
2 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) FOR THE THREE MONTHS ENDED JANUARY 31, 2003 AND 2002 (UNAUDITED) 2003 2002 --------------- --------------- NET (LOSS) PER COMMON SHARE Basic and Diluted: Continuing operations $ (0.02) $ (0.05) Discontinued operations (0.00) (0.02) --------------- --------------- NET (LOSS) $ (0.02) $ (0.07) =============== =============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic and diluted 59,250,249 11,072,185 =============== =============== 3 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) FOR THE THREE MONTHS ENDED JANUARY 31, 2003 (UNAUDITED)
PREFERRED STOCK COMMON STOCK ADDITIONAL --------------------- ---------------------------- PAID IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL --------- ---------- ------------- ------------- ------------- ------------- ------------- BALANCE, NOVEMBER 1, 2002 0 $ 0 45,000,097 $ 45,000 $ 15,349,368 $(20,336,150) $ (4,941,782) CONVERSION OF DEBENTURES FOR COMMON STOCK: PRINCIPAL 0 0 17,943,270 17,943 40,738 0 58,681 ACCRUED INTEREST 0 0 505,930 506 1,364 0 1,870 INTEREST EXPENSE 0 0 279,428 279 489 0 768 FEES AND COSTS FOR ISSUANCE OF COMMON STOCK 0 0 0 0 (40,000) 0 (40,000) ISSUANCE OF COMMON STOCK FOR: CONSULTING FEES 0 0 8,500,000 8,500 90,500 0 99,000 LEGAL FEES 0 0 2,000,000 2,000 22,000 0 24,000 INTEREST EXPENSE - CONVERTIBLE DEBENTURES - BENEFICIAL CONVERSION FEATURE 0 0 0 0 837,998 0 837,998 NET (LOSS) FOR THE THREE MONTHS ENDED JANUARY 31, 2003 0 0 0 0 0 (1,378,004) (1,378,004) --------- ---------- ------------- ------------- ------------- ------------- ------------- BALANCE, JANUARY 31, 2003 0 $ 0 74,228,725 $ 74,228 $ 16,302,457 $(21,714,154) $ 5,337,469) ========= ========== ============= ============= ============= ============= =============
4 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JANUARY 31, 2003 AND 2002 (UNAUDITED)
2003 2002 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) from continuing operations $(1,378,004) $ (556,993) Adjustments to reconcile net (loss) to net cash (used) in operating activities of continuing operations: Loss from discontinued operations 0 (240,847) Write down of net assets held for sale 0 137,534 Depreciation 2,968 8,381 Amortization 2,500 0 Interest expense - convertible debentures -beneficial conversion feature 837,998 116,214 Common stock issued for expenses 123,768 89,816 Provision for uncollectible accounts 3,100 (10,154) Changes in operating assets and liabilities: Accounts receivable (21,078) 54,404 Inventories (37,070) 2,833 Prepaid expenses (18,000) (1,338) Accounts and notes payable 55,577 90,641 Accrued liabilities and taxes 206,635 250,438 Deferred income (3,733) (1,580) ------------ ------------ NET CASH (USED) IN OPERATING ACTIVITIES (225,339) (60,651) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets held for sale 0 48,635 ------------ ------------ NET CASH PROVIDED BY INVESTING ACTIVITIES 0 48,635 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of convertible debentures payable 360,000 201,236 Repayments on note payable, factor 0 (58,313) Repayment of note payable, other (419) 0 ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 359,581 142,923 ------------ ------------
5 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE THREE MONTHS ENDED JANUARY 31, 2003 AND 2002 (UNAUDITED)
2003 2002 --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS $134,242 $130,907 CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 948 6,981 --------- --------- CASH AND CASH EQUIVALENTS, AT END OF PERIOD $135,190 $137,888 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during year for: Interest $ 2,334 $ 22,486 ========= ========= Taxes $ 0 $ 0 ========= ========= NON-CASH INVESTING AND FINANCING ACTIVITIES Issuance of common stock for convertible debentures $ 58,681 $183,681 ========= ========= Issuance of common stock for fees, services and expenses $123,768 $ 94,666 ========= ========= Issuance of common stock for accounts payable and accrued liabilities $ 1,870 $401,935 ========= ========= Interest expense - convertible debentures-beneficial conversion feature $837,998 $116,214 ========= =========
6 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2003 (UNAUDITED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. IBIZ, Inc. designs, manufactures (through subcontractors), and distributes a line of accessories for the PDA and handheld computer market which are distributed through large retail chain stores and e-commerce sites. IBIZ Inc. also markets LCD monitors, OEM notebook computers, third party software, and general purpose financial application keyboards. Invnsys Technology Corporation (hereinafter referred to as Invnsys) is an inactive entity. Qhost, Inc. is an inactive entity. PRESENTATION ------------ The interim consolidated financial statements of the Company are condensed and do not include some of the information necessary to obtain a complete understanding of the financial data. Management believes that all adjustments necessary for a fair presentation of results have been included in the unaudited consolidated financial statements for the interim periods presented. Operating results for the three-month period ended January 31, 2003 are not necessarily indicative of the results that may be expected for the year ended October 31, 2003. Accordingly, your attention is directed to footnote disclosures found in the October 31, 2002 Annual Report and particularly to Note 1 which includes a summary of significant accounting policies. PRINCIPLES OF CONSOLIDATION --------------------------- The consolidated financial statements include the accounts of IBIZ Technology Corp. and its wholly owned subsidiaries - IBIZ, Inc., Invnsys Technology Corporation and Qhost, Inc. All material inter-company accounts and transactions have been eliminated. 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, 2003. 7 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2003 (UNAUDITED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. The Companies depreciates their 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 10 Years Office furniture and equipment 5 - 10 Years Vehicles 5 Years Molds 5 Years ACCOUNTING FOR CONVERTIBLE DEBT SECURITIES ------------------------------------------ The Company has issued convertible debt securities with non-detachable conversion features. The Company accounts for such securities in accordance with Emerging Issues Task Force Topic D-60. The Company has recorded the fair value of the beneficial conversion features as interest expense and an increase to Additional Paid in Capital. COMMON STOCK ISSUED FOR NON-CASH TRANSACTIONS --------------------------------------------- It is the Company's policy to value stock issued for non-cash transactions at the stock closing price at the date the transaction is finalized. REVENUE RECOGNITION ------------------- Product sales - When the goods are shipped and title passes to the customer. 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. SHIPPING AND HANDLING COSTS --------------------------- The Company's policy is to classify shipping and handling costs as part of cost of goods sold in the statement of operations. 8 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2003 (UNAUDITED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ADVERTISING ----------- All direct advertising costs are expenses as incurred. The Company charged to operations $4,481 and $12,621 in advertising costs for the three months ended January 31, 2003 and 2002, respectively. RESEARCH AND DEVELOPMENT ------------------------ The Company expenses research and development costs as incurred. 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 bases 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. CONCENTRATION OF RISK --------------------- INDUSTRY The Company's products are intended for the computer and technology-related industry. This industry experiences a high degree of obsolescence and changes in buying patterns. The Company must expend funds for research and development and identification of new products in order to stay competitive. 9 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2003 (UNAUDITED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FINANCIAL INSTRUMENTS --------------------- Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable. Concentrations of credit risk with respect to trade receivables are normally limited due to the large number of customers comprising the Company's customer base and their dispersion across different geographic areas. The Company routinely assesses the financial strength of its customers. The Company normally does not require a deposit to support large customer orders. At January 31, 2003, three customers accounted for 51% of net receivables. PURCHASES --------- The Company relies primarily on two suppliers for its products. The loss of either supplier could have a material impact on the Company's operations. Purchases for three months ended January 31, 2003 totaled 97% and 3% from each supplier. REVENUES -------- For the three months ended January 31, 2003, the Company had one customer which exceeded 10% of total revenues. PERVASIVENESS OF ESTIMATES -------------------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECENT ACCOUNTING PRONOUNCEMENTS -------------------------------- The FASB recently issued the following statements: FASB 144 - Accounting for the impairment or disposal of long-lived assets FASB 145 - Rescission of FASB statements 4, 44 and 64 and amendment of FASB 13 FASB 146 - Accounting for costs associated with exit or disposal activities FASB 147 - Acquisitions of certain financial institutions FASB 148 - Accounting for stock based compensation 10 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2003 (UNAUDITED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) -------------------------------------------- These FASB statements did not have a material impact on the Company's financial position and results of operations. GOING CONCERN ------------- These consolidated 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 following factors raise substantial doubt as to the Company's ability to continue as a going concern: A. Continued operating losses B. Negative working capital C. Lack of cash from continuing operations D. Delinquent payroll taxes E. Unpaid wages F. Decline in national economy Management's plans to eliminate the going concern situation include, but are not limited to: A. Paid some, but not all, delinquent payables and unpaid wages through the issuance of common stock. B. Increase sales through new line of products acquired on July 11, 2002. C. Requested abatement of delinquent payroll tax penalties. Should the Company be unsuccessful in its plans, the operations of the company could be discontinued. NOTE 2 PROPERTY AND EQUIPMENT Property and equipment and accumulated depreciation at January 31, 2003 consists of: Tooling $ 68,100 Machinery and equipment 37,641 Office furniture and equipment 81,027 Vehicle 39,141 Molds 50,000 ------------ 275,909 Less accumulated depreciation 171,173 ------------ Total property and equipment $ 104,736 ============ 11 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2003 (UNAUDITED) NOTE 3 INTELLECTUAL PROPERTY RIGHTS AND RELATED ROYALTY AGREEMENT On July 11, 2002, the Company purchased the Xela Case Keyboard and all related Intellectual Property and Resale Rights from ttools, LLC for $200,000. The Company is obligated to pay a royalty of $2.00 per unit sold on the first one million units. In accordance with FASB 142, the Company will amortize the Intellectual Property Rights over its estimated useful life of three years from the date the products are fully developed and ready for sale. Estimated Amortization Expense: ------------------------------- For the year ended October 31, 2003 $ 39,000 For the year ended October 31, 2004 66,667 For the year ended October 31, 2004 66,667 For the year ended October 31, 2005 27,666 ------------ Total Estimated Amortization Expense $ 200,000 ============ NOTE 4 NOTES RECEIVABLE, OFFICERS Invnsys Technology Corporation A note due from the president of the Company, which is payable on demand and accrues interest at 6%. Management believes the note is uncollectible since IBIZ no longer has collateral for the note. The Company elected to write-off the loan as uncollectible by establishing an allowance for doubtful collections for the total amount due on the note. Total amount of note receivable $ 373,159 Less allowance for doubtful collection (373,159) ------------ Note Receivable, Net $ 0 ============ NOTE 5 NOTE PAYABLE, GAMMAGE AND BURNHAM In July 2001, the Company issued a note to Gammage and Burnham, PLC for the payment of $80,000 of legal fees previously recorded in accounts payable. The note is secured by accounts receivable but the security is waived in favor of the note payable to Platinum Funding Corporation providing Gammage and Burnham PLC receives $2,500 each time that Invnsys draws against its factoring line. As of January 31, 2003, the Company is in default of their loan agreement. 12 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2003 (UNAUDITED) NOTE 6 TAXES PAYABLE Taxes payable consists of the following: Payroll taxes payable, current and deferred $ 158,575 California income tax payable 19,028 ----------- $ 177,603 =========== NOTE 7 TAX CARRYFORWARDS The Company has the following tax carryforwards at January 31, 2003: 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, 20l9 October 31, 2000 3,574,086 October 31, 2020 October 31, 2001 5,051,232 October 31, 2021 October 31, 2002 1,838,129 October 31, 2022 January 31, 2003 540,006 January 31, 2023 ------------- $ 12,174,226 ============= NOTE 8 CONVERTIBLE DEBENTURES See detail of terms and conditions in Form 10-KSB for the year ended October 31, 2002. CONVERTIBLE DEBENTURES ----------------------
CURRENT TOTAL PORTION ------------ ------------ UNSECURED DEBENTURES Lites Trading Company - $1,600,000 debenture $ 750,000 $ 0 $5,000,000 convertible debenture 1,681,737 1,681,737 Laurus Master Fund, Ltd. 328,190 328,190 Alpha Capital 240,000 140,000 ------------ ------------ Total Unsecured Debentures $ 2,999,927 $ 2,149,927 ============ ============
13 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2003 (UNAUDITED) NOTE 8 CONVERTIBLE DEBENTURES (CONTINUED)
CURRENT TOTAL PORTION ----------- ----------- SECURED DEBENTURES ------------------ AJW Entities $ 959,000 $ 959,000 ----------- ----------- Total Secured Debentures $ 959,000 $ 959,000 =========== =========== Total Debentures $ 3,958,927 $ 3,108,927 =========== =========== Maturities of convertible debentures are as follows: 2003 $ 3,108,927 2004 100,000 2005 750,000 ----------- Total $ 3,958,927 ===========
NOTE 9 NOTE PAYABLE, FACTOR On October 9, 2001, the Company entered into a two year factoring agreement with Platinum Funding Corporation. The terms of the agreement provide that Platinum Funding Corporation may purchase Invnsys' accounts receivable, without recourse, by advancing 70% of the sales invoice to Invnsys. The interest charged on the loan is based upon the period of time an invoice is unpaid and ranges from 3% to 15%. At October 31, 2002, the Company is no longer using the services of Platinum Funding Corporation and plans to settle the account balances for an estimated $15,000. NOTE 10 CANCELLATION OF DEBT 2003 2002 ---------- ---------- Settlement of prior year liabilities $ 0 $ 42,031 ---------- ---------- $ 0 $ 42,031 ========== ========== 14 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2003 (UNAUDITED) NOTE 11 COMMITMENTS AND CONTINGENCIES OPERATING LEASE --------------- The Company leases its office and warehouse facilities under the following terms and conditions: 1. Term - Three years from February 1, 2002 to January 31, 2005 2. Size of facility - 4,343 square feet 3. Base rent - Monthly rentals plus taxes and common area operating expenses 4. Base rental schedule - MONTHS RENT ---------- ---------- 1 - 12 $ 2,172 13 - 24 3,692 25 - 36 4,343 Future minimum lease payments excluding taxes and expenses are as follows: January 31, 2004 $ 44,304 January 31, 2005 52,116 ---------- $ 96,420 ========== Rent expense for the three months ended January 31, 2003 and 2002 was $10,442 and $27,829, respectively. PAYROLL TAXES ------------- The Company is negotiating a settlement regarding delinquent payroll taxes of approximately $65,000. Interest is being accrued on the outstanding balance. No amounts have been accrued for any penalties. WORKERS' COMPENSATION INSURANCE ------------------------------- Through February 2003, the Company did not carry general liability or workers' compensation coverage, nor was it self-insured. The Company accrues liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. As of February 28, 2003, there were no known liability claims. No amounts have been accrued for any penalties which may be assessed by the State of Arizona for non-compliance with the laws and regulations applicable to workers' compensation insurance. 15 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2003 (UNAUDITED) NOTE 11 COMMITMENTS AND CONTINGENCIES (CONTINUED) LEGAL ----- The Company is the defendant in one lawsuit for unpaid wages. Management has recorded a liability in the amount of $20,000. REAL ESTATE ----------- The Company has pledged all of its assets, except inventory, to guarantee a mortgage of $905,000 on the premises it previously occupied at 1919 W. Lone Cactus Drive, Phoenix, Arizona. Ken Schilling, the President of the Company has an ownership interest in the property at 1919 W. Lone Cactus Drive. OFFICERS' COMPENSATION ---------------------- As of January 31, 2003, the Company has employment agreements with two of its corporate officers. The 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 officer. 3. Options for 120,000 shares of common stock which will vest and be exercisable for a period of ten years. 4. Option price of $0.20 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. UNPAID OFFICERS' SALARIES ------------------------- On December 20, 2001, the Board of Directors authorized the issuance of convertible debentures to the officers of the Company as consideration for their unpaid wages. As of the date of this filing, the debentures have not been issued. NOTE 12 COMMON STOCK STOCK ISSUANCES --------------- 1. On November 26, 2002, the Company filed an S-B Registration Statement with the SEC and subsequently issued 9,000,000 shares of common stock to individuals for services rendered. 2. On December 6, 2002, the Company issued 1,500,000 shares of restricted common stock in consideration of services rendered. 16 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2003 (UNAUDITED) NOTE 12 COMMON STOCK (CONTINUED) STOCK PURCHASE WARRANTS ----------------------- As of January 31, 2003, the Company has issued the following common stock purchase warrants:
NUMBER EXERCISE DATE OF SHARES TERM PRICE ----------------- --------- ------- ------------------ December 28, 1999 20,000 5 years $ 9.40 January 10, 2000 28,125 5 years $ 9.90 March 27, 2000 61,500 5 years $ 14.50 - 20.50 May 17, 2000 12,500 3 years $ 10.20 - 50.00 August 30, 2000 3,413 5 years $ 9.37 August 30, 2000 25,000 3 years $ 5.00 August 30, 2000 25,000 3 years $ 7.50 August 30, 2000 3,636 3 years $ 10.00 September 3, 2000 10,900 3 years $ 10.00 September 27, 2000 27,875 3 years $ 9.00 October 31, 2000 50,000 2 years $ 4.76 December 20, 2000 40,000 5 years $ 2.28 December 20, 2000 15,000 5 years $ 2.28 April 26, 2001 150,000 5 years $ 1.23 June 22, 2001 150,000 5 years $ 0.42 June 27, 2001 150,000 5 years $ 0.21 August 21, 2001 52,500 5 years $ 0.39 October 9, 2001 35,000 5 years $ 0.26 January 15, 2002 16,667 5 years $ 105% of Closing January 15, 2002 50,000 5 years $ 105% of Closing January 30, 2002 500,000 5 years $ 0.06 April 23, 2002 300,000 5 years $ 0.06 August 15, 2002 105,000 5 years $ 0.05 October 9, 2002 75,000 5 years $ 0.05 November 5, 2002 30,000 5 years $ 0.05 January 31, 2003 1,500,000 5 years $ 0.01 ------------ 3,437,116 ============ 3,437,116 shares are exercisable at January 31, 2003.
17 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2003 (UNAUDITED) NOTE 13 PREFERRED STOCK On December 20, 2001, the Board of Directors authorized the issuance of 3,500,000 shares of preferred stock to three officers and one director in lieu of their annual bonus and retention incentives. The preferred stock will have a 10:1 conversion rate from common stock to preferred stock and will have a "super" voting right of 100:1. As of the date of this report the preferred stock had not been issued. The Company has not designated any other rights or dividend policy in regard to the Preferred Stock. NOTE 14 RELATED PARTY TRANSACTION On February 1, 2002, the Company transferred $249,918 of net assets held for sale in full payment of delinquent rent and property taxes in the amount of $78,376 on property previously rented by the Company. Ken Schilling, the President of the Company has an ownership interest in this property. NOTE 15 SUBSEQUENT EVENTS On February 24, 2003, the Articles of Incorporation were amended to increase the number of authorized shares of common stock from 450,000,000 shares to 5,000,000,000 shares. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------- CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. In consultation with our Board of Directors, we have identified seven accounting principles that we believe are key to an understanding of our financial statements. These important accounting policies require management's most difficult, subjective judgments. (1) ACCOUNTS RECEIVABLE Accounts receivable are reported at the customer's outstanding balances less any allowance for doubtful accounts. (2) ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for doubtful accounts on accounts receivables is charged to income in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. (3) INVENTORIES Inventories are stated at the lower of cost (determined principally by average cost) or market. (4) ACCOUNTING FOR CONVERTIBLE DEBT SECURITIES The Company has issued convertible debt securities with non-detachable conversion features. The Company has recorded the fair value of the beneficial conversion features as interest expense and an increase to Additional Paid in Capital. (5) REVENUE RECOGNITION Product Sales - when the goods are shipped and title passes to the customer. 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. (6) GOING CONCERN As shown in the accompanying financial statements, the Company has incurred significant losses, has negative working capital and needs additional capital to finance its operations. These factors create uncertainty about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The Company also intends to finance its operations through sales of its securities as well as entering into loans and other types of financing arrangements such as convertible debenture. (7) CONSULTING AGREEMENTS The Company issued common stock for payment of consulting services. The cost of the consulting services was determined by multiplying the common shares issued by the market price of the shares at the inception date of the agreement. 19 RESULTS OF OPERATIONS The three months ended January 31, 2003 compared to the three months ended January 31, 2002. REVENUES. Sales from continuing operations decreased by approximately 45% to $75,310 in the three months ended January 31, 2003 from $135,737 in the three months ended January 31, 2002. The decrease was mainly a result of the focus by management on raising financing for IBIZ, Inc., a transition to a new line of industry unique products and the overall slow down in the national economic conditions. COST OF SALES. The cost of sales of $91,735 in the three months ended January 31, 2003 increased from $83,516 for the three months ended January 31, 2002. This increase of 10% is a result of higher product costs and increases in employee salaries. GROSS PROFIT. Gross profit as a percentage of sales was a negative 22% in the three months ended January 31, 2003 as compared to a positive 38% for the three months ended January 31, 2002. The decrease in gross profit resulted from reductions in sales, higher product costs and increases in employee salaries. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased approximately 2% to $441,229 in the three months ended January 31, 2003 from $449,278 in the three months ended January 31, 2002. The minimal decrease in expenses resulted from reductions in overall expenses. INTEREST EXPENSE. Interest expense decreased 4% to $82,352 in the three months ended January 31, 2003 from $85,753 in the three months ended January 31, 2002. The minimal decrease in interest is a result of lower interest rate convertible debentures being converted and new higher interest rate convertible debentures being issued. INTEREST EXPENSE - CONVERTIBLE DEBENTURES-BENEFICIAL CONVERSION FEATURE. The Company has issued convertible debt securities with a non-detachable convertible feature that were "in-the-money" at the date of issuance. . The Company has recorded the fair value of the beneficial conversion feature as interest expense and an increase in paid-in-capital. Interest expense on the convertible debentures was $837,998 and $116,214 for three months ended January 31, 2003 and 2002, respectively. NET LOSS FROM CONTINUING OPERATIONS. Net loss from continuing operations increased 147% to $1,378,004 for the three months ended January 31, 2003 from a net loss of $556,993 for the three months ended January 31, 2002. The increase in net loss was primarily the result of the reduction in sales, higher product costs, increases in employee salaries and the increase in beneficial conversion interest. DISCONTINUED OPERATIONS. Loss from discontinued operations was $240,847 for three months ended January 31, 2002 as a result of management's election to discontinue non-profitable segments of the Company's operations and to focus on profitable business units as of October 31, 2001. The Company completed the discontinuance at October 31, 2002 and incurred no further expenses from that date. LIQUIDITY. Net cash (used) by operating activities for the three months ended January 31, 2003 was $225,339 compared to $60,651 (used) by operating activities for the three months ended January 31, 2002. The $164,688 change was primarily due to: a. Increase in accounts receivable resulting from the Company's major customer paying on approximately 60 day terms instead of the agreed upon terms of 45 days. b. Increase in inventories resulting from the purchase of new product line for shipment in the second quarter of this fiscal year c. Increase in prepaid expenses resulting from the purchase of packaging to accompany the new product line d. Decrease in accounts and notes payable and accrued liabilities and taxes e. Increase in net loss after adjustments for non-cash activities. The Company plans to remedy the deficiency of operating cash flows by increasing income from its new product line. Our investing activities for the three months ended January 31, 2003 provided no cash, as compared to $48,635 which was provided in the three months ended January 31, 2002. The primary change was that the Company received cash from the sale of assets for during the three months ended January 31, 2002 and had no investing activities in the three months ended January 31, 2003. 20 Our financing activities for the three months ended January 31, 2003 provided cash of $359,581 compared to $142,923, for the three months ended January 31, 2002. The primary change was that the Company obtained $360,000 of new debenture financing for the three months ended January 31, 2003 compared to $201,236 for the three months ended January 31, 2002. The Company also repaid $58,313 on its note payable, factor during the three months ended January 31, 2002 and $0 during the three months ended January 31, 2003. Capital Resources Working capital is summarized and compared as follows: January 31, 2003 January 31, 2002 ---------------- ---------------- Current assets $ 333,706 $ 656,677 Current liabilities 5,126,364 3,807,888 ---------------- ---------------- Working capital (deficit) $ (4,792,658) $ (3,151,211) ================ ================ The increase in the deficit in working capital was primarily due to the net loss sustained from operations, liquidation of net assets held for sale and the increase in the convertible debentures, current portion. At January 31, 2003, stockholders' deficit was $5,337,469 as compared to a stockholders' deficit of $4,941,782 at October 31, 2002. The $395,687 change in stockholders' deficit was accounted for as follows: Increase in Stockholders' Equity Issuance of common stock $ 29,228 Conversion of convertible debentures, net of costs 115,091 Interest expense - convertible debentures - beneficial conversion feature 837,998 Decreases in stockholders' equity net loss (1,378,004) --------------- Net Change $ (395,687) =============== The Company currently has no material commitments for capital expenditures. The Company has $3,108,927 and $850,000 of debt payments related to convertible debentures due within the next year and next two to five years, respectively. ITEM 3. CONTROLS AND PROCEDURES As of January 31, 2003, an evaluation was performed by our Chief Executive Officer and Acting Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, Our Chief Executive Officer and Acting Chief Accounting Officer, concluded that our disclosure controls and procedures were effective as of January 31, 2003. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to January 31, 2003. 21 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 securities of iBIZ sold by iBIZ during the nine month period ended July 31, 2002, 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 not involved these transactions. PRIVATE PLACEMENTS OF COMMON STOCK AND WARRANTS FOR CASH None. SALES OF DEBT AND WARRANTS FOR CASH To obtain funding for our ongoing operations, we entered into a Securities Purchase Agreement with three accredited investors on January 31, 2003 for the sale of (i) $500,000 in convertible debentures and (ii) warrants to buy 2,500,000 shares of our common stock. This registration statement covers the resale of the common stock underlying these securities. The investors are obligated to provide us with the funds as follows: - $300,000 was disbursed on January 31, 2003 - $100,000 will be disbursed within ten days of filing this prospectus with the Securities and Exchange Commission - $100,000 will be disbursed within ten days of the effectiveness of this prospectus. The debentures bear interest at 12%, mature one year from the date of issuance, and are convertible into our common stock, at the investors' option, at the lower of (i) $0.01 or (ii) 50% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including the conversion date. The full principal amount of the convertible debentures are due upon default under the terms of the convertible debentures. The warrants are exercisable until seven years from the date of issuance at an exercise price of $0.01 per share. OPTION GRANTS None. ISSUANCES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS None. 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. 22 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 AND REPORTS ON FORM 8-K (a) Exhibits. Exhibit Number Description -------------- ----------- 99.1 Certification of the Chief Executive Officer and Chief Financial Officer of iBiz Technologies Corp. Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None. 23 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 March 2003 IBIZ TECHNOLOGY CORP. By: /s/ KENNETH W. SCHILLING ------------------------------------------- Kenneth W. Schilling, President, and acting principal accounting officer By: /s/ MARK H. PERKINS ------------------------------------------- Mark H. Perkins, Executive Vice President 24 CERTIFICATION I, Kenneth Schilling, CEO and Acting CFO, certify that: 1. I have reviewed this annual report on Form 10-QSB of IBIZ Technology Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 14, 2003 /S/ KENNETH SCHILLING -------------------------- CEO AND ACTING ACTING CFO 25