================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(AMENDMENT NO. 1)
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
For the transition period from __________ to __________
Commission File Number 0-27721
EBIZ ENTERPRISES, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 84-1075269
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
15695 North 83rd Way
Scottsdale, Arizona 85260
(Address of principal executive offices)
(480) 778-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the issuer's common equity outstanding as of
January 31, 2001 was 33,352,167 shares of common stock, par value $.001.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
================================================================================
EBIZ ENTERPRISES, INC.
INDEX TO FORM 10-QSB/A
FOR THE QUARTER ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements................................................ 3
Consolidated Balance Sheets
December 31, 2000 (unaudited) and June 30, 2000................. 3
Consolidated Statements of Operations
For the Three and Six Months Ended December 31, 2000
(unaudited) and 1999 (unaudited)................................ 4
Consolidated Statements of Cash Flows
For the Six Months Ended December 31, 2000 (unaudited)
and 1999 (unaudited)............................................ 5
Notes to the Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 14
PART II
OTHER INFORMATION
Item 1. Legal Proceedings................................................... 20
Item 2. Changes in Securities and Use of Proceeds........................... 20
Item 6. Exhibits and Reports on Form 8-K.................................... 21
SIGNATURES.................................................................. 21
2
PART I
FINANCIAL INFORMATION
EBIZ ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 (UNAUDITED) AND JUNE 30, 2000
December 31, June 30,
2000 2000
------------ ------------
ASSETS (Unaudited)
(Restated)
Current Assets:
Cash $ 287,059 $ 50,997
Restricted cash (Note 3) 1,782,381 --
Accounts receivable, net of allowance for doubtful accounts
of $325,039 and $75,988 at December 31, 2000 and
June 30, 2000, respectively 1,127,914 585,846
Inventory, net 1,532,301 747,545
Prepaid expenses and other current assets 31,988 28,158
------------ ------------
Total current assets 4,761,643 1,412,546
Furniture and Equipment, net 1,661,531 532,896
Deferred Loan Fees, net 91,761 131,079
Restricted cash (Note 2) 2,100,528 4,504,164
partnerAxis Intangible Assets, net 3,034,670 --
Goodwill, net 19,813,194 629,162
------------ ------------
Total assets $ 31,463,327 $ 7,209,847
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 4,390,238 $ 1,880,822
Accrued expenses 3,036,615 1,367,135
Line of credit 230,000 250,000
Secured convertible note 1,000,000 --
Notes payable 320,525 71,928
------------ ------------
Total current liabilities 8,977,378 3,569,885
------------ ------------
Convertible Debenture, net 6,216,095 4,503,579
------------ ------------
Total liabilities 15,193,473 8,073,464
------------ ------------
Commitments and Contingencies
Redeemable common stock: 240,000 shares outstanding 1,200,000 1,200,000
------------ ------------
Stockholders' Equity (Deficit):
Convertible preferred stock; $.001 par value;
5,000,000 shares authorized; 7,590 shares issued
and outstanding at December 31, 2000 and June 30, 2000,
liquidation $100 value per share 366,737 366,737
Common stock; $.001 par value; 70,000,000 shares authorized;
12,564,566 and 8,497,566 shares issued and outstanding at
December 31, 2000 and June 30, 2000, respectively 22,424 8,498
Additional paid-in capital 34,426,154 9,808,580
Accumulated deficit (19,745,461) (12,247,432)
------------ ------------
Total stockholders' equity (deficit) 15,069,854 (2,063,617)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 31,463,327 $ 7,209,847
============ ============
The accompanying notes are an integral part
of these consolidated financial statements
3
EBIZ ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
(Restated) (Restated)
NET REVENUES $ 3,159,651 $ 2,264,949 $ 5,589,458 $ 7,903,577
COST OF SALES 2,521,636 2,112,100 4,583,544 7,458,705
RESTRUCTURING EXPENSE -INVENTORY -- 125,430 -- 125,430
------------ ------------ ------------ ------------
GROSS PROFIT 638,015 27,419 1,005,914 319,442
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 2,385,294 1,475,431 3,514,744 2,712,409
DEPRECIATION AND AMORTIZATION 1,599,059 51,087 1,768,202 91,715
PROVISIONS FOR DOUBTFUL ACCOUNTS 55,779 156,497 117,493 188,427
RESTRUCTURING EXPENSE -- 26,500 -- 26,500
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (3,402,117) (1,682,096) (4,394,525) (2,699,609)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
INTEREST EXPENSE (2,024,710) (877,394) (3,203,828) (1,330,722)
INTEREST & OTHER INCOME 69,843 63,927 138,274 85,183
------------ ------------ ------------ ------------
TOTAL OTHER (1,954,867) (813,467) (3,065,554) (1,245,539)
------------ ------------ ------------ ------------
NET LOSS (5,356,984) (2,495,563) (7,460,079) (3,945,148)
DIVIDENDS ON PREFERRED STOCK 18,975 27,238 37,950 54,476
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (5,375,959) $ (2,522,801) $ (7,498,029) $ (3,999,624)
============ ============ ============ ============
LOSS PER COMMON SHARE:
BASIC AND DILUTED $ (0.25) $ (0.34) $ (0.49) $ (0.54)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
BASIC AND DILUTED 21,640,150 7,370,500 15,368,505 7,341,703
============ ============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements
4
EBIZ ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31,
----------------------------
2000 1999
----------- -----------
(Unaudited)
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,460,079) $(3,945,148)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 1,768,202 91,715
Stock exchanged for services 54,923 54,000
Warrants issued to convertible Debenture holder 1,075,623 199,185
Interest costs of Beneficial Conversion Feature 1,153,910 831,066
Amortization of discount and loan fees 575,847 132,376
Changes in assets and liabilities:
Accounts receivable (353,104) 907,709
Inventory (280,003) 773,396
Prepaid expenses and other current assets (55,511) (20,454)
Accounts payable 290,252 46,779
Accrued expenses 102,187 (233,583)
----------- -----------
Net cash used in operating activities (3,127,753) (1,162,959)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(net of effect of business acquisitions):
Cash from Business acquisition 128,355 --
Purchase of furniture, fixtures and equipment (865,795) (51,868)
----------- -----------
Net cash used in investing activities (737,440) (51,868)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit, net (20,000) (225,000)
Borrowings under secured convertible note 500,000 --
Borrowings under notes payable -- 488,000
Principal repayments of notes payable -- (973,356)
Borrowings under convertible debenture, net -- 6,903,391
Transfer from/(to) restricted cash non-current, net 2,403,636 (5,000,000)
Transfer from/(to) restricted cash, net (1,782,381) --
Sale of stock, net of expenses 3,000,000 (10,646)
----------- -----------
Net cash provided by financing activities 4,101,255 1,182,389
----------- -----------
Net increase in cash 236,062 43,928
Cash, beginning of period 50,997 76,366
----------- -----------
Cash, end of period $ 287,059 $ 43,928
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 6,990 $ 95,504
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND OPERATING ACTIVITIES:
Issuance of common stock for services $ -- $ 179,651
Dividends accrued on preferred stock $ 37,950 $ --
Issuance of warrants to convertible Debenture holder $ 125,166 $ --
Conversion of debt and related interest to common stock $ 64,205 $ --
Issuance of common stock for furniture, equipment & intangible assets $ 3,400,000 $ --
The accompanying notes are an integral part
of these consolidated financial statements
5
EBIZ ENTERPRISES, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDING DECEMBER 31, 2000 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company has directed its primary strategy to manufacturing and
distributing computer servers utilizing the Linux operating system for the
business environment. Management believes the demand for the Linux-based
products and services represents a rapidly growing business opportunity.
Management believes the completion of the LinuxMall.com, Inc. ("LINUXMALL")
merger (see Note 5) has created additional opportunities and that the investment
by Caldera Systems, Inc. ("CALDERA") (see Note 3) and the investment by The
Canopy Group, Inc. ("CANOPY") (see Note 2 and Note 4) evidence the Company's
ability to obtain additional financing. The merger with Jones Business Systems,
Inc. ("JBSI") (see Note 6) is also expected to create additional opportunities
for financing. The Company was successful in acquiring additional capital
investments from Canopy in January 2001. In addition to pursuing additional
investors the Company continues to undertake cost control measures in its
operations. The merger with JBSi is expected to create opportunities to
eliminate duplicative and redundant costs.
The Company has been advised by its independent public accountants that, if
the Company has not successfully obtained additional financing prior to the
completion of their audit of the Company's consolidated financial statements for
the year ended June 30, 2001, their auditor's report on those financial
statements will be modified.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the instructions to Form
10-QSB/A. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles ("GAAP") for complete
financial statements. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary for a fair presentation of
the results for the interim periods presented have been made. The results for
the three and six month periods ending December 31, 2000 may not necessarily be
indicative of the results for the entire fiscal year. These consolidated
financial statements should be read in conjunction with the Company's Form
10-KSB/A for the year ended June 30, 2000.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or net
realizable value. Reserves of $325,329 and $75,988 at December 31, 2000 and June
30, 2000, respectively, are established against Company-owned inventory for
excess, slow-moving and obsolete items and for items where the net realizable
value is less than cost.
6
Inventory consists of the following:
Dec. 31, June 30,
2000 2000
---------- ----------
Components $ 830,001 $ 578,649
Work-in-process 5,574 8,008
Finished goods 696,726 160,888
---------- ----------
$1,532,301 $ 747,545
========== ==========
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in accordance with
Statement of Position No. 98-1, ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. Capitalization of software development
costs begins when the preliminary project stage is completed and management
authorizes and commits to funding the computer software project and it is
probable that the project will be completed and the software will be used to
perform the function intended. Upgrades and enhancements that result in
additional functionality are capitalized as incurred. The Company periodically
reviews the carrying value of software development costs. Impairments, if any,
will be recognized when the asset is not expected to provide any future service
potential to the Company. Amortization of capitalized software development costs
begins when all substantial testing is complete, and the computer software is
ready for its intended use. Software development costs are amortized using the
straight-line method with a useful life of five years, which represents the
remaining estimated economic life of the computer software.
ACCOUNTS PAYABLE
Included in accounts payable is approximately $333,000 and $169,000 of bank
overdrafts at December 31, 2000 and June 30, 2000, respectively.
STRATEGIC ALLIANCE
The Company entered into an "exclusive marketing alliance" with
UserFriendly on September 20, 2000 for a period of 12 months. Under the terms of
the agreement, UserFriendly provides advertising services on its Web site and a
direct link to Ebiz's Web site, TheLinuxStore.com, where all purchase
transactions are made by customers. Under the terms of the agreement, Ebiz is to
pay UserFriendly a fixed monthly advertising fee and a percentage of the gross
margin recorded by Ebiz for sales to customers coming through the direct
connection between the Web sites. These payments will be recorded as advertising
and commission expenses, respectively. No revenue generating transactions or
advertising had occurred under the terms of the agreement as of December 31,
2000.
RESTATEMENT
The Company has restated its financial statements for the three- and
six-month periods ending December 31, 2000 and 1999. The restatement relates to
the recording of a beneficial conversion feature of the Debenture issued on
7
August 25, 1999 (see Note 2) and the additional issuance costs related to
subsequent amendments that were made to the Debenture. The effect of the
restatement did not have an impact on cash flow of the Company. However, it will
result in a non-cash charge recorded as additional interest expense.
A beneficial conversion feature was incurred when the Company issued the
Debenture with a non-detachable conversion feature allowing the holder to
convert at a price less than the current fair market value of the Company's
stock. The Company's stock is highly volatile as a result of low volumes of
trades and large spread in bid and ask prices quoted by market makers. As a
result of the volatility, the Company believes that an average of closing trade
prices over a short period prior to issuance of the Debenture is more
representative of fair market value. The Company's interpretation of the fair
market value of its common stock on the date of the issuance of the Debenture
was different than the position taken by the Securities and Exchange Commission
("SEC") during a recent review. The Company has chosen to accept the SEC's
interpretation and restate its financial statements.
The effect on net loss attributable to common stockholders for the three
months ending December 31, 2000 and 1999 was an increase of $571,451 and
$594,532, respectively. The effect on net loss per common share, basic and
diluted, for the three months ending December 31, 2000 and 1999 was an increase
of $0.03 and $0.08, respectively. The effect on net loss attributable to common
stockholders for the six months ending December 31, 2000 and 1999 was an
increase of $1,211,707 and $831,066, respectively. The effect on net loss per
common share, basic and diluted, for the six months ending December 31, 2000 and
1999 was an increase of $0.08 and $0.11, respectively. The Company previously
reported a net loss attributable to common stockholders of $4.8 million and $1.9
million or $0.22 and $0.26 net loss per common share, basic and diluted for the
three-month periods ended December 31, 2000 and 1999, respectively, and $6.3
million and $3.2 million or $0.41 and $0.43 net loss per common share, basic and
diluted, for the six-month periods ended December 31, 2000 and 1999
respectively.
(2) CONVERTIBLE DEBENTURE
In August, 1999 the Company completed a private placement of a $7.1 million
convertible debt facility (the "DEBENTURE"). In conjunction with the Debenture,
the Company issued warrants to acquire 245,000 shares of common stock at a
market-based exercise price as defined by the Debenture agreement. The warrants
were originally exercisable for the purchase of shares of common stock as
follows: 60,000 at $7.4723 per share, 60,000 at $8.6219 per share and 125,000 at
$6.3227 per share. The fair value of these warrants, as calculated by using the
Black-Scholes pricing model, was estimated to be approximately $796,000, using
the following weighted average assumptions: stock price of $7.625, risk free
interest rate of 5.63%, expected life of two years, a volatility factor of 80%
and a dividend yield of 0%, and is recorded as a debt discount in the
accompanying consolidated financial statements. Additional issuance costs of
approximately $197,000 were paid and recorded as deferred loan fees in the
accompanying consolidated financial statements. Discounts and deferred loan fees
are amortized using the straight-line method, which approximates the effective
interest method, as additional interest expense over the term of the loan.
8
The Company received an initial infusion of $2.1 million as a result of
issuance of the Debenture, which was utilized to repay outstanding debt at June
30, 1999 and to provide working capital. The remaining $5.0 million was
deposited with a bank to collateralize a letter of credit issued as security for
the Debenture.
The Debenture is convertible, at the holder's option, into shares of the
Company's common stock over an 18 month period at approximately $394,000 per
month. The Company's ability to reduce the cash collateral and to have these
amounts available for working capital is contingent upon the holder converting
the Debenture or the Company's ability to pay down the Debenture with cash from
other sources. If the holder, at its discretion, converts the Debenture, the
Company could draw approximately $.70 for each $1 of Debenture principal
converted to fund operations. This ratio has been modified (see Note 5). The
unconverted balance, if any, of the Debenture and the unconverted accrued
interest is due February 24, 2002.
The per share conversion price was initially equal to the lesser of (a)
$7.4953 or (b) the average of the three lowest closing bid prices of the
Company's common stock for the 15 consecutive trading days ending on the trading
day immediately preceding submission of a notice to convert by the holder. In
the event the closing bid price of the Company's common stock is less than
$7.4953 at any time during the five trading days preceding a due date, the
Company has the right to redeem for cash the monthly conversion amount of the
Debenture at premiums ranging from 105% to 108%.
The Debenture required that the related shares of the Company's common
stock issuable upon conversion of the Debenture be registered under the
Securities Act of 1933 and the regulations of the SEC before the holder could
begin to convert the Debenture to common stock. The necessary registration was
initiated by the Company in October 1999 and became effective in February 2000.
As of September 30, 2000, the holder had accrued the rights to convert
approximately $5.5 million of the principal of the Debenture into shares of the
Company's common stock.
The Company recorded a beneficial conversion feature of approximately $3.6
million related to the issuance of the Debenture. The beneficial conversion
feature was based on the difference between the closing trade price and the
conversion price on the date of issuance on the portion of the Debenture that
was convertible, net of the proceeds allocated to the warrants. For the portion
of the Debenture not convertible upon issuance, the holder accrues the right to
convert over a period of 18 months.
In February 2000, the Debenture was amended to reduce the conversion price
on accrued principal of $2,761,108 and interest of $140,203 to equal the lesser
of (a) $3.84 or (b) the average of the three lowest closing bid prices of the
Company's common stock for the 15 consecutive trading days ending on the trading
day immediately preceding submission of a notice to convert by the holder. In
March 2000, the Debenture was amended to change the formula on the variable
conversion price from the three lowest closing bid prices to the three lowest
trading prices in the 15 consecutive trading days ending on the trading day
immediately preceding submission of a notice to convert by the holder. In
connection with the amendments to the Debenture, the Company recorded additional
deferred loan fees of approximately $140,000, which will be amortized over the
remaining term of the Debenture that the holder accrues the right to convert.
9
In July 2000, the Debenture was amended to reduce the conversion price of
$264,087 of principal to the lesser of (a) $1.00 or (b) the average of the three
lowest trade prices of the Company's common stock for the 15 consecutive trading
days ending on the trading day immediately preceding submission of a notice to
convert by the holder. In connection with the amendment to the Debenture, the
Company recorded additional deferred loan fees of approximately $170,000, which
will be amortized over the remaining term of the Debenture that the holder
accrues the right to convert.
In connection with the February 2000 amendment, $500,000 of the cash
collateral was released by the holder. In connection with the July 2000
amendment, an additional $250,000 of cash collateral was released by the holder.
Also, in conjunction with the July 2000 release of funds, the Company
issued warrants to acquire 125,000 shares of common stock at $2.00 per share.
The fair value of these warrants, as calculated by using the Black-Scholes
pricing model, was estimated to be approximately $125,000, using the following
weighted average assumptions: stock price of $1.56, exercise price of $2.00,
risk free rate of 6.48%, expected life of five years, a volatility factor of 80%
and a dividend yield of 0%, and is recorded as financing costs in the
accompanying consolidated financial statements. The remaining net cash
collateral is reflected as other restricted cash in the accompanying
consolidated financial statements.
On October 19, 2000, the Debenture holder and the Company agreed to
additional modifications of the Debenture. The Company agreed to convert
$2,083,500 principal amount of the Debenture in exchange for 2.5 million shares
of the Company's common stock. The Debenture holder agreed to reduce the
collateral requirements under the Debenture by a total of $2,083,500
immediately, and by up to an additional $416,500, in two $208,250 increments
provided November and December net revenues equal or exceeded certain projected
levels. Upon reduction of the collateral requirements, the outstanding Debenture
balance/letter of credit requirement ratio is to be reset and all further
reductions of Debenture principal will reduce the letter of credit requirement
by the amount of such ratio. The Company also agreed to reduce the per share
conversion ratio of the Debenture to the lesser of (a) $1.00 or (b) the amount
equal to the average of the lowest three trade prices of the Company's common
stock for the 15 consecutive trading days ending on the day preceding the date
of submission of a conversion notice, for an additional $416,500 principal
amount of the Debenture and to re-price the exercise price of an existing
outstanding warrant to purchase 245,000 shares to $4.00 per share. The warrant
was originally exercisable at $6.3227 per share for 125,000 shares, $7.4723 per
share for 60,000 shares and $8.6219 per share for 60,000 shares. The fair market
value of the re-priced warrants, as calculated by the Black-Scholes pricing
model, was estimated to be approximately $55,000, using the following weighted
average assumptions: stock price of $0.88, exercise price of $4.00, risk free
interest rate of 6.48%, expected life of 3.5 years, a volatility factor of 80%
and a dividend yield of 0%. In connection with the re-pricing of the warrants,
the Company recorded additional deferred loan fees of approximately $55,000,
which will be amortized as interest expense over the remaining term of the
Debenture.
10
In connection with the modification of the Debenture, the Company issued
warrants to purchase 850,000 shares of its common stock at $1.00 per share and
500,000 shares at $1.10 per share to Canopy. In consideration for issuance of
the warrants, Canopy purchased the 2.5 million shares issued upon conversion of
the Debenture from the Debenture holder. The fair value of these warrants, as
calculated by the Black-Scholes pricing model, was estimated to be approximately
$740,000, using the following weighted average assumptions: stock price of
$0.84, risk free interest rate of 6.48%, expected life of five years, a
volatitlity factor of 80% and a dividend yield of 0%. In connection with the
issuance of the warrants, the Company recorded a charge to interest expense of
approximately $740,000.
Interest payable to the holder has been accrued monthly since September
1999 with approximately $150,000 paid in cash, as required by the terms of the
Debenture, prior to the registration process. During February 2000,
approximately $140,500 of interest was converted into 36,546 shares of common
stock. An additional $8,200 of interest converted into 4,799 shares of common
stock during March through June 2000. The fair value of the Company's common
stock ranged from $6.90 to $1.92 on the dates of the interest conversions during
the period from February to June 2000. The Company recorded a beneficial
conversion feature on the conversion of interest for the period of February
through June of 2000 of approximately $86,000. Additionally, during February
through June 2000, approximately $429,000 of principal was converted to 222,683
shares. No conversions were made during July and August 2000. During September
2000, approximately $60,900 of principal and $3,293 of interest was converted
into 63,563 and 3,437 shares of common stock, respectively. The fair value of
the Company's common stock ranged from $1.06 to $2.13 on the dates of the
interest conversion in September 2000. The Company recorded a beneficial
conversion feature on the conversion of interest of approximately $2,000, which
is reflected as additional interest expense during the three months ending
September 30, 2000. As of December 31, 2000 the remaining balance of accrued
interest payable was approximately $505,000.
Subsequent to December 31, 2000, the Company did not have the required
amount of reserved common shares available under the Debenture, and as a result,
the portion of the Debenture that is redeemable in cash by the holder has been
classified as current in the accompanying consolidated balance sheet.
(3) PURCHASE AND INVESTMENT WITH CALDERA SYSTEMS, INC.
On September 15, 2000, the Company entered into a Purchase and Sale
Agreement with Caldera for the acquisition of all of the intellectual property,
technology and certain specified assets related to Caldera's proprietary
marketing distribution concept known as Electronic Linux Marketplace. The
Company will further develop the business concept in a wholly owned subsidiary,
partnerAxis, Inc. ("PARTNERAXIS"). The Company issued 4,000,000 shares of its
common stock to Caldera as its initial payment for the assets. The stock issued
was valued at $1.60 per share, the average closing price for September 11, 2000
through September 15, 2000. Of the $6.4 million total, $3,360,811 has been
recorded as partnerAxis intangible assets, $3 million as restricted cash and
$39,189 as furniture and equipment in the accompanying consolidated financial
statements. The Company has engaged a third party to determine the purchase
11
price allocation of the intangible assets acquired. The intangible assets are
anticipated to be amortized over a useful life of 2 to 3 years. Up to 4,000,000
additional shares of common stock were issuable to Caldera based on the earnings
performance of partnerAxis, as defined in the Purchase and Sale Agreement,
during the period of December 15, 2000 through December 15, 2001. The exact
number of additional shares to be issued is not determinable at this time.
The Purchase and Sale Agreement with Caldera also provided for $3 million
of cash to the Company which was received for 3 of the 4 million shares issued
in the transaction. These funds are restricted for use in developing and
implementing the partnerAxis business plan and are included in restricted cash
in the accompanying consolidated balance sheet.
The Company has reached an agreement in principle with Caldera as reflected
in a term sheet dated January 24, 2001 regarding modification of the Purchase
and Sale Agreement entered into on September 15, 2000. As part of the Purchase
and Sale Agreement, $3 million in proceeds from the sale to Caldera of 3 million
shares of common stock of the Company were to be used in developing the business
plan of partnerAxis. Caldera and the Company have agreed to modify the Purchase
and Sale Agreement with regard to the balance of the $3 million proceeds which
now total $2.1 million. Per the term sheet, $1 million would be immediately
deposited with an independent escrow agent and the remaining $1.1 million must
be deposited with the escrow agent no later than June 30, 2001 (the "ESCROW
FUNDS"). Prior to this date, the Company may use those funds for purposes other
than developing the business plan of partnerAxis, and the Company has, in fact,
used $1.1 million of the Escrow Funds for other purposes. Should the Company
fail to deposit the $1.1 million with the escrow agent by June 30, 2001, the
Company is required to issue to Caldera a warrant to purchase 1 million shares
of common stock of the Company at the price per share and on terms and
conditions as set forth in the warrant. Additional terms include payment of a 5%
royalty on revenues derived from partnerAxis in lieu of issuance of additional
shares based on earnings performance. Final documents for the modification
should be completed and executed in the near future.
(4) SECURED CONVERTIBLE PROMISSORY NOTE
On August 22, 2000, the Company issued a Secured Convertible Promissory
Note to Canopy in the amount of $500,000 in exchange for cash. The note bears
interest at the annual compounded rate of 10% per annum and is convertible into
shares of common stock at $1.00 per share at the holder's discretion. The
maturity date of the note was September 22, 2000. The fair market value of the
Company's stock was $1.26 on the date of issuance. A beneficial conversion
feature of $130,000 has been recorded as interest expense.
The note was amended December 31, 2000 and combined with a $500,000 Secured
Convertible Promissory Note dated July 10, 2000 from LinuxMall to Canopy plus
all accrued interest (the "AMENDED NOTE"). The Amended Note was issued for a
total principal amount of $1,041,781 and is due June 30, 2001. If the Amended
Note is not timely paid it is convertible into shares of common stock at a per
share conversion price equal to the lesser of 50% of the average closing price
of the stock for the five day period prior to conversion or $0.75 per share. In
addition, warrants to purchase 1,230,769 shares of the Company's common stock at
$0.375 per share were issued to Canopy. The fair value of these warrants, as
calculated by using the Black-Scholes pricing model, was estimated to be
approximately $215,000, using the following weighted average assumptions: stock
12
price of $0.375, exercise price of $0.375, risk free rate of 6.48%, expected
life of two years, a volatility factor of 80% and a dividend yield of 0%, and is
recorded as interest expense.
(5) ACQUISITION OF LINUXMALL.COM , INC.
On October 5, 2000, the Company completed the acquisition of LinuxMall by
the merger of LinuxMall into a newly formed wholly owned subsidiary of the
Company. Under the terms of the final transaction, the Company paid $14.7
million for the acquisition comprised of 7.4 million shares of the Company's
common stock valued at $9.6 million, options to purchase 0.9 million shares of
the Company's common stock valued at $0.9 million, warrants for 4.6 million
shares of the Company's common stock valued at $4.1 million and related
transaction costs totaling $0.1 million. The fair value of all shares to be
issued to acquire LinuxMall equals approximately $9.6 million or $1.30 per
share. In addition, the Company assumed $5.7 million in net liabilities for
total consideration of $20.5 million. Approximately 2.5 million shares will be
issued in January 2001 upon conversion of the remaining outstanding preferred
convertible debentures. The amendments to the original purchase agreement were
not significant, except for a change in the conversion ratio on October 3, 2000,
which reduced the ratio from 2.2 to 1 for all shares to a ratio of 2.0 to 1 for
preferred stock and 1.8 to 1 for common stock, which triggered a new measurement
date for the purchase price determination. The transaction will be accounted for
under the purchase method of accounting in accordance with APB 16. The Company
engaged a third party to determine the purchase price allocation of the
intangible assets acquired. The allocation of the total purchase price is as
follows:
Period of
Amortization
Amount In Years
------------ ------------
ALLOCATION:
Current assets $ 722,071
Other non-current assets 461,163
Current liabilities (4,387,921)
Long-term debt (2,526,270)
------------
Assembled workforce 330,000 3
Technology 1,310,000 3
Customer List 770,000 2
Trademarks 4,210,000 5
Goodwill 13,845,771 5
------------
$ 14,734,814
============
The liabilities assumed were comprised of convertible debt, trade accounts
payable and accrued expenses.
13
(6) SUBSEQUENT EVENTS
On January 4, 2001, the Company completed the acquisition of JBSI by the
merger of JBSI into a newly formed wholly owned subsidiary of the Company. Under
the terms of the final transaction, the Company paid $7.8 million for the
acquisition comprised of 8.3 million shares of the Company's common stock valued
at $6.0 million and options for 3.7 million shares of the Company's common stock
valued at $1.7 million. The fair value of all shares to be issued to acquire
JBSI equals approximately $6.0 million or $0.7312 per share. The fair value of
the options was calculated by using the Black-Scholes pricing model using the
following weighted average assumptions: stock price of $0.7312, exercise price
of $0.40, risk free rate of 6.48%, expected life of two years, a volatility
factor of 80% and a dividend yield of 0%. In addition, the Company assumed $3.7
million in net liabilities for total consideration of $11.5 million. Amendments
to the Plan of Merger dated November 20, 2000 were not significant, and this
measurement date was used for the purchase price determination. The transaction
will be accounted for under the purchase method of accounting in accordance with
APB 16. The Company has engaged a third party to determine the purchase price
allocation of the intangible assets acquired. The intangible assets are
anticipated to be amortized over a useful life of two to five years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements include, but are not limited to,
statements regarding future events, our plans and expectations, financial
projections and performance and acceptance of our products and services in the
marketplace. Our actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed elsewhere in this Form 10-QSB/A or
incorporated herein by reference. See "Special Note on Forward-Looking
Statements" below.
OVERVIEW
Ebiz Enterprises, Inc. is a computer solutions integrator supplying
server-based hardware and software solutions to computer resellers and high-end
corporate users on a nationwide basis. We are headquartered in Scottsdale,
Arizona with our primary production facilities located in Stafford, Texas. We
also own and operate a number of Web sites designed to supply and support the
Linux and Unix technical communities. These sites include Linuxmall.com,
TheLinuxStore.com, JBSI.com and Ebizmart.com.
During the fiscal quarter ended December 31, 2000, we completed our
acquisition of LinuxMall.com, Inc. ("LINUXMALL"). We acquired all of the
outstanding stock and assumed outstanding convertible debentures of LinuxMall.
As a result, we acquired the LinuxMall.com Web site, a leading Linux e-commerce
site and an Internet gathering place for the Linux community. The combination of
this Web site with TheLinuxStore.com is expected to position Ebiz as one of the
largest vendor-neutral Linux shopping mall and destination sites on the
Internet.
14
Management's focus in the fiscal quarter ended December 31, 2000 was
consolidation of LinuxMall operations to Scottsdale, securing additional
operating capital and improving our direct sales team.
On October 6, 2000 Dave Shaw and Ray Goshorn assumed the positions of Chief
Executive Officer and Chief Financial Officer, respectively. By November 1, 2000
all fulfillment functions of LinuxMall had been successfully transferred to the
Scottsdale warehouse. All customer service functions, sales and marketing
responsibilities for the Web site, as well as the wholesale division of
LinuxMall had also been transferred.
In October of 2000, we secured an additional $2,083,500 in capital as a
result of conversion of a portion of our outstanding Debenture` and a negotiated
sale of the shares issued upon such conversion. Additionally, in December 2000,
we restructured the terms of an outstanding $1,000,000 obligation to terms that
management believes to be more favorable.
Our sales team has progressed by the hiring of additional personnel and the
implementation of a training program designed to migrate our sales efforts from
low-margin, desktop PC's to higher margin Linux-based servers directed to the
corporate environment. As a result, both our sales and margins improved in the
three months ended December 31, 2000.
While e-commerce represents only a small percentage of our revenue, our Web
sites, LinuxMall.com and TheLinuxStore.com, are significant elements of our
overall Linux strategy. LinuxMall.com is intended to be the central branding
name for all of our Web properties. TheLinuxStore.com is a vendor-neutral site
for the purchase of "EVERYTHING LINUX." This site offers brand name systems,
peripherals, components and software from nationally known vendors, in addition
to our own brands. Popular recent additions to our offering of vendor-neutral
solutions include products such as 3ware storage controllers, Cobalt Servers,
Stormix firewalls and Cyclades remote access servers.
Our primary sales focus continues to migrate to the configuring and selling
of server-based computer solutions for a variety of business applications. Our
research and development group has been working on several new products that
focus on the "SPECIALIZED SERVER" marketplace. We anticipate these products will
be introduced in the fiscal quarter ending March 31, 2001.
Additionally, on November 17, 2000, we signed a definitive agreement to
purchase Jones Business Systems, Inc. ("JBSI") and completed this transaction on
January 4, 2001. Under the terms of the agreement, we acquired all of the
outstanding stock of JBSI. JBSI is a computer integrator primarily focused in
the UNIX marketplace. JBSI brings approximately $30 million in annual revenue to
our operations. More importantly, management believes that one of the greatest
sources of new Linux users will come from the UNIX environment. We believe that
direct and first access to this user base provides us with a substantial
advantage over our competition. Also significant is JBSI's state-of-the-art
manufacturing facility in Stafford, Texas. As of February 5, 2001, we relocated
all of our production facilities and inventory to this facility.
15
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2000 (AS RESTATED) AND
DECEMBER 31, 1999 (AS RESTATED)
Sales for the three months ended December 31, 2000 were $3,159,651 compared
to $2,264,949 in the three months ended December 31, 1999. The $894,702
increase, approximately 39.5% from the prior period, was due to higher sales of
Linux servers and related components and the volume added by the LinuxMall
acquisition which represented approximately two-thirds of the increase.
Cost of sales for the three months ended December 31, 2000 decreased to
79.8% of sales down from 98.8% of sales for the same period in 1999 which
resulted in a corresponding gross profit margin increase to 20.2% from 1.2% for
these periods. The increase was the result of our continued emphasis on higher
margin Linux systems and components, advertising revenues and the addition of
higher margin sales through the LinuxMall.com Web site. The gross profit for the
fiscal quarter ended December 31, 2000 was $638,015, an increase of $610,596
from the fiscal quarter ended December 31, 1999.
Selling, general and administrative expense was $2,385,294, or 75.5% of
sales, for the three months ended December 31, 2000 as compared to $1,475,431,
or 65.1% of sales, for the same period in 1999. The increase of $909,863, or
61.7%, was primarily due to salaries and related expenses for sales and
information technology personnel, the business formation and development
programs of our partnerAxis, Inc. subsidiary and higher marketing and
advertising expenses.
Depreciation and amortization expense increased to $1,599,059 in the three
months ended December 31, 2000 from $51,087 in the same period in 1999. The
increase was due to the amortization of the partnerAxis intangible assets and
the amortization of the goodwill recorded as the result of acquisitions.
Interest expense for the three months ended December 31, 2000 was
$2,013,182 as compared to $877,394 for the three months ended December 31, 1999.
The increase of $1,135,788 was principally due to the costs recorded for the
additional warrants issued in connection with financing activities and the $1.0
million increase in convertible short term debt. Interest and other income was
$69,843 for the three months ended December 31, 2000 as compared to $63,927 for
the same period in 1999. The increase was due to the interest earned by the
partnerAxis restricted cash.
The preceding factors resulted in a net loss attributable to common
stockholders of $5,364,431 or $0.25 per diluted share for the three months ended
December 31, 2000 as compared to a net loss attributable to common stockholders
of $2,522,801, or $0.34 per diluted share, for the three months ended December
31, 1999.
16
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2000 (AS RESTATED) AND DECEMBER
31, 1999 (AS RESTATED)
Sales were $5,589,458 for the six months ended December 31, 2000 compared
to $7,903,577 for the six months ended December 31, 1999. The decrease of
$2,314,119, approximately 29.3%, was due to our shift in strategic focus away
from brokerage sales and the sales of low-priced, Windows-based systems that
represented about half of sales in the six months ended December 31, 1999. These
decreases we partially offset by increased sales of Linux servers, server
components, advertising revenues and the volume added by the LinuxMall
acquisition.
Cost of sales for the six months ended December 31, 2000 decreased to 82.0%
of sales from 96.0% of sales for the same period in 1999, resulting in a
corresponding gross profit margin increase to 18.0% from 4.0% of sales for these
same periods. This improvement was the direct result of our strategic shift
towards Linux products and systems and the addition of higher margin sales by
the LinuxMall acquisition. The gross profit for the six months ended December
31, 2000 was $1,005,914, an increase of $686,472 from the six months ended
December 31, 1999.
Selling, general and administrative expense was $3,514,744, or 62.9% of
sales, for the six months ended December 31, 2000 as compared to $2,712,409, or
34.3% of sales, for the same period in the prior year. The increase of $802,335,
or 29.6%, was primarily due to higher sales and technical personnel costs and
the development costs of partnerAxis, Inc.
Depreciation and amortization expense for the six months ended December 31,
2000 was $1,768,202, an increase of $1,676,487 from the $91,715 recorded for the
six months ended December 31, 1999. This increase was primarily due to the
amortization of the partnerAxis intangible assets acquired in September, 2000
and the amortization of the goodwill recorded for acquisitions.
Interest expense was $3,203,828 for the six months ended December 31, 2000
as compared to $1,330,722 for the six months ended December 31, 1999. The
increase of $1,873,106 was primarily due to the amortization expenses related to
the Debenture, costs recorded for the warrants issued in connection with capital
financings, and debt assumed with the acquisition of LinuxMall. Interest and
other income for the six months ended December 31, 2000 was $138,274, an
increase of $53,091 from the same period in 1999 due to the interest earned by
the restricted cash accounts.
The preceding factors resulted in a net loss attributable to common
stockholders of $7,498,029, or $0.49 per diluted share, for the six months ended
December 31, 2000 as compared to a net loss attributable to common stockholders
of $3,999,624, or $0.54 per diluted share, for the six months ended December 31,
1999.
17
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2000 cash and cash equivalents were $287,059, an increase
of $236,062 from the total of $50,997 at June 30, 2000. Our net cash used in
operating activities for the six months ended December 31, 2000 was $3,127,753
as compared to $1,162,959 used in the six months ended December 31, 2000. During
the first six months of fiscal 2001, cash generated by financing activities was
used to increase the size of our sales and information technology organizations
and to implement the start-up programs of the partnerAxis business plan.
The net cash used in investing activities during the first half of fiscal
2001 was $737,440. During the six months ended December 31, 2000, our most
significant activity in this area was the acquisition and development of the
software for the partnerAxis Web site . The acquisition of the partnerAxis
intangible assets during the first quarter of fiscal 2001 was completed through
the issuance of shares of our common stock and, therefore, had no effect on cash
flow.
During the six months ended December 31, 2000, the net cash provided by
financing activities was $4,101,255. We received $3.0 million from the sale of
stock to Caldera in September, 2000. These funds are restricted for use in
developing partnerAxis, Inc. and $1,217,619 was utilized in the three months
ended December 31, 2000. Borrowings were $500,000, $251,032 was released from
restricted cash by the Debenture holder in July, 2000 and an additional
$2,152,604 was released in October, 2000.
DEBENTURE AND WARRANT
On August 25, 1999 we issued the Debenture and Warrant for a total of $7.1
million. The Debenture is due February 24, 2002. The principal of the Debenture
was initially convertible into a minimum of 947,260 shares of our common stock.
The holder could convert up to $394,444 face amount of the Debenture upon
issuance and up to $394,444 on each monthly anniversary date thereafter (each, a
"DUE DATE"). Any amount not converted accumulates and may be converted
thereafter. The holder is prohibited from converting any amount of the Debenture
which would cause the holder's total ownership of common stock to equal five
percent or more of the total shares outstanding. The per share conversion price
was initially equal to the lesser of (a) $7.4953 or (b) the average of the three
lowest closing bid prices of our common stock for the 15 consecutive trading
days ending on the trading day immediately preceding submission of a notice to
convert by the holder. In the event the closing bid price of our common stock is
less than $7.4953 per share at any time during the five trading days preceding a
Due Date, we have the right to redeem for cash the monthly conversion amount of
the Debenture (in lieu of allowing the holder to convert such amount) at
premiums ranging from 105% to 108%. The Debenture is secured by deposits at Bank
One Arizona, NA in the initial amount of $5,000,000 less $500,000 released
during February, 2000 and $250,000 in July, 2000. In connection with the release
of the $250,000 in July, 2000, we issued an additional warrant to acquire
125,000 shares of common stock at $2.00 per share. The warrant is exercisable at
any time prior to July 12, 2003. As of December31, 2000, the warrant had not
been exercised. The required amount of the restricted cash decreases by $0.7042
for every $1 of principal reduction of the Debenture whether the reduction
occurs by conversion or redemption. Aggregate conversions of principal and
accrued interest have been made and as of September 30, 2000, $641,709 of
principal and accrued interest had been converted to 331,028 shares of common
stock.
18
On February 8, 2000, Ebiz and the holder of the Debenture agreed to modify
the terms of conversion of the Debenture. The per share conversion price of the
accrued principal convertible as of February 25, 2000 of $2,761,108 and
outstanding interest as of February 7, 2000 of $140,203 was changed to equal the
lesser of (a) $3.84, or (b) the average of the three lowest closing bid prices
of its common stock for the 15 consecutive trading days ending on the trading
day immediately preceding the submission of a conversion notice by the holder.
The $3.84 per share price equaled the conversion price of the Debenture on
January 25, 2000. As modified, the principal of the Debenture is convertible
into a minimum of 1,826,831 shares.
On March 31, 2000 Ebiz and the Debenture holder agreed to an additional
modification to the conversion price formula by changing the reset price
determinant to the average of the three lowest trading prices from the three
lowest closing bid prices occurring in the 15 day period prior to conversion.
All other aspects of the formula remained unchanged.
On October 19, 2000, we agreed to additional modifications of the
Debenture. The holder agreed to convert $2,083,500 principal amount of the
Debenture in exchange for 2,500,000 shares of our common stock. The holder
agreed to reduce the cash collateral requirements of the Debenture by
$2,083,500. We also agreed to convert the per share conversion ratio for an
additional $416,500 principal amount of the Debenture to the lesser of (a) $1.00
or (b) the average of the lowest trading prices occurring on any three of the 15
day period prior to a conversion.
The Warrant was exercisable for the purchase of 245,000 shares of our
common stock, 60,000 at $7.4723 per share, 60,000 at $8.6219 per share and
125,000 at $6.3227 per share. The exercise prices were modified on October 19,
2000 to $4.00 per share in connection with the transaction described above. The
Warrant is exercisable at any time prior to August 22, 2004. As of December 31,
2000 none of the Warrants have been exercised.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this Form 10-QSB/A
contains express or implied forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. We intend that such forward-looking statements be subject
to the safe harbors created thereby. We may make written or oral forward-looking
statements from time to time in filings with the SEC, in press releases,
quarterly conference calls or otherwise. The words "BELIEVES," "EXPECTS,"
"ANTICIPATES," "INTENDS," "FORECASTS," "PROJECT," "PLANS," "ESTIMATES" and
similar expressions identify forward-looking statements. Such statements reflect
our current views with respect to future events and financial performance or
operations and speak only as of the date the statements are made.
Forward-looking statements involve risks and uncertainties and readers are
cautioned not to place undue reliance on forward-looking statements. Our actual
results may differ materially from such statements. Factors that cause or
contribute to such differences include, but are not limited to, those discussed
19
elsewhere in this Form 10-QSB/A, as well as those discussed in our Form 10-KSB/A
for the fiscal year ended June 30, 2000, including those in the Notes to
Consolidated Financial Statements and in "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION" and "DESCRIPTION OF BUSINESS -
Factors Affecting Future Performance" sections which are incorporated by
reference in this Form 10-QSB/A.
Although we believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the results contemplated in such
forward-looking statements will be realized. The inclusion of such
forward-looking information should not be regarded as a representation that the
future events, plans or expectations contemplated will be achieved. We undertake
no obligation to publicly update, review or revise any forward-looking
statements to reflect any change in our expectations or any change in events,
conditions or circumstances on which any such statements are based. Our filings
with the SEC, including the Form 10-KSB/A referenced above, may be accessed at
the SEC's Web site, www.sec.gov.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various legal proceedings and have certain outstanding
claims as described in our Form 10-KSB/A for the year ended June 30, 2000.
[CERTAIN/ALL] outstanding vendor claims have been settled. Management believes
that all such matters are within ordinary levels for an organization of our size
and nature. Management believes that these disputes will be resolved without
material adverse consequences to operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 5, 2000, we completed the acquisition of LinuxMall by the merger
of LinuxMall into a newly formed wholly owned subsidiary. Under the terms of the
final transaction, we agreed to issue 7.4 million shares of its common stock
valued at $9.6 million, options to purchase 0.9 million shares of its common
stock valued at $0.8 million, and warrants to purchase 4.6 million shares of its
common stock valued at $4.0 million. An additional approximate 2.5 million
shares will be issued in January 2001 upon conversion of the remaining
outstanding preferred convertible debentures. The securities were issued in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933.
On October 19, 2000 JEM Ventures EBIZ, LLC ("JEM VENTURES") and Ebiz agreed
to additional modifications of the Debenture. Ebiz agreed to convert $2.1
million principal amount of the Debenture in exchange for 2.5 million shares of
Ebiz's common stock. JEM Ventures agreed to reduce the collateral requirements
under the Debenture by a total of $2.1 million. Upon reduction of the letter of
credit requirements, the outstanding Debenture balance/letter of credit
requirement ratio is reset and all reductions of Debenture principal will reduce
the letter of credit requirement by the amount of the revised ratio. Ebiz also
agreed to reduce the per share conversion ratio of the Debenture to the lesser
of (a) $1.00 or (b) the average of the three lowest prices of our common stock
20
occuringin the 15 day period prior to conversion for an additional $416,500
principal amount of the Debenture and to reprice the exercise price of existing
oustanding warrants to purchase 245,000 shares to $4.00 per share. The warrants
were originally exerciseable at $6.3227 for 125,000 shares, at $7.4723 for
60,000 shares and at $8.6219 for 60,000 shares.
In connection with the above described modification of the Debenture, Ebiz
issued warrants to purchase 850,000 shares of its common stock at $1.00 per
share and 500,000 shares at $1.10 per share to The Canopy Group. In
consideration for issuance of the warrants, Canopy agreed to purchase the
2,500,000 shares issued upon conversion of the Debenture directly from JEM
Ventures. The warrants were issued in reliance on the exemption from
registrations provided by Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
During the three month period ended December 31, 2000, Ebiz filed a Form
8-K on October 3, 2000, a Form 8-K on October 20, 2000, a Form 8-K/A on December
19, 2000 and a Form 8-K/A on December 20, 2000.
The Form 8-K filed on October 3, 2000 disclosed information related to the
acquisition by Ebiz from Caldera of intellectual property and other assets
related to the marketing and distribution concept known as Electronic Linux
Marketplace. Ebiz is operating these assets in a separate wholly owned
subsidiary, partnerAxis, Inc. This Form 8-K also disclosed the acquisition by
Caldera of 3,000,000 shares of Ebiz common stock.
The Form 8-K filed on October 20, 2000, the Form 8-K/A filed on December
19, 2000 and the Form 8-K/A filed on December 20, 2000 all disclosed information
related to the acquisition of LinuxMall by Ebiz.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed by the undersigned, thereunto duly authorized.
EBIZ ENTERPRISES, INC.
Dated May 21, 2001 By /s/ Ray Goshorn
-------------------------------------
Ray Goshorn
Chief Financial Officer
21