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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 September 30, 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
September 30, 2000 was 12,804,566 shares of common stock, par value $.001.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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EBIZ ENTERPRISES, INC.
INDEX TO FORM 10-QSB/A
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION PAGE NUMBER
Item 1. Consolidated Financial Statements................................... 2
Consolidated Balance Sheets
September 30, 2000 and June 30, 2000 ........................... 2
Consolidated Statements of Operations
For the Three Months Ended September 30, 2000 and 1999.......... 3
Consolidated Statements of Cash Flows
For the Three Months Ended September, 2000 and 1999............. 4
Notes to the Consolidated Financial Statements.................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 12
PART II
OTHER INFORMATION
Item 1. Legal Proceedings................................................... 16
Item 2. Changes in Securities............................................... 17
Item 5. Other Information................................................... 17
Item 6. Exhibits and Reports on Form 8-K.................................... 18
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
EBIZ ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND JUNE 30, 2000
September 30, June 30,
2000 2000
------------ ------------
ASSETS (Unaudited)
(Restated)
Current Assets:
Cash $ 75,010 $ 50,997
Restricted cash (Note 3) 3,000,000 --
Accounts receivable, net of allowance for doubtful accounts
of $137,602 and $75,988 at September 30, 2000 and
June 30, 2000, respectively 851,045 585,846
Inventory, net 756,786 747,545
Prepaid expenses and other current assets 79,074 28,158
------------ ------------
Total current assets 4,761,915 1,412,546
Furniture and Equipment, net 572,569 532,896
Deferred Loan Fees, net 111,420 131,079
Restricted cash (Note 2) 4,253,132 4,504,164
partnerAxis Intangible Assets, net 3,314,772 --
Goodwill, net 577,965 629,162
------------ ------------
Total assets $ 13,591,773 $ 7,209,847
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 2,333,135 $ 1,880,822
Accrued expenses 1,598,766 1,367,135
Line of credit 250,000 250,000
Secured convertible note 500,000 --
Convertible debenture 946,666 --
Notes payable 71,928 71,928
------------ ------------
Total current liabilities 5,700,495 3,569,885
------------ ------------
Convertible Debenture, net 4,065,943 4,503,579
------------ ------------
Total liabilities 9,766,438 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 September 30, 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
September 30, 2000 and June 30, 2000, respectively 12,565 8,498
Additional paid-in capital 16,615,535 9,808,580
Accumulated deficit (14,369,502) (12,247,432)
------------ ------------
Total stockholders' equity (deficit) 2,625,335 (2,063,617)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 13,591,773 $ 7,209,847
============ ============
The accompanying notes are an integral
part of these consolidated financial statements
2
EBIZ ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Three Months Ended September 30,
--------------------------------
2000 1999
----------- -----------
(Unaudited)
(Restated)
NET REVENUES $ 2,429,807 $ 5,638,628
COST OF SALES 2,061,908 5,346,605
----------- -----------
GROSS PROFIT 367,899 292,023
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 1,129,450 1,236,978
DEPRECIATION AND AMORTIZATION 169,143 40,628
PROVISIONS FOR DOUBTFUL ACCOUNTS 61,714 31,930
----------- -----------
LOSS FROM OPERATIONS (992,408) (1,017,513)
----------- -----------
OTHER INCOME (EXPENSE):
INTEREST EXPENSE (1,179,118) (453,328)
INTEREST & OTHER INCOME 68,431 21,256
----------- -----------
TOTAL OTHER (1,110,687) (432,072)
----------- -----------
NET LOSS (2,103,095) (1,449,585)
DIVIDENDS ON PREFERRED STOCK 18,975 27,238
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(2,122,070) $(1,476,823)
=========== ===========
LOSS PER COMMON SHARE:
BASIC AND DILUTED $ (0.23) $ (0.20)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES: BASIC
AND DILUTED 9,141,066 7,319,972
=========== ===========
The accompanying notes are an integral
part of these consolidated financial statements
3
EBIZ ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Three Months Ended September 30,
--------------------------------
2000 1999
----------- -----------
(Unaudited)
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,103,095) $(1,449,585)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 169,143 40,628
Stock exchanged for services -- 9,000
Warrants issued to convertible Debenture holder 125,166 --
Interest costs of Beneficial Conversion Feature 726,670 236,534
Amortization of discount and loan fees 165,500 33,094
Changes in assets and liabilities:
Accounts receivable (265,199) (49,351)
Inventory (9,241) 140,472
Prepaid expenses and other current assets (50,916) 31,313
Accounts payable 452,313 452,069
Accrued expenses 215,948 (157,314)
----------- -----------
Net cash used in operating activities (573,711) (713,140)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment (72,391) (80,165)
----------- -----------
Net cash used in investing activities (72,391) (80,165)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit, net -- (350,000)
Borrowings under secured convertible note 500,000 --
Borrowings under notes payable -- 488,000
Principal repayments of notes payable -- (887,900)
Borrowings under convertible debenture, net -- 6,903,391
Transfer from/(to) restricted cash non-current, net 251,032 (5,000,000)
Transfer from/(to) restricted cash, net (3,000,000) --
Sale of stock, net of expenses 2,919,083 47,850
----------- -----------
Net cash provided by financing activities 670,115 1,201,341
----------- -----------
Net increase in cash 24,013 408,036
Cash, beginning of period 50,997 76,366
----------- -----------
Cash, end of period $ 75,010 $ 484,402
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 6,990 $ 124,295
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND OPERATING ACTIVITIES:
Issuance of common stock for services $ -- $ 9,000
Dividends accrued on preferred stock $ 18,975 $ 27,238
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
4
EBIZ ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDING SEPTEMBER 30, 2000 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company has directed its primary strategy towards the Linux operating
system segment of the market. 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 5) evidence the Company's ability to
obtain additional financing. The merger with Jones Business Systems, Inc.
("JBSI") (see Note 5) 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. 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-month period ending September 30, 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 $166,055 and $151,265 at September 30, 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.
Inventory consists of the following:
Sept. 30, June. 30,
2000 2000
-------- --------
Components $567,574 $578,649
Work-in-process 4,940 8,008
Finished goods 184,272 160,888
-------- --------
$756,786 $747,545
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5
ACCOUNTS PAYABLE
Included in accounts payable is approximately $210,000 and $169,000 of bank
overdraft at September 30, 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 September 30,
2000.
RESTATEMENT
The Company has restated it's financial statements for the three-month
periods ending September 30, 2000 and 1999. The restatement relates to the
recording of a beneficial conversion feature of the Debenture issued on 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") staff during a recent review. The Company has chosen to accept the SEC's
interpretation and restate its financial statements.
In addition, the financial position and results of operations presented in
the financial statements for the quarter ended September 30, 2000, have been
restated to (a) increase the value of the transaction for the purchase and
investment with Caldera Systems, Inc. (see Note 3) as a single multi-element
transaction, (b) record a beneficial conversion feature on the secured
convertible promissory note issued in August 2000 (see Note 4), and (c) classify
cash restricted in use to restricted cash.
The effect on net loss attributable to common stockholders for the three
months ending September 30, 2000 and 1999 was an increase of $812,388 and
$236,534, respectively. The effect on net loss per common share, basic and
diluted, for the three months ending September 30, 2000 and 1999 was an increase
of $0.09 and $0.03, respectively. The Company previously reported a net loss
attributable to common stockholders of $1.3 million and $1.2 million or $0.14
and $0.17 net loss per common share, basic and diluted for the three month
period ended September 30, 2000 and 1999, respectively.
6
(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.
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.
7
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.
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.
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
8
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 September 30, 2000 the remaining balance of accrued
interest payable was approximately $391,000.
Subsequent to September 30, 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. 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 restricted
cash consists of funds restricted for use in developing and implementing the
partnerAxis business plan. 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 three years.
Up to 4,000,000 additional shares of common stock may be issued 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.
(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 Company is in default
under the provisions of the note and is currently finalizing an extension. 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.
(5) SUBSEQUENT EVENTS
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
9
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 were
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 change in the
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.
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
10
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 reprice the exercise price of the existing
outstanding warrants to purchase 245,000 shares to $4.00 per share. The warrants
were 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. In connection
with the repricing 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.
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.
On November 17, 2000, the Company signed an Agreement and Plan of Merger
with JBSi. JBSi is a Houston-based national solutions integrator, builder of
Linux and UNIX systems and provider of technical and professional services.
Through the business combination, the Company will acquire all of the
outstanding capital stock and equity interests of JBSi in a stock for stock
exchange. The transaction will be accounted for under the purchase method of
accounting. The closing of the merger is subject to certain conditions and
provisions.
11
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 and our plans and expectations. Our actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such difference 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 designer and operator of Internet e-commerce
Web sites and a developer and distributor of computer systems, components and
accessories for personal and business computing. During the second quarter of
fiscal 2000, we decided to concentrate our strategic focus on the Linux segment
of the computer market, which we feel offers stronger growth and profitability
opportunities than the market for low price, conventional computer systems. We
de-emphasized our programs for the mass merchant and brokerage channels of
distribution and we restructured our organization to implement our Linux
development and marketing programs.
In May, 2000, we executed a letter of intent to acquire LinuxMall.com, Inc.
("LINUXMALL") through a stock for stock exchange. LinuxMall.com, a Web site
operated by LinuxMall, is a leading Linux e-commerce Web site and an Internet
gathering place for the Linux community. The combination of this site with our
TheLinuxStore.com site is anticipated to produce one of the leading
vendor-neutral Internet Linux shopping mall and destination sites for the
world-wide Linux community and position Ebiz as one of the leading
vendor-neutral solutions providers in the industry. On August 7, 2000, we
entered into an Agreement and Plan of Merger with LinuxMall which was amended on
October 3, 2000. The acquisition was completed effective October 5, 2000. Under
the terms of the agreement, we acquired all of the outstanding stock and assumed
outstanding convertible debentures of LinuxMall. Our current stockholders will
own approximately 56% of the resulting company, on a fully diluted basis, which
will retain the Ebiz Enterprises, Inc. name and will be headquartered in
Scottsdale, Arizona. The agreement identified the principal officers and certain
persons to be appointed to our Board of Directors, and defined the basic steps
for combining the operations of the two companies.
In addition to its strategic benefits, we believe that the acquisition of
LinuxMall will facilitate our ability to enter into future financing and
partnering agreements. In September, 2000, a $3.0 million equity investment was
made by Caldera Systems, Inc. ("CALDERA") to fund a new subsidiary comprised of
personnel and assets also acquired from Caldera. In October, 2000, The Canopy
Group, Inc. ("CANOPY"), a venture capital, management and resource company,
purchased 2,500,000 shares of our common stock.
Our Web sites, LinuxMall.com and TheLinuxStore.com, are significant
elements of our 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
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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.
TheLinuxLab.com, another of our Web properties, offers cost-effective technical
expertise from over 2,800 registered Linux technicians to Linux users and
independent product testing and certification for Linux-related products. This
Web site provides objective reports of each product tested and also includes
links to TheLinuxStore.com for clients to acquire the software and hardware they
have evaluated.
We configure and sell computer systems for a variety of applications. We
have partnered with TurboLinux, a leading provider of Linux software clustering
solutions, to develop the L-SERVER(TM) line of network file servers that are
scalable, manageable and affordable. The DUOS(TM) line of workstations is a
"DUAL" boot system, based on Corel LINUX OS and Windows 98 and comes with both
the Linux and Windows versions of WordPerfect Office 2000 Suite. The DUOS(TM)
systems enable business network users to continue to use Windows applications
while enjoying the stability of a Linux network. The PIA(TM) and ELEMENT-L(TM)
are our Linux system brands for traditional applications in homes and businesses
and are also important elements in our Linux product strategy. We also sell
custom built conventional Windows-based systems under our M2 SYSTEMS(TM) brand
name. Our products are sold directly to end users through our Web site,
TheLinuxStore.com, to corporate customers by our own sales force and to selected
value-added resellers.
During the three months ended September 30, 2000, we began a major sales
force expansion and more than doubled the size of our sales force in this
period. Our sales organization is focused on direct sales to corporate clients
and select value-added resellers.
Ebiz's predecessor was originally incorporated in Colorado in May 1984, as
VDG Capital Corporation. Following a reorganization, VDG Capital's name was
changed to Vinculum Incorporated in August 1994. In June 1998, Vinculum acquired
the operating assets and liabilities of Genras, Inc., an Arizona corporation,
and reincorporated in Nevada as CPU Micromart, Inc. In May 1999, CPU Micromart
changed its name to Ebiz Enterprises, Inc.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 (AS RESTATED) AND
SEPTEMBER 30, 1999 (AS RESTATED)
Sales were $2,429,807 for the quarter ended September 30, 2000 compared to
$5,638,628 for the quarter ended September 30, 1999. The $3,208,821 decrease,
approximately 56.9%, from the prior period, was due to the shift of our
strategic focus away from brokerage sales and the high volume sales of
low-priced Windows-based systems to mass merchants and price oriented
distributors that represented more than 60% of sales in the first quarter of
fiscal 2000. These decreases were partially offset by increased sales of higher
priced servers and workstations, increased sales to business customers by our
sales force and advertising revenues. In the first quarter of fiscal 2001, our
sales mix was approximately 35% computer systems, 61% components and accessories
and 4% advertising compared to 22% computer systems, 78% components and
accessories and 0% advertising in the fiscal quarter of fiscal 2000.
Cost of sales for the three months ended September 30, 2000 decreased to
84.9 % of sales from 94.8% of sales from the same period in 1999. The gross
profit margin increased to 15.1% of sales for the quarter ended September 30,
2000 from 5.2% of sales for the quarter ended September 30, 1999. The increase
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was the result of our strategic shift towards emphasizing higher margin Linux
system sales, sales to business end users and advertising revenues. The gross
profit for the first quarter of fiscal 2001 was $367,899, an increase of $75,876
from the first quarter of fiscal 2000.
Selling, general and administrative expense was $1,129,450, or 46.5% of
sales, for the quarter ended September 30, 2000 as compared to $1,236,978, or
21.9% of sales, for the same period in 1999. This was a decrease of $ 107,528,
or 8.7%, which was primarily due to lower legal and consulting fees, lower rent
and other decreased overhead expenses which were partially offset by higher
sales force salary expenses.
Interest expense increased to $1,179,118 in the quarter ended September 30,
2000 from $453,328 in the same period in 1999. The increase was due to a full
three months of interest and amortization expenses related to the Debenture as
compared to one and a half months in the first quarter ended September 30, 1999,
a beneficial conversion feature of $130,000 recorded on the Secured Convertible
Promissory Note issued to Canopy and the expenses recorded for the warrants
issued to the Debenture holder for the release of restricted cash in July 2000.
Interest and other income was $68,481 for the three months ended September 30,
2000 as compared to $21,256 for the three months ended September 30, 1999. This
increase was the result of interest earned by the restricted cash related to the
Debenture.
The preceding factors resulted in a net loss attributable to common
stockholders of $2,122,070 or $0.23 per diluted share, for the three months
ended September 30, 2000 as compared to a net loss attributable to common
stockholders of $1,476,823, or $0.20 per diluted share, for the three months
ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had cash and cash equivalents of $75,010 which
was a $24,013 increase from the total of $50,997 at June 30, 2000. Our net cash
used in operating activities was $573,711 for the three months ended September
30, 2000 as compared to $713,140 used in the three months ending September 30,
1999. In the three months ended September 30, 2000, the cash generated by
financing activities was used to increase our sales force and to maintain the
levels of development expenses required to implement our strategic programs.
The net cash used in investing activities was $72,391. In the three months
ending September 30, 2000, these activities included the acquisition and
configuration of additional equipment for our Web sites, our internal data
networks and sales force workstations. The acquisition of the partnerAxis assets
was completed through the issuance of shares of Ebiz common stock and had no
effect on cash flow during the first three months ended September 30, 2000.
During the three months ended September 30, 2000, the net cash provided by
financing activities was $670,115. We received $3.0 million from Caldera which
is restricted for use in implementing and developing our subsidiary,
partnerAxis. Borrowings under additional notes payable were $500,000 which
represents the proceeds of the Secured Convertible Promissory Note placed with
Canopy in August 2000. Restricted cash of $251,032 was released by the Debenture
holder in July 2000.
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We believe that the acquisition of LinuxMall will create additional
financing opportunities for Ebiz. The developments discussed in Note 5 to the
financial statements are specific examples of these opportunities. However, we
will require additional funding to support the operational and working capital
requirements of our strategic plan. There can be no certainty of our ability to
meet our ultimate capital needs.
DEBENTURE AND WARRANT
On August 25, 1999 we issued a convertible debenture (the "DEBENTURE") and
warrant (the "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 additional warrants to acquire 125,000 shares of common stock at
$2.00 per share. The warrants are exercisable at any time prior to July 12,
2003. As of September 30, 2000, the warrants had not been exercised. The
required amount of the restricted cash decreases, initially 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.
On February 8, 2000, Ebiz and the Debenture holder 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.
The Warrant is 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 in October, 2000 to $4.00
per share. The Warrant is exercisable at any time prior to August 22, 2004. As
of September 30, 2000 no exercise of the Warrant had occurred.
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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
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
Ebiz is involved in various legal proceedings and has certain outstanding
claims as described in our Form 10-KSB/A for the year ended June 30, 2000. No
material developments have occurred in these proceedings. 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.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 12, 2000, JEM Ventures EBIZ, LLC ("JEM VENTURES") agreed to reduce
the collateral requirement under Debenture by $250,000 and a like amount of cash
was made available to Ebiz. In exchange for this reduction, Ebiz agreed to
reduce the conversion price of $264,087 principal of the Debenture to the lesser
of (a) $1.00 or (b) the average of the lowest three trade prices of Ebiz's stock
for the 15 consecutive days ending on the trading day prior to submission of a
conversion notice (the "MARKET PRICE"). Additionally, Ebiz agreed to issue JEM
Ventures warrants to purchase 125,000 shares of Ebiz's common stock at $2.00 per
share. The warrants expire three years from the date of the advance. The
modification of the Debenture and issuance of the warrants were in reliance on
the exemption from registration as provided by Section 4(2) of the Securities
Act.
On August 22, 2000, we issued a Secured Convertible Promissory Note to
Canopy in the amount of $500,000 in exchange for $500,000 cash. The note bears
interest at the annual compounded rate of 10% per annum and is convertible into
shares of our common stock at $1.00 per share. The Secured Convertible
Promissory Note was issued in reliance on the exemptions from registration under
Sections 4(2) and 4(6) of the Securities Act.
On September 15, 2000, we issued a total of 4 million shares to Caldera for
$3 million cash and the acquisition of all of the intellectual property,
technology and certain other specified assets related to Caldera's proprietary
marketing and distribution concept known as the Electronic Linux Marketplace. We
intend to further develop the business concept in a wholly-owned subsidiary,
partnerAxis. We issued 4 million shares of common stock to Caldera as its
initial payment for assets. The stock issued was valued at $1.60 per share, the
average closing price for September 11, 2000 through September 15, 2000. Up to 4
million additional shares of common stock may be issued 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
shares were issued in reliance on the exemption from registration of such shares
as provided by Sections 4(2) and 4(6) of the Securities Act.
ITEM 5. OTHER INFORMATION
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 paid $14.7 million for the acquisition comprised of 7.4
million shares of common stock valued at $9.6 million, options to purchase 0.9
million shares of common stock valued at $0.9 million, warrants for 4.6 million
shares of 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, we
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
transaction will be accounted for under the purchase method of accounting.
On October 19, 2000 JEM Ventures and Ebiz agreed to additional
modifications of the Debenture. Ebiz agreed to convert $2,083,500 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 $2,083,500 immediately, and by up to an additional
17
$416,500, in two $208,250 increments provided November and December revenues
equal or exceeded certain projected levels. Upon reduction of the letter of
credit requirements, the outstanding Debenture balance/letter of credit
requirement ratio is to be reset and all further reduction of Debenture
principal will reduce the letter of credit requirement by the amount of such
ratio. We also agreed to reduce the per share conversion ratio of the Debenture
to the lesser of (a) $1.00 or (b) the Market Price for an additional $416,500
principal amount of the Debenture and to reprice the exercise price of the
existing oustanding Warrant to purchase 245,000 shares to $4.00 per share. The
Warrant was 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 Canopy. 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.
On November 17, 2000, we entered into an Agreement and Plan of Merger with
Jones Business Systems, Incorporated ("JBSI"). JBSi is a Houston-based national
solutions integrator, builder of Linux and UNIX systems and provider of
technical and professional services. Under the terms of the agreement, we will
acquire all of the outstanding capital stock and equity interests of JBSi in a
stock for stock exchange. The transaction will be accounted for under the
purchase method of accounting. The closing of the acquisition is subject to
certain conditions and provisions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.20(1) Secured Convertible Promissory Note, dated August 21, 2000,
issued by Ebiz to The Canopy Group, Inc. ("CANOPY")
10.21(1) Security Agreement, dated August 21, 2000, between Ebiz and
Canopy
10.22(1) Stock and Warrant Purchase Agreement, dated October 19, 2000
between Ebiz, Canopy and JEM
10.23(1) Warrant Agreement dated October 20, 2000 issued by Ebiz to
Canopy for 850,000 shares
10.24(1) Warrant Agreement dated October 20, 2000 issued by Ebiz to
Canopy for 500,000 shares
10.25(1) Investors Rights Agreement dated October 20, 2000 between
Ebiz and Canopy
10.26(1) Letter Agreement re: Debenture dated October 20, 2000
between Ebiz and JEM
27.1 Financial Data Schedule
(1) INCORPORTED BY REFERENCE FROM EBIZ'S FORM 10-QSB FOR THE THREE
MONTHS ENDED SEPTEMBER 30, 2000 AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON NOVEMBER 20, 2000.
(b) REPORTS ON FORM 8-K
One Form 8-K was filed by Ebiz during the three month period ended
September 30, 2000. This Form 8-K reported the acquisition of the ELM
assets from Caldera.
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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
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