U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------
FORM 10-QSB
--------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 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 Identification No.)
Incorporation or Organization)
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 March
31, 2000 was 8,180,968 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 FILING
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements............................................ 2
Balance Sheets
March 31, 2000 (unaudited) and June 30, 1999 ................. 2
Statements of Operations
For the Three and Nine Months Ended March 31, 2000
(unaudited) and 1999 (unaudited).............................. 3
Statements of Cash Flows
For the Nine Months Ended March 31, 2000 (unaudited)
and 1999 (unaudited).......................................... 4
Notes to the Financial Statements.................................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 8
PART II
OTHER INFORMATION
Item 2. Changes in Securities........................................... 14
Item 5. Other Information............................................... 15
Item 6. Exhibits and Reports on Form 8-K................................ 15
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EBIZ ENTERPRISES, INC.
BALANCE SHEETS
MARCH 31, 2000 (UNAUDITED) AND JUNE 30, 1999
March 31, June 30,
2000 1999
----------- -----------
ASSETS (UNAUDITED)
Current Assets:
Cash $ 553,906 $ 76,366
Accounts receivable, net of allowance for doubtful accounts of
$285,565 and $40,000 at March 31, 2000 and June 30, 1999, respectively 512,127 1,669,816
Inventory, net of allowance of $169,534 and $10,000
on March 31, 2000 and June 30, 1999, respectively 825,862 1,568,148
Prepaid advertising 1,050,000 --
Other prepaid expenses and other current assets 110,250 128,184
----------- -----------
Total current assets 3,052,145 3,442,514
Furniture and Equipment, net 549,351 474,778
Deferred Loan Fees, net 150,738
Restricted Cash 4,503,707
Goodwill, net 686,359
----------- -----------
Total assets $ 8,942,300 $ 3,917,292
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,873,653 $ 1,423,178
Accrued expenses 337,848 468,549
Line of credit 250,000 350,000
Notes payable 71,928 610,000
----------- -----------
Total current liabilities 2,533,429 2,851,727
----------- -----------
Convertible Debenture 6,385,730
----------- -----------
Total liabilities 8,919,156 2,851,727
----------- -----------
Stockholders' Equity:
Convertible preferred stock; $.001 par value; 5,000,000 shares
authorized; 8,950 and 10,895 shares issued and outstanding at
March 31, 2000 and June 30, 1999, respectively, liquidation $100
value per share 502,734 868,599
Common stock; $.001 par value; 70,000,000 shares authorized;
8,180,968 and 7,261,715 shares issued and outstanding at
March 31, 2000 and June 30, 1999, respectively 8,181 7,262
Common stock subscribed 4,500,000
Subscriber receivable (4,500,000)
Additional paid-in capital 6,377,749 2,343,762
Accumulated deficit (6,865,520) (2,154,058)
----------- -----------
Total stockholders' equity 23,144 1,065,565
----------- -----------
Total liabilities and stockholders' equity $ 8,942,300 $ 3,917,292
=========== ===========
The accompanying notes are an integral part of these financial statements
2
EBIZ ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(unaudited) (unaudited)
SALES $ 2,223,655 $ 4,062,451 $ 10,127,232 $ 11,024,493
COST OF SALES 1,981,158 3,750,723 9,439,863 10,442,477
RESTRUCTURING EXPENSE -INVENTORY -- -- 125,430 --
------------ ------------ ------------ ------------
GROSS PROFIT 242,497 311,728 561,939 582,016
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 1,512,701 536,242 4,225,110 1,425,176
DEPRECIATION AND AMORTIZATION 50,461 11,169 142,176 43,466
PROVISIONS FOR DOUBTFUL ACCOUNTS 14,717 8,704 203,144 24,524
RESTRUCTURING EXPENSE -- -- 26,500 --
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,335,382) (244,387) (4,034,991) 911,150)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
INTEREST EXPENSE (257,877) (7,898) (757,533) (103,402)
INTEREST & OTHER INCOME 77,591 4,216 162,774 11,703
------------ ------------ ------------ ------------
TOTAL OTHER (180,286) (3,682) (594,759) (91,699)
------------ ------------ ------------ ------------
NET LOSS (1,515,608) (248,069) (4,629,730) (1,002,849)
DIVIDENDS ON PREFERRED STOCK 27,238 -- 81,714 --
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (1,542,906) $ (248,069) $ (4,711,464) $ (1,002,849)
============ ============ ============ ============
LOSS PER SHARE:
BASIC $ (0.20) $ (0.03) $ (0.63) $ (0.15)
DILUTED $ (0.20) $ (0.03) $ (0.63) $ (0.15)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES
BASIC 7,647,031 7,312,586 7,442,739 6,695,009
DILUTED 7,647,031 7,312,586 7,442,739 6,695,009
The accompanying notes are an integral part of these financial statements
3
EBIZ ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
NINE MONTHS ENDED MARCH 31,
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,629,750) $(1,002,849)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 142,176 43,466
Common stock issued for services and inventory 1,299,000 218,751
Warrants issued for consulting services 199,185 --
Amortization of discount and loan fees 231,658 --
Changes in assets and liabilities:
Accounts receivable 1,157,689 (1,009,082)
Due from officers and stockholders -- (42,468)
Inventory 742,286 (599,169)
Prepaid advertising (1,050,000) --
Other current assets 17,934 62,848
Accounts payable 450,475 72,027
Accrued expenses (212,416) 58,797
----------- -----------
Net cash used in operating activities (1,651,763) (2,197,679)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures, intellectual
property and equipment (211,551) (271,679)
----------- -----------
Net cash used in investing activities (211,551) (271,628)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit, net (100,000) 250,000
Borrowings under notes payable 488,000 261,786
Principal repayments of notes payable (1,026,072) (261,786)
Borrowings from convertible debenture, net 6,903,391 --
Transfer to restricted cash, net (4,503,707) --
Sale of stock, net of expenses 579,242 1,929,581
----------- -----------
Net cash provided by financing activities 2,340,854 2,179,581
----------- -----------
Net increase (decrease) in cash 477,540 (289,726)
Cash, beginning of period 76,366 468,651
----------- -----------
Cash, end of period $ 553,906 $ 178,925
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 298,445 $ 103,402
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
AND OPERATING ACTIVITIES:
Issuance of common stock for services and inventory $ 1,299,000 $ 218,751
Dividends accrued on preferred stock $ 81,714 $ --
Issuance of warrants for consulting services $ 199,185 $ --
Subscriber receivable for common stock to be issued $ 4,500,000 $ --
Conversion of debt and related interest to common stock $ 244,503 $ --
Issuance of common stock for business acquisition $ 700,000 $ --
The accompanying notes are an integral part of these financial statements
4
EBIZ ENTERPRISES, INC.
NOTES TO THE FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDING MARCH 31, 2000 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-QSB. Accordingly, they do not
include all 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 and nine-month periods
ending March 31, 2000 may not necessarily be indicative of the results for the
entire fiscal year. These financial statements should be read in conjunction
with the Company's Form 10-SB/A for the year ended June 30, 1999.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or net
realizable value. Reserves of $169,534 and $10,000 at March 31, 2000 and June
30, 1999, 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:
Mar. 31, June 30,
2000 1999
---------- ----------
(unaudited)
Components $ 563,358 $1,155,981
Work-in-process 16,314 44,947
Finished goods 246,190 367,220
---------- ----------
$ 825,862 $1,568,148
========== ==========
ACCOUNTS PAYABLE
Included in accounts payable is approximately $168,000 and $215,000 of
bank overdraft at March 31, 2000 and June 30, 1999, respectively.
5
(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. In
compliance with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the fair
value of these warrants, as calculated by using the Black-Scholes pricing model,
was estimated to be approximately $796,000 and is recorded as a debt discount in
the accompanying financial statements. In addition, loan costs of approximately
$197,000 were paid and recorded as deferred loan fees in the accompanying
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 from the
Debenture, which was utilized to repay the Company's outstanding debt at June
30, 1999 and to provide working capital. The remaining $5.0 million was
deposited with a bank as collateral for the Debenture. In February, 2000,
$500,000 of the cash collateral was released by the holder. The net cash
collateral is reflected as restricted cash in the accompanying financial
statements. 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 required for the
letter of credit 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 can draw approximately $.70 for
each $1 of Debenture principal converted from the letter of credit to fund
operations. The unconverted balance, if any, of the Debenture and the
unconverted accrued interest is due February 24, 2002.
The Debenture required that the related shares of the Company's common
stock be registered under the Securities Act of 1933 and the regulations of the
Securities and Exchange Commission ("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. The
holder began accruing rights to convert the Debenture upon its signing and as of
March 31, 2000 the holder had accrued the rights to convert approximately
$3,152,000 of the principal of the Debenture into shares of the Company's common
stock. 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 completion of the registration process. During February
and March, 2000, approximately $244,500 of the Debenture's principal and accrued
interest were converted to approximately 64,500 shares of common stock and as of
March 31, 2000 the remaining balance of accrued interest payable was
approximately $81,000.
(3) RESTRUCTURING EXPENSE
In November, 1999 the Company implemented a change in its strategic
business plan to concentrate its focus on the Linux market and to de-emphasize
the sales of low-priced Windows-based systems. Consequently, the Company
incurred a restructuring charge of $26,500 for asset revaluation and $125,430
6
for markdown of inventory that were directly related to the businesses being
de-emphasized. As of March 31, 2000, approximately $62,500 in charges have been
made against these liabilities.
(4) WARRANTS ISSUED FOR CONSULTING SERVICES
In October, 1999 the Company engaged a consulting firm to assist with
its strategic planning and corporate development programs. In conjunction with
the engagement, the Company issued warrants to purchase 220,000 shares of common
stock at a market-based exercise price. In compliance with SFAS No. 123, the
fair value of these warrants, as calculated by using the Black-Scholes pricing
model, was estimated to be approximately $199,000 and is recorded as an expense
in selling, general and administration expenses in the accompanying financial
statements.
(5) COMMON STOCK ISSUED FOR ADVERTISING
In January, 2000 the Company entered into a Premier Advertiser
Agreement with CNET, Inc. Under the agreement, the Company became a part of
CNET's "PREMIER ADVERTISER" program for CNET's Linux Center and received
advertising for, and links to, its Website, THELINUXSTORE.COM. The term of the
agreement is through February, 2001, subject to earlier termination. The Company
is required to purchase a minimum of $2 million of advertising under the
agreement during its stated term. Additionally, the Company paid an integration
fee equal to $1.2 million by issuing 240,000 shares of its common stock to CNET,
Inc. This integration fee has been recorded as prepaid advertising and is being
amortized over the term of the agreement. The advertising on the CNET Linux
Center began on February 11, 2000 and $150,000 of the integration fee was
amortized in the third quarter of Fiscal 2000.
(6) ACQUISITION OF INFOMAGIC, INC.
On March 30, 2000, the Company acquired all of the issued and
outstanding common stock of InfoMagic, Inc., which distributes open source and
low cost software products through its Website, WWW.INFOMAGIC.COM and selected
distributors. In exchange, the Company issued 200,000 shares of its common stock
at $3.50 per share to the shareholders of InfoMagic, Inc., for total
consideration of $700,000. In addition to assets and common stock, the Company
acquired InfoMagic's customer base of over 100,000 clients. This acquisition has
been accounted for under the purchase method of accounting. The purchase price
in excess of the net tangible worth has been recorded as goodwill and is being
amortized over five years.
(7) PRIVATE PLACEMENT OF COMMON STOCK
On March 31, 2000, the Company entered into a Securities Purchase
Agreement with Mr. Shi-En Shiau and Prime Technology Holdings Limited (the
"PURCHASERS") for the purchase of 2.5 million shares of the Company's common
stock at a price of $2.00 per share (subject to adjustment as described in the
Securities Purchase Agreement). At the closing, the Purchaser paid $500,000 in
cash and executed a promissory note, due May 5, 2000, for $4.5 million. The due
date of the note was later extended to May 12, 2000. The Company is required to
file a registration statement related to the common stock with the SEC within 30
days of the payment of the promissory note. The $500,000 cash received was
recorded as common stock and additional paid-in capital. The $4.5 million note
was recorded as common stock subscribed and a subscriber receivable.
7
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 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 Websites 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. Our financial statements
for the second quarter included the provisions for inventory, collection and
other costs resulting from this change in strategic direction.
In the third quarter, we began to accelerate our programs for the Linux
market with the development and roll-out of two new Linux computer system
product lines, the L-Servers and duOS, the introduction of a new technical
resource Website for the Linux community, THELINUXLAB.COM, the announcement of
the first "PURE LINUX" Internet Service Provider, LINUXWIRED.NET, and the
acquisition of INFOMAGIC.COM, an established distributor of open source,
primarily Linux, software. In addition, we initiated a major advertising program
with CNET's Linux Center.
We have partnered with TurboLinux, a leading provider of Linux software
clustering solutions, to develop the L-Server line of network file servers that
are scalable, manageable and affordable. The duOS 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. These systems
will enable business network users to continue to use their favorite 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 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, and to corporate customers by our own sales force. We also
sell our systems through retailers, resellers and major e-commerce Web sites,
such as CNET.COM and ONSALE.COM.
8
THELINUXSTORE.COM is the Company's principal Website and a core element
of our Linux strategy. It is a vendor-neutral site for the purchase of
"EVERYTHING LINUX." The site offers brand name systems, peripherals, components
and software from nationally known vendors, in addition to our own brands. The
Website's traffic has been growing at an average of 40% per month and is
generating opportunities for vendor sponsorship and advertising revenues that
are important elements in our profitability improvement strategy.
THELINUXLAB.COM 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. The Website will provide
objective reports of each product tested and also includes links to
THELINUXSTORE.COM for clients to acquire the software and hardware they have
evaluated.
LINUXWIRED.NET was launched in April, 2000. It is a full service
Internet Service Portal, focused on the Linux community that provides dial-up
service for Linux-based computer systems for $16.95 per month and a host of
Internet portal services such as news, shopping, tech support, message boards,
classifieds, a job posting service and Ebiz's Virtual Knowledge Exchange which
will enable users to ask the vendors of the products offered at
THELINUXSTORE.COM application and other questions in a chat room environment. In
addition to user fees, we expect this portal to generate advertising revenues as
its traffic grows.
In March, 2000 Ebiz acquired InfoMagic, Inc., an established and
visible open source and low cost software distribution company with its
principal emphasis on Linux software. Since its inception, InfoMagic has sold
its products to over 100,000 clients in the Linux market and has achieved
substantial visibility in the Linux community. The acquisition provides Ebiz
with additional reach into that marketplace.
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 (Vinculum) 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 QUARTERS ENDED MARCH 31, 2000 AND MARCH 31, 1999
Sales were $2,223,655 for the quarter ended March 31, 2000 compared to
$4,062,451 for the quarter ended March 31, 1999. The $1,838,796 decrease,
approximately 45.3%, from the prior period, was due to the shift of our
strategic focus away from the high volume sales of low-priced Windows based
systems to mass merchants and price oriented distributors that represented more
than 55% of sales in the third quarter of fiscal 1999. These decreases were
partially offset by higher sales of our Linux systems, increased sales to
business customers by our sales force and advertising revenues.
9
Cost of sales for the three months ended March 31, 2000 decreased to
89.1% of sales from 92.3% of sales from the same period in 1999. The gross
profit margin increased to 10.9% of sales for the quarter ended March 31, 2000
from 7.7% of sales for the quarter ended March 31, 1999. The increase was the
result of our strategic shift towards emphasizing higher margin Linux system
sales, sales to business end users and the beginning of advertising revenue
generation by THELINUXSTORE.COM.
Selling, general and administrative expense was $1,512,701, or 68.0% of
sales, for the quarter ended March 31, 2000 as compared to $536,242 or 13.2% of
sales, for the same period in 1999. This was due to higher expenditures for
advertising and marketing, consulting and legal expenses for strategy
development, the costs generated by the expansion of our Linux engineering,
sales and marketing organizations and the introduction of our new Websites
WWW.THELINUXLAB.COM and WWW.LINUXWIRED.NET. Our advertising and marketing
expense, in particular, increased to 22.7% of sales for the third quarter of
fiscal 2000 from 0.4% a year earlier. This increase was primarily due to the
advertising program that was initiated with CNET.
Interest expense increased to $257,877 in the quarter ended March 31,
2000 from $7,898 in the same period in 1999. The increase was due to interest
and amortization expenses related to the Debenture. Interest and other income
was $77,591 for the three months ended March 31, 2000 as compared to $4,216 for
the three months ended March 31, 1999. This increase was the result of interest
earned by the restricted cash related to the Debenture and the sale of
marketable securities the Company had acquired in 1998.
The preceding factors resulted in a net loss attributable to common
stockholders of $1,542,906, or $0.20 per diluted share, for the three months
ended March 31, 2000 as compared to a net loss attributable to common
stockholders of $248,069, or $0.03 per diluted share, for the three months ended
March 31, 1999.
COMPARISON OF NINE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
Sales for the nine months ended March 31, 2000 were $10,127,232
compared to $11,024,493 for the nine months ended March 31, 1999. The $897,261
decrease, approximately 8.1%, was primarily the result of the reduction of sales
of low-priced computers and to lower brokerage sales. These two categories
represented over 65% of total sales in the first nine months of fiscal 1999. The
decreases in these areas were partially offset by higher sales of Linux
computers and increased sales to business customers through our sales force.
Cost of sales for the nine months ended March 31, 2000 decreased to
94.5% of sales from 94.7% of for the same period in 1999. The gross profit
margin for the nine months ended March 31, 2000 increased to 5.5% of sales from
5.3% of sales for the comparable period of the prior fiscal year. The increase
was due to the change in sales mix away from low priced computers and the
auction business and towards the Linux market and the productivity of our own
sales force. Our gross profit margin, excluding restructuring related inventory
markdowns for the nine months ended March 31, 2000, was 6.8%.
10
Selling, general and administrative expense was $4,225,110, or 41.7% of
sales, for the nine months ended March 31, 2000 as compared to $1,425,176, or
12.9% of sales, for the same period in 1999. The increase was due to
substantially increased advertising and promotion expenses and higher
expenditures for marketing, sales and technical personnel and the related
expenses required to build the organization and implement the programs in our
redefined strategic plan. The non-recurring, non-cash expense of $199,185 that
was recorded for warrants issued for consulting services during the second
quarter of fiscal year 2000 was also a significant component of the increase.
Provisions for doubtful accounts increased to $203,144 in the nine
months ending March 31, 2000 from $24,524 in the first nine months of fiscal
1999. The increase was caused by collection disputes that have developed with
the customers who represented the majority of our low-end system business that
has been de-emphasized as we concentrate our focus on the Linux market.
Due to our decision to change our strategic business plan,
restructuring expenses were $151,930 for the nine months ended March 31, 2000.
Of these expenses, $125,430 related to inventory markdowns and $26,500 related
to asset revaluation. There were no such expenses in the first nine months of
fiscal 1999.
Interest expense was $757,533 for the nine months ended March 31, 2000
as compared to $103,402 in the same period in 1999. The increase was due to
interest and amortization expenses related to the Debenture. Interest and other
income was $162,774 for the first three quarters of fiscal 2000 versus $11,703
in first three quarters of fiscal 1999. This increase was the result of interest
earned by the restricted cash related to the Debenture and the third quarter
sale of marketable securities the Company had acquired in 1998.
The preceding operational factors resulted in a net loss attributable
to common stockholders of $4,711,464 or $0.63 per diluted share, for the nine
months ended March 31, 2000 as compared to a net loss of $1,002,849 or $0.15 per
diluted share, for the nine months ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we had cash and cash equivalents of $553,906 which
was a $477,540 increase from the total of $ 76,366 at June 30, 1999. This
increase was primarily due to the cash received for the private placement of
common stock and the cash generated by the Debenture in August, 1999 and
February, 2000. The cash generated by the Debenture provided for the repayment
of most of the debt outstanding at August, 1999 and for most of the net cash
used in operations during the first nine months of fiscal 2000.
Our net cash used in operating activities was $1,651,763 for the nine
months ended March 31, 2000 as compared to $2,197,679 used in the nine months
ending March 31, 1999. In the first nine months of Fiscal 2000, the cash
generated by the Debenture and by reductions in accounts receivable and
inventory was used for the increases in our sales, advertising/marketing,
administration and development expenses required to implement our strategic
11
programs. A portion of the CNET advertising expense was paid through the
issuance of common stock and, therefore, had no effect on cash flow. In the nine
months ending March 31, 1999 the net cash used in operating activities was
primarily for increased inventory and accounts receivable and for Website
development.
The net cash used in investing activities was $211,551 and $271,628 for
the nine months periods ending March 31, 2000 and March 31, 1999, respectively.
In the nine months ending March 31, 2000, these activities included the
acquisition and configuration of equipment for our Websites, our internal data
networks and communications systems. The acquisition of InfoMagic, Inc. was
completed through the issuance of shares of Ebiz common stock and had no effect
on cash flow during the first nine months of fiscal 2000. For the same period in
fiscal 1999, investing activities included the acquisition of software and
equipment for administrative and operations functions and Website equipment.
During the nine months ended March 31, 2000, the net cash provided by
financing activities was $2,340,854. The Debenture provided $6,903,391 of which
approximately $4,500,000 is held in restricted bank accounts as collateral that
is to be accessed through the conversion of the Debenture to common stock. We
also received $500,000 from the private placement of common stock. The balance
of the purchase price was evidenced by a promissory note in the amount of
$4,500,000 which is due May 12, 2000. We repaid $350,000 of our line of credit
and $887,900 of the principal of notes payable during the first quarter of
fiscal 2000. Our line of credit was reopened in December, 1999 and $250,000 was
outstanding at March 31, 2000. Additional notes payable of $488,000 were
initiated during the first nine months of fiscal 2000 and $71,928 were
outstanding at the end of the period.
DEBENTURE AND WARRANT
On August 25, 1999 we issued the Debenture and Warrant for a total of
$7,100,000. 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. The required amount of the letter
of credit decreases by $0.7042 for every $1 of principal reduction of the
Debenture whether the reduction occurs by conversion or redemption.
12
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 1,297,921 shares.
The Debenture holder agreed to immediately convert all accrued interest
of $140,203 into 36,511 shares of Ebiz common stock and to reduce its cash
collateral requirements by $500,000 until a total of $710,026 in principal of
the Debenture has been converted. The accrued interested was converted to common
stock on February 8, 2000. During February and March, 2000, an additional $462
of accrued interest and $103,838 in principal were converted to 28,001 shares of
common stock.
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 Warrant is exercisable at any time prior to
August 22, 2004. As of March 31, 2000 none of the Warrants have been exercised.
SERIES A PREFERRED
During the three month period ending March 31, 2000, a holder of a
total of 1,945 shares of the Company's outstanding Series A Preferred elected to
convert their shares into the Company's common stock. A total of 32,418 shares
of common stock were issued upon such conversion.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this Form 10-QSB
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.
13
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, as well as those discussed in our Form 10-SB/A,
including those in the Notes to Consolidated Financial Statements and in
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
Operation" and "FACTORS AFFECTING FUTURE PERFORMANCE" sections which are
incorporated by reference in this Form 10-QSB.
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 based. Our filings with
the SEC, including the Form 10-SB/A, may be accessed at the SEC's Web site,
WWW.SEC.GOV.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
DEBENTURE
The discussion of the modification of the Debenture above under "PART
1. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - DEBENTURE AND WARRANT" is incorporated herein by
reference.
ISSUANCE OF SECURITIES
In February 2000 Ebiz and Mesirow Financial, Inc. agreed to the
issuance of 9,474 shares of Ebiz common stock at $4.75 per share to Mesirow
Financial in payment of $45,000 of investment banking fees due for services
rendered in January, 2000. This issuance was in addition to the 18,948 shares
issued to Mesirow Financial at $2.375 per share in payment of invvestment
banking fees for services rendered in December, 1999. See "ITEM 2. CHANGES IN
SECURITIES" in our Form 10Q-SB for the period ended December 31, 1999. The
shares were issued in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act. Ebiz agreed to register for resale the
shares issued and underlying the warrant granted to Mesirow Financial.
14
Ebiz issued 240,000 shares of its common stock to CNET, Inc. in payment
of an Integration Fee of $1,200,000 under the Premier Advertiser Agreement
discussed below. See ITEM 5. OTHER INFORMATION. The shares were issued in
reliance upon the exemption from registration provided under Section 4(2) of the
Securities Act.
In March 2000, Ebiz issued 200,000 shares of its common stock to Joel
and Kim Goldberger in exchange for 100% for the outstanding capital stock of
InfoMagic, Inc. The common stock issued was priced at $3.50 per share and total
consideration was recorded at $700,000. The shares were issued in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act.
In March 2000, Ebiz issued 2,500,000 shares of its common stock to Mr.
Shi-En Shiau and Prime Technology Holdings Limited for a total purchase price of
$5,000,000. Of the total purchase price, $500,000 was paid in cash and
$4,500,000 was paid by delivery of a non-recourse note due May 12, 2000 and
secured by the 2,500,000 shares issued. Upon payment of the note, the per share
purchase price adjusts to an amount equal to two-thirds of the average of the
closing bid price of Ebiz's common stock for the five days immediately
preceeding the date of payment. If the note is not paid, Ebiz will only be
required to issue shares equal to the amount of cash actually paid divided by
the average of the closing bid price for its common stock for the five day
period preceeding the due date and will redeem the balance in cancellation of
the note. The shares of common stock were issued in reliance upon the exemption
for registration provided by Rule 506 of Regulation D and Section 4(2) of the
Securities Act.
ITEM 5. OTHER INFORMATION
In January, 2000 Ebiz entered into a Premier Advertising Agreement with
CNET, Inc. Under the agreement, Ebiz will be a part of CNET's "PREMIER
ADVERTISER" program and will receive the advertising for and links to its
Website, THELINUXSTORE.COM. The term of the agreement is through February 1,
2001, subject to earlier termination. Ebiz is required to purchase a minimum of
$2,000,000 of advertising under the agreement during its stated term, and to pay
an Integration Fee equal to $1,200,000 by issuance of 240,000 shares of its
common stock. In March, 2000 Ebiz suspended payment of advertising fees pending
further negotiations related to the Premier Advertising Agreement.
On March 31, 2000 and in conjunction with the sale of common stock to
Mr. Shi-En Shiau and Prime Technology Holdings Limited, Ebiz entered into a
Strategic Manufacturing Marketng, Distribution, Product Development and
Financing Agreement with Emerald Strategic Investments, LLC, an affiliate of Mr.
Shiau. This agreement appoints Emerald as an exclusive manufacturing sourcing
agent and exclusive product sourcing agent in Asia for Ebiz. Emerald is
obligated to engage a manufacturer in Asia suitable to Ebiz for the manufacture
of Ebiz's systems. Emerald is also obligated under the agreement to provide a
credit facility to Ebiz.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
27.1 Financial Data Schedule
REPORTS ON FORM 8-K
None.
15
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 15, 2000 By /s/ Jeffrey I. Rassas
-------------------------------
Jeffrey I. Rassas
Chief Executive Officer
16