U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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(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 _______________
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Commission File Number 0-27721
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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
September 30, 2000 was 12,804,566 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 SEPTEMBER 30, 2000
TABLE OF CONTENTS
Page
Number
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PART I. FINANCIAL INFORMATION
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..................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................ 13
Item 2. Changes in Securities......................................... 13
Item 5. Other Information............................................. 14
Item 6. Exhibits and Reports on Form 8-K.............................. 14
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
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(unaudited)
ASSETS
Current Assets:
Cash, including $3,000,000 restricted for use in developing partnerAxis $ 3,075,010 $ 50,997
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
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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
Other Restricted Cash 4,253,132 4,504,164
partnerAxis Intangible Assets, net 1,884,272 --
Goodwill, net 577,965 629,162
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Total assets $ 12,161,273 $ 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 --
Notes payable 71,928 71,928
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Total current liabilities 4,753,829 3,569,885
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Convertible Debenture, net 6,158,919 6,140,209
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Total liabilities 10,912,747 9,710,094
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Commitments and Contingencies
Redeemable common stock: 240,000 shares outstanding 1,200,000 1,200,000
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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 11,069,519 6,015,132
Accumulated deficit (11,400,296) (10,090,614)
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Total stockholders' equity (deficit) 48,525 (3,700,247)
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Total liabilities and stockholders' equity (deficit) $ 12,161,273 $ 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
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(unaudited)
NET REVENUES $ 2,429,807 $ 5,638,628
COST OF SALES 2,061,908 5,346,605
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GROSS PROFIT 367,899 292,023
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 1,129,450 1,236,978
DEPRECIATION AND AMORTIZATION 149,643 40,628
PROVISIONS FOR DOUBTFUL ACCOUNTS 61,714 31,930
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LOSS FROM OPERATIONS (972,908) (1,017,513)
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OTHER INCOME (EXPENSE):
INTEREST EXPENSE (386,230) (216,794)
INTEREST & OTHER INCOME 68,431 21,256
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TOTAL OTHER (317,799) (195,538)
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NET LOSS (1,290,707) (1,213,051)
DIVIDENDS ON PREFERRED STOCK 18,975 27,238
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NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(1,309,682) $(1,240,289)
=========== ===========
LOSS PER COMMON SHARE:
BASIC AND DILUTED $ (0.14) $ (0.17)
=========== ===========
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
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(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,290,707) $(1,213,051)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 149,643 40,628
Stock exchanged for services -- 9,000
Warrants issued to convertible Debenture holder 125,166 --
Amortization of discount and loan fees 99,282 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)
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Net cash used in operating activities (573,711) (713,140)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment (72,391) (80,165)
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Net cash used in investing activities (72,391) (80,165)
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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, net 251,032 (5,000,000)
Sale of stock, net of expenses 2,919,083 47,850
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Net cash provided by financing activities 3,670,115 1,201,341
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Net increase in cash 3,024,013 408,036
Cash, beginning of period 50,997 76,366
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Cash, end of period $ 3,075,010 $ 484,402
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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 $ 1,950,000 $ --
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 represent a rapidly growing business
opportunity. Management believes the completion of the LinuxMall.com, Inc.
(LinuxMall) merger (see note 5), the investment by Caldera Systems, Inc.
(Caldera) (see note 3) and the investment by The Canopy Group, Inc. (Canopy)
(see note 5) are the result of the Company's ability to create additional
financing. In addition, the merger with Jones Business Systems, Inc. (JBSi) (see
note 5) will create additional opportunities for financing.
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 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 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 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
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Components $567,574 $578,649
Work-in-process 4,940 8,008
Finished goods 184,272 160,888
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$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.
(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 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. Additional issuance 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. In July, 2000, an
additional $250,000 of cash collateral was released by the holder. In
conjunction with this 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 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.
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 can draw approximately $.70 for each $1 of Debenture principal converted
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. 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. 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. During February through September 2000, approximately
6
$641,700 of the Debenture's principal and accrued interest were converted to
approximately 331,000 shares of common stock and as of September 30, 2000 the
remaining balance of accrued interest payable was approximately $383,000.
(3) PURCHASE AND INVESTMENT WITH CALDERA SYSTEMS, INC.
On September 15, 2000, the Company entered into a Purchase and Sale
Agreement with Caldera Systems, Inc. ("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 1,000,000 shares of its common
stock to Caldera as its initial payment for the assets. The stock issued was
valued at $1.95 per share, the average closing price for September 13, 2000
through September 19, 2000. Of the $1,950,000 total, $1,910,811 has been
recorded as partnerAxis intangible assets and $39,189 as furniture and equipment
in the accompanying consolidated financial statements. 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.
The Purchase and Sale Agreement with Caldera also provided for
Caldera's purchase of 3,000,000 shares of common stock for $3 million. These
funds are restricted for use in developing and implementing the partnerAxis
business plan and are included in cash in the accompanying consolidated balance
sheet.
(4) SECURED CONVERTIBLE PROMISSORY NOTE
In August, 2000, the Company issued a Secured Convertible Promissory
Note to The Canopy Group, Inc. 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.
(5) SUBSEQUENT EVENTS
On October 5, 2000, the Company completed the acquisition of
LinuxMall.com, Inc. ("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 issued approximately 7,240,000 shares of its common
stock in exchange for cancellation of all outstanding common stock and certain
preferred securities of LinuxMall. An additional approximate 2,510,000 shares
will be issued in January, 2001 upon conversion of the remaining outstanding
preferred securities. At the October 4, 2000 closing price of $1.281 per share,
the value of all shares to be issued to acquire LinuxMall equals approximately
$12,490,000. The transaction will be accounted for under the purchase method of
accounting. The Company is currently in the process of determining the purchase
price allocation.
7
On October 19, 2000, the Debenture holder and the Company agreed to
additional modifications of the Debenture. Ebiz agreed to convert $2,083,500
principal amount of the Debenture in exchange for 2,500,000 million shares of
Ebiz'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 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 reductions of Debenture
principal will reduce the letter of credit requirement by the amount of such
ratio. The Company also agreed to reduce the per share conversion ratio of the
Debenture to the lesser of (a) $1.00 or (b) the amount equal to the average of
the lowest three trade prices of the Company's common stock for the 15
consecutive trading days ending on the day preceeding 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 an existing oustanding warrant to
purchase 245,000 shares to $4.00 per share. The warrant was originally
exerciseable 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 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 The Canopy Group, Inc.
("CANOPY"). In consideration for issuance of the warrants, Canopy purchased the
2,500,000 shares issued upon conversion of the Debenture from JEM Ventures EBIZ
LLC.
On November 17, 2000, the Company signed 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. 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.
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. ("EBIZ" or "WE") 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
8
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, the Company executed a letter of intent to acquire
LinuxMall.com, Inc. ("LINUXMALL") through a stock for stock exchange.
LinuxMall.com is a leading Linux e-commerce site and an Internet gathering place
for the Linux community. The combination with TheLinuxStore.com is expected to
position Ebiz as one of the largest vendor-neutral Internet Linux shopping mall
and destination sites in the world and one of the leading vendor-neutral
solutions providers in the industry. On August 7, 2000, Ebiz 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, Ebiz acquired all of the outstanding stock and assumed
outstanding convertible debentures of LinuxMall. The current Ebiz stockholders
will own approximately 57% 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 Ebiz's 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. to fund a new subsidiary comprised of personnel
and assets also acquired from Caldera. In October, 2000, The Canopy Group, Inc.,
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
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
9
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 (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 THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
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.
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
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 $386,230 in the quarter ended September
30, 2000 from $216,794 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 and the expenses recorded for the warrant 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
10
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 $1,309,682 or $0.14 per diluted share, for the three months
ended September 30, 2000 as compared to a net loss attributable to common
stockholders of $1,240,289, or $0.17 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 $3,075,010
which was a $3,024,013 increase from the total of $50,997 at June 30, 2000. This
increase was primarily due to the cash received for the restricted purpose of
implementing and developing the partnerAxis subsidiary in September, 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 Websites, 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 $3,670,115. We received $3.0 million from Caldera
Systems 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 The Canopy Group, Inc. in August, 2000. Restricted cash of $251,032 was
released by the Debenture holder in July, 2000.
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 the Debenture and Warrant for a total of
$7.1 million. The Debenture is due February 24, 2002. The principal of the
Debenture was initially convertible into a minimum of 947,260 shares of our
common stock. The holder could convert up to $394,444 face amount of the
Debenture upon issuance and up to $394,444 on each monthly anniversary
11
date thereafter (each, a "DUE DATE"). Any amount not converted accumulates and
may be converted thereafter. The holder is prohibited from converting any amount
of the Debenture which would cause the holder's total ownership of common stock
to equal five percent or more of the total shares outstanding. The per share
conversion price was initially equal to the lesser of (a) $7.4953 or (b) the
average of the three lowest closing bid prices of our common stock for the 15
consecutive trading days ending on the trading day immediately preceding
submission of a notice to convert by the holder. In the event the closing bid
price of our common stock is less than $7.4953 per share at any time during the
five trading days preceding a Due Date, we have the right to redeem for cash the
monthly conversion amount of the Debenture (in lieu of allowing the holder to
convert such amount) at premiums ranging from 105% to 108%. The Debenture is
secured by deposits at Bank One Arizona, NA in the initial amount of $5,000,000
less $500,000 released during February, 2000 and $250,000 in July, 2000. In
connection with the release of the $250,000 in July, 2000, we issued an
additional warrant to acquire 125,000 shares of common stock at $2.00 per share.
The warrant is exercisable at any time prior to July 12, 2003. As of September
30, 2000, the warrant had not been exercised. The required amount of the
restricted cash decreases by $0.7042 for every $1 of principal reduction of the
Debenture whether the reduction occurs by conversion or redemption. Additional
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 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.
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 none of the Warrants have been exercised.
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
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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, as well as those discussed in our Form 10-KSB 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.
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 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 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.
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 $264,086.95 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
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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 21, 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 19, 2000, we issued a total of 4,000,000 shares to Caldera
Systems, Inc. Of these shares, 3,000,000 were issued for $3,000,000 cash and
1,000,000 for the acquisition of all of the intellectual property and certain
other specified assets related to Caldera's proprietary marketing and
distribution concept known as the Electronic Linux Marketplace. The assets have
been contributed to a wholly-owned subsidiary and will be operated under the
name partnerAxis. The 1,000,000 shares issued for the assets were valued at
$1,950,000. Up to an additional 4,000,000 shares may be issued to Caldera based
on the earnings performance of partnerAxis during the period from December 15,
2000 to 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 merger
of LinuxMall into a newly formed wholly owned subsidiary of Ebiz. Under the
terms of the final transaction, Ebiz issued approximately 7,240,000 shares of
its common stock in exchange for cancellation of all outstanding common stock
and certain preferred securities of LinuxMall. An additional approximate
2,510,000 shares will be issued in January, 2001 upon conversion of the
remaining outstanding preferred securities. At the October 4, 2000 closing price
of $1.281 per share, the value of all shares to be issued to acquire LinuxMall
equals approximately $12,490,000. 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 2,500,000 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
$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. Ebiz 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
an 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.
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In connection with the above described modification of the Debenture,
Ebiz issued warrants to purchase 850,000 shares of its common stock at $1.00 per
share and 500,000 shares at $1.10 per share to The Canopy Group. In
consideration for issuance of the warrants, Canopy agreed to purchase the
2,500,000 shares issued upon conversion of the Debenture directly from JEM
Ventures.
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 Secured Convertible Promissory Note, dated August 21, 2000,
issued by Ebiz to The Canopy Group, Inc. ("CANOPY")
10.21 Security Agreement, dated August 21, 2000, between Ebiz and
Canopy
10.22 Stock and Warrant Purchase Agreement, dated October 19, 2000
between Ebiz, Canopy and JEM
10.23 Warrant Agreement dated October 20, 2000 issued by Ebiz to
Canopy for 850,000 shares
10.24 Warrant Agreement dated October 20, 2000 issued by Ebiz to
Canopy for 500,000 shares
10.25 Investors Rights Agreement dated October 20, 2000 between Ebiz
and Canopy
10.26 Letter Agreement re: Debenture dated October 20, 2000 between
Ebiz and JEM
27.1 Financial Data Schedule
(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: November 20, 2000 By: /s/ Ray Goshorn
--------------------------------
Ray Goshorn
Chief Financial Officer
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