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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 December 31, 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
January 31, 2001 was 33,352,167 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 FILING
FOR THE QUARTER ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
PAGE
NUMBER
------
Item 1. Financial Statements................................................ 3
Consolidated Balance Sheets
December 31, 2000 (unaudited) and June 30, 2000...................... 3
Consolidated Statements of Operations
For the Three and Six Months Ended December 31, 2000 (unaudited)
and 1999 (unaudited)................................................. 4
Consolidated Statements of Cash Flows
For the Six Months Ended December 31, 2000 (unaudited)
and 1999 (unaudited)................................................. 5
Notes to the Financial Statements...................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 12
PART II
OTHER INFORMATION
Item 1. Legal Proceedings................................................... 18
Item 2. Changes in Securities............................................... 18
Item 6. Exhibits and Reports on Form 8-K.................................... 19
SIGNATURES...................................................................20
2
PART I
FINANCIAL INFORMATION
EBIZ ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 (UNAUDITED) AND JUNE 30, 2000
DECEMBER 31, JUNE 30,
2000 2000
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash $ 287,059 $ 50,997
Restricted cash (Note 3) 1,782,381 --
Accounts receivable, net of allowance for doubtful accounts of $325,039
and $75,988 at December 31, 2000 and June 30, 2000, respectively 1,127,914 585,846
Inventory, net 1,532,301 747,545
Prepaid expenses and other current assets 31,988 28,158
------------ ------------
Total current assets 4,761,915 1,412,546
Furniture and Equipment, net 1,661,531 532,896
Deferred Loan Fees, net 91,761 131,079
Restricted cash (Note 2) 2,100,528 4,504,164
partnerAxis Intangible Assets, net 3,034,670 --
Goodwill, net 19,813,194 629,162
------------ ------------
Total assets $ 31,463,327 $ 7,209,847
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 4,390,238 $ 1,880,822
Accrued expenses 3,036,615 1,367,135
Line of credit 230,000 250,000
Secured convertible note 1,000,000 --
Notes payable 320,524 71,928
------------ ------------
Total current liabilities 8,977,377 3,569,885
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Convertible Debenture, net 6,461,407 6,140,209
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Total liabilities 15,438,784 9,710,094
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Commitments and Contingencies
Redeemable common stock: 240,000 shares outstanding 1,200,000 1,200,000
------------ ------------
Stockholders' Equity (Deficit):
Convertible preferred stock; $.001 par value; 5,000,000
shares authorized; 7,590 shares issued and outstanding at
December 31, 2000 and June 30, 2000, liquidation $100 value per share 366,737 366,737
Common stock; $.001 par value; 70,000,000 shares authorized;
21,571,366 and 8,497,566 shares issued and outstanding at
December 31, 2000 and June 30, 2000, respectively 21,571 8,498
Additional paid-in capital 30,769,279 6,015,132
Accumulated deficit (16,388,463) (10,090,614)
------------ ------------
Total stockholders' equity (deficit) 14,824,543 (3,700,247)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 31,463,327 $ 7,209,847
============ ============
The accompanying notes are an integral part of
these consolidated financial statements
3
EBIZ ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(unaudited) (unaudited)
NET REVENUES $ 3,159,651 $ 2,264,949 $ 5,589,458 $ 7,903,577
COST OF SALES 2,521,636 2,112,100 4,583,544 7,458,705
RESTRUCTURING EXPENSE -INVENTORY -- 125,430 -- 125,430
------------ ------------ ------------ ------------
GROSS PROFIT 638,015 27,419 1,005,914 319,442
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 2,385,294 1,475,431 3,514,744 2,712,409
DEPRECIATION AND AMORTIZATION 1,599,059 51,087 1,768,202 91,715
PROVISIONS FOR DOUBTFUL ACCOUNTS 55,779 156,497 117,493 188,427
RESTRUCTURING EXPENSE -- 26,500 -- 26,500
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (3,402,117) (1,682,096) (4,394,525) (2,699,609)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
INTEREST EXPENSE (1,453,259) (282,862) (2,003,649) (499,656)
INTEREST & OTHER INCOME 69,843 63,927 138,274 85,183
------------ ------------ ------------ ------------
TOTAL OTHER (1,383,416) (218,935) (1,865,375) (414,473)
------------ ------------ ------------ ------------
NET LOSS (4,785,533) (1,901,031) (6,259,900) (3,114,082)
DIVIDENDS ON PREFERRED STOCK 18,975 27,238 37,950 54,476
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (4,804,508) $ (1,928,269) $ (6,297,850) $ (3,168,558)
============ ============ ============ ============
LOSS PER COMMON SHARE:
BASIC AND DILUTED $ (0.22) $ (0.26) $ (0.41) $ (0.43)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
BASIC AND DILUTED 21,640,150 7,370,500 15,368,505 7,341,703
============ ============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements
4
EBIZ ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2000 1999
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(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,259,900) $(3,114,082)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 1,768,202 91,715
Stock exchanged for services 54,923 54,000
Warrants issued to convertible Debenture holder 1,075,623 199,185
Amortization of discount and loan fees 529,578 132,376
Changes in assets and liabilities:
Accounts receivable (353,104) 907,709
Inventory (280,003) 773,396
Prepaid expenses and other current assets (55,511) (20,454)
Accounts payable 290,252 46,779
Accrued expenses 102,187 (233,583)
----------- -----------
Net cash used in operating activities (3,127,753) (1,162,959)
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CASH FLOWS FROM INVESTING ACTIVITIES:
(net of effect of business acquisitions):
Cash from Business acquisition 128,355 --
Purchase of furniture, fixtures and equipment (865,795) (51,868)
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Net cash used in investing activities (737,440) (51,868)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit, net (20,000) (225,000)
Borrowings under secured convertible note 500,000 --
Borrowings under notes payable -- 488,000
Principal repayments of notes payable -- (973,356)
Borrowings under convertible debenture, net -- 6,903,391
Transfer from/(to) restricted cash non-current, net 2,403,636 (5,000,000)
Transfer from/(to) restricted cash, net (1,782,381) --
Sale of stock, net of expenses 3,000,000 (10,646)
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Net cash provided by financing activities 4,101,255 1,182,389
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Net increase in cash 236,062 43,928
Cash, beginning of period 50,997 76,366
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Cash, end of period $ 287,059 $ 43,928
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 6,990 $ 95,504
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND OPERATING ACTIVITIES:
Issuance of common stock for services $ -- $ 179,651
Dividends accrued on preferred stock $ 37,950 $ --
Issuance of warrants to convertible Debenture holder $ 125,166 $ --
Conversion of debt and related interest to common stock $ 64,205 $ --
Issuance of common stock for furniture, equipment & intangible assets $ 3,400,000 $ --
The accompanying notes are an integral part of
these consolidated financial statements
5
EBIZ ENTERPRISES, INC.
NOTES TO THE FINANCIAL STATEMENTS FOR
THE THREE AND SIX MONTHS ENDING DECEMBER 31, 2000 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements for Ebiz Enterprise, Inc.
(the "COMPANY") have been prepared in accordance with generally accepted
accounting principles for interim financial information and, except as noted
below, 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. The accompanying financial
statements have not been reviewed by independent auditors because the Company
currently does not have an independent auditor of record. Upon engagement of
independent auditors, the Company anticipates that such auditors will review
these financial statements and that an amended Form 10-QSB will be filed. 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
December 31, 2000 may not necessarily be indicative of the results for the
entire fiscal year. These consolidated financial statements should be read in
conjunction with the Company's Form 10-KSB for the year ended June 30, 2000.
The Company has been advised by its prior independent public accountants
that, if the Company has not successfully obtained additional financing prior to
the completion of the audit of the Company's consolidated financial statements
for the year ended June 30, 2001, the auditor's report on those financial
statements will be qualified.
The Company has directed its primary strategy to manufacturing and
distributing computer servers utilizing the Linux operating system for the
business environment. Management believes the demand for the Linux-based
products and services represents a rapidly growing business opportunity and that
the completion of the acquisition of the LinuxMall.com, Inc. ("LINUXMALL")
(Footnote 5), the acquisition of Jones Business Systems, Inc. ("JBSI") (Footnote
6) and the investment by The Canopy Group, Inc. ("CANOPY") (Footnote 2) are the
result of the Company's ability to demonstrate continued financial viability as
well as to secure additional financing. In addition, the acquisition of JBSI has
created supplemental financing sources and eliminated duplicative and redundant
costs. The Company has been successful in acquiring additional capital
commitments from Canopy. In addition to pursuing additional equity financing,
the Company continues to undertake additional cost control measures in its
operations.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or net
realizable value. Reserves of $325,329 and $75,988 at December 31, 2000 and June
30, 2000, respectively, are established against Company-owned inventory for
excess, slow-moving and obsolete items and for items where the net realizable
value is less than cost.
6
Inventory consists of the following:
Dec. 30, June 30,
2000 2000
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Components $ 830,001 $ 578,649
Work-in-process 5,574 8,008
Finished goods 696,726 160,888
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$1,532,301 $ 747,545
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ACCOUNTS PAYABLE
Included in accounts payable is approximately $333,000 and $169,000 of bank
overdrafts at December 31, 2000 and June 30, 2000, respectively.
STRATEGIC ALLIANCE
The Company entered into an "EXCLUSIVE MARKETING ALLIANCE" agreement with
UserFriendly on September 20, 2000. The agreement with UserFriendly is for a
term of twelve months. Under the agreement, UserFriendly provides advertising
services on its Web site and a direct link to the Company's Web site,
TheLinuxStore.com, where customers make all purchase transactions. Under the
terms of the agreement, the Company is to pay UserFriendly a fixed monthly
advertising fee and a percentage of the gross margin recorded for sales to
customers coming through the direct connection between the Web sites. These
payments will be recorded as advertising and commission expenses, respectively.
The Company has recently initiated discussions with UserFriendly regarding
restructuring the compensation arrangement under the exclusive marketing
alliance.
(2) CONVERTIBLE DEBENTURE
In August 1999 the Company completed a private placement of a $7.1 million
convertible debt facility (the "DEBENTURE") with JEM Ventures EBIZ, LLC ("JEM
VENTURES"). In conjunction with the Debenture, the Company issued JEM Ventures
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 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 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 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 ("Restricted
Cash") was deposited with a bank to collateralize a letter of credit issued as
security for the Debenture.
7
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 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 be registered under the Securities Act of 1933 and the regulations of the
Securities and Exchange Commission ("SEC") so that registered shares would be
available in the event the Debenture holder made conversions. The necessary
registration was initiated by the Company in October 1999 and became effective
in February 2000. As of December 31, 2000 the holder had accrued the rights to
convert approximately $4.5 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 2000, approximately
$140,500 of interest was converted into 36,546 shares of common stock. An
additional $8,300 of interest converted into 4,799 shares of common stock during
March through June of 2000. The fair value of the Company's common stock ranged
from $6.13 to $1.75 on the dates of the interest conversions during the period
from February to June of 2000. During February through June of 2000,
approximately $429,000 of principal was converted to 222,683 shares. No
conversions were made during July and August of 2000. During September 2000,
approximately $60,900 of principal and $3,293 of interest was converted into
63,564 and 3,436 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. As of December 31, 2000 the remaining balance of
accrued interest payable was approximately $383,000.
In February 2000, $500,000 of the Restricted Cash was released and 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.
8
In July 2000, an additional $250,000 of Restricted Cash was released and
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. An approximate $23,000 beneficial conversion feature
charge has been recorded to interest expense. In conjunction with this release
of funds, the Company issued warrants to JEM Ventures 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 5 years, a volatility factor of 80% and a dividend yield of 0%, and is
recorded as financing costs in the accompanying consolidated financial
statements.
On October 19, 2000, JEM Ventures 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 2,500,000 million shares of
the Company's common stock. The Debenture holder agreed to reduce the collateral
requirements under the Debenture in the same amount resulting in an immediate
release of $2,083,500 of Restricted Cash, with additional reductions if certain
criteria were satisfied. As of December 31, 2000, the criteria were not
satisfied and no additional collateral reductions were required. Upon reduction
of the Restricted Cash requirements, the outstanding Debenture balance/letter of
credit requirement ratio was reset and all further reductions of Debenture
principal will reduce the letter of credit requirement by the amount of such
ratio. The Company 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 the warrants to purchase 245,000
shares issued in August 1999 to $4.00 per share. The fair value of this warrant
repricing, as calculated by using the Black-Scholes pricing model, was estimated
to be approximately $55,000, using the following weighted average assumptions:
stock price of $0.88, risk free interest rate of 6.48%, expected life of 3.5
years, a volatility factor of 80% and a dividend yield of 0%, and is recorded as
a debt discount in the accompanying financial statements. The remaining
Restricted Cash is reflected as other restricted cash in the accompanying
consolidated financial statements.
In connection with the October 19 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 2,500,000 shares issued upon
conversion of the Debenture from JEM Ventures. 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 5 years, a
volatility factor of 80% and a dividend yield of 0%.
(3) PURCHASE AND INVESTMENT WITH CALDERA SYSTEMS, INC.
On September 15, 2000, the Company entered into a Purchase and Sale
Agreement ("P&S 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
9
known as Electronic Linux Marketplace. The Company will further develop the
business concept in a wholly owned subsidiary, partnerAxis, Inc.
("PARTNERAXIS"). The Company issued 4,000,000 shares of its common stock to
Caldera as its initial payment for the assets. The stock issued was valued at
$1.60 per share, the average closing price for September 11, 2000 through
September 15, 2000. Of the $6.4 million total, $3,360,811 has been recorded as
partnerAxis intangible assets, $3 million as restricted cash and $39,189 as
furniture and equipment in the accompanying consolidated financial statements.
The Company has engaged a third party to determine the purchase price allocation
of the intangible assets acquired. The intangible assets are anticipated to be
amortized over a useful life of 2 to 3 years. Up to 4,000,000 additional shares
of common stock were issuable to Caldera based on the earnings performance of
partnerAxis, as defined in the Purchase and Sale Agreement, during the period of
December 15, 2000 through December 15, 2001.
The P&S Agreement with Caldera also provided for $3 million of cash to the
Company, which was received for 3 of the 4 million shares issued in the
transaction. These funds are restricted for use in developing and implementing
the partnerAxis business plan and are included in restricted cash in the
accompanying consolidated balance sheet.
The Company has reached an agreement in principle with Caldera as reflected
in a term sheet signed January 2, 2001 regarding modification of the P&S
Agreement entered into on September 15, 2000. As part of the P&S Agreement, $3
million in proceeds from the sale to Caldera of 3 million shares of common stock
of the Company were to be used in developing the business plan of partnerAxis.
Caldera and the Company have agreed to modify the P&S Agreement with regard to
the balance of the $3 million proceeds, which now total $2.1 million. Per the
term sheet, $1 million would be immediately deposited with an independent escrow
agent and the remaining $1.1 million must be deposited with the escrow agent no
later than June 30, 2001 (the "ESCROW FUNDS"). Prior to this date, the Company
may use those funds for purposes other than developing the business plan of
partnerAxis, and the Company has, in fact, used $1.1 million of the Escrow Funds
for other purposes. Should the Company fail to deposit the $1.1 million with the
escrow agent by June 30, 2001, the Company is required to issue to Caldera a
warrant to purchase 1 million shares of common stock of the Company at the price
per share equal to the lesser of 50% of fair market value per share on the
exercise date or $1.00 per share and on terms and conditions as set forth in the
warrant. Additional terms include payment of a 5% royalty on revenues derived
from partnerAxis in lieu of issuance of additional shares based on earnings
performance. Final documents for the modification should be completed and
executed in the near future.
(4) SECURED CONVERTIBLE PROMISSORY NOTE
On August 22, 2000, the Company issued a Secured Convertible Promissory
Note to Canopy in the amount of $500,000 in exchange for cash. The note bears
interest at the annual compounded rate of 10% per annum and is convertible into
shares of common stock at $1.00 per share at the holder's discretion. The
maturity date of the note was September 22, 2000. The fair market value of the
Company's stock was $1.26. An approximate $130,000 beneficial conversion feature
charge has been recorded as interest expense.
The note was amended December 31, 2000 and combined with a $500,000 Secured
Convertible Promissory Note dated July 10, 2000 from LinuxMall to Canopy plus
all accrued interest (the "AMENDED NOTE"). The Amended Note was issued for a
total principal amount of $1,041,781 and is due June 30, 2001. If the Amended
Note is not timely paid it is convertible into shares of common stock at a per
share conversion price equal to the lesser of 50% of the average closing price
of the stock for the five day period prior to conversion or $0.75 per share. In
addition, warrants to purchase 1,230,769 shares of the Company's common stock at
$0.375 per share were issued to Canopy.
10
(5) ACQUISITION OF LINUXMALL.COM , INC.
On October 5, 2000, the Company completed the acquisition of LinuxMall by
the merger of LinuxMall into a newly formed wholly owned subsidiary of the
Company. Under the terms of the final transaction, the Company paid $14.7
million for the acquisition comprised of 7.4 million shares of the Company's
common stock valued at $9.6 million, options for 0.9 million shares of the
Company's common stock valued at $0.9 million, warrants for 4.6 million shares
of the Company's common stock valued at $4.1 million and related transaction
costs totaling $0.1 million. In addition, $5.7 million in net liabilities of
LinuxMall are included for the total consideration of $20.4 million.
Approximately 2.5 million additional shares were issued in January 2001 upon
conversion of the remaining outstanding preferred convertible debentures. The
fair value of all shares to be issued to acquire LinuxMall equals approximately
$9.6 million or $1.30 per share. All amendments to the 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 has engaged a third party to determine the purchase price
allocation of the intangible assets acquired. The allocation is as follows:
Period of
Amortization
Amount in Years
------ --------
Assembled workforce 330,000 3
Technology 1,310,000 3
Customer List 770,000 2
Trademarks 4,210,000 5
Goodwill 13,779,152 5
-----------
20,399,152
(6) SUBSEQUENT EVENTS
On January 4, 2001, the Company completed the acquisition JBSI by the
merger of JBSI into a newly formed wholly owned subsidiary of the Company. Under
the terms of the final transaction, the Company paid $8.7 million for the
acquisition comprised of 8.3 million shares of the Company's common stock valued
at $6.1 million and options for 3.7 million shares of the Company's common stock
valued at $2.6 million. The fair value of all shares to be issued to acquire
JBSI equals approximately $6.1 million or $0.7312 per share. Any amendments to
the Plan of Merger, dated November 17, 2000 are not significant, and this
measurement date was used for the purchase price determination. The transaction
will be accounted for under the purchase method of accounting in accordance with
APB 16. The Company has engaged a third party to determine the purchase price
allocation of the intangible assets acquired. The intangible assets are
anticipated to be amortized over a useful life of 2 to 3 years.
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, our plans and expectations, financial
projections and performance and acceptance of our products and services in the
marketplace. Our actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such 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.
Effective January 17, 2001, our independent auditors resigned. A Form 8-K
and Form 8-K/A reporting this resignation were filed with the Securities and
Exchange Commission ("SEC") on January 22, and January 26, 2001 respectively.
Because of the timing of this resignation, we have been unable to replace the
independent auditors, but anticipate that we will do so in the near term. As a
result, the financial statements included in this Form 10-QSB have not been
reviewed by an independent auditor firm, as required under applicable SEC rules.
We anticipate that the new independent auditors we engage will review these
financial statements and that an amended Form 10-QSB will be filed with the
reviewed financial statements. We have been advised by the SEC that until an
amended Form 10-QSB is filed with financial information that has been reviewed
by independent auditors, that the SEC does not consider us to have current
public information available for purposes of Rule 144(c). Accordingly, Rule 144,
other than Rule 144(k), may not be relied upon for sales of our common stock by
persons holding any such shares considered to be "Restricted Securities" under
Rule 144.
OVERVIEW
Ebiz Enterprises, Inc. is a computer solutions integrator supplying
server-based hardware and software solutions to computer resellers and high-end
corporate users on a nationwide basis. We are headquartered in Scottsdale,
Arizona with our primary production facilities located in Stafford, Texas. We
also own and operate a number of Web sites designed to supply and support the
Linux and Unix technical communities. These sites include Linuxmall.com,
TheLinuxStore.com, JBSI.com and Ebizmart.com.
During the fiscal quarter ended December 31, 2000, we completed our
acquisition of LinuxMall.com, Inc. ("LINUXMALL"). We acquired all of the
outstanding stock and assumed outstanding convertible debentures of LinuxMall.
As a result, we acquired the LinuxMall.com Web site, a leading Linux e-commerce
site and an Internet gathering place for the Linux community. The combination of
this Web site with TheLinuxStore.com is expected to position Ebiz as one of the
largest vendor-neutral Linux shopping mall and destination sites on the
Internet.
Management's focus in the fiscal quarter ended December 31, 2000 was
consolidation of LinuxMall operations to Scottsdale, securing additional
operating capital and improving our direct sales team.
On October 6, 2000 Dave Shaw and Ray Goshorn assumed the positions of Chief
Executive Officer and Chief Financial Officer, respectively. By November 1, 2000
all fulfillment functions of LinuxMall had been successfully transferred to the
Scottsdale warehouse. All customer service functions, sales and marketing
responsibilities for the Web site, as well as the wholesale division of
LinuxMall had also been transferred.
12
In October of 2000, we secured an additional $2,083,500 in capital as a
result of conversion of a portion of our outstanding Debentures and a negotiated
sale of the shares issued upon such conversion. Additionally, in December 2000,
we restructured the terms of an outstanding $1,000,000 obligation to terms that
management believes to be more favorable.
Our sales team has progressed by the hiring of additional personnel and the
implementation of a training program designed to migrate our sales efforts from
low-margin, desktop PC's to higher margin Linux-based servers directed to the
corporate environment. As a result, both our sales and margins improved in the
three months ended December 31, 2000.
While e-commerce represents only a small percentage of our revenue, our Web
sites, LinuxMall.com and TheLinuxStore.com, are significant elements of our
overall Linux strategy. LinuxMall.com is intended to be the central branding
name for all of our Web properties. TheLinuxStore.com is a vendor-neutral site
for the purchase of "EVERYTHING LINUX." This site offers brand name systems,
peripherals, components and software from nationally known vendors, in addition
to our own brands. Popular recent additions to our offering of vendor-neutral
solutions include products such as 3ware storage controllers, Cobalt Servers,
Stormix firewalls and Cyclades remote access servers.
Our primary sales focus continues to migrate to the configuring and selling
of server-based computer solutions for a variety of business applications. Our
research and development group has been working on several new products that
focus on the "SPECIALIZED SERVER" marketplace. We anticipate these products will
be introduced in the fiscal quarter ending March 31, 2001.
Additionally, on November 17, 2000, we signed a definitive agreement to
purchase Jones Business Systems, Inc. ("JBSI") and completed this transaction on
January 4, 2001. Under the terms of the agreement, we acquired all of the
outstanding stock of JBSI. JBSI is a computer integrator primarily focused in
the UNIX marketplace. JBSI brings approximately $40 million in annual revenue to
our operations. More importantly, management believes that one of the greatest
sources of new Linux users will come from the UNIX environment. We believe that
direct and first access to this user base provides us with a substantial
advantage over our competition. Also significant is JBSI's state-of-the-art
manufacturing facility in Stafford, Texas. As of February 5, 2001, we relocated
all of our production facilities and inventory to this facility.
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
Sales for the three months ended December 31, 2000 were $3,159,651 compared
to $2,264,949 in the three months ended December 31, 1999. The $894,702
increase, approximately 39.5% compared to the prior period, was due to higher
sales of Linux servers and related components and the volume added by the
LinuxMall acquisition which represented approximately two-thirds of the
increase.
Cost of sales for the three months ended December 31, 2000 decreased to
79.8% of sales down from 98.8% of sales for the same period in 1999 which
resulted in a corresponding gross profit margin increase to 20.2% from 1.2% for
these periods. The increase was the result of our continued emphasis on higher
margin Linux systems and components, advertising revenues and the addition of
higher margin sales through the LinuxMall.com Web site. The gross profit for the
fiscal quarter ended December 31, 2000 was $638,015, an increase of $610,596
from the fiscal quarter ended December 31, 1999.
13
Selling, general and administrative expense was $2,385,294, or 75.5% of
sales, for the three months ended December 31, 2000 as compared to $1,475,431,
or 65.1% of sales, for the same period in 1999. The increase of $909,863, or
61.7%, was primarily due to salaries and related expenses for sales and
information technology personnel, the business formation and development
programs of our partnerAxis, Inc. subsidiary and higher marketing and
advertising expenses.
Depreciation and amortization expense increased to $1,599,059 in the three
months ended December 31, 2000 from $51,087 in the same period in 1999. The
increase was due to the amortization of the partnerAxis intangible assets and
the amortization of the goodwill recorded as the result of acquisitions.
Interest expense for the three months ended December 31, 2000 was
$1,453,259 as compared to $282,862 for the three months ended December 31, 1999.
The increase of $1,170,427 was principally due to the costs recorded for the
additional warrants issued in connection with financing activities and the $1.0
million increase in convertible short term debt. Interest and other income was
$69,843 for the three months ended December 31, 2000 as compared to $63,927 for
the same period in 1999. The increase was due to the interest earned by the
partnerAxis restricted cash.
The preceding factors resulted in a net loss attributable to common
stockholders of $4,804,508 or $0.22 per diluted share for the three months ended
December 31, 2000 as compared to a net loss attributable to common stockholders
of $1,928,269, or $0.26 per diluted share, for the three months ended December
31, 1999.
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
Sales were $5,589,458 for the six months ended December 31, 2000 compared
to $7,903,577 for the six months ended December 31, 1999. The decrease of
$2,314,119, approximately 29.3%, was due to our shift in strategic focus away
from brokerage sales and the sales of low-priced, Windows-based systems that
represented about half of sales in the six months ended December 31, 1999. These
decreases we partially offset by increased sales of Linux servers, server
components, advertising revenues and the volume added by the LinuxMall
acquisition.
Cost of sales for the six months ended December 31, 2000 decreased to 82.0%
of sales from 96.0% of sales for the same period in 1999, resulting in a
corresponding gross profit margin increase to 18.0% from 4.0% of sales for these
same periods. This improvement was the direct result of our strategic shift
towards Linux products and systems and the addition of higher margin sales by
the LinuxMall acquisition. The gross profit for the six months ended December
31, 2000 was $1,005,914, an increase of $686,472 from the six months ended
December 31, 1999.
14
Selling, general and administrative expense was $3,514,744, or 62.9% of
sales, for the six months ended December 31, 2000 as compared to $2,712,409, or
34.3% of sales, for the same period in the prior year. The increase of $802,335,
or 29.6%, was primarily due to higher sales and technical personnel costs and
the development costs of partnerAxis, Inc.
Depreciation and amortization expense for the six months ended December 31,
2000 was $1,768,202, an increase of $1,676,487 from the $91,715 recorded for the
six months ended December 31, 1999. This increase was primarily due to the
amortization of the partnerAxis intangible assets acquired in September 2000 and
the amortization of the goodwill recorded for acquisitions.
Interest expense was $2,003,649 for the six months ended December 31, 2000
as compared to $499,656 for the six months ended December 31, 1999. The increase
of $1,503,993 was primarily due to the debt discount and the costs recorded for
the warrants issued in connection with capital financings, and debt assumed with
the acquisition of LinuxMall. Interest and other income for the six months ended
December 31, 2000 was $138,274, an increase of $53,091 from the same period in
1999 due to the interest earned on the restricted cash accounts.
The preceding factors resulted in a net loss attributable to common
stockholders of $6,297,850, or $0.41 per diluted share, for the six months ended
December 31, 2000 as compared to a net loss attributable to common stockholders
of $3,168,558, or $0.46 per diluted share, for the six months ended December 31,
1999.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2000 cash and cash equivalents were $287,059, an increase
of $236,062 from the total of $50,997 at June 30, 2000. Our net cash used in
operating activities for the six months ended December 31, 2000 was $3,127,753
as compared to $1,162,959 used in the six months ended December 31, 2000. During
the first six months of fiscal 2001, cash generated by financing activities was
used to increase the size of our sales and information technology organizations
and to implement the start-up programs of the partnerAxis business plan.
The net cash used in investing activities during the first half of fiscal
2001 was $737,440. During the six months ended December 31, 2000, our most
significant activity in this area was the acquisition and development of the
software for the partnerAxis Web site. The acquisition of the partnerAxis
intangible assets during the first quarter of fiscal 2001 was completed through
the issuance of shares of our common stock and, therefore, had no effect on cash
flow.
During the six months ended December 31, 2000, the net cash provided by
financing activities was $4,101,255. We received $3.0 million from the sale of
stock to Caldera Systems, Inc. in September 2000. These funds are restricted for
use in developing partnerAxis, Inc. and $1,217,619 was utilized in the three
months ended December 31, 2000. Borrowings were $500,000, $251,032 was released
from restricted cash by the Debenture holder in July, 2000 and an additional
$2,152,604 was released in October, 2000.
15
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 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 generally
prohibited from converting any amount of the Debenture that 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 current amount of approximately $2,100,000. The required
amount of the restricted cash initially decreased 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 December 31, 2000, $2,725,209 of principal and accrued
interest had been converted to 2,831,028 shares of common stock.
On February 8, 2000, we agreed to modify the terms of conversion of the
Debenture in consideration of a release of $500,000 of the restricted cash
collateral. 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 amended 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.
On March 31, 2000 we 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. This modification was granted in
consideration for waiver of certain rights under the Debenture. All other
aspects of the formula remained unchanged.
In connection with a release of $250,000 of restricted cash collateral in
July 2000, we issued an additional warrant to the holder 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 December 31, 2000, the warrant had not been
exercised. We also agreed to reduce the conversion price of $264,097 of
principal to the lesser of (a) $1.00 or (b) the average of the three lowest
daily prices of our common stock for the 15 trading days prior to conversion.
On October 19, 2000, we agreed to additional modifications of the
Debenture. The holder agreed to convert $2,083,500 principal amount of the
Debenture in exchange for 2,500,000 shares of our common stock. The holder
agreed to reduce the cash collateral requirements of the Debenture by
$2,083,500. We also agreed to convert the per share conversion ratio for an
additional $416,500 principal amount of the Debenture to the lesser of (a) $1.00
or (b) the average of the lowest trading prices occurring on any three of the 15
day period prior to a conversion.
16
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 on October19, 2000 to $4.00
per share in connection with the transaction described above. The Warrant is
exercisable at any time prior to August 22, 2004. As of December 31, 2000 none
of the Warrants have been exercised.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this Form 10-QSB
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, 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.
17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various legal proceedings and have certain outstanding
claims as described in our Form 10-KSB for the year ended June 30, 2000. Certain
outstanding vendor claims have been settled. Management believes that all such
matters are within ordinary levels for an organization of our size and nature.
Management believes that these disputes will be resolved without material
adverse consequences to operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 5, 2000, we completed the acquisition of LinuxMall by the merger
of LinuxMall into a newly formed wholly owned subsidiary. Under the terms of the
final transaction, we agreed to issue 7.4 million shares of its common stock
valued at $9.6 million, options to purchase 0.9 million shares of its common
stock valued at $0.9 million, and warrants to purchase 4.6 million shares of its
common stock valued at $4.1 million. An additional approximate 2.5 million
shares will be issued in January 2001 upon conversion of the remaining
outstanding preferred convertible debentures. The securities were issued in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933.
On October 19, 2000 JEM Ventures EBIZ, LLC ("JEM VENTURES") and Ebiz agreed
to additional modifications of the Debenture. Ebiz agreed to convert $2.1
million principal amount of the Debenture in exchange for 2.5 million shares of
Ebiz's common stock. JEM Ventures agreed to reduce the collateral requirements
under the Debenture by a total of $2.1 million. Upon reduction of the letter of
credit requirements, the outstanding Debenture balance/letter of credit
requirement ratio is reset and all reductions of Debenture principal will reduce
the letter of credit requirement by the amount of the revised ratio. Ebiz also
agreed to reduce the per share conversion ratio of the Debenture to the lesser
of (a) $1.00 or (b) the average of the three lowest prices of our common stock
occuringin the 15 day period prior to conversion for an additional $416,500
principal amount of the Debenture and to reprice the exercise price of existing
oustanding warrants to purchase 245,000 shares to $4.00 per share. The warrants
were originally exerciseable at $6.3227 for 125,000 shares, at $7.4723 for
60,000 shares and at $8.6219 for 60,000 shares.
In connection with the above described modification of the Debenture, Ebiz
issued warrants to purchase 850,000 shares of its common stock at $1.00 per
share and 500,000 shares at $1.10 per share to The Canopy Group. In
consideration for issuance of the warrants, Canopy agreed to purchase the
2,500,000 shares issued upon conversion of the Debenture directly from JEM
Ventures. The warrants were issued in reliance on the exemption from
registrations provided by Section 4(2) of the Securities Act.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
During the three month period ended December 31, 2000, Ebiz filed a
Form 8-K on October 3, 2000, a Form 8-K on October 20, 2000, a Form 8-K/A
on December 19, 2000 and a Form 8-K/A on December 20, 2000.
The Form 8-K filed on October 3, 2000 disclosed information related to
the acquisition by Ebiz from Caldera Systems, Inc. of intellectual property
and other assets related to the marketing and distribution concept known as
Electronic Linux Marketplace. Ebiz is operating these assets in a separate
wholly owned subsidiary, partnerAxis, Inc. This Form 8-K also disclosed the
acquisition by Caldera of 3,000,000 shares of Ebiz common stock.
The Form 8-K filed on October 20, 2000, the Form 8-K/A filed on
December 19, 2000 and the Form 8-K/A filed on December 20, 2000 all
disclosed information related to the acquisition of LinuxMall.com, Inc. by
Ebiz.
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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 February 20, 2001 By /s/ Ray Goshorn
--------------------------------
Ray Goshorn
Chief Financial Officer
20