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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from __________ to __________
Commission File Number 0-27721
EBIZ ENTERPRISES, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 84-1075269
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10225 Via Linda, Suite 300
Scottsdale, Arizona 85258
(Address of principal executive offices)
(480) 346-2020
(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 April
30, 2001 was 33,897,325 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
FOR THE QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements....................................... 3
Consolidated Balance Sheets
March 31, 2001 (unaudited) and June 30, 2000............... 3
Consolidated Statements of Operations
For the Three and Nine Months Ended March 31, 2001
(unaudited) and 2000 (unaudited)........................... 4
Consolidated Statements of Cash Flows
For the Nine Months Ended March 31, 2001 (unaudited)
and 2000 (unaudited)....................................... 5
Notes to the Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 14
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 20
Item 2. Changes in Securities and Use of Proceeds.................. 20
Item 6. Exhibits and Reports on Form 8-K........................... 21
SIGNATURES......................................................... 22
2
PART I
FINANCIAL INFORMATION
EBIZ ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 (UNAUDITED) AND JUNE 30, 2000
Mar 31, 2001 June 30,2000
------------ ------------
ASSETS (Unaudited)
Current Assets:
Cash $ 756 $ 50,997
Accounts receivable, net of allowance for doubtful
accounts of $864,493 and $75,988 at March 31, 2001
and June 30, 2000, respectively 3,811,531 585,846
Inventory, net 2,006,775 747,545
Other prepaid expenses and current assets 445,573 28,158
------------ ------------
Total current assets 6,264,635 1,412,546
Furniture and Equipment, net 1,679,332 532,896
Restricted cash (Note 2) 2,109,556 4,504,164
Goodwill, net 29,285,204 629,162
Other Assets 927,390 131,079
------------ ------------
Total assets $ 40,266,117 $ 7,209,847
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of indebtedness 7,898,204 321,928
Accounts payable 7,987,505 1,880,822
Other Liabilities and Accrued expenses 3,072,241 1,367,135
------------ ------------
Total current liabilities 18,957,950 3,569,885
Convertible Debenture, net 4,205,095 4,503,579
Noncurrent portion of indebtedness 515,877 0
------------ ------------
Total liabilities 23,678,922 8,073,464
------------ ------------
Commitments and Contingencies
Redeemable Common Stock: 240,000 shares outstanding 1,200,000 1,200,000
------------ ------------
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
5,000,000 shares authorized; 7,590 shares issued
and outstanding at March 31, 2001 and June 30, 2000,
liquidation value $100 per share 366,737 366,737
Common stock; $0.001 par value; 70,000,000 shares
authorized; 33,174,681 and 8,497,566 shares issued
and outstanding at March 31, 2001 and June 30, 2000,
respectively 33,175 8,498
Additional paid-in capital 44,973,533 9,808,580
Notes Receivable for Common Stock (248,800) 0
Accumulated deficit (29,737,450) (12,247,432)
------------ ------------
Total stockholders' equity (deficit) 15,387,195 (2,063,617)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 40,266,117 $ 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 Nine Months Ended March 31, 2001 and 2000
(Unaudited)
Three Months Ended March 31, Nine Months Ended March 31,
------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(restated) (restated)
(unaudited) (unaudited)
Net Revenues $ 8,417,852 $ 2,223,655 $ 14,007,310 $ 10,127,232
Cost of Sales 7,251,474 1,981,158 11,835,018 9,439,863
Restructuring Expense - Inventory -- -- -- 125,430
------------ ------------ ------------ ------------
Gross profit 1,166,378 242,497 2,172,292 561,939
Selling, General and Administrative Expenses 3,979,104 1,512,701 7,493,848 4,225,110
Depreciation and Amortization 2,440,848 50,461 4,209,050 142,176
Provisions for Doubtful Accounts 58,946 14,717 176,439 203,144
Loss on Sale of partnerAxis 3,542,584 -- 3,542,584 --
Restructuring Expense -- -- -- 26,500
------------ ------------ ------------ ------------
Loss from operations (8,855,104) (1,335,382) (13,249,629) (4,034,991)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (1,152,159) (954,419) (4,355,987) (2,285,141)
Interest & Other income 34,248 77,591 172,522 162,774
------------ ------------ ------------ ------------
Total Other (1,117,911) (876,828) (4,183,465) (2,122,367)
------------ ------------ ------------ ------------
Net loss (9,973,015) (2,212,210) (17,433,094) (6,157,358)
Dividends on preferred stock 18,975 27,238 56,925 81,714
------------ ------------ ------------ ------------
Net Loss Attributable to Common Stockholders $ (9,991,990) $ (2,239,448) $(17,490,019) $ (6,239,072)
============ ============ ============ ============
Loss Per Common Share:
Basic and Diluted $ (0.30) $ (0.29) $ (0.83) $ (0.84)
Weighted Average Number of Common Shares:
Basic and Diluted 33,161,240 7,647,031 21,199,733 7,442,739
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
EBIZ ENTERPRISES, INC
Consolidated Statements of Cash Flows
For the Nine Months Ended March 31, 2001 and 2000
(Unaudited)
Nine Months Ended March 31,
-------------------------------
2001 2000
----------- -----------
(restated)
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (17,433,094) (6,157,358)
Adjustments to reconcile net loss to net cash used in
operatin activities:
Depreciation and amortization 4,209,050 142,176
Loss on Sales of partnerAxis 3,612,171 --
Securities exchanged for services 54,923 1,299,000
Warrants issued to convertible Debenture holder 1,308,077 199,185
Interest costs of Beneficial Conversion Feature 1,679,202 1,509,025
Amortization of discount and loan fees 675,620 250,241
Changes in assets and liabilities:
Accounts receivable 3,645 1,157,689
Inventory (44,295) 742,286
Prepaid advertising -- (1,050,000)
Prepaid expenses and other current assets (328,606) 17,934
Accounts payable (589,350) 450,475
Accrued expenses (395,147) (212,416)
----------- -----------
Net cash used in operating activities (7,247,804) (1,651,763)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES: (net of effect of business acquisitions):
Cash from Business acquisition 128,355 --
Increase in other assets (11,171) --
Purchase of furniture, fixtures, intellectual property and equipment,net (704,958) (211,551)
----------- -----------
Net cash used in investing activities (587,774) (211,551)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES: (net of effect of business acquisitions):
Net borrowings under line of credit 995,776 (100,000)
Borrowings from convertible secured note 1,500,000 488,000
Borrowings under notes payable -- --
Principal repayments of notes payable (105,047) (1,026,072)
Borrowings from convertible debenture, net -- 6,903,391
Transfer from/(to) restricted cash (non-current), net 2,394,608 (4,503,707)
Sale of stock, net of expenses 3,000,000 579,242
----------- -----------
Net cash provided by financing activities 7,785,337 2,340,854
----------- -----------
Net increase (decrease) in cash (50,241) 477,540
Cash, beginning of period 50,997 76,366
----------- -----------
Cash, end of period 756 553,906
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest 140,227 298,445
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND OPERATING ACTIVITIES:
Issuance of common stock for services and inventory -- 1,299,000
Dividends accrued on preferred stock 56,925 81,714
Beneficial Conversion Feature on Convertible Debentures 1,679,202 --
Issuance of warrants to Debenture holder 1,363,496 199,185
Subscriber receivable for common stock to be issued -- 4,500,000
Conversion of debt and related interest to common stock 2,147,705 244,503
Issuance of common stock for business acquisition 22,372,546 700,000
Issuance of stock for intangible assets and furniture and equipment 3,400,000 --
Issuance of options for consulting services 54,923 --
Issuance of stock for intangible assets 2,759,250 --
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 NINE MONTHS ENDING MARCH 31, 2001 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 qualified.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles ("GAAP") for complete
financial statements. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary for a fair presentation of
the results for the interim periods presented have been made. The results for
the three and nine month periods ending March 31, 2001 may not necessarily be
indicative of the results for the entire fiscal year. These consolidated
financial statements should be read in conjunction with the Company's Form
10-KSB/A for the year ended June 30, 2000.
ACCOUNTS PAYABLE
Included in accounts payable is approximately $22,000 and $169,000 of bank
overdrafts at March 31, 2001 and June 30, 2000, respectively.
RESTATEMENT
The Company has restated its financial statements for the three and nine
month periods ending March 31, 2000. The restatement relates to the recording of
a beneficial conversion feature of the Debenture issued on August 25, 1999 (see
Note 2) and the additional issuance costs related to subsequent amendments that
were made to the Debenture. The effect of the restatement did not have an impact
on cash flow of the Company. However, it did result in a non-cash charge
recorded as additional interest expense.
A beneficial conversion feature was incurred when the Company issued the
Debenture with a non-detachable conversion feature allowing the holder to
convert at a price less than the current fair market value of the Company's
stock. The Company's stock is highly volatile as a result of low volumes of
trades and large spread in bid and ask prices quoted by market makers. As a
result of the volatility, the Company believes that an average of closing trade
prices over a short period prior to issuance of the Debenture is more
representative of fair market value. The Company's interpretation of the fair
market value of its common stock on the date of the issuance of the Debenture
was different than the position taken by the Securities and Exchange Commission
("SEC") during a recent review. The Company has chosen to accept the SEC's
interpretation and restate its financial statements.
6
The effect on net loss attributable to common stockholders for the three
months ending March 31, 2000 was an increase of $696,542. The effect on net loss
per common share, basic and diluted, for the three months ending March 31, 2000
was an increase of $0.09. The effect on net loss attributable to common
stockholders for the nine months ending March 31, 2000 was an increase of
$1,527,608. The effect on net loss per common share, basic and diluted, for the
nine months ending March 31, 2000 was an increase of $0.19. The Company
previously reported a net loss attributable to common stockholders of $1.5
million or $0.20 net loss per common share, basic and diluted for the
three-month periods ended March 31, 2000, and $4.7 million or $0.63 net loss per
common share, basic and diluted, for the nine month periods ended March 31,
2000.
(2) CONVERTIBLE DEBENTURE
In August, 1999 the Company completed a private placement of a $7.1 million
convertible debt facility (the "DEBENTURE"). In conjunction with the Debenture,
the Company issued warrants to acquire 245,000 shares of common stock at a
market-based exercise price as defined by the Debenture agreement. The warrants
were originally exercisable for the purchase of shares of common stock as
follows: 60,000 at $7.4723 per share, 60,000 at $8.6219 per share and 125,000 at
$6.3227 per share. The fair value of these warrants, as calculated by using the
Black-Scholes pricing model, was estimated to be approximately $796,000, using
the following weighted average assumptions: stock price of $7.625, risk free
interest rate of 5.63%, expected life of two years, a volatility factor of 80%
and a dividend yield of 0%, and is recorded as a debt discount in the
accompanying consolidated financial statements. Additional issuance costs of
approximately $197,000 were paid and recorded as deferred loan fees in the
accompanying consolidated financial statements. Discounts and deferred loan fees
are amortized using the straight-line method, which approximates the effective
interest method, as additional interest expense over the term of the loan.
The Company received an initial infusion of $2.1 million as a result of
issuance of the Debenture, which was utilized to repay outstanding debt at June
30, 1999 and to provide working capital. The remaining $5.0 million was
deposited with a bank to collateralize a letter of credit issued as security for
the Debenture.
The Debenture is convertible, at the holder's option, into shares of the
Company's common stock over an 18 month period at approximately $394,000 per
month. The Company's ability to reduce the cash collateral and to have these
amounts available for working capital is contingent upon the holder converting
the Debenture or the Company's ability to pay down the Debenture with cash from
other sources. If the holder, at its discretion, converts the Debenture, the
Company could draw approximately $.70 for each $1 of Debenture principal
converted to fund operations. This ratio has been modified (see Note 5). The
unconverted balance, if any, of the Debenture and the unconverted accrued
interest is due February 24, 2002.
The per share conversion price was initially equal to the lesser of (a)
$7.4953 or (b) the average of the three lowest closing bid prices of the
Company's common stock for the 15 consecutive trading days ending on the trading
day immediately preceding submission of a notice to convert by the holder. In
the event the closing bid price of the Company's common stock is less than
$7.4953 at any time during the five trading days preceding a due date, the
Company has the right to redeem for cash the monthly conversion amount of the
Debenture at premiums ranging from 105% to 108%.
7
The Debenture required that the related shares of the Company's common
stock issuable upon conversion of the Debenture be registered under the
Securities Act of 1933 and the regulations of the SEC before the holder could
begin to convert the Debenture to common stock. The necessary registration was
initiated by the Company in October 1999 and became effective in February 2000.
As of March 31, 2000, the holder had accrued the rights to convert all the
outstanding principal of approximately $4.5 million of the principal of the
Debenture into shares of the Company's common stock.
The Company recorded a beneficial conversion feature of approximately $3.6
million related to the issuance of the Debenture. The beneficial conversion
feature was based on the difference between the closing trade price and the
conversion price on the date of issuance on the portion of the Debenture that
was convertible, net of the proceeds allocated to the warrants. For the portion
of the Debenture not convertible upon issuance, the holder accrues the right to
convert over a period of 18 months.
In February 2000, the Debenture was amended to reduce the conversion price
on accrued principal of $2,761,108 and interest of $140,203 to equal the lesser
of (a) $3.84 or (b) the average of the three lowest closing bid prices of the
Company's common stock for the 15 consecutive trading days ending on the trading
day immediately preceding submission of a notice to convert by the holder. In
March 2000, the Debenture was amended to change the formula on the variable
conversion price from the three lowest closing bid prices to the three lowest
trading prices in the 15 consecutive trading days ending on the trading day
immediately preceding submission of a notice to convert by the holder. In
connection with the amendments to the Debenture, the Company recorded additional
deferred loan fees of approximately $140,000, which will be amortized over the
remaining term of the Debenture that the holder accrues the right to convert.
In July 2000, the Debenture was amended to reduce the conversion price of
$264,087 of principal to the lesser of (a) $1.00 or (b) the average of the three
lowest trade prices of the Company's common stock for the 15 consecutive trading
days ending on the trading day immediately preceding submission of a notice to
convert by the holder. In connection with the amendment to the Debenture, the
Company recorded additional deferred loan fees of approximately $170,000, which
will be amortized over the remaining term of the Debenture that the holder
accrues the right to convert.
In connection with the February 2000 amendment, $500,000 of the cash
collateral was released by the holder. In connection with the July 2000
amendment, an additional $250,000 of cash collateral was released by the holder.
Also, in conjunction with the July 2000 release of funds, the Company
issued warrants to acquire 125,000 shares of common stock at $2.00 per share.
The fair value of these warrants, as calculated by using the Black-Scholes
pricing model, was estimated to be approximately $125,000, using the following
weighted average assumptions: stock price of $1.56, exercise price of $2.00,
risk free rate of 6.48%, expected life of five years, a volatility factor of 80%
and a dividend yield of 0%, and is recorded as financing costs in the
accompanying consolidated financial statements. The remaining net cash
collateral is reflected as other restricted cash in the accompanying
consolidated financial statements.
8
On October 19, 2000, the Debenture holder and the Company agreed to
additional modifications of the Debenture. The Company agreed to convert
$2,083,500 principal amount of the Debenture in exchange for 2.5 million shares
of the Company's common stock. The Debenture holder agreed to reduce the
collateral requirements under the Debenture by a total of $2,083,500
immediately, and by up to an additional $416,500, in two $208,250 increments
provided November and December net revenues equaled or exceeded certain
projected levels. Upon reduction of the collateral requirements, the outstanding
Debenture balance/letter of credit requirement ratio is to be reset and all
further reductions of Debenture principal will reduce the letter of credit
requirement by the amount of such ratio. The Company also agreed to reduce the
per share conversion ratio of the Debenture to the lesser of (a) $1.00 or (b)
the amount equal to the average of the lowest three trade prices of the
Company's common stock for the 15 consecutive trading days ending on the day
preceding the date of submission of a conversion notice, for an additional
$416,500 principal amount of the Debenture and to re-price the exercise price of
an existing outstanding warrant to purchase 245,000 shares to $4.00 per share.
The warrant was originally exercisable at $6.3227 per share for 125,000 shares,
$7.4723 per share for 60,000 shares and $8.6219 per share for 60,000 shares. The
fair market value of the re-priced warrant, as calculated by the Black-Scholes
pricing model, was estimated to be approximately $55,000, using the following
weighted average assumptions: stock price of $0.88, exercise price of $4.00,
risk free interest rate of 6.48%, expected life of 3.5 years, a volatility
factor of 80% and a dividend yield of 0%. In connection with the re-pricing of
the warrant, the Company recorded additional deferred loan fees of approximately
$55,000, which will be amortized as interest expense over the remaining term of
the Debenture.
In connection with the modification of the Debenture, the Company issued
warrants to purchase 850,000 shares of its common stock at $1.00 per share and
500,000 shares at $1.10 per share to The Canopy Group, Inc. ("Canopy"). In
consideration for issuance of the warrants, Canopy purchased the 2.5 million
shares issued upon conversion of the Debenture from the Debenture holder. The
fair value of these warrants, as calculated by the Black-Scholes pricing model,
was estimated to be approximately $740,000, using the following weighted average
assumptions: stock price of $0.84, risk free interest rate of 6.48%, expected
life of five years, a volatitlity factor of 80% and a dividend yield of 0%. In
connection with the issuance of the warrants, the Company recorded a charge to
interest expense of approximately $740,000.
Interest payable to the holder has been accrued monthly since September
1999 with approximately $150,000 paid in cash, as required by the terms of the
Debenture, prior to the registration process. During February 2000,
approximately $140,500 of interest was converted into 36,546 shares of common
stock. An additional $8,200 of interest converted into 4,799 shares of common
stock during March through June 2000. The fair value of the Company's common
stock ranged from $6.90 to $1.92 on the dates of the interest conversions during
the period from February to June 2000. The Company recorded a beneficial
conversion feature on the conversion of interest for the period of February
through June of 2000 of approximately $86,000. Additionally, during February
through June 2000, approximately $429,000 of principal was converted to 222,683
shares. No conversions were made during July and August 2000. During September
2000, approximately $60,900 of principal and $3,293 of interest was converted
into 63,563 and 3,437 shares of common stock, respectively. The fair value of
the Company's common stock ranged from $1.06 to $2.13 on the dates of the
9
interest conversion in September 2000. The Company recorded a beneficial
conversion feature on the conversion of interest of approximately $2,000, which
is reflected as additional interest expense during the three months ending
September 30, 2000. As of March 31, 2001 the remaining balance of accrued
interest payable was approximately $598,000.
(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, Inc. ("partnerAxis"). The Company issued
4,000,000 shares of its common stock to Caldera as its initial payment for cash
and 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 $3 million of restricted cash was
dedicated for use in developing and implementing the partnerAxis business plan.
The intangible assets are anticipated to be amortized over a useful life of 2 to
3 years. Up to 4,000,000 additional shares of common stock were issuable to
Caldera based on the earnings performance of partnerAxis, as defined in the
Purchase and Sale Agreement, during the period of December 15, 2000 through
December 15, 2001. The exact number of additional shares to be issued is not
determinable at this time.
The Company has reached an agreement in principle with Caldera as reflected
in a term sheet dated January 24, 2001 regarding modification of the Purchase
and Sale Agreement entered into on September 15, 2000. As part of the Purchase
and Sale Agreement, $3 million in proceeds from the sale to Caldera of 3 million
shares of common stock of the Company were to be used in developing the business
plan of partnerAxis. Caldera and the Company have agreed to modify the Purchase
and Sale Agreement with regard to the balance of the $3 million proceeds which
now total $2.1 million. Per the term sheet, $1 million would be immediately
deposited with an independent escrow agent and the remaining $1.1 million must
be deposited with the escrow agent no later than June 30, 2001 (the "ESCROW
FUNDS"). Prior to this date, the Company may use those funds for purposes other
than developing the business plan of partnerAxis, and the Company has, in fact,
used $1.1 million of the Escrow Funds for other purposes. Should the Company
fail to deposit the $1.1 million with the escrow agent by June 30, 2001, the
Company is required to issue to Caldera a warrant to purchase 1 million shares
of common stock of the Company at the price per share and on terms and
conditions as set forth in the warrant. Additional terms include payment of a 5%
royalty on revenues derived from partnerAxis in lieu of issuance of additional
shares based on earnings performance. Final documents for the modification
should be completed and executed in the near future.
On April 16, 2001, the Company completed the sale of its wholly owned
subsidiary, partnerAxis, Inc. ("partnerAxis"), to BySynergy, LLC ("BySynergy"),
pursuant to a Stock Purchase Agreement dated April 13, 2001 (see Note 7).
10
(4) SECURED CONVERTIBLE PROMISSORY NOTE
On August 22, 2000, the Company issued a Secured Convertible Promissory
Note to Canopy in the amount of $500,000 in exchange for cash. The note bears
interest at the annual compounded rate of 10% per annum and is convertible into
shares of common stock at $1.00 per share at the holder's discretion. The
maturity date of the note was September 22, 2000. The fair market value of the
Company's stock was $1.26 on the date of issuance. A beneficial conversion
feature of $130,000 has been recorded as interest expense.
The note was amended December 31, 2000 and combined with a $500,000 Secured
Convertible Promissory Note dated July 10, 2000 from LinuxMall to Canopy plus
all accrued interest (the "AMENDED NOTE"). The Amended Note was issued for a
total principal amount of $1,041,781 and is due June 30, 2001. If the Amended
Note is not timely paid it is convertible into shares of common stock at a per
share conversion price equal to the lesser of 50% of the average closing price
of the stock for the five day period prior to conversion or 200% of the closing
price on the date of the Amended Note. In addition, warrants to purchase
1,230,769 shares of the Company's common stock at $0.375 per share were issued
to Canopy. The fair value of these warrants, as calculated by using the
Black-Scholes pricing model, was estimated to be approximately $215,000, using
the following weighted average assumptions: stock price of $0.375, exercise
price of $0.375, risk free rate of 6.48%, expected life of two years, a
volatility factor of 80% and a dividend yield of 0%, and is recorded as interest
expense.
On January 29, 2001, the Company issued a Secured Convertible Promissory
Note to Canopy in the amount of $1,000,000 in exchange for cash. The note bears
interest at the annual compounded rate of 10% per annum and is due on October
29, 2001 (THE "CANOPY 1/29/01 NOTE"). If the Canopy 1/29/01 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 200% of the closing price on the date
of the Canopy 1/29/01 note. In addition, warrants to purchase 1,063,829 shares
of the Company's common stock at $0.47 per share were issued to Canopy. The fair
value of these warrants, as calculated by using the Black-Scholes pricing model,
was estimated to be approximately $233,000, using the following weighted average
assumptions: stock price of $0.47, exercise price of $0.47, risk free rate of
6.48%, expected life of two years, a volatility factor of 80% and a dividend
yield of 0%, and is recorded as interest expense.
(5) ACQUISITION OF LINUXMALL.COM , INC.
On October 5, 2000, the Company completed the acquisition of LinuxMall by
the merger of LinuxMall into a newly formed wholly owned subsidiary of the
Company. Under the terms of the final transaction, the Company paid $14.7
million for the acquisition comprised of 7.4 million shares of the Company's
common stock valued at $9.6 million, options to purchase 0.9 million shares of
the Company's common stock valued at $0.9 million, warrants for 4.6 million
shares of the Company's common stock valued at $4.1 million and related
transaction costs totaling $0.1 million. The fair value of all shares to be
issued to acquire LinuxMall equals approximately $9.6 million or $1.30 per
share. In addition, $5.7 million in net liabilities are included in the
calculation for a total consideration of $20.5 million. Approximately 2.5
million shares were issued in January 2001 upon conversion of the remaining
11
outstanding preferred convertible debentures. The amendments to the original
purchase agreement were not significant, except for a change in the conversion
ratio on October 3, 2000, which reduced the ratio from 2.2 to 1 for all shares
to a ratio of 2.0 to 1 for preferred stock and 1.8 to 1 for common stock, which
triggered a new measurement date for the purchase price determination. The
transaction will be accounted for under the purchase method of accounting in
accordance with APB 16. The Company engaged a third party to determine the
purchase price allocation of the intangible assets acquired. The allocation of
the total purchase price is as follows:
Period of
Amortization
Amount In Years
------------ ------------
ALLOCATION:
Current assets $ 722,071
Other non-current assets 461,163
Current liabilities (4,387,921)
Long-term debt (2,526,270)
------------
Assembled workforce 330,000 3
Technology 1,310,000 3
Customer List 770,000 2
Trademarks 4,210,000 5
Goodwill 13,845,771 5
------------
$ 14,734,814
============
The liabilities were comprised of convertible debt, trade accounts payable
and accrued expenses.
(6) ACQUISITION OF JBSI, INC.
On January 4, 2001, the Company completed the acquisition of JBSI by the
merger of JBSI into a newly formed wholly owned subsidiary of the Company. Under
the terms of the final transaction, the Company paid $7.8 million for the
acquisition comprised of 8.3 million shares of the Company's common stock valued
at $6.0 million and options for 3.7 million shares of the Company's common stock
valued at $1.7 million. The fair value of all shares to be issued to acquire
JBSI equals approximately $6.0 million or $0.7312 per share. The fair value of
the options was calculated by using the Black-Scholes pricing model using the
following weighted average assumptions: stock price of $0.7312, exercise price
of $0.40, risk free rate of 6.48%, expected life of two years, a volatility
factor of 80% and a dividend yield of 0%. In addition, $3.7 million in net
liabilities are included in the calculation of the total consideration of $11.5
million. Amendments to the Plan of Merger dated November 20, 2000 were not
significant, and this measurement date was used for the purchase price
determination. The transaction will be accounted for under the purchase method
of accounting in accordance with APB 16. The Company has engaged a third party
to determine the purchase price allocation of the intangible assets acquired.
The intangible assets are anticipated to be amortized over a useful life of two
to five years.
12
(7) SUBSEQUENT EVENTS
On April 6, 2001, the Company issued a Secured Convertible Promissory Note
to Canopy in the amount of $1,000,000 in exchange for cash (THE "CANOPY 4/6/01
NOTE"). The proceeds were funded for customers purchase orders for the
manuafacturing of high performance computers. The note bears interest at the
annual compounded rate of 10% per annum and is due on Ocotober 5, 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 200% of the
closing price on the date of the Canopy 4/6/01 note. In addition, warrants to
purchase 520,834 shares of the Company's common stock at $0.96 per share were
issued to Canopy. The fair value of these warrants, as calculated by using the
Black-Scholes pricing model, was estimated to be approximately $233,000, using
the following weighted average assumptions: stock price of $0.47, exercise price
of $0.47, risk free rate of 6.48%, expected life of two years, a volatility
factor of 80% and a dividend yield of 0%, and will be recorded as interest
expense in the quarter ending June 30, 2001.
On April 16, 2001, the Company completed the sale of its wholly owned
subsidiary, partnerAxis, Inc.("partnerAxis"), to BySynergy, LLC ("BySynergy"),
pursuant to a Stock Purchase Agreement dated April 13, 2001. The Company
realized a loss of $3,612,171 in relation to the sale of partnerAxis.
At the Closing, the Company conveyed all of the outstanding capital stock
of partnerAxis to BySynergy for a nominal cash payment, and the Company
delegated to BySynergy certain duties and obligations of the Company (the
"Obligations") set forth in the Use Restriction Agreement dated September 15,
2000 by and between the Company and Caldera Systems, Inc. ("Caldera") as
modified. BySynergy expressly assumed the Obligations and agreed to fully
perform all of the Obligations which are identified as (i) providing a minimum
of $1.1 million in financing for partnerAxis no later than June 30, 2001 and
continuing to develop, fund and operate partnerAxis until December 31, 2001,
(ii) paying to Caldera a 5% royalty on the total gross revenue earned by
partnerAxis, their successors and assigns with respect to the business of
partnerAxis, and (iii) granting to Caldera, for its internal business purposes
only, a perpetual fully paid-up, royalty free license to use all of the
intellectual property, technology, software, the computer programs, trade
secrets, data, designs, proprietary works and processes now-existing or as it
may be developed in the future that is used in or related to or associated with
the business of partnerAxis.
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,
13
statements regarding future events, our plans and expectations, financial
projections and performance and acceptance of our products and services in the
marketplace. Our actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed elsewhere in this Form 10-QSB or
incorporated herein by reference. See "Special Note on Forward-Looking
Statements" below.
OVERVIEW
EBIZ had two significant developments during the quarter ended March 31,
2001 which are anticipated to generate both expense savings and revenue growth.
The developments were the acquisition of Jones Business Systems, Inc. ("JBSI")
and the disposition of a subsidiary, partnerAxis, Inc. ("partnerAxis").
With the acquisition of JBSI, we almost tripled our revenue to
approximately $8.4 million. Also, after deducting non-recurring and one-time
expenses discussed below, our selling, general and administrative expense, as a
percentage of sales, has been reduced from 68% to 23% as compared to the quarter
ended March 31, 2000. The favorable financial impact that is anticipated from
the complete integration of JBSI will be realized beginning next quarter.
Even with the achievement of our cost reductions and revenue growth goals
we will still need to raise additional capital to satisfy current obligations.
Details of management's plans to address capital needs are discussed below. See
"Liquidity and Capital Resources".
ACQUISITION OF JBSI - Effective January 4, 2001, we completed the acquisition of
JBSI. JBSI is a computer integrator primarily focused in the UNIX marketplace,
which brings approximately $30 million in additional annual revenue to our
operations. We believe that one of the greatest sources of new Linux users will
come from the UNIX environment and that direct and first access to this user
base provides us with a substantial advantage over our competition.
Equally important, we finalized our integration into JBSI's
state-of-the-art manufacturing facility located in Stafford, Texas. During the
quarter, inventory and all production, purchasing and customer service functions
were relocated from the Arizona location to the Stafford facility. We believe
that significant cost reductions will be realized in future operations through
the elimination of non-recurring costs such as personnel, professional fees,
facility overhead and advertising. The savings from these reductions were not
realized for the quarter ending March 31, 2001 for two reasons. The complete
integration of the two companies was not completed until March 2001, resulting
in duplicate costs through most of the quarter. The most significant reduction,
an approximate 31% decrease in the employee head count, had no favorable impact
on the current quarter expenses because of the severance packages issued to the
terminated employees. However, we anticipate that these reductions will produce
a savings of approximately $400,000 per quarter into the future.
In addition, we incurred one-time charges totaling approximately $1 million
during the quarter ended March 31, 2001, which were mostly related to the JBSI
acquisition. The one-time expenses were primarily legal and accounting
14
professional fees, relocation related expenses, loss on disposition of assets
from shutting down the Colorado and Arizona facilities, and the write-off of
inactive inventory.
DISPOSITION OF PARTNERAXIS - On April 16, 2001, we completed the disposition of
partnerAxis. With the disposition, we realized a non-cash loss of $3.6 million,
primarily due to the write off of the intangible assets and capitalized software
development costs previously recorded.
The major factors leading to the decision to dispose partnerAxis were the
costs necessary to operate the subsidiary, approximately $500,000 during the
quarter ended March 31, 2001. The disposition relieves the requirement of
raising additional capital necessary to fund the continuing development of
partnerAxis until it could begin to produce revenues. The disposition also
allows us to focus primarily on our core business of supplying computing
solutions to our corporate and channel accounts nationwide.
Although there is considerable focus on reduction of expenses, an increase
in revenue is mandatory for success. Our primary sales focus continues to
migrate to the configuring and selling of Linux based servers and computer
solutions for a variety of business applications. This bundled solutions
approach offers higher margins and is directed to the corporate environment. Our
research and development team has been working on several new products that
focus on the "SPECIALIZED SERVER" marketplace. During the quarter ended March
31, 2001 we began to receive orders for these products and began shipping these
products in April.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
Sales for the three months ended March 31, 2001 were $8,417,852 compared to
$2,223,655 in the three months ended March 31, 2000. The $6,194,197 increase,
approximately 278.6% over the prior period, was due to the additional sales
volume added by the JBSI acquisition.
Cost of sales for the three months ended March 31, 2001 was $7,251,474 as
compared to $1,981,158 for the three months ended March 31, 2000, an increase of
$5,270,316. The cost of sales percentage for the three months ended March 31,
2000, decreased to 86.1% of sales, down from 89.1% of sales for the same period
in 2000, which resulted in a corresponding gross profit margin increase to 13.9%
from 10.9% for the respective periods. The 3% increase was the result of our
continued emphasis on higher margin Linux systems and components and advertising
revenues. During the quarter ending March 31, 2001, we recorded a charge to cost
of sales of approximately $135,000 (1.5% of revenue for the quarter) for
obsolete and inactive inventory. The gross profit for the fiscal quarter ended
March 31, 2001 was $1,166,378, an increase of $923,881 from the fiscal quarter
ended March 31, 2000.
Selling, general and administrative expense was $3,979,104, or 47% of
revenue, for the three months ended March 31, 2001 as compared to $1,512,701, or
68% of revenue, for the same period in 2000. The increase of $2,466,403, or
163.0%, was due to additional expenses related to the JBSI acquisition in the
form of one-time merger related expenses of approximately $1 million. These
expenses represent primarily professional fees, travel and restructuring charges
15
related to the closing of facilities in Arizona and Colorado. Additional cost
increases of approximately $500,000 came from the continued development of
partnerAxis, approximately $1.2 million from an increase in employee related
costs, primarily salaries, commissions and benefits, and $100,000 from duplicate
overhead expenses related to the separate operation of the companies until the
integration was complete. These increases were partially offset by a decrease of
$450,000 in marketing and advertising expenses.
Depreciation and amortization expense increased to $2,440,848 in the three
months ended March 31, 2001 from $50,461 in the same period in 2000. The
increase was due to the amortization of the partnerAxis intangible asset and the
goodwill recorded as the result of the LinuxMall and JBSI acquisitions.
Interest expense for the three months ended March 31, 2001 was $1,152,159
as compared to $954,419 for the three months ended March 31, 2000. The increase
of $197,740 was principally due to the costs recorded for the additional
warrants issued in connection with financing activities. Interest and other
income was $34,248 for the three months ended March 31, 2001 as compared to
$77,591 for the same period in 2000.
The preceding factors resulted in a net loss attributable to common
stockholders of $9,991,990 or $0.30 per diluted share for the three months ended
March 31, 2001 as compared to a net loss attributable to common stockholders of
$2,239,448, or $0.29 per diluted share, for the three months ended March 31,
2000.
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
Sales were $14,007,310 for the nine months ended March 31, 2001 compared to
$10,127,232 for the nine months ended March 31, 2000. The increase of
$3,880,078, approximately 38.3% over the prior period, was due to the volume
added by the JBSI acquisition.
Cost of sales for the nine months ended March 31, 2001 was $11,835,018 as
compared to $9,439,863 for the nine months ended March 31, 2000, an increase of
$2,395,155. The cost of sales percentage for the nine months ended March 31,
2001 decreased to 84.5% of sales from 94.5% of sales for the same period in
2000, resulting in a corresponding gross profit margin increase to 15.5% from
5.5% 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 JBSI acquisition. During the nine months ending March
31, 2001, we recorded a charge to cost of sales of approximately $135,000 for
obsolete and inactive inventory. The gross profit for the nine months ended
March 31, 2001 was $2,172,292, an increase of $1,610,353 from the nine months
ended March 31, 2000.
Selling, general and administrative expense was $7,493,848, or 53% of
revenue, for the nine months ended March 31, 2001 as compared to $4,225,110, or
42% of revenue, for the same period in the prior year. The increase of
$3,268,738, or 77.4%, was due to additional expenses related to the JBSI
acquisition in the form of one-time merger related expenses of approximately $1
16
million. These expenses represent primarily professional fees, travel and
restructuring charges related to the closing of facilities in Arizona and
Colorado. Additional cost increases of approximately $700,000 came from the
continued development of partnerAxis, approximately $1.9 million from an
increase in employee related costs, primarily salaries, commissions and
benefits, and $100,000 from duplicate overhead related to the separate operation
of the companies until the integration was complete. These increases were
partially offset by a decrease of $350,000 in marketing and advertising
expenses.
Depreciation and amortization expense for the nine months ended March 31,
2001 was $4,209,050, an increase of $4,066,874 over the $142,176 recorded for
the nine months ended March 31, 2000. The increase was due to the amortization
of the partnerAxis intangible assets and the amortization of the goodwill
recorded as the result of the LinuxMall and JBSI acquisitions.
Interest expense was $4,355,987 for the nine months ended March 31, 2001 as
compared to $2,285,141 for the nine months ended March 31, 2000. The increase of
$2,070,846 was primarily due to the amortization expenses related to the
Debenture, costs recorded for the warrants issued in connection with capital
financings, and interest on additional debt assumed with the acquisition of
LinuxMall and JBSI. Interest and other income for the nine months ended March
31, 2001 was $172,522, an increase of $9,748 from the same period in 2000.
The preceding factors resulted in a net loss attributable to common
stockholders of $17,490,019, or $0.83 per diluted share, for the nine months
ended March 31, 2001 as compared to a net loss attributable to common
stockholders of $6,239,072, or $0.84 per diluted share, for the nine months
ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our net cash used in operating activities for the nine months ended March
31, 2001 was $7,247,804 as compared to $1,651,763 used in the nine months ended
March 31, 2000. The operating cash shortage was financed through financing
activities discussed below.
The net cash used from investing activities during the nine months ending
March 31, 2001 was $587,774. The most significant expenditure was capitalized
software of $886,980, representing the acquisition and development of the
software for partnerAxis. This amount was written off, as part of the loss on
sale of partnerAxis, in the quarter ended March 31, 2001.
Net Cash from financing activities during the nine months ended March 31,
2001 was $7,785,337. $3.0 million was realized from the sale of stock to Caldera
Systems, Inc. ("Caldera") in September, 2000. These funds were restricted for
use in developing partnerAxis and $2,805,481 were utilized in the nine months
ended March 31, 2001. We received loans in the amount of $1,500,000 from The
Canopy Group, Inc. ("Canopy") and $2,394,608 was released from restricted cash
by the Debenture holder. With the acquisition of JBSI, we acquired a revolving
line of credit ("RLOC") in the amount of $3.5 million from which a net of
approximately $1 million was drawn during the quarter ended March 31, 2001. As
of March 31, 2001, $2.6 million of the RLOC had been utilized.
We do not anticipate that our operating activities will generate sufficient
cash flow to meet all of our operating requirements and other current working
capital deficiencies for the next quarter. Consequently, it will be necessary to
raise additional funds from equity or debt financing and receive an extension on
existing loans. No assurance can be given that such additional financing will be
available on acceptable terms or at all. In the event we are unsuccessful in
resolving our working capital needs, our operations will be severely and
adversely impacted and we may be required to seek relief in a Chapter 11
bankruptcy reorganization proceeding.
17
In order to improve its working capital position, we are aggressively
addressing the following issues:
* REPLACING THE EXISTING REVOLVING LINE OF CREDIT. The RLOC referred to
above is with Finova Capital Corporation ("Finova") which is secured
by our receivables and inventory, which supplies working capital to
fund operations. The RLOC expired on April 15, 2001 management is
currently in negotiation to extend the RLOC until June 2001 and to
obtain a replacement credit facility.
* RAISING CAPITAL THROUGH THE SALE OF CONVERTIBLE DEBENTURES. We have
had discussions with selected investment bankers and brokers regarding
private placement of convertible debentures to raise up to $5 million
in additional cash for working capital.
* RESTRUCTURING OF CURRENT PAYABLES AND SHORT-TERM OBLIGATIONS. We have
contacted several of our largest creditors to discuss restructuring of
our current payables and short-term obligations.
DEBENTURE AND WARRANT
On August 25, 1999 we issued the Debenture and Warrant for a total of $7.1
million. The Debenture is due February 24, 2002. The principal of the Debenture
was initially convertible into a minimum of 947,260 shares of our common stock.
The holder could convert up to $394,444 face amount of the Debenture upon
issuance and up to $394,444 on each monthly anniversary date thereafter (each, a
"DUE DATE"). Any amount not converted accumulates and may be converted
thereafter. The holder is prohibited from converting any amount of the Debenture
which would cause the holder's total ownership of common stock to equal five
percent or more of the total shares outstanding. The per share conversion price
was initially equal to the lesser of (a) $7.4953 or (b) the average of the three
lowest closing bid prices of our common stock for the 15 consecutive trading
days ending on the trading day immediately preceding submission of a notice to
convert by the holder. In the event the closing bid price of our common stock is
less than $7.4953 per share at any time during the five trading days preceding a
Due Date, we have the right to redeem for cash the monthly conversion amount of
the Debenture (in lieu of allowing the holder to convert such amount) at
premiums ranging from 105% to 108%. The Debenture is secured by current deposits
at American National Bank and Trust Company of Chicago. The initial amount
deposited was $5,000,000 reduced by $500,000 released during February 2000,
$250,000 in July 2000 and $2,083,500 in October 2000. In connection with the
release of the $250,000 in July 2000, we issued an additional warrant to acquire
125,000 shares of common stock at $2.00 per share. The warrant is exercisable at
any time prior to July 12, 2003. As of December31, 2000, the warrant had not
been exercised. The required amount of the restricted cash decreases by $0.7042
for every $1 of principal reduction of the Debenture whether the reduction
occurs by conversion or redemption. Aggregate conversions of principal and
accrued interest have been made and as of March 31, 2001, $2,725,209 of
principal and accrued interest had been converted to 2,831,028 shares of common
stock.
18
On February 8, 2000, Ebiz and the holder of the Debenture agreed to modify
the terms of conversion of the Debenture. The per share conversion price of the
accrued principal convertible as of February 25, 2000 of $2,761,108 and
outstanding interest as of February 7, 2000 of $140,203 was changed to equal the
lesser of (a) $3.84, or (b) the average of the three lowest closing bid prices
of its common stock for the 15 consecutive trading days ending on the trading
day immediately preceding the submission of a conversion notice by the holder.
The $3.84 per share price equaled the conversion price of the Debenture on
January 25, 2000. As modified, the principal of the Debenture is convertible
into a minimum of 1,826,831 shares.
On March 31, 2000 Ebiz and the Debenture holder agreed to an additional
modification to the conversion price formula by changing the reset price
determinant to the average of the three lowest trading prices from the three
lowest closing bid prices occurring in the 15 day period prior to conversion.
All other aspects of the formula remained unchanged.
On October 19, 2000, we agreed to additional modifications of the
Debenture. The holder agreed to convert $2,083,500 principal amount of the
Debenture in exchange for 2,500,000 shares of our common stock. The holder
agreed to reduce the cash collateral requirements of the Debenture by
$2,083,500. We also agreed to convert the per share conversion ratio for an
additional $416,500 principal amount of the Debenture to the lesser of (a) $1.00
or (b) the average of the lowest trading prices occurring on any three of the 15
day period prior to a conversion.
The Warrant was exercisable for the purchase of 245,000 shares of our
common stock, 60,000 at $7.4723 per share, 60,000 at $8.6219 per share and
125,000 at $6.3227 per share. The exercise prices were modified on October 19,
2000 to $4.00 per share in connection with the transaction described above. The
Warrant is exercisable at any time prior to August 22, 2004. As of March 31,
2001 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/A
for the fiscal year ended June 30, 2000, including those in the Notes to
19
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/A referenced above, may be accessed at
the SEC's Web site, www.sec.gov.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various legal proceedings and have certain outstanding
claims as described in our Form 10-KSB/A for the year ended June 30, 2000.
Certain 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 December 31, 2000, we amended the Canopy note and combined it 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 200%
of the closing price on the date of issuance of the Amended Note. In addition,
warrants to purchase 1,230,769 shares of common stock at $0.375 per share were
issued to Canopy. The note and warrants were issued in reliance on the exemption
provided by Section 4(2) of the Securities Act.
On January 3, 2001, we issued approximately 2.8 million shares of common
stock upon conversion of the remaining outstanding preferred convertible
debentures assumed in the LinuxMall acquisition. The principal and interest
balances converted were $2.6 million and $140,000, respectively. The shares were
issued in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act.
On January 4, 2001, we completed the acquisition of JBSI by the merger of
JBSI into a newly formed wholly owned subsidiary. Under the terms of the final
transaction, we agreed to issue 8.3 million shares of our common stock valued at
$6.0 million and options to purchase 3.7 million shares of our common stock
valued at $1.7 million. The securities were issued in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933.
20
On January 29, 2001, the Company issued a Secured Convertible Promissory
Note to Canopy in the amount of $1,000,000 in exchange for cash. The note bears
interest at the annual compounded rate of 10% per annum and is due on October
29, 2001 (THE "CANOPY 1/29/01 NOTE"). If the Canopy 1/29/01 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 200% of the closing price on the date
of issuance of the Canopy 1/29/01 note. In addition, warrants to purchase
1,063,829 shares of common stock at $0.47 per share were issued to Canopy. The
note and warrants were issued in reliance on the exemption provided by Section
4(2) of the Securities Act.
On April 6, 2001, the Company issued a Secured Convertible Promissory Note
to Canopy in the amount of $1,000,000 in exchange for cash (THE "CANOPY 4/6/01
NOTE"). The proceeds were funded for customers purchase orders for the
manuafacturing of high performance computers. The note bears interest at the
annual compounded rate of 10% per annum and is due on October 5, 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 200% of the
closing price on the date of issuance of the Canopy 4/6/01 Note. In addition,
warrants to purchase 520,834 shares of common stock at $0.96 per share were
issued to Canopy. The note and warrants were issued in reliance on the exemption
provided by Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
During the quarter ending March 31, 2001, Ebiz filed a Form 8-K
on January 19, 2001, a Form 8-K on January 22, 2001, a Form 8-K/A on
January 26, 2001, a Form 8-K/A on March 20, 2001 and a Form 8-K/A on
March 23, 2001.
The Form 8-K filed on January 22, 2001, the Form 8-K/A filed on
January 26, 2001 and Form 8-K/A filed on March 23, 2001 disclosed
information related to the resignation of Ebiz's independent
accountant.
The Form 8-K filed on January 19, 2001 the Form 8-K/A filed on
March 20, 2001 disclosed information related to the acquisition of
JBSI by Ebiz.
21
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed by the undersigned, thereunto duly authorized.
EBIZ ENTERPRISES, INC.
Dated May 15, 2001 By /s/ Ray Goshorn
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Ray Goshorn
Chief Financial Officer
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