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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 September 30, 2001
[ ] 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)
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
September 30, 2001 was 34,062,328 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 SEPTEMBER 30, 2001
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
PAGE NUMBER
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Item 1. Financial Statements ........................................... 3
Consolidated Balance Sheets
September 30, 2001 (unaudited) and June 30, 2001 ............. 3
Consolidated Statements of Operations
For the Three Months Ended September 30, 2001
(unaudited) and 2000 (unaudited) ............................. 4
Consolidated Statements of Cash Flows
For the Three Months Ended September 30, 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 .......................... 7
PART II
OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 10
Item 2. Changes in Securities and Use of Proceeds ...................... 10
Item 6. Exhibits and Reports on Form 8-K ............................... 10
SIGNATURES
2
PART I
FINANCIAL INFORMATION
EBIZ ENTERPRISES, INC.
Consolidated Balance Sheets
September 30, 2001 (Unaudited) and June 30, 2001
September 30, June 30,
2001 2001
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(Unaudited)
ASSETS
Current Assets:
Cash $ 211,520 $ 557,894
Accounts receivable, net of allowance for
doubtful accounts of $824,283 and $1,085,815
at September 30, 2001 and June 30, 2001, respectively 212,168 1,958,486
Inventory, net 317,783 999,365
Prepaid expenses and other current assets 162,441 179,543
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Total current assets 903,912 3,695,288
Property and Equipment, net 1,017,125 1,183,361
Deferred Loan Fees, net 32,784 52,443
Restricted cash (Note 2) 250,000 258,879
Goodwill, net 2,832,230 2,832,230
Other Assets 68,894 69,557
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Total assets $ 5,104,945 $ 8,091,758
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 9,990,647 $ 9,499,695
Accrued expenses 2,482,719 2,383,609
Notes payable 2,756,963 4,722,873
Related party Notes payable 2,289,708 2,330,986
Convertible Debenture, net of discount 2,980,465 2,889,579
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Total current liabilities 20,500,502 21,826,742
Notes payable 481,881 486,812
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Total liabilities 20,982,383 22,313,554
Stockholders' Equity (Deficit):
Convertible preferred stock; $0.001 par value;
5,000,000 shares authorized; 7,590 shares issued
and outstanding at June 30, 2001 and 2000, respectively 366,737 366,737
Common stock; $0.001 par value; 70,000,000 shares authorized;
34,062,328 shares issued and outstanding at September 30, 2001
and June 30, 2001, respectively 34,063 34,063
Additional paid-in capital 46,715,220 46,715,220
Accumulated deficit (62,993,458) (61,337,816)
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Total stockholders' equity (deficit) (15,877,438) (14,221,796)
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$ 5,104,945 $ 8,091,758
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See the accompanying notes to these consolidated financial statements.
3
EBIZ ENTERPRISES, INC.
Consolidated Statements of Operations
For the Three Months Ended September 30, 2001 and 2000
2001 2000
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(Unaudited) (Unaudited)
Net Revenue $ 1,625,535 $ 2,429,807
Cost of Sales 1,387,364 2,061,908
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Gross profit 238,171 367,899
Selling, General and Administrative Expenses 1,382,712 1,129,450
Depreciation and Amortization 176,557 169,143
Provisions for Doubtful Accounts 30,000 61,714
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Loss from Operations (1,351,098) (992,408)
Other Income (Expense):
Interest Expense (288,915) (1,179,118)
Interest & Other income 3,346 68,431
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Net loss (1,636,667) (2,103,095)
Dividends on preferred stock (18,975) (18,975)
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Net Loss Attributable To Common Stockholders $(1,655,642) $(2,122,070)
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Net Loss Per Common Share, Basic and Diluted $ (0.05) $ (0.23)
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Weighted Average Common Shares: Basic and Diluted 34,062,328 9,141,066
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See the accompanying notes to these consolidated financial statements.
4
EBIZ ENTERPRISES, INC
Consolidated Statements of Cash Flows
For the Three Months Ended September 30, 2001 and 2000
Three months ended September 30,
--------------------------------
2001 2000
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(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,636,667) $(2,103,095)
Adjustments to reconcile net loss to net cash used
in operating activities-
Depreciation and amortization 176,557 169,143
Warrants issued to debt holders -- 125,166
Interest costs of Beneficial Conversion Feature -- 726,670
Amortization of discount and loan fees 110,545 165,500
Changes in assets and liabilities:
Accounts receivable 1,746,318 (265,199)
Inventory 681,582 (9,241)
Prepaid expenses and other current assets 17,765 (50,916)
Accounts payable 490,952 452,313
Accrued expenses 80,135 215,948
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Net cash provided by (used in) operating activities 1,667,187 (573,711)
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CASH FLOWS FROM INVESTING ACTIVITIES:
(net of effect of business acquisitions):
Purchase of furniture, fixtures, intellectual property and
equipment, net (10,321) (72,391)
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Net cash used in investing activities (10,321) (72,391)
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CASH FLOWS FROM FINANCING ACTIVITIES:
(net of effect of business acquisitions):
Net (repayments) borrowings under line of credit (1,965,910) --
Borrowings under secured convertible note -- 500,000
Borrowings (repayments) under related party notes payable (41,278) --
Principal repayments of notes payable (4,931) --
Transfer from/(to) restricted cash (non-current), net 8,879 251,032
Transfer from/(to) restricted cash, net -- (3,000,000)
Sale of stock, net of expenses -- 2,919,083
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Net cash provided by (used in) financing activities (2,003,240) 670,115
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Net increae (decrease) in cash (346,374) 24,013
Cash, beginning of year 557,894 50,997
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Cash, end of year $ 211,520 $ 75,010
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 9,161 $ 6,990
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND OPERATING ACTIVITIES:
Dividends accrued on preferred stock $ 18,975 $ 18,975
Issuance of warrants to Debenture holder -- 125,166
Issuance of common stock for business acquisition -- 3,400,000
Conversion of debt and related interest to common stock -- 64,205
See the accompanying notes to these consolidated financial statements.
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EBIZ ENTERPRISES, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDING SEPTEMBER 30, 2001 AND 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles ("GAAP") for complete
financial statements. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary for a fair presentation of
the results for the interim periods presented have been made. The results for
the three month period ending September 30, 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 for the year ended June 30, 2001.
(2) RECENT DEVELOPMENTS
BANKRUPTCY FILING. On September 7, 2001 we and our wholly owned subsidiary
Jones Business Systems, Inc. ("JBSI") filed separate voluntary petitions to
reorganize under Chapter 11 of the Bankruptcy Code with the federal bankruptcy
court in Phoenix, Arizona. We are currently operating as a debtor-in-possession
under the supervision of the bankruptcy court. As a debtor-in-possession, we are
authorized to operate our business but may not engage in transactions outside
the ordinary course of business without approval of the bankruptcy court.
Subject to certain exceptions under the Bankruptcy Code, our filing for
reorganization automatically stayed the continuation of any judicial or
administrative proceedings against us. Any creditor actions to obtain possession
of property from us or to create, perfect, or enforce any lien against our
property has also been stayed. As a result, our creditors are precluded from
collecting pre-petition debts without the approval of the bankruptcy court.
We have the exclusive right for 120 days after our bankruptcy filing on
September 7, 2001 to file a plan of reorganization and 60 additional days to
obtain necessary acceptance. These periods may be extended by the bankruptcy
court upon a showing of good cause. We are developing a reorganization plan for
both companies which we expect to file with the bankruptcy court no later than
December 15, 2001. Confirmation of a plan of reorganization is necessary for us
to continue as a going concern. The bankruptcy filing was precipitated by our
inability to timely raise additional capital, the loss of the asset based credit
facility for our wholly owned subsidiary, JBSI, and debt that we are unable to
adequately support. The long-term implementation of our business plan and our
company strategies, as well as the achievement of the objectives of those
strategies, is dependent upon our ability to successfully restructure through a
confirmed plan of reorganization.
On September 13, 2001 we entered into a Stipulation for Use of Cash
Collateral ("STIPULATION") with The Canopy Group, Inc. ("CANOPY") which allows
us to use 95% of the collections received from pre-petition accounts receivable
on which Canopy holds a security interest. In exchange for this agreement, we
granted to Canopy a first lien security interest in all of our post petition
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receivables, inventory and the proceeds thereof. In addition, we may use 95% of
the proceeds from all post petition accounts receivable and inventory to operate
our business. The remaining 5% is to be applied to the outstanding balance of
the debt owed to Canopy which approximates $4,100,000. The Stipulation has
provided some temporary relief for the cash flow challenges we continue to
experience.
On September 24, 2001 we entered into an Agreement for Secured Line of
Credit (the "SECURED LINE") with Caldera Systems, Inc. ("CALDERA"). Under terms
of the Secured Line, Caldera provided a $250,000 line of credit which will
facilitate our ability to purchase product from Caldera. In exchange for the
granting of the line of credit, we executed a promissory note for $542,125.61
representing the pre-petition debt owed to Caldera and granted a junior security
interest in all of our assets to Caldera to secure the promissory note and all
amounts that may become due and owing under the line of credit.
On November 8, 2001 we entered into a Dealer Loan and Security Agreement
for Secured Line of Credit (the "DEALER LOAN") with Textron Financial
Corporation ("TEXTRON") and an Agreement to Provide Letter of Credit and
Financial Accommodations (the "LOC") with Canopy. Under the terms of the Dealer
Loan, Textron will provide to us credit and financing in the amount of $500,000
to facilitate the purchase of goods and inventory on favorable terms from our
suppliers. This will provide assistance in filling orders from our clients and
meeting the demand for our products. Under the LOC, Canopy has provided a
$500,000 letter of credit to secure the credit extended by Textron under the
Dealer Loan.
Even with the transactions set forth above, we have need for additional
capital and are continuing our efforts to locate and raise additional capital.
CEO RESIGNATION. Effective October 5, 2001, Dave Shaw resigned as CEO to
pursue other interests. Bruce Parsons was selected by our Board of Directors to
replace Mr. Shaw as CEO. Mr. Parsons now holds the titles of President and CEO.
ASSIGNMENT OF FINOVA LETTER OF CREDIT TO CANOPY. In August 2001, Canopy
assumed Finova Capital Corporation's ("FINOVA") first position lien by
purchasing the $2,000,000 balance of the term note and the approximately
$350,000 balance of the revolving line of credit ("RLOC"). Canopy reestablished
access to collected accounts receivable at that time, thereby providing cash to
us for our operations.
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 differences include, but
are not limited to, those discussed elsewhere in this Form 10-QSB or
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incorporated herein by reference. See "Special Note on Forward-Looking
Statements" below.
OVERVIEW
We entered into the quarter ended September 30, 2001 without a functioning
revolving line of credit, preventing us the ability to source the product
necessary to fill the orders placed by out customers. Although Canopy assumed
the RLOC in August 2001 and reestablished access to the collected accounts
receivables, it was necessary to enter into the protection afforded by a
reorganization under Chapter 11 of the Bankruptcy Code.
Subsequent to the Chapter 11 filing on September 7, 2001, we have made
considerable reductions in operating expenses, primarily in personnel. Although
these reductions will have significant impact on our future operations, it will
be necessary to raise additional capital, reestablish the relationships with
existing customers and generate new customers to successfully emerge out of
Chapter 11.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
Net revenues for the three months ended September 30, 2001 were $1,625,535
compared to $2,429,807 in the three months ended September 30, 2000. The
$804,272 decrease, 33.1%, from the prior period, was due to the inability to
source product to meet the orders placed.
Cost of sales for the three months ended September 30, 2001 was $1,387,364
as compared to $2,061,908, a decrease of $674,544 related to the decrease in
revenues. The cost of sales percentage increased to 85.3% of sales, up from
84.9% of sales for the same period in 2000, which resulted in a corresponding
gross profit margin decrease to 14.7% from 15.1% for the respective periods. The
decrease reflects some of the special pricing we afforded customers during the
quarter in an attempt to maintain relationships. The gross profit for the fiscal
quarter ended September 30, 2001 was $238,171, a decrease of $129,728 from the
fiscal quarter ended September 30, 2000.
Selling, general and administrative expense was $1,382,712, or 85.1% of
revenue, for the three months ended September 30, 2001 as compared to
$1,129,450, or 46.5% of revenue, for the same period in 2000. The increase of
$253,262, or 22.4%, was due to increases in personnel related costs and
professional fees, offset by a decrease in advertising and marketing.
Interest expense for the three months ended September 30, 2001 was $288,915
as compared to $1,179,118 for the three months ended September 30, 2000. The
decrease of $890,203 was principally due to the costs recorded in the prior year
for expenses recorded for the warrants issued to the Debenture holder for the
release of restricted cash in July 2000, a beneficial conversion feature of
$130,000 recorded on the Secured Convertible Promissory Note issued to Canopy,
and the higher interest and amortization expenses related to the Debenture. The
reduced interest and other income of $3,346 for the three months ended September
30, 2001 as compared to $68,431 for the same period in 2000, was primarily
related to the reduced Debenture balance.
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The preceding factors resulted in a net loss attributable to common
stockholders of $1,655,642 or $0.05 per basic and diluted share for the three
months ended September 30, 2001 as compared to a net loss attributable to common
stockholders of $2,122,070, or $0.23 per basic and diluted share, for the three
months ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our net cash used in operating activities for the three months ended
September 30, 2001 was $1,667,187 as compared to $573,711 used in the three
months ended September 30, 2000. The operating cash shortage was financed
through financing activities discussed below. The primary source of cash
resulted from the reduction in accounts receivable and inventory. The reduction
in receivables was primarily used to reduce the RLOC.
The net cash used from investing activities during the three months ending
September 30, 2001 was $10,321.
The net cash used from financing activities during the three months ended
September 30, 2001 was $2,003,240. Most of the reduction was used to reduce the
RLOC, which was terminated on June 30, 2001. From June 30, 2001 until the date
that Canopy assumed the RLOC, all collections of accounts receivable were
applied to reducing the RLOC.
On September 13, 2001 we entered into a Stipulation for Use of Cash
Collateral ("STIPULATION") with The Canopy Group, Inc. ("CANOPY") which allows
us to use 95% of the collections received from pre-petition accounts receivable
on which Canopy holds a security interest. In exchange for this agreement, we
granted to Canopy a first lien security interest in all of our post petition
receivables, inventory and the proceeds thereof. In addition, we may use 95% of
the proceeds from all post petition accounts receivable and inventory to operate
our business. The remaining 5% is to be applied to the outstanding balance of
the debt owed to Canopy which approximates $4,100,000. The Stipulation has
provided some temporary relief for the cash flow challenges we continue to
experience.
On September 24, 2001 we entered into an Agreement for Secured Line of
Credit (the "SECURED LINE") with Caldera Systems, Inc. ("CALDERA"). Under terms
of the Secured Line, Caldera provided a $250,000 line of credit which will
facilitate our ability to purchase product from Caldera. In exchange for the
granting of the line of credit, we executed a promissory note for $542,125.61
representing the pre-petition debt owed to Caldera and granted a junior security
interest in all of our assets to Caldera to secure the promissory note and all
amounts that may become due and owing under the line of credit.
On November 8, 2001 we entered into a Dealer Loan and Security Agreement
for Secured Line of Credit (the "DEALER LOAN") with Textron Financial
Corporation ("TEXTRON") and an Agreement to Provide Letter of Credit and
Financial Accommodations (the "LOC") with Canopy. Under the terms of the Dealer
Loan, Textron will provide to us credit and financing in the amount of $500,000
to facilitate the purchase of goods and inventory on favorable terms from our
suppliers. This will provide assistance in filling orders from our clients and
meeting the demand for our products. Under the LOC, Canopy has provided a
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$500,000 letter of credit to secure the credit extended by Textron under the
Dealer Loan.
Even with the transactions set forth above, we have need for additional
capital and are continuing our efforts to locate and raise additional capital.
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, 2001, including those in the Notes to
Consolidated Financial Statements and in "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION" and "DESCRIPTION OF BUSINESS -
Factors Affecting Future Performance" sections which are incorporated by
reference in this Form 10-QSB.
Although we believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the results contemplated in such
forward-looking statements will be realized. The inclusion of such
forward-looking information should not be regarded as a representation that the
future events, plans or expectations contemplated will be achieved. We undertake
no obligation to publicly update, review or revise any forward-looking
statements to reflect any change in our expectations or any change in events,
conditions or circumstances on which any such statements are based. Our filings
with the SEC, including the Form 10-KSB referenced above, may be accessed at the
SEC's Web site, www.sec.gov.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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, 2001. 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.
10
Management believes that these disputes will be resolved without material
adverse consequences to operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
None
(B) REPORTS ON FORM 8-K
During the quarter ending September 30, 2001, Ebiz filed
Form 8-K filed on September 24, 2001 regarding the bankruptcy filing with
the Federal bankruptcy court in Phoenix, Arizona.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed by the undersigned, thereunto duly authorized.
EBIZ ENTERPRISES, INC.
Dated November 19, 2001 By: /s/ Bruce Parsons
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Bruce Parsons
Chief Executive Officer
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