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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 December 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT
For the transition period from _____________ to _______________
Commission File Number 0-27721
EBIZ ENTERPRISES, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 84-1075269
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
15695 North 83rd Way
Scottsdale, Arizona 85260
(Address of principal executive offices)
(480) 778-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes No X
The number of shares of the issuer's common equity outstanding as of
December 31, 1999 was 7,383,063 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, 1999
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements.................................................................................. 3
Balance Sheets
December 31, 1999 (unaudited) and June 30, 1999 ................................... 3
Statements of Operations
For the Three and Six Months Ended December 31, 1999 (unaudited) and
1998 (unaudited).................................................................... 4
Statements of Cash Flows
For the Six Months Ended December 31, 1999 (unaudited) and 1998 (unaudited)......... 5
Statements of Comprehensive Income
For the Three and Six Months Ended December 31, 1999 (unaudited) and
1998 (unaudited).................................................................... 6
Notes to the Financial Statements............................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................ 10
PART II
OTHER INFORMATION
Item 2. Changes in Securities................................................................................. 15
Item 5. Other Information..................................................................................... 15
Item 6. Exhibits and Reports on Form 8-K...................................................................... 15
SIGNATURES
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EBIZ ENTERPRISES, INC.
BALANCE SHEETS
DECEMBER 31, 1999 (UNAUDITED) AND JUNE 30, 1999
December 31, June 30,
1999 1999
----------- -----------
(unaudited)
ASSETS
Current Assets:
Cash $ 43,928 $ 76,366
Accounts receivable, net of allowance for doubtful accounts
of $180,778 and $40,000 in December 30, 1999 and
June 30, 1999 respectively 762,107 1,669,816
Inventory, net of allowance of $205,502 and $10,000 in
December 31, 1999 and June 30, 1999, respectively 794,752 1,568,148
Prepaid expenses and other current assets 143,438 128,184
----------- -----------
Total current assets 1,744,225 3,442,514
Furniture and Equipment, net 434,931 474,778
Deferred Loan Fees, net 170,397 --
Restricted Cash 5,000,000 --
Note Receivable 50,000 --
----------- -----------
Total assets $ 7,399,553 $ 3,917,292
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,469,957 $ 1,423,178
Accrued expenses 289,442 468,549
Line of credit 125,000 350,000
Notes payable 124,644 610,000
----------- -----------
Total current liabilities 2,009,043 2,851,727
----------- -----------
Convertible Debenture 6,409,945 --
----------- -----------
Total liabilities 8,418,988 2,851,727
----------- -----------
Stockholders' Equity:
Convertible preferred stock; $1 par value; 5,000,000 shares
authorized;10,895 shares issued and outstanding at
December 31, 1999 and June 30, 1999, liquidation
$100 value per share 807,951 868,599
Common stock; $1 par value; 70,000,000 shares authorized;
7,383,063 and 7,261,715 shares issued and outstanding at
December 31, 1999 and June 30, 1999, respectively 7,383 7,262
Additional paid-in capital 3,493,045 2,343,762
Accumulated deficit (5,327,814) (2,154,058)
----------- -----------
Total stockholders' equity (1,019,435) 1,065,565
----------- -----------
Total liabilities and stockholders' equity $ 7,399,553 $ 3,917,292
=========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
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EBIZ ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31 SIX MONTHS ENDED DECEMBER 31
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
SALES $ 2,264,949 $ 2,375,289 $ 7,903,577 $ 6,962,042
COST OF SALES 2,112,100 2,116,034 7,458,705 6,691,754
RESTRUCTURING EXPENSE - INVENTORY 125,430 -- 125,430 --
----------- ----------- ----------- -----------
GROSS PROFIT 27,419 259,255 319,442 270,288
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 1,475,431 478,746 2,712,409 888,934
DEPRECIATION AND AMORTIZATION 51,087 16,148 91,715 32,297
PROVISIONS FOR DOUBTFUL ACCOUNTS 156,497 15,820 188,427 15,820
RESTRUCTURING EXPENSE 26,500 -- 26,500 --
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,682,096) (251,459) (2,699,609) (666,763)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
INTEREST EXPENSE (282,862) (42,585) (499,656) (95,504)
INTEREST INCOME 63,927 2,635 85,183 7,487
----------- ----------- ----------- -----------
TOTAL OTHER (218,935) (39,950) (414,473) (88,017)
----------- ----------- ----------- -----------
NET LOSS (1,901,031) (291,409) (3,114,082) (754,780)
DIVIDENDS ON PREFERRED STOCK 27,238 -- 54,476 --
NET LOSS ATTTRIBUTABLE TO COMMON
STOCKHOLDERS ($1,928,269) ($ 291,409) ($3,168,558) ($ 754,780)
=========== =========== =========== ===========
LOSS PER SHARE:
BASIC ($ 0.26) ($ 0.05) ($ 0.43) ($ 0.12)
DILUTED ($ 0.26) ($ 0.05) ($ 0.43) ($ 0.12)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
BASIC 7,370,500 6,454,646 7,341,703 6,378,149
DILUTED 7,370,500 6,454,646 7,341,703 6,378,149
The Accompanying Notes are an Integral Part
of the Financial Statements
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EBIZ ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
1999 1998
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($3,114,082) ($ 754,780)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 91,715 32,297
Common stock issued for services and inventory 54,000 179,651
Warrants issued for consulting services 199,185 --
Amortization of discount and loan fees 132,376 --
Changes in assets and liabilities:
Accounts receivable 907,709 (195,391)
Due from officers and stockholders -- (41,568)
Inventory 773,396 (327,062)
Prepaid expenses and other current assets (20,454) 66,325
Accounts payable 46,779 5,778
Accrued expenses (233,583) 58,797
----------- -----------
Net cash used in operating activities (1,162,959) (975,953)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures, intellectual property and equipment (51,868) (134,251)
----------- -----------
Net cash used in investing activities (51,868) (134,251)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit (225,000) 151,500
Borrowings under notes payable 488,000 110,286
Principal repayments of notes payable (973,356) (261,786)
Borrowings from convertible debenture, net 6,903,391 --
Transfer to restricted cash (5,000,000) --
Sale of stock, net of expenses (10,646) 1,239,750
----------- -----------
Net cash provided by financing activities 1,182,389 1,239,750
----------- -----------
Net increase (decrease) in cash and cash equivalents (32,438) 129,546
Cash and cash equivalents, beginning of period 76,366 468,651
----------- -----------
Cash and cash equivalents, end of period $ 43,928 $598,197
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 290,473 $ 95,504
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND OPERATING
ACTIVITIES:
Issuance of common stock for services and inventory $ 54,000 $ 179,651
Dividends accrued on preferred stock $ 54,476 $ --
Issuance of warrants for consulting services $ 199,185 --
The Accompanying Notes are an Integral Part
of the Financial Statements
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EBIZ ENTERPRISES, INC.
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
------------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net loss attributable to common stockholders $(1,928,269) $ (291,409) $(3,168,558) $ (754,780)
----------- ----------- ----------- -----------
Other comprehensive loss, net of tax
Unrealized holding gain/(loss) arising
during period 1,676 -- (5,200) --
----------- ----------- ----------- -----------
Comprehensive loss $(1,926,593) $ (291,409) $(3,173,758) $ (754,780)
=========== =========== =========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
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EBIZ ENTERPRISES, INC.
NOTES TO THE FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDING DECEMBER 31, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions for Form 10-QSB. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles ("GAAP") for complete financial statements. In the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary for a fair presentation of the results for the interim periods
presented have been made. The results for the three-month and six-month periods
ending December 31, 1999 may not necessarily be indicative of the results for
the entire fiscal year. These financial statements should be read in conjunction
with the Company's Form 10-SB/A for the year ended June 30, 1999.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or net
realizable value. Reserves of $205,502 and $10,000 at December 31, 1999 and June
30, 1999, respectively, are established against Company-owned inventory for
excess, slow-moving and obsolete items and for items where the net realizable
value is less than cost.
Inventory consists of the following:
Dec. 31, June. 30,
1999 1999
---------- ----------
(unaudited)
Components $ 195,400 $1,155,981
Work-in-process 49,505 44,947
Finished goods 549,847 367,220
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$ 794,752 $1,568,148
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ACCOUNTS PAYABLE
Included in accounts payable is approximately $102,000 and $215,000 of
bank overdraft at December 31, 1999 and June 30, 1999, respectively.
LOSS PER SHARE
During 1998, the Company adopted SFAS No. 128, Earnings Per Share.
Pursuant to SFAS No. 128, basic earnings per common share are computed by
dividing net income (loss) by the weighted average number of shares of common
stock outstanding during the year. No outstanding options or warrants were
assumed to be exercised for purposes of calculating diluted earnings per share
for the three months and six months ended December 31, 1999 and 1998, as their
effect was anti-dilutive. Below are the disclosures required pursuant to SFAS
No. 128 for the three-month and six-month periods ended December 31, 1999 and
1998. All per share amounts have been adjusted to give effect to the one for ten
reverse stock split effected in June 1998 (in thousands, except per share data):
THREE MONTHS ENDED DECEMBER 31 SIX MONTHS ENDED DECEMBER 31
1999 1998 1999 1998
---- ---- ---- ----
Basic:
Loss attributable to common stockholders $(1,928) $ (291) $(3,169) $ (755)
Weighted average common shares 7,371 6,455 7,342 6,378
------- ------- ------- ------
Loss per common share $ (0.26) $ (0.05) $ (0.43) $(0.12)
======= ======= ======= ======
Diluted:
Loss attributable to common stockholders $(1,928) $ (291) $(3,169) $ (755)
Weighted average common shares 7,371 6,455 7,342 6,378
------- ------- ------- ------
Loss per common share $ (0.26) $ (0.05) $ (0.43) $(0.12)
======= ======= ======= ======
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(2) CONVERTIBLE DEBENTURE
In August, 1999, the Company completed a private placement of a $7.1
million convertible debt facility (the Debenture). In conjunction with the
Debenture, the Company issued warrants to acquire 245,000 shares of common stock
at a market-based exercise price as defined by the Debenture agreement. In
compliance with SFAS No. 123, Accounting For Stock-Based Compensation, the fair
value of the Warrant, as calculated by using the Black-Scholes pricing model,
was estimated to be approximately $796,000 and is recorded as a debt discount in
the accompanying financial statements. In addition, loan costs of approximately
$197,000 were paid and recorded as deferred loan fees in the accompanying
financial statements. Discounts and deferred loan fees are amortized using the
straight-line method which approximated the effective interest method as
additional interest expense over the term of the loans.
The Company received an initial infusion of $2.1 million from the
Debenture which was utilized to repay the Company's outstanding debt at June 30,
1999 and to provide working capital. The remaining $5.0 million was deposited
with a bank as collateral for the Debenture and is therefore reflected as
restricted cash in the accompanying financial statements. The Debenture is
convertible, at the holder's option, into shares of the Company's common stock
over an 18 month period at approximately $394,000 per month. The Company's
ability to reduce the cash collateral required for the letter of credit and to
have these amounts available for working capital is contingent upon the holder
converting the Debenture or the Company's ability to pay down the Debenture with
cash from other sources. If the holder, at its discretion, converts the
Debenture, the Company can draw approximately $.70 for each $1 of Debenture
principal converted from the letter of credit to fund operations. The
unconverted balance, if any, of the Debenture and the unconverted accrued
interest is due February 24, 2002.
The Debenture required that the related shares of the Company's common
stock be registered in accordance with the regulations of the Securities and
Exchange Commission before the holder could begin to convert the Debenture to
common stock. The necessary registration process was initiated by the company in
October, 1999 and was completed in February, 2000. The holder began accruing
rights to convert the Debenture upon its signing and as of December 31, 1999 the
holder had accrued the rights to convert approximately $ 1,972,000 to shares of
the Company's common stock.
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(3) RESTRUCTURING EXPENSE
In November, 1999 the Company implemented a change in its strategic
business plan to concentrate its focus on the Linux market and to de-emphasize
the sales of low-priced Windows-based systems. Consequently, the Company
incurred a restructuring charge of $26,500 for asset revaluation and $125,430
for markdown of inventory that were directly related to the businesses we are
de-emphasizing. As of December 31, 1999 no charges have been made against these
liabilities.
(4) WARRANTS ISSUED FOR CONSULTING SERVICES
In October, 1999, the Company engaged a consulting firm to assist us
with our strategic planning and corporate development programs. In conjunction
with the engagement, the Company issued warrants to acquire 220,000 shares of
common stock at a market-based exercise price. In compliance with SFAS No. 123,
Accounting For Stock-Based Compensation, the fair value of the Warrant, as
calculated by using the Black-Scholes pricing model, was estimated to be
approximately $199,000 and is recorded as an expense in selling, general and
administration expenses in the accompanying financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements include, but are not limited to,
statements regarding future events and our plans and expectations. Our actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such difference include, but are not limited to, those
discussed elsewhere in this Form 10-QSB or incorporated herein by reference. See
"Special Note on Forward-Looking Statements" below.
OVERVIEW
EBIZ Enterprises, Inc. is a designer and operator of Internet
e-commerce Web sites and a developer and distributor of computer systems,
components and accessories for personal and business computing. Our primary
computer system brands are PIA(TM) and Element-L(TM) which use the Linux
operating system and are important elements in our Linux strategy. We also sell
conventional Windows-based systems under our M2 Systems(TM) brand name. Our
products are sold directly to end users through our Web sites, TheLinuxStore.com
and EBIZmart.com, and to corporate customers by our own sales force. We also
sell our systems through retailers, resellers and major e-commerce Web sites,
such as dealdeal.com and onsale.com.
During the second quarter of fiscal 2000, we decided to concentrate our
strategic focus on the Linux segment of the market which we feel has
much stronger growth opportunities than the low price, high volume, conventional
computing systems market. We have de-emphasized our programs for the mass
merchant and brokerage channels of distribution which declined to 2% of total
sales in the second quarter from over 50% of our sales in the preceding three
quarters. At the same time we began to restructure our organization to
facilitate the implementation of our expanding Linux marketing, Website
development and product development programs. We have also made provisions in
the financial statements for the second quarter of fiscal 2000 for the
inventory, collection and other costs resulting from this change in the
Company's strategic direction.
TheLinuxStore.com has become a core element of our Linux strategy. We
are positioning it as a leader in the Linux market providing community resources
and services, such as free e-mail, a free Linux directory and links to numerous
Linux-based sites, and technology expertise. In addition the e-commerce section
of the site provides "Everything Linux" and offers a large selection of
Linux-compatible technical products and related items, including desktop and
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notebook computers, workstations, servers, hardware components, peripherals,
software, books and geek gear.
Ebiz's predecessor was originally incorporated in Colorado in May 1984,
as VDG Capital Corporation. Following a reorganization, VDG Capital's name was
changed to Vinculum Incorporated (Vinculum) in August 1994. In June 1998,
Vinculum acquired the operating assets and liabilities of Genras, Inc. (an
Arizona corporation) and reincorporated in Nevada as CPU Micromart, Inc. In May
1999, CPU Micromart changed its name to Ebiz Enterprises, Inc.
COMPARISON OF THE QUARTERS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
Sales were $2,264,949 for the quarter ended December 31, 1999 compared
to $2,375,289 for the quarter ended December 31, 1998. The $110,340 decrease,
approximately 4.6%, below the prior period, was due to the de-emphasis of the
sales of low-priced Windows based systems to mass merchants and price oriented
distributors and to lower brokerage sales. These decreases were partially offset
by higher sales of our Linux systems and by increased sales to business
customers by our sales force.
Cost of sales for the three months ended December 31,1999 increased to
93.3% of sales from 89.1% of sales from the same period in 1998. The gross
profit margin decreased to 1.2% of sales for the quarter ended December 31, 1999
from 10.9% of sales for the same period in 1998. The decrease was due to
inventory markdowns associated with our change in business strategy and the
production inefficiencies that resulted from lower system sales volume and
close-out sales of our low-end system inventory and related components. Employee
reductions and other production restructuring measures were initiated during the
second quarter of fiscal year 2000 to address the inefficiencies resulting from
the decreased volume.
Selling, general and administrative expense was $1,475,431, or 65.1%
of sales, for the quarter ended December 31, 1999 as compared to $478,746, or
20.2% of sales, for the same period in 1998. This was due to higher expenditures
for advertising and marketing, higher strategy development expenses, the costs
generated by the expansion of our Linux engineering, sales and marketing
organizations and the development of our new websites www.TheLinuxLab.com and
-------------------
www.LinuxWired.net that are key elements in our Linux strategic focus. In
- ------------------
addition to these recurring expenses, we recorded $199,185 of non-recurring,
non-cash expense for warrants issued for consulting services to comply
with SFAS No. 123 as stated in Note 4 of the Notes to the Financial Statements.
Provisions for doubtful accounts increased to $156,497 in the quarter
ending December 31, 1999 from $15,820 in the second quarter of fiscal 1999.
The increase was caused by collection disputes that have developed with the
customers who represented the majority of our past low-end system business.
Restructuring expenses were $151,930 for the three months end December
31, 1999. Of these expenses, $125,430 were generated by the markdown of
inventory. The remaining $26,500 was due to the revaluation of assets that were
directly related to the businesses that we strategically de-emphasized. There
were no such expenses in the second quarter of fiscal 1999.
Interest expense increased to $282,862 in the quarter ended December
31, 1999 from $42,585 in the same period in 1998. The increase was due to
interest and amortization expenses related to the Debenture.
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The preceding operational factors resulted in 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 as compared to a net loss attributable to common
stockholders of $291,409, or $0.05 per diluted share, for the three months ended
December 31, 1998.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
Sales for the six months ended December 31, 1999 were $7,903,577
compared to $6,962,042 for the six months ended December 31, 1998. The $941,535
increase, approximately 13.5%, was the result of higher system sales in the
first quarter of fiscal 2000, increased productivity of our sales force, and a
substantial increase in sales through our Websites.
Cost of sales for the six months ended December 31, 1999 decreased to
94.4% of sales from 96.1% of for the same period in 1998. The gross profit
margin for the six months ended December 31, 1999 increased to 4.0% of sales
from 3.9% of sales for the first two quarters of the prior fiscal year. The
increase was due to the change in sales mix away from the auction business and
towards the Linux market and the productivity of our own sales force,
particularly in the first quarter of fiscal 2000. Our gross profit margin
excluding restructuring related inventory markdowns for the six months ended
December 31, 1999 was 5.6% of sales.
Selling, general and administrative expense was $2,712,409, or 34.7%
of sales, for the six months ended December 31, 1999 as compared to $888,934,
or 12.8% of sales, for the same period in 1998. The increase was due to higher
expenditures for marketing, sales and technical personnel and the related
program expenses required to build the organization and implement the tactics
that are included in our redefined strategic plan. The non-recurring, non-cash
expense of $199,185 that was recorded for warrants issued for consulting
services during the second quarter of fiscal year 2000 was also a component
of the increases.
Provisions for doubtful accounts increased to $188,427 in the six
months ending December 31, 1999 from $15,820 in the second half of fiscal 1999.
As noted earlier, the increase was caused by collection disputes that have
developed with the customers who represented the majority of our low-end system
business that is being de-emphasized as we concentrate our focus on the Linux
market.
Due to our decision to change our strategic business plan,
restructuring expenses were $151,930 for the six months ended December 31, 1999.
Of these expenses, $125,430 related to inventory markdowns and $26,500 related
to asset revaluation. There were no such expenses in the first half of fiscal
1999.
Interest expense was $499,656 for the six months ended December 31,
1999 as compared to $95,504 in the same period in 1998. The increase was due to
interest and amortization expenses related to the Debenture.
The preceding operational factors resulted in a net loss attributable
to common stockholders of $3,168,558, or $0.43 per diluted share, for the six
months ended December 31,
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1999 as compared to a net loss of $754,780, or $0.12 per diluted share, for the
six months ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had cash and cash equivalents of $43,928,
representing a decrease of $32,438 from the total of $76,366 at June 30,1999.
The decrease was primarily due to investing activities as the cash provided by
the convertible Debenture placed in August, 1999 provided for the repayment of
most of the debt outstanding at that time and for the net cash used in
operations during the first half of fiscal 2000.
Our net cash used in operating activities was $1,162,959 for the six
months ended December 31, 1999 as compared to $975,953 used in the six months
ending December 31, 1998. In first half of fiscal 2000, the cash generated by
the Debenture and by reductions in accounts receivable and inventory was used
for the sales, marketing, administration and development expenses incurred to
implement our strategic programs. In the six months ending December 31, 1998,
the net cash used in operating activities was primarily for increased inventory
and accounts receivable.
The net cash used in investing activities was $51,868 and $134,251 for
the six month periods ending December 31, 1999 and December 31, 1998,
respectively. In six months ending December 31, 1999, these activities included
the acquisition and configuration of equipment for our Websites and logistics
and communications systems. For the same period in 1998, investing activities
included the acquisition of software and equipment for administrative and
operations functions.
During the six months ended December 31, 1999, the net cash provided by
financing activities was $1,182,389. The Debenture provided $6,903,391, million,
of which $5,000,000 was placed in a restricted bank account as collateral for
the Debenture, which is to be accessed through the conversion of the Debenture
into shares of our common stock. We repaid $350,000 of our line of credit and
$887,900 of the principal of notes payable. Our line of credit was reopened in
December, 1999 and $125,000 was outstanding at the end of the period. Additional
notes payable of $488,000 were initiated during the quarter and $124,644 were
outstanding on December 31, 1999.
During the six months ended December 31, 1999, the holder of the
Debenture accrued the rights to convert approximately $1,972,000 of the
principal, and the accrued interest thereon, to shares of our common stock. The
required registration of those and other shares of common stock was completed in
February, 2000. We anticipate that the exercising of these conversion rights,
and future conversion rights, under the terms of the Debenture, will provide
timely funding for our increased marketing and development programs for our
Linux marketing efforts.
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DEBENTURE AND WARRANT
On August 25, 1999 we issued the Debenture and Warrant for a total of
$7,100,000. The Debenture is due February 24, 2002. The principal of the
Debenture was initially convertible into a minimum of 947,260 shares of our
common stock. The holder may convert up to $394,444 face amount of the Debenture
upon issuance and up to $394,444 on each monthly anniversary date thereafter
(each, a "Due Date"). Any amount not converted accumulates and may be converted
thereafter. The holder is prohibited from converting any amount of the Debenture
which would cause the holder's total ownership of common stock to equal five
percent or more of the total shares outstanding. The per share conversion price
was initially equal to the lesser of (a) $7.4953 or (b) the average of the three
lowest closing bid prices of our common stock for the 15 consecutive trading
days ending on the trading day immediately preceding submission of a notice to
convert by the holder. In the event the closing bid price of our common stock is
less than $7.4953 per share at any time during the five trading days preceding a
Due Date, we have the right to redeem for cash the monthly conversion amount of
the Debenture (in lieu of allowing the holder to convert such amount) at
premiums ranging from 105% to 108%. The Debenture is secured by deposits at Bank
One Arizona, NA in the initial amount of $5,000,000. The required amount of the
letter of credit decreases by $.7042 for every $1 of principal reduction of the
Debenture whether the reduction occurs by conversion or redemption.
On February 8, 2000, Ebiz and the holder of the Debenture agreed to
modify the terms of conversion of the Debenture. The per share conversion price
of the accrued principal convertible as of February 25, 2000 of $2,761,108 and
outstanding interest as of February 7, 2000 of $140,203 was changed to equal
the lesser of (a) $3.84, or (b) the average of the three lowest closing bid
prices of its common stock for the 15 consecutive trading days ending on the
trading day immediately preceding the submission of a conversion notice by the
holder. The $3.84 per share price equaled the conversion price of the Debenture
on January 25, 2000. As modified, the principal of the Debenture is convertible
into a minimum of 1,297,921 shares.
The Debenture holder agreed to immediately convert all accrued
interest of $140,203 into 36,511 shares of Ebiz common stock and to reduce its
cash collateral requirements by $500,000 until a total of $710,026 in principal
of the Debenture has been converted.
The Warrant is exercisable for the purchase of 245,000 shares of our
common stock, 60,000 at $7.4723 per share, 60,000 at $8.6219 per share and
125,000 at $6.3227 per share. The Warrant is exercisable at any time prior to
August 22, 2004.
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 and 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 Securities and
Exchange Commission ("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-SB/A, including those in the Notes to
Consolidated Financial Statements and in "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION" and "FACTORS AFFECTING FUTURE
PERFORMANCE" sections which are incorporated by reference in this Form 10-QSB.
Although we believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
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therefore, there can be no assurance that the results contemplated in such
forward-looking statements will be realized. The inclusion of such
forward-looking information should not be regarded as a representation that the
future events, plans or expectations contemplated will be achieved. We undertake
no obligation to publicly update, review or revise any forward-looking
statements to reflect any change in our expectations or any change in events,
conditions or circumstances on which any such statements based. Our filings with
the SEC, including the Form 10-SB/A, may be accessed at the SEC's Web site,
www.sec.gov.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
DEBENTURE
The discussion of the modification of the Debenture above under "PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Debenture and Warrant" is incorporated herein by reference.
ISSUANCE OF SECURITIES
Ebiz agreed to issue 18,948 shares of its common stock at $2.375 per share
to Mesirow Financial Inc. in lieu of payment of professional fees of $45,000
for investment banking and advising services rendered for the month of
December, 1999. Ebiz also agreed in December, 1999 that 220,000 outstanding
warrants held by Mesirow Financial granted as additional compensation for its
services would fully vest. Of these 220,000 warrants, 55,000 are exercisable at
$4.5375 per share, 55,000 at $5.15625 per share, 55,000 at $6.1875 per share
and 55,000 at $8.25 per share, and all expire in October through December,
2003. Ebiz agreed to register for resale the shares issued and underlying the
warranted granted to Mesirow Financial.
Ebiz has agreed to issue 240,000 shares of its common stock to CNET, Inc.
in payment of an Integration Fee of $1,200,000 under the Premier Advertiser
Agreement discussed below. See ITEM 5. OTHER INFORMATION.
Ebiz issued 36,511 shares on February 10, 2000 at $3.84 per share in
conversion of outstanding interest on the Debenture of $140,203. See the
discussion above under "PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Debenture and Warrant."
ITEM 5. OTHER INFORMATION.
In January, 2000 Ebiz entered into a Premiser Advertiser Agreement with
CNET, Inc. Under the agreement, Ebiz will be a part of CNET's "Premier
Advertiser" program and will receive advertising for and links to its Website,
TheLinuxStore.com. The term of the agreement is through February 1, 2001,
subject to earlier termination. Ebiz is required to purchase a minimum of
$2,000,000 of advertising under the agreement during its stated term, and to
pay an Integration Fee equal to $1,200,000 by issuance of 240,000 shares of its
common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
27.1 Financial Data Schedule
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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 14, 2000 By /s/ Jeffrey I. Rassas
--------------------------
Jeffrey I. Rassas
Chief Executive Officer
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EXHIBIT INDEX
27.1 Financial Data Schedule