U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended February 28, 2001
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
for the transition period from . . . . to . . . .
Commission file number 0-26578
MYRIENT, INC.
(Formerly known as LMKI, INC.)
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Exact name of small business issuer as specified in its charter)
Nevada 33-0662114
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
65 Enterprise, Aliso Viejo, CA 92656
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(Address of principal executive offices) (Zip Code)
(949) 330-6500
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(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all the reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve 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 [ ]
As of February 28, 2001 the number of shares of common stock outstanding was
35,951,079.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
INDEX
PART I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at February 28, 2001 (unaudited) and
August 31, 2000 (audited)
Consolidated Statements of Operations (unaudited) for the three
and six months ended February 28, 2001 and 2000
Consolidated Statements of Cash Flows (unaudited) for the six
months ended February 28, 2001 and 2000
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussions and Analysis of Financial Condition
and Results of Operations
PART II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MYRIENT, INC.
(Formerly known as LMKI, Inc.)
Consolidated Balance Sheets
February 28, August 31,
2001 2000
------------ ------------
ASSETS (Unaudited)
Current assets:
Cash $ 25,990 $ 12,877
Accounts receivable, net of allowance for
doubtful accounts of $589,000 and $50,000 2,938,726 1,633,204
------------ ------------
Total current assets 2,964,716 1,646,081
Property and equipment, net 6,336,738 4,935,343
Deposits and other assets 391,697 352,954
------------ ------------
$ 9,693,151 $ 6,934,378
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Account payable and accrued liabilities $16,968,910 $12,477,312
Lines of credit 950,000 600,000
Convertible notes payable 1,000,000 1,000,000
Accrued payroll and related liabilities 1,120,000 557,356
Accrued dividends payable 219,328 131,155
Accrued interest payable to related parties 226,889 143,163
Derivative liability 580,000 -
Current portion of capital lease obligations 82,702 82,702
------------ ------------
Total current liabilities 21,147,829 14,991,688
Obligations under capital lease, net of current portion 111,755 155,964
Convertible long-term note payable 400,000 -
Related party notes payable 2,330,437 2,020,173
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23,990,021 17,167,825
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Stockholders' deficit:
Series A 6% convertible preferred stock,
$.001 par value; 5,000 authorized,
3,650 and 4,000 issued and outstanding,
respectively; liquidation preference
and accrued dividends of $3,857,515 and
$4,131,155, respectively 4 4
Common stock, $.001 par value;
50,000,000, shares outstanding,
35,951,079 and 42,288,367 shares issued
and outstanding, respectively 35,953 42,289
Deferred compensation (270,000) -
Additional paid-in capital 15,401,197 15,397,404
Accumulated deficit (29,464,024) (25,673,144)
------------ ------------
Total stockholders' deficit (14,296,870) (10,233,447)
------------ ------------
$ 9,693,151 $ 6,934,378
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
3
MYRIENT, INC.
(Formerly known as LMKI, Inc.)
Consolidated Statements of Operations
(Unaudited)
Three months ended February 28, Six months ended February 28,
------------------------------- -------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Net sales $ 4,901,917 $ 2,126,113 $ 8,541,112 $ 3,631,166
Cost of sales 2,973,585 1,352,499 5,916,501 1,756,342
-------------- -------------- -------------- --------------
Gross profit 1,928,332 773,614 2,624,611 1,874,824
Operating expenses:
Selling 1,228,140 768,265 1,916,134 1,141,787
General and administrative 1,831,034 1,813,573 4,041,231 2,566,537
-------------- -------------- -------------- --------------
Total operating expenses 3,059,174 2,581,838 5,957,365 3,708,324
-------------- -------------- -------------- --------------
Loss from operations (1,130,842) (1,808,224) (3,332,754) (1,833,500)
Interest expense, net 274,394 88,369 351,668 114,853
-------------- -------------- -------------- --------------
Net loss $ (1,405,236) $ (1,896,593) $ (3,684,422) $ (1,948,353)
============== ============== ============== ==============
Net loss available to common
stockholders per share $ (0.05) $ (0.05) $ (0.11) $ (0.05)
============== ============== ============== ==============
Basic and diluted weighted
average common shares 29,872,071 36,538,633 34,716,365 36,327,149
outstanding ============== ============== ============== ==============
The accompanying notes are an integral part of
these consolidated financial statements.
4
MYRIENT, INC.
(Formerly known as LMKI, Inc.)
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended February 28,
-------------------------------
2001 2000
-------------- --------------
Cash flows from operating activities:
Net loss $ (3,684,422) $ (1,948,353)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 465,710 102,583
Amortization of goodwill - 302,206
Vesting of previously issued options and warrants 310,584 -
Stock issued in exchange for salaries and services 100,895 352,920
Interest expense related to increase in
value of derivative liability 151,429 -
Changes in operating assets and liabilities:
Accounts receivable, net (1,905,522) (563,461)
Other assets 16,202 (330,903)
Account payable and accrued liabilities 4,491,598 3,065,553
Accrued payroll and related liabilities 562,644 (84,687)
Accrued interest payable to related parties 112,346 31,570
-------------- --------------
Net cash provided by operating activities 621,464 927,428
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Cash flows from investing activities:
Purchases of property and equipment (1,867,105) (3,378,679)
Net increase in deposits (98,023) (256,085)
-------------- --------------
Net cash used in investing activities (1,965,128) (3,634,764)
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Cash flows from financing activities:
(Payments) refund on capitalized lease obligations (44,209) 16,778
Proceeds from preferred stock, net of offering costs - 3,658,100
Proceeds from employee purchase of common stock 8,505 -
Proceeds from short-swing profits 16,380 -
Repayments on related party notes payable (93,645) -
Proceeds from borrowings on lines of credit 644,000 -
Proceeds from related party notes payable 325,746 661,119
Proceeds from unrelated party notes payable 500,000 -
-------------- --------------
Net cash provided by financing activities 1,356,777 4,335,997
-------------- --------------
Net increase in cash 13,113 1,628,661
Cash, beginning of period 12,877 125,692
-------------- --------------
Cash, end of period $ 25,990 $ 1,754,353
============== ==============
Supplemental cash flow disclosures:
Cash paid for interest $ 116,513 $ 114,853
============== ==============
Cash paid for taxes $ 12,604 $ -
============== ==============
See the accompanying notes for non-cash investing and financing activities.
The accompanying notes are an integral part of
these consolidated financial statements.
5
MYRIENT, INC.
(Formerly known as LMKI, Inc.)
Notes to Condensed Consolidated Financial Statements
For the three and six months ended February 28, 2001 and 2000
(Unaudited)
NOTE 1. MANAGEMENT'S REPRESENTATION:
The management of Myrient, Inc. and its subsidiaries (the "Company" or
"Myrient") (formerly known as LMKI, Inc.) without audit has prepared the
consolidated financial statements included herein. The accompanying unaudited
financial statements consolidate the accounts of the Company and its wholly
owned subsidiaries and have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information. Certain information and note disclosures normally
included in the consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been omitted. In the opinion of the management of the Company, all adjustments
considered necessary for fair presentation of the consolidated financial
statements have been included and were of a normal recurring nature, and the
accompanying consolidated financial statements present fairly the financial
position as of February 28, 2001, and the results of operations and cash flows
for the three and six months ended February 28, 2001 and February 29, 2000.
NOTE 2. DESCRIPTION OF BUSINESS
Myrient is a Nevada Corporation engaged in providing high-speed
Internet access, data, voice and video services to individuals and businesses.
NOTE 3. ORGANIZATION AND SUMMARY OF SIGNIFCANT ACCOUNTING POLICIES:
GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
normal course of business. The Company has negative working capital of
$18,183,113, liabilities from the underpayment of payroll taxes (see Note 9),
certain notes payable in default (see Notes 4, 5, and 6), a stockholders'
deficit of $14,296,870, and losses from operations through February 28, 2001.
The Company hopes to continue to increase revenues from additional
revenue sources and increase margins as a result of amending its contracts with
vendors and other cost cutting measures. In the absence of significant revenues
and profits, the Company intends to fund operations through additional debt and
equity financing arrangements which management believes may be insufficient to
fund its capital expenditures, working capital, and other cash requirements for
the fiscal year ending August 31, 2001. Therefore, the Company may be required
to seek additional funds to finance its long-term operations. The successful
outcome of future activities cannot be determined at this time and there are no
assurances that if achieved, the Company will have sufficient funds to execute
its intended business plan or generate positive operating results.
6
These circumstances raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Myrient, Inc. and its wholly owned subsidiaries. All significant
inter-company balances and transactions have been eliminated.
RISKS AND UNCERTAINTIES
The Company operates in a highly competitive industry that is subject
to intense competition, government regulation and rapid technological change.
The Company's operations are subject to significant risk and uncertainties,
including financial, operational, technological, regulatory and other risks
associated with an emerging business, including the potential risk of business
failure.
REVENUE RECOGNITION
Fees for high-speed Internet access, data, voice and video services are
recognized as services are provided.
Deferred Revenue
Deferred revenue represents billings in advance for fees related to
high-speed Internet access, data, voice, and video services relating to future
periods. The Company recognizes deferred revenue in the statement of operations
as the service is provided. The Company has billed but not recognized
approximately $896,000 of deferred revenue, as the related services have not yet
been performed as of February 28, 2001.
NET LOSS PER COMMON SHARE
The Company has adopted Statement of Accounting of Financial Accounting
Standards No. 128 ("SFAS 128") "Earnings per Share". Under SFAS 128, basic
earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares assumed to be
outstanding during the period of computation. Diluted earnings per share is
computed similar to basic earnings per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential shares had been issued and if the additional common
shares were dilutive. The Company net loss has been increased for the effect of
accrued dividends to preferred stockholders (see Note 11). Stock options and
warrants outstanding are not considered common stock equivalents, as the effect
on net loss per share would be anti-dilutive.
Stock-Based Compensation
The Company accounts for non-employee stock based compensation under
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), SFAS 123
defines a fair value based method of accounting for stock based compensation.
However, SFAS 123 allows an entity to continue to measure compensation cost
related to stock and stock options issued to employees using the intrinsic
method of accounting prescribed by Accounting Principles Board Opinion No.
25("APB 25"), "Accounting for Stock issued to Employees." Under APB 25,
7
compensation cost, if any, is recognized over the respective vesting period
based on the difference, on the date of grant, between the fair value of the
Company's common stock and the grant price. Entities electing to remain with the
accounting method of APB 25 must make pro forma disclosures of net income and
earnings per share, as if the fair value method of accounting defined in SFAS
123 had been applied. The Company has elected to account for its stock based
compensation to employees under APB 25.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB 25. FIN 44 clarifies the application of APB 25 for (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequences for various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain provisions cover specific events that occur after either December
15, 1998, or January 12, 2000. The adoption of FIN 44 did not have a material
effect on the financial statements.
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131
("SFAS No. 131"), "Disclosures about Segments of an Enterprise and Related
Information," during fiscal 1999. SFAS 131 establishes standards for the way
that public companies report information about operating segments and related
disclosures about products and services, geographic areas and major customers in
annual consolidated financial statements. The Company views its operations and
manages its business as principally one segment.
Comprehensive Income
The Company has adopted Financial Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income." SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The adoption of SFAS 130 has not
materially impacted the Company's financial position or results of operations,
as the Company has no items of comprehensive income.
Website Development Costs
In March 2000, the Emerging Issues Task Force reached a consensus on
Issue No. 00-2, "Accounting for Web Site Development Costs" ("EITF 00-2") to be
applicable to all web site development costs incurred for the quarter beginning
after June 30, 2000. The consensus states that for specific web site development
costs, the accounting for such costs should be accounted for under AICPA
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The adoption of EITF 00-2 did
not have a material impact on the Company's financial position or results of
operations.
8
Derivative Instruments and Hedging Activities
Effective September 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS 137 and 138. The new accounting standard
requires that all derivative instruments be recorded on the balance sheet at
fair value. The Company has embedded derivatives relating to the conversion
feature on certain debt instruments.
As of February 28, 2001, the Company recorded the fair value of all
outstanding derivative instruments as liabilities on the balance sheet. The
transition adjustment of approximately $151,000 was not material to earnings and
is included in interest expense in the accompanying statement of operations.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition," which outlines the
basic criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. The effective date of this pronouncement is the fourth quarter of
the fiscal year beginning after December 15, 1999. The Company believes that
adopting SAB 101 will not have a material impact on its financial position and
results of operations.
Reclassifications
Certain reclassifications were made to prior period amounts, enabling
them to conform to current period presentation.
NOTE 4. RELATED PARTY NOTES PAYABLE
Stockholders
From time to time, the Company borrows funds from several of its
stockholders for working capital purposes. During the six months ended February
28, 2001, the Company had principal borrowings of approximately $325,746 from
various stockholders and made principal repayments of approximately $93,645.
Certain notes require monthly payments ranging from $5,000 to $40,000 with all
principal and interest due on maturity dates through February 2001. The
remaining notes require principal and interest on demand. The notes accrue
interest ranging from 8% to 21%. The outstanding balance on these notes totaled
$648,564, with accrued interest of $49,116, which is included in accrued
interest payable at February 28, 2001. Interest expense incurred for the three
and six months ended February 28, 2001 and 2000 was $41,935 and $50,197, and
$57,680 and $59,228, respectively. As of the date of the report, certain notes
were in default. The notes payable are shown as long-term debt as the note
holders have agreed not to demand payment in the next twelve months.
During the six months ended February 28, 2001, note holders converted
$278,759 plus accrued interest of $28,620 of notes payable into 1,985,396 shares
of the Company's common stock (based on the closing bid price of the Company's
common stock on the date of conversion)(see Note 9).
9
Former Employee
From time to time, the Company borrowed funds from its former Chairman
and CEO (who resigned August 8, 2000) for working capital purposes. During the
quarter ended February 28, 2001, the Company had no principal borrowing nor made
any principal payment related to these borrowings. After considering the
adjustments made in connection with a severance agreement between the Company
and the former Chairman and CEO (see Note 7), the outstanding balance on this
note at February 28, 2001 totaled $1,681,873 plus accrued interest of $177,773
(which is included in accrued interest payable to related party at February 28,
2001). The note, as amended, requires monthly payments ranging from $125,000 to
$252,000 with all principal and interest due by September 15, 2001 and accrues
interest at 8%, and is secured by 5,000,000 shares of stock held by the
Company's President (see Note 7). Interest expense incurred for the three and
six months ended February 28, 2001 and 2000 was $37,149 and $62,149; and $33,984
and $52,984, respectively. This note payable is shown as long-term debt as the
note is subordinated to the $1,000,000 convertible note payable (see Note 6) and
no payments will be made until the note is paid in full.
NOTE 5. LINES OF CREDIT
The Company has a revolving line of credit agreement (the "Line") with
a financial institution. The Line bears interest at the prime rate (9.0% at
February 28, 2001) plus 2% per annum. The Line is secured by substantially all
of the Company's assets. The terms of the agreement provide for borrowings of up
to the lesser of $600,000 or the aggregate of 80% of eligible accounts
receivable, as defined. At February 28, 2001, the Company's outstanding
borrowings totaled $600,000. The Line matured on February 15, 2001. The Company
is in the process of renegotiating this Line with the financial institution.
Interest expense incurred on the Line for the three and six months ended
February 28, 2001 and 2000 was $17,360 and $33,360; and $4,189 and $4,189,
respectively.
During January 2001, the Company received a commitment for a line of
credit of up to $5,000,000 for working capital purposes from a financial
institution. This line requires the President personally to secure the line with
1,000,000 shares of common stock. In addition, interest on the line is at 10%
with a maturity date of six months from the date of each advance and no
prepayment penalties. During the six months ended February 28, 2001, the Company
has drawn $644,000 on this line of credit of which the lender has converted
$294,000 into 2,177,778 shares of restricted common stock (based on the closing
bid price of the Company's common stock on the date of conversion).
NOTE 6. CONVERTIBLE NOTE PAYABLE
The Company has a convertible note agreement (the "Note") with a
financial institution for $1,000,000. The Note, bearing interest at the prime
rate (9.0% at February 28, 2001) plus 5%, was due August 3, 2000 and is
convertible to common stock if not paid by August 31, 2000, at a share price
equal to the lesser of the share price on the date of the agreement or at a 30%
discount of the share price on the date of conversion. As of February 28, 2001,
the outstanding balance on the Note was $1,000,000. The Note requires the
Company to maintain certain net worth and solvency ratio covenants, with which
the Company was not in compliance as of February 28, 2001. Interest expense
incurred for the three and six months ended February 28, 2001 was $29,255 and
$45,502, respectively. Due to the conversion feature, the Company has recorded a
derivative liability of $562,609 (representing the fair value of the conversion
feature at February 28, 2001 using the Black-Scholes option pricing model) in
the accompanying balance sheet at February 28, 2001.
10
During the six months ended February 28, 2001, the Company borrowed
$500,000 for working capital purposes from an unrelated third party. The
borrowings are due January 16, 2003, accrue interest at prime (9.0% at February
28, 2001) plus two percent (2%) with interest payable in semi-annual payments
beginning June 16, 2001. The note holder may convert the principal portion into
shares of restricted common stock in traunches of $100,000 every 30 days, except
under a default condition, where the entire balance due may be converted. The
note is convertible into restricted common stock at a price equal to the fair
market value on date of conversion, less a 15% restricted common stock discount,
as defined. During the current quarter, the note holder converted $100,000 of
principal into 869,565 shares of the Company's common stock at an exercise price
of $0.115 (based on the closing bid price of the Company's common stock on the
date of conversion). Due to the embedded conversion feature, the Company has
recorded a derivative liability of $17,391 (represent the fair value of the
conversion feature at February 28, 2001 using the Black-Scholes option pricing
model) in the accompanying balance sheet at February 28, 2001.
NOTE 7. SEVERANCE AGREEMENTS
The Company entered into a severance agreement effective August 8, 2000
and restated and amended November 15, 2000, with the former Chairman and CEO, as
follows:
o the Company agreed to pay the former Chairman and CEO a
severance amount of $120,000 payable in twelve equal monthly
installments beginning August 10, 2000. Through February 28,
2001, the Company has made payments in the amount of $120,000,
of which $110,000 was paid during the six months ended
February 28, 2001, in connection with the severance liability;
o the Company and the former Chairman and CEO agreed to offset a
note payable to the former Chairman and CEO with certain
accounts receivable in the amount of $600,000 from SpeeDSL, a
related party (see Note 4);
o the former Chairman and CEO agreed to return 15,000,000 shares
of common stock and the Company would increase his note
payable balance by $1,000,000 (see Note 4);
o the Company's President agreed to secure the note payable to
the former Chairman and CEO with 5,000,000 shares of common
stock held personally by him (see Note 4); and
o the former Chairman and CEO agreed to cancel 2,000,000 options
that were outstanding at August 31, 2000.
Effective August 8, 2000 the Company entered into a severance agreement
with its former Chief Operating Officer ("COO"). The agreement requires the
Company to pay the former COO a severance amount of $120,000 payable in twelve
equal monthly installments beginning August 10, 2000. Through February 28, 2001,
the Company has made payments in the amount of $90,000, of which $30,000 was
paid during the three months ended February 28, 2001 in connection with the
severance liability. At February 28, 2001, the Company has recorded the
remaining undiscounted amount of $30,000 in accrued liabilities in the
accompanying Balance Sheet.
11
NOTE 8. ACCRUED PAYROLL TAXES
The Company has recorded an accrual for past due payroll taxes as of
February 28, 2001 due to the under-payment of the Company's payroll tax
liability. As a result, the Company has accrued approximately $1,120,000 related
to payroll taxes and accrued payroll and related liabilities in the accompanying
balance sheet at February 28, 2001. The Company is currently negotiating
installment payments to settle this debt.
NOTE 9. STOCKHOLDERS' EQUITY
Preferred Stock
During the three and six months ended February 28, 2001, the Company
has accrued $45,253 and $106,458 of dividends in connection with the outstanding
Preferred Series A shares, of which $18,285 were converted into common stock in
connection with the conversion of 350 shares of Preferred Series A (see below).
Short-Swing Profits
During November 2000, it was discovered that the former CFO and
beneficial owner (as defined by the Securities Exchange Act of 1934), had
profited from purchases and subsequent sales of the Company's common stock held
for less than six (6) months (a "short-swing" profit). Pursuant to Section 16(b)
of the Securities Exchange Act of 1934, the Company acted to recover these
profits from the former CFO. As a result, the Company received $16,380, which
has been credited to additional paid-in capital as a contribution to
shareholders' deficit.
Stock Options and Warrants
During the six months ended February 28, 2001, the Board of Directors
granted to various employees, pursuant to the 2000 stock option plan, an
aggregate of 2,013,000 options at exercise prices ranging from $0.14 to $0.562
(based on the closing bid price of the Company's common stock on the date of
each grant). The options vest through May 2003 and are exercisable through
January 2011. During the three months and six months ended February 28, 2001,
the Company recognized $13,050 and $310,584, respectively of compensation and
consulting expense in the statement of operations due to the vesting of
previously issued options and warrants.
Common Stock
During the six months ended February 28, 2001, the Company issued
698,710 shares of common stock in connection with the conversion of 350 shares
of Preferred Series A, plus accrued dividends in the amount of $18,285, at
conversion prices ranging from $0.25 to $0.917 per share, in accordance with the
conversion terms of the Preferred A shares.
During the six months ended February 28, 2001, the Company issued
1,985,396 shares of common stock in connection with the conversion of certain
related party notes payable of $278,759 plus accrued interest of $28,620 (see
Note 4) at conversion prices ranging from $0.135 to $0.37 per share (based on
the closing bid price of the Company's common stock on the date of conversion).
12
During the six months ended February 28, 2001, the Company issued
3,047,343 shares of common stock in connection with the conversion of certain
un-related third party notes payable of $394,000 (see Note 4) at conversion
prices ranging from $0.115 to $0.135 per share (based on the closing bid price
of the Company's common stock on the date of conversion).
During the six months ended February 28, 2001, the Company issued
731,263 shares of common stock valued at $75,470 (based on the closing bid price
of the Company's common stock on the date of grant) to employees for wages.
During the six months ended February 28, 2001, the Company issued
2,000,000 shares of common stock valued at $270,000 (based on the closing bid
price of the Company's common stock on the date of grant) as a sign on bonus for
the new CEO. These shares were issued in February 2001 and will be recognized in
the statement of operations as earned over a one-year period; therefore, the
Company has recorded this as deferred compensation in the accompanying balance
sheet.
During the six months ended February 28, 2001, a Company officer bought
45,000 shares of common stock for $8,505.
During the six months ended February 28, 2001, the Company issued
155,000 shares of common stock valued at $25,425 (based on the closing bid price
of the Company's common stock on the date of grant) to various third parties for
services provided.
NOTE 10. RELATED PARTY TRANSACTIONS
During fiscal 2000, the former Chairman and CEO of the Company entered
into a verbal contract with SpeeDSL, which is owned and operated by the son of
the former Chairman and CEO, to be a reseller of access services. During the
quarter ended November 30, 2000, the Company invoiced SpeeDSL approximately
$190,000 for access fees. During the quarter ended February 28, 2001, the
Company invoiced SpeeDSL approximately $158,000 for access fees, approximately
$219,000 for customer provided equipment and approximately $245,000 for
disconnect fees. In February, the Company stopped doing business with SpeeDSL
and has reserved $500,000 towards the receivables balance of $721,000.
13
NOTE 11. EARNINGS PER SHARE
Basic and diluted loss per common share for the three and six months
ended February 28, 2001 and 2000 is computed as follows:
Three Months Three Months Six Months Six Months
Feb 28, 2001 Feb 29, 2000 Feb 28, 2001 Feb 29, 2000
------------- ------------- ------------- -------------
Numerator for basic and diluted
loss per common share:
Net loss $ (1,405,236) $ (1,896,593) $ (3,684,422) $ (1,948,353)
Preferred dividends (45,253) (40,087) (106,458) (40,087)
------------- ------------- ------------- -------------
Net loss available to
common stockholders $ (1,450,489) $ (1,936,680) $ (3,790,880) $ (1,988,440)
============= ============= ============= =============
Denominator for basic and diluted
loss per common share:
Weighted average common
shares outstanding 29,872,071 36,538,633 34,716,365 36,327,149
============= ============= ============= =============
Net loss per common share
available to common
stockholders $ (0.05) $ (0.05) $ (0.11) $ (0.05)
============= ============= ============= =============
NOTE 12. SUBSEQUENT EVENTS
In March the Company reached and agreement with Mesora Investors LLC
("Mesora"), the holder of its Preferred Series A shares for the retirement of
all 3,645 of the outstanding shares, as follows:
o As of March 8, 2001, Mesora converted 2,445 Preferred Series A
shares, with a liquidation value of $2,445,000, plus all
accrued dividends of $212,515, at a price of $0.90 per share,
into 2,952,794 shares of Myrient's common stock.
o Mesora converted 700 Preferred Series A shares, with a
liquidation value of $700,000, at a price of $0.90 per share
into 777,777 shares of Myrient's common stock, and has agreed
to hold the shares for 120 days. During this period, Myrient
has agreed to repurchase the shares at Mesora's cost for the
sum of $700,000, personally guaranteed by Myrient's Vice
Chairman and CEO.
o Mesora has sold to Myrient the 500 remaining Preferred Series
A shares at its cost for an aggregate price of $500,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT:
This quarterly report on Form 10-QSB may contain statements that could
be deemed forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 and the Private Securities Litigation Reform
Act, which statements are inherently subject to risks and uncertainties.
Forward-looking statements are statements that include projections, predictions,
expectations and beliefs about future events or results or otherwise are not
statements of historical fact. Such statements are often characterized by the
use of qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," "anticipate," or other statements concerning
opinions or judgment of the Company and its management about future events.
14
Factors that could influence the accuracy of such forward-looking statements
include, but are not limited to, the financial success or changing strategies of
the Company's customers, actions of government regulators, the level of market
interest rate and general economic conditions. All forward-looking statements
included herein are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements. It is important to note that the Company's actual results could
differ materially from those in such forward-looking statements due to the
factors cited above. As a result of these factors, there can be no assurance the
Company will not experience material fluctuations in future operating results on
a quarterly or annual basis, which would materially and adversely affect the
Company's business, financial condition and results of operations.
GENERAL OVERVIEW
The Company's operating results have fluctuated in the past and may in
the future fluctuate significantly, depending upon a variety of factors,
including the timely deployment and expansion of new network architectures, the
incurrence of related capital costs, variability and length of the sales cycle
associated with the Company's product and service offerings, the receipt of new
value-added network services and consumer services subscriptions and the
introduction of new services by the Company and its competitors. Additional
factors that may contribute to variability of operating results include: the
pricing and mix of services offered by the Company; customer retention rate;
market acceptance of new and enhanced versions of the Company's services;
changes in pricing policies by the Company's competitors; the Company's ability
to obtain sufficient supplies of sole or limited-source components; user demand
for network and Internet access services; balancing of network usage over a
24-hour period; the ability to manage potential growth and expansion; the
ability to identify, acquire and integrate successfully suitable acquisition
candidates; and charges related to acquisitions. In response to competitive
pressures, the Company may take certain pricing or marketing actions that could
have a material adverse affect on the Company's business. As a result,
variations in the timing and amounts of revenue could have a material adverse
affect on the Company's quarterly operating results. Due to the foregoing
factors, the Company believes the period-to-period comparisons of its operating
results are not necessarily meaningful and that such comparisons cannot be
relied upon as indicators of future performance. In the event that the Company's
operating results in any future period fall below the expectations of securities
analysts and investors, the trading price of the Company's common stock would
likely decline.
15
RESULTS OF OPERATIONS
FOR THREE MONTHS ENDED FEBRUARY 28, 2001:
- -----------------------------------------
Revenue
Revenue totaled approximately $4,901,917 for the three months ended
February 28, 2001, a $2,775,804 increase over revenue of $2,126,113 for the
three months ended February 29, 2000. These increases reflect the growth in
revenue from Real Private Network(TM) (RPN(TM)), Broadband Internet Access,
Internet and Intranet based Web Hosting, Hosted Application Services,
Intelligent Routing and Content Delivery Services, Network and Systems
Management, Professional Services, from marketing arrangements with new
strategic partners, and sale of equipment to support these product offerings.
Cost of Sales
Cost of sales for the three months ended February 28, 2001 was
$2,973,585, an increase of 1,621,086 from $1,352,499 for the three months ended
February 29, 2000. Cost of sales consists primarily of access charges from local
exchange carriers, backbone and Internet access costs, and the cost of customer
equipment to support network systems. Gross profit percentage increased to 39%
in 2001 from 36% in 2000. In an effort to reduce the monthly minimum usage fees
of Internet service provider access, the Company is continuously negotiating new
contracts with various providers to obtain competitive pricing; as a result the
Company expects its gross profit percentage to continue increasing.
Selling Expense
Selling expense consists primarily of personnel expenses, including
salary and commissions, and costs for customer support functions. Marketing and
sales expense was $1,228,140 for the three months ended February 28, 2001 and
$768,265 for the three months ended February 29, 2000, which represents a
$459,875 increase. The current executive management of the Company has directed
its sales focus from reselling retail based business class DSL connectivity to
higher margin Managed Services, including Real Private Network(TM) (RPN(TM))
technology, Internet and Intranet based Web Hosting, Hosted Application
Services, Intelligent Routing and Content Delivery Services, Network and Systems
Management, and Professional Services.
General and Administrative Expense
General and administrative expense consists primarily of personnel
expense, rent and professional fees. General and administrative expense was
$1,831,034 for the three months February 28, 2001 and $1,813,573 for the three
months ended February 29, 2000, which represents a $17,461 increase. As of
February 28, 2001, general and administrative expense primarily consisted of
$630,116 in administrative wages, technical support engineers and related taxes
and benefits; $237,095 in depreciation expense; $81,170 in operating equipment
leases; $27,560 in systems implementation and costs; $275,627 for professional
fees; $133,820 in rent expense; $99,890 in telephone expenses; $3,007 of
non-cash charged for the vesting of previously issued options for services
rendered and for compensation; $75,470 of non-cash charges for issuance of stock
in lieu of compensation, and $267,279 in other operating expenses. Currently,
the Company is taking aggressive steps to decrease future general and
administrative expenses.
Interest Expense
Interest expense was $274,394 for the three months ended February 28,
2001 and $88,369 for the three months ended February 29, 2000. The increase in
interest expense is substantially related to the company acquiring working
capital through a line of credit, convertible note payable and related party
notes payable and the change in fair value of the derivative liability for the
embedded conversion feature on convertible notes payable. The increase is
related to interest on capital leases of $1,589, interest on the Company's line
of credit of $17,360, interest on notes payable of $79,084, and interest on
convertible note payable of $29,255 and the change in fair value of the embedded
derivative liability related to the convertible notes payable of $151,429 (net
of previously recorded conversion feature of $428,571), net of interest income
of approximately $4,323.
16
Net Loss
As a result of the above factors, the Company incurred a net loss for
the three-month period ended February 28, 2001 of $1,405,236 or $0.05 per share
compared to $1,896,593 or $0.05 per share for the three months ended February
29, 2000. The Company's near term focus is to become profitable by negotiating
provider costs and reducing all expenses to minimum levels. However, we cannot
assure that the Company will be profitable in the future.
FOR SIX MONTHS ENDED FEBRUARY 28, 2001:
- ---------------------------------------
Revenue
Revenue totaled approximately $8,541,112 for the six months ended
February 28, 2001, a $4,909,946 increase over revenue of $3,631,166 for the six
months ended February 29, 2000. These increases reflect the growth in revenue
from Real Private Network(TM) (RPN(TM)), Broadband Internet Access, Internet and
Intranet based Web Hosting, Hosted Application Services, Intelligent Routing and
Content Delivery Services, Network and Systems Management, Professional
Services, from marketing arrangements with new strategic partners, and sale of
equipment to support these product offerings.
Cost of Sales
Cost of sales for the six months ended February 28, 2001 was
$5,916,501, an increase of 4,160,159 from $1,756,342 for the six months ended
February 29, 2000. Cost of sales consists primarily of access charges from local
exchange carriers, backbone and Internet access costs, and the cost of customer
equipment to support network systems. Gross profit percentage decreased to 31%
in 2001 from 52% in 2000. In an effort to reduce the monthly minimum usage fees
of Internet service provider access, the Company is continuously negotiating new
contracts with various providers to obtain competitive pricing; as a result the
Company expects its gross profit percentage to increase.
Selling Expense
Selling expense consists primarily of personnel expenses, including
salary and commissions, and costs for customer support functions. Marketing and
sales expense was $1,916,134 for the six months ended February 28, 2001 and
$1,141,787 for the six months ended February 29, 2000, which represents a
$774,347 increase. The current executive management of the Company has directed
its sales focus from reselling retail based business class DSL connectivity to
higher margin Managed Services, including Real Private Network(TM) (RPN(TM))
technology, Internet and Intranet based Web Hosting, Hosted Application
Services, Intelligent Routing and Content Delivery Services, Network and Systems
Management, and Professional Services.
17
General and Administrative Expense
General and administrative expense consists primarily of personnel
expense, rent and professional fees. General and administrative expense was
$4,041,231 for the six months February 28, 2001 and $2,566,537 for the six
months ended February 29, 2000, which represents a $1,474,694 increase. As of
February 28, 2001, general and administrative expense primarily consisted of
$1,377,099 in administrative wages, technical support engineers and related
taxes and benefits; $465,710 in depreciation expense; $103,492 in operating
equipment leases; $250,655 in systems implementation and costs; $534,049 for
professional fees; $285,794 in rent expense; $141,280 in telephone expenses;
$310,584 of non-cash charges for the vesting of previously issued options for
services rendered and for compensation; $75,470 of non-cash charges for issuance
of stock in lieu of compensation, and $497,098 in other operating expenses.
Currently, the Company is taking aggressive steps to decrease future general and
administrative expenses.
Interest Expense
Interest expense was $351,668 for the six months ended February 28,
2001 and $114,853 for the six months ended February 29, 2000. The increase in
interest expense is substantially related to the company acquiring working
capital through a line of credit, convertible note payable and related party
notes payable and the change in the fair value of the derivative liability for
the conversion feature on convertible notes payable. The increase is related to
interest on capital leases of $15,000, interest on the Company's line of credit
of $33,360, interest on notes payable of $125,700, and interest on convertible
note payable of $45,502 and the change in fair value of the embedded derivative
liability related to the convertible notes payable of $151,429 (net of
previously recorded conversion feature of $428,571), net of interest income of
approximately $19,323.
Net Loss
As a result of the above factors, the Company incurred a net loss for
the six months ended February 28, 2001 of $3,684,422 or $0.11 per share compared
to $1,948,353 or $0.05 per share for the six months ended February 29, 2000. The
Company's near term focus is to become profitable by negotiating provider costs
and reducing all expenses to minimum levels. However, we cannot assure that the
Company will be profitable in the future.
STOCKHOLDERS' DEFICIT
Stockholders' deficit increased by $4,063,423, from $(10,233,447) as of
August 31, 2000 to ($14,296,870) as of February 28, 2001. The increase is
attributable to the six month net loss of $3,684,422, dividends accrued on
preferred stock of $106,458, the retirement of the former CEO's 15,000,000
shares of common stock for $1,000,000, and the reclassification of a beneficial
conversion to an embedded derivative liability on convertible notes payable of
$428,571; offset by the issuance of common stock in connection with the
conversion of debt for $701,379, issuance of common stock for the conversion of
preferred stock and accrued dividends of $18,285, cash received of $16,380 for
short-swing profits, issuance of stock of $100,895 for services, vesting of
previously issued options and warrants of $310,584, and the receipt of cash for
stock sale of $8,505.
18
ASSETS AND LIABILITIES
Assets increased by $2,758,773 from $6,934,378 as of August 31, 2000 to
$9,693,151 as of February 28, 2001. The increase was due primarily to increases
in accounts receivable of $1,305,522, net property and equipment of $1,401,395,
cash of $13,113 and other assets of $38,743. Liabilities increased by $6,822,196
from $17,167,825 as of August 31, 2000 to $23,990,021 as of February 28, 2001.
The increase was primarily to increases in accounts payable and accrued expenses
of $4,491,598, lines of credit of $350,000, payroll and payroll related
liabilities of $562,644, notes payable-related parties of $310,264, convertible
long-term note payable of $400,000, derivative liability on convertible notes
payable of $580,000, and other liabilities of $171,899; offset by a decrease in
capital leases of $44,209.
LIQUIDITY AND CAPITAL RESOURCES
General
Overall, the Company had positive cash flows of $13,113 in the six
months ended February 28, 2001 resulting from $621,464 of cash provided by
operating activities and $1,356,777 of cash provided by the Company's financing
activities, offset by $1,965,128 of cash used in investing activities.
Cash Flows from Operations
Net cash provided by operating activities of $621,464 in the six months
ended February 28, 2001 was primarily due to the increase of other assets of
$16,202, operating liabilities, principally accounts payable and accrued
expenses of $4,491,598, payroll and related taxes of $562,644; accrued interest
to related parties of $112,346; interest expense related to the increase in
value of derivative liability of $151,429, the fair market value of stock issued
for salaries and services of $100,895; vesting of previously issued options and
warrants of $310,584; net of a depreciation expense of $465,710; offset by the
net loss of $3,684,422 and an increase in accounts receivable of $1,905,522.
Cash Flows from Investing
Net cash used in investing activities of $1,965,128 in the six months
ended February 28, 2001 funded purchases of property and equipment of $1,867,105
and an increase in deposits of $98,023.
Cash Flows from Financing
Net cash provided by financing activities of $1,356,777 in the six
months ended February 28, 2001 was primarily due to the proceeds from unrelated
party notes payable of $500,000, related party notes payable of $325,746,
borrowings on lines of credit of $644,000, employee purchase of common stock for
$8,505, and the short-swing profits of $16,380; offset primarily by repayments
on notes payable and capitalized leases obligations of $137,854.
To date, the Company has satisfied its cash requirements primarily
through debt and equity financings and capitalized lease financings. The
Company's principal uses of cash are to fund working capital requirements and to
service capital lease and debt financing obligations. The Company believes that
it will generate positive cash flow from operations within the next twelve
months. There can be no assurances that the Company will be successful in
securing additional financing, and if secured, it will be sufficient to satisfy
working capital needs.
19
LONG-TERM FINANCING
The Company believes that its anticipated funds from operations will
not be sufficient to fund its working capital and other requirements through
August 31, 2001. Therefore, the Company will be required to seek additional
funds either through debt or equity financing to finance its long-term
operations ("Additional Funds"). Should the Company fail to raise the Additional
Funds, the Company will have insufficient funds for the Company's intended
operations for the next twelve months that may have a material adverse effect on
the Company's long-term results of operations.
CONTINGENT LIABILITIES
As of August 31, 2000, the Company had been billed approximately
$2,744,000 from a third party for consultation services in connection with the
implementation of certain software programs. The Company has retained the
services of an outside consultant to examine the appropriateness of such
services and related charges. As of February 28, 2001, the Company has not made
any payments related to this charge and has accrued approximately $2,744,000 in
accounts payable in the accompanying balance sheet.
As of August 31, 2000, the Company entered into an agreement with a
third party for software licenses and promotional support for approximately
$1,261,000, with the intent to resell the related licenses to customers. As of
February 28, 2001, the Company has not made any payments pursuant to this
agreement and has accrued approximately $1,261,000 in accounts payable in the
accompanying balance sheet. The Company is currently in the process of trying to
renegotiate the amount due with the third party.
The Company has recorded an accrual for past due payroll taxes due to
the under-payment of the Company's payroll tax liability. As a result, the
Company has accrued approximately $1,120,000 related to payroll taxes under
accrued payroll and related liabilities in the accompanying balance sheet at
February 28, 2001. The Company is currently negotiating installment payments to
settle this debt.
CAPITAL EXPENDITURES
The Company has no future capital expenditures of significance planned
for the remainder of its fiscal year 2001.
GOING CONCERN
The Company's independent certified public accountants have stated in
their report included in the Form 10-KSB as of August 31, 2000, that since the
Company has incurred operating losses in the last two years, has a working
capital deficit and a significant stockholders deficit, these conditions raise
substantial doubt about the Company's ability to continue as a going concern.
20
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company may from time to time be involved in various claims,
lawsuits, disputes with third parties, actions involving allegations of
discrimination, or breach of contract actions incidental to the operation of its
business. The Company is not currently involved in any such litigation, which it
believes could have a materially adverse effect on its financial condition or
results of operations.
Item 2. Changes in Securities and Use of Proceeds
During the six months ended February 28, 2001, the Company issued
698,710 shares of common stock in connection with the conversion of 350 shares
of Preferred Series A, plus accrued dividends in the amount of $18,285, at
conversion prices ranging from $0.25 to $0.917 per share, in accordance with the
conversion terms of the Preferred Series A shares. This issuance was conducted
under an exemption under Section 4(2) of the Securities Act of 1933.
During the six months ended February 28, 2001, the Company issued
1,985,396 shares of common stock in connection with the conversion of certain
related party notes payable of $278,759 plus accrued interest of $28,620 at
conversion prices ranging from $0.135 to $0.37 per share (based on the closing
bid price of the Company's common stock on the date of conversion). This
issuance was conducted under an exemption under Section 4(2) of the Securities
Act of 1933.
During the six months ended February 28, 2001, the Company issued
3,047,343 shares of common stock in connection with the conversion of certain
un-related third party notes payable of $394,000 at conversion prices ranging
from $0.115 to $0.135 per share (based on the closing bid price of the Company's
common stock on the date of conversion). This issuance was conducted under an
exemption under Section 4(2) of the Securities Act of 1933.
During the six months ended February 28, 2001, the Company issued
731,263 shares of common stock valued at $75,470 (based on the closing bid price
of the Company's common stock on the date of grant) to employees for wages. This
issuance was conducted under an exemption under Section 4(2) of the Securities
Act of 1933.
During the six months ended February 28, 2001, the Company issued
2,000,000 shares of common stock valued at $270,000 as a sign on bonus for the
new CEO. This issuance was conducted under an exemption under Section 4(2) of
the Securities Act of 1933.
21
During the six months ended February 28, 2001, the Company issued
45,000 shares of common stock purchased by an officer for $8,505. This issuance
was conducted under an exemption under Section 4(2) of the Securities Act of
1933.
During the six months ended February 28, 2001, the Company authorized
the issuance of 155,000 shares of common stock valued at $25,425 (based on the
closing bid price of the Company's common stock on the date of grant) to various
third parties for services provided. This issuance was conducted under an
exemption under Section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company provided a mail out to all shareholders of record for the
following:
1. Approval of Amended and Restated 1999 and 2000 Stock Option
Plan dated February 8, 2001
2. Approval of name change from LMKI, Inc. to Myrient, Inc. dated
February 21, 2001
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Form 8-K:
1. Notice of filing formal complaint against former officers and
directors dated January 25, 2001
2. Notice of elimination of Chief Information Officer position
dated January 30, 2001
3. Notice of change of corporate name and symbol dated February
8, 2001
4. Notice of announcement of new CEO and Vice Chairman dated
February 12, 2001
The above reports on Form 8-K have been filed during the three months
ended February 28, 2001.
22
[SIGNATURES]
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: March 21, 2001
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
MYRIENT, INC. (Registrant)
Signature Title Date
- --------- ----- ----
/S/ Toan V. Dinh Vice Chairman and March 21, 2001
- -------------------------------- Chief Executive Officer
Toan V. Dinh
/S/ Bryan L. Turbow Director and March 21, 2001
- -------------------------------- President/CTO
Bryan L. Turbow
23