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 May 31, 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.)
-------------
Exact name of small business issuer as specified in its charter)
Nevada 33-0662114
------ ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
65 Enterprise, Aliso Viejo, CA 92656
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(949) 330-6500
--------------
(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 July 6, 2001 the number of shares of common stock outstanding was
39,770,854.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
INDEX
PART I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at May 31, 2001 (unaudited) and
August 31, 2000 (audited)
Consolidated Statements of Operations (unaudited) for the three
and nine months ended May 31, 2001 and 2000
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended May 31, 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
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MYRIENT, INC.
(Formerly known as LMKI, Inc.)
Consolidated Balance Sheets
May 31, August 31,
2001 2000
------------ ------------
ASSETS (Unaudited)
Current assets:
Cash $ 269,839 $ 12,877
Accounts receivable, net of allowance for
doubtful accounts of $712,000 and $50,000 2,720,935 1,633,204
------------ ------------
Total current assets 2,990,774 1,646,081
Property and equipment, net 6,102,010 4,935,343
Deposits and other assets 224,979 352,954
------------ ------------
$ 9,317,763 $ 6,934,378
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Account payable and accrued liabilities $16,117,203 $12,477,312
Lines of credit 500,000 600,000
Convertible note payable 1,000,000 1,000,000
Notes payable 598,735 -
Related party notes payable 850,000 -
Accrued payroll and related liabilities 1,164,900 557,356
Accrued dividends payable - 131,155
Accrued interest payable to related parties 280,853 143,163
Current portion of capital lease obligations 82,702 82,702
------------ ------------
Total current liabilities 20,594,393 14,991,688
Obligations under capital lease, net of current portion 89,190 155,964
Convertible long-term note payable 400,000 -
Related party notes payable, net of current portion 3,474,787 2,020,173
------------ ------------
24,558,370 17,167,825
------------ ------------
Stockholders' deficit:
Series A 6% convertible preferred stock,
$.001 par value; 5,000 shares authorized,
0 shares and 4,000 shares issued and outstanding
respectively, liquidation preference and accrued
dividends of $0 and $4,131,155, respectively - 4
Common stock, $.001 par value;
50,000,000 shares authorized,
39,770,854 and 42,288,367 shares issued
and outstanding, respectively 39,773 42,289
Deferred compensation (135,000) -
Additional paid-in capital 14,885,525 15,397,404
Accumulated deficit (30,030,905) (25,673,144)
------------ ------------
Total stockholders' deficit (15,240,607) (10,233,447)
------------ ------------
$ 9,317,763 $ 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 May 31, Nine months ended May 31,
------------------------------- -------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Net sales $ 3,782,311 $ 2,621,354 $ 12,323,423 $ 6,252,520
Cost of sales 2,319,593 1,531,327 8,236,094 3,287,669
-------------- -------------- -------------- --------------
Gross profit 1,462,718 1,090,027 4,087,329 2,964,851
Operating expenses:
Selling 466,989 1,216,654 2,383,123 2,358,441
General and administrative 1,571,286 2,686,441 5,612,517 5,127,478
-------------- -------------- -------------- --------------
Total operating expenses 2,038,275 3,903,095 7,995,640 7,485,919
-------------- -------------- -------------- --------------
Loss from operations (575,557) (2,813,068) (3,908,311) (4,521,068)
Derivative interest
(income) expense (151,429) - - -
Interest expense, net 142,752 116,697 342,990 231,551
-------------- -------------- -------------- --------------
Net loss $ (566,880) $ (2,929,765) $ (4,251,301) $ (4,752,619)
============== ============== ============== ==============
Net loss available to common
stockholders per share $ (0.02) $ (0.08) $ (0.12) $ (0.13)
============== ============== ============== ==============
Basic and diluted weighted
average common shares 37,388,928 37,249,566 35,749,535 36,634,622
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)
Nine months ended May 31,
-------------------------------
2001 2000
-------------- --------------
Cash flows from operating activities:
Net loss $ (4,251,301) $ (4,752,619)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 700,438 272,740
Amortization of goodwill - 328,653
Vesting of previously issued options and warrants 313,591 -
Stock issued in exchange for salaries and services 284,139 632,643
Changes in operating assets and liabilities:
Accounts receivable, net (1,087,731) (1,279,966)
Other assets 16,893 (493,003)
Account payable and accrued liabilities 3,639,891 1,780,690
Accrued payroll and related liabilities 607,544 (2,226)
Accrued interest payable to related parties 155,302 56,860
-------------- --------------
Net cash provided by operating activities 378,766 (3,456,228)
-------------- --------------
Cash flows from investing activities:
Cash acquired in acquisition of Color Networks - 2,837
Purchases of property and equipment (1,867,105) (2,497,602)
Net decrease/(increase) in deposits 111,082 (134,597)
-------------- --------------
Net cash used in investing activities (1,756,023) (2,629,362)
-------------- --------------
Cash flows from financing activities:
Payments on capitalized lease obligations (66,774) (112,423)
Proceeds from preferred stock, net of offering costs - 4,578,100
Proceeds from employee purchase of common stock 8,505 -
Proceeds from short-swing profits 16,380 -
Repurchase of preferred stock (500,000) -
Payments on related party notes payable (709,718) -
Proceeds from borrowings on lines of credit, net 792,735 1,360,150
Proceeds from related party notes payable 2,093,091 505,562
-------------- --------------
Net cash provided by financing activities 1,634,219 6,331,389
-------------- --------------
Net increase in cash 256,962 245,799
Cash, beginning of period 12,877 125,692
-------------- --------------
Cash, end of period $ 269,839 $ 371,491
============== ==============
Supplemental cash flow disclosures:
Cash paid for interest $ 249,478 $ 231,551
============== ==============
Cash paid for taxes $ 14,612 $ -
============== ==============
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 nine months ended May
31, 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 May 31, 2001, and the results of operations and cash flows for
the three and nine months ended May 31, 2001 and May 30, 2000. The interim
results are not necessarily indicative of the results for the full year.
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
$17,603,619, liabilities from the underpayment of payroll taxes (see Note 8), a
stockholders' deficit of $15,240,607, notes in default (see Notes 4 and 7), and
losses from operations through May 31, 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.
Principals 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. Fees charged for set-ups of new customers
are recognized with the first month of services 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 $816,000 of deferred revenue, as the related services have not yet
been performed as of May 31, 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.
7
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,
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. This statement, as amended by SFAS 137, is effective for financial
statements for all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company has determined that there is no impact on its results of
operations or financial position as a result of adopting this standard. The
Company recognized interest expense of $151,429 related to derivative liability
as of the quarter ended February 28, 2001, but has reversed this expense in the
current quarter ended May 31, 2001, due to the fact the Company has determined
that SFAS 133 does not apply to its financial instruments.
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 has determined
that there is no impact on its results of operations or financial position as a
result of adopting this standard.
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 nine months ended May 31,
2001, the Company had principal borrowings of approximately $1,443,091 from
various stockholders and made principal repayments of approximately $109,718.
Certain notes require monthly payments ranging from $5,000 to $40,000 with all
principal and interest due on maturity dates through May 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
$1,792,586, with accrued interest of $37,941, which is included in accrued
interest payable to related party at May 31, 2001. 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 May 2001, the Company borrowed $150,000 for working capital
purposes from a related party. The borrowings and all accrued interest are due
on demand.
9
During the nine months ended May 31, 2001, note holders converted
$278,759 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 10).
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. 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 May 31, 2001 totaled $1,682,201 plus accrued
interest of $225,838 (which is included in accrued interest payable to related
party at May 31, 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 8). 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. LINE OF CREDIT
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 to personally secure the line with
1,000,000 shares of common stock. In addition, interest on the line is accrued
at 10% with a maturity date of six months from the date of each advance and no
prepayment penalties. During the nine months ended May 31, 2001, the Company has
drawn $792,735 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).
In April 2001, the Company's revolving line of credit agreement for
$598,735 was renegotiated with a financial institution as a note agreement (the
"Note"). The Note bears interest at the current monthly prime rate plus two
percent (2%) with interest payable monthly. Repayment of note will begin in June
2001 with six principal payments of $18,750 each; in December 2001 with six
principal payments of $28,125 each; and one principal payment of $317,485 in May
2002. The Note matures on May 30, 2002. The Note is secured by substantially all
of the Company's assets.
NOTE 6. CONVERTIBLE NOTE PAYABLE
In April 2001, the Company's convertible note agreement (the "Note")
with a financial institution for $1,000,000 was renegotiated. The Note bears
interest at the current monthly prime rate plus two percent (2%) with interest
payable monthly. Repayment of the note will begin in June 2001 with six
principal payments of $31,250 each; in December 2001 with six principal payments
of $46,875 each; and one principal payment of $437,500 in May 2002. The Note
matures on May 30, 2002. The Note is secured by substantially all of the
Company's assets and is convertible to common stock if not paid by May 30, 2002,
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. The
Note requires the Company to maintain certain net worth and solvency ratio
covenants, with which the Company was not in compliance as of May 31, 2001. The
Company is currently working with the lender to resolve this matter.
10
During the nine months ended May 31, 2001, the Company borrowed
$500,000 for working capital purposes from a related party. The borrowings are
due January 16, 2003, accrue interest at prime 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 nine months
ended May 31, 2001, 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).
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 May 31, 2001, the Company has made payments in
the amount of $120,000, of which $110,000 was paid during the nine
months ended May 31, 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 Notes 4 and
10);
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 May 31, 2001, the
Company has made payments in the amount of $120,000, of which $30,000 was paid
during the three months ended May 31, 2001 in connection with the severance
liability.
NOTE 8. ACCRUED PAYROLL TAXES
The Company has recorded an accrual for past due payroll taxes as of
May 31, 2001 due to the under-payment of the Company's payroll tax liability. As
a result, the Company has accrued approximately $1,164,900 related to payroll
taxes and accrued payroll and related liabilities in the accompanying balance
sheet at May 31, 2001. The Company is currently negotiating installment payments
to settle this debt and remaining current with payroll tax liability for
calendar year 2001.
11
NOTE 9. STOCKHOLDERS' EQUITY
Preferred Stock
During the nine months ended May 31, 2001, the Company has accrued
$106,460 of dividends in connection with the outstanding Preferred Series A
shares, of which all accrued dividends were converted into common stock in
connection with the conversion of 3,650 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 nine months ended May 31, 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 and nine months ended May 31, 2001, the Company
recognized $3,007 and $313,591 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 March 2001 the Company reached and agreement with Mesora
Investors LLC ("Mesora"), the holder of its Preferred Series A shares for the
retirement of all 3,650 of the outstanding shares. As of March 8, 2001, Mesora
converted 2,450 Preferred Series A shares, with a liquidation value of
$2,450,000, plus all accrued dividends of $237,615, at a price of $0.91 per
share, into 2,952,794 shares of Myrient's common stock. 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 as collateral
against a note payable of $700,000, and has agreed to hold the shares to May 17,
2001. As of May 17, 2001, Myrient has agreed to repurchase the shares at
Mesora's cost of $700,000, personally guaranteed by Myrient's Vice Chairman.
Mesora has sold to Myrient the 500 remaining Preferred Series A shares at its
cost of $500,000 which the Company utilized the existing Line of Credit to make
the purchase.
12
During the nine months ended May 31, 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 (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).
During the nine months ended May 31, 2001, the Company issued 3,047,343
shares of common stock in connection with the conversion of certain third party
notes payable of $394,000 (see Notes 4 and 6) 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 nine months ended May 31, 2001, the Company issued 820,467
shares of common stock valued at $123,714 (based on the closing bid price of the
Company's common stock on the date of grant) to employees for wages.
During the nine months ended May 31, 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. As
of May 31, 2001 the Company has recognized $135,000 of compensation in the
current statement of operations.
During the nine months ended May 31, 2001, a Company officer bought
45,000 shares of common stock for $8,505.
During the nine months ended May 31, 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.
As of May 31, 2001 the Company has reserved $620,000 towards the receivables
balance of $721,000.
13
NOTE 11. EARNINGS PER SHARE
Basic and diluted loss per common share for the three and nine months
ended May 31, 2001 and 2000 is computed as follows:
Three Months Three Months Nine Months Nine Months
May 31, 2001 May 31, 2000 May 31, 2001 May 31, 2000
------------- ------------- ------------- -------------
Numerator for basic and diluted
loss per common share:
Net loss $ (566,880) $ (2,929,765) $ (4,251,301) $ (4,752,619)
Preferred dividends ( - ) (65,144) (106,458) (105,230)
------------- ------------- ------------- -------------
Net loss available to
common stockholders $ (566,880) $ (2,994,909) $ (4,357,759) $ (4,857,849)
============= ============= ============= =============
Denominator for basic and diluted
loss per common share:
Weighted average common
shares outstanding 37,388,928 37,249,566 35,749,535 36,634,622
============= ============= ============= =============
Net loss per common share
available to common
stockholders $ (0.02) $ (0.08) $ (0.12) $ (0.13)
============= ============= ============= =============
NOTE 12. SUBSEQUENT EVENTS
The Company is in negotiations with the former Chief Executive Officer
to resolve issues related to the severance agreement (see Note 7).
14
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.
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 May 31, 2001:
- ------------------------------------
Revenue
Revenue totaled approximately $3,782,311 for the three months ended May
31, 2001, a $1,160,957 increase over revenue of $2,621,354 for the three months
ended May 31, 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 May 31, 2001 was $2,319,593,
an increase of 788,266 from $1,531,327 for the three months ended May 31, 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 39% in 2001 from
42% in 2000. The gross profit percentage decrease is due to the re-focus of
selling efforts to Managed Services, which have an increased upfront cost for
customized solutions. 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 $466,989 for the three months ended May 31, 2001 and
$1,216,654 for the three months ended May 31, 2000, which represents a $749,665
decrease. During the quarter ended May 31, 2000 the Company was focused on
garnering market share of the business class broadband market with increased
personnel and incentive programs. The current executive management of the
Company has directed its sales focus from reselling retail based business
connectivity to higher margin Managed Services thereby significantly reducing
selling costs.
General and Administrative Expense
General and administrative expense consists primarily of personnel
expense, rent and professional fees. General and administrative expense was
$1,571,286 for the three months May 31, 2001 and $2,686,441 for the three months
ended May 31, 2000, which represents a $1,115,155 decrease. As of May 31, 2001,
general and administrative expense primarily consisted of $486,146 in
administrative wages, technical support engineers and related taxes and
benefits; $234,728 in depreciation expense; $465,998 in operating equipment
leases; $123,602 for professional fees; $137,668 in rent expense; $74,116 in
telephone expenses; $3,007 of non-cash charged for the vesting of previously
issued options for services rendered and for compensation; $165,533 of non-cash
charges for issuance of stock in lieu of compensation, $170,874 for research and
development expenses, and $217,114 in other operating expenses; offset by
$507,500 for the reduction of costs expensed in the prior year. The Company is
continuing aggressive steps to decrease future general and administrative
expenses.
16
Interest Expense
Interest expense was ($8,677) for the three months ended May 31, 2001
and $116,697 for the three months ended May 31, 2000. The net decrease in
interest expense is substantially related to the reversal of $151,429 of
derivative interest expense in the three months ended May 31, 2001 for the
embedded conversion feature on convertible notes payable which was recorded to
interest expense in the three months ended February 28, 2001, as such entry was
not required under SFAS 133. The remaining amount of interest expense in 2001 of
$143,915 is directly related to the Company acquiring working capital through a
convertible note payable and related party notes payable. Interest expense is
comprised of interest on capital leases of $25,169, interest on the Company's
line of credit of $16,560, interest on notes payable of $72,623, and interest on
convertible note payable of $29,563, net of interest income of approximately
$1,163.
Net Loss
As a result of the above factors, the Company incurred a net loss for
the three-month period ended May 31, 2001 of $566,880 or $0.02 per share
compared to $2,929,765 or $0.08 per share for the three months ended May 31,
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 nine months ended May 31, 2001:
- -----------------------------------
Revenue
Revenue totaled approximately $12,323,423 for the nine months ended May
31, 2001, a $6,070,903 increase over revenue of $6,252,520 for the nine months
ended May 31, 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 nine months ended May 31, 2001 was $8,236,094, an
increase of 4,948,425 from $3,287,669 for the nine months ended May 31, 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 33% in 2001 from
47% 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.
17
Selling Expense
Selling expense consists primarily of personnel expenses, including
salary and commissions, and costs for customer support functions. Marketing and
sales expense was $2,383,123 for the nine months ended May 31, 2001 and
$2,358,441 for the nine months ended May 31, 2000, which represents a $24,682
increase. During the nine months ended May 31, 2000 the company was focused on
garnering market share of the business class broadband market with increased
personnel and incentive programs. The current executive management of the
Company has directed its sales focus from reselling retail based business
connectivity to higher margin Managed Services thereby significantly controlling
overhead costs.
General and Administrative Expense
General and administrative expense consists primarily of personnel
expense, rent and professional fees. General and administrative expense was
$5,612,517 for the nine months May 31, 2001 and $5,127,478 for the nine months
ended May 31, 2000, which represents a $485,039 increase. As of May 31, 2001,
general and administrative expense primarily consisted of $1,949,376 in
administrative wages, technical support engineers and related taxes and
benefits; $700,438 in depreciation expense; $569,491 in operating equipment
leases; $250,655 in systems implementation and costs; $657,651 for professional
fees; $423,462 in rent expense; $215,396 in telephone expenses; $313,591 of
non-cash charges for the vesting of previously issued options for services
rendered and for compensation; $284,139 of non-cash charges for issuance of
stock in lieu of compensation and services, $190,679 for research and
development expense, and $565,139 in other operating expenses; offset by
$507,500 for the reduction of costs expensed in the prior year. The Company is
continuing aggressive steps to decrease future general and administrative
expenses.
Interest Expense
Interest expense was $342,990 for the nine months ended May 31, 2001
and $231,551 for the nine months ended May 31, 2000. The increase in interest
expense is substantially related to the company acquiring working capital
through a convertible note payable and related party notes payable. Interest is
comprised of interest on capital leases of $32,356, interest on the Company's
line of credit of $65,816, interest on notes payable of $147,104, and interest
on convertible note payable of $103,201, net of interest income of approximately
$5,487.
Net Loss
As a result of the above factors, the Company incurred a net loss for
the nine months ended May 31, 2001 of $4,251,301 or $0.12 per share compared to
$4,752,619 or $0.13 per share for the nine months ended May 31, 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.
18
STOCKHOLDERS' DEFICIT
Stockholders' deficit increased by $5,007,160, from $(10,233,447) as of
August 31, 2000 to ($15,240,607) as of May 31, 2001. The increase is
attributable to the nine month net loss of $4,251,301, dividends accrued on
preferred stock of $106,460, the retirement of the former CEO's 15,000,000
shares of common stock for $1,000,000, issuance of common stock for the
conversion of preferred stock and accrued dividends of $944,100; offset by the
issuance of common stock in connection with the conversion of debt for $672,759,
cash received of $16,380 for short-swing profits, issuance of stock of $284,139
in lieu of wages and services, vesting of previously issued options and warrants
of $313,591, and the receipt of cash for stock sale of $8,505.
ASSETS AND LIABILITIES
Assets increased by $2,383,385 from $6,934,378 as of August 31, 2000 to
$9,317,763 as of May 31, 2001. The increase was due primarily to increases in
accounts receivable of $1,087,731, net property and equipment of $1,166,667,
cash of $256,962; offset by a decrease in other assets of $127,975. Liabilities
increased by $7,390,545 from $17,167,825 as of August 31, 2000 to $24,558,370 as
of May 31, 2001. The increase was primarily to increases in accounts payable and
accrued expenses of $3,639,891, lines of credit of $500,000, notes payable of
$598,735, payroll and payroll related liabilities of $607,544, notes
payable-related parties of $2,304,614, convertible long-term note payable of
$400,000, and other liabilities of $6,535; offset by the conversion of lines of
credit debt of $600,000 and capital leases of $66,774.
LIQUIDITY AND CAPITAL RESOURCES
General
Overall, the Company had positive cash flows of $256,962 in the nine
months ended May 31, 2001 resulting from $378,766 of cash provided by operating
activities and $1,634,219 of cash provided by the Company's financing
activities, offset by $1,756,023 of cash used in investing activities.
Cash Flows from Operations
Net cash provided by operating activities of $378,766 in the nine
months ended May 31, 2001 was primarily due to the increase of operating
liabilities, principally accounts payable and accrued expenses of $3,639,891,
payroll and related taxes of $607,544; accrued interest to related parties of
$155,302; vesting of previously issued options and warrants of $313,591; the
fair market value of stock issued for salaries and services of $284,139; other
assets of $16,893 and depreciation expense of $700,438; offset by the net loss
of $4,251,301 and an increase in accounts receivable of $1,087,731.
19
Cash Flows from Investing
Net cash used in investing activities of $1,756,023 in the nine months
ended May 31, 2001 funded purchases of property and equipment of $1,867,105,
offset by a decrease in deposits of $111,082.
Cash Flows from Financing
Net cash provided by financing activities of $1,634,219 in the nine
months ended May 31, 2001 was primarily due to the proceeds from related party
notes payable of $2,093,091, borrowings on lines of credit of $792,735, employee
purchase of common stock for $8,505, the short-swing profits of $16,380; offset
by the repurchase of preferred stock in the amount of $500,000 and repayments on
notes payable and capitalized leases obligations of $776,492.
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.
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 May 31, 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
May 31, 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 May
31, 2001. The Company is currently negotiating installment payments to settle
this debt and remaining current with payroll tax liability for calendar year
2001.
CAPITAL EXPENDITURES
The Company has no future capital expenditures of significance planned
for the remainder of its fiscal year 2001.
20
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.
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations.
21
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 nine months ended May 31, 2001, the Company issued 4,429,281
shares of common stock in connection with the conversion of 4000 shares of
Preferred Series A, plus accrued dividends in the amount of $255,900, 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 nine months ended May 31, 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 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 nine months ended May 31, 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 nine months ended May 31, 2001, the Company issued 820,467
shares of common stock valued at $123,714 (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 nine months ended May 31, 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.
During the nine months ended May 31, 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 nine months ended May 31, 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.
22
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. Proxy statement with notice of annual meeting of shareholders
to be held on July 31, 2001
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Form 8-K:
None
23
[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: July 13, 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/ Barry H. Hall Chairman of the Board July 13, 2001
- -------------------------------- and Director
Barry H. Hall
/S/ Bryan L. Turbow Director and July 13, 2001
- -------------------------------- President/CTO
Bryan L. Turbow
/S/ Teresa Throenle Director July 13, 2001
- --------------------------------
Teresa Throenle
24