UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission file number 0-26578
MYRIENT, INC.
---------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Nevada 33-0662114
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
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 of 1934 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 15, 2002 the number of shares of common stock outstanding was
64,275,498
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Myrient, Inc.
Consolidated Balance Sheet
May 31, 2002
(Unaudited)
ASSETS
Current assets:
Accounts receivable, net of allowance for doubtful accounts of
approximately $1,680,000 $ 881,759
-------------
Total current assets 881,759
Property and equipment, net of accumulated depreciation of $364,711 524,181
Deposits and other assets 223,572
-------------
Total assets $ 1,629,512
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 8,913,409
Line of credit borrowings 500,000
Current portion of notes payable 7,252,621
Convertible note payable 875,000
Accrued payroll and related liabilities 1,438,411
Accrued interest payable 919,984
Current portion of capital lease obligations 99,177
-------------
Total current liabilities 19,998,602
Related party loans and notes payable 2,204,524
-------------
Total liabilities 22,203,126
-------------
Stockholders' deficit:
Preferred stock, $0.01 par value; 10,000,000 shares authorized, no shares
issued and outstanding --
Common stock, $0.01 par value; 75,000,000 shares authorized, 57,773,464
shares issued and outstanding 57,773
Additional paid-in capital 18,130,397
Accumulated deficit (38,761,784)
-------------
Total stockholders' deficit (20,573,614)
-------------
Total liabilities and stockholders' deficit $ 1,629,512
=============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
1
Myrient, Inc.
Consolidated Statements of Operations
(Unaudited)
Nine Months Ended May 31,
2002 2001
------------- -------------
Net sales $ 7,530,889 $ 12,323,423
Cost of sales 2,851,855 8,236,094
------------- -------------
Gross profit 4,679,034 4,087,329
------------- -------------
Operating expenses:
General and administrative 6,045,786 5,421,838
Selling 1,420,114 2,383,123
Loss on impairment of fixed assets 1,260,257 --
Research and development 719,289 190,679
Settlement expense 502,496 --
------------- -------------
Total operating expenses 9,947,942 7,995,640
------------- -------------
Operating loss (5,268,908) (3,908,311)
Other income (expense):
Other income 475,000 --
Interest expense, net (936,221) (342,990)
Loss on disposal of fixed assets (159,333) --
------------- -------------
Total other income (expense) (620,554) (342,990)
------------- -------------
Net loss before extraordinary item (5,889,462) (4,251,301)
Extraordinary item - gain on extinguishment of debt 1,059,528 --
------------- -------------
Net loss $ (4,829,934) $ (4,251,301)
============= =============
Net loss available to common stockholder per common share:
Loss before extraordinary item $ (0.12) $ (0.12)
Extraordinary item 0.02 --
------------- -------------
Basic and diluted $ (0.10) $ (0.12)
============= =============
Basic and diluted weighted average shares outstanding 49,603,888 35,749,535
============= =============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
2
Myrient, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended May 31,
2002 2001
------------- -------------
Net sales $ 2,543,567 $ 3,782,311
Cost of sales 297,580 2,319,593
------------- -------------
Gross profit 2,245,987 1,462,718
Operating expenses:
General and administrative 3,385,719 1,380,607
Selling 640,304 466,989
Loss on impairment 1,260,257 --
Research and development 267,387 190,679
------------- -------------
Total operating expenses 5,553,667 2,038,275
------------- -------------
Operating loss (3,307,680) (575,557)
Other income (expense):
Interest expense, net (313,701) (142,752)
------------- -------------
Net loss before extraordinary item (3,621,381) (718,309)
Extraordinary item - gain on extinguishment of debt 39,978 --
------------- -------------
Net loss $ (3,581,403) $ (718,309)
============= =============
Net loss available to common stockholder per common share:
Loss before extraordinary item $ (0.07) $ (0.02)
Extraordinary item 0.00 --
------------- -------------
Basic and diluted $ (0.07) $ (0.02)
============= =============
Basic and diluted weighted average shares outstanding 53,125,559 37,388,928
============= =============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3
Myrient, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended May 31,
---------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $(4,829,934) $(4,251,301)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Gain on extinguishment of debt (1,059,528) --
Bad debt expense 3,672,127 --
Impairment expense 1,260,257 --
Depreciation 616,575 700,438
Vesting of previously issued options and warrants 12,027 313,591
Estimated fair market value of stock, options and
warrants issued for salaries and services, net 399,591 284,139
Loss on disposal of fixed assets 159,333 --
Non-cash portion of cost of sales 281,918 --
Non-cash portion of settlement expense 469,196 --
Changes in operating assets and liabilities:
Accounts receivable (3,590,701) (1,087,731)
Other assets 27,959 16,893
Accounts payable and accrued liabilities 1,245,057 3,639,891
Accrued payroll and related liabilities 45,280 607,544
Accrued interest payable 820,099 155,302
------------ ------------
Net cash provided by (used in) operating activities (470,744) 378,766
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (152,332) (1,867,105)
Capitalized computer software development cost (203,976) --
Deposits -- 111,082
------------ ------------
Net cash used in investing activities (356,308) (1,756,023)
------------ ------------
Cash flows from financing activities:
Principal repayments on notes payable (51,000) --
Proceeds from borrowings on lines of credit -- 792,735
Proceeds from notes payable -- 2,093,091
Repayments on related party notes payable (24,639) (709,718)
Proceeds from related party loans and notes payable 597,905 --
Repayment on capitalized leased obligations (55,512) (66,774)
Proceeds from sale of common stock and exercise of options 176,800 --
Proceeds from short swing-profits -- 16,380
Repurchase of preferred stock -- (500,000)
Proceeds from employee purchase of common stock -- 8,505
------------ ------------
Net cash provided by financing activities 643,554 1,634,219
------------ ------------
Net change in cash (183,498) 256,962
Cash at beginning of period 183,498 12,877
------------ ------------
Cash at end of period $ -- $ 269,839
============ ============
4
Myrient, Inc.
Consolidated Statements of Cash Flows - Continued
(Unaudited)
Nine Months Ended May 31,
---------------------------
2002 2001
----------- -----------
Supplemental cash flow disclosures:
Cash paid during the period for interest $ 116,100 $ 249,478
=========== ===========
Cash paid during the period for income taxes $ -- $ 14,612
=========== ===========
Supplemental disclosure of non-cash investing and financing activities:
See footnotes for non-cash investing and financing activities during
the nine months ended May 31, 2002.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
Myrient, Inc.
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Myrient,
Inc. (the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included.
Operating results for the quarter ended May 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending August 31,
2002. For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended August 31, 2001.
2. SOFTWARE DEVELOPMENT COSTS
On September 1, 2001, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 identifies three stages of a typical
software development project: preliminary project stage, application development
stage, and the post-implementation stage. As required by SOP 98-1, the Company
capitalizes certain qualifying costs (primarily employee salary expense)
incurred during the application development stage. All other internal use
development costs are expensed as incurred.
The Company has been developing certain computer software projects since
the third quarter of the prior year and incurred $191,679 research and
development cost in the prior year. The adoption of SOP 98-1 in the prior year
did not have a material impact on the Company's results of operations, financial
position or cash flows for the year. The $191,679 research and development cost
was presented as part of general and administrative expense in the Company's
statement of operations for the year ended August 31, 2001.
The Company incurred $923,804 of research and development expenditures
during the nine months ended May 31, 2002, of which $203,976 was capitalized
under SOP 98-1 as property and equipment in the accompanying Balance Sheet and
$719,828 was expensed under research and development in the accompanying
Statement of Operations.
Amortization of capitalized computer software development cost is provided
on a project-by-project basis on the straight-line method over the estimated
economic life of the products (not to exceed five years).
The carrying value of capitalized computer software development cost is
periodically reviewed, and a loss is recognized when the value of estimated
undiscounted cash flow benefit related to the asset falls below the unamortized
cost, consistent with the Company's policy regarding long-lived assets.
6
Myrient, Inc.
Notes to Consolidated Financial Statements
3. IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS No. 121 requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceeds the future undiscounted cash flows attributable to such assets. At May
31, 2002, management determined that some of the Company's long-lived assets
were impaired, resulting in an impairment loss of $1,260,257 in the consolidated
statement of operations.
4. LOSS PER SHARE
The Company has adopted Statement of Accounting of Financial Accounting
Standards No. 128 ("SFAS No. 128") "Earnings per Share." Under SFAS No. 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. Stock options and warrants outstanding on February 28,
2002 and 2001 are not considered common stock equivalents, as the affect on net
loss per share would be anti-dilutive.
5. SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards No. 131
("SFAS No. 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 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 accounts for its operations and
manages its business as one segment.
6. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
"Reporting Comprehensive Income," established the standard for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The adoption of SFAS No. 130 has not
materially impacted the Company's financial position or results of operations,
as the Company has no items of comprehensive income.
7. 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.
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations or discrimination, or
breach of contract actions incidental to the normal operations of its business.
The Company is currently not involved in any such litigation which
7
Myrient, Inc.
Notes to Consolidated Financial Statements
7. RISKS AND UNCERTAINTIES, CONTINUED
management believes could have a material adverse effect on its financial
position or results of operations.
8. 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. As of May 31, 2002, the Company has negative working
capital of approximately $19,000,000, is in default on substantially all notes
payable, and has a stockholders' deficit of approximately $21,000,000.
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, 2002. 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.
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.
9. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
In October 2001, a total of 50,000 shares of common stock previously issued
to the Company's directors were returned to the Company due to the change of the
compensation plan which is still in process and the related $17,500 compensation
expense was reversed.
During the nine months ended May 31, 2002, the Company issued to several of
its employees a total of 3,222,228 shares of common stock valued at $359,345
(based on the closing bid prices of the Company's common stock on the dates of
issuance), which was recorded as compensation expense.
During the nine months ended May 31, 2002, the Company recorded $12,027 of
compensation expense associated with the vesting of warrants previously issued
to its outside service providers.
During the nine months ended May 31, 2002, the Company issued to several
outside consultants a total of 314,684 shares of common stock valued at $54,445
(based on the closing bid price of the Company's common stock on the date of
issuance), which was recorded as consulting expense.
8
Myrient, Inc.
Notes to Consolidated Financial Statements
9. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL, CONTINUED
During the nine months ended May 31, 2002, the Company issued a total of
7,900,088 shares of the common stock valued at $703,107 (based on the closing
bid price of the Company's common stock on the date of issuance) for conversion
of $673,150 of related party debt and $29,957 of related accrued interest.
During the nine months ended May 31, 2002, the Company sold a total of
1,916,668 shares of common stock for proceeds of $175,000.
In January 2002, an employee exercised options to purchase 15,000 shares of
the Company's common stock for total proceeds of $1,800.
In January 2002, the Company issued 30,000 shares of its common stock to a
third party as part of a settlement for terminating certain operating lease
agreements. These shares were valued at $3,300 based on the fair market value on
the date of grant.
In April 2002, the Company issued 50,000 shares of its common stock to a
third party for the purchase of certain fixed assets. These shares were valued
at $8,000 based on the fair market value on the date of grant.
In December 2001, the Company cancelled and returned to the Company's
treasury 500,000 shares of common stock previously issued to Seven Keys
Development Trust, of which Robert C. Weaver, Jr., the Company's former
director, is a trustee. The Company had investigated and concluded that these
cancelled shares were issued upon the exercise of the unauthorized stock options
granted by William J. Kettle, the Company's former Chairman of the Board
Directors and Chief Executive Officer. During the quarter ended May 31, 2002 the
Company accrued the original $15,500 Robert Weaver paid for the shares and
offset this accrued liability against additional paid in capital.
10. NOTES PAYABLE
During the quarter ended November 30, 2001, a $5,500,000 accounts payable
balance owed to one of the Company's vendors was converted to a note payable
based on the agreement signed by and between the Company and the vendor. The
note, requiring various monthly payments of principal and interest beginning in
April 2002 and a balloon payment in December 2009, bears a 12% interest per
annum and contains prepayment incentives that provide the Company with potential
debt forgiveness in future years if certain payments are made. The Company did
not make the first scheduled payment. Pursuant to the terms of the note, this
non-payment has put the note into default and therefore the entire amount of
this note has been presented as current debt.
11. OTHER INCOME
During the nine months ended May 31, 2002, the Company generated one-time
revenue of $475,000 from the sale of certain digital subscriber line ("DSL")
accounts to a third-party supplier (which provides DSL communication access).
Pursuant to an agreement, the Company offset certain accounts payable owed to
the third party with this revenue gained.
9
Myrient, Inc.
Notes to Consolidated Financial Statements
12. SETTLEMENT OF LEASE
In December 2001, the Company entered into a Settlement Agreement and
Mutual release related to the termination of several leases. As a result of the
agreement, the Company was released of the remaining payments under the lease
(totaling over $1,100,000) in exchange for a non-interest bearing note with
payments totaling $610,000, a one time cash payment of $30,000 and the issuance
of 30,000 shares of the Company's common stock (see Note 8). The Company
discounted the note payable using a 12% interest rate to $469,196. This note
requires quarterly payments ranging from $10,000 to $40,000 beginning in June
2002. As a result, the Company has recorded a settlement expense of $502,496 in
the accompanying statement of operations. The Company also incurred a loss on
disposal of fixed assets of $159,333, representing the net book value of the
fixed assets associated with these leases.
13. EXTRAORDINARY ITEM - FORGIVENESS OF DEBT
During the nine months ended May 31, 2002, the Company recognized an
extraordinary gain of $1,019,550 on the cancellation of a large account payable
balance by a vendor. The relief of the payable was partly due to the successful
sale and migration of certain DSL accounts to a third party's network (see Note
10).
During the nine months ended May 31, 2002, the Company recognized an
extraordinary gain of $39,978 on the conversion of an account payable balance to
a note payable by a vendor. The vendor agreed to accept less than the original
account payable due to the fixed payment terms of the note.
14. RELATED PARTY TRANSACTIONS
In March 2002 a director agreed to convert $100,000 of the principal
balance of a note payable into 904,977 shares of the Company's restricted common
stock (based on the fair market value of the stock on the date of grant).
During the nine months ended May 31, 2002, the President of the Company
loaned the Company $597,905. These loans are due on demand, and are non-interest
bearing. In March 2002, the President of the Company converted $250,000 of the
principal balance of this loan into 2,840,909 shares of common stock (based on
the fair market value of the stock on the date of grant). Subsequent to May 31,
2002, $315,085 of the remaining balance was converted into common stock (see
Note 15).
During the nine months ended May 31, 2002, certain other related parties
converted $323,150 of principal and $29,957 of interest into 4,154,202 shares of
the Company's restricted common stock (based on the fair market value of the
stock on the date of grant.).
During the nine months ended May 31, 2002, the Company transferred
equipment with a net book value of $14,910 to the President of the Company in
exchange for relief of debt in the amount of $14,910. As the amount of debt
relief was equal to the net book value of the assets transferred, no gain or
loss was recognized.
15. SUBSEQUENT EVENTS
In June 2002, the President of the Company agreed to convert $315,085 of
the principal balance of notes payable into 7,502,034 shares of the Company's
restricted common stock (based on the fair market value of the stock on the date
of grant).
In June 2002, the Company negotiated a settlement with a IT consulting firm
in the amount of $2,000,000. The terms of this settlement call for payments to
be made quarterly over 6 years beginning in September of 2003 bearing 6%
interest. The Company recognized an extraordinary gain on debt extinguishment of
approximately $450,000 that will be reflected in the Company's year-end
financial statements.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains certain forward-looking statements that
are subject to business and economic risks and uncertainties, and the Company's
actual results could differ materially from those forward-looking statements.
The following discussion regarding the financial statements of the Company
should be read in conjunction with the financial statements and notes thereto.
GENERAL
Myrient, Inc. (the "Company") is an outsourced Information Technology
solutions provider that delivers managed services that allow enterprises to
conduct secure communications with remote offices, partners and customers
worldwide. The Company enables its customers to outsource all of their
communications needs, while ensuring the highest level of security and
reliability. The Company manages and controls a nationwide data communications
network that allows it to offer high-quality integrated turnkey solutions. The
Company's services include Managed Virtual Private Networking, Broadband
Internet Access, Managed Web Hosting, Storage and off-site disaster recovery
services, Network and Systems Management, and Professional Services.
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 but not limited to: 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. Currently, the Company does
not have the systems available to provide segment information. 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.
11
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MAY 31, 2002 AND 2001
NET SALES
Net Sales totaled approximately $2,543,567 for the three months ended
May 31, 2002, a $1,238,744 decrease over revenue of $3,782,311 for the three
months ended May 31, 2001. Revenues generated from Broadband Internet Access
decreased to zero primarily due to the reduction of approximately 150
individuals involved in reselling retail based business class digital subscriber
lines ("DSL") connectivity during the three months ended May 31, 2002 as
compared to the three months ended May 31, 2001. The decrease was offset by an
increase in revenues generated from Real Private Networking, Internet and
Intranet based Web Hosting, Hosted Application Services, Intelligent Routing and
Content Delivery Services, Managed Virtual Private Networking and Professional
Services, as well as a non-recurring increase in revenue of $2,180,326 resulting
from the sale of customer premises equipment for the three months ended May 31,
2002 as compared to the corresponding period of 2001.
COST OF SALES
Cost of sales for the three months ended May 31, 2002 was $297,580, a
decrease of $2,022,013 from $2,319,593 for the three months ended May 31, 2001.
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, and a non-recurring cost associated with the purchase
of customer premises equipment of $197,413. The Company's Internet access costs
significantly decreased reflecting the decrease in revenues generated from
Broadband Internet Access during the three months ended May 31, 2002 as compared
to the corresponding period of 2001.
GROSS PROFIT
Gross profit increased $783,269 to $2,245,987 for the three months
ended May 31, 2002 from $1,462,718 for the three months ended May 31, 2001 and
the profit margin increased 49% to 88% for the three months ended May 31, 2002
from 39% for the three months ended May 31, 2001. The increase in gross profit
and the increase in gross profit margin resulted from a significant decrease in
revenues generated from the lower margin services (Broadband Internet Access
delivered over DSL) and an increase in revenues generated from the higher margin
services (managed services including Real Private Networking, Internet and
Intranet based Web Hosting, Hosted Application Services, Intelligent Routing and
Content Delivery Services, Managed Virtual Private Networking and Professional
Services), as well as a non-recurring increase in profit resulting from the sale
of customer premises equipment of $1,982,913 which accounted for 88% of the
gross profit, during the three months ended May 31, 2002 as compared to the
corresponding period of 2001.
SELLING EXPENSE
Selling expense consists primarily of personnel expenses, including
salary and commissions, and costs for customer support functions. Marketing and
sales expense was $640,304 for the three months ended May 31, 2002 and $466,989
for the three months ended May 31, 2001, which represents a $173,315 increase.
The increase is primarily due to an increase in a higher sales commission rate
being paid resulting from the Company's focus on higher margin products and
services for the three months ended May 31, 2002 as compared to the three months
ended May 31, 2001.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense consists primarily of personnel expense,
rent and professional fees. General and administrative expense was $3,653,106
for the three months May 31, 2002 and $1,571,286 for the three months ended May
31, 2001, which represents a $2,081,820 increase primarily due to a one-time
reserve for bad debt associated with inactive customers that failed to pay for
their service fees and for customer premises equipment during their transition
to a vendor's network. Subsequently, these outstanding accounts have been placed
with several collection agencies for recovery.
12
LOSS ON IMPAIRMENT OF FIXED ASSETS
For the three months ended May 31, 2002, the Company incurred a loss of
$1,260,257 on the impairment of a substantial portion of its fixed assets that
are no longer being used in the course of business. Additionally, the Company
has returned capitalized leased equipment to the respective leasing companies
that provided leases for DSL based network equipment that the company no longer
requires to service its existing customer base. There was no such cost in the
corresponding period in 2001.
RESEARCH AND DEVELOPMENT
For the three months ended May 31, 2002, the Company incurred a cost of
$267,387 for Research and Development activities, an increase of $76,708 from
$190,679 for the three months ended May 31, 2001. The increase is primarily due
to the addition of engineering personnel.
INTEREST EXPENSE
Interest expense was $313,701 for the three months ended May 31, 2002
and $142,752 for the three months ended May 31, 2001. The increase in interest
expense resulted from the higher average interest-bearing borrowing balance
during the three months ended May 31, 2002 as compared to the corresponding
period in 2001. The higher average borrowing balance is primarily related to the
conversion of a $5.5 million balance from accounts payable to a note payable as
of August 31, 2001.
NET LOSS
As a result of the above factors, the Company incurred a net loss for
the three-month period ended May 31, 2002 a loss of $3,581,403 or $0.07 per
share compared to a loss of $718,309 or $0.02 per share for the three months
ended May 31, 2001.
COMPARISON OF NINE MONTHS ENDED MAY 31, 2002 AND 2001
NET SALES
Net sales decreased $4,792,534 to $7,530,889 for the nine months ended May
31, 2002 from $12,323,423 for the nine months ended May 31, 2001. Revenues
generated from Broadband Internet Access decreased to zero primarily due to the
reduction of approximately 150 individuals involved in reselling retail based
business class digital subscriber lines ("DSL") connectivity during the nine
months ended May 31, 2002 as compared to the nine months ended May 31, 2001. The
decrease was offset by an increase in revenues generated from Real Private
Networking, Internet and Intranet based Web Hosting, Hosted Application
Services, Intelligent Routing and Content Delivery Services, Managed Virtual
Private Networking and Professional Services as well as a non-recurring increase
in revenue of $ 2,969,103 resulting from the sale of customer premises equipment
for the nine months ended May 31, 2002 as compared to the corresponding period
of 2001.
COST OF SALES
Cost of sales decreased $5,384,239 to $2,851,855 for the nine months ended
May 31, 2002 from $8,236,094 for the nine months ended May 31, 2001. 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, and a non-recurring cost associated with the purchase of
customer premises equipment of $261,918. The Company's Internet access costs
significantly decreased reflecting the decrease in revenues generated from
Broadband Internet Access during the nine months ended May 31, 2002 as compared
to the corresponding period of 2001.
13
GROSS PROFIT
Gross profit increased $591,705 to $4,679,034 for the nine months ended May
31, 2002 from $4,087,329 for the nine months ended May 31, 2001 and the profit
margin increased 29% to 62% for the nine months ended May 31, 2002 from 33% for
the nine months ended May 31, 2001. The increase in gross profit and the
increase in gross profit margin resulted from a significant decrease in revenues
generated from the lower margin services (Broadband Internet Access delivered
over DSL) and an increase in revenues generated from the higher margin services
(managed services including Real Private Networking, Internet and Intranet based
Web Hosting, Hosted Application Services, Intelligent Routing and Content
Delivery Services, Managed Virtual Private Networking and Professional
Services), as well as a non-recurring increase in profit resulting from the sale
of customer premises equipment of $2,707,185 which accounted for 58% of the
gross profit during the nine months ended May 31, 2002 as compared to the
corresponding period of 2001.
SELLING EXPENSE
Selling expense consists primarily of personnel expenses including salary,
commissions and costs for customer support functions. Selling expense decreased
$963,009 to $1,420,114 for the nine months ended May 31, 2002 from $2,383,123
for the nine months ended May 31, 2001. The decrease is primarily due to a
decrease in selling commission resulting from the decrease in revenues generated
from Broadband Internet Access for the nine months ended May 31, 2002 as
compared to the nine months ended May 31, 2001.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense consists primarily of personnel expense,
rent and professional fees. General and administrative expense increased
$1,152,558 to $6,765,075 for the nine months ended May 31, 2002 from $5,612,517
for the nine months ended May 31, 2001 primarily due to a one-time reserve for
bad debt associated with inactive customers that failed to pay their service
fees and for customer premises equipment during their transition to a vendor's
network. Subsequently, these outstanding accounts have been placed with several
collection agencies for recovery.
LOSS ON IMPAIRMENT OF FIXED ASSETS
For the nine months ended May 31, 2002, the Company incurred a loss of
$1,260,257 on the impairment of a substantial portion of its fixed assets that
are no longer being used in the course of business. Additionally, the Company
has returned capitalized leased equipment to the respective leasing companies
that provided leases for DSL based network equipment that the company no longer
requires to service its existing customer base. There was no such cost in the
corresponding period in 2001.
RESEARCH AND DEVELOPMENT
For the nine months ended May 31, 2002, the Company incurred a cost of
$719,289 for research and development activities, an increase of $528,610 from
$190,679 for the three months ended May 31, 2001. The increase is due to the
fact that these activities did not commence until the quarter ended May 31,
2001.
14
OTHER INCOME
The Company generated one-time revenue of $475,000 from sale of its certain
DSL accounts to a third-party supplier (which provides DSL communication access)
during the nine months ended May 31, 2002. No such revenue was generated in the
corresponding period in 2001. Additionally, the Company also incurred a loss on
disposal of fixed assets of $159,333 during the nine months ended May 31, 2002
representing the net book value of the fixed assets associated with cancelled
leases.
SETTLEMENT EXPENSE
In December 2001, the Company was released from paying over $1.1 Million in
future lease payments after entering into a settlement agreement with a leasing
company that provided leases for networking equipment no longer needed that was
used to service DSL customers. Consequently, the Company took a one-time
settlement expense charge of $502,496 during the second quarter and wrote off
associated fixed assets of $159,333, recognizing a loss on disposal of fixed
assets of $159,333.
INTEREST EXPENSE
Interest expense increased $593,231 to $936,221 for the nine months ended
May 31, 2002 from $342,990 for the nine months ended May 31, 2001. The increase
in interest expense resulted from the higher average interest-bearing borrowing
balance during the nine months ended May 31, 2002 as compared to the
corresponding period in 2001. The higher average borrowing balance is primarily
related to the conversion of a $5.5 million balance from accounts payable to a
note payable as of August 31, 2001.
EXTRAORDINARY GAIN
During the nine months ended May 31, 2002 the Company recognized an
extraordinary gain of $1,059,528 on the settlement of accounts payable balances
with vendors. The relief of the payable was primarily due to the successful sale
and migration of certain DSL accounts to a third party's network.
NET LOSS
As a result of the above, the Company incurred a net loss of $4,829,934 for
the nine months ended May 31, 2002 as compared to a net loss of $4,251,301 for
the nine months ended May 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that its anticipated funds from operations will be
insufficient to fund its working capital and other requirements through August
31, 2002. 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 nine months that may have a material adverse effect on the Company's
long-term results of operations.
Cash balance decreased $183,498 to $0 on May 31, 2002 from $183,498 on
August 31, 2001.
To date, the Company has satisfied its cash requirements primarily through
related party debt, equity and capitalized lease financings. The Company's
principal uses of cash are to fund working capital requirements and to service
its capital lease and debt financing obligations.
The Company expects to be successful in its attempt to reduce its debt
substantially through aggressive negotiations with its creditors. The Company
has been successful with the creditors that it has negotiated with thus far and
expects to continue this trend.
15
The Company's independent certified public accountants have stated in their
report in the Company's Form 10-KSB for the year ended August 31, 2001, that the
Company had incurred operating losses in the last two years, had a working
capital deficit (including a significant accrued payroll taxes due to under
payment of payroll taxes), a significant long-term borrowing balance and a
significant stockholders' deficit. The Company's working capital deficit
increased $1,720,335 to $19,116,843 on May 31, 2002 from $17,396,508 on August
31, 2001 and the stockholders' deficit increased $3,545,905 to $20,573,614 on
May 31, 2002 from $17,027,705 on August 31, 2001. These financial conditions
raise substantial doubt about the Company's ability to continue as a going
concern.
FORWARD-LOOKING INFORMATION
Certain statements in this Section and elsewhere in this report are
forward-looking in nature and relate to trends and events that may affect the
Company's future financial position and operating results. Such statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The terms "believe," "expect," "anticipate," "intend," and
"project" and similar words or expressions are intended to identify
forward-looking statements. These statements speak only as of the date of this
report. The statements are based on current expectations, are inherently
uncertain, are subject to risks, and should be reviewed with caution. Actual
results and experience may differ materially from the forward-looking statements
as a result of many factors, including changes in economic conditions in the
markets served by the Company, increasing competition, fluctuations in raw
materials and energy prices, and other unanticipated events and conditions. It
is not possible to foresee or identify all such factors. The Company makes no
commitment to update any forward-looking statement or to disclose any facts,
events, or circumstances after the date hereof that may affect the accuracy of
any forward-looking statement.
16
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 that 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
-----------------------------------------
In March 2002, the Company issued 88,736 shares of common stock to an
outside consultant valued at $15,080 (based on the closing bid price of the
Company's common stock on the date of issuance) in exchange for three months of
services from the consultant. This transaction was an issuance of securities by
the issuer not involving any public offering and is therefore covered by the
exemption allowed under Section 4(2) of the Securities Act of 1933.
In March 2002, the Company issued a total of 1,666,668 shares of the common
stock in exchange for the receipt of a total of $150,000 in private placements
from four separate private investors. These transactions were issuances of
securities by the issuer not involving any public offering and are therefore
covered by the exemption allowed under Section 4(2) of the Securities Act of
1933.
In March 2002 the Company issued a total of 904,977 shares of common stock
valued at $100,000 (based on a conversion formula defined in the promissory
note) as a related party debt conversion to equity pursuant to a partial
cancellation of a promissory note. This transaction was an issuance of
securities by the issuer not involving any public offering and is therefore
covered by the exemption allowed under Section 4(2) of the Securities Act of
1933.
In March 2002, the Company issued 2,840,909 shares of its common stock in
exchange for the conversion of $250,000 (based on the closing bid price of the
Company's common stock on the date of issuance) of related party loans from the
President of the Company. This transaction was an issuance of securities by the
issuer not involving any public offering and is therefore covered by the
exemption allowed under Section 4(2) of the Securities Act of 1933.
In March 2002, the Company issued 1,572,302 shares of common stock valued
at $166,664 (based on a fifteen percent discount on the closing bid price of the
Company's common stock on the date of issuance) to the President of the Company
as part of his compensation package. This transaction was an issuance of
securities by the issuer not involving any public offering and is therefore
covered by the exemption allowed under Section 4(2) of the Securities Act of
1933.
During the quarter ended May 31, 2002, the Company issued 392,683 shares of
common stock valued at $41,589 (based on a 15% discount on the closing bid price
of the Company's common stock on the date of issuance) to certain employees as
compensation. This transaction was an issuance of securities by the issuer not
involving any public offering and is therefore covered by the exemption allowed
under Section 4(2) of the Securities Act of 1933.
In April 2002, the Company issued 50,000 shares of common stock valued at
$8,000 (based on the closing bid price of the Company's common stock on the date
of issuance) to an employee pursuant to an asset purchase agreement. This
transaction was an issuance of securities by the issuer not involving any public
offering and is therefore covered by the exemption allowed under Section 4(2) of
the Securities Act of 1933.
17
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
18
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Myrient, Inc.
Date: July 22, 2002 by: /s/ BARRY H. HALL
-------------------------------------
Barry H. Hall
Chairman of the Board and Director
by: /s/ BRYAN L. TURBOW
-------------------------------------
Bryan L. Turbow
Director and President/CTO
by: /s/ STEPHEN V. CAGNAZZI
--------------------------------------
Stephen V. Cagnazzi
Director
19