---------------------------
OMB APPROVAL
---------------------------
---------------------------
OMB NUMBER: 3235-0070
Expires: April 30, 2003
Estimated average burden
hours per response....34.00
---------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Amendment No. 1
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the period ending September 30, 2000
------------------
Commission File No.
Milinx Business Group, Inc.
Suite 3226, 1001 Fourth Avenue
Seattle, Washington 98154
-------------------------
(Exact name of registrant as specified in its charter)
Delaware
--------
(State or other jurisdiction of incorporation or organization)
91-1954074
----------
(I.R.S. Employer Identification No.)
Suite 3226, 1001 Fourth Avenue
Seattle, Washington
(Address of principal executive offices)
98154
-----
(Zip Code)
(206) 621-7032 or (604) 647-7600
--------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes _____ No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
16,461,911 common shares issued and outstanding at October 31, 2000.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MILINX BUSINESS GROUP, INC. and SUBSIDIARIES
Consolidated Balance Sheets
September 30, June 30,
2000 2000
Unaudited
------------- ------------
CURRENT ASSETS
Cash $ 1,814,366 $ 2,162,430
Receivables
Trade 9,227 9,334
Subscriptions -- 323,721
General Sales Tax 452,655 327,149
Employee and stockholders 45,731 20,692
------------ ------------
Total accounts receivable 507,613 680,896
Due from Milinx Marketing Group 81,701 82,644
Security deposits 121,837 209,362
Prepaid rent and other 215,100 43,549
------------ ------------
Total current assets 2,740,617 3,178,881
PROPERTY AND EQUIPMENT-AT COST, net of accumulated depreciation 4,413,658 3,572,168
OTHER ASSETS
Licenses 2,254,717 2,036,985
Capital lease deposits 97,716 203,915
Security deposits -- 1,300
------------ ------------
$ 9,506,708 $ 8,993,249
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,053,338 $ 981,233
Accrued liabilities 209,789 279,758
Due to Milinx Management Corporation 3,586 3,586
Capital lease obligations - current portion 787,033 536,061
Customer deposits -- 2,529
------------ ------------
Total current liabilities 2,053,746 1,803,167
CAPITAL LEASE OBLIGATIONS, net of current portion 792,305 927,808
COMMITMENTS AND CONTIGENCIES -- --
STOCKHOLDER' EQUITY
Series A 10% non-cumulative, voting convertible preferred stock, liquidation 3,675 3,675
value of $1,176,000
Series B 10% non-cumulative, voting convertible preferred stock -- 1,681
Series C 10% non-cumulative, voting convertible preferred stock, liquidation 1,595 2,207
value of $1,594,511
Common stock 16,303 9,671
Additional paid in capital 18,431,594 14,908,291
Unearned compensation (680,549) (1,102,626)
Accumulated deficit (10,965,290) ((7,480,702)
Accumulated other comprehensive deficit (146,671) (79,923)
------------ ------------
6,660,657 6,262,274
------------ ------------
$ 9,506,708 $ 8,993,249
============ ============
MILINX BUSINESS GROUP, INC. and SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
For the three months ended
--------------------------
September 30,
2000 1999
------------- ------------
Net sales $ 87,689 $ 45,971
Cost of sales 148,237 100,657
----------- -----------
Gross profit (loss) (60,548) (54,686)
----------- -----------
Selling, general and administrative expenses 3,373,528 1,069,329
Other expenses
Interest 50,173 --
Miscellaneous 339 2,544
----------- -----------
50,512 2,544
----------- -----------
Net loss $ 3,484,588 $ 1,126,559
=========== ===========
Net loss per common share - basic and diluted $ 0.27 $ 0.13
=========== ===========
The accompanying notes are an integral part of these statements.
3
MILINX BUSINESS GROUP, INC. and SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
For the three months ended
September 30,
---------------------------
2000 1999
----------- -----------
Increase (Decrease) in cash
Cash flows from operating activities
Net loss $(3,484,588) $(1,126,559)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 388,660 83,285
Write off of license and trademark costs -- 100,000
Employee stock and stock option compensation 263,136 --
Changes in assets and liabilities
Receivables (150,545) (37,862)
Security deposits and prepaid expenses (84,026) --
Accounts payable, accrued liabilities and customer 1,850 --
deposits
----------- -----------
Net cash used in operating activities (3,065,513) (981,136)
Cash flows from investing activities
Acquisition of fixed assets (788,961) (435,740)
Acquisition of intangible assets (217,752) (156,823)
Equipment deposits -- (3,759)
----------- -----------
Net cash used in investing activities (1,006,713) (596,322)
----------- -----------
Cash flows from financing activities
Proceeds from issuance of common stock 181,788 --
Proceeds from conversion of D warrants 3,499,748 --
Proceeds from issuance of Class A Units -- 1,227,500
Proceeds from conversion of Class D Units 325,970 --
Proceeds from exercise of stock options 2,798 --
Payments on capital lease obligations (219,394) --
Proceeds from sale of common stock to employees -- 13,606
----------- -----------
Net cash provided by financing activities 3,790,910 1,241,106
----------- -----------
Effect of the exchange rate changes on cash (66,748) 7,492
Net decrease in cash (348,064) (328,860)
Cash at beginning of year 2,162,430 4,522
----------- -----------
Cash at end of year $ 1,814,366 $ (324,338)
=========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 50,173 $ --
Property acquired under capital lease $ 334,863 $ --
The accompanying notes are an integral part of these statements.
4
MILINX BUSINESS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. FINANCIAL STATEMENTS
The unaudited consolidated financial statements of the Company and its
subsidiaries have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles (GAAP) have been
condensed or omitted pursuant to such rules and regulations. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for the entire fiscal year ending June 30, 2001. The Company was
incorporated on December 10, 1998 and commenced its operations on February 10,
1999. This Form 10-Q should be read in conjunction with the Form 10-K that
includes consolidated financial statements for the year ended June 30, 2000 and
June 30, 1999.
NOTE 2. BASIC AND DILUTED NET EARNINGS PER COMMON AND COMMON-EQUIVALENT
SHARE
Basic and diluted loss per share is based on the weighted average number of
common shares outstanding during the period. The weighted average number of
common shares outstanding during the three months ended September 30, 2000 and
September 30, 1999 was 12,801,315 and 8,470,000, respectively. Diluted loss per
share includes the effect of all potentially dilutive common stock equivalents.
Diluted loss per share for the three months ended September 30, 2000 and
September 30,1999 equaled basic loss per share due to the anti-dilutive effect
of the common stock equivalents.
NOTE 3. MANAGEMENT PLANS
The Company's negative cash flow from operations is expected to continue through
the at least the next two quarters of the fiscal year. Until subscription
revenue exceeds cash operating expenditures, substantial additional equity
capital will have to be raised to fund capital expenditures and operations.
For the quarter ended September 30, 2000, the Company raised $3,686,583 in
equity capital without the benefit of an operating Data Center prior to August
2000, software applications or an ability to market any of its ASP services.
The Company is currently in the process of completing a private placement of
3,111,111 shares of common stock at a price of $4.50 per share. For the first
$7,000,000 in gross proceeds received, an additional one (1) bonus share will be
issued for each two (2) shares purchased. $201,987 in gross proceeds was
received during the quarter ended September 30, 2000. Subsequent to September
30, 2000 and through the date of this filing, the Company received an additional
$244,000 in gross proceeds from this offering.
5
NOTE 4. NEW SUBSIDIARIES
Milinx Business Systems, Inc., a wholly owned subsidiary of Milinx
Business Group, Inc., was incorporated in the State of Nevada on June 22,
2000. Payroll expenses for the CFO and two employees working in
California were paid through this company.
NOTE 5. CONTINGENCIES
On October 4, 2000, two former employees of Milinx's subsidiary, Milinx Business
Services, Inc., ("Services"), advanced separate actions in British Columbia
Supreme Court against Services alleging breach of their employment severance
agreements and claiming unspecified damages. The Company believes the actions
are completely without merit and has not included any accruals.
Services will be vigorously defending these actions and counterclaiming against
the respective individuals for breach of employment and severance agreements and
claiming return of funds paid out under their respective severance agreements
and damages for wrongful breach.
Milinx Business Services, Inc., Milinx Business Group, Inc. and Maynard L.
Dokken commenced an action in October 2000 against Raging Bull Inc., John
Doe Services Provider, John Doe I, II, and III and Jane Doe I, II and
III. Raging Bull is an Internet Bulletin Board that permits users to post
inquiries and opinions with respect to various securities. John Doe
Services Provider is an Internet Service Provider or Providers ("ISPs").
John Doe I, II, and III and Jane Doe I, II, and III, all individuals whose
identities are unknown to the Plaintiffs, have undertaken various postings
on Raging Bull Inc. that are defamatory to the Plaintiffs. The Plaintiffs
were granted an Order that, among other things, Raging Bull Inc. must
either defend the action or provide all information in its possession to
assist in identifying the remaining Defendants. Raging Bull Inc. has
provided the information identifying the ISPs and the pleadings have been
amended naming Netcom Canada Inc., UUNet Canada Inc., Future Shop Ltd.,
Telus Advanced Communications and MTS Advanced Inc. as Defendants.
Amended pleadings were filed and served.
NOTE 6. OTHER
Milinx Business Services, Inc. entered into an Offer to Sublease with Bema Gold
Corporation to sublease floor space located at 595 Burrard Street in Vancouver,
BC on August 8, 1999. A deposit of $34,658 was paid at the signing of the
agreement and a further $103,974 (first 3 months of rent) was paid at the time
of acceptance by the lessor. On December 1, 2000 a payment of $103,974 (rent for
3 more months), plus the first month rent of $34,658 are due. The sublease
expires on April 21, 2002. Milinx has also extended the master lease to expire
in 2004.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH THE FINANCIAL
STATEMENTS AND RELATED NOTES OF MILINX BUSINESS GROUP, INC. AND ITS WHOLLY OWNED
SUBSIDIARIES (MILINX) INCLUDED IN THIS FILING FOR THE FIRST FISCAL QUARTER ENDED
SEPTEMBER 30, 2000.THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS INVOLVING
RISKS AND UNCERTAINTIES, SUCH AS OUR FUTURE PLANS, ABILITY TO SIGNIFICANTLY,
MEETING REVENUE GOALS, OBJECTIVES, EXPECTATIONS, PROJECTIONS, AND INTENTIONS.
OUR ACTUAL RESULTS HAVE DIFFERED MATERIALLY FROM PROJECTIONS MADE IN OTHER
FILINGS AND COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH
FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS FILING. SIGNIFICANT
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO DIFFERENCES AS SET FORTH IN THIS
DOCUMENT INCLUDE THOSE DISCUSSED IN "RISK FACTORS" AS WELL AS THOSE SET FORTH IN
THIS FILING AND OTHER FILINGS MADE BY THE COMPANY. THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN ARE MADE AS OF THE DATE OF THIS FILING AND WE ASSUME
NO OBLIGATION TO UPDATE THE REASONS ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. UNLESS SPECIFIED
OTHERWISE AS USED HEREIN, THE TERMS "WE", "US", OR "OUR" REFER TO MILINX
BUSINESS GROUP, INC. AND ITS WHOLLY OWNED SUBSIDIARIES.
The Economy
The United States economic expansion is now demonstrably slowing after its tenth
year of record economic expansion. But there is some fragmented evidence that
inflationary pressures on both prices and wages are increasing, placing the US
Federal Reserve Bank in a conundrum. Historically, the Bank would most likely
move to lower interest rates to stimulate the economy but that action has to be
done with extreme caution so as not to further exacerbate inflation. However, we
expect that the US economy will continue to grow at a rate of 3.5% to 4% of
Gross Domestic Product (GDP), which is still regarded as healthy economic
growth. Canada just began its recovery in 1995 and current projections indicate
that its rate of GDP growth in the year 2000 will exceed that of the United
States.
As of the date of this filing, the US equity markets are in a state of some
turmoil and many uncertainties. Earnings reports of firms for the third calendar
quarter for many companies have not met projections and the performance of their
share price has been adversely affected. In that the Technology Sector has, in
recent years, been richly valued, the downward adjustment in the common shares
of those businesses has been more pronounced. To further increase uncertainty,
the United States has, as of now, not completed the election of its 43rd
President. In our opinion, these factors, either singularly or taken together,
make it considerably more difficult for firms to raise additional debt or equity
capital.
Milinx Overview
Milinx was incorporated in the State of Delaware in December 1998 and commenced
active operations on February 10, 1999. Since that time, we have invested
significant financial resources in computer hardware, software, integration,
technology, proprietary software applications, and recruiting talented and
experienced personnel.
7
An Application Service Provider (ASP) is broadly defined as a firm that that is
remotely hosting software applications and providing access and use of its
services for a recurring monthly fee on a subscription basis. Milinx intends to
become a full-service ASP with market focus oriented to Small Office/Home Office
(SOHO) customer and, as applications are added to our customer suite, to Small
and Medium Enterprises (SME).
We believe that the ASP delivery model of Information Technology (IT) Services
is well positioned to become the dominant global business computing model by
2004, when Ovum, an International Research and Marketing Firm, projects US$44
billion dollars in revenues from these firms.
To the customer, the ASP delivery model offers at least the following distinct
advantages:
o Lower total cost of ownership.
o The latest software is readily available and more affordable.
o New applications can be deployed much more expeditiously.
o The focus and capital of the customer can be shifted to its core competency
rather than supporting and implementing expensive IT applications.
In August 2000, we opened our first Data Center occupying a floor of an office
building in Vancouver, BC. Although our Data Center can currently accommodate up
to 1,000,000 subscribers, our plan has been to supplement it with "mini" data
centers or co-located facilities with other companies to penetrate the market in
the United States.
With the completion of our first Data Center in August 2000, the implementation
of our Marketing Plan began in earnest. We researched our known and perceived
competitors along with identifying the initial suite of offerings that would be
most appealing to the marketplace.
Marketing and Sales Channels
Initially, we are offering our products through three distinct, but
complementary, sales channels:
o Direct Corporate Sales Force: Targeting businesses of sufficient existing
or potential size to justify the deployment of Milinx Sales Personnel,
supplemented by IT Professionals, to address technical challenges and
issues. Usually, this is a firm of 100+ employees that would greatly
benefit from outsourcing some or all of its applications.
o Direct Sales Network: An independent targeted group of 5,000 business
professionals who contract with our wholly owned subsidiary, ASP Technology
One, Inc., to resell Milinx products for a commission, specifically
oriented to the SOHO and SME markets.
8
o Internet Service Providers ("ISPs") and Telecommunications Companies
("Telcos"): Offering Milinx Products to the existing customer base of these
firms in a revenue sharing model. As an example, in September 2000, we
successfully concluded a Strategic Marketing Alliance with AOL Canada to
offer our services to that firm's subscribers. We expect that this
marketing opportunity will expand and allow us valuable entree into a very
wide spectrum of geographic locations. By leveraging these alliances we
expect to be able to introduce our services to millions of users in a very
cost effective and timely manner.
o Purchase of Internet Service Providers (ISPs): The Company has embarked
upon a strategy to purchase smaller ISPs (under 25,000 subscribers) and
market its enhanced services to the business base of subscribers. Consumer
clients of the ISPs purchased will be sold in bulk to other firms serving
that niche of the market.
o In that regard, on November 15,2000, Milinx executed a non-binding Letter
of Agreement to purchase the assets of the BIG Online Division of Metasoft
Systems, Inc. (Metasoft) which includes approximately 2,600 business
clients consisting principally of non-profit organizations. Previously, the
Company entered into an agreement to market its miMessaging unified
messaging service to Metasoft's clientele and other Milinx services as they
become available.
We believe that the timing is very opportune for this business model for the
following reasons:
o Rapidly increasing awareness and acceptance of web based software
solutions.
o The exponential growth that has occurred and we expect to continue to occur
of E-Commerce and Internet usage (according to CommerceNet Research Center,
projected users will number 490 million in 2002).
o The availability of web based software products.
o The expanding demands of small and medium sized businesses for cost
effective, robust, state-of-the-art IT solutions along with a profitable
and facile Internet presence.
The offerings with which Milinx has entered the ASP market represent a suite of
products encompassing depth, functionality and comprehensiveness for our key
target sectors, and positions the Company to score rapid penetration gains that
are necessary to achieve a significant market share.
Product Overview
Milinx is now and will be making our initial offering to customers in four
increments that began in June 2000 and will conclude in June 2001. However, as
market conditions dictate and the results of our Research and Development
efforts come to fruition, new services may be added to supplement present
offerings and continually expand our product line. Initially, our two primary
target markets for Milinx's services will be the Small Office/Home Office (SOHO)
market (under 10 employees) and the Small to Medium Enterprises (SME) market.
9
Already available are the following services:
miOFFICE: Servicing both the SOHO and SME markets, this suite
of applications currently includes collaboration and
file-sharing applications as well as e-mail and
calendaring solutions.
miMESSAGING: This Unified Messaging solution includes the
ability to have all voice, paging, fax and
e-mail messages sent to one mailbox for
dissemination to the customer, as well as
expanded functions to include "follow-me
messaging", voice recognition and text-to
speech conversion.
October to December 2000:
Throughout the fourth quarter, we expect to see the following new services added
to the Milinx suite of offerings:
miTRAINING: Primarily directed at the SOHO market, this Internet
based application suite provides online training for
our clientele.
miBILLING: Expected to be deployed by the end of 2000,this
application is targeted at SOHO and SME
organizations that want to avail themselves of,
web centric business billing techniques and
procedures to properly control and monitor
their accounts receivables with the latest
technology available.
miCOMMERCE
Express: This solution contains all the essential
functionalities in the miCOMMERCE suite of
services and it is aimed at the SOHO and SME
businesses. Merchants can sell their products
securely over the Internet with instant credit
card billing and transaction remittances. The
service expected to be ready by December 2000.
miCRM Express: This solution contains all the essential
functionalities in the miCRM suite of services
and it is aimed at the SOHO and SME
businesses. The product integrates information
related to customers and company partners so
that a customer-centric view is available to
support any activities related to the
maintenance of customer relationships. The
service expected to be ready by December 2000.
January to March 2001:
miCOMMERCE: This website-creation solution is aimed at the
SOHO and SME businesses that seek to establish
an online catalogue and sell their products
securely over the Internet with instant credit
card billing and transaction remittances.
Currently, in the final stage of development,
it is expected to be ready for deployment
during the fourth quarter of 2000.
10
miOFFICE VO: Aimed at the SOHO and SME markets, this next
stage of MiOffice will include word processing,
presentation and spreadsheet solutions. This
suite of products is currently in the
developmental stage, and with integration into
our suite of services by March 2001.
miCRMCustomer Relationship Management (CRM) solutions are
by definition intended to centralize and
organize all customer information for any
company. Milinx's solution is expected to be
available in early 2001 to service a primary
target market of SMEs along with a secondary
market of SOHOs.
miPORTAL: This application creates a secure, customized
online environment that allows our customers
to bring employees, partners, suppliers and
customers together onto the same web centric
environment. This development-stage solution
is expected to deploy late in the first quarter
of 2001.
April to June 2001
miCAST: This application increases the versatility
and utility of e-mail, allowing our customers
to add voiceover functionality to their e-mails
without significantly increasing the size of
the e-mail file. In the development stage, this
solution is expected to be available sometime in
the fourth quarter.
Competition
The market for our services is now and will continue to be very competitive. To
obtain customers, Milinx has spent and will be further expending significant
financial resources. These payments include advertising, commissions, share
warrants, and other financial inducements. Generally, our competition includes
other ASPs, Systems Integrators, ISPs and web hosting companies, software
companies and telcos. We have yet to achieve any significant market share and
many of our competitors have substantially more financial resources and brand
recognition than we do.
Liquidity and Capital Resources
As of the date of this filing, Milinx does not have sufficient cash resources,
access to credit, equity capital, or working capital and may not be able to meet
ongoing obligations on a timely basis.
In the first fiscal quarter, the Company received $3,499,748 from the conversion
of D warrants, $325,970 from the conversion of D Units (including the collection
of $323,721 of subscriptions receivable), and $181,788 from the placement of
common shares.
Since July 2000, the Company has attempted to place privately 2,500,000 in
common shares at a price of $4.50 per share but only $446,000 has been raised to
date. We are actively soliciting funding from the placement of notes with
private accredited individuals including an equity conversion option and
continuing to solicit the sale of common stock. To date, we have received
$400,000 from a private investor from the proceeds of a Demand Note that prior
to December 15,2000 can, in whole or in part, be applied to the purchase of
common shares at $4.50 per share plus receiving an additional 1/2 bonus share.
11
In October 2000, the offering was expanded to 3,111,111 common shares at a price
of $4.50 per share plus a bonus share was added at no additional cost for the
first $7,000,000 invested. As of the date of this filing, no additional
subscriptions or funds have been received from this revised offering.
Projected revenues have not materialized as anticipated and the Company is
slightly behind schedule in completing proprietary applications to supplement
its existing suite of services. Our marketing program is being substantially
changed to focus our efforts significantly on Value Added Resellers (VARs) such
as Internet Service Providers (ISPs) and Telcos.
While the Company is aggressively exploring new third party equity and debt
financing, these efforts to date have only been somewhat successful. We are
currently negotiating debt or debt and equity financing in excess of $10,000,000
with several investment firms experienced in providing this type of funding to
technology and development companies such as Milinx. Management is committed to
concluding these needed financing arrangements on a basis that meets our capital
requirements and is in the best interests of our shareholders. As a consequence
and to conserve capital, Milinx (and many other companies in the IT sector) is
reducing expenditures significantly by staff reductions, eliminating all
discretionary expenses, deferring capital expenditures, and postponing all plans
for geographic expansion. Even with these measures, there is no assurance that
the present liquidity difficulties can be overcome.
Revenue, Cash Flow, and Profitability Projections
On July 21, 2000, Milinx filed a Form 8-K with the SEC, which, among other
things, forecasted positive cash flow in calendar Q1 of 2001 and profitable
operations in calendar O2 in 2001. Due principally to significantly slower than
anticipated build-up of revenues, the Company has revised its forecasts such
that we are now not projecting positive cash flow in Calendar Q4 2001 and
profitable operations in calendar Q1 of 2002.
Results of Operations
Revenue, Cost of Sales, and Gross Loss: For the first quarter of fiscal 2001
increased $41,718 or 91% to $87,689 in the comparable period in 2000 as our ASP
services had just begun to be sold to subscribers. However, cost of goods sold
increased $47,580 or 47% to $148,237 slightly increasing the Gross Loss to
$60,548. As of the date of this filing, the Company had over 1,200 reseller
agents/clients and over 2,500 subscribers for its miMessaging Service.
The Gross Loss from Operations for the first fiscal quarter was $3,484,588 which
was a $2,358,029 increase from the $1,126,559 Gross Loss from Operations in the
comparable period 2000. With the completion of its Data Center, the Company just
began receiving ASP revenues in August 2000 has embarked upon an aggressive
effort to reduce all expenditures.
12
Selling, General, and Administrative Expenses: These quarterly expenses
increased in fiscal 2001, $2,304,199 from $1,069,329 to $3,373,528. This
increase was principally a result of the increases to the following
expenditures:
o Wages and Salaries increased $968,5000 to $1,486,682 as a result of hiring
the staff we anticipated would be necessary to develop and integrate our
applications and service projected clientele. In that these projections
proved to be too optimistic, the Company now is reducing staff.
o Advertising was $152,533 while there were no funds expended on this item in
the first quarter of fiscal 2000. To continue to solicit subscribers, it is
doubtful this expense can be much reduced and may increase in the future.
o Amortization of computer hardware, software, and licenses increased
$305,375 to $388,660. It is likely this expense will continue to increase
as new software is developed or purchased.
o Consulting fees increased $318,708 to $393,648. As part of the Company's
cost reductions, this rate of increase will be reduced considerably.
o Office expenses increased $117,173 to $243,625. As our personnel expense is
reduced, this expense will decline commensurately.
o Telephone increased $95,396 to $115,019. As most of this expense is due to
access lines for customers, this expense is unlikely to decline and may
well increase in the future.
o Travel and entertainment increased $92,339 to $124,108. All discretionary
expenditures in this category will be eliminated.
o Amortization of Deferred Compensation was $263,136. There was no expense
for this item in 1999, as the shares of Milinx were not publicly trading.
Presuming the share price increases in the future, this expense will
commensurately increase.
Risk Factors
INVESTING IN OUR COMPANY INVOLVES CONSIDERABLE RISK. YOU SHOULD CAREFULLY
CONSIDER THE RISKS SET FORTH IN THIS FILING AND OTHER FILINGS IN DETAIL BEFORE
MAKING AN INVESTMENT DECISION. THESE RISKS AND UNCERTAINTIES ARE NOT THE ONLY
ONES THAT WE FACE OR THAT MAY ADVERSELY AFFECT OUR BUSINESS. IF ANY OF THE
FOLLOWING RISKS OR UNCERTAINTIES ACTUALLY OR PARTIALLY OCCURS, OUR COMPANY,
FINANCIAL CONDITION, OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY
AFFECTED. THIS FILING ALSO CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT
INHERENTLY INVOLVE RISK AND UNCERTAINTY. OUR ACTUAL RESULTS COULD DEVIATE
MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. THIS COULD
OCCUR BECAUSE OF THE RISKS SET FORTH IN THIS DOCUMENT, OUR OTHER FILINGS, OR
UNANTICIPATED EVENTS AND OCCURRENCES NOT YET FORESEEN.
13
o Milinx is presently experiencing financial difficulties and may be unable
to timely meet its financial obligations.
o We do not have the cash, equity capital, credit, or working capital to pay
our current expenditures. o We are seeking both debt and equity financing
which may not be available on acceptable on terms and conditions to us, if
at all. Milinx is attempting to purchase smaller ISPs but there is no
assurance that the cash resources or financing will be available to pursue
this strategy.
o The Company is reducing its payroll that will involve the payment of
accrued vacation and severance mandated by the Province of British
Columbia.
o We are operating at a significant loss, which will further erode our
already limited resources.
o Our monthly cash flow deficit is approximately $1,000,000 and must be
reduced significantly. However, there is no assurance that this can be
accomplished before our limited cash resources are exhausted.
o Our marketing program is being revised and retargeted to VARs and Telcos.
We have not yet proven the new program to be economically viable.
o Only our platform proprietary applications are available and none are yet
to be commercially proven
o The ASP Business Model has yet to be proven.
o We are competing with companies with substantially more financial resources
and brand awareness.
o Additional IT personnel need to be hired. However, our present financial
difficulties may make that difficult to achieve.
o Due at least to all of the aforementioned variables, forecasting positive
cash flow and profitability is most difficult and neither might ever be
achieved.
o The trading price of our common stock could be subject to significant
fluctuations.
o It is the intention of the Company to list its shares on the Nasdaq "Small
Cap" or National Board. Presently, we qualify for neither.
o On a fully diluted basis, we would have 35,000,000 shares of common stock
available if all preferred shares were converted into common stock and
options and warrants are exercised. We cannot predict the effect, if any,
this would have on our share price.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On October 4, 2000, two former employees of Milinx's subsidiary, Milinx
Business Services, Inc., ("Services"), advanced separate actions in British
Columbia Supreme Court against Services alleging breach of their employment
severance agreements and claiming unspecified damages. The Company believes
that these actions are without merit and has not provided any accruals.
Services will be vigorously defending these actions and counterclaiming
against the respective individuals for breach of employment and severance
agreements and claiming return of funds paid out under their respective
severance agreements and damages for wrongful breach.
Milinx Business Services, Inc., Milinx Business Group, Inc. and Maynard
Dokken commenced an action in October 2000 against Raging Bull Inc., John
Doe Services Provider, John Doe I, II, and III and Jane Doe I, II and III.
Raging Bull is an Internet Bulletin Board that permits users to post
inquiries and opinions with respect to various securities. John Doe
Services Provider is an Internet Service Provider or Providers ("ISPs").
John Doe I, II, and III and Jane Doe I, II, and III, all individuals whose
identities are unknown to the Plaintiffs, have undertaken various postings
on Raging Bull Inc. that are defamatory to the Plaintiffs. The Plaintiffs
were granted an Order that, amongst other things, Raging Bull Inc. must
either defend the action or provide all information in its possession to
assist in identifying the remaining Defendants. Raging Bull Inc. has
provided the information identifying the ISPs and the pleadings have been
amended naming Netcom Canada Inc., UUNet Canada Inc., Future Shop Ltd.,
Telus Advanced Communications and MTS Advanced Inc. as Defendants. Amended
pleadings were filed and served today.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the quarter the Company issued the following unregistered
securities. Unless indicated, cash and net proceeds are the same. Also
unless indicated, sales under Rule 506 were to persons believed to be
accredited investors, as defined in Regulation D:
Under Regulation S, the Company sold 44,886 common shares at $4.50 per
share for total cash proceeds of $201,987. Subsequent to September 30, 2000
and through the date of this filing, the Company received an additional
$244,000 in gross proceeds from this offering.
15
1,749,874 Class D Warrant were converted to common shares for total cash
proceeds to the Company of $3,499,748.
Investors converted 2,247,511 D Units to Series C Preferred shares raising
$2,249. In addition, the Company collected $323,721 for outstanding D Unit
subscriptions.
In addition to the above, during the three months ending September 30,
2000, the Company issued 296,000 common shares in connection with the
exercise of employee stock options, for total cash proceeds of $2,798 with
an additional $5,037 in outstanding receivables.
All above proceeds were used for general working capital and operating
purposes, including the lease and rental of equipment, legal, accounting
and transfer agent fees, construction of the Company's data center, as well
salaries to employees, directors and officers of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
On November 15,2000, Milinx executed a non-binding Letter Agreement (Agreement)
to purchase the assets of the BIG Online division of Metasoft Systems, Inc. of
Vancouver, BC. The purchase price is $3,547,297 comprised of the following:
o $2,094,595 cash on closing.
o $777,027 in a convertible subordinate debenture secured by the assets being
purchased bearing an interest rate of 1% per annum and due one year from
date of closing.
o $675,675 in shares of Milinx common stock. The number of shares to be
issued will be computed based upon the average closing price for the shares
for the five (5) days prior to closing.
The purchase of these assets is contingent upon a definitive asset purchase
agreement being executed, due diligence being conducted by Milinx, and the
approval by its Board of Directors.
On November 15, 2000, Douglas A. Hicks resigned as Executive Vice President of
the Company. He will continue as a consultant at a monthly fee of $15,203 until
January 31,2001.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 10K filed October 13, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MILINX BUSINESS GROUP, INC. November 20, 2000
/s/ James W. Summers
---------------------------------
James W. Summers
Chief Financial Officer