10-Q 1 milinx10q_march2002.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from July 1, 2001 to March 31, 2002 ------------- --------------- Commission file number: 000-26421 ------------ Milinx Business Group, Inc. --------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 91-1954074 ------------------- -------------- (State or other jurisdiction of (I.R.S. Employer organization) Identification No.) P.O. Box 2156 Danville, California 94526 -------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) (925) 736-3413 ------------------------ (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] 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: As of May 28, 2002, the Issuer had 30,728,979 shares of common stock, par value $0.001, issued and outstanding. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Balance Sheets................................................ 3 Statements of Operations...................................... 4 Statements of Cash Flows...................................... 5 Notes to Financial Statements................................. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS.............................................13 ITEM 2(C). CHANGES IN SECURITIES AND USE OF PROCEEDS..................13 ITEM 3. DEFAULTS UPON SENIOR SECURITIES...............................13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.........14 ITEM 5. OTHER INFORMATION.............................................14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..............................14 SIGNATURES ..................................................................15 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MILINX BUSINESS GROUP, INC. and SUBSIDIARIES Consolidated Balance Sheets March 31, 2002 June 30, 2001 ASSETS (Unaudited) CURRENT ASSETS Cash $ 45,359 $ 33,680 Receivables and services tax 33,629 35,039 Security deposits -- 75 Prepaid rent and other 62,591 5,355 ------------ ------------ Total current assets 141,579 74,149 PROPERTY AND EQUIPMENT, net 544,904 1,100,226 OTHER ASSETS Capital lease deposits 10,146 10,571 ------------ ------------ $ 696,629 $ 1,184,946 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable $ 236,812 $ 1,582,188 Accrued liabilities 840,800 1,456,368 Due to Milinx Management Corporation 3,586 3,586 Due to secured creditors 1,568,586 -- Due to unsecured creditors 319,114 Deferred revenue 146,730 -- Capital lease obligations -- 1,588,678 Notes payable, net of unamortized discount 667,532 444,444 ------------ ------------ Total current liabilities 3,783,160 5,075,264 COMMITMENTS AND CONTINGENCIES -- -- REDEEMABLE COMMON SHARES 480,551 -- STOCKHOLDERS' DEFICIT Series A preferred stock 3,675 3,675 Series C preferred stock 117 1,016 Common stock 23,977 23,078 Shares subscribed 641,669 10,000 Additional paid in capital 21,967,863 21,803,465 Unearned compensation (36,198) -- Accumulated deficit (26,123,940) (25,492,701) Accumulated other comprehensive deficit (44,245) (238,851) ------------ ------------ (3,567,082) (3,890,318) ------------ ------------ $ 696,629 $ 1,184,946 ============ ============ The accompanying notes are an integral part of these statements. 3

~~TABLE~~MILINX OFBUSINESS ~~CONTENTS~~GROUP, ~~PART~~INC. Iand SUBSIDIARIES Consolidated Statements of Operations (unaudited) Nine months ended Three months ended March 31 March 31 ---------------------------- ~~FINANCIAL~~---------------------------- ~~INFORMATION~~2002 ~~ITEM~~2001 1.2002 ~~FINANCIAL~~2001 ~~STATEMENTS~~Net ~~Balance~~Sales ~~Sheets..................................................~~$ 3-- ~~Statements~~$ of276,514 ~~Operations........................................~~$ 4-- ~~Statements~~$ 165,031 Cost of ~~Cash~~Sales ~~Flows........................................~~-- 5390,169 ~~Notes~~-- to112,669 ~~Financial~~------------ ~~Statements...................................~~------------ 6------------ ~~ITEM~~------------ 2.Gross ~~MANAGEMENT'S~~Profit ~~DISCUSSION~~(loss) ~~AND~~-- ~~ANALYSIS~~(113,655) OF-- ~~FINANCIAL~~52,362 ~~CONDITION~~Selling, ~~AND~~General ~~RESULTS~~and OFAdministrative ~~OPERATIONS.......................................~~expense 2,014,205 9,192,389 ~~ITEM~~641,514 3.2,535,479 ~~QUANTITATIVE~~Other ~~AND~~expenses ~~QUALITATIVE~~(income) ~~DISCLOSURES~~Interest ~~ABOUT~~393,149 ~~MARKET~~178,586 ~~RISK......13~~176,144 ~~PART~~57,548 IIMiscellaneous -- ~~OTHER~~(72,973) ~~INFORMATION~~-- ~~ITEM~~(179,040) Impairment loss -- 468,403 -- 468,403 Gain on sale of property and equipment (49,954) -- -- -- Gain on settlement of liabilities (351,244) -- (26,262) -- Expenses as a result of bankruptcy proceedings 125,760 -- 125,760 -- Gain on settlement of liabilities from bankruptcy (1.,500,677) ~~LEGAL~~-- ~~PROCEEDINGS...............................................13~~(1,500,677) ~~ITEM~~-- 2------------ ------------ ------------ ------------ (C1,382,966). ~~CHANGES~~574,016 IN(1,225,035) ~~SECURITIES~~346,911 ~~AND~~------------ ~~USE~~------------ OF------------ ~~PROCEEDS....................13~~------------ ~~ITEM~~Net Loss from operations before minority interest and cumulative effect of change in accounting principle 631,239 9,880,060 (583,521) 2,830,028 Cumulative effect of change in accounting principle -- 705,133 -- 705,133 ------------ ------------ ------------ ------------ Net Loss from operations before minority Interest 631,239 10,585,193 (583,521) 3.,535,161 ~~DEFAULTS~~------------ ~~UPON~~------------ ~~SENIOR~~------------ ~~SECURITIES.................................13~~------------ ~~ITEM~~Minority 4.interest ~~SUBMISSION~~share OFin ~~MATTERS~~net TOloss Aof ~~VOTE~~a OFSubsidiary ~~SECURITIES~~-- ~~HOLDERS...........13~~(5,291) ~~ITEM~~-- (5.,291) ~~OTHER~~------------ ~~INFORMATION...............................................13~~------------ ~~ITEM~~------------ 6.------------ ~~EXHIBITS~~Net ~~AND~~Loss ~~REPORTS~~(Income) ON$ ~~FORM~~631,239 8$ 10,579,902 $ (583,521) $ 3,529,870 ============ ============ ============ ============ Net Loss (Income) per Common Share-KBasic And Diluted $ 0.02 $ 0.64 $ (0.~~.............................14~~02) ~~SIGNATURES~~$ 0.~~......................................................................15~~18 ============ ============ ============ ============ Weighted average common shares outstanding 29,565,054 16,531,096 34,211,873 19,610,388 ============ ============ ============ ============

The accompanying notes are an integral part of these statements. 4

MILINX BUSINESS GROUP, INC. and SUBSIDIARIES Consolidated Statements of ~~Operations~~Cash Flows (unaudited) ~~Six~~Nine months ended ~~Three~~March ~~months ended December~~ 31 ~~December 31~~ ----------------------------- 2002 2001 INCREASE (DECREASE) IN CASH CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (631,239) $(10,579,902) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 454,954 1,560,205 Gain on debt settlements (1,500,677) -- Stock options issued for employee and consulting services 123,700 -- Impairment loss -- 468,403 Cumulative effect of change in accounting principle, -- 705,133 Minority interest -- (5,291) Gain on sale of subsidiary's share -- (178,505) Write off of related party balances -- 32,705 Amortization of convertible debt discount 102,480 44,444 Shares issued in lieu of cancellation fees -- 80,000 Loss on property and equipment disposal 49,954 -- Millennium units issued for services -- 100,000 Shares issued for services 31,377 -- Employee stock option compensation --~~-----~~ ~~2001~~483,178 ~~2000~~Changes ~~2001~~in ~~2000~~assets ~~Net~~and ~~Sales~~liabilities $Receivables --1,410 ~~$ 11~~112,~~483~~471 $Security --deposits $and 23prepaid expenses (16,~~794~~113) ~~Cost~~(10,628) ofAccounts ~~Sales~~payable, --accrued ~~277~~liabilities and customer deposits 529,~~500~~436 555,963 Related party receivables -- ~~129~~16,~~263~~024 ------------ ------------ Net cash used in operating activities (854,718) (6,615,800) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment -- (1,170,755) Disposal (purchase) of property and equipment, net 5,002 -- Acquisition of licenses and trademarks -- (218,507) ------------ ------------ ~~Gross~~Net ~~Profit~~cash ~~(loss)~~provided --by (~~166,017~~used in) --investing activities 5,002 (~~105~~1,~~469~~389,262) ~~Selling,~~CASH ~~General~~FLOWS ~~and~~FROM ~~Administrative~~FINANCING ~~expense~~ACTIVITIES ~~1,372,691~~Proceeds ~~6,656,910~~from ~~861~~issuance of stock subscriptions 427,~~146~~000 -- Proceeds from conversion of D warrants -- 3,~~283~~629,~~382~~748 ~~Other~~Proceeds ~~expenses~~from ~~(income)~~issuance ~~Interest~~of ~~217,005~~notes ~~121,038~~payable ~~150~~235,~~457~~500 ~~70,865 Miscellaneous~~ -- ~~106,067~~Proceeds from conversion of Class D units -- ~~105~~325,~~728~~970 ~~Gain~~Proceeds onfrom ~~sale~~issuance of ~~property~~common ~~and~~to ~~equipment~~employees ~~(49~~-- 8,~~954)~~010 ~~339~~Proceeds --from conversion of Millinium units -- ~~Gain~~2,132,860 Payments on ~~settlement~~capital oflease ~~liabilities~~obligations -- (~~324~~543,~~982~~762) Borrowings -- ~~(324~~19,~~982)~~038 Issuance of convertible debentures -- 400,000 ------------ ------------ Net cash provided by financing activities 662,500 5,971,864 Effect of the exchange rate changes on cash 198,895 (88,240) ------------ ------------ Net increase (~~157,931~~decrease) ~~227~~in cash 11,~~105~~679 (~~174~~2,~~525~~121,438) ~~176,593~~Cash ~~Net~~at ~~Loss~~beginning $of ~~1,214,760~~the $period 733,~~050,032~~680 ~~$ 686~~2,~~621 $ 3~~162,~~565,444~~430 ~~============~~------------ ~~============ ============ ============ Net Loss per Common Share~~-~~Basic~~----------- &Cash ~~Diluted~~at $end ~~0.04~~of $the ~~0.48~~period $ ~~0.02~~45,359 $ ~~0.21~~40,992 ============ ============ ~~============~~SUPPLEMENTAL ~~============~~DISCLOSURES ~~Weighted~~Property ~~average~~acquired ~~common~~under ~~shares~~capital ~~outstanding~~leases ~~27,292,153~~$ ~~14,676,936~~-- ~~29,202,221~~$ 16416,~~642,652~~302 ============ ============ ~~============ ============ The accompanying notes are an integral part of these statements. 4~~

The accompanying notes are an integral part of these statements. 5 MILINX BUSINESS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. FINANCIAL STATEMENTS The unaudited, consolidated financial statements of Milinx Business Group, Inc.(the Company or Milinx), 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 unaudited consolidated financial statements of the Company reflect all adjustments that are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. 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, 2002. 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, as amended, that includes consolidated financial statements for the year ended June 30, 2001, 2000 and the six months ended June 30, 1999. NOTE 2. LOSS PER 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 and nine months ended March 31, 2002 and 2001, was 34,211,873, 29,565,054, and 19,610,388, 16,531,096, respectively. Diluted loss per share includes the effect of all potentially issue-able common stock. Diluted loss per share for the three and nine months ended March 31, 2002 and 2001, equaled basic loss per share due to the anti-dilutive effect of the potentially issue-able common stock. NOTE 3. COMPREHENSIVE INCOME The Company has adopted SFAS 130, Reporting Comprehensive Income. The statement requires inclusion of foreign currency adjustments, reported separately in stockholder's equity as other comprehensive income. The Company's total comprehensive loss (income) for the three and nine months ended March 31, 2002 and 2001 was $(599,185), $432,344, and $3,536,704, and $10,668,142, respectively. NOTE 4. MANAGEMENT PLANS The Company's negative cash flow from operations is expected to continue through at least through the 2002 calendar year. Until subscription and product revenues exceed cash operating expenditures, substantial additional equity capital will have to be raised to fund capital expenditures and operations. Management began its fund-raising effort in mid-March with the intention of raising $3,000,000 to $5,000,000. There is no assurance the Company will successfully raise any funds. For the quarter ended March 31, 2002, the Company sold, in two private debt offerings, a total of $26,500 in debt that included the promise to issue 67,500 shares of the Company's common stock. One offering provided 5000 shares of restricted common stock for every $1,000 loaned under the terms of the note. The terms of the note are: i) the note bears interest for the first 120 days at the rate of 12% per annum, the Company has the option to retire this note during this period and the note holder has the option of converting the note during this 120 day period into an additional 5000 shares per $1,000 loaned, ii) should the Company not retire the note nor the shareholders convert the note during the first 120 day period, the note automatically extends to a term of 300 days and accrues interest at the rate of 15% for the entirety of the period. The Company has closed all of the previous offerings. On February 8, 2002 the Company extended an Exempt Private Offering, to accredited investors only, in the amount of $500,000 to provide funding for operations. This offering has two parts: Part 1.) In exchange for a minimum investment of $5,000 but investments less than $100,000 the Company granted common restricted shares at the price of $0.06 per share plus warrants to purchase up to 50% of the number of shares at an exercise price of $0.08 per share. The warrants have a term of 2 years. Part 2.) In exchange for a minimum investment of $100,000 the company granted common restricted shares at the price of $0.04 per share plus warrants to purchase up to 25% of the number of shares at an exercise price of $0.08 per share. The warrants have a term of 2 years. The Company has raised $244,000 under this offering. 6 In September 2001, Milinx's current management team took over as part of a turnaround initiative. This management team assessed the business and financial position of the Company and determined that the only viable alternative was to attempt to reorganize through a voluntary reorganization filing in British Columbia, Canada by its subsidiary, 580880BC Ltd., dba Milinx Business Services, Inc. 580880BC Ltd.'s proposed plan of reorganization ultimately needed to receive the support of its secured creditors and its unsecured creditors. On February 22, 2002 the Court in Vancouver, British Columbia, Canada approved the plan that had been previously approved on January 14, 2002 by the necessary number of unsecured creditors. Pursuant to the reorganization plan the Board of Directors approved a resolution to offer proven creditors 1 share of restricted common stock for each Canadian dollar of the amount of approved debt remaining after payment. On October 12, 2001, Milinx's subsidiary, 580880BC Ltd., filed with the Office of the Superintendent of Bankruptcy (OSOB) in British Columbia, Canada, a Notice of Intention. 580880BC Ltd. and on December 24, 2001, filed a plan of reorganization with the court. On December 24, 2001 580880BC Ltd. filed a plan of reorganization with the court. 580880BC Ltd.'s plan of reorganization ultimately addresses three discrete groups of creditors: secured creditors, preferred creditors and general unsecured creditors. 580880BC Ltd.'s two major secured creditors are Cisco Systems and Sun Microsystems. These secured claims amounted to approximately $1,600,000. These claims have been negotiated outside the formal plan filed with the court, as secured creditors are not bound by a plan of reorganization approved by the general unsecured creditors and the court. The basic terms for settlement of the secured claims include forgiveness of $200,000 in outstanding liabilities, cash payments to the Company of $42,000, return of certain equipment, a restructuring of the leases resulting in monthly payments of approximately $50,000 starting March 2002, and cash payments of $50,000 payable over six months starting February 2002. Milinx has not yet performed on the terms of this structure and is in the process of renegotiating the payment terms with the parties. 580880BC Ltd.'s preferred creditors include its landlord for the data center and several former employees with wage claims. The amount of the preferred creditors' claims that must be paid immediately upon court approval of the plan is approximately $111,297 which is broken down into approximately $71,683 of unpaid wage claims and $39,614 of rental arrears claims. Within six months after court approval of the plan, 580880BC Ltd. must pay an additional $134,563 in back withholding taxes. The amount of the preferred claims is not negotiable. 580880BC Ltd.'s general unsecured creditors have claims of approximately $1.8 million. This amount excludes any indebtedness of 580880BC Ltd. to its parent, Milinx. The remaining amounts have been extinguished pursuant to the terms of the approved plan. The Court accepted the plan of reorganization, the OSOB and 580880BC Ltd.'s notified unsecured creditors of a meeting to consider the plan of reorganization. At a meeting of the Creditors held in Vancouver BC on January 14, 2002, the Company's plan was approved by a sufficient number and dollar amount of the creditors to proceed. The Court approved the plan of reorganization as proffered by the Company on February 22, 2002. The plan as approved calls for funding certain cash payments in the required statutory amounts to satisfy the agreed amounts is satisfaction of all claims as submitted. The plan's payment schedule falls in four parts; i) Payment immediately upon approval of the sum of $111,297 in satisfaction of employee wage claims and prior rent claims; ii) payment 30 days from approval of an amount equal to $500.00CDN per creditor in satisfaction of all outstanding claims, payment was due on March 22nd 2002 of $53,448.00USD; iii) issuance 60 days from the date of plan approval of one share per dollar of debt remaining to acclaimed creditors after payments of all funds under the plan; iv) payment six months from the date of approval of the plan of $134,563 to Revenue Canada. The first payments of the claims of the employees and prior rent claims have been made, as well as payment to Revenue Canada. 580880BC Ltd.'s general unsecured creditors have claims of approximately $1.8 million. This amount has been settled by the plan by way of paying $500 per creditor and shares of common stock at the value of 1 share for each $1 Canadian of approved claim. Subsequent to March 31, 2002, 1,742,455 shares have been issued to acclaimed creditors. During the course of the reorganization, Milinx has been and will continue to pay expenses of approximately $15,000 per month for the lease of the data center, in addition to other general and administrative costs. The landlord has consented to a partial sublease of the space at 1045 Howe St, which reduces the cost of the space by approximately 30%. Milinx will need to fund the balance of the debt under the plan of reorganization. There can be no assurance that Milinx will be able to fund the debt and failure to do so will force the subsidiary into a deemed bankruptcy. 7 On January 12, 2002, the Company held a noticed annual shareholders meeting in Burlingame, California. The purpose of this meeting was to elect a new Board of Directors. The Board has been expanded with the addition of a new board member chartered as the "Designated Shareholder Representative." A new Board of Directors was elected consisting of Thomas Loker who was elected Chairman, Maynard Dokken, Stanley Mazor, John Erickson (elected as the Designated Shareholder Representative) and Jackson Brown. Mr. Erickson and Mr. Mazor are not involved with the management of the Company. The Board passed a resolution constituting a compensation committee chartered to be composed of three members. Two members of the board sit on the committee one of those must be the Designated Shareholder Representative, a third committee member must be a non-board member selected from the shareholders. Shawn Wootton, as selected by the Board to serve as the outside shareholder, and joined John Erickson and Jackson Brown as the charter members of this committee. On January 25, 2002 Mr. Maynard Dokken resigned from the Board and all subsidiary companies and resigned all executive positions to pursue other interests. The Company does not believe this will have a material adverse affect on the Company and Mr. Dokken continues to make himself available to the Company on an as needed basis. No new replacement director has yet been appointed. The Company is in the process of a private equity offering to raise $3 to 5 million. Based on management's estimates this amount of funding could allow the Company to conduct its operations, generate sales, and target positive cash flow from operations within the calendar year 2003. There is no assurance, however, that these funds will be available or will be available on terms acceptable to the Company. NOTE 5. CONTINGENCIES On April 6, 2001 Milinx Business Group and Milinx Business Services filed a Writ of Summons in the Supreme Court of British Columbia against Sun Microsystems, Inc., Netscape Communications Canada, Inc., Netergy Networks, Inc. Intraware Canada, Inc. and Burntsand Inc. claiming for damages in excess of 10,000,000 Canadian dollars for misrepresentations and breach of contract. Sunrise International Leasing Corporation (with all correspondence under the SUN Microsystems letterhead) filed a Summons and Complaint in the State of Minnesota, County of Hennepin against Milinx Business Group and Milinx Business Services, for two Counts, Breach of Equipment Lease by Milinx Business Services: in excess of $50,000 in damages and immediate possession of equipment and Breach of Lease Guaranty by Milinx Business Group: in excess of $50,000 damages and seizure of equipment. Milinx takes the position that this is in reaction to the Writ of Summons issued in the Supreme Court of British Columbia and therefore the jurisdiction and claim should be part of and in the same jurisdiction of British Columbia. All of these suits have now been settled with mutual releases executed by all parties. In the matter of the Netergy Networks settlement the company received the sum of $200,000 in cash. In the matter of Sun Microsystems, Inc., Netscape Communications Canada, Inc., Intraware Canada, Inc. and Burntsand, Inc. the company received a credit of $197,101 as a reduction in liability due to renegotiated terms, a cash payment of approximately $27,000 and a credit of $146,730 from Intraware applied to the provision of two years of Sun Gold level service and maintenance. On October 4, 2000, three former employees of Milinx Business Services advanced separate actions in the British Columbia Supreme Court against Milinx Business Services alleging breach of their employment severance agreements and claiming unspecified damages. One of the claimants has since discontinued the action against Milinx Business Services and Employment Standards has dismissed a vacation wage claim of one of the two remaining employees. The plan of reorganization addressed these claims and is now a binding settlement on all employees. There are numerous unsecured creditors of Milinx Business Services who have filed suit or threatened actions against Milinx Business Services. These matters were resolved in the reorganization plan approved by the court February 22, 2002 but certain sums remain to be paid pursuant to the plan. On August 15, 2001, the Government of Canada, through the divisions of Revenue Canada and Employment Standards filed super-priority liens against the Company and certain directors and officers for unpaid employee wages, accrued vacation, payroll taxes and severance pay. The Company had recorded these claims, approximating $740,000, in accrued liabilities. The amount in question is in dispute, and the Company has filed an appeal to determine the correct amount owing. The claims were addressed in the pending reorganization, and the Company has deposited with the Bankruptcy Trustee the necessary amounts to meet the first of these obligations as confirmed by the plan. The necessary funds to meet certain other obligations including the Revenue Canada obligations, due 6 months from the date of approval of the plan, in the amount of $134,563 have not yet been placed with the Trustee and failure to do so can result in the forced liquidation of the subsidiary company in Canada. To the knowledge of the officers and directors of Milinx, there are no other pending legal proceedings or litigation and none of its property is the subject of a pending legal proceeding. Further, except as discussed above, Milinx's officers and directors know of no legal proceedings against Milinx or its property contemplated by any governmental authority. From December 2000 to June 2001, the Company conducted an offering of its Millenium offering (see 2001 Form 10-K). Some of the sales of securities may have been made in violation of the Act, creating liability under the Act. The Company believed that the sales were exempt from registration under the Act, but facts recently coming to its attention created uncertainty whether the exemption was fully complied with. If a Court were to determine that the exemption had not been fully complied with, the Company's maximum possible liability would be $306,000, plus statutory interest. The Company would vigorously defend any assertion by investors that it had not complied with the exemption and would seek contribution from third parties the Company believes to be responsible for the potential violations. 8 NOTE 6. OTHER As of the date of this filing, Milinx Business Services, Inc. is not current on its capital lease payments. The leases were all nearly twelve months past due as of March 31, 2002. As of the date of this filing, due to restructuring of certain leases and the return of certain unnecessary equipment the past due amount reflected from nine to twelve months of past due payments in the prior filing have been waived or deferred. Due to the aforementioned events of default, the Company classified all capital lease liabilities as current for financial statement presentation purposes. Adjustments were made in the financials for the period ending March 31, 2002 to reflect the lease renegotiations. Certain capital lease payments that were to be paid beginning Jan 1, 2002 have not been made and the Company is in the process of renegotiating the starting payment dates but there can be no assurance the company will be successful and the equipment secured by the leases could be forfeited. In such an event the Company would need to secure other equipment to replace the forfeited equipment and there is no assurance the Company would be able to do so. For the period ended March 31, 2002, an accrual of $383,065 for employee and management services was recorded, of which $116,425 related primarily to the prior quarter. The agreement between Milinx Business Group, Inc. and Thomas Loker, included bringing on a new management team to facilitate the Company reorganization and debt restructure. Payments for reimbursable expenses were made in the previous quarter however there were no payments or accruals for compensation due the management team. The salary-related accrual was made in the quarter ended March 31, 2002 to update retroactively the amounts due to the management team. NOTE 7. NEW AUTHORATIVE ACCOUNTING PRONOUNCEMENTS In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for segments of a business to be disposed of. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The initial application of SFAS 144 did not have an impact on the Company's consolidated financial statements. NOTE 8. SUBSEQUENT EVENTS Subsequent to March 31, 2002 the company continued to offer the February 8, 2002 Exempt Private Offering, to accredited investors only, in the amount of $500,000 to provide funding for operations. This offering has two parts: Part 1.) In exchange for a minimum investment of $5,000 but investments less than $100,000 the Company granted common restricted shares at the price of $0.06 per share plus warrants to purchase up to 50% of the number of shares at an exercise price of $0.08 per share. The warrants have a term of 2 years. Part 2.) In exchange for a minimum investment of $100,000 the Company granted common restricted shares at the price of $0.04 per share plus warrants to purchase up to 25% of the number of shares at an exercise price of $0.08 per share. The warrants have a term of 2 years. The Company has raised $22,500 under this offering subsequent to March 31, 2002. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Except for the historical information presented in this document, the matters discussed in this Form 10-Q, and specifically in Management's Discussion and Analysis of Financial Condition and Results of Operations, or otherwise incorporated by reference into this document contain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). These statements can be identified by the use of forward-looking terminology such as believes, expects, may, will, should, or anticipates or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. The safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, apply to forward-looking statements made by the Company. You should not place undue reliance on forward-looking statements. Forward-looking statements involve risks and uncertainties, including those identified within the section entitled Outlook: Issues and Uncertainties contained in our Form 10-K, as amended, for the year ended June 30, 2001. The actual results that the Company achieves may differ materially from any forward-looking statements due to such risks and uncertainties. These forward-looking statements are based on current expectations, and the Company assumes no obligation to update this information. Readers are urged to carefully review and consider the various disclosures made by the Company in this Quarterly Report on Form 10-Q and in the Company's other reports filed with the Securities and Exchange Commission that advise interested parties of the risks and factors that may affect the Company's business. 9 The following discussion and analysis should be read in conjunction with the financial information contained in Item 1 and the Company's audited financial statements contained in its Form 10-K, as amended, for the year ended June 30, 2001. Overview Milinx Business Group, Inc. was incorporated under the laws of the State of Delaware on December 10, 1998. On December 9, 1999, Milinx entered into a stock exchange agreement with Forestay Corporation, a public company incorporated in Delaware. Under the agreement, Forestay became a wholly owned subsidiary of Milinx, and Milinx elected successor status under the Securities and Exchange Act of 1934 Rule 12g-3. Milinx started its life to ride the wave of Application Service Providers and firmly become a participant in the Dot Com bonanza. Milinx is no longer a Dot Com and no longer focused to develop itself as an ASP business. Milinx is now focused on the internet only so far as it becomes a vehicle to enhance the sale and distribution of the services and products Milinx will be bringing to market through its acquisition, partnership and joint venture strategies. Milinx is effectively a company trying to be reborn from the ashes of failure. The major assets that form the basis for the Company's turnaround initiative are owned by its subsidiary, 580880BC Ltd., a British Columbia corporation dba Milinx Business Services, Inc., which is in the process of completing a court-supervised reorganization proceeding in British Columbia, Canada. The approved plan is conditioned upon satisfaction of the remaining payments scheduled under the plan. The Company must raise additional capital to meet the required schedule of payments under the plan. During fiscal year 2000 and the first half of fiscal year 2001, Milinx was engaged in developing and hosting proprietary business application software that could be delivered over a network, such as the Internet. As a part of this strategy, during fiscal year 2001 the Company placed in service a data center in Vancouver, British Columbia. Due to economic conditions, funding constraints and other factors, the Company was not able to effectively launch its application software service during the second half of fiscal year 2001. By the end of fiscal year 2001, the Company had lost all of its employees but two, and it required substantial capital infusions merely to sustain the lease and other financial commitments it had undertaken in anticipation of its product launch. In September 2001, Milinx's current management team took over as part of a turnaround initiative. This management team assessed the business and financial position of the Company and determined that the only viable alternative was to attempt to fundamentally reorganize through a voluntary reorganization filing in British Columbia, Canada by 580880BC Ltd., and obtaining approval of a plan of reorganization, because its business model contemplates using two material assets of 580880BC Ltd. Additionally, the new management team determined that the previous business model for the Company was no longer viable and required a redirection of the Company from that of a developer of software and technologies to that of a developer of markets and revenue streams. Now that the plan for reorganization has been approved, Milinx is in the process of reestablishing its operations, assuming it can continue to obtain adequate capital. Milinx will begin to develop revenue streams and markets from some of the prior intellectual property of the company. The Company intends to take some of the previous components and begin to generate revenue from them. Milinx intends to focus its offerings to the market in the general area of Collaborative Business Services. The Company has developed a strategy to offer a Collaborative Management Suite of products or CMS. CMS will provide the core of applications that will allow customers to gain the same advantage of integrated services typically only available through large scale integrated systems available in Fortune 500-1000 companies. Milinx will ultimately offer a single, unified collaborative system supporting the business enterprise. Due to current market conditions and the relative availability of significantly valuable technologies at significant discount relative to development cost, the Company expects to focus much of it's efforts at acquiring needed technologies for integration into the CMS core rather than a much more costly, and time consuming, proprietary development process. CMS will provide the core integrated suite of functionality. Customers will be able to share applications and information seamlessly across the enterprise, each individual working within the applications they are skilled and trained in while having access to information and data within their applications that is actually resident to other users and other applications. This system will allow for scalable, secure, seamless integration of information where ever and whenever it resides. Milinx intends to derive this application suite from both the completion of some exiting Milinx technologies and through acquisition and/or licensing of market available technologies. The Company is in various stages of negotiation with a number of other companies and technologies to provide the required systems for both the CMS core suite as well as enhancements to the offerings. One principal enhancement to the CMS core is the Advanced Collaborative Enterprise System or ACES. This technology is available to Milinx via an acquisition. The Company has negotiated favorable terms and is awaiting completion of sufficient funding to implement the transaction. 10 The Company has entered into an agreement whereby the Company can offer for resale a collaborative discussion server technology both individually and as part of our CMS suite. The Company expects to begin to generate revenue from the sale of this product in the next quarter. The foregoing statement should be noted as a forward-looking statement and should be treated as such under the definition as described herein. Additionally, the Company has identified and is in various stages of evaluation and negotiation for other valuable technologies including a document exchange system, enterprise modeling and simulation tools, streaming media and compression technologies, unified messaging and soft-switch technologies and others. Some of the planned benefits of CMS include: o Single Message Interface (Unified Messaging) o Seamlessly Exchange Documents Between Applications o Establish Rules Based Project Management o Completely Tailorable to Business Needs o Powerful Web Based Data Management System for Full Accessibility o Able to Support Any Business Enterprise o Captures Company's Expertise within the System o Transparently Integrates any Kind of Company Information into Dynamic Web Based Pages called CMS Documents o Scalable Based on Needs and Budgets The Company is in the process of raising the necessary capital to support operations. A number of contacts have been made with the investment community and some of these contacts have led to presentations of the company's business plans. At this time the company continues to work through these initial contacts as follow up and in many cases additional referrals have been forthcoming. While the current financing market remains difficult, the company believes that it plan is attractive to certain potential investors. The company's current cash levels will not continue to support the company much longer during this process. Management is concerned the company may run out of time due to lack of funds before it can locate these potential investors. Liquidity and Capital Resources During the nine months ended March 31, 2002, the Company used approximately $855,000 in its operating activities. The Company funded its operations primarily through the sale of approximately $26,500 in notes payable, and issuance of stock subscriptions of approximately $427,000. The Company's net working capital shortfall at June 30, 2001, decreased to a deficit of $3,641,581 at March 31, 2002, due primarily to debt write-offs resulting from Court-approved bankruptcy settlements. During October 2001 the Company commenced a new private placement of convertible debentures. The securities offered have not been and will not be registered under the Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The offering is based on $1,000 increments, with each increment entitling the purchaser to a note for the full value of the increment, with 12% interest, callable by the Company in 120 days, and 5,000 restricted common shares. If the Company does not call the notes, they are due in 300 days but they bear 15% interest from the date of issue. The offering has been extended until February 8, 2002, and it sought to raise up to $400,000. As of the filing of this report, the Company had raised $235,500 in this offering. The proceeds have been used to pay operating expenses and complete the Company's audit and Form 10-K filing. This disclosure is not an offer of securities or a solicitation of an offer to buy securities. Sales will be made only to investors with preexisting contacts with the Company and its authorized representatives. This offering was effectively closed on February 8, 2002. In December 2001 the Company commenced an additional private equity placement. The securities offered have not been and will not be registered under the Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The offering is based on minimum investments of $50,000. The offering consists of common stock at $.08 per share plus 50% warrant coverage with an exercise price of $.08 per share. The offering was open until February 8, 2002. As of the filing of this report, the Company had raised approximately $183,000 in this offering. The proceeds will be used to pay operating expenses and complete the Company's first quarter 10-Q filing. This disclosure is not an offer of securities or a solicitation of an offer to buy securities. Sales will be made only to investors with preexisting contacts with the Company and its authorized representatives. This offering was effectively closed on February 8th 2002. In February 2002 the Company commenced an additional private equity placement. The securities offered have not been and will not be registered under the Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. This offering has two parts: Part 1.) In exchange for a minimum investment of $5,000 but investments less than $100,000 the company granted common restricted shares at the price of $0.06 per share plus warrants to purchase up to 50% of the number of shares at an exercise price of $0.08 per share. The warrants have a term of 2 years. 11 Part 2.) In exchange for a minimum investment of $100,000 the company granted common restricted shares at the price of $0.04 per share plus warrants to purchase up to 25% of the number of shares at an exercise price of $0.08 per share. The warrants have a term of 2 years. The Company has raised $244,000 under this offering. The proceeds will be used to pay operating expenses. On October 12, 2001, Milinx's subsidiary, 580880BC Ltd., filed with the Office of the Superintendent of Bankruptcy (OSOB) in British Columbia, Canada, a Notice of Intention. On December 24, 2001 580880BC Ltd. filed a plan of reorganization with the court. The plan required to treat all claimants equally. In some instances equal treatment consists of an equal per claim payment. In others, it consists of a pro-rata payment based on the amount of a claim. The plan combines these approaches. The plan also includes payments over time. The critical consideration, however, was that the plan must be attractive enough to the claimants that it secured the necessary votes for approval. The court accepted the plan of reorganization, the OSOB and 580880BC Ltd.'s notified unsecured creditors of a meeting to consider the plan of reorganization. The meeting occurred January 14, 2002. The plan received approval by the unsecured creditors (which occurred due to the requirement of the plan receiving the vote of a majority in number of the creditors filing a proof of claim and the vote of 66% of the dollar value of the claims), then the plan was submitted to the court for its approval, which occurred February 22nd 2002. Effective upon the court approval, the plan became a contract between 580880BC Ltd. and its general unsecured creditors, and the balance of general unsecured debt is extinguished conditioned upon 580880 BC Ltd. performing according to the plan. 580880BC Ltd.'s plan of reorganization ultimately addresses three discrete groups of creditors: secured creditors, preferred creditors and general unsecured creditors. 580880BC Ltd.'s two major secured creditors are Cisco Systems and Sun Microsystems. These secured claims amounted to approximately $1,600,000. These claims have been negotiated outside the formal plan filed with the court, as secured creditors are not bound by a plan of reorganization approved by the general unsecured creditors and the court. The basic terms for settlement of the secured claims include forgiveness of $200,000 in outstanding liabilities, cash payments to the Company of $42,000, return of certain equipment, a restructuring of the leases resulting in monthly payments of approximately $50,000 starting March 2002, and cash payments of $50,000 payable over six months starting February 2002. Milinx has not yet performed on the terms of this structure and intends to renegotiate the payment terms with the parties. 580880BC Ltd.'s preferred creditors include its landlord for the data center and several former employees with wage claims. The amount of the preferred creditors' claims that must be paid immediately upon court approval of the plan is approximately $111,297 which is broken down into approximately $71,683 of unpaid wage claims and $39,614 of rental arrears claims. Within six months after court approval of the plan, 580880BC Ltd. must pay an additional $134,563 in back withholding taxes. The amount of the preferred claims is not negotiable. 580880BC Ltd.'s general unsecured creditors have claims of approximately $1.8 million. This amount excludes any indebtedness of 580880BC Ltd. to its parent, Milinx. The remaining amounts have been extinguished pursuant to the terms of the approved plan. Milinx has funded the first payment required under the plan and will need to fund the balance of the debt under the plan of reorganization. There is no assurance that Milinx's will be able to fund the debt remaining under the plan. While the Company proceeds with the plan of reorganization for 580880BC Ltd. it has monthly expenses of approximately $200,000 that it must meet. In addition, it has professional expenses associated with the reorganization and its public company status that must be met from time to time. The notes issued in an August and September 2001 offering in the amount of $118,000 have completed the first 120 day window where by the option to convert the note into shares of Milinx will expire. As of the filing of this report, none of the shares have converted into restricted common stock. The Company continues to offer an extension for conversion to the Note-Holders during this quarter. In addition to these reorganization-related cash requirements, management believes that the Company will require a capital infusion of at least $1.7 million to launch the new Products and Services as planned. Additional working capital will likely be necessary to sustain the unified messaging service until break-even. The Company is in the process of raising additional equity in the range of $3,000,000 to 5,000,000 that began in March 2002 through an unregistered private placement as allowable under the Securities and Exchange Act of 1944. The Company is not committed to make any capital expenditures, although it may need to acquire fixed assets from time to time. 12 There can be no assurance that adequate capital will be available on terms acceptable to the Company, or at all. If the Company is unable to raise additional capital, it may not be able to continue as a going concern, and it might have to reorganize under bankruptcy laws, liquidate or enter into a business combination. The Company has not presently identified any probable business combination. Results of Operations The net loss (income) from operations, as reflected in the Consolidated Statements of Operations, for the three months and nine months ended March 31, 2002 and 2001, was $(583,521), $631,239, $3,529,870 and $10,579,902. During the quarter ended March 31, 2002, the Company recorded a gain from settlement of liabilities under the plan of reorganization in the amount of $1,500,677. Revenues decreased to zero for the three months and nine months ended March 31, 2002 from approximately $165,000 and $277,000 for the same periods in 2001, due to the Company halting all operations of 580880 BC Ltd. in connection with the pending reorganization proceeding. Assuming 580880BC Ltd. successfully reorganizes and the Company subsequently succeeds in launching the unified messaging service, management does not anticipate that the products and services that provided revenues in fiscal years 2001 and 2000 will contribute to post-reorganization revenues. Selling, general and administrative expenses decreased to approximately $642,000 for the three months ended March 31, 2002 from approximately $2,535,000 for the same period in 2001. This decrease is due to the layoff of the Company's employees in June 2001 offset by the hiring of a new management team in August 2001. Assuming 580880BC Ltd. successfully reorganizes and the Company subsequently succeeds in launching its new products and services, management expects that selling, general and administrative expenses will become significant, but not nearly of the magnitude seen in prior periods. Significant reductions will continue to be derived due to the reduction in required headcount and lower marketing costs achievable through the new strategy of focusing away from software development and towards developing revenue markets and distribution of acquired technologies and products. An accrual of $383,065 for employee and management services was recorded in the three months ended March 31,2002, of which $116,425 relates to prior quarters. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company believes its exposure to overall foreign currency risk is immaterial. The Company does not manage or maintain market risk sensitive instruments for trading or other purposes and is, therefore, not subject to multiple foreign exchange rate exposures. The Company has no outstanding long-term indebtedness for which the Company is subject to the risk of interest rate fluctuations. The Company reports its operations in US dollars and its currency exposure, although considered by the Company as immaterial, is primarily between the US and Canadian dollars. Exposure to the currencies of other countries is also immaterial as international transactions are settled in US dollars. Any future financing undertaken by the Company will be denominated in US dollars. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On August 15, 2001, the Government of Canada, through the divisions of Revenue Canada and Employment Standards filed super-priority liens against the Company and certain directors and officers for unpaid employee wages, accrued vacation, payroll taxes and severance pay. The Company had recorded these claims, totaling $740,000, in accrued liabilities. The amount in question is in dispute, and the Company has filed an appeal to determine the correct amount owing. The claims were addressed in the pending reorganization, and the Company has lodged with the Bankruptcy Trustee the necessary amounts to meet these obligations as confirmed by the plan. The necessary funds to meet certain other Revenue Canada obligations, due 6 months from the date of approval of the plan, in the amount of $134,563USD have not yet been placed with the Trustee and failure to do so can result in the forced liquidation of the subsidiary company in Canada. The Company has already made payments of $125,760 against these claims. To the knowledge of the officers and directors of Milinx, there are no other pending legal proceedings or litigation and none of its property is the subject of a pending legal proceeding. Further, except as discussed above, Milinx's officers and directors know of no legal proceedings against Milinx or its property contemplated by any governmental authority. ITEM 2 (C). CHANGES IN SECURITIES AND USE OF PROCEEDS Set forth below is information regarding the issuance and sales of our securities without registration during the quarter ending March 31, 2002. No such sales involved the use of an underwriter, and no commissions were paid in connection with the sale of any securities. 13 During nine months ended March 31, 2002 the Company issued $235,500 in notes and convertible debentures and 5,582,000 shares of its voting common stock to accredited investors. The issuance of the notes and convertible debentures and shares was exempt from registration under Rule 506 of Regulation D under the Securities Act. ITEM 3. DEFAULTS UPON SENIOR SECURITIES On November 9, 2000, the Company sold a $444,4444 convertible debenture to an unrelated third party for net proceeds of $400,000. The debenture was to mature on March 31, 2001, with 12% interest and was convertible upon demand into shares of the Company's common stock at $3.00 per share. Based on the November 9, 2001 opening price of the Company's stock, there was no value to the beneficial conversion feature associated with the debenture. The $44,000 premium paid on the debenture was amortized as an additional interest expense. On December 29, 2000 the holder of convertible debentures called the outstanding principal balance by providing the Company with a thirty-day notice. The Company is currently in a default on the debenture. As of June 30, 2001, the outstanding principal balance was $444,444. In addition, accrued interest expenses include $60,361 of unpaid interest. The Company intends to negotiate a conversion of the debt into equity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None ITEM 5. OTHER INFORMATION Effective April 2002 Mr. Stan Mazor resigned as a director due to personal reasons. Effective February 2002 Mr. Steve Price resigned as acting Chief Financial Officer to pursue other interests. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS Exhibit Number Description -------------- ------------ 3.1* Certificate of Incorporation 3.3* By-laws 4.1* Specimen Stock Certificate * Incorporated by reference from the Form 10-K of the Company filed with the Securities and Exchange Commission on October 13, 2000. REPORTS ON FORM 8-K On October 15, 2001, the Company filed a report on Form 8-K dated October 12, 2001, which included an Item 3 disclosing Other Events. On January 12, 2002, the Company filed a report on Form 8-K dated January 12, 2001, which included an Item 3 disclosing Other Events. On January 25, 2002, the Company filed a report on Form 8-K dated April 11, 2001, which included an Item 6 disclosing Resignation of Registrant's Directors. On April 11, 2002, the Company filed a report on Form 8-K dated April 11, 2001, which included an Item 6 disclosing Resignation of Registrant's Directors. 14 REPORTS ON FORM 10-K On November 16, 2001, the Company filed a report on Form 10-K for fiscal year ending June 30, 2001. On December 24, 2001, the Company filed a report on Form 10-K/A for fiscal year ending June 30, 2001. REPORTS ON FORM 10-Q On December 21, 2001, the Company filed a report on Form 10-Q for the quarter ending September 30, 2001. On March 22, 2002, the Company filed a report on Form 10-Q for the quarter ending December 31, 2001. 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. Date: June 18, 2002 By: /s/ Thomas W. Loker --------------------- ---------------------------------------- Name: Thomas W. Loker Title: Chairman 16

MILINX BUSINESS GROUP, INC. and SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) Six months ended December 31 --------------------------- 2001 2000 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $ (1,214,760) $(7,050,032) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 311,042 826,771 Amortization of convertible debt discount 71,970 16,944 Shares issued in lieu of cancellation fees -- 80,000 Loss on property and equipment disposal 49,954 -- Stock option issued for employee and consulting services 76,803 -- Shares issued for services 31,377 -- Employee stock option compensation -- 304,528 Changes in assets and liabilities Receivables 1,410 (282,565) Security deposits and prepaid expenses (21,630) (153,148) Accounts payable, accrued liabilities and customer deposits 113,731 587,960 ------------ ------------ Net cash used in operating activities (580,103) (5,669,542) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Property and Equipment -- (1,101,721) Disposal (purchase) of property and equipment, net 5,002 -- Acquisition of licenses and trademarks -- (218,507) ------------ ------------ Net cash provided by (used in) investing activities 5,002 (1,320,228) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock -- 513,691 Proceeds from issuance of stock subscriptions 183,000 -- Proceeds from conversion of D warrants -- 3,629,748 Proceeds from issuance of notes payable 222,000 (143,222) Proceeds from conversion of Class D units 325,970 Proceeds from issuance of common to employees -- 7,923 Proceeds from conversion of Millinium units -- 401,387 Proceeds from exercise of stock options -- -- Payments on capital lease obligations -- 400,000 ------------ ------------ Net cash provided by financing activities 405,000 5,135,497 Effect of the exchange rate changes on cash 183,231 (81,406) Net increase (decrease) in cash and cash equivalents 13,130 (1,935,679) Cash and cash equivalents at beginning of the period 33,680 2,162,430 ------------ ------------ Cash and cash equivalents at end of the period $ 46,810 $ 226,751 ============ ============ The accompanying notes are an integral part of these statements. 5

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