FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-23823
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PIPELINE TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Colorado 84-1313024
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Kings Avenue, Suite 200, Jacksonville, FL 32207
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(Address of principal executive offices) (Zip Code)
(904) 346-0170
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(Registrant's telephone number, including area code)
(Former name, former address and former
fiscal year, if changed since last report)
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. Yes XX No
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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.
Class of Stock Amount Outstanding
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$.001 par value 15,029,375 shares outstanding
Common Stock at May 20, 2002
PIPELINE TECHNOLOGIES, INC.
Index
Page
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Part I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet (unaudited) at March 31, 2002 1
Consolidated Statements of Operations (unaudited) for the
three and nine months ended March 31, 2002 and 2001. 2
Consolidated Statements of Cash Flows (unaudited) for the nine 3
months ended March 31, 2002 and 2001.
Notes to Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis or Plan of Operation 6
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
ii
Pipeline Technologies, Inc.
Consolidated Balance Sheet
March 31 2002
(Unaudited)
The Company did not obtain a review of the interim financial
statements by an independent accountant using
professional review standards and procedures.
ASSETS
Current Assets
Cash and cash equivalents $ 838
Accounts receivable 359,081
Allowance for doubtful accounts (359,081)
Other current assets 546,216
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Total Current Assets 547,054
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Property and Equipment, net 311,223
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Other Assets 158,751
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$ 1,017,028
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LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses $ 1,565,556
Due to related parties 376,412
Payroll taxes 187,930
Notes payable - related parties 3,030,331
Notes payable 417,754
Deferred revenue 1,475,196
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Total Current Liabilities 7,053,179
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Stockholders' (Deficit)
Common stock, $.001 par value, 40,000,000
shares authorized, 13,379,375 shares
issued and outstanding 12,628
Paid in capital 3,390,344
Accumulated deficit (9,439,123)
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(6,036,151)
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$ 1,017,028
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See the accompanying notes to the consolidated financial statements
1
Pipeline Technologies, Inc.
Consolidated Statements of Operations
For Three Months & Nine Months Ended March 31, 2001, 2002
(Unaudited)
Three Months Nine Months
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2002 2001 2002 2001
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Net Sales $ 345,310 $ 706,557 $ 2,664,822 $ 2,319,512
Cost of Sales 390,853 772,210 $ 2,441,616 2,050,763
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Gross profit (45,543) (65,653) 223,206 268,749
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Operating expenses:
Impairment of Goodwill 3,108,952 -- 3,108,952 3,108,952
Selling, general and administrative expenses 377,356 916,624 $ 1,859,627 1,482,271
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377,356 916,624 4,968,579 4,591,223
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(Loss) from operations (422,899) (982,277) (4,745,373) (4,322,474)
Other (income) expense:
Other income -- --
Interest expense 69,255 83,897 (236,577) 167,322
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69,255 83,897 (236,577) 167,322
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Net (loss) $ (492,154) $ (1,066,174) $ (4,981,950) $ (4,489,796)
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Per share information:
Weighted average shares outstanding - basic and fully diluted 13,379,375 10,995,712 12,182,604 10,587,534
============ ============ ============ ============
Net (loss) per share - basic and fully diluted $ (0.04) $ (0.10) $ (0.41) $ (0.42)
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See the accompanying notes to the consolidated financial statements.
2
Pipeline Technologies, Inc.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2002 and 2001
(Unaudited)
Nine Months
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2002 2001
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OPERATING ACTIVITIES
Net cash (used in) operating activities $ 214,340 $(1,451,739)
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INVESTING ACTIVITIES
Purchase of property and equipment (26,800) 59,091
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Net cash (used in) investing activities (26,800) 59,091
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FINANCING ACTIVITIES
Proceeds from issuance of stock -- 1,447,651
Repayments on notes payable-related party -- (100,268)
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Net cash provided by financing activities (189,014) 1,347,383
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Net increase (decrease) in cash (1,474) (163,447)
Beginning - cash and cash equivalents 2,312 228,055
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Ending - cash and cash equivalents $ 838 $ 64,608
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See the accompanying notes to the consolidated financial statements.
3
PIPELINE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
(1) Basis Of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") for interim financial information and Item
310(b) of Regulation S-B. They do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the consolidated financial statements of the Company as of
June 30, 2001 and for the periods then ended, including notes thereto, included
in the Company's Form 10-KSB.
These financial statements have not been reviewed by an independent
accountant using professional review standards and procedures, even though that
review is required by Regulation S-B.
(2) Earnings Per Share
The Company calculates net income (loss) per share as required by SFAS No.
128, "Earnings per Share." Basic earnings (loss) per share are calculated by
dividing net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share are calculated by
dividing net income (loss) by the weighted average number of common shares and
dilutive common stock equivalents outstanding. During periods when
anti-dilutive, common stock equivalents are not considered in the computation.
(3) Impairment of Long Lived Assets
Long lived assets and certain identifiable intangibles held and used by the
Company are reviewed for possible impairment whenever events or circumstances
indicate the carrying amount of an asset may not be recoverable or is impaired.
Management has not identified any impairment losses as of March 31, 2001 other
than those described in Note 5.
(4) Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes", which
requires use of the liability method. FAS 109 provides that deferred tax assets
and liabilities are recorded based on the differences between the tax bases of
assets and liabilities and their carrying amounts for financial reporting
purposes, referred to as temporary differences. Deferred tax assets and
liabilities at the end of each period are determined using the currently enacted
tax rates applied to taxable income in the periods in which the deferred tax
assets and liabilities are expected to be settled, or realized.
4
The Company's deferred tax asset resulting from net operating loss
carryforwards is fully offset by a valuation allowance. The Company has recorded
a valuation allowance to state its deferred tax assets at estimated net
realizable value due to the uncertainty related to realization of these assets
through future taxable income.
The provision for income taxes differs from the amount computed by applying
the statutory rate of 34% to income before income taxes due to the effect of the
net operating loss.
(5) Acquisition
During December 2001, the Company completed the acquisition of Achieve
Networks, Inc. ("Achieve"), a company that operates a private IP network for
transmission of voice and data communications. The Company issued 2,449,012
shares of its common stock in exchange for 83% of the issued and outstanding
shares of Achieve. An additional 550,988 shares were subsequently issued
pursuant to an amendment to the acquisition agreement. The business combination
was accounted for as a purchase. The results of operations for Achieve are
included in the accompanying financial statements since the acquisition date.
The total purchase price of the acquisition was $2,449,012, which represents the
fair market value of the common shares issued. The acquisition price exceeded
the fair value of the net liabilities acquired of $659,940 by $3,108,952. This
excess has been recorded as goodwill and has been charged to operations as an
impairment loss.
The net liabilities acquired consisted of the following:
Cash $ 3,510
Other current assets 97,276
Property and equipment, net 221,298
Other assets 20,000
Current liabilities (1,002,024)
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$ (659,940)
(6) Operating Leases
The Company leases office space and certain equipment pursuant to leases
classified as operating leases. Subsequent to its fiscal year end of June 30,
2001, the Company either entered into or assumed responsibility pursuant to the
acquisition of Achieve of various operating leases ranging in terms from 24 to
36 months. The leases require monthly payments aggregating approximately $23,000
and future minimum payments of approximately $752,000.
(7) Legal Proceedings
On January 14, 2002, Mark Roberts, a former shareholder of Achieve, brought
a civil action against our President, Timothy J. Murtaugh, and us alleging
breach of contract and other claims in connection with the acquisition of
Achieve. The claim was brought in the District Court of Dallas County, Texas in
the G-134th Judicial District. The complaint seeks damages suffered by the
Plaintiff and other relief.
5
As a result of satisfaction of claims alleged by the Plaintiff and certain
actions taken by us, we have recently agreed to settle the lawsuit and to
resolve the dispute. As part of that settlement, Plaintiff has filed a motion to
dismiss the suit.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Introduction
The following discussion and analysis covers (i) material changes in the
financial condition and liquidity of Pipeline Technologies, Inc. ("us" or the
"Company") since fiscal year end June 30, 2001 and (ii) the results of
operations for the three and nine months ended March 31, 2002 and 2001. This
discussion and analysis should be read in conjunction with the audited financial
statements and "Management's Discussion and Analysis or Plan of Operation"
included in the Company's Annual Report on Form 10-KSB for the fiscal year ended
June 30, 2001 as filed with the Securities and Exchange Commission
("Commission").
Reference is made to the exhibits to this report or otherwise filed by the
Company with the Commission. The discussion contained herein is qualified in its
entirety by reference to those exhibits.
Results of Operations
Overview. For the three months ended March 31, 2002, we reported a net loss
of $492,154, or $.04 per share, on total revenue of $345,310. This compares to a
net loss of $1,066,174, or $.10 per share, on revenue of $706,557 for the
quarter ending March 31, 2001. Our loss for the nine months ended March 31, 2002
was $4,981,950 on revenue of $2,664,822. Thus, while our revenue during the
first nine months of 2002 increased slightly from the corresponding period in
2001, our net loss also increased substantially. The substantial increase in the
net loss for the period ended in 2002 is attributable to an impairment of
goodwill that resulted from the acquisition of Achieve, recorded in the second
fiscal quarter of this year.
Our revenue during the first nine months of 2002 increased 15% from the
first nine months of fiscal 2001. The increase in our revenue is attributable to
additional customers that we have added with new and renewed marketing efforts
during the fourth quarter of last fiscal year and the first three quarters of
this year.
Unearned Revenue. We have recorded a substantial amount of unearned revenue
during the last nine months. This results from two factors: (i) our fees for
long distance telephone service are charged in advance and we recognize revenue
ratably over the period that services are provided; and (ii) we suspect that a
substantial portion of the new customers for which cash was received by us may
have been signed up involuntarily ("slammed") as the result of the efforts of a
third-party entity marketing our service. Accordingly, these customers may
demand cancellation of the service and we may be forced to refund any
unauthorized credit card charges. We terminated the services of the third party
during our first fiscal quarter, after learning of the situation.
7
We have carefully evaluated our new customer accounts in an effort to
determine the appropriate amount of the reserve, using our previous cancellation
experience and information from our credit card servicing company as a gauge. We
are still unable to determine the exact amount of unauthorized charges. However,
we believe that they will be substantial and that we have adequately reserved
for these charge backs.
Marketing. We have retained a new entity to market our services. Although
this new entity will use outbound telemarketing in its efforts, we do not
anticipate a recurrence of the unauthorized charges we encountered with our
prior third-party marketing entity due to the initiation of more stringent
controls. Furthermore, this entity has committed to incorporate inbound
telemarketing as well as internet-based marketing to reduce our reliance on
outbound methods. We are also increasing our agent-based and direct marketing
efforts which should increase sales volume and customer retention.
Gross Profit. Costs of revenue for the third quarter of 2002 exceeded our
revenue by $45,543. This results from a new dealer arrangement which we recently
commenced for marketing our service which provides for front-loaded commissions.
However, we anticipate that this arrangement will produce more favorable results
in the future as the customers renew and the commissions are reduced. We did
report positive gross profit for the first nine months of the year.
None-the-less, we still reported a net loss for the nine- month period, as our
gross profit was insufficient to cover the impairment in goodwill and general
and administrative expenses.
General and Administrative Expenses. General and administrative expenses of
$377,356 for the three-month period ended March 31, 2002 consisted primarily of
salaries, payroll expenses and professional fees. This represents a substantial
decrease of $539,268 from the third quarter of last year. We have pared our
staff and reduced our overhead significantly in an effort to improve operations
and conserve working capital. Professional fees are related to the expenses of
maintaining the Company's status as a public reporting entity, pursuing the
marketing entity for its perceived improper conduct and other routine business
matters. The Company also incurred advertising and marketing related expenses.
Liquidity and Capital Resources
Overview. Our financial condition deteriorated substantially from fiscal
year end June 30, 2001, a trend that continued from last year. At March 31,
2002, we reported negative working capital of $6,506,125, a decrease of
$3,002,911, or 85%, from fiscal year end June 30, 2001. The Company continues to
suffer from a serious lack of liquidity and capital. The decrease in working
capital since fiscal year end is primarily attributable to cash applied to
operations and the vendor payments associated with the acquisition of Achieve.
Current Assets and Liquidity. Current assets reported at March 31, 2002
increased from fiscal year end; current liabilities, however, increased in a
much greater amount. The largest increase in our current liabilities was
accounts payable, which increased approximately $1,000,000, or 190% from fiscal
year end. The increase in accounts payable is primarily attributable to expenses
assumed in connection with the acquisition of Achieve and our increased sales
this period. Deferred revenue also increased substantially. As discussed above,
this amount results primarily from our concern about the unauthorized sales of
our service and potential cancellations by customers.
8
We remain dependent on future operations or cash from outside sources to
continue as a going concern. Our most significant obligations are notes payable,
all of which are due on demand. We also have a significant amount of accounts
payable. Our representatives have had discussions with certain of these vendors
and lenders in an effort to restructure and extend or convert the debt. However,
there is no assurance that these discussions will be successful.
The Company is currently exploring other financing options as well. It is
anticipated that any new financing would take the form of private equity
financing, as the Company is not a candidate for conventional debt financing due
to its limited cash flow and limited assets with which to secure such debt.
Forward-Looking Statements. This Report (including any documents
incorporated herein by reference) and other oral statements subsequently made by
or on behalf of the Company may contain "forward-looking statements" within the
meaning of the Federal securities laws. Such forward-looking statements include,
without limitation, statements regarding the Company's plans for working
capital, future revenues, acquisitions and plan of operation and are identified
by words such as "anticipates," "plans," "expects" and "estimates." A variety of
factors could cause the Company's actual results to differ materially from those
contemplated by these forward-looking statements, including, without limitation,
the Special Factors discussed in our Form 10-KSB for the fiscal year ended June
30, 2001. Most of these factors are beyond the control of the Company. Investors
are cautioned not to put undue reliance on any forward-looking statements. The
Company hereby disclaims any intent or obligation to update publicly these
forward-looking statements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On January 14, 2002, Mark Roberts, a former shareholder of Achieve, brought
a civil action against our President, Timothy J. Murtaugh, and us alleging
breach of contract and other claims in connection with the acquisition of
Achieve Networks Inc. The claim was brought in the District Court of Dallas
County, Texas in the G-134th Judicial District. The complaint seeks damages
suffered by the Plaintiff and other relief.
As a result of satisfaction of claims alleged by the Plaintiff and certain
actions taken by us, we have recently agreed to settle the lawsuit and to
resolve the dispute. As part of that settlement, Plaintiff has filed a motion to
dismiss the suit.
Item 2. Changes in Securities
(c) In a transaction related to the acquisition of Achieve, we issued
750,988 shares of our common stock to a former owner of Achieve in a transaction
exempt from the registration requirements of the Securities Act of 1933 pursuant
to the provisions of Regulation D and Rule 506. In connection with the
transaction, the Company obtained a written representation that the recipient
was an "accredited investors" within the meaning of Rule 501 and that such
individual had such knowledge and experience in financial and business matters
that he was capable of evaluating the merits and risks of the investment. The
Company also restricted transfer of the certificate representing the shares by
placing a legend thereon and by issuing stop transfer orders to its transfer
agent.
9
The shares were issued directly by the Company, and accordingly, no
commissions or discounts were paid or allowed in connection with the
transaction.
Item 6. Exhibits and Reports on Form 8-K
The Company filed a report on Form 8-K dated April 11, 2002 reporting the
settlement of a lawsuit commenced in connection with the acquisition of Achieve.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PIPELINE TECHNOLOGIES, INC.
Date: May 21, 2002 By: /s/ Timothy J. Murtaugh
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Timothy J. Murtaugh, President, Chief
Executive and Chief Financial Officer
11