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, 2001
---------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-23823
--------
PIPELINE TECHNOLOGIES, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-1313024
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Kings Avenue, Suite 200, Jacksonville, FL 32207
----------------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(904) 346-0170
----------------------------------------------------
(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
--- ---
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
--------------------- --------------------------------
$.001 par value 10,149,383 shares outstanding
Common Stock at May 18, 2001
PIPELINE TECHNOLOGIES, INC.
Index
Page
Part I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet (unaudited) at March 31, 2001 1
Consolidated Statements of Operations (unaudited) for the
three and nine months ended March 31, 2001 and from December 2
2, 1999 (inception) to March 31, 2001.
Consolidated Statements of Cash Flows (unaudited) for the
three and nine months ended March 31, 2001 and from December 3
2, 1999 (inception) to March 31, 2001.
Notes to Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis or Plan of Operation
5
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 7
Item 2. Changes in Securities 8
Item 3. Defaults on Senior Securities 8
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
ii
PIPELINE TECHNOLOGIES, INC.
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED BALANCE SHEET
March 31, 2001
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 64,608
Accounts receivable 2,400
-----------
Total current assets 67,008
-----------
PROPERTY AND EQUIPMENT, net 85,596
OTHER ASSETS
Employee receivable 7,879
Deposits 50,000
-----------
$ 210,483
===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 414,497
Accrued expenses-related party 23,035
Accrued interest - related party 114,547
Notes payable - related party 2,272,383
-----------
Total current liabilities 2,824,462
-----------
STOCKHOLDERS' (DEFICIT)
Common stock, $0.001 par value, 15,000,000 shares
authorized, 10,149,383 shares issued
and outstanding 1,700
12% cumulative convertible preferred stock,
$.001 par value, stated value of $50,000 per share,
200 shares authorized, no shares issued
or outstanding, convertible into shares of
common stock at a percentage of the common
stock price at specified dates -
Additional paid in capital 952,259
Deficit accumulated during the development stage (3,567,938)
-----------
(2,613,979)
-----------
$ 210,483
===========
The Notes to the Consolidated Financial Statements
are an integral part of these statements
1
PIPELINE TECHNOLOGIES, INC.
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
DECEMBER 2, 1999
THREE MONTHS NINE MONTHS (INCEPTION)
ENDED ENDED THROUGH
MARCH 31, 2001 MARCH 31, 2001 MARCH 31, 2001
-------------- -------------- ----------------
REVENUES $ 177,130 $ 263,416 $ 264,511
COST OF GOODS SOLD 413,345 602,811 604,948
------------ ------------ ------------
GROSS (LOSS) (236,215) (339,395) (340,437)
------------ ------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES 586,235 2,130,582 3,116,759
------------ ------------ ------------
(LOSS) FROM OPERATIONS (822,450) (2,469,977) (3,457,196)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Other income 555 555 555
Interest expense (50,591) (116,276) (121,972)
Rental income - 6,390 10,650
Interest income - 25 25
------------ ------------ ------------
(50,036) (109,306) (110,742)
------------ ------------ ------------
NET (LOSS) $ (872,486) $ (2,579,283) $ (3,567,938)
============ ============ ============
PER SHARE INFORMATION:
WEIGHTED AVERAGE SHARES OUTSTANDING
(BASIC AND DILUTED) 10,149,383 10,064,402 9,391,066
============ ============ ============
NET (LOSS) PER COMMON SHARE (BASIC AND DILUTED) $ (0.09) $ (0.26) $ (0.38)
============ ============ ============
The Notes to the Consolidated Financial Statements
are an integral part of these statements
2
PIPELINE TECHNOLOGIES, INC.
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
DECEMBER 2, 1999
THREE MONTHS NINE MONTHS (INCEPTION)
ENDED ENDED THROUGH
MARCH 31, 2001 MARCH 31, 2001 MARCH 31, 2001
-------------- -------------- ----------------
OPERATING ACTIVITIES
Net cash flow from operating activities $ (881,616) $(1,451,739) $(2,369,262)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (39,349) (59,091) (92,472)
----------- ----------- -----------
Net cash (used in) investing activities (39,349) (59,091) (92,472)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of stock - - 1,000
Proceeds from note payable - related party 985,000 1,447,649 2,700,608
Payments on notes payable - related party - (100,266) (175,266)
----------- ----------- -----------
Net cash provided by financing activities 985,000 1,347,383 2,526,342
----------- ----------- -----------
Net increase (decrease) in cash 64,035 (163,447) 64,608
CASH AT BEGINNING OF PERIOD 573 228,055 -
----------- ----------- -----------
CASH AT END OF PERIOD $ 64,608 $ 64,608 $ 64,608
=========== =========== ===========
SUPPLEMENTAL CASHFLOW INFORMATION:
Cash paid for:
Interest $ - $ - $ -
=========== =========== ===========
Income taxes $ - $ - $ -
=========== =========== ===========
NON CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of notes payable to common stock $ - $ - $ 252,959
=========== =========== ===========
Issuance of common stock for financing $ - $ 700,000 $ 700,000
=========== =========== ===========
The Notes to the Consolidated Financial Statements
are an integral part of these statements
3
PIPELINE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
(1) Basis Of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("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. These
financial statements should be read in conjunction with the audited consolidated
financial statements of the Company as of June 30, 2000, including notes
thereto, included in the Company's Form 10-KSB.
The Company was incorporated on December 2, 1999. Comparative information from
the quarter ending March 31, 2000 is not presented because the information is
not considered relevant.
(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 is calculated by dividing
net income (loss) by the weighted average number of common shares outstanding
for the period. Diluted earnings (loss) per share is calculated by dividing net
income (loss) by the weighted average number of common shares and dilutive
common stock equivalents outstanding. During the periods presented, common stock
equivalents were not considered as their effect would be anti-dilutive.
4
PIPELINE TECHNOLOGIES, INC.
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. (the "Company")
since fiscal year end June 30, 2000 and (ii) the results of operations for the
three and nine months ended March 31, 2001. This discussion and analysis should
be read in conjunction with "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, 2000 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.
Liquidity and Capital Resources
At March 31, 2001, the Company's financial condition continued to decline
from fiscal year end June 30, 2000 and from the end of the previous quarter at
December 31, 2000. The Company continues to suffer from a serious lack of
liquidity and capital.
At March 31, 2001, the Company had a deficit in working capital of
$2,757,454, a decrease of $1,990,382, or 260%, from fiscal year end June 30,
2000. This means that at March 31, 2001, the Company's current liabilities of
$2,824,462 exceeded its current assets (cash and accounts receivable) by
$2,757,454. Current assets decreased $211,624 from fiscal year end and current
liabilities increased $1,811,134. The Company also had a deficit in
shareholders' equity of $2,613,979. These facts, together with the fact that the
Company has sustained continuing and substantial losses from operations since
inception, raise serious doubt about the Company's ability to continue as a
going concern.
All of the Company's cash flow since inception has been from loans by
related parties. The Company's operations have used $2,369,262 of cash since
inception, funded by net loans of $2,526,342. One of the Company's principal
lenders has loaned the Company almost $2,000,000, including almost $1,000,000 in
the third quarter ended March 31, 2001. This individual has committed to loan an
additional $400,000 subsequent to March 31, 2001. Management anticipates that
this commitment will fund the Company's activities through fiscal year end June
30, 2001. However, there is no assurance that the lender will advance any
additional cash beyond this commitment or that the Company will continue in
operation beyond that time.
A substantial majority of the cash spent since inception has been spent on
operations, as the Company has very little invested in plant or equipment. The
Company's business plan is predicated on utilizing equipment and networks
acquired and/or operated by third parties. Cash requirements for operations
therefore include marketing and sales, IT, customer service, management and
5
other administrative expenses. The Company expects that its operations in the
future will continue to use, rather than provide, cash as it continues efforts
to implement its business plan and increase revenue.
Management is making repeated and concerted efforts to increase revenue in
an effort to generate cash flow (see "-Results of Operations" below). Management
believes that an increase in revenue is a necessary prerequisite to additional
financing, and that such financing is not then assured. The Company is also
analyzing staff reductions in a further effort to conserve available resources.
However, there is no assurance that these steps will be successful, or that they
will result in a reduction of negative cash flow.
The Company's current liabilities include $414,497 of accounts payable and
accrued expenses payable to independent third parties. The most significant
obligations, however, are notes payable, all of which are classified as short
term. The Company has outstanding $2,272,383 which it has borrowed to meet its
short-term cash requirements. Of that amount, $300,000 in principal is past due,
$800,000 is due in August 2001 and the remainder is due on demand, all of which
accrues interest at the rate of 12% per annum. Representatives of the Company
have had discussions with certain of these lenders in an effort to restructure
the past-due debt. However, there is no assurance that these discussions will be
successful.
The Company is currently exploring other financing options. 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.
Management is of the opinion that the Company is wholly dependent on receipt of
cash from outside sources to continue as a going concern.
Results of Operations
The Company remained in the development stage for accounting purposes
during the third fiscal quarter of 2001, as it had not received significant
revenues from operations and management still spends a significant portion of
its time seeking capital. However, based upon recent marketing efforts conducted
by the Company and a new network provider, management expects that the Company
may receive more significant revenue beginning later in calendar 2001.
During the three month period ended March 31, 2001, the Company continued
to incur a net loss from operations, as revenue was insufficient to cover costs
of goods sold and other expenses. During that three-month period, the Company
realized a net loss from operations of $872,486, or $0.09 per share, on revenue
of $177,130. Results for the nine-month period were a loss of $2,579,283, or
$.26 per share, on revenue of $263,416. The net loss for the third quarter
decreased significantly from the loss from the previous quarter ended December
31, 2000, primarily because $700,000 of non-cash financing costs were not
repeated in the latest quarter. Otherwise, the results for the third quarter
were similar to the results for the second quarter. There were no comparable
operating results for the three or nine months ended March 31, 2000, as the
Company only commenced operation in December of 1999 and the results for the
three months ended March 31, 2000 were not considered relevant.
6
Compounding the losses occasioned by its recent entry into the
telecommunications industry, costs of revenue exceeded revenue by $339,395
during the nine months ended March 31, 2001. The Company's business plan is
based on providing unlimited, long-distance phone service for a flat monthly
rate. The Company has arrangements with third-party network carriers to provide
this service to its customers. However, during the first and second quarters of
the fiscal year, the cost of the network access exceeded the revenue from
customers, as the Company was unable to generate enough revenue to cover the
access charges. During the third quarter, after struggling to find a reliable
carrier, the network was down for a substantial period of time, and the Company
temporarily offered complimentary service in an effort to remedy the
inconvenience and retain customers. This adversely affected the Company's gross
profit.
General and administrative expenses of $2,130,582 for the nine-month period
consisted primarily of salaries, payroll expenses, financing costs and
professional fees. Financing costs of $700,000 represented a one-time, non-cash
expense associated with the Company's obligation to issue 200,000 shares of
common stock to two lenders who advanced money to the Company on a short-term
basis to supplement cash flow when the private placement funding failed.
Otherwise, expenses during the third fiscal quarter were not substantially
different than those in the second quarter. Professional fees are related to the
expenses of maintaining the Company's status as a public reporting entity,
defense of a civil lawsuit and other routine business matters. The Company also
incurred advertising and marketing related expenses. Management believes that
development of a Web site is integral to the Company's marketing efforts.
This Report (including any documents incorporated herein by reference) and
other oral statements subsequently made by or on behalf of the Company 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 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 the
Form 10-KSB and those discussed above. Most of these factors are beyond the
control of the Company. Investors are cautioned not to put undue reliance on
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.
In its annual report on Form 10-KSB, the Company reported that it was a
defendant in a civil lawsuit. Plaintiffs in that action sued the Company, its
wholly owned subsidiary and its President alleging misappropriation of corporate
opportunity and breach of a settlement agreement.
In October 2000, plaintiffs' claim for misappropriation was dismissed by
the court. In March 2001, the remainder of the case was resolved. The recent
settlement requires the Company and its President to pay the plaintiff the sum
of $80,000 in four equal installments, the first of which has already been paid.
Upon receipt of the final payment, the plaintiff will fully and finally dismiss
the complaint. If the defendants fail to make the payments in a timely manner,
the plaintiff is entitled to apply to the court for a judgment in the amount of
$175,000, less any amount previously paid.
7
Item 2. Changes in Securities and Use of Proceeds
During the quarter ended March 31, 2001, the Company issued 200,000 shares
of its common stock to two lenders in partial consideration for their making
short-term loans for working capital. The Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 in issuing
the stock. The Company provided the recipients with information substantially
similar to that which would be contained in a registration statement. The
Company had a pre-existing relationship with both individuals, one of whom is a
director, and confirmed their ability to fend for themselves in the transaction
prior to issuing the stock. No underwriter was utilized by the Company in this
transaction, and no commission was paid in connection with the issuance of the
stock.
Item 3. Defaults Upon Senior Securities.
As described above under Part I, Item 2, the Company is currently in
default under a loan with two lenders in the principal amount of $300,000. This
debt was originally due in November 2000. The total amount presently due,
including accrued interest, is $315,140.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits:
No exhibits are required to be filed with this report.
B. Reports on Form 8-K:
We did not file any reports on Form 8-K during the period covered by
this report.
8
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PIPELINE TECHNOLOGIES, INC.
Date: May 21, 2001
-------------
By: /s/ Robert L. Maige
-----------------------------------------
Robert L. Maige, Authorized Signatory and
Chief Financial Officer
9