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 December 31, 2001
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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)
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(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 No XX
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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 13,379,375 shares outstanding
Common Stock at March 18, 2002
PIPELINE TECHNOLOGIES, INC.
Index
Page
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Part I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet (unaudited) at December 31, 2001 1
Consolidated Statements of Operations (unaudited) for the
three and six months ended December 31, 2001 2
Consolidated Statements of Cash Flows (unaudited) for the
three and six months ended December 31, 2001 3
Notes to Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis or Plan of Operation 6
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
ii
Pipeline Technologies, Inc.
Consolidated Balance Sheet
December 31, 2001
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 4,393
Accounts receivable 399,816
Other current assets 109,239
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Total Current Assets 513,448
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Property and Equipment, net 311,223
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Other Assets 175,123
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$ 999,794
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LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses $ 1,926,906
Due to related parties 216,601
Payroll taxes 100,809
Notes payable - related parties 2,881,816
Notes payable 162,000
Bank overdraft 93,271
Deferred revenue 1,162,388
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Total Current Liabilities 6,543,791
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Stockholders' (Deficit)
Common stock, $.001 par value, 15,000,000
shares authorized, 12,628,387 shares
issued and outstanding 12,628
Paid in capital 3,390,344
Accumulated deficit (8,946,969)
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(5,543,997)
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$ 999,794
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See the accompanying notes to the consolidated financial statements.
1
Pipeline Technologies, Inc.
Consolidated Statements of Operations
For the Three Months and Six Months Ended December 31, 2001 and 2000
(Unaudited)
Three Months Six Months
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2001 2000 2001 2000
------------ ------------- ------------ ------------
Net Sales $ 706,557 $ 73,532 $ 2,319,512 $ 86,285
Cost of Sales 772,210 124,608 2,050,763 189,466
------------ ------------ ------------ ------------
Gross profit (65,653) (51,076) 268,749 (103,181)
------------ ------------ ------------ ------------
Operating expenses:
Impairment of goodwill 3,108,952 -- 3,108,952 --
Selling, general and administrative expenses 916,624 1,121,758 1,482,271 1,544,347
------------ ------------ ------------ ------------
4,025,576 1,121,758 4,591,223 1,544,347
------------ ------------ ------------ ------------
(Loss) from operations (4,091,229) (1,172,834) (4,322,474) (1,647,528)
Other (income) expense:
Other income -- (25) -- (6,415)
Interest expense 83,897 37,674 167,322 65,685
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83,897 37,649 167,322 59,270
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Net (loss) $ (4,175,126) $ (1,210,483) $ (4,489,796) $ (1,706,798)
============ ============ ============ ============
Per share information:
Weighted average shares outstanding - basic and fully diluted 10,995,712 10,095,036 10,587,534 10,022,607
============ ============ ============ ============
Net (loss) per share - basic and fully diluted $ (0.38) $ (0.12) $ (0.42) $ (0.17)
============ ============ ============ ============
See the accompanying notes to the consolidated financial statements.
2
Pipeline Technologies, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended December 31, 2001 and 2000
(Unaudited)
2001 2000
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Cash flows from operating activities:
Net cash (used in) operating activities $(252,914) $(563,521)
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Cash flows from investing activities:
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Net cash (used in) investing activities (26,800) (26,344)
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Cash flows from financing activities:
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Net cash provided by financing activities 281,795 362,383
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Net increase (decrease) in cash 2,081 (227,482)
Beginning - cash and cash equivalents 2,312 228,055
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Ending - cash and cash equivalents $ 4,393 $ 573
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See the accompanying notes to the consolidated financial statements.
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PIPELINE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(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 two years then ended, including notes thereto,
included in the Company's Form 10-KSB.
(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 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 December 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.
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.
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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 November 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. 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 exceed 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)
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(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.
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 agreed to dismiss
the suit.
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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 six months ended December 31, 2001 and 2000. 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. The second quarter of our current fiscal year marked the first
period for which we included results of operations for our newly acquired
subsidiary, Achieve Networks, Inc. Achieve is the operator of a private voice
and data network that we acquired in December of 2001. We now use this network
to serve our long distance customers in place of networks owned by independent
third parties that we have contracted in the past. Our hope is that this
acquisition will provide us a more reliable source of network access and
eventually result in lower costs for service.
For the three months ended December 31, 2001, we reported a net loss of
$4,175,126, or $.38 per share, on total revenue of $706,557. This compares to a
net loss of $1,210,483, or $.12 per share, on revenue of $73,532 for the quarter
ending December 31, 2000. Our loss for the six months ended December 31, 2001
was $4,489,796 on revenue of $2,319,512, compared to a loss of $1,706,798 on
revenue of $86,285 for the six months ended December 31, 2000. Thus, while our
revenue during the first half of 2002 increased significantly from the
corresponding periods in 2001, our net loss also increased substantially. The
substantial increase in the net loss for the periods ended in 2001 is
attributable to an impairment of goodwill that resulted from the acquisition.
Our revenue increased 861% from the first quarter of fiscal 2001, while our
net loss increased 245%. Comparable figures for the six months ended December
31, 2001 were increases of 2588% and 163%, respectively. The substantial
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 two quarters of this year. The increase in our net
loss is attributable to the impairment discussed above.
Impairment. The impairment of goodwill recorded for the three and six month
period ended December 31, 2001 resulted from the acquisition. As described in
the notes to the unaudited financial statements for the period, the acquisition
price of $2,449,012 exceeded the fair value of the net liabilities of Achieve by
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$3,108,952. This situation resulted from our estimate of the appropriate value
of Achieve. Notwithstanding the book value, we estimated that the acquisition
was worth approximately $2,500,000 based on such non-balance sheet items as
access to the network, potential customer contacts and synergies between the
companies. The excess of the purchase price over the fair value of the
liabilities assumed was recorded as an impairment loss during the quarter ended
December 31, 2001.
Unearned Revenue. We have recorded a substantial amount of unearned revenue
during the last six 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.
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. The gross amount of fees collected by us through the
efforts of that third-party entity marketing our services was $3,434,140, of
which $1,162,388 has been classified as unearned revenue. As of December 31,
2001, approximately $1,171,000 has been refunded to these customers.
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 second quarter of 2002 exceeded our
revenue by $65,653. 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 six months of the year.
None-the-less, we still reported a net loss for the six- month period, as our
gross profit was insufficient to cover general and administrative expenses.
Included in our costs of sales for the six-month period was commission paid
to the terminated marketing company of approximately $750,000. This represented
the largest component of our costs, even exceeding our network access charges.
Unfortunately, we may be unable to recover any commission paid to this entity
for perceived improper sales or marketing techniques. We also paid a significant
amount in credit card charges in connection with billings to customers during
the period.
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General and Administrative Expenses. General and administrative expenses of
$916,624 for the three-month period ended December 31, 2001 consisted primarily
of salaries, payroll expenses, and professional fees. This represents an
increase of $351,000 from the first quarter of this year, but a decrease of
$205,000 from the comparable period of the prior fiscal year. The increase from
the last quarter is attributable to expenses acquired in connection with the
acquisition of Achieve. 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.
Management believes that development and maintenance of a Web site is integral
to the Company's marketing efforts.
Liquidity and Capital Resources
Overview. Our financial condition declined from fiscal year end June 30,
2001, a trend that unfortunately carried over from last year. At December 31,
2001, we reported negative working capital of $6,030,343, a decrease of
$1,627,217, or 37%, 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.
Recent Acquisition. During the second quarter, we completed the acquisition
of Achieve Networks. Achieve is the operator of an IP network in partnership
with a national provider. This acquisition resulted in the acquisition of net
liabilities of $659,940, which contributed to our decrease in working capital.
All of those liabilities are current liabilities. However, we believe that the
acquisition will help our long-term growth, because it allows us more control
over network access necessary to serve our customers.
In the short-term, the acquisition may increase our losses, as we are
required to make payments to Achieve's network partners for network access.
However, once our customer base is expanded to a critical mass, we believe that
our operations will be improved.
Current Assets and Liquidity. Current assets reported at December 31, 2001
increased substantially from fiscal year end; current liabilities, however,
increased in a greater amount. Of our current assets, accounts receivable
increased the most, rising over $388,000 from fiscal year end.
The largest increase in our current liabilities was accounts payable, which
increased $1,398,000, or 264% from fiscal year end. The increase in accounts
payable is primarily attributable to expenses assumed in connection with the
acquisition and our increased sales. Deferred revenue also increased
substantially, rising $1,135,000 or 4200%. As discussed above, this amount
results primarily from our concern about the unauthorized sales of our service
and potential cancellations by customers.
Cash Flow. After returning to positive cash flow for one quarter, our
operations returned to negative cash flow during the second quarter of the
current fiscal year, the net effect of which was negative cash flow for the
first six months of the year. Negative cash flow of $252,914 for the first half
of the year was slightly reduced from the negative cash flow of $563,521 for the
first half of 2001.
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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 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 below and 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. 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 agreed to dismiss
the suit.
Item 2. Changes in Securities
(c) In a transaction completed December 3, 2001, we issued 2,449,012 shares
of our common stock to certain former owners of Achieve Networks, Inc. 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 written representations that the former
shareholders were "accredited investors" within the meaning of Rule 501 and that
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such individuals had such knowledge and experience in financial and business
matters that they were capable of evaluating the merits and risks of the
investment. The Company also restricted transfer of the certificates
representing the shares by placing legends thereon and by giving stop transfer
orders to its transfer agent.
The shares were issued directly by the Company in an exchange, and
accordingly, no commissions or discounts were paid or allowed in connection with
the transaction.
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of shareholders on December 10, 2001. At the
meeting, all nominees for election to the Board of Directors were reelected, and
two new members were elected. The shareholders also ratified the appointment of
Stark Winter Schenkein & Co., LLP as the Company's auditors for the fiscal year
ending June 30, 2002 and an Amendment to the Articles of Incorporation
increasing the amount of authorized capital stock. The votes on these
resolutions were as follows:
Election of Directors
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Timothy J. Murtaugh: Votes For: 9,606,718 Votes Against: 0 Abstain: 1,300
Robert L. Maige: Votes For: 9,606,718 Votes Against: 0 Abstain: 1,300
Pieter Both: Votes For: 9,606,718 Votes Against: 0 Abstain: 1,300
Bruce Scott: Votes For: 9,606,718 Votes Against: 0 Abstain: 1,300
Edward Kaloust: Votes For: 9,606,718 Votes Against: 0 Abstain: 1,300
Approval of Auditors
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Votes For: 9,605,343 Votes Against: 1,075 Abstain: 1,600
Amendment to the Articles of Incorporation
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Votes For: 9,547,435 Votes Against: 60,083 Abstain: 500
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits:
None.
B. Reports on Form 8-K:
We filed an 8-K dated December 3, 2001 to report the acquisition of
Achieve Networks, Inc.
10
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: March 20, 2001 By: /s/ Timothy J. Murtaugh
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Timothy J. Murtaugh, President and
Chief Executive Officer
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