FORM 10-QSB/A
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
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 15,029,375 shares outstanding
Common Stock at June 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 and 2000 2
Consolidated Statements of Cash Flows (unaudited) for the six
months ended December 31, 2001 and 2000 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 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 10
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
Accounts receivable $ 399,816
Other current assets 17,239
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Total Current Assets 417,055
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Property and Equipment, net 97,301
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Other Assets 155,123
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$ 669,479
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LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses $ 1,767,225
Due to related parties 13,701
Payroll taxes 100,809
Notes payable - related parties 2,881,816
Bank overdraft 93,271
Deferred revenue 1,162,388
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Total Current Liabilities 6,019,210
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Stockholders' (Deficit)
Common stock, $.001 par value, 15,000,000
shares authorized, 12,628,387 shares
issued and outstanding 12,628
Paid in capital 3,910,343
Accumulated (deficit) (9,272,702)
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(5,349,731)
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$ 669,479
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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
---------------------------- ----------------------------
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 (loss) (65,653) (51,076) 268,749 (103,181)
------------ ------------ ------------ ------------
Operating expenses:
Write off of investment 2,977,476 -- 2,977,476 --
Selling, general and administrative expenses 853,833 1,121,758 1,419,480 1,544,347
------------ ------------ ------------ ------------
3,831,309 1,121,758 4,396,956 1,544,347
------------ ------------ ------------ ------------
(Loss) from operations (3,896,962) (1,172,834) (4,128,207) (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) $ (3,980,859) $ (1,210,483) $ (4,295,529) $ (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 $ (0.36) $ (0.12) $ (0.41) $ (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 $(273,443) $(563,521)
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Cash flows from investing activities:
Net cash (used in) investing activities (26,800) (26,344)
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Cash flows from financing activities:
Net cash provided by financing activities 297,931 362,383
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Net (decrease) in cash (2,312) (227,482)
Beginning - cash and cash equivalents 2,312 228,055
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Ending - cash and cash equivalents $ -- $ 573
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See the accompanying notes to the consolidated financial statements.
3
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 commons
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 SFAS 109, "Accounting for Income
Taxes", which requires use of the liability method. SFAS 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.
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.
4
(5) Acquisition
During November 2001 the Company completed the acquisition of Achieve Networks,
Inc. ("Achieve") a company that operates a private 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 to be accounted for as a purchase. The total purchase
price of the acquisition was $2,449,012 which represents the fair market value
of the common shares issued.
During December 2001 the Company filed a Form 8-K discussing the acquisition of
Achieve. Subsequently, Mark Roberts, a former shareholder of Achieve, brought a
civil action against the Company and its President, alleging breach of contract
and fraud in connection with the acquisition of Achieve. The complaint sought to
rescind the original contract between Achieve and the Company.
Because of the uncertainty created by the lawsuit and the fact that the
plaintiff sought to rescind the contract, the Company did not include the
financial information for Achieve in its financial statements as of December 31,
2001 and the period then ended. The Company executed a Settlement and Release
Agreement with the Plaintiff to resolve the dispute during April 2002. The
Settlement provides that the plaintiff dismiss the lawsuit and the acquisition
be completed. The Company will include the financial information for Achieve
commencing on April 1, 2002 in its consolidated financial statements. Because
Achieve has no net assets and has incurred substantial losses from operations,
the Company has charged its investment of $2,449,012 in Achieve and its advances
to Achieve aggregating $528,464 at December 31, 2001 to operations during the
period.
(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) Basis of Presentation
The Company's financial statements are presented on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business.
The Company has experienced significant losses from operations. For the period
ended December 31, 2001 the Company incurred a net loss of $4,295,529. In
addition, the Company has a working capital deficit of $5,602,155, an
accumulated deficit of $9,272,702 and a stockholders' deficit of $5,349,731 at
December 31, 2001.
The Company's ability to continue as a going concern is contingent upon its
ability to expand its operations and secure additional financing. The Company is
pursuing financing for its operations and seeking to expand its operations.
Failure to secure such financing or expand its operations may result in the
Company not being able to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.
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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. For the three months ended December 31, 2001, we reported a net
loss of $3,980,859, or $.36 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 $4,295,529 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 the write off of our investment in Achieve Networks,
Inc. See Note 5 to the unaudited consolidated financial statements.
Our revenue increased 861% from the first quarter of fiscal 2001, while our
net loss increased 228%. Comparable figures for the six months ended December
31, 2001 were increases of 2588% and 152%, 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 write off discussed above.
Write off of Investment. The write off recorded for the three and six month
period ended December 31, 2001 resulted from the acquisition of Achieve. We
originally completed this acquisition in November 2001 by issuing 2,449,012
shares of our common stock valued at $2,449,012 for 83% of the outstanding stock
of Achieve. We subsequently issued another 750,988 shares in connection with
this acquisition. Achieve operates a private IP network for transmission of
voice and data communications, that we intended to use in connection with our
VOIP services. In February 2002, the principal shareholder of Achieve filed a
civil lawsuit against us and our President alleging breach of contract and fraud
in connection with the acquisition. We settled that lawsuit effective March 31,
2002, and the suit was dismissed. As a result, the operations of Achieve will be
included with our operating results beginning April 1, 2002.
6
Because Achieve has no net assets and has incurred substantial losses from
operations in the past, we have charged our investment of $2,449,012 and our
advances to Achieve aggregating $528,464 at December 31, 2001 to operations
during the period. These charges totaling $2,977,476 have been charged to
operations for the three and six months 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 that 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 that we recently
commenced for marketing our service that 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.
7
General and Administrative Expenses. General and administrative expenses of
$853,833 for the three-month period ended December 31, 2001 consisted primarily
of salaries, payroll expenses, and professional fees. This represents an
increase of $288,186 from the first quarter of this year, but a decrease of
$267,925 from the comparable period of the prior fiscal year. The increase from
the last quarter is attributable to expenses incurred in connection with the
original 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 $5,602,155, a decrease of
$1,199,029, or 27%, from fiscal year end June 30, 2001. The Company continues to
suffer from a serious lack of liquidity and capital, and management believes
that we remain dependent on receipt of additional working capital and
achievement of profitable operations to continue as a going concern. The
decrease in working capital since fiscal year end is primarily attributable to
cash applied to operations and the advances to Achieve.
Current Assets and Liquidity. Current assets reported at December 31, 2001
increased from fiscal year end; current liabilities, however, increased in a
much 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 $1,238,343, or 234% from fiscal year end. The increase in accounts
payable is primarily attributable to expenses related to our ongoing operations
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. Cash used in operations of $273,443 for the first
half of the year was slightly reduced from the cash used of $563,521 for the
first half of 2001.
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.
8
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 settled the lawsuit. As part of that
settlement, Plaintiff has dismissed 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 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
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.
9
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: June 18, 2002 By: /s/ Timothy J. Murtaugh
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Timothy J. Murtaugh, President, Chief
Executive and Principal Financial Officer
11