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, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
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 of incorporation) (I.R.S. Identification No.)
1001 Kings Avenue, Suite 200, Jacksonville, FL 32207
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(Address of principle 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 10,149,383 shares outstanding
Common Stock at February 13, 2001
PIPELINE TECHNOLOGIES, INC.
Index
Page
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Part I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet (unaudited) at December 31, 2000 1
Consolidated Statements of Operations (unaudited) for the
three and six months ended December 31, 2000 and from December
2, 1999 (inception) to December 31, 2000. 2
Consolidated Statements of Cash Flows (unaudited) for the
three and six months ended December 31, 2000 and from December
2, 1999 (inception) to December 31, 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 8
Item 2. Changes in Securities 8
Item 3. Defaults on Senior Securities 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
ii
PIPELINE TECHNOLOGIES, INC.
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED BALANCE SHEET
December 31, 2000
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 573
ACCOUNTS RECEIVABLE 43,189
PROPERTY AND EQUIPMENT, net of depreciation 52,849
OTHER ASSETS
Employee receivable 7,879
Deposits 40,000
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$ 144,490
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LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 509,465
Accrued expenses-related party 24,788
Accrued interest - related party 64,347
Note payable 150,000
Notes payable - related party 1,137,383
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Total current liabilities 1,885,983
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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,
$.01 par value, stated value of $50,000 per share,
200 shares authorized, no shares issued
or outstanding, convertible into shares of
common stock at a percentage of the common
stock price at specified dates -
Additional paid in capital 952,259
Deficit accumulated during the development stage (2,695,452)
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(1,741,493)
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$ 144,490
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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 SIX MONTHS (INCEPTION)
ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2000 2000
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REVENUES $ 73,532 $ 86,285 $ 87,381
COST OF GOODS SOLD 124,608 189,466 191,603
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GROSS (LOSS) (51,076) (103,181) (104,222)
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GENERAL AND ADMINISTRATIVE EXPENSES 1,121,758 1,544,347 2,530,524
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(LOSS) FROM OPERATIONS (1,172,834) (1,647,528) (2,634,746)
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OTHER INCOME (EXPENSE)
Rental income - 6,390 10,650
Interest income 25 25 25
Interest expense (37,674) (65,685) (71,381)
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(37,649) (59,270) (60,706)
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NET (LOSS) $(1,210,483) $ (1,706,798) $(2,695,452)
============ ============= =============
PER SHARE INFORMATION:
WEIGHTED AVERAGE SHARES OUTSTANDING
(BASIC AND DILUTED) 10,095,036 10,022,607 9,218,285
============ ============= =============
NET (LOSS) PER COMMON SHARE
(BASIC AND DILUTED) $ (0.12) $ (0.17) $ (0.29)
============ ============= =============
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 SIX MONTHS (INCEPTION)
ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2000 2000
------------ ------------ ------------
OPERATING ACTIVITIES
Net cash flow from operating activities $ (273,326) $ (563,521) $(1,481,044)
------------ ------------ ------------
INVESTING ACTIVITIES
Purchase of property and equipment (22,740) (26,344) (59,725)
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Net cash (used in) investing activities (22,740) (26,344) (59,725)
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FINANCING ACTIVITIES
Proceeds from issuance of stock - - 1,000
Proceeds from note payable 362,649 462,649 1,715,608
Payments on notes payable (100,266) (100,266) (175,266)
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Net cash provided by financing activities 262,383 362,383 1,541,342
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Net increase (decrease) in cash (33,683) (227,482) 573
CASH AT BEGINNING OF PERIOD 34,256 228,055 -
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CASH AT END OF PERIOD $ 573 $ 573 $ 573
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SUPPLEMENTAL CASHFLOW INFORMATION:
Cash paid for:
Interest $ - $ - $ -
============ ============ ============
Interest $ - $ - $ -
============ ============ ============
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
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The Notes to the Consolidated Financial Statements
are an integral part of these statements
3
PIPELINE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(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. For
further information, refer to 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 December 31, 1999 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.
(3) Related Party Transactions
Certain officers of the Company have loaned money to the Company at various
times during the period when cash is needed. The balance due these officers was
$24,788 at December 31, 2000.
4
(4) Note payable
During the three months ended December 31, 2000, the Company issued $300,000 in
convertible loans, $150,000 of which is to a related party. The notes earn
interest at a rate of 12% per annum and the loan holders are entitled to 200,000
shares of stock in partial consideration for the loans. The notes are
convertible into the Company's common stock at $.50 a share, at the option of
the holder. The notes were payable in November and December, 2000. As of
December 31, 2000, the notes had not been repaid.
The Company received $62,383 of financing from two related parties. One of the
notes bears interest at 12% per annum and the other is non-interest bearing. The
notes are due on demand.
(5) Contingencies
The Company is a defendant in a lawsuit filed by a former affiliate alleging
fraud in the inducement to enter into a settlement agreement. The Company feels
that the claims are barred by the former settlement agreement. Additionally, the
Company has an indemnity agreement with LM Investment Group ("LM"). The Company
believes the claims are without merit and intends to vigorously defend them. The
Company will also seek compensation from LM if any loss is ascribed to the
Company.
(6) Equity transactions
In October 2000, the Company entered into a convertible preferred stock purchase
agreement with an unrelated third party. The third party agreed to purchase 200
shares of the Company's Series A Convertible Preferred Stock in exchange for
$10,000,000. As of December 31, 2000, the agreement had not been funded.
In October 2000, the Company agreed to issue warrants to consultants to purchase
60,000 shares of stock at prices ranging from $3.35 to $5.35 a share,
exercisable upon issuance and expiring in November 2001. The Company is in the
process of canceling the warrants due to non-performance on the part of the
consultants.
During the quarter ending December 31, 2000, the Company agreed to issue 200,000
shares of common stock related to notes payable (Note 4). The stock was valued
at its fair market value on the date of the agreement.
5
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 six months ended December 31, 2000. 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
transition period ended June 30, 2000 as filed with the Securities and Exchange
Commission.
This Report (including any documents incorporated herein by reference)
contains "forward- looking statements" within the meaning of the Federal
securities laws. Such forward-looking statements include, without limitation,
statements regarding the Company's plan 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 below. Most of these factors are beyond the
control of the Company. Investors are cautioned not to put undue reliance on
forward-looking statements.
Reference is made to the exhibits to this Report. The discussion contained
herein is qualified in its entirety by reference to those exhibits.
Liquidity and Capital Resources
At December 31, 2000, Pipeline Technologies, Inc. (the "Company") continued
to suffer from a lack of working capital. At that date, the Company had a
deficit in working capital of $1,842,794, a decrease of $1,075,722 from fiscal
year end June 30, 2000. Current assets decreased $203,067 from fiscal year end
and current liabilities increased $872,655. At December 31, 2000, the Company's
current liabilities of $1,885,983 substantially exceeded its current assets of
$43,762. The Company also had a deficit in shareholder's equity of $1,741,493.
The Company remains dependent on receipt of financing from outside sources to
continue in operation.
The Company's current liabilities include $509,465 of accounts payable and
accrued expenses payable to independent third parties. The most significant
obligations, however, are notes payable to related parties. The Company has
borrowed approximately $1,100,000 from directors and/or principal shareholders
to meet its short-term cash requirements. Of that amount, $150,000 was due in
December and the remainder, plus accrued interest, is due in August, 2001. An
additional loan of $150,000 from an unrelated party originally due in November
of 2000 is in arrears. Representatives of the Company have had discussions with
these lenders in an effort to restructure the past-due debt. However, there is
no assurance that these discussions will be successful.
6
During the six month period ended December 31, 2000, the Company's cash
flow was limited to a net of $362,383 advanced by lenders. The Company's
operations used $563,521 of cash during that six month period. Overall, cash
decreased $227,482 from fiscal year end. All of that amount was spent on
operations. 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. Substantially all of its capital requirements are related to
costs and expenses of operation.
In an effort to satisfy its capital requirements, the Company executed an
agreement in October, 2000 to sell $10,000,000 of preferred stock to a single
overseas purchaser in a private placement. The closing of the transaction was
scheduled for late November, 2000. The terms of the agreement required the
Company to sell a convertible preferred stock carrying a 12% cumulative,
preferred dividend. However, the proposed purchaser of the preferred stock named
in the purchase agreement has so far failed and refused to pay the purchase
price, and management of the Company is not optimistic that the purchase price
will ever be paid. Through its representative, the Company has had numerous
discussions with the proposed purchaser in an effort to obtain the funding from
this source, so far to no avail. This required the Company to borrow funds on a
short-term basis to meet operating expenses, as described above.
The Company is currently exploring other financing options and possible
recourse against the proposed purchaser of the preferred stock, but no final
decisions have yet been made. It is anticipated that any new financing would
take the form of private equity financing, as the Company is not a candidate for
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 second 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 contracts executed by the Company to date
and subject to receipt of sufficient working capital, management expects that
the Company will receive revenues beginning later in calendar 2001.
During the three month period ended December 31, 2000, the Company
continued to incur a net loss from operations, as revenues were insufficient to
cover costs of goods sold and other expenses. During that three month period,
the Company realized a net loss from operations of $1,172,834, or $0.12 per
share, on revenue of $73,532. The net loss increased significantly from the loss
from the previous quarter ended September 30, 2000, primarily from $700,000 of
financing costs associated with the short-term loans discussed above. There were
no comparable operating results for the three months ended December 31, 1999, as
the Company only commenced operation in December of that year.
During the three months ended December 31, 2000, costs of revenue exceeded
revenue by $51,076. The Company's business plan is built on providing unlimited,
long-distance phone service for a fixed monthly rate. The Company has
arrangements with third-party network carriers to provide service to its
customers. Presently, the cost of this network access is such that the Company
is not generating sufficient revenue from its customers to cover the access
charges. The Company continued efforts to market its service to a larger group
of customers as it tries to overcome that deficit. Management is also exploring
options to obtain different network access at a lower cost to improve gross
profit.
7
General and administrative expenses of $1,121,758 for the quarter consisted
primarily of salaries, payroll expenses, financing costs and professional fees.
Financing costs of $700,000 represent a 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. With the exception of the financing costs,
general and administrative expenses were generally consistent with those
expenses for the previous quarter. Management and staff positions have been
maintained or expanded as the Company continues efforts to implement its
business plan and expand revenues. Professional fees were related to expenses of
maintaining the Company's status as a public reporting entity and defense of a
civil lawsuit. The Company also incurred $8,862 in advertising and marketing
related expenses. Management believes that development of a Web site is integral
to the Company's marketing efforts.
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. There remains pending a claim for breach of a settlement pursuant to
which plaintiffs allege they are entitled to recoup $175,000 from the
defendants. The Company denies the material allegations of that claim and is
defending the suit vigorously.
Item 2. Changes in Securities and Use of Proceeds
The Company is obligated to issue 200,000 shares of its common stock to two
lenders in partial consideration for their making short-term loans for working
capital. It is contemplated that the shares will be issued in February, 2001.
The Company will rely on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933 in issuing the stock. The Company
will provide the recipient with information substantially similar to that which
would be contained in a registration statement. The Company has a pre-existing
relationship with both individuals, one of whom is a director, and will confirm
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 will be paid in connection with the issuance of the stock.
8
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 $307,397.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits:
None.
B. Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the
period covered by this report:
1. Form 8-K, reporting a change in the Company's name,
dated October 27, 2000.
9
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: February 20, 2001 By: /s/ Robert L. Maige
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Robert L. Maige, Authorized Signatory
and Chief Financial Officer
10