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 September 30, 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)
(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
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$.001 par value 10,179,375 shares outstanding
Common Stock at November 6, 2001
PIPELINE TECHNOLOGIES, INC.
Index
Page
Part I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet at September 30, 2001 (unaudited)... 1
Consolidated Statements of Operations for the three months
ended September 30, 2001 and 2000 (unaudited).................. 2
Consolidated Statements of Cash Flows for the three months
ended September 30, 2001 and 2000 (unaudited).................. 3
Notes to Consolidated Financial Statements (unaudited)......... 4
Item 2. Management's Discussion and Analysis or Plan of Operation ..... 5
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 8
SIGNATURES................................................................ 9
ii
Pipeline Technologies, Inc
Consolidated Balance Sheet
September 30, 2001
(unaudited)
Assets
Current assets:
Cash $ 1,521,897
Accounts receivable 9,247
Other receivables 250,827
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Total current assets 1,781,971
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Property and equipment, net 99,452
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Other assets:
Deposits 112,173
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$ 1,993,596
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Liabilities and Stockholders' (Deficit)
Current liabilities:
Accounts payable and accrued expenses $ 789,527
Accounts payable - affiliates 13,701
Deferred revenue 2,332,996
Notes payable - related parties 2,522,383
Notes payable 152,874
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5,811,481
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Stockholders' (deficit):
Common stock, $.001 par value,
15,000,000 shares authorized,
10,179,375 shares issued and outstanding 10,179
Additional paid in capital 1,463,780
Accumulated deficit (5,291,843)
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(3,817,884)
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$ 1,993,597
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See the accompanying notes to the financial statements
1
Pipeline Technologies, Inc.
Consolidated Statements of Operations
(unaudited)
Three Months Three Months
Ended Ended
September 30, September 30,
2001 2000
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Revenue $ 1,612,955 $ 12,753
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Operating expenses:
Cost of sales 1,278,553 64,858
Selling, general and administrative expenses 565,647 422,589
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1,844,200 487,447
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Other Income and Expenses:
Rental income -- 6,390
Interest and financing (83,425) (28,011)
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Net (Loss) $ (314,670) $ (496,315)
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Per share information - basic and fully diluted:
Weighted average shares outstanding 10,179,375 9,949,383
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Net (loss) per share $ (0.03) $ (0.05)
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See the accompanying notes to the financial statements.
2
Pipeline Technologies, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Three Months Three Months
Ended Ended
September 30, September 30,
2001 2000
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OPERATING ACTIVITIES
Net cash flow provided by (used in) operating activities $ 1,536,601 $ (290,195)
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INVESTING ACTIVITIES
Purchase of property and equipment (19,890) (3,604)
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Net cash (used in) investing activities (19,890) (3,604)
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FINANCING ACTIVITIES
Proceeds from notes payable 2,874 100,000
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Net cash provided by financing activities 2,874 100,000
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Net increase (decrease) in cash 1,519,585 (193,799)
Beginning - cash balance 2,312 228,055
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Ending - cash balance $ 1,521,897 $ 34,256
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See the accompanying notes to the financial statements.
3
PIPELINE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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. These financial statements should be
read in conjunction with the audited consolidated financial statements of the
Company as of June 30, 2001, including notes thereto, included in the Company's
Form 10-KSB.
The Company was in the development stage from its inception through June 30,
2001. The fiscal year ending June 30, 2002 is the first year during which it is
considered an operating company.
(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. ("us" or the
"Company") since fiscal year end June 30, 2001 and (ii) the results of
operations for the three months ended September 30, 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. We reported the first significant revenue in our history for the
first quarter of fiscal 2002, but still reported a loss from operations. For the
three months ended September 30, 2001, we reported a net loss of $314,670, or
$.03 per share, on total revenue of $1,612,955. This compares to a net loss of
$496,315, or $.05 per share, on revenue of $12,753 for the quarter ending
September 30, 2000. Our revenue increased 12,500% from the first quarter of
fiscal 2001, while our net loss decreased 36%. 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 quarter of this year.
Unearned Revenue. We have recoded a substantial amount of unearned revenue
during the quarter. 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. Upon learning of this situation, we
immediately terminated the services of the third party.
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 $2,332,996 has been classified as unearned revenue. As of the date of
filing this report, approximately $758,000 has been refunded to these customers.
5
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. Unlike the first quarter of fiscal 2001, we reported a
positive gross profit for the first quarter of 2002. Revenue exceeded our costs
of revenue by $334,402, compared to a negative gross profit of $52,105 for the
first quarter of last year. None-the-less, we still reported a net loss for the
quarter, as our gross profit was insufficient to cover general and
administrative expenses.
Included in our costs of sales was commission paid to the independent
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 ($110,000) in credit card charges in connection with billings to
customers during the period.
General and Administrative Expenses. General and administrative expenses of
$565,647 for the three-month period consisted primarily of salaries, payroll
expenses, and professional fees. Expenses during the first fiscal quarter of
this year were not substantially different than those in the first quarter of
last year. 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. The Company's financial condition declined from fiscal year end
June 30, 2001, a trend that unfortunately carried over from last year. At
September 30, 2001, we reported negative working capital of $4,029,510, a
decrease of $373,616, or 10%, from fiscal year end June 30, 2001. The Company
continues to suffer from a serious lack of liquidity and capital.
Current Assets and Liquidity. Current assets reported at September 30, 2001
increased substantially from fiscal year end; current liabilities, however,
increased in a greater amount. Of our current assets, cash increased the most,
rising over $1,500,000 from fiscal year end. Unfortunately, substantially all of
that cash was extinguished subsequent to the end of the quarter, due to refunds
to customers, payments to creditors and advances of approximately $400,000 to a
prospective acquisition candidate.
The largest increase in our current liabilities was deferred revenue, which
increased $2,305,936, or 8500% from fiscal year end. As discussed above, this
amount results primarily from our concern about the unauthorized sales of our
service and potential cancellations by customers. Accounts payable also
increased by about $260,000, related to our increased sales and professional
fees related to a proposed acquisition.
6
Cash Flow. Our operations produced the first positive cash flow during the
first quarter of the current fiscal year. Cash flow of $1,536,601 for the first
quarter compares favorably to negative cash flow of $290,195 for the first
quarter of 2001. We spent a minor portion of that amount during the quarter on
the acquisition of property and equipment.
Despite the increase in cash flow, 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.
Representatives of the Company have had discussions with certain of these
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.
Investors should be aware of the following special factors potentially
affecting our business:
Unauthorized sales of our service, or "slamming," may result in substantial
demands for refunds of prepaid charges, cancellation of service and/or
regulatory inquiries, any of which could have a material adverse affect on our
business and financial condition. As discussed previously, we have recently
determined that some of our customers may have been enrolled involuntarily, or
slammed, by the efforts of a third party retained to market our service. While
we terminated the third party after discovering this fact, we believe that many
customers, perhaps a majority of the customers obtained through the efforts of
that firm, may cancel their service and demand refunds of the associated
charges. This may require substantial refunds by us, cause a substantial
reduction in our customer base and invite an investigation by concerned
regulatory authorities. Many customers have cancelled and demanded refunds to
date, adversely affecting our working capital and liquidity. If the number of
customers cancelling is greater than we presently anticipate, our reserve for
unearned revenue may be insufficient, further eroding our operating results and
possibly requiring a restatement of our financial statements. We are actively
investigating the situation in an effort to quantify the problem. As of the date
of this report, however, we are unable to determine the magnitude of the
problem.
7
PART II. OTHER INFORMATION
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 filed one report on Form 8-K dated September 4, 2001 during
the period covered by this report, disclosing the execution of a
definitive agreement to acquire a telephony network provider.
8
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: November 14, 2001 By: /s/ Robert L. Maige
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Robert L. Maige, Authorized Signatory
and Chief Financial Officer
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