U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2001
--------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________________
Commission file number 0-14978
--------
PRE-CELL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-0751916
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
385 East Drive, Melbourne, Florida 32904
(Address of principal executive offices)
(Zip Code)
(321) 308-2900
(Registrant's telephone number, including area code)
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 report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate number or shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
As of March 1, 2001, 42,528,189 shares of the Registrant's Common Stock were
issued and outstanding.
PRE-CELL SOLUTIONS, INC.
Form 10-Q
TABLE OF CONTENTS
Heading Page
PART I. FINANCIAL STATEMENTS
Item 1. Condensed Consolidated Financial Statements
Balance Sheets - January 31, 2001 (unaudited) and April
30, 2000...........................................................3
Statements of Operations - Three and nine months ended
January 31, 2001 and 2000 (unaudited)..............................4
Statements of Stockholders' Equity - Nine months ended
January 31, 2001 (unaudited).......................................5
Statements of Cash Flows - Nine months ended January 31,
2001 and 2000 (unaudited)..........................................6
Notes to Consolidated Financial
Statements.........................................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................13
Item 2. Changes in Securities...............................................14
Item 3. Defaults Upon Senior Securities.....................................14
Item 4. Submission of Matters to a Vote of Securities Holders...............14
Item 5. Other Information...................................................14
Item 6. Exhibits and Reports on Form 8-K....................................14
SIGNATURES...................................................................15
Page 2
PART I
Item 1. Financial Statements.
Pre-Cell Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
January 31, 2001 April 30, 2000
---------------- --------------
(Unaudited)
Assets
Cash .................................................................. $ 41,316 $ 383,333
Restricted cash........................................................ 356,000 500,000
Accounts receivable, net............................................... 506,860 272,378
Inventory.............................................................. 74,347 186,875
Prepaid expenses and other............................................. 44,823 120,565
--------------- --------------
Total current assets............................................... 1,023,346 1,463,151
Furniture, fixtures and equipment, net................................. 511,904 343,175
Goodwill, net.......................................................... 21,872,945 18,331,219
Other assets........................................................... 18,728 107,554
--------------- --------------
$ 23,426,923 $ 20,245,099
=============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable.......................................................... $ 1,399,363 $ 31,716
Accounts payable....................................................... 1,074,778 505,847
Customers deposits .................................................... 101,541 253,099
Due to stockholders.................................................... 1,124,697 697,027
Accrued expenses ...................................................... 1,095,322 601,830
--------------- --------------
Total current liabilities.......................................... 4,795,701 2,089,519
--------------- --------------
Stockholders' equity:
Preferred stock ....................................................... -- --
Common stock........................................................... 425,281 397,368
Additional paid in capital ............................................ 26,582,898 20,519,992
Accumulated other comprehensive income/(loss).......................... 30,186 (3,894)
Accumulated deficit ................................................... (8,407,143) (2,757,885)
--------------- --------------
Total stockholders' equity ................................................. 18,631,222 18,155,581
--------------- --------------
$ 23,426,923 $ 20,245,099
=============== ==============
See accompanying notes to consolidated financial statements
Page 3
Pre-Cell Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended January 31, Nine Months Ended January 31,
------------------------------ -----------------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues................................... $ 2,056,570 $ 62,252 $ 4,469,631 $ 133,251
------------- ------------- ------------ -------------
Expenses:
Direct costs........................... 1,422,152 31,587 2,632,455 103,284
Selling, General and Administrative ... 3,009,971 97,834 6,670,505 234,618
Goodwill amortization.................. 274,959 25,500 762,461 59,500
------------- ------------- ------------ -------------
Total expenses 4,707,082 154,921 10,065,421 397,402
------------- ------------- ------------ -------------
Operating loss............................. (2,650,512) (92,669) (5,595,790) (264,151)
Interest and other expense ................ 2,862 -- 53,468 --
------------- ------------- ------------ -------------
Net loss................................... (2,653,374) (92,669) (5,649,258) (264,151)
Other comprehensive income - foreign
currency translation adjustments......... 9,864 -- 34,080 --
------------- ------------- ------------ -------------
Comprehensive loss......................... $ (2,643,510) $ (92,669) $ (5,615,178) $ (264,151)
============= ============= ============ =============
Basic and diluted loss per common share.... $ (.06) $ -- $ (.13) $ --
============= ============= ============ =============
Basic and diluted weighted average number of
common shares outstanding................ 42,528,189 33,852,730 41,912,616 33,852,730
============= ============= ============ =============
See accompanying notes to consolidated financial statements
Page 4
Pre-Cell Solutions, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Common Stock
------------ Accumulated
Number Additional Other
of Par Paid-In Comprehensive Accumulated
Shares Value Capital Income (loss) Deficit Total
------ ----- ------- ------------ ------- -----
BALANCE, April 30, 2000 39,736,859 $ 397,368 $ 20,519,992 $ (3,894) $ (2,757,885) $ 18,155,581
Unaudited:
Common stock issued
for cash 2,133,330 21,333 1,578,667 -- -- 1,600,000
Exercise of common
stock options 658,000 6,580 19,740 -- -- 26,320
Contingent stock consideration
to be issued in connection
with acquisitions -- -- 3,684,499 -- -- 3,684,499
Contingent stock consideration
to be issued in connection
with note payable issued -- -- 30,000 -- -- 30,000
Warrants issued in settlement of
accrued compensation -- -- 750,000 -- -- 750,000
Other comprehensive income -
Foreign currency translation
adjustment -- -- -- 34,080 -- 34,080
Net loss -- -- -- -- (5,649,258) (5,649,258)
---------- --------- ------------ ---------- ------------ ------------
BALANCE, January 31, 2001
(unaudited) 42,528,189 $ 425,281 $ 26,582,898 $ 30,186 $ (8,407,143) $ 18,631,222
========== ========= ============ ========== ============ ============
See accompanying notes to consolidated financial statements
Page 5
Pre-Cell Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended January 31,
2001 2000
---- ----
Cash flows from operating activities:
Net loss................................................................. $ (5,649,258) $ (264,151)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization......................................... 857,752 59,675
Issuance of common stock warrants for compensation.................... 750,000 --
Contingent stock issued in connection with note payable............... 30,000 --
Changes in operating assets and liabilities (net of effects
of acquisitions):
Restricted cash..................................................... 144,000 --
Accounts receivable................................................. (190,832) (15,560)
Inventory........................................................... 115,392 --
Prepaid expenses and deposits....................................... 75,742 (2,000)
Accounts payable.................................................... 1,220,852 33,961
Accrued expenses and other liabilities.............................. 434,279 (47)
Due to stockholders/officers........................................ 182,586 105,000
Due to related party................................................ -- 88,248
------------- ------------
Net cash provided by (used in) operating activities......................... (2,029,487) 5,126
------------- ------------
Cash flows from investing activities:
Purchase of property and equipment....................................... (87,021) (5,633)
Increase in other assets................................................. (13,230) --
Cash acquired in acquisitions............................................ 17,025 --
------------- ------------
Net cash provided by (used in) investing activities......................... (83,226) (5,633)
------------- ------------
Cash flows from financing activities:
Proceeds from the sale of common stock and exercise of options........... 1,626,320 --
Proceeds from the issuance of debt instruments........................... 150,222 --
Repayment on note payable ............................................... (5,997) --
------------- ------------
Net cash provided by financing activities................................... 1,770,545 --
------------- ------------
Effect of exchange rate changes on cash and cash equivalents................ 150 --
------------- ------------
Net (decrease) in cash and cash equivalents................................. (342,018) (507)
Cash at beginning of period................................................. 383,333 507
------------- ------------
Cash at end of period....................................................... $ 41,316 $ --
============= ============
See accompanying notes to consolidated financial statements
Page 6
Pre-Cell Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Pre-Cell
Solutions, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for a complete financial statement presentation.
In the opinion of management, such unaudited interim information reflects all
adjustments, consisting only of normal recurring adjustments, necessary to
present the Company's financial position and results of operations for the
periods presented. The results of operations and cash flows for interim periods
are not necessarily indicative of the results to be expected for a full fiscal
year. The consolidated balance sheet as of April 30, 2000 was derived from the
audited consolidated financial statements as of that date but does not include
all the information and notes required by generally accepted accounting
principles. These consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements as
presented in the Company's annual report on Form 10-K. The report of our
independent certified public accountants on the Company's 2000 financial
statements contained an explanatory paragraph emphasizing that there was
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Note 2 - Acquisitions
Transnational Communications
On December 1, 2000, the Company's wholly owned subsidiary, Pre-Cell Solutions,
Inc. a Florida corporation ("PCF"), entered into an agreement to acquire all of
the outstanding shares of Transnational Communications, Inc. ("TNT"), a prepaid
local exchange service company in San Antonio, Texas, for 1,000,000 shares of
Pre-Cell common stock. Additionally, on December 1, 2000 PCF entered into an
agreement to manage and control all the operations of TNT during the transition
period for the customer accounts to be switched from TNT to PCF. The final
closing of the transaction is subject only to the approval of the Public Utility
Commissions Rules and Regulations, which approval is considered probable and is
expected to be finalized within the Company's fourth fiscal quarter ending April
30, 2001. With this effective level of control management has consolidated the
operations of TNT from December 1, 2000 forward.
The acquisition described above was accounted for by the purchase method of
accounting. The cost of the acquisition has been allocated on the basis of the
estimated fair market values of the assets acquired and liabilities assumed. The
excess of the purchase price over the fair values of the net assets acquired was
approximately $2,447,000 and has been recorded as goodwill, which is being
amortized on a straight-line basis over 20 years.
The transaction was recorded as follows:
Contingent stock consideration to be issued
in connection with acquisition........................ 2,188,000
Less fair value of assets acquired...................... (86,280)
Liabilities assumed..................................... 345,508
---------
Excess cost of net assets acquired...................... 2,447,228
=========
Teleconex
On August 1, 2000, the Company's wholly owned subsidiary, Pre-Cell Solutions,
Inc. a Florida corporation ("PCF"), entered into an agreement to acquire all of
the outstanding shares of Teleconex, Inc. ("Teleconex"), a prepaid local
exchange service company in Pensacola, Florida, for 683,333 shares of Pre-Cell
common stock plus cash of $160,000. Additionally, on August 1, 2000 PCF entered
into an agreement to manage and control all the operations of Teleconex during
the transition period for the customer accounts to be switched from Teleconex to
PCF. The final closing of the transaction is expected to occur during the fourth
fiscal quarter ending April 30, 2001. This closing was subject only to the
approval of the Public Utility Commissions Rules and Regulations, which approval
was finalized within the Company's third fiscal quarter ended January 31, 2001.
With this effective level of control management has consolidated the operations
of Teleconex from August 1, 2000 forward.
Page 7
The acquisition described above was accounted for by the purchase method of
accounting. The cost of the acquisition has been allocated on the basis of the
estimated fair market values of the assets acquired and liabilities assumed. The
excess of the purchase price over the fair values of the net assets acquired was
approximately $1,857,000 and has been recorded as goodwill, which is being
amortized on a straight-line basis over 20 years. The transaction was recorded
as follows:
Contingent stock consideration to be issued in
connection with acquisition.......................... 1,496,499
Due to owners.......................................... 160,000
-----------
Total consideration to be issued................. 1,656,499
Less fair value of assets acquired..................... (212,202)
Liabilities assumed.................................... 412,662
-----------
Excess cost of net assets acquired..................... 1,856,959
===========
During the fiscal year ended April 30, 2000, the Company acquired 100% of the
outstanding stock of two entities.
US Intellicom, Inc.
On April 4, 2000 (the "Closing Date"), Pre-Cell Solutions, Inc. ("Pre-Cell"),
USI Merger Corp., a Georgia corporation and wholly-owned subsidiary of Pre-Cell
("USI Merger Subsidiary"), US/Intellicom, Inc., a Georgia corporation ("USI")
and Ronald I. Kindland and each of the other stockholders of USI ("USI
Stockholders") executed a Merger And Reorganization Agreement ("USI Merger
Agreement"), pursuant to which USI merged ("USI Merger") with and into USI
Merger Corp.
In connection with the USI Merger, Pre-Cell issued an aggregate of 11,440,000
shares of Pre-Cell common stock to the stockholders of USI determined on the
basis of a negotiated value of the business and proprietary technology developed
by USI and the market value of Pre-Cell's common stock. Under the terms of the
agreement, the holders of USI common stock were issued 8.8 shares of Pre-Cell
common stock in exchange for each share of USI common stock. In connection with
the acquisition and as a condition of closing, Pre-Cell established an option
pool in the aggregate of 2,133,330 shares of common stock whereby certain
stockholders of USI that had guaranteed USI's line of credit shall, until
December 31, 2000, have the right to acquire Pre-Cell common stock. The line of
credit was paid and closed during the quarter ended October 31, 2000, and the
guarantees of certain shareholders were released. Concurrent with the release of
the guarantees these shareholders exercised their option to acquire 2,133,330
additional shares of the Company's common stock.
As these options are exercised the shareholder guarantees are released and the
amount available under the USI line of credit is reduced by a corresponding
amount. Additionally, all outstanding options to purchase USI shares became
fully vested and were automatically converted into options to purchase Pre-Cell
shares on a basis of 8.8 Pre-cell shares for each USI share entitled to be
purchased under the USI options, at the per share price equal to the quotient of
(i) the price contained in the USI options, divided by (ii) 8.8.
Pre-Paid Solutions
On April 4, 2000, Pre-Cell, Pre-Paid Acquisition Corp., a Florida corporation
and wholly-owned subsidiary of Pre-Cell ("Pre-Paid Merger Subsidiary"), Pre-Paid
Solutions, Inc., a Florida corporation ("Pre-Paid") and Thomas E. Biddix and
each of the other stockholders of Pre-Paid ("Pre-Paid Stockholders") executed a
Merger And Reorganization Agreement ("Pre-Paid Merger Agreement"), pursuant to
which Pre-Paid was merged ("Pre-Paid Merger") with and into Pre-Paid Acquisition
Corp.
In connection with the Pre-Paid Merger, Pre-Cell issued an aggregate of
20,219,127 shares of Pre-Cell common stock to the stockholders of Pre-Paid
determined on the basis of a negotiated value of the business and certain
contracts of Pre-Paid and the market value of Pre-Cell's common stock. Under the
terms of the agreement, the holders of Prepaid common stock were issued 2.81915
shares of Pre-Cell common stock in exchange for each share of Prepaid common
stock. Additionally, all outstanding options and warrants to purchase Pre-Paid
shares became fully vested and were automatically converted into options and
warrants to purchase Pre-Cell shares on a basis of 2.81915 Pre-Cell shares for
each Pre-Paid share entitled to be purchased under the Pre-Paid options, at the
per share price equal to the quotient of (i) the price contained in the Pre-Paid
options and warrants, divided by (ii) 2.81915.
The acquisitions described above were accounted for by the purchase method of
accounting and accordingly, the operating results have been included in the
Company's consolidated results of operations from the date of acquisition.
Page 8
The costs of the acquisitions have been allocated on the basis of the estimated
fair market values of the assets acquired and liabilities assumed. The excess of
the purchase prices over the fair values of the net assets acquired was
approximately $16,985,000 and has been recorded as goodwill, which is being
amortized on a straight-line basis over 20 years. Accordingly, the accompanying
consolidated statements of operations do not include any revenues or expenses
related to these acquisitions prior to the closing date.
Pro Forma results
Following are the Company's unaudited pro forma results for the three and nine
months ended January 31, 2001 and 2000 assuming the acquisitions of US
Intellicom, Pre-paid Solutions, Teleconex and TNT occurred on May 1, 1999:
Three months ended January 31, Nine months ended January 31,
------------------------------ -----------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net revenues................. $ 2,056,570 $ 2,514,311 $ 6,819,015 $ 6,176,567
Net loss..................... (2,677,589) (3,368,302) (6,059,030) (2,021,090)
Basic and diluted net loss
per common share (.06) (.08) (.14) (.05)
Weighted average
outstanding shares......... 44,211,522 40,754,567 43,595,949 40,754,567
The pro forma consolidated results of operations include adjustments to give
effect to amortization of goodwill. The unaudited pro forma information is not
necessarily indicative of the results of operations that would have occurred had
the purchase been made at the beginning of the periods presented or the future
results of the combined operations.
Note 3 - Financing
The Company had a line-of-credit available under which it could borrow up to
$1,600,000 at an interest rate of 2.30% over the lender's commercial paper rate.
The line was paid and closed during the quarter ended October 31, 2000, and the
guarantees of certain shareholders were released. Concurrent with the release of
the guarantees these shareholders exercised their option to acquire 2,133,330
additional shares of the Company's common stock for cash proceeds of $1.6
million. In addition, the Company converted $977,800 of its accounts payable to
notes payable and issued $150,000 of new debt.
Note 4 - Accrued expenses
Accrued expenses consist of the following:
January 31, 2001 April 30, 2000
---------------- --------------
Accrued claim (see Note 5)..... $ 380,000 $ 380,000
Accrued interest............... 14,172 101,004
Accrued compensation........... 372,206 108,052
Accrued other.................. 328,944 12,774
------------ -----------
$ 1,095,322 $ 601,830
============ ===========
Note 5 - Commitments and contingencies
Employment agreements
The Company has employment agreements with its executive officers. The
agreements cover a three-year period beginning April 1, 2000 and are terminable
for cause by either party. They also include provisions for discretionary
bonuses and in one instance an incentive bonus for product development. Certain
of the agreements provide for the grant of a total of 1,606,000 shares of the
Company's common stock. The shares vest 20% on October 1, 2000, 30% on January
1, 2001 with the remaining 50% on April 1, 2001. The agreements include a
covenant against competition with the Company and prohibit divulgence of
confidential information.
In October 2000 and in January 2001 one of these agreements including 856,000
granted shares of the Company's common stock was amended to provide that the
initial vesting periods were extended to February 2001. There was no
compensation expense related to this modification. The Company has recognized
compensation expense of $285,333 during the nine months ended January 31, 2001
as a result of this stock grant. The remaining unvested
Page 9
compensation expense of $142,667 as a result of the stock grant will be
recognized in the fourth fiscal quarter ending April 30, 2001 as it becomes
fully vested.
In November 2000 one of these agreements including 750,000 granted shares of the
Company's common stock was amended to eliminate the common stock grant and grant
the executive a contingent five-year warrant to acquire 750,000 shares of the
Company's common stock at an exercise price of $.01. This warrant is subject to
a forbearance agreement preventing the executive from exercising any rights
under the Warrant until such time as the Company increases its total authorized
common stock to at least 100,000,000 shares at a meeting of its stockholders
called for that purpose. The Company has recognized compensation expense of
$750,000 during the nine months ended January 31, 2001 as a result of the stock
grants.
Letters of credit
The Company is contingently liable under the terms of various letters of credit
of up to $356,000 issued to secure credit from certain of its suppliers of
cellular phone airtime. The letter of credit is secured by a $356,000
certificate of deposit. As of February 28, 2001 there were no claims against any
of the letters of credit.
Litigation
On September 21, 1999, the two subsidiaries acquired during April 2000 were
named as defendants in two lawsuits alleging patent infringement arising out of
having made, used, offered for sale and/or sold in the United States products
which infringe one or more claims of Patent No. 5,631,947 and Patent No.
5,577,100. The claims for monetary damages are undisclosed. While any litigation
or investigation has an element of uncertainty, in the opinion of management and
legal counsel, there is no reasonable probability at present of any substantial
liabilities arising out of this matter.
An action was brought against US Intellicom, Inc. (USI), a subsidiary of the
Company, by RiverHawk Capital Resources, Inc., an affiliate of RiverHawk
Holdings, Inc. (RiverHawk) before the American Arbitration Association, claiming
that it is entitled to a "success" fee in connection with a letter agreement
between the parties. On June 9, 2000 the Arbitrator found that RiverHawk was
entitled to a success fee of $374,517, plus one-half of the costs and expenses
of arbitration. The Company has accrued $380,000 at April 30, 2000 and January
31, 2001 and adjusted the purchase price of the USI acquisition. However, USI
has filed a Motion to Vacate the Decision of the Arbitrator. If this motion is
denied the Company intends to appeal.
From time-to-time, the Company is involved in other legal proceedings incidental
to the conduct of its business. The Company believes that this other litigation,
individually or in the aggregate, to which it is currently a party is not likely
to have a material adverse effect on our business, financial condition, results
of operations, or cash flows.
Note 6 - Income taxes
There was no income tax expense/benefit for the Company for the three and nine
months ended January 31, 2001.
The Company maintains a valuation allowance to state its deferred tax assets at
an estimated net realizable value, this balance at January 31, 2001 was zero due
to the uncertainty related to realization of these assets through future taxable
income. The recognition of any future tax benefits resulting from the net
operating loss carryforwards acquired will reduce goodwill.
Note 7 - Supplemental cash flow information
Supplemental disclosure of cash flow information and non-cash investing and
financing activities is as follows:
Nine months ended January 31,
2001 2000
---- ----
Cash paid for interest for the period...... $ 123,556 $ --
------------- ---------
Page 10
In addition to the above non-cash item, the following is a summary of non-cash
transactions entered into for the acquisitions listed in Note 2:
Contingent common stock to be issued.................... $ (3,684,499)
Issuance of related party note payable.................. (160,000)
-------------
Total non-cash consideration paid....................... (3,844,499)
-------------
Accounts receivable acquired............................ 43,650
Inventory acquired...................................... 2,864
Property and equipment acquired......................... 175,475
Other assets acquired................................... 76,493
Goodwill acquired....................................... 4,304,187
-------------
Total non-cash acquisition of assets.................... 4,602,669
-------------
Notes payable assumed................................... (245,622)
Accounts payable assumed................................ (208,250)
Accrued liabilities assumed............................. (59,214)
Related party notes payable assumed..................... (245,084)
-------------
Total non-cash assumption of liabilities................ (758,170)
-------------
Net cash paid........................................... $ 0
=============
During the quarter ended January 31, 2001 the Company converted $977,800 of
accounts payable to notes payable.
Item No. 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis of the Company's consolidated financial
position and consolidated results of operations should be read in conjunction
with the Company's condensed consolidated financial statements and related notes
thereto included in Item 1.
Forward-Looking Statements
This report contains forward-looking statements. Additional written or oral
forward-looking statements may be made by the Company from time to time in
filings with the Securities and Exchange Commission or otherwise. Such
forward-looking statements are within the meaning of the term in Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.
Forward-looking statements may include, but not be limited to, projections of
revenues, income, or loss, estimates of capital expenditures, plans for future
operations, products or services, and financing needs or plans, as well as
assumptions relating to the foregoing. The words "believe," "expect,"
"anticipate," "estimate," "project," and similar expressions identify forward
looking statements, which speak only as of the date the statement was made.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from that set forth in, contemplated by, or
underlying the forward-looking statements. The Company undertakes no obligation
to publicly update or revise any forward looking statements, whether as a result
of new information, future events, or otherwise.
The following disclosures, as well as other statements in this Report on Form
10-Q, and in the notes to the Company's condensed consolidated financial
statements, describe factors, among others, that could contribute to or cause
such differences, or that could affect the Company's stock price.
Overview
Since 1995, we were inactive but structured to take advantage of business
opportunities which management believed would be in the best interest of our
shareholders. In December 1998, we acquired Pre-Cell Solutions (a Florida
corporation) through the issuance of 32,156,000 shares of our common stock and
we changed our name to Pre-Cell Solutions, Inc. In April 2000, we acquired
Pre-Paid Solutions and US Intellicom through the issuance of 31,659,127 shares
of our common stock. In August and in December 2000, we acquired two unrelated
prepaid local exchange service companies through the contingent issuance of
1,683,333 shares of our common stock. We currently offer prepaid wireless, long
distance and local telecommunication products and services through distributors
and resellers as well as licensing prepaid wireless technology to other wireless
resellers.
Page 11
Results of Operations
Three months ended January 31, 2001 compared to three months ended January 31,
2000
Revenues for the three months ended January 31, 2001 were $2,056,570 up
$1,994,318 from $62,252 for the three months ended January 31, 2000. Of this
increase $1,432,655 resulted from a decrease of ($58,654) in revenues of our
historical Prepaid Dialtone business, offset by an increase of $1,491,309 in
revenues from the newly acquired Teleconex and TNT businesses. Of the remaining
$561,663 of the increase, $253,936 resulted from the operations of Pre-Paid
Solutions, Inc. and $307,727 resulted from the operations of US Intellicom,
Inc., both of which were acquired in April 2000.
Direct costs for the three months ended January 31, 2001 were $1,422,152 up
$1,390,565 from $31,587 for the three months ended January 31, 2001. Of this
increase, $1,104,341 resulted from an increase of our Direct Dialtone business.
The operations of Pre-Paid Solutions accounted for the balance of this increase
of $286,223.
Other operating expenses increased $2,912,137 from $97,834 in the three months
ended January 31, 2000 to $3,009,971 in the three months ended January 31, 2001.
The operations of US Intellicom accounted for $732,992 of the increase, the
operations of our Direct Dialtone business accounted for $498,737 of the
increase and $1,680,408 resulted from the operations of Pre-Paid Solutions and
increases in corporate overhead as we emerged from an inactive entity and
continued to establish the infrastructure necessary to accomplish our strategic
business plans.
The amortization of goodwill was $274,959 for the quarter ended January 31, 2001
as compared to $25,500 for the quarter ended January 31, 2000. This increase was
the result of an increase in goodwill of approximately $16,985,000 associated
with the acquisitions of Pre-Paid Solutions and US Intellicom that occurred in
April 2000 and approximately $4,304,000 associated with the acquisitions of
Teleconex effective August 1, 2000 and TNT effective December 1, 2000. This
increase reflects three months of amortization in the current period, which will
be approximately $1,141,000 annually.
There was no income tax expense/benefit for the Company for the three months
ended January 31, 2001 and 2000.
The Company maintains a valuation allowance to state its deferred tax assets at
an estimated net realizable value, this balance at January 31, 2001 was zero due
to the uncertainty related to realization of these assets through future taxable
income. The recognition of any future tax benefits resulting from the net
operating loss carryforwards acquired will reduce goodwill.
Net loss for the three months ended January 31, 2001 was $2,653,374 as compared
to a loss of $92,669 for the three months ended January 31, 2000. This increase
in net loss of $2,560,705 is primarily the result of the combined effects of the
increased other operating expenses of $2,912,137 and increased goodwill
amortization of $249,459 offset by approximately $603,753 in increased gross
profit margins on revenues.
Nine months ended January 31, 2001 compared to nine months ended January 31,
2000
Revenues for the nine months ended January 31, 2001 were $4,469,631 up
$4,336,380 from $133,251 for the nine months ended January 31, 2000. Of this
increase $2,265,731 resulted from a decrease of ($93,204) in revenues of our
historical Prepaid Dialtone business, offset by an increase of $2,358,935 in
revenues from the newly acquired Teleconex and TNT businesses. Of the remaining
$2,070,649 of the increase, $758,026 resulted from the operations of Pre-Paid
Solutions, Inc. and $1,312,623 resulted from the operations of US Intellicom,
Inc., both of which were acquired in April 2000.
Direct costs for the nine months ended January 31, 2001 were $2,632,455 up
$2,529,171 from $103,284 for the nine months ended January 31, 2000. Of this
increase, $1,736,870 resulted from an increase of our Direct Dialtone business.
The operations of Pre-Paid Solutions accounted for $761,491 of the increase and
the operations of US Intellicom accounted for $30,810 of the increase.
Other operating expenses increased $6,435,887 from $234,618 in the nine months
ended January 31, 2000 to $6,670,505 in the nine months ended January 31, 2001.
The operations of US Intellicom accounted for $2,248,082 of the increase, the
operations of Teleconex and TNT accounted for $589,214 of the increase and
$3,598,591 resulted from the operations of Pre-Paid Solutions and increases in
corporate overhead as we emerged from an inactive entity and continued to
establish the infrastructure necessary to accomplish our strategic business
plans.
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The amortization of goodwill was $762,461 for the nine months ended January 31,
2001 as compared to $59,500 for the nine months ended January 31, 2000. This
increase was the result of an increase in goodwill of approximately $16,985,000
associated with the acquisitions of Pre-Paid Solutions and US Intellicom that
occurred in April 2000 and approximately $4,304,000 associated with the
acquisition of Teleconex effective August 1, 2000 and TNT effective December 1,
2000. This increase reflects nine months of amortization in the current period,
which will be approximately $1,141,000 annually.
There was no income tax expense/benefit for the Company for the nine months
ended January 31, 2001 and 2000.
The Company maintains a valuation allowance to state its deferred tax assets at
an estimated net realizable value, this balance at January 31, 2001 was zero due
to the uncertainty related to realization of these assets through future taxable
income. The recognition of any future tax benefits resulting from the net
operating loss carryforwards acquired will reduce goodwill.
Net loss for the nine months ended January 31, 2001 was $5,649,258 as compared
to a loss of $264,151 for the nine months ended January 31, 2000. This increase
in net loss of $5,385,107 is primarily the result of the combined effects of the
increased other operating expenses of $6,435,887 and increased goodwill
amortization of $702,961 offset by $1,807,209 in increased gross profit margins
on revenues.
Liquidity and Capital Resources
For the nine months ended January 31, 2001, net cash used in operating
activities was $2,029,487. This was mainly due to the operating loss for the
period. As of January 31, 2001, we had cash of $41,316 and a net working capital
deficit of $3,772,355.
Net cash provided from financing activities for the nine months ended January
31, 2001 was $1,770,545. The financing of operating losses was provided by
approximately $1,626,320 from the sale of our common stock and issuance of notes
payable of $150,000.
Our ability to meet our future obligations in relation to the orderly payment of
our recurring, general and administrative expenses on a current basis is
dependent on our ability to expand our current customer base, secure and develop
new business opportunities and raise additional capital. We are unable to
predict how long it may be able to survive without a significant infusion of
capital from outside sources and we cannot predict whether such capital
infusion, if available, will be on terms and conditions favorable to us.
The Company's audited financial statements for the year ended April 30, 2000 and
unaudited financial statements for the period ended January 31, 2001 were
prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. However, absent our ability to execute our plans to expand our current
customer base, secure and develop new business opportunities and raise
additional capital, we may be unable to continue as a going concern, which could
significantly impact the liquidation or settlement value of our assets and
liabilities.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On May 6, 1999 Telemac Cellular Corporation filed suit against US Intellicom,
Inc., our wholly owned subsidiary, in the Northern District of California.
Telemac Cellular alleges patent infringement arising out of US Intellicom's use
of its prepaid cellular software products. Telemac is seeking, among other
relief, an undetermined amount of damages. As there are numerous disputed facts
and because Telemac has yet to quantify its claim, we cannot provide a range of
potential loss.
On September 21, 1999, two of our subsidiaries were named as defendants in
lawsuits filed by Topp Telecom, Inc., alleging patent infringement arising out
of having made, used, offered for sale and/or sold in the United States products
which infringe one or more claims of Patent No. 5,613,947 and Patent No.
5,577,100. The claim for monetary damages are undisclosed. As this litigation is
in the early stages, and Topp Telecom has yet to quantify its claim, we cannot
provide a range of potential loss.
On March 7, 2000 RiverHawk Capital Resources instituted an action against US
Intellicom, Inc., in the Superior Court of Fulton County, Georgia. RiverHawk
Capital Resources alleged breach of contract against U.S. Intellicom
Page 13
seeking damages in excess of $300,000 in connection with a "success fee",
pursuant to the letter agreement dated October 27, 1998 between RiverHawk
Capital Resources and US Intellicom, on account of the merger transaction among
U.S. Intellicom, Pre-Cell Solutions and USI Merger Corp. effective April 5,
2000. The complaint was amended to allege that a "success fee" of $2.5 million
was owed to RiverHawk Resources. An arbitrator ruled on June 9, 2000 that US
Intellicom pay to RiverHawk $374,517 as the success fee, plus expenses for the
arbitration proceeding. On July 24, 2000 US Intellicom filed a Response to the
claim and an Application to Vacate the Award in Arbitration. In the event of the
arbitrators decision being upheld, we will be required to pay to RiverHawk
$374,517.
From time-to-time, we are involved in other legal proceedings incidental to the
conduct of our business. We believe that this other litigation, individually or
in the aggregate, to which we are currently a party is not likely to have a
material adverse effect on our business, financial condition or results of
operations.
Item 2. Changes in Securities and Use of Proceeds.
Described below are the sales of securities by the Company during the nine
months ended January 31, 2001 that were not registered under the Securities Act
of 1933, as amended (the "1933 Act"). On the issuance of these securities the
Company relied on the exemption from registration under the 1933 Act set forth
in Section 4(2) thereof, based on established criteria for effecting a private
offering, including the number of offerees for each transaction, access to
information regarding the Company, disclosure of information by the Company,
restrictions on resale of the securities offered, investment representations by
the purchasers, and the qualification of the offerees as "accredited investors."
In July 2000, the Company sold 88,890 shares of its common stock for $66,667 to
two private investors. Based on the knowledge, experience and economic strength
of these investors, the Company believes this transaction was exempt from
registration with the Commission under Section 4(2) of the Securities Act of
1933.
In August and September 2000, the Company sold 2,044,440 shares of its common
stock for $1,533,333 to seventeen private investors. Based on the knowledge,
experience and economic strength of these investors, the Company believes this
transaction was exempt from registration with the Commission under Section 4(2)
of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
No. Exhibit Description Filed Herewith or Incorporated by Reference to:
--- ------------------- -----------------------------------------------
2.3 Agreement and plan of merger among Filed as an exhibit to report on Form 10-Q filed
Pre-Cell Solutions, a Colorado corporation, December 15, 2000.
Pre-Cell Solutions, a Florida corporation,
Teleconex, Inc. and Teleconex Stockholders
2.4 Services Agreement among Pre-Cell Filed as an exhibit to report on Form 10-Q filed
Solution, a Florida corporation and December 15, 2000.
Teleconex, Inc.
Page 14
Exhibit
No. Exhibit Description Filed Herewith or Incorporated by Reference to:
--- ------------------- -----------------------------------------------
2.5 Agreement and plan of merger among Filed herewith.
Pre-Cell Solutions, a Colorado corporation,
Transnational Acquisition Corp., a Texas corporation,
Transnational Telecommunications, Inc. and
Transnational Stockholders
2.6 Services Agreement among Pre-Cell Filed herewith
Solution, a Florida corporation and
Transnational Telecommunications, Inc.
(b) Report on Form 8-K
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on March 20, 2001.
PRE-CELL SOLUTIONS, INC.
By: /s/ Thomas E. Biddix
-----------------------------------------
Thomas E. Biddix
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Thomas E. Biddix President and Chief Executive Officer March 20, 2001
- --------------------
Thomas E. Biddix
/s/ Thomas E Fricks Chief Operating Officer March 20, 2001
- ------------------- (Principal Accounting
Thomas E Fricks and Financial Officer)
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