UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT OF 1934 for the transition period from __________
to ___________
Commission File Number: 0-06334
BRAINWORKS VENTURES, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
NEVADA 87-0281240
(State of Incorporation) (IRS Employer ID Number)
101 MARIETTA STREET, SUITE 3450, ATLANTA, GEORGIA 30303
(Address of Principal Executive Offices)
(404) 524-1667
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or 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 [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 2,603,852 shares as of
February 12, 2001.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
BRAINWORKS VENTURES, INC.
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED DECEMBER 31, 2001
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheet
as of December 31, 2001........................................................................3
Consolidated Statements of Operations
for the Three Months and Nine Months Ended
December 31, 2001 and December 31, 2000.........................................................4
Consolidated Statements of Cash Flows
for the Nine Months Ended December 31, 2001
and December 31, 2000...........................................................................5
Notes to Consolidated Financial Statements......................................................6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...................................7
PART II - OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS...................................................8
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K............................................................8
SIGNATURES...........................................................................................10
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRAINWORKS VENTURES, INC.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2001
ASSETS
Current assets:
Cash $ 649,000
Other receivables 2,000
Due from employees/stockholders 8,000
Prepaid expenses and other current assets 45,000
-----------
Total current assets 704,000
Fixed assets, net of accumulated depreciation of $82,000 311,000
Investments in non-marketable equity securities, at cost 281,000
Intangible assets, net of accumulated amortization of $969,000 2,186,000
-----------
$ 3,482,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 429,000
Due to officers/stockholders 26,000
-----------
Total current liabilities 455,000
-----------
Stockholders' equity
Common stock, $0.01 par value; authorized 25,000,000 shares;
issued and to be issued 2,604,000 shares 26,000
Additional paid-in capital 8,618,000
Deferred compensation (1,100,000)
Receivables for stock (60,000)
Accumulated deficit (4,457,000)
-----------
Total stockholders' equity 3,027,000
-----------
$ 3,482,000
===========
See accompanying notes to consolidated financial statements
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BRAINWORKS VENTURES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
----------------------------------- -----------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues $ 68,000 $ 597,000
Cost of Revenues 51,000 535,000
----------- -----------
Gross profit
17,000 62,000
Selling, general and
administrative expenses 856,000 $ 326,000 2,880,000 $ 2,142,000
----------- ----------- ----------- -----------
Loss from operations (839,000) (326,000) (2,818,000) (2,142,000)
Realized gain on sale of
securities 200,000 1,320,000
Interest and dividends 3,000 26,000 19,000 48,000
----------- ----------- ----------- -----------
Loss before income tax provision (836,000) (100,000) (2,799,000) (774,000)
Income tax provision 0 0 0 330,000
----------- ----------- ----------- -----------
Net loss $ (836,000) $ (100,000) $(2,799,000) $(1,104,000)
=========== =========== =========== ===========
Net loss per common share-
basic and diluted $ (0.33) $ (0.10) $ (1.15) $ (1.14)
=========== =========== =========== ===========
Weighted number of shares
outstanding, basic and
diluted 2,555,000 954,000 2,433,000 969,000
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements
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BRAINWORKS VENTURES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31,
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,799,000) $(1,104,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 919,000
Gain on sale of securities (1,120,000)
Stock issued for compensation 21,000
Income taxes payable 317,000
Deferred compensation amortization 1,137,000 1,720,000
Changes in operating assets and liabilities
Accounts receivable 96,000
Prepaid expenses and other current assets 15,000
Accounts payable and accrued liabilities 82,000 7,000
----------- -----------
Net cash used in operating activities (529,000) (180,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition costs (78,000)
Purchase of fixed assets (1,000) (67,000)
Proceeds from sale of investments 1,524,000
Purchase of investments (205,000)
----------- -----------
Net cash (used in) provided by investing activities (79,000) 1,252,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Collections of stock subscriptions receivable 2,000
Collection of notes receivable from officers/ stockholders 225,000
Proceeds from the sale of treasury stock 8,000
Net proceeds from issuance of shares 419,000
----------- -----------
Net cash provided by financing activities 646,000 8,000
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 38,000 1,080,000
Cash, beginning of period 611,000 248,000
----------- -----------
CASH, END OF PERIOD $ 649,000 $ 1,328,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Value of options issued $ 1,320,000 $ 2,229,000
Value of stock issued for acquisition $ 554,000 $ --
Value of stock issued for fixed assets $ 32,000 $ --
See accompanying notes to consolidated financial statements
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BRAINWORKS VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
Brainworks Ventures, Inc., a Nevada corporation ("BWV"), together with
its wholly-owned subsidiaries, Brainworks Ventures Labs, Inc. ("BVL") and
Executive Ventures Partners, Inc. ("EVP"), referred to herein collectively as
the "Company," develops, invests in and operates internet and other technology
companies located primarily in the southeastern United States.
On February 14, 2001, BWV acquired BVL, a venture development company
that provides business consulting services to early stage technology companies.
On May 8, 2001, BWV acquired EVP, a consulting company that specializes in the
development and implementation of corporate venturing programs. EVP's target
clients are Fortune 2000 companies and government research laboratories. EVP
works with clients to identify undervalued assets that can be commercialized
and provides the resources and management talent to build a business around
those assets. EVP also works with businesses to establish corporate venturing
programs that manage corporate venture capital funds designed to make strategic
investments.
The accompanying unaudited, consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, EVP and BVL,
from their respective dates of acquisition. All intercompany balances and
transactions have been eliminated. These unaudited financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America and in accordance with the instructions to Form
10-QSB for interim financial information. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
such statements include all adjustments (consisting of normally recurring
accruals) considered necessary for fair presentation. Operating results for the
nine-month period ended December 31, 2001, are not necessarily indicative of
the results that may be expected for the year ending March 31, 2002. For
further information, refer to the audited consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-KSB for
the year ended March 31, 2001, filed with the Securities and Exchange
Commission on July 16, 2001.
The Company has sustained a significant operating loss for the
nine-month period ended December 31, 2001, and operating losses are expected to
continue. Further, the Company's operations continue to generate negative cash
flow. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company has implemented cost control measures
to reduce operating expenses. Management's plans include raising additional
capital and/or debt financing or the sale of the Company. If the Company raises
additional funds by issuing additional equity securities, then the percentage
ownership of the Company's current stockholders will be diluted. There is no
assurance that such capital and/or debt financing will be available to the
Company when and to the extent required or that, if available, it will be
available on terms acceptable to the Company. The consolidated financial
statements included herein do not include any adjustments that might result
from the outcome of these uncertainties.
NET LOSS PER SHARE
Basic and diluted loss per share for the three-month and nine-month
periods ended December 31, 2001 and December 31, 2000 is computed based on the
weighted average number of common shares outstanding. Common shares issuable on
the exercise of options are not included in the calculation of net loss per
share because their effect would be antidilutive.
NOTE B - ACQUISITION
On May 8, 2001, BWV acquired EVP. All of the outstanding common stock
of EVP was exchanged for 500,000 shares of BWV's common stock, par value $.01
per share (the "Common Stock"), with a fair value of $554,000. The Common Stock
issued in the acquisition is entitled to "piggy-back" registration rights.
Certain stockholders of EVP were also stockholders or directors of the Company
prior to the Company's acquisition of EVP and such stockholders received
390,000 shares out of the total 500,000 shares of Common Stock exchanged. The
transaction was accounted for as a purchase pursuant to Accounting Principle
Board No. 16, Accounting for Business Combinations.
The assets acquired, liabilities assumed and the cost of the acquisition were
as follows:
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Assets acquired:
Current assets, principally accounts and unbilled $122,000
receivables
Fixed assets 5,000
Intangible assets 497,000
--------
$624,000
Liabilities assumed:
Accounts payable and accrued liabilities $ 35,000
Due to stockholder 35,000
Common stock issued to EVP stockholders at fair value 554,000
--------
$624,000
The following unaudited pro forma condensed statements of operations
assume the Company's acquisition of EVP occurred on April 1, 2001. In the
opinion of management, all adjustments necessary to present fairly such
unaudited pro forma statements have been made.
Nine months ended December 31,
2001 2000
----------- -----------
Revenue $ 686,000 $ 108,000
Net loss $(2,767,000) $(1,105,000)
Net loss per share $ (1.11) $ (0.75)
NOTE C - RECLASSIFICATION
Certain items in the Company's Quarterly Report on Form 10-QSB for the
period ended December 31, 2000, have been reclassified to conform to current
year classifications. Such reclassifications had no effect on previously
reported income.
NOTE D - PRIVATE PLACEMENT
In November and December 2001, the Company raised net proceeds of
$419,000 in a private placement offering of units. Each unit was sold for $3.00
and consisted of 1 share of common stock and one warrant exercisable at $5.50.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain statements contained in this Quarterly Report on Form 10-QSB
are "forward-looking statements," within the meaning of the Private Securities
Litigation Reform Act of 1995, and are thus prospective in nature. Such
forward-looking statements reflect management's beliefs and assumptions and are
based on information currently available to management. The forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause actual results, performance or achievements of the Company to
differ materially from those expressed or implied in such statements. There can
be no assurance that such factors or other factors will not affect the accuracy
of such forward-looking statements.
RESULTS OF OPERATIONS
For the three months ended December 31, 2001 and 2000, the Company
recorded revenues of $68,000 and $0, respectively. The source of revenue is from
consulting services provided by EVP during the period ended December 31, 2001.
For the three months ended December 31, 2001 and 2000, the cost of
revenue was $51,000 and $0, respectively. The cost of revenue is primarily
direct consulting and payroll expenses.
For the three months ended December 31, 2001, selling, general and
administrative expenses were $856,000, an increase of $530,000 over the
corresponding period ended December 31, 2000. The increase was primarily due to
higher payroll expenses and operating costs incurred from the acquisitions of
BVL and EVP and a non-cash compensation charge of $350,000 related to
amortization of stock options granted to consultants and advisors.
For the nine months ended December 31, 2001 and 2000, the Company
recorded revenues of $597,000 and $0, respectively. The increase in revenue is
primarily due to consulting revenue earned by BVL and EVP.
7
For the nine months ended December 31, 2001 and 2000, the cost of
revenue was $535,000 and $0, respectively. The cost of revenue is primarily
direct consulting and payroll expenses.
For the nine months ended December 31, 2001, selling, general and
administrative expenses were $2,880,000, an increase of $738,000 over the
corresponding period ended December 31, 2000. The increase is primarily due to
higher payroll and operating costs incurred after the acquisitions of BVL and
EVP and a non-cash compensation charge of $1,137,000 related to the
amortization of stock options granted to consultants and advisors. Selling,
general and administrative expenses for the nine months period ended December
31, 2000, included a non-cash compensation charge of $1,720,000 related to the
stock options granted for services.
During the nine months ended December 31, 2000, the Company realized
net gains of $1,320,000 on the disposal of its investments in Corporacion De La
Fonda and $200,000 on the sale of mineral rights.
The Company continues to incur significant operating costs. These
costs primarily consist of payroll expenses, professional fees and consulting
expenses. The Company's ability to attain profitability depends, in part, on
its ability to increase consulting revenue from EVP and BVL.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, working capital was $249,000 compared to
$653,000 at March 31, 2001. This decrease was principally due to cash used in
operations resulting from the current period loss.
For the nine months ended December 31, 2001, net cash used in
operating activities was $529,000 and net cash used in investing activities was
$79,000. Net cash provided by financing activities was $646,000, including net
proceeds of $419,000 from a private placement of Common Stock and Warrants and
the collection of a $225,000 note receivable from an officer and director of
the Company. For the nine months ended December 31, 2000, net cash used in
operations was $180,000, net cash provided by investing activities was
$1,252,000 and net cash provided by financing activities was $8,000.
Current assets as of December 31, 2001 were $704,000, a decrease of
$252,000 from March 31, 2001 and a decrease of $829,000 from December 31,
2000. Total assets as of December 31, 2001 of $3,482,000 represents a decrease
of $482,000 in total assets from March 31, 2001 and an increase in total
assets from December 31, 2000 of $1,882,000. This increase in total assets was
primarily due to the Company's acquisitions of BVL and EVP, which acquisitions
occurred on February 14, 2001 and May 8, 2001, respectively, and the Company's
issuance of 141,918 shares of Common Stock through a private placement offering
for net proceeds of $419,000.
While management believes that the Company's acquisitions of BVL and
EVP should assist the Company in pursuing its business direction, management's
plans include seeking additional capital or debt financing or the possible sale
of the Company.
INFLATION
The Company does not currently view the effects of inflation as having
a material effect on the Company's business.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Between October 22, 2001 and January 21, 2002, the Company conducted a
private placement offering (the "Private Placement") of shares of Common Stock
and warrants to purchase shares of Common Stock by offering for sale "Units" at
a purchase price of $9,000 per Unit, with each Unit consisting of 3,000 shares
of Common Stock and a warrant to purchase one (1) share of Common Stock at an
exercise price of $5.50 per share, exercisable until five years from date of
grant ("Type I Warrant"). Through the Private Placement, the Company sold 48.3
Units for an aggregate offering price of $434,750 and became obligated to issue
the 144,918 shares of Common Stock and the 144,918 Type I Warrants comprising
the Units sold.
Pursuant to the terms of the Private Placement, upon exercise of a
Type I Warrant, the holder thereof shall receive an additional warrant to
purchase one (1) share of Common Stock at an exercise price of $8.50 share,
8
exercisable until five years from the date of grant ("Type II Warrant"). Also
pursuant to the terms of the Private Placement, upon exercise of a Type II
Warrant, the holder thereof shall receive an additional warrant to purchase one
(1) share of Common Stock at an exercise price of $12.375 per share,
exercisable until five years form date of grant ("Type III Warrant" and,
collectively with the Type I Warrant and the Type II Warrant, the "Warrants").
At the option of the Company, each of the Warrants shall terminate thirty (30)
days after the Company notifies the holder thereof that the closing price of
the Common Stock has equal or exceeded the exercise price of such Warrant for
ten (10) consecutive trading days.
The shares of Common Stock and the Type I Warrants issued pursuant to
the Private Placement were issued without registration under the Securities Act
of 1933, as amended (the "Securities Act"), in reliance upon the exemption in
Rule 506 of Regulation D promulgated pursuant to Section 4(2) of the Securities
Act ("Regulation D"). The Company based such reliance upon factual
representations made to the Company by each purchaser of a Unit as to such
purchaser's investment intent, sophistication, and status as an "accredited
investor," as that term is defined in Rule 501 of Regulation D, among other
things.
On October 22, 2001, the Company issued 2,000 shares of Common Stock
to an independent contractor of the Company in consideration for administrative
services rendered to the Company. These shares were issued without registration
under the Securities Act in reliance upon the exemption of Section 4(2) of the
Securities Act. The Company based such reliance on representations made by such
independent contractor as to such independent contractor's investment intent
and sophistication, among other things.
On November 11, 2001, and pursuant to the Brainworks Ventures, Inc.
2000 Stock Option Plan (the "Plan"), the Company granted a non-qualified stock
option to purchase 20,000 shares of Common Stock to an advisor of the Company
in consideration for advisory services rendered to the Company by such advisor.
This option has an exercise price of $4.25 per share, vests and first becomes
exercisable in its entirety one (1) year from the date of grant, and expires
the earlier of November 2, 2004, or upon the occurrence of certain events
specified in the Stock Option Agreement entered into between the advisor and
the Company pursuant to the Plan. This option was issued without registration
under the Securities Act in reliance upon the exemption of Section 4(2) of the
Securities Act. The Company based such reliance on representations made by the
advisor to the Company as to such advisor's investment intent and
sophistication, among other things.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the
quarter ended December 31, 2001.
9
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
BRAINWORKS VENTURES, INC.
By: /s/ Marc J. Schwartz
-------------------------------------------------
Marc J. Schwartz
Chief Financial Officer, Vice President
and Treasurer
Dated: February 19, 2002
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