UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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:
September 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________________ to ________________
Commission file number
0-21151
PROFILE TECHNOLOGIES, INC.
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 91-1418002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2 Park Avenue, Suite 201
Manhasset, New York
(Address of Principal 11030
Executive Office) (Zip Code)
516-365-1909
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the part 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 [X] No [ ]
Applicable only to corporate issuers
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: On November 19, 2003, there were
5,461,659 shares of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X ]
2
TABLE OF CONTENTS
Description Page Number
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
At September 30, 2003 (Unaudited) and At June 30, 2003...........4
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended September 30, 2003 and 2002...................5
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 2003 and 2002....................6
Notes to Condensed Consolidated Financial Statements (Unaudited)..7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................11
Item 3. Controls and Procedures..........................................18
PART II. OTHER INFORMATION
Item 1. Legal Proceeding.................................................19
Item 2. Changes in Securities............................................19
Item 3. Defaults Upon Senior Securities..................................22
Item 4. Submission of Matters to a Vote of Security Holders..............22
Item 5. Other Information................................................22
Item 6. Exhibits and Reports on Form 8-K.................................22
SIGNATURES....................................................................24
CERTIFICATIONS................................................................25
3
PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements.
PROFILE TECHNOLOGIES, INC.
Condensed Balance Sheets
(unaudited)
September 30, June 30,
Assets 2003 2003
Current assets:
Cash and cash equivalents $ -- $ --
Accounts Receivable 53,825 --
Contract work-in-progress 61,750 11,310
Prepaid expenses and other current assets 16,310 50,733
----------- -----------
Total current assets 131,885 62,043
Equipment, net 99,885 115,332
Patents, net 48,868 61,308
Other Assets 2,415 2,415
----------- -----------
Total assets $ 283,053 $ 241,098
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to stockholders $ 793,013 $ 641,012
Accounts payable 253,652 189,903
Accrued liabilities 408,628 348,558
----------- -----------
Total current liabilities $ 1,455,293 1,179,473
----------- -----------
Total liabilities 1,179,473
-----------
Long term convertible debt net of discount of $18,500 at 9/30/03 $ 6,500
Stockholders' equity:
Common stock, $0.001 par value. Authorized 15,000,000
shares; issued and outstanding 5,461,659 shares 5,462 5,462
Additional paid-in capital 8,368,201 8,349,701
Accumulated deficit (9,952,403) (9,293,538)
----------- -----------
Total stockholders' deficit (1,178,740) (938,375)
Commitments, contingencies and subsequent events
Total liabilities and Stockholders' deficit $ 283,053 $ 241,098
=========== ===========
See accompanying notes to condensed financial statements
4
PROFILE TECHNOLOGIES, INC.
Condensed Statements of Operations
(unaudited)
For the three months ended,
September 30,
2003 2002
Revenues $ 136,150 $ 334,913
Cost of revenues 124,948 126,774
Gross profit 11,202 208,139
Operating expenses:
Research and development 42,348 54,652
General and administrative 218,528 204,449
Total operating expenses 260,877 259,101
Loss from operations (249,675) (50,962)
Other income 1,762
6
Interest expense 10,952 9,404
Net loss $ (258,865) $ (60,360)
Basic and diluted net loss per share $ (0.05) $ (0.01)
Shares used to calculate basic and diluted
net loss per share 5,461,659 5,375,167
See accompanying notes to condensed financial statements
5
PROFILE TECHNOLOGIES, INC.
Condensed Statements of Cash Flows
(unaudited)
For the three months ended
September 30,
2003 2002
Cash flows from operating activities:
Net loss $(258,865) $ (60,360)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 29,707 45,143
Accreted interest on notes payable -- 7,529
Stock compensation -- 2,875
Changes in certain assets and liabilities:
Accounts receivable (53,825) (128,306)
Contract work-in-progress (50,440) (103,980)
Prepaid expenses and other current assets 34,423 5,868
Other assets -- 6,463
Other accounts payable 63,750 (36,694)
Accrued liabilities 60,070 33,800
Net cash used in operating activities (175,180) (227,662)
Cash flows from investing activities - Purchase of equipment (1,820) --
Cash flows from financing activities
Proceeds from issuance of subordinated debt and attached warrants 25,000 105,222
Proceeds from issuance of notes payable 152,000 106,500
Net cash provided by financing activities 177,000 211,522
Net decrease in cash and cash equivalents -- (16,140)
Cash and cash equivalents at beginning of the period -- 73,514
Cash and cash equivalents at end of the period $ -- $ 57,374
Supplementary disclosure of cash flow information:
Note payable converted to common stock -- 15,000
Issuance of stock and warrants previously subscribed -- 231,250
See accompanying notes to condensed financial statements
6
PROFILE TECHNOLOGIES, INC
September 30, 2003
Notes to Condensed Financial Statements
1. Description of Business
Profile Technologies, Inc. (the "Company") is in the business of developing and
commercializing potential processes for the nondestructive, noninvasive testing
of both above ground and buried pipelines for the effectiveness of pipeline
cathodic protecting systems and coating integrity. The Company's future revenues
are currently dependent upon the market's acceptance of its sole developed
process.
2. Basis of Presentation
The unaudited interim condensed financial statements and related notes of the
Company have been prepared pursuant to the instructions to Form 10-QSB.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant to such
instructions. The condensed financial statements and related notes should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's annual report on form 10-KSB for the year ended June
30, 2003 (filed October 28, 2003). The information furnished reflects, in the
opinion of management, all adjustments, consisting of only normal recurring
items, necessary for fair presentation of the results of the interim periods
presented. Interim results are not necessarily indicative of results for a full
year.
3. Net Loss Per Share
Basic loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding during the period. Diluted loss per
share is computed by dividing the net loss by the weighted average number of
common and dilutive common equivalent shares outstanding during the period. As
the Company had a net loss attributable to common shareholders in each of the
periods presented, basic and diluted net loss per share are the same.
Excluded from the computation of diluted loss per share for the three months
ended September 30, 2003 are options and warrants to acquire 2,963,817 shares of
common stock with a weighted-average exercise price of $2.25 because their
effect would be antidilutive. Excluded also from the computation of diluted loss
per share for the three months ended September 30, 2002 are options and warrants
to acquire 2,798,817 shares of common stock with a weighted-average exercise
price of $2.35 because their effect would be antidilutive. For the three months
ended September 30, 2003 and 2002, additional potential dilutive securities that
were excluded from the diluted loss per share computation are the exchange
rights discussed in footnote 5 that could result in options to acquire up to
615,816 shares of common stock with an exercise price of $1.00 at September 30,
2003 and 286,850 such shares at September 30, 2002.
7
4. Notes Payable - Stockholders
On May 9, 2002, the Company entered into a bridge loan of up to $150,000 with
Murphy Evans, President and a director of the Company. Mr. Evans has currently
loaned the Company $126,000 pursuant to this bridge loan. Pursuant to the terms
of the loan, once Mr. Evans loaned the Company $125,000, the Company cancelled
150,000 warrants with exercise prices ranging from $3.00 per share to $7.50 per
share (old warrants), previously held by Mr. Evans, with and issued to Mr. Evans
150,000 five-year warrants with an exercise price of $1.05.
The cancellation of the old warrants is an effective re-pricing and will be
accounted for as a "variable plan" until such time as the warrants are
exercised, expire or are forfeited. Variable plan accounting will result in
intrinsic value associated with the warrants being adjusted to compensation
expense based on each reporting period's ending stock value. As of September 30,
2003, no intrinsic value had been recorded related to these warrants as the
stock price was below the exercise price.
As a result of the cancellation and re-issuance of the warrants with a reduced
exercise price, the Company recorded an additional $15,000 discount on notes
payable and an increase in additional paid in capital based on the difference
between the fair value of the old warrants and the fair value of the new
warrants. The fair value of the old and new warrants on the day of cancellation
and issuance was based on an option pricing model with the following
assumptions: warrant lives ranging from 5 to 5.5 years, risk free interest rates
of 5.25%, volatility of 120% and a zero dividend yield. Corresponding interest
expense related to the note was $8,639 and $9,404 for the three months ended
September 30, 2003 and September 30, 2002, respectively.
The original note provided for interest of 6% per annum on the unpaid balance.
Effective January 1, 2003, the Company and Mr. Evans entered into an agreement
under which this note and all other past and future advances from Mr. Evans
carry an interest rate of 5% per annum, interest is payable on June 30 and
December 31 of each year, and the notes mature on December 31, 2003. Under the
terms of this agreement, Mr. Evans loaned the Company an additional $152,000
during the three months ended September 30, 2003. As of September 30, 2003, the
June 30, 2003 interest payments had not been made and Mr. Evans had made no
demand for payment. All advances from Mr. Evans are convertible into any debt or
equity offering by the Company.
In 2002, the Company issued non-interest bearing bridge notes payable to two
officers in the amounts of $15,000 and $7,500, convertible into 21,428 and
10,714 equity units, respectively. Each equity unit is comprised of one share of
common stock accompanied by a detachable five-year warrant to purchase an
additional share of common stock with an exercise price of $1.05. To the extent
that the notes are not converted before maturity, both notes are payable in full
when the Company determines it has sufficient working capital to do so. The note
in the amount of $15,000 was converted to 21,428 equity units described above in
2003.
8
In 2003, the Company issued $50,000 in non-interest bearing bridge notes payable
to two stockholders of the Company, convertible into 71,428 equity units. Each
equity unit is comprised of one share of common stock accompanied by a
detachable five-year warrant to purchase an additional share of common stock
with an exercise price of $1.05. To the extent that the notes are not converted
before maturity, the loans are payable in full when the Company determines it
has sufficient working capital to do so.
In addition, in 2003, the Company issued $34,047 in a note payable to an officer
of the Company. The note accrues interest at 5% and is due and payable on
December 31, 2003. The note is convertible into any debt or equity offering made
by the Company.
The following is a summary of notes payable to stockholders as of September 30,
2003.
Evans 701,465
Officer Notes 41,547
Other Stockholder Notes 50,000
--------
Total $793,012
========
5. Liquidity
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company incurred cumulative losses of
$9,552,403 through September 30, 2003 and had negative working capital of
($1,323,408) as of September 30, 2003. Additionally, the Company has expended a
significant amount of cash in developing its technology and patented processes.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management recognizes that in order to meet the Company's
capital requirements, and continue to operate, additional financing, including
seeking industry-partner investment through joint ventures or other possible
arrangements, will be necessary. The Company is evaluating alternative sources
of financing to improve its cash position and is undertaking efforts to raise
capital. If the Company is unable to raise additional capital or secure
additional revenue contracts and generate positive cash flow, it is unlikely
that the Company will be able to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
To reduce cash outflows, certain of the Company's employees, officers and
directors have agreed to defer a portion of their salaries and consulting fees
from August 2001 until the Company has sufficient resources to pay the amounts
owed or to exchange such amounts into options as described below. At September
30, 2003, the Company accrued approximately $307,908 related to the deferred
payment of the salaries and consulting fees which is included under accrued
liabilities. On March 18, 2002, the Board of Directors approved a right whereby
for each dollar of deferred salary and fees, the employee, officer or director
could exchange their deferred amount for an option to purchase two shares of
common stock with a five-year term at an exercise price of $1.00 per share. No
conversions have occurred to date. As there was no intrinsic value associated
with these exchange rights, no additional compensation cost has been recorded.
9
On June 19, 2003, the Board of Directors approved the offering of $1,000,000 in
convertible debentures. The Debentures are convertible into that number of
shares of the Company's common stock equal to the amount of the converted
indebtedness divided by $0.50 per share. The Debentures bear interest at a rate
of 5% per annum, payable quarterly. The Company is required to redeem each
Debenture on the 5th anniversary of the date of the Debenture. The Company may,
in its discretion, redeem any Debenture at any time prior to the mandatory
redemption date of the Debenture by providing no less than 60 days' prior
written notice to the holder of the Debenture.
Upon the purchase of, and for each $0.50 of the Debenture's principal amount,
the Company will issue to an investor a warrant (the "Warrant") to purchase one
(1) share of the Company's common stock at an exercise price of $0.75 per share.
For example, if an investor executes a Debenture in the principal amount of
$100,000, the Company will issue to such investor 200,000 Warrants. The Warrants
will be exercisable at any time prior to the 5th anniversary date of the
redemption of the Debenture. As of June 30, 2003, the Company had not received
any funds from this offering.
As of September 30, 2003, the Company had raised $25,000 from this offering.
Warrants issued in connection with this offering were recorded as paid-in
capital at their fair value, estimated at $18,500, based on an option pricing
model with the following assumptions: warrant life of 10 years, risk free
interest rate of 4.45%, volatility of 120%, and a zero dividend yield.
Accordingly, the Company recorded a $18,500 discount on the convertible debt
issued under this offering.
6. NASDAQ Delisting
In June 2001, the Company announced that it received a Nasdaq Staff
Determination, indicating that the Company failed to comply with the minimum bid
price and net tangible asset/shareholder equity requirements of the Nasdaq
Marketplace Rules for continued listing set forth in Marketplace Rule
4310(c)(4), and that its securities were, therefore, subject to delisting from
the Nasdaq SmallCap Market. On August 10, 2001, the Nasdaq Stock Market
suspended trading in the Company's common stock. Effective Monday, August 13,
2001, the Company began trading on the Over the Counter Bulletin Board under the
symbol PRTK.
10
Item 2. Management's Discussion and Analysis or Plan of Operation.
General
Since its formation in 1988, Profile Technologies, Inc., a Delaware
corporation (the "Company"), has been engaged in the business of researching and
developing a high speed scanning process, which is nondestructive and
noninvasive, to test remotely buried, encased and insulated pipelines for
corrosion. The Company's electromagnetic wave inspection process, referred to as
the Company's "Inspection EMWSM" or "EMW," is a patented process of analyzing
the waveforms of electrical impulses in a way that extracts point-to-point
information along a segment of pipeline to illustrate the integrity of the
entire pipeline. This process involves sending electrical pulses along the pipe
being tested from two directions toward a varying intersecting point between the
two pulser locations. One or more of the modified pulses is analyzed to
determine whether an anomaly exists at the intersecting location.
The EMW process is designed to detect external corrosion of pipelines which
occurs under pipe insulation and on buried pipes, without the need for taking
the lines out of service, physically removing the insulation or digging up
pipes, and then visually inspecting the outside of the pipe for corrosion. The
Company often can inspect the pipelines by using various access points to the
pipelines that already exist for other reasons. Where such access is not already
available, the Company's technology permits the inspection of pipelines with a
minimal amount of disturbance to the coating or insulation on the pipeline. In
addition, the Company's technology permits an inspection of the entire pipeline,
as opposed to other technologies which only conduct inspections at points
selected for the testing. Such "spot inspections" are not necessarily accurate
in indicating the overall condition of a pipe segment.
The most common forms of pipeline corrosion under insulation are localized
corrosion of carbon steel and chloride stress corrosion cracking of stainless
steel. Refineries, chemical plants, utilities, natural gas transmission
companies and the petroleum industry have millions of miles of pipeline, and
much of this pipeline is exposed to harsh and severe environments. As a result,
there is an on-going effort by these industries to ensure that the quality of
the pipe meets standards established by regulatory bodies and the industry to
protect operating personnel and the environment.
In the summer of 1998, the Company completed its first commercial contract
on the North Slope of Alaska, testing approximately 100 road and carribou
crossings on British Petroleum pipelines under a contract with ASCG Inspection,
Inc.
In the summer of 1999, the Company followed up its initial Alaska work
under a contract with another large multi-national oil company to test
approximately 250 below grade pipes. During the summer of 2000, the Company
expanded its Alaska efforts by testing a total of 372 below-ground pipes. In
2001, the Company tested 441 lines in Alaska. In 2002, the Company inspected 364
lines.
11
Based on estimates provided by its customers, the Company originally
planned to inspect between 400 and 500 below-grade lines in Alaska in 2003.
However, based on the Company's final work scopes and the fact that more than 40
lines could not be tested for physical reasons, the Company anticipates that it
will inspect approximately 250 below-grade pipes this year. In addition to the
approximately 250 below-grade lines that were successfully tested, the Company
competed the testing of approximately 3,500 feet of above-grade, insulated pipes
for one of its Alaska customers in an effort to demonstrate that it should be
included in that customer's 2004 above-grade inspection budget. Although the
Company is confident it can provide greater value to its customer than companies
offering competing inspection technologies for above-grade work, there can be no
assurance that the Company will be able to secure any contracts to perform
above-grade, insulated pipe inspections during the remainder of 2003 or 2004 or
at any time in the future. Nevertheless, because above-grade work can continue
as late as December, the Company will continue to seek such work on a commercial
basis for 2003. If the Company is successful in securing above-grade work for
2004, that work could begin as early as March.
In January 2002, the Company retained Dr. Charles Frost, President of Pulse
Power Physics, Inc., to assist in the improvement of the Company's hardware,
software and its testing and data interpretation methods.
The Company's data interpretation process has also been largely automated.
The Company's business model and strategy is heavily dependent on its ability to
automate the date interpretation process and fully implement its technology. If
the Company is unable to automate completely the data interpretation process and
fully implement its technology, the Company may not be able to secure additional
fee-for-service contracts or implement a licensing and joint venture business
model. As a result, such failure may have a material adverse effect on the
business and financial condition of the Company.
Sales
The Company derives revenue solely from the sale of the EMW inspection
technology service. The Company relies upon several employees, including the
Chief Executive Officer, the Chief Operating Officer, the Vice President - Field
Operations, for the Company's sales functions. The Company relies solely upon
the employees of the Company to conduct its sales activities.
During the three months ended September 30, 2003, all of the Company's
sales were attributable to two customers. These customers individually accounted
for 15% and 85%, and 35% and 65%, of net sales during the three months ended
September 30, 2003 and 2002, respectively.
Marketing
The Company's sales and marketing strategy includes positioning the
Company's EMW technology as the method of choice to detect pipeline corrosion
where the pipelines are either inaccessible to other inspection tools or much
more costly to inspect with tools other than Profile's EMW inspection. Pending
completion of designed improvements to its buried pipe inspection equipment and
procedures, the Company intends to concentrate its marketing efforts on
above-grade insulated pipe such as is common in refineries and chemical plants
and on encased road and stream crossings.
12
Upon completion of its redesigned buried pipe product, which the Company
plans to accomplish during the fiscal year 2004, the Company intends to refocus
on the natural gas utility and pipeline market, particularly in so-called "high
consequence areas" (e.g., densely populated areas). However, the design and
fabrication of an improved buried pipe product is dependent on the availability
of sufficient funding for the project.
There can be no assurance that the Company will be successful in
concentrating its marketing efforts for the EMW technology on above-grade
insulated pipe or in the "high consequence areas" of the natural gas utility and
pipeline market.
Critical Accounting Estimates and Policies
The discussion and analysis of financial condition and results of
operations is based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including contract revenue recognition and impairment of long-lived
assets. The Company bases its estimates on historical experience and on various
other assumptions that the Company believes to be reasonable under the
circumstances, the results of which form its basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ materially from these estimates under
different assumptions and conditions, and such variations may be adverse.
The Company recognizes revenue from service contracts using the
percentage-of-completion method of contract accounting. Contract revenues earned
are measured using either the percentage-of-contract costs incurred to date to
total estimated contract costs or, when the contract is based on measurable
units of completion, revenue is based on the completion of such units.
Historically, the majority of the Company's revenue has been recognized based on
the completion of measurable units. Anticipated losses on contracts, if any, are
charged to earnings as soon as such losses can be estimated. Changes in
estimated profits on contracts are recognized during the period in which the
change in estimate is known. The Company records claims for additional
compensation on contracts upon revision of the contract to include the amount to
be received for the additional work performed. Contract costs include all direct
material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools and repairs, and
depreciation costs. Selling, general, and administrative costs are charged to
expense as incurred. Service contracts generally extend no more than six months.
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company assesses the
recoverability by determining whether the balance can be recovered through
forecasted future operations. The amount of impairment, if any, is measured
based on projected future results using a discount rate reflecting the Company's
assumed average cost of funds.
13
Results of Operations
The Company's operating results depend exclusively on its ability to market
its EMW inspection technology. If the Company is not able to automate completely
the EMW inspection process and fully implement its new technology, the Company
may not be able to obtain future contracts to sell or to license its EMW
technology. Since the Company's revenues are derived solely from the marketing
and sale of its EMW technology, any failure to obtain future contracts will have
a material adverse effect on the business and financial condition of the
Company.
Revenues for the three months ended September 30, 2003 were $136,150 which
represented a decrease of $198,763 or 59% as compared to revenues of $334,913
for the three months ended September 30, 2002. This decrease was due to the
inspection of fewer lines by the Company in Alaska during the fiscal year 2003.
Revenues during the fiscal year ended 2003 and quarter ended September 30, 2003
were derived primarily from work performed on the North Slope of Alaska.
Cost of revenues decreased 1.4% to $124,948 for the three months ended
September 30, 2003 compared to $126,774 for the three months ended September 30,
2002.
Gross profit decreased to $11,202 for the three months ended September 30,
2003 from gross profit of $208,139 for the three months ended September 30,
2002. The decrease in gross profit for the three months ended September 30, 2003
as compared to the same quarter of the previous year resulted from decrease in
revenues and corresponding inefficiencies.
Research and development expenses for the three months ended September 30,
2003 decreased 22.54% to $42,348 from $54,652 for the three months ended
September 30, 2002, a decrease of $14,089. The decrease in the Company's
research and development expenses was due to lower salaries and a reduction in
the number of the Company's employees. In addition, the Company substantially
completed a major research and development project to improve the Company's
hardware and software in the second half of the fiscal year ended 2002.
General and administrative expenses increased to $218,528 for the three
months ended September 30, 2003 from $204,449 for the three months ended
September 30, 2002, an increase of $14,079.
Loss from operations increased to $249,675 for the three months ended
September 30, 2003 compared to $50,962 for the three months ended September 30,
2002 an increase of $198,713. The increase is primarily due to a decrease in
revenues.
Interest expense was $10,952 and $9,404 for the three months ended
September 30, 2003 and September 30, 2002, respectively. This interest expense
resulted from the issuance of a notes payable by the Company to certain
stockholders, as described in "Liquidity and Capital Resources" section below.
Net Loss increased to $258,865 for the three months ended September 30,
2003 compared to $60,360 for the three months ended September 30, 2002, an
increase of $198,505. This increase is due to a reduction in revenues as
discussed above. As a result of the Company's cost structure, which includes a
significant amount of fixed costs, fluctuations in revenue will significantly
impact the Company's gross margin and loss from operations.
14
Liquidity and Capital Resources
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company incurred cumulative losses
of $9,552,403 through September 30, 2003 and had negative working capital of
($1,323,408) as of September 30, 2003. Additionally, the Company has expended a
significant amount of cash in developing its technology and patented processes.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management recognizes that in order to meet the Company's
capital requirements, and continue to operate, additional financing, including
seeking industry-partner investment through joint ventures or other possible
arrangements, will be necessary. The Company is evaluating alternative sources
of financing to improve its cash position and is undertaking efforts to raise
capital. If the Company is unable to raise additional capital or secure
additional revenue contracts and generate positive cash flow, it is unlikely
that the Company will be able to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
To reduce cash outflows, certain of the Company's employees, officers and
directors have agreed to defer a portion of their salaries and consulting fees
from August 2001 until the Company has sufficient resources to pay the amounts
owed or to exchange such amounts into options as described below. At September
30, 2003, the Company accrued approximately $307,908 related to the deferred
payment of the salaries and consulting fees which is included under accrued
liabilities. On March 18, 2002, the Board of Directors approved a right whereby
for each dollar of deferred salary and fees, the employee, officer or director
could exchange their deferred amount for an option to purchase two shares of
common stock with a five-year term at an exercise price of $1.00 per share. No
conversions have occurred to date. As there was no intrinsic value associated
with these exchange rights, no additional compensation cost has been recorded.
On June 19, 2003, the Board of Directors approved the offering (the "2003
Offering") of $1,000,000 in convertible debentures (the "Debentures"). The
Debentures are convertible into that number of shares of the Company's common
stock equal to the amount of the converted indebtedness divided by $0.50 per
share. The Debentures bear interest at a rate of 5% per annum, payable
quarterly. The Company is required to redeem each Debenture on the 5th
anniversary of the date of the Debenture. The Company may, in its discretion,
redeem any Debenture at any time prior to the mandatory redemption date of the
Debenture by providing no less than 60 days' prior written notice to the holder
of the Debenture.
Upon the purchase of, and for each $0.50 of the Debenture's principal
amount, the Company will issue to an investor a warrant (the "Warrant") to
purchase one (1) share of the Company's common stock at an exercise price of
$0.75 per share. For example, if an investor executes a Debenture in the
principal amount of $100,000, the Company will issue to such investor 200,000
Warrants. The Warrants will be exercisable at any time prior to the 5th
anniversary date of the redemption of the Debenture.
15
As of September 30, 2003, the Company had raised $25,000 from the 2003
Offering. Warrants issued in connection with this offering were recorded as
paid-in capital at their fair value, estimated at $18,500, based on an option
pricing model with the following assumptions: warrant life of 10 years, risk
free interest rate of 4.45%, volatility of 120%, and a zero dividend yield.
Accordingly, the Company recorded a $18,500 discount on the convertible debt
issued under the 2003 Offering.
The Company's contractual obligations consist of commitments under
operating leases, deferred salary and fees, and repayment of loans payable to
certain officers, directors and stockholders. Future minimum rental payments on
the operating leases are less than $6,000 for the remainder of the fiscal year
2004, with no further contractual obligations thereafter, although the Company
expects to continue to incur costs on leased properties, as the Company has
extended such leases in the past or will use alternate facilities. As of
September 30, 2003, deferred salary and fees were equal to $307,908, and the
salaries and fees will continue to be deferred until the Company has sufficient
resources to pay the amounts owed, or the employees, officers, or directors
exchange such amounts as described below. On March 18, 2002, the Board of
Directors approved a right under which any such employee, officer or director
could exchange each dollar of his or her deferred salary or fees for an option
to purchase two shares of the Company's common stock which may be exercised over
a five-year term at an exercise price of $1.00 per share. As of September 30,
2003, no conversions have occurred.
As of September 30, 2003, the Company had outstanding loans payable to
certain officers, directors and stockholders with principal amounts, in the
aggregate, equal to $793,012. The terms of the various notes are described below
under "Part II, Item 2, Changes in Securities."
Capital will be expended to support operations until the Company can
generate sufficient cash flows from operations. In order for the Company to
generate cash flows from operations, the Company must generate additional
revenue generating contracts. Management is currently directing the Company's
activities towards obtaining additional service contracts, which, if obtained,
will necessitate the Company attracting, hiring, training and outfitting
qualified technicians. If additional service contracts are obtained, it will
also necessitate additional field test equipment purchases in order to provide
the services. The Company's intention is to purchase such equipment for its
field crews for the foreseeable future, until such time as the scope of
operations may require alternate sources of financing equipment. The Company
expects that if additional contracts are secured, and revenues increase, working
capital requirements will increase. There can be no assurance that the Company's
process will gain widespread commercial acceptance within any particular time
frame, or at all. The Company will incur additional expenses as it hires and
trains field crews and support personnel related to the successful receipt of
commercial contracts. Additionally, the Company anticipates that cash will be
used to meet capital expenditure requirements necessary to develop
infrastructure to support future growth. There can be no assurance that the
Company will be able to secure additional revenue generating contracts to
provide sufficient cash.
16
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains "forward-looking statements."
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes,"
"anticipates," "expects" or words of similar import. Similarly, statements that
describe the Company's projected future results, future plans, objectives or
goals or future conditions or events are also forward looking statements. Actual
results are inherently difficult to predict. Any such forward-looking statements
are subject to the risks and uncertainties that could cause actual results of
operations, financial condition, acquisitions, financing transactions,
operations, expenditures, expansion and other events to differ materially from
those expressed or implied in such forward-looking statements. Any such
forward-looking statements would be subject to a number of assumptions
regarding, among other things, future economic, competitive and market
conditions generally. Such assumptions would be based on facts and conditions as
they exist at the time such statements are made as well as predictions as to
future facts and conditions, the accurate prediction of which may be difficult
and involve the assessment of events beyond the Company's control.
The forward-looking statements contained in this report are based on
current expectations that involve a number of risks and uncertainties. Such
forward-looking statements are based on assumptions that the Company will obtain
or have access to adequate financing to continue its operations, that the
Company will market and provide products and services on a timely basis, that
there will be no material adverse competitive or technological change with
respect to the Company's business, demand for the Company's products and
services will significantly increase, that the Company will be able to secure
additional fee-for-services or licensing contracts, that the Company's executive
officers will remain employed as such by the Company, that the Company's
forecast accurately anticipate market demand, and that there will be no material
adverse change in the Company's operations, business or governmental regulation
affecting the Company or its customers. The foregoing assumptions are based on
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control. Although the Company believes the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements.
17
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported. The Company's executive officers, including
the Company's Chief Executive Officer, who also serves as Chief Financial
Officer, and the Chief Operating Officer, are responsible for establishing and
maintaining disclosure controls and procedures for the Company. These executives
have designed such controls to ensure that all material information related to
the Company is made known to them by others within the organization. As of
September 30, 2003, the Company's Chief Executive Officer and Chief Operating
Officer completed an evaluation of the Company's disclosure controls and
procedures and have determined that such disclosure controls and procedures are
functioning properly and effectively. They did not discover any significant
deficiencies or material weaknesses within the controls and procedures that
require modification. There were no changes in the Company's internal control
over financial reporting identified in connection with the Company's evaluation
that occurred during the Company's first fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
18
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any pending or threatened legal proceedings.
Item 2. Changes in Securities.
On March 18, 2002, the Board of Directors approved an offering of 1,000,000
shares of the Company's common stock at a price of $0.70 per share, with
attached warrants (the "2002 Offering"). Each warrant entitles the holder to
purchase one share of common stock at an exercise price of $1.05 per share until
April 4, 2007. The Company did not incur or pay any commissions with respect to
offers and sales of securities under the 2002 Offering. The 2002 Offering
terminated on December 31, 2002. As of December 31, 2002, the Company had raised
a total of $403,200 from the 2002 Offering. All of the investors were accredited
investors. The 2002 Offering is exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act").
In April 2002, the Company issued a non-interest bearing bridge loan in the
principal amount of $15,000 (the "Gemino Loan") payable to Henry Gemino, the
Chief Executive Officer, Chief Financial Officer and a director and stockholder
of the Company. The terms of the Gemino Loan provided for payment at such time
as the Company determined that it had sufficient working capital to repay the
principal balance of the Gemino Loan and for the conversion into 21,428 equity
units. Each equity unit was comprised of one share of the Company's common
stock, with a detached 5-year warrant to purchase one additional share of the
Company's common stock at an exercise price of $1.05 per share. The Gemino Loan
is exempt from registration under the Securities Act pursuant to Section 4(2)
thereof. The Gemino Loan was converted into the 21,428 equity units in 2002.
In April 2002, the Company issued a non-interest bearing bridge loan in the
principal amount of $7,500 (the "Scott Loan") payable to G.L. Scott, the former
Chairman of the Board of Directors and stockholder of the Company. The Scott
Loan is payable at such time as the Company determines that it has sufficient
working capital to repay the principal balance of the Scott Loan and is
convertible into 10,714 equity units at any time prior to payment. Each equity
unit is comprised of one share of the Company's common stock, with a detached
5-year warrant to purchase one additional share at an exercise price of $1.05
per share. The Scott Loan is exempt from registration under the Securities Act
pursuant to Section 4(2) thereof. On September 29, 2002, Mr. Scott died
unexpectedly from a stroke before converting any part of this loan. As of
November 14, 2003, Mr. Scott's estate had not converted any part of the Scott
Loan into equity units.
On May 9, 2002, the Company entered into a $150,000 bridge loan agreement
with Murphy Evans, the President and a director and stockholder of the Company
(the "Evans Loan"). The Company's Board of Directors approved the terms of the
Evans Loan. The Evans Loan is exempt from registration under Section 4(2) of the
Securities Act.
19
Mr. Evans had loaned the Company $126,000, pursuant to the Evans Loan.
Under the terms of the Evans Loan, once Mr. Evans loaned the Company $125,000,
the Company cancelled 150,000 warrants held by Mr. Evans, with exercise prices
ranging from $3.00 per share to $7.50 per share, and issued to Mr. Evans 150,000
five-year warrants with an exercise price of $1.05 per share. If the Company had
raised $400,000 pursuant to the 2002 Offering within 90 days of May 9, 2002, the
entire loan amount would have been converted into the Company's common stock in
accordance with the terms of the 2002 Offering. However, the Company raised only
$346,250, not $400,000, under the 2002 Offering within 90 days of May 9, 2002.
As a result, under the terms of the Evans Loan, the Company would have been
obligated to commence making monthly loan payments to Mr. Evans in the amount of
$25,000 per month, with interest accruing at 6% per annum on the unpaid
principal balance of the Evans Loan. On March 6, 2003, the Evans Loan was
replaced and superseded by the Amended Evans Loan as described below. As of
March 6, 2003, Mr. Evans made no demand for payment under the Evans Loan, and no
repayments of the Evans Loan had been made by the Company.
During 2002, the Company also entered into certain non-interest bearing
bridge loans in the aggregate amount of $56,500 (the "Subsequent Evans Loan")
payable to Murphy Evans, the President and a director and shareholder of the
Company. The terms of the Subsequent Evans Loan provided for payment at such
time as the Company determined it had sufficient working capital to repay the
principal balance of the Subsequent Evans Loan which was convertible into 81,428
equity units at any time prior to payment. Each equity unit was comprised of one
share of the Company's common stock, with a detached 5-year warrant to purchase
one additional share at an exercise price of $1.05 per share. The Subsequent
Evans Loan is exempt from registration under Section 4(2) of the Securities Act.
On March 6, 2003, the Subsequent Evans Loan was replaced and superseded by the
Amended Evans Loan as described below. As of March 6, 2003, no repayments of the
Subsequent Evans Loan had been made by the Company.
During the fiscal year ended June 30, 2003, Murphy Evans also loaned
$194,650 to the Company (collectively, the "Non-Convertible Evans Loan"). This
loan agreement provided for payment at such time as the Company determined it
had sufficient working capital to repay the Non-Convertible Evans Loan. Interest
was to accrue on the Non-Convertible Evans Loan at a rate of 5% per annum. The
Non-Convertible Evans Loan is exempt from registration under Section 4(2) of the
Securities Act. On March 6, 2003, the Non-Convertible Evans Loan was replaced
and superseded by the Amended Evans Loan as described below. As of March 6,
2003, no repayments of the Evans Loan had been made by the Company.
On March 6, 2003, the Company's Board of Directors approved the Loan
Amendment and Promissory Note (the "Amended Evans Loan") between the Company and
Murphy Evans. The Amended Evans Loan amends and supersedes the indebtedness
under the Evans Loan, Subsequent Evans Loan and Non-Convertible Evans Loan by
aggregating the debt under all of these loans by Mr. Evans into one promissory
note bearing interest on the aggregate principal balance at a rate of 5% per
annum, payable on June 30 and December 31 of each year. The outstanding balance
under the Amended Evans Loan is due and payable in full on December 31, 2003.
The Amended Evans Loan superseded and replaced all of the terms under the Evans
Loan, Subsequent Evans Loan and Non-Convertible Evans Loan, including the
conversion feature under the Subsequent Evans Loan.
20
In addition, the terms of the Amended Evans Loan will apply to all future
loans that may be made to the Company by Murphy Evans. Due to the necessity by
the Company to obtain additional financing in the future to sustain the
Company's operations, the Board of Directors approved the terms of the Amended
Evans Loan. From March 6, 2003 through June 30, 2003, Murphy Evans loaned the
company an additional $172,315 under the Amended Evans Loan. During the three
months ended September 30, 2003, Mr. Evans loaned the Company an additional
$152,000 under the Amended Evans Loan. The Amended Evans Loan is exempt from
registration under Section 4(2) of the Securities Act. As of September 30, 2003,
the outstanding principal balance of the Amended Evans Loan was equal to
$701,465. As of November 14, 2003, the Company has not made the interest payment
due on June 30, 2003 under the Amended Evans Loan, and Mr. Evans has not made
any demand for payment, or exercised any of his remedies, under the Amended
Evans Loan.
During the twelve months ended June 30, 2003, the Company entered into two
non-interest bearing bridge loans in the respective principal amounts of $40,000
and $10,000 (the "Shareholder Loans") payable to two shareholders of the
Company. The terms of the Shareholder Loans provide for payment at such time as
the Company determines it has sufficient working capital to repay the principal
balances of the Shareholder Loans. The Shareholder Loans are convertible into
57,142 and 14,286 equity units, respectively, at any time prior to payment. Each
equity unit is comprised of one share of the Company's common stock, with a
detached 5-year warrant to purchase one additional share at an exercise price of
$1.05 per share. The Shareholder Loans are exempt from registration under
Section 4(2) of the Securities Act. As of November 14, 2003, neither shareholder
had converted either Shareholder Loan into equity units.
On June 19, 2003, the Board of Directors approved a promissory note (the
"2003 Gemino Note") in the principal amount of $34,047 payable to Henry E.
Gemino, the Chief Executive Officer, Chief Financial Officer and a director and
stockholder of the Company. The 2003 Gemino Note bears interest at the rate of
5% per annum, payable on each June 30 and December 31 of each year. The 2003
Gemino Note evidences the Company's obligation to repay Mr. Gemino certain
amounts advanced by Mr. Gemino to pay certain expenses of the Company. The
outstanding balance under the 2003 Gemino Note is due and payable in full on
December 31, 2003. The 2003 Gemino Note is exempt from registration under
Section 4(2) of the Securities Act. As of September 30, 2003, the outstanding
principal balance of the 2003 Gemino Note was equal to $34,047. As of November
14, 2003, the Company has not made the interest payment due on June 30, 2003
under the 2003 Gemino Note, and Mr. Gemino has not made any demand for payment,
or exercised any of his remedies, under the 2003 Gemino Note.
On June 19, 2003, the Board of Directors approved an offering (the "2003
Offering") of $1,000,000 in convertible debentures (the "Debentures"). The
Debentures are convertible into that number of shares of the Company's common
stock equal to the amount of the converted indebtedness divided by $0.50 per
share. The Debentures bear interest at a rate of 5% per annum, payable
quarterly. The Company is required to redeem each Debenture on the fifth
anniversary of the date of the Debenture. The Company may, in its discretion,
redeem any Debenture at any time prior to the mandatory redemption date of the
Debenture by providing no less than 60 days' prior written notice to the holder
of the Debenture.
21
Upon the purchase of, and for each $0.50 of the Debenture's principal
amount, the Company will issue to an investor a warrant (the "Warrant") to
purchase one (1) share of the Company's common stock at an exercise price of
$0.75 per share. For example, if an investor executes a Debenture in the
principal amount of $100,000, the Company will issue to such investor 200,000
Warrants. The Warrants will be exercisable at any time prior to the 5th
anniversary date of the redemption of the Debenture. The 2003 Offering is exempt
from registration under Section 4(2) of the Securities Act. As of June 30, 2003,
the Company had not received any funds from the 2003 Offering. As of September
30, 2003, the Company had raised $25,000 from the 2003 Offering.
Item 3. Defaults Upon Senior Securities.
On March 6, 2003, the Board of Directors approved the terms of the Amended
Evans Loan between the Company and Murphy Evans. See "Part II, Item 2, Changes
in Securities." The Amended Evans Loan amends and supersedes the indebtedness
under the Evans Loan, the Subsequent Evans Loan and the Non-Convertible Evans
Loan by aggregating the debt under all of these loans by Mr. Evans into one
promissory note bearing interest on the aggregate principal balance at a rate of
5% per annum, payable on June 30 and December 31 of each year. The outstanding
balance under the Amended Evans Loan is due and payable in full on December 31,
2003.
As of September 30, 2003, the outstanding principal balance of the Amended
Evans Loan was equal to $701,465. As of November 14, 2003, the Company has not
made the interest payment in the amount of $13,061, which was due and payable to
Mr. Evans on June 30, 2003. As of November 14, 2003, the Company's total
arrearage under the Amended Evans Loan with respect to this interest payment was
equal to $21,397. As of November 14, 2003, Mr. Evans has not made any demand for
payment, or exercised any of his remedies, under the Amended Evans Loan.
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 31.1 Certification of Henry E. Gemino, as Chief Executive
Officer and Chief Financial Officer of the Company,
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
22
Exhibit 31.2 Certification of Philip L. Jones, as Chief Operating
Officer of the Company, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification under Section 906 of the
Sarbanes-Oxley Act of 2002 by Henry E. Gemino, as
Chief Executive Officer and Chief Financial Officer
of the Company.
Exhibit 32.2 Certification under Section 906 of the
Sarbanes-Oxley Act of 2002 by Philip L. Jones, as
Chief Operating Officer of the Company.
(b) Reports on Form 8-K
None.
23
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROFILE TECHNOLOGIES, INC.
--------------------------
(Registrant)
Date: November 19, 2003 /s/ Henry E. Gemino
-----------------------------------
Henry E. Gemino
Chief Executive Officer and
Chief Financial Officer
24