===============================================================================
UNITED STATES
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 September 30, 2008
|_| 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: 000-29196
---------
PROFILE TECHNOLOGIES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 91-1418002
------------------------------ --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Park Avenue, Suite 201
Manhasset, New York 11030
------------------------ -----
(Address of principal executive offices) (Zip Code)
(516) 365-1909
--------------
(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 reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|.
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes|_| No |X|.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 15,640,760 shares of Common
Stock as of November 1, 2008.
================================================================================
PROFILE TECHNOLOGIES, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2008
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets (Unaudited)....................................... 3
Statements of Operations (Unaudited) ............................ 4
Statements of Stockholders' Deficit (Unaudited).................. 5
Statements of Cash Flows (Unaudited)............................. 6
Notes to Financial Statements (Unaudited)........................ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 16
Item 4T Controls and Procedures................................... 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................... 22
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds ......................................... 22
Item 3. Defaults Upon Senior Securities........................... 23
Item 4. Submission of Matters to a Vote of Security Holders....... 23
Item 5. Other Information......................................... 23
Item 6. Exhibits.................................................. 23
Signatures
Certifications
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
PROFILE TECHNOLOGIES, INC.
Balance Sheets
(Unaudited)
September 30, June 30,
2008 2008
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 950,566 $ 294,113
Accounts receivable 22,656 16,872
Prepaid expenses and other current assets 13,408 11,557
------------ ------------
Total current assets 986,630 322,542
Equipment, net of accumulated depreciation of $7,447 and $12,791 4,441 7,567
Other assets 7,263 7,303
------------ ------------
Total assets $ 998,334 $ 337,412
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 182,024 $ 168,484
Notes payable to stockholders 7,500 7,500
Current portion of convertible debt, net of unamortized discount of $6,019 and $7,488 18,981 67,512
Deferred wages 779,802 769,792
Accrued professional fees 246,150 232,150
Accrued interest 1,126 1,371
Other accrued expenses 12,644 12,644
------------ ------------
Total current liabilities 1,248,227 1,259,453
Long-term convertible debt, net of unamortized discount of $30,134 and $32,030 4,866 2,970
Stockholders' deficit:
Common stock, $0.001 par value: 35,000,000 shares authorized,
15,639,145 and 14,383,705 shares issued and outstanding 15,639 14,384
Common stock issuable; 1,615 and 5,555 shares 2 6
Additional paid-in capital 16,450,242 15,466,797
Accumulated deficit (16,720,642) (16,406,198)
------------ ------------
Total stockholders' deficit (254,759) (925,011)
Commitments, contingencies and subsequent events
------------ ------------
Total liabilities and stockholders' deficit $ 998,334 $ 337,412
============ ============
See accompanying notes to financial statements.
3
PROFILE TECHNOLOGIES, INC.
Statements of Operations
(Unaudited)
Three months ended
September 30,
2008 2007
------------ ------------
Revenue $ 17,183 $ --
Cost of revenue (11,357) --
------------ ------------
Gross margin 5,826 --
Operating expenses:
Research and development 82,433 87,166
Selling 22,450 --
General and administrative 205,308 187,472
------------ ------------
Total operating expenses 310,191 274,638
------------ ------------
Loss from operations (304,365) (274,638)
Loss on disposal of fixed assets (7,567) --
Interest expense (4,994) (17,318)
Interest income 2,482 3,025
------------ ------------
Net loss $ (314,444) $ (288,931)
============ ============
Basic and diluted net loss per share $ (0.02) $ (0.02)
Weighted average shares outstanding used to
calculate basic and diluted net loss per share 15,131,683 13,161,796
See accompanying notes to financial statements.
4
PROFILE TECHNOLOGIES, INC.
Statements of Stockholders' Deficit
For the Three Months Ended September 30, 2008 and Year Ended June 30, 2008
(Unaudited)
Common Stock Common Stock Issuable
----------------------------- -----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Balance at June 30, 2007 12,798,706 $ 12,799 -- $ --
Issuance of common stock warrants and options
for services to consultants -- -- -- --
Issuance of common stock warrants and options
for services to employees and board of directors -- -- -- --
Issuance of common stock related to the 2007 Offering 1,434,999 1,435 5,555 6
Common stock issuance costs related to the 2007 Offering -- -- -- --
Issuance of common stock upon conversion
of convertible debt to equity 30,000 30 -- --
Exercise of stock options 50,000 50 -- --
Exercise of warrants 70,000 70 -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at June 30, 2008 14,383,705 $ 14,384 5,555 $ 6
Issuance of common stock previously reported as "issuable" 5,555 6 (5,555) (6)
Issuance of common stock for services to consultants -- -- 1,615 2
Stock compensation amortization expense -- -- -- --
Issuance of common stock related to the 2007 Offering 1,109,885 1,109 -- --
Common stock issuance costs related to the 2007 Offering -- -- -- --
Issuance of common stock upon conversion
of convertible debt to equity 100,000 100 -- --
Exercise of warrants 40,000 40 -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at September 30, 2008 15,639,145 $ 15,639 1,615 $ 2
============ ============ ============ ============
(Continued on following page)
PROFILE TECHNOLOGIES, INC.
Statements of Stockholders' Deficit (Continued)
For the Three Months Ended September 30, 2008 and Year Ended June 30, 2008
(Unaudited)
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Deficit
------------ ------------ ------------
Balance at June 30, 2007 $ 13,599,061 $(14,661,970) $ (1,050,110)
Issuance of common stock warrants and options
for services to consultants 83,600 -- 83,600
Issuance of common stock warrants and options
for services to employees and board of directors 525,876 -- 525,876
Issuance of common stock related to the 2007 Offering 1,295,060 -- 1,296,501
Common stock issuance costs related to the 2007 Offering (129,650) -- (129,650)
Issuance of common stock upon conversion
of convertible debt to equity 14,970 -- 15,000
Exercise of stock options 27,450 -- 27,500
Exercise of warrants 50,430 -- 50,500
Net loss -- (1,744,228) (1,744,228)
------------ ------------ ------------
Balance at June 30, 2008 $ 15,466,797 $(16,406,198) $ (925,011)
Issuance of common stock previously reported as "issuable" -- -- --
Issuance of common stock for services to consultants 2,118 -- 2,120
Stock compensation amortization expense 5,563 -- 5,563
Issuance of common stock related to the 2007 Offering 997,794 -- 998,903
Common stock issuance costs related to the 2007 Offering (99,890) -- (99,890)
Issuance of common stock upon conversion
of convertible debt to equity 49,900 -- 50,000
Exercise of warrants 27,960 -- 28,000
Net loss -- (314,444) (314,444)
------------ ------------ ------------
Balance at September 30, 2008 $ 16,450,242 $(16,720,642) $ (254,759)
============ ============ ============
See accompanying notes to financial statements.
5
PROFILE TECHNOLOGIES, INC.
Statements of Cash Flows
(Unaudited)
Three months ended
September 30,
2008 2007
--------- ---------
Cash flows from operating activities:
Net loss $(314,444) $(288,931)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 193 655
Loss on disposal of fixed assets 7,567 --
Accreted discount on convertible debt 3,365 498
Amortization of convertible debt discount included in interest expense -- 14,802
Amortization of debt issuance costs 40 40
Equity issued for services to consultants 2,120 --
Equity issued for services to employees and board of directors 5,563 17,220
Changes in operating assets and liabilities:
Accounts receivable (5,784) --
Prepaid expenses and other current assets (1,851) (3,597)
Accounts payable 13,540 21,194
Deferred wages 10,010 3,549
Accrued professional fees 14,000 36,500
Accrued interest (245) (63)
Other accrued expenses -- 1,279
--------- ---------
Net cash used in operating activities (265,926) (196,854)
Cash flows from investing activities:
Purchase of fixed assets (4,634) --
--------- ---------
Net cash used in investing activities (4,634) --
Cash flows from financing activities:
Common stock issuance costs (99,890) (97,830)
Proceeds from issuance of common stock 998,903 978,300
Proceeds from exercise of warrants 28,000 45,000
--------- ---------
Net cash provided by financing activities 927,013 925,470
--------- ---------
Increase in cash and cash equivalents 656,453 728,616
Cash and cash equivalents at beginning of period 294,113 119,585
--------- ---------
Cash and cash equivalents at end of period $ 950,566 $ 848,201
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,981 $ 1,558
Convertible debt converted into 100,000 and 30,000 shares
of common stock during the three months ended September 30, 2008 and 2007 $ 50,000 $ 15,000
See accompanying notes to financial statements.
6
PROFILE TECHNOLOGIES, INC
Notes to Financial Statements (Unaudited)
September 30, 2008
Note 1: Description of Business and Going Concern Uncertainties
Profile Technologies, Inc. (the "Company"), was incorporated in 1986 and
commenced operations in fiscal year 1988. The Company is in the business of
providing pipeline inspection services to locate corrosion and other anomalies
that require assessment to verify pipeline integrity. The Company has developed
a patented, non-destructive and non-invasive, high speed scanning process that
uses electromagnetic waves to remotely inspect buried and aboveground, cased and
insulated pipelines for corrosion and other anomalies. The Company's inspection
services are available to owners and operators of natural gas and oil pipelines,
power plants and refineries, utilities, and other facilities which have cased or
insulated pipe. The Company is actively marketing to this sector. In conjunction
with providing inspection services, the Company continues research and
development of the application of its patented technologies to inspect pipelines
for internal corrosion and anomalies as well as for those pipelines that are
directly buried.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company incurred cumulative losses
of $16,720,642 through September 30, 2008, and had negative working capital of
$261,597 as of September 30, 2008. The Company faces all of the risks common to
companies that are actively marketing to customers utilizing a relatively new
technology, including under capitalization and uncertainty of funding sources,
high expenditure levels, uncertain revenue streams, and difficulties managing
growth. 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 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.
Note 2: Presentation of Interim Information
The accompanying unaudited interim financial statements have been
prepared in accordance with Form 10-Q instructions and in the opinion of
management of Profile Technologies, Inc., include all adjustments (of a normal
recurring nature) considered necessary to present fairly the financial position
as of September 30, 2008 and December 31, 2007, the results of operations for
the three months ended September 30, 2008 and 2007 and cash flows for the three
months ended September 30, 2008 and 2007. These results have been determined on
the basis of generally accepted accounting principles and practices in the
United States and applied consistently with those used in the preparation of the
Company's 2008 Annual Report on Form 10-KSB. The preparation of financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, and expenses. On an on-going
basis, the Company evaluates its estimates, including contract revenue
recognition and impairment of long-lived assets. Actual results and outcomes may
differ materially from these estimates and assumptions.
Certain information and footnote disclosures normally included in the
annual financial statements presented in accordance with generally accepted
accounting principles in the United States have been condensed or omitted. It is
suggested that the accompanying unaudited interim financial statements be read
in conjunction with the financial statements and notes thereto incorporated by
reference in the Company's 2008 Annual Report on Form 10-KSB.
Note 3: Summary of Significant Accounting Policies
Cash and cash equivalents
Cash and cash equivalents includes highly liquid investments with original
maturities of three months or less. On occasion, the Company has amounts
deposited with financial institutions in excess of federally insured limits.
7
Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate
made for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Management determines the allowance for doubtful accounts by
regularly evaluating individual customer receivables and considering a
customer's financial condition and credit history and economic conditions. To
date, the Company has not deemed it necessary to record an allowance for
doubtful accounts.
Concentration of Credit Risk and Fair Value of Financial Instruments
The Company extends credit to customers based on an evaluation of their
financial condition. The Company does not require any collateral.
Revenue for the three months ended September 30, 2008 consisted of pipeline
inspections performed for one customer. The Company cannot be assured that
additional revenue generating contracts will be secured in the future.
The Company has the following financial instruments: cash, accounts
payable, notes payable to stockholders, and convertible debt. The carrying value
of these instruments, other than the convertible debt, approximates fair value
based on their liquidity. The fair value of the convertible debt was determined
as the excess of the proceeds over the fair value of the warrants.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Deferred Financing Fees
The Company records costs incurred related to debt financings as deferred
financing fees and amortizes, on a straight-line basis, the costs incurred over
the life of the related debt. The amortization is recognized as interest in the
financial statements. Upon conversion into equity or extinguishment of the
related debt, the Company recognizes any unamortized portion of the deferred
financing fees as interest expense.
Deferred Contract Costs
The Company defers costs that are incurred related to future contracts only
if the costs can be directly associated with a specific anticipated contract and
if their recoverability from that contract is probable. The Company evaluates
evidence of recoverability by reviewing signed contracts, written communication,
approved proposals and historical customer relationships in determining the
probability of obtaining a revenue generating contract. If there is uncertainty
surrounding the attainment of a contract, all expenses incurred related to the
contract are expensed as incurred. Upon execution of an anticipated contract,
deferred contract costs are expensed as cost of revenue using the percentage of
completion method of accounting. See "Contract Revenue Recognition" below.
Selling Expenses
Selling expense is primarily comprised of salary expense for employees who
spend time meeting with prospective customers, costs that are incurred by the
Company to provide field demonstrations to prospective customers, and costs
incurred to attend conferences and trade shows.
Contract Revenue Recognition
The Company recognizes revenue from service contracts using the percentage
of completion method of 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. This method is used because
management considers total cost or measurable units of completion to be the best
available measure of progress on contracts. Because of the inherent
uncertainties in estimating costs, it is at least reasonably possible that the
estimates used may change in the near term.
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.
8
Cost of revenue includes contract costs incurred to date as well as any
idle time incurred by personnel scheduled to work on customer contracts.
The Company records revenue from claims and change orders upon customer
approval of revisions to the contract. 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.
Research and Development
Research and development costs are expensed when incurred. During the three
months ended September 30, 2008 and 2007, the Company incurred $82,433 and
$87,166 on research and development activities.
Equipment
Equipment is stated at cost and is depreciated using the straight-line
method over estimated useful lives of two to five years. Contract related assets
are used for inspecting pipelines for corrosion. Contract related assets are
depreciated based on the number of pipelines that the Company anticipates
inspecting over the estimated useful life of the asset, not to exceed three
years.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews long-lived assets, such as equipment and intangibles,
for impairment at least annually or whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
Valuation of Warrants and Options
The Company estimates the value of warrants and option grants using a
Black-Scholes pricing model based on management assumptions regarding the
warrant and option lives, expected volatility, and risk free interest rates.
Vendor Concentration
Consultant Scientist Fees
The Company relies on the expertise of two consultant scientists to
facilitate the development and testing of the Company's hardware and software.
These scientists are also instrumental in compiling and interpreting the data
captured during the use of the hardware and software. The loss of the
specialized knowledge provided by the scientists could have an adverse effect on
the ability of the Company to successfully market its hardware and software.
During the three months ended September 30, 2008 and 2007, the Company incurred
cash fees payable to the scientists of $52,043 and $71,460, which are included
in research and development expense.
As of September 30, 2008, the Company owed the consultant scientists a
total of $88,739, which is included in accounts payable at September 30, 2008.
Recently Issued Accounting Standards
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
(SFAS 157), which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair-value measurements required under
other accounting pronouncements. It does not change existing guidance as to
whether or not an instrument is carried at fair value. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. In February 2008, the FASB issued
FASB Staff Position No. FAS 157-1 (FSP FAS 157-1), which excludes SFAS No. 13,
"Accounting for Leases" and certain other accounting pronouncements that address
fair value measurements under SFAS 13, from the scope of SFAS 157. In February
2008, the FASB issued FASB Staff Position No. 157-2 (FSP 157-2), which provides
a one-year delayed application of SFAS 157 for nonfinancial assets and
liabilities, except for items that are recognized or disclosed at fair value in
9
the financial statements on a recurring basis (at least annually). The Company
is required to adopt SFAS 157 as amended by FSP FAS 157-1 and FSP FAS 157-2 on
July 1, 2009, the beginning of its fiscal year 2010. The Company does not expect
the application of SFAS No. 157 to have a material effect on the Company's
financial statements.
In October 2008, the FASB issued FASB Staff Position No. FAS 157-3,
"Determining the Fair Value of a Financial Asset in a Market That Is Not Active"
(FSP 157-3), which clarifies the application of SFAS 157 when the market for a
financial asset is inactive. Specifically, FSP 157-3 clarifies how (1)
management's internal assumptions should be considered in measuring fair value
when observable data are not present, (2) observable market information from an
inactive market should be taken into account, and (3) the use of broker quotes
or pricing services should be considered in assessing the relevance of
observable and unobservable data to measure fair value. The guidance in FSP
157-3 is effective immediately and will apply to the Company upon adoption of
SFAS 157.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities, Including an Amendment to FASB No.
115" (SFAS 159). Under SFAS 159, entities may elect to measure specified
financial instruments and warranty and insurance contracts at fair value on a
contract-by-contract basis, with changes in fair value recognized in earnings
each reporting period. The election, called the fair value option, will enable
entities to achieve an offset accounting effect for changes in fair value of
certain related assets and liabilities without having to apply more complex
hedge accounting provisions. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company did not elect the fair value
option for any of its existing financial assets or financial liabilities;
therefore, this statement is did not have a material impact on the Company's
financial statements.
In June 2008, the FASB issued Staff Position EITF 03-06-1, "Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities" (FSP EITF 03-06-1). FSP EITF 03-06-1 provides that
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method in SFAS No. 128, "Earnings per Share". EITF
03-06-1 did not have any impact on the Company's financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements, an Amendment of Accounting Research
Bulletin No 51" (SFAS 160). SFAS 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, changes in a parent's ownership of a noncontrolling interest,
calculation and disclosure of the consolidated net income attributable to the
parent and the noncontrolling interest, changes in a parent's ownership interest
while the parent retains its controlling financial interest and fair value
measurement of any retained noncontrolling equity investment. SFAS 160 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption
is prohibited. The Company must adopt SFAS 160 on July 1, 2009, the beginning of
its fiscal year 2010. The Company does not expect the application of SFAS No.
160 to have a material effect on the financial statements.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations"
(SFAS 141R), which establishes principles and requirements for the reporting
entity in a business combination, including recognition and measurement in the
financial statements of the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, and interim periods within those fiscal years. The Company
must adopt SFAS 141R on July 1, 2009, the beginning of its fiscal year 2010. The
Company does not expect the application of SFAS 141R to have a material effect
on the financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities--an Amendment of FASB Statement No. 133"
(SFAS 161), which requires enhanced disclosures about derivative and hedging
activities. This statement is effective for financial statements issued for
periods beginning after November 15, 2008. Early adoption is permitted. The
Company must provide these new disclosures no later than its third quarter of
fiscal 2009. The Company does not expect the application of SFAS 161 to have a
material effect on the financial statements.
Note 4: Stock Based Compensation, Stock Options and Warrants
On January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123R Share-Based Payment ("SFAS 123R"). Prior to January
1, 2006, the Company accounted for stock-based awards under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
10
Employees ("APB 25"), and related Interpretations, as permitted by SFAS 123. In
accordance with APB 25, no compensation expense was required to be recognized
for stock options granted that had an exercise price equal to or greater than
the fair market value of the underlying common stock on the date of grant.
The Company adopted SFAS 123R using the modified-prospective application
method, which requires measurement of compensation cost for all stock-based
awards at fair value on the date of grant and recognition of compensation over
the requisite service period. The Company grants stock options that are either
fully vested upon grant or have a four-year vesting period (defined by SFAS 123R
as the requisite service period), and no performance or service conditions,
other than continued employment. Stock compensation cost related to options that
are fully vested upon grant is recognized immediately. Stock compensation cost
related to options that have a vesting period is amortized ratably over the
requisite service period.
The fair value of stock options is based on the price of a share of the
Company's common stock on the date of grant. In determining fair value of stock
options, the Company uses the Black-Scholes option pricing model that employs
the following key weighted average assumptions:
Three months ended
September 30,
-----------------------------
2008 2007
------------- ------------
Risk-free interest rate N/A * 4.23%
Expected Volatility N/A * 80.78%
Expected dividend yield N/A * 0%
Expected life N/A * 5.0 years
Weighted average Black-Scholes value of options granted N/A * $0.78
* Note: There were no stock options granted during the three months ended
September 30, 2008.
The risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time of grant for a bond with a similar term. The Company does not
anticipate declaring dividends in the foreseeable future. Volatility is
calculated based on the historical weekly closing stock prices for the same
period as the expected life of the option. As permitted by SAB 107, the Company
uses the "simplified" method for determining the expected term of its "plain
vanilla" stock options. SFAS 123R also requires that the Company recognize
compensation expense for only the portion of stock options that are expected to
vest. Therefore, the Company applies an estimated forfeiture rate that is
derived from historical employee termination data and adjusted for expected
future employee turnover rates. To date, the Company has not experienced any
forfeitures. If the actual number of forfeitures differs from those estimated by
the Company, additional adjustments to compensation expense may be required in
future periods. The Company's stock price volatility, option lives and expected
forfeiture rates involve management's best estimates at the time of such
determination, all of which impact the fair value of the option calculated under
the Black-Scholes methodology and, ultimately, the expense that will be
recognized over the life of the option.
The following table sets forth the share-based compensation cost resulting
from stock option grants that was recorded in the Company's Statements of
Operations for the three months ended September 30, 2008 and 2007:
Three months ended
September 30,
------------------------
2008 2007
------- -------
General and administrative $ -- $15,000
Research and development 5,563 2,220
------- -------
Total $ 5,563 $17,220
======= =======
1999 Stock Option Plan
During 1999, the Company adopted a stock option plan (the "1999 Plan"). The
1999 Plan provides for both incentive and nonqualified stock options to be
granted to employees, officers, directors, and consultants. The 1999 Plan
originally provided for the granting of options to purchase a maximum of 500,000
shares of common stock with expiration dates of a maximum of five years from the
date of grant. In November 2006, the Board of Directors amended, and the
11
Company's stockholders approved, an increase in the maximum number of shares of
common stock available for grant to 3,500,000 and an increase in the period of
time for which stock options may be exercisable to ten years from the date of
grant.
Since the inception of the 1999 Plan, and prior to the amendment approved
in November 2006, the Company made various stock option grants that had
expiration dates exceeding five years from the date of grant. These stock option
grants were deemed to be granted outside of the 1999 Plan.
A summary of the Company's stock option activity for the three months ended
September 30, 2008 and the year ended June 30, 2008 follows:
Weighted
Weighted Average
Number Average Remaining Aggregate
of Exercise Contractual Intrinsic
Options (1) Price Term Value
----------- --------- ----------- -----------
Outstanding at June 30, 2007 3,180,000 $ 1.14
Grants 665,000 1.23
Exercises (50,000) 0.55
Expirations (40,000) 6.50
----------
Outstanding at June 30, 2008 and September 30, 2008 3,755,000 $ 1.11 6.20 years $1,277,450
==========
Exercisable at September 30, 2008 3,667,500 $ 1.11 6.25 years $1,246,450
==========
Available for grant at September 30, 2008 (2) 2,030,000
==========
(1) Consists of stock options outstanding under the 1999 Plan and stock
options outstanding that were granted outside of the 1999 Plan.
(2) Shares available for future stock option grants to employees,
officers, directors and consultants of the Company under the 1999
Plan.
The aggregate intrinsic value of the table above represents the total
pretax intrinsic value for all "in-the-money" options (i.e., the difference
between the Company's closing stock price on the last trading day of its fourth
quarter of 2008 and the exercise price, multiplied by the number of shares) that
would have been received by the option holders had all option holders exercised
their options on June 30, 2008. This amount changes based on the fair market
value of the Company's stock.
As of September 30, 2008, the Company had $66,813 of total unrecognized
compensation cost related to unvested stock options, which is expected to be
recognized over a weighted average period of 3.02 years.
12
The following table summarizes information about stock options outstanding
at September 30, 2008:
Options outstanding Options exercisable
---------------------------------------------- ---------------------------------------------
Weighted Weighted
average Weighted average Weighted
Number of remaining average Number of remaining average
Exercise options contractual exercise options contractual exercise
prices outstanding life (years) price exercisable life (years) price
------ ----------- ------------ -------- ----------- ----------- ----------
$0.50 20,000 0.62 $ 0.50 20,000 0.62 $ 0.50
0.70 110,000 0.21 0.70 110,000 0.21 0.70
0.86 435,000 8.12 0.86 435,000 8.12 0.86
0.95 140,000 8.12 0.95 140,000 8.12 0.95
1.05 150,000 3.16 1.05 112,500 2.47 1.05
1.12 285,000 5.71 1.12 285,000 5.71 1.12
1.13 50,000 4.42 1.13 -- -- --
1.16 1,850,000 5.70 1.16 1,850,000 5.70 1.16
1.20 350,000 7.56 1.20 350,000 7.56 1.20
1.21 150,000 7.20 1.21 150,000 7.20 1.21
1.32 200,000 9.13 1.32 200,000 9.13 1.32
1.50 15,000 8.95 1.50 15,000 8.95 1.50
--------- ---------
$0.50 - 1.50 3,755,000 6.20 $ 1.11 3,667,500 6.25 $ 1.11
========= =========
Warrants
The Company has granted warrants to compensate key employees, consultants,
and board members for past and future services and as incentives during
placements of stock and convertible debt.
A summary of the Company's warrant-related activity for the three months
ended September 30, 2008 and the year ended June 30, 2008 follows:
Number of Weighted
warrants average
outstanding exercise price
----------- --------------
Outstanding at June 30, 2007 8,887,456 $ 0.94
Expirations (666,428) 3.24
Exercises (70,000) 0.72
---------
Oustanding at June 30, 2008 8,151,028 $ 0.75
Exercises (40,000) 0.70
---------
Outstanding at September 30, 2008 8,111,028 $ 0.75
=========
13
The following table summarizes information about warrants outstanding, all
of which are exercisable at September 30, 2008:
Weighted
average
Number of remaining Weighted
Exercise warrants contractual life average
prices outstanding (years) exercise price
------ ----------- ------- --------------
$0.60 439,600 2.87 $ 0.60
0.75 7,100,000 2.65 0.75
0.86 450,000 8.12 0.86
1.00 50,000 3.53 1.00
1.05 71,428 3.61 1.05
---------
$0.60-1.05 8,111,028 2.98 $ 0.75
=========
Cash received from warrants exercised during the three months ended
September 30, 2008 and 2007 was $28,000 and $50,500.
Note 5: Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the
weighted average number of common shares outstanding during the period. Diluted
net 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 stockholders in
each of the periods presented, basic and diluted net loss per share are the
same.
Excluded from the computation of diluted net loss per share for the three
months ended September 30, 2008, because their effect would be antidilutive, are
stock options and warrants to acquire 11,866,028 shares of common stock with a
weighted-average exercise price of $0.86 per share. Also excluded from the
computation of diluted net loss per share for the three months ended September
30, 2008 are 120,000 shares of common stock that may be issued if investors
exercise their conversion right under the Debentures related to the 2003
Offering as discussed in Note 7 "Convertible Debt" because their effect would be
antidilutive.
Excluded from the computation of diluted net loss per share for the three
months ended September 30, 2007, because their effect would be antidilutive, are
stock options and warrants to acquire 12,093,884 shares of common stock with a
weighted-average exercise price of $0.99 per share. Also excluded from the
computation of diluted net loss per share for the year ended September 30, 2007
are 220,000 shares of common stock that may be issued if investors exercise
their conversion right under the Debentures related to the 2003 Offering as
discussed in Note 7 "Convertible Debt" because their effect would be
antidilutive.
For the three months ended September 30, 2008 and 2007, additional
potential dilutive securities that were excluded from the diluted net loss per
share computation are the exchange rights discussed in Note 8 "Deferred Wages
and Accrued Professional Fees" that could result in options to acquire up to
223,000 shares of common stock with an exercise price of $1.00 per share at
September 30, 2008 and 2007.
For purposes of earnings per share computations, shares of common stock
that are issuable at the end of a reporting period are included as outstanding.
Note 6: Related Parties
Notes Payable to Stockholders
In April 2002, the Company issued a non-interest bearing bridge note
payable to an officer of the Company in the amount of $7,500. The note is
payable in full when the Company determines it has sufficient working capital to
do so. On September 29, 2002, the officer who was owed the $7,500 died.
14
Note 7: Convertible Debt
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. Delinquent interest payments bear interest at a rate of 12% per
annum. 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. Certain events of default will result in the Debentures being
redeemable by the Company upon demand of the holder.
Upon the purchase of, and for each $0.50 of the Debenture's principal
amount, the Company issued to each 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. The Warrants are exercisable at any time prior to the 5th
anniversary date of the redemption of the Debenture.
Warrants issued in connection with the 2003 Offering were recorded based on
their relative fair value as compared to the fair value of the debt at issuance.
The relative fair value of the warrants was recorded as paid-in capital. The
intrinsic value of the Debentures results in a beneficial conversion feature,
recorded as a discount against the Debentures, which reduces the book value of
the convertible debt to not less than zero. The Company amortizes the discount
using the effective interest method over the five-year life of the Debentures.
During the quarter ended March 31, 2005, the Board of Directors terminated
the 2003 Offering. As of the closing date of the 2003 Offering, the Company had
raised $503,000 from the 2003 Offering.
During the three months ended September 30, 2008, two investors exercised
their conversion right and converted their Debenture in the principal amount of
$50,000, pursuant to the terms of the 2003 Offering. Accordingly the investors
were issued a total of 100,000 shares of common stock. The carrying value of the
convertible debt was reclassified as equity upon conversion.
During the three months ended September 30, 2007, one investor exercised
his conversion right and converted his Debenture in the principal amount of
$15,000, pursuant to the terms of the 2003 Offering. Accordingly the investor
was issued 30,000 shares of common stock. The carrying value of the convertible
debt was reclassified as equity upon conversion. Since the convertible debt
instruments include a beneficial conversion feature, the remaining unamortized
discount of $14,802 at the conversion date was recognized as interest expense
during the three months ended September 30, 2007.
As of September 30, 2008, accrued interest on the Debentures was $1,126.
The Company recorded interest expense related to the accretion of the discount
on the Debentures and amortization of the convertible debt discount as a result
of the conversions discussed above of $3,365 and $15,300 for the three months
ended September 30, 2008 and 2007. As of September 30, 2008 the carrying value
of the long-term portion of the Debentures was $4,866, net of unamortized debt
discount of $30,134. As of September 30, 2008 the carrying value of the current
portion of the Debentures was $18,981, net of unamortized debt discount of
$6,019.
Note 8: Deferred Wages and Accrued Professional Fees
To reduce cash outflows, certain of the Company's employees, officers,
consultants, and directors have agreed to defer a portion of their salaries and
professional fees until the Company has sufficient resources to pay the amounts
owed or to exchange such amounts into options as described below. At September
30, 2008, the Company has accrued $1,025,952 related to the deferred payment of
salaries and professional fees of which $779,802 is included under deferred
wages and $246,150 in accrued professional fees. On March 18, 2002, the Board
approved a conversion right on all deferred wages and accrued professional fees
deferred as of March 18, 2002 (the "Conversion Right"). Pursuant to the
Conversion Right, employees, officers, consultants, and directors may elect to
convert $1.00 of fees owed to them as of March 18, 2002 for an option to
purchase two shares of the Company's common stock, at an exercise price of $1.00
per share for a term of five years. Of the total $1,025,952 deferred salaries
and professional fees, the amount subject to the Conversion Right is $111,500,
resulting in the potential issuance of 223,000 options under the terms mentioned
above. No conversions have occurred to date. At March 18, 2002, there was no
intrinsic value associated with these exchange rights. As such, no additional
compensation cost was recorded.
15
Note 9: 2007 Private Placement Equity Offering
On June 21, 2007, the Company entered into a private placement offering
(the "2007 Offering") of 1,300,000 shares of common stock at $0.90 per share to
accredited investors. On October 4, 2007, the Board approved an increase in the
offering to 2,000,000 shares of common stock for a total offering price of
$1,800,000. On June 24, 2008, the Board determined that it was in the best
interests of the Company to extend the termination date of the 2007 Offering and
voted to extend the expiration date to August 15, 2008.
During the three months ended September 30, 2008 and 2007, the Company
raised $998,903 and $978,300 under the terms of the 2007 Offering. Accordingly,
the Company issued 1,109,885 and 1,086,998 shares of common stock pursuant to
the terms of the 2007 Offering during the three months ended September 30, 2008
and 2007.
The 2007 Offering was closed on August 15, 2008. The Company raised gross
proceeds of $2,295,404 and issued 2,550,439 shares of common stock pursuant to
the terms of the 2007 Offering.
The Company engaged two brokerage firms to help in the fund raising efforts
of the 2007 Offering. Pursuant to the terms of the agreement with the brokerage
firms, the Company paid the brokerage firms a ten percent cash commission on all
funds that the brokerage firm helped raise. Accordingly, during the three months
ended September 30, 2008 and 2007, the Company incurred total cash fees payable
to the brokerage firms of $99,890 and $97,860. As of September 30, 2008, the
Company was current with respect to the amount owed the brokerage firms.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Forward-Looking Statements
--------------------------
This Quarterly Report on Form 10-Q 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.
Overview
--------
Profile Technologies, Inc. is in the business of providing pipeline
inspection services to locate corrosion and other anomalies that require
assessment to verify pipeline integrity. The Company has developed a patented,
non-destructive and non-invasive, high speed scanning process that uses
16
electromagnetic waves to remotely inspect buried and aboveground, cased and
insulated pipelines for corrosion and other anomalies. The Company's inspection
services are available to owners and operators of natural gas and oil pipelines,
power plants and refineries, utilities, and other facilities which have cased or
insulated pipe. The Company is actively marketing to this sector. In conjunction
with providing inspection services, the Company continues research and
development of the application of its patented technologies to inspect pipelines
for internal corrosion and anomalies as well as for those pipelines that are
directly buried.
EMW-C Technology
----------------
The Company's core business is based on the technologies that it has
developed and patented for inspection of pipelines using electromagnetic waves.
Born from these technologies, the Company has researched and developed
inspection methods that have become commercial or near commercial products and
services. The Company currently offers a service to inspect cased and thermally
insulated pipelines. This service is marketed by the Company as the EMW-C(TM).
The Company is also in the process of adapting its technology to inspect
pipeline internals for corrosion and other anomalous conditions and has filed
patents for this adaptation. Other applications including inspection of direct
buried pipelines and expansion to other non-pipeline industries are also in
consideration for development.
Capital will be expended to support operations until the Company can
generate sufficient cash flows from operations. In order to do so, the Company
must obtain additional revenue generating contracts for the use of its
commercially available EMW-C(TM) service. The Company has identified a
significant need for cased and insulated pipeline inspection services throughout
North America and abroad. The Company believes that its EMW technology possesses
unique capabilities, is flexible in its application and provides a cost
efficient solution to obtaining valuable information about the condition of the
pipeline that is otherwise difficult to obtain. The Company is working to
position itself as the preferred inspection method by working with pipeline
operators, associations, and regulatory agencies to provide them with an
understanding of the Company's EMW technology and its advantages. The Company
has, and will continue to provide demonstrations, visit with pipeline operators,
and provide presentations at industry conferences. Since the availability of the
EMW-C(TM) in November of 2007, this effort has already resulted in several field
demonstrations and revenue generating contracts and has likewise raised interest
for additional field inspections.
As revenue is generated, the Company will continue to manufacture its EMW
inspection equipment. The Company will also need to hire and train additional
technicians to provide inspection services as demand requires. The Company
expects that if revenue contracts are secured, working capital requirements will
increase. 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. In time, with increased sales, the
Company may consider its position as a service provider and alternatively sell
or lease its service to pipeline operators and/or inspection service providers
while maintaining the intellectual rights to the technology and equipment.
At times when resources and funds are available, the Company will continue
to further develop its secondary technologies with the intent to offer them
commercially. The internal pipeline inspection method is best suited as the next
potential product as patents have already been filed and the development closely
aligns with that of the existing cased and insulated pipeline inspection method.
The Company has already fielded inquires about this new method from potential
customers and expects the development time to be 12 to 24 months, building upon
the previous research already conducted. However, the Company does not expect to
proceed to full time development of this method until greater revenues are
achieved from the EMW-C(TM) or alternate funding and resources are made
available.
Results of Operations
---------------------
Revenue for the three months ended September 30, 2008 and 2007 was $17,183
and $nil. Revenue for the three months ended September 30, 2008 consists of
pipeline inspections performed for one customer. Prior to obtaining these
revenue generating contracts, the Company was engaged solely in the
redevelopment and improvement of its testing hardware and software.
17
Cost of revenue for the three months ended September 30, 2008 and 2007 was
$11,357 and $nil. Cost of revenue for the three months ended September 30, 2008
includes travel expenses to mobilize and demobilize field crews and inspection
equipment to and from the inspection site and employee and consultant
compensation expense to prepare for the job, inspect the pipelines, and
interpret and report the related data to the customer.
Research and development expense for the three months ended September 30,
2008 was $82,433 as compared to $87,166 for the three months ended September 30,
2007. Research and development expense consists of fees paid to consulting
scientists to develop the Company's inspection technologies and hardware, salary
and benefit costs for employees, and supplies and equipment utilized for the
development of the inspection technologies.
Selling expense for the three months ended September 30, 2008 was $22,450
as compared to $nil for the three months ended September 30, 2007. Selling
expense is primarily comprised of salary expense for employees who spend time
meeting with prospective customers, costs that are incurred by the Company to
provide field demonstrations to prospective customers, and costs incurred to
attend conferences and trade shows.
General and administrative expense for the three months ended September 30,
2008 was $205,308 as compared to $187,472 for the three months ended September
30, 2007. The increase is primarily due to the increase in medical and life
insurance premiums.
Loss from operations for the three months ended September 30, 2008 was
$304,365 as compared to $274,638 for the three months ended September 30, 2007.
The increase of $29,727, or 11%, is primarily due to increases in selling
expense of $22,450 and general and administrative expense of $17,836 as a direct
result of providing demonstrations, visiting with pipeline operators, and
providing presentations at industry conferences in anticipation of obtaining
revenue generating contracts in addition to an overall increase in employee
benefit expense.
The Company recorded a loss on disposal of fixed assets of $7,567 during
the three months ended September 30, 2008 as a result of the removal of the cost
and accumulated depreciation from the Company's financial statements for field
equipment that was either no longer in service or deemed obsolete.
Interest expense for the three months ended September 30, 2008 was $4,994
as compared to $17,318 for the three months ended September 30, 2007. The
decrease of $12,324 is substantially the impact of investors exercising their
conversion right in accordance with the terms of the 2003 Offering. Two
investors exercised their conversion right during the three months ended
September 30, 2008 as compared to one investor during the three months ended
September 30, 2007. The discount related to the Debentures converted during the
three months ended September 30, 2008 was expensed during fiscal year 2004 when
these Debentures were deemed to be in default with respect to the payment of
accrued interest. The Company had not defaulted on the Debenture converted to
equity during the three months ended September 30, 2007. Since the convertible
debt instruments include a beneficial conversion feature, the remaining
unamortized discount of $14,802 at the conversion date was recognized as
interest expense during the three months ended September 30, 2007. The decrease
in interest expense during the three months ended September 30, 2008 compared to
September 30, 2007 as a result of the conversion of the Debentures was offset by
an increase in the accretion of the discount on the Debentures. Accreted
interest on the Debentures was $3,365 for the three months ended September 30,
2008 as compared to $498 for the three months ended September 30, 2007.
Interest income for the three months ended September 30, 2008 was $2,482, a
decrease of $543, as compared to $3,025 for the three months ended September 30,
2007.
The Company incurred a net loss of $314,444 and $288,931 for the three
months ended September 30, 2008 and 2007.
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 $16,720,642 through September 30, 2008, and had negative working capital of
$261,597 as of September 30, 2008. 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.
On August 15, 2008, the Company closed a private offering of its common
stock, raising gross proceeds of $2,295,404 from the sale of 2,550,439 shares of
common stock (see Note 9, "2007 Private Placement Equity Offering"). However,
management recognizes that in order to meet the Company's capital requirements
18
and continue to operate, additional financing, including seeking
industry-partner investment or through joint ventures or other possible
arrangements within the next twelve months. 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 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.
At September 30, 2008, the Company had cash and cash equivalents of
$950,566. The Company has financed its operations primarily from funds received
pursuant to the 2007 Private Placement Equity Offering completed by the Company
on August 15, 2008, raising net proceeds of $2,065,864.
Net cash used in operating activities was $265,926 for the three months
ended September 30, 2008, compared to net cash used of $196,854 for the same
period in 2007. The increase of $69,072 in cash used was partially the result of
the Company hiring a new employee in March 2008 (contributing to the increase by
approximately $17,000), increasing the amount paid to an existing employee
(contributing to the increase by $6,000), an increase in employee benefits and
insurance (contributing to the increase by approximately $8,000), and an
increase in supplies and equipment purchased for the development of the
inspection technologies.
Net cash used in investing activities was $4,634 for the three months ended
September 30, 2008, compared to $nil during the same period in 2007. During the
three months ended September 30, 2008, the Company purchased $4,634 of contract
related equipment.
Net cash provided by financing activities was $927,013 for the three months
ended September 30, 2008 compared to net cash provided by financing activities
of $925,470 for the same period in 2007. During the three months ended September
30, 2008, the Company raised net proceeds of $899,013 pursuant to the terms of
the 2007 Offering compared to $880,470 during the three months ended September
30, 2007. Offsetting the increase in cash provided by financing activities as a
result of proceeds received pursuant to the 2007 Offering was the decrease in
proceeds from the exercise of warrants, which was $28,000 during the three
months ended September 30, 2008 and $45,000 during the same period in 2007.
Deferred Wages and Accrued Professional Fees
To reduce cash outflows, certain of the Company's employees, officers,
consultants, and directors have agreed to defer a portion of their salaries and
professional fees until the Company has sufficient resources to pay the amounts
owed or to exchange such amounts into options as described below. At September
30, 2008, the Company has accrued $1,025,952 related to the deferred payment of
salaries and professional fees of which $779,802 is included under deferred
wages and $246,150 in accrued professional fees. On March 18, 2002, the Board
approved a conversion right on all deferred wages and accrued professional fees
deferred as of March 18, 2002 (the "Conversion Right"). Pursuant to the
Conversion Right, employees, officers, consultants, and directors may elect to
convert $1.00 of fees owed to them as of March 18, 2002 for an option to
purchase two shares of the Company's common stock, at an exercise price of $1.00
per share for a term of five years. Of the total $1,025,952 deferred salaries
and professional fees, the amount subject to the Conversion Right is $111,500,
resulting in the potential issuance of 223,000 options under the terms mentioned
above. No conversions have occurred to date. At March 18, 2002, there was no
intrinsic value associated with these exchange rights. As such, no additional
compensation cost was recorded.
Convertible Debt
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. Delinquent interest payments bear interest at a rate of 12% per
annum. 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. Certain events of default will result in the Debentures being
redeemable by the Company upon demand of the holder.
Upon the purchase of, and for each $0.50 of the Debenture's principal
amount, the Company issued to each investor a warrant (the "Warrant") to
purchase one (1) share of the Company's common stock at an exercise price of
19
$0.75 per share. The Warrants are exercisable at any time prior to the 5th
anniversary date of the redemption of the Debenture.
Warrants issued in connection with the 2003 Offering were recorded based on
their relative fair value as compared to the fair value of the debt at issuance.
The relative fair value of the warrants was recorded as paid-in capital. The
intrinsic value of the Debentures results in a beneficial conversion feature,
recorded as a discount against the Debentures, which reduces the book value of
the convertible debt to not less than zero. The Company amortizes the discount
using the effective interest method over the five-year life of the Debentures.
During the quarter ended March 31, 2005, the Board of Directors terminated
the 2003 Offering. As of the closing date of the 2003 Offering, the Company had
raised $503,000 from the 2003 Offering.
During the three months ended September 30, 2008, two investors exercised
their conversion right and converted their Debenture in the principal amount of
$50,000, pursuant to the terms of the 2003 Offering. Accordingly the investors
were issued a total of 100,000 shares of common stock. The carrying value of the
convertible debt was reclassified as equity upon conversion.
During the three months ended September 30, 2007, one investor exercised
his conversion right and converted his Debenture in the principal amount of
$15,000, pursuant to the terms of the 2003 Offering. Accordingly the investor
was issued 30,000 shares of common stock. The carrying value of the convertible
debt was reclassified as equity upon conversion. Since the convertible debt
instruments include a beneficial conversion feature, the remaining unamortized
discount of $14,802 at the conversion date was recognized as interest expense
during the three months ended September 30, 2007.
As of September 30, 2008, accrued interest on the Debentures was $1,126.
The Company recorded interest expense related to the accretion of the discount
on the Debentures and amortization of the convertible debt discount as a result
of the conversions discussed above of $3,365 and $15,300 for the three months
ended September 30, 2008 and 2007. As of September 30, 2008 the carrying value
of the long-term portion of the Debentures was $4,866, net of unamortized debt
discount of $30,134. As of September 30, 2008 the carrying value of the current
portion of the Debentures was $18,981, net of unamortized debt discount of
$6,019.
2007 Private Placement Equity Offering
On June 21, 2007, the Company entered into a private placement offering
(the "2007 Offering") of 1,300,000 shares of common stock at $0.90 per share to
accredited investors. On October 4, 2007, the Board approved an increase in the
offering to 2,000,000 shares of common stock for a total offering price of
$1,800,000. On June 24, 2008, the Board determined that it was in the best
interests of the Company to extend the termination date of the 2007 Offering and
voted to extend the expiration date to August 15, 2008.
During the three months ended September 30, 2008 and 2007, the Company
raised $998,903 and $978,300 under the terms of the 2007 Offering. Accordingly,
the Company issued 1,109,885 and 1,086,998 shares of common stock pursuant to
the terms of the 2007 Offering during the three months ended September 30, 2008
and 2007.
On August 15, 2008, the 2007 Offering was closed. The Company raised gross
proceeds of $2,295,404 and issued 2,550,439 shares of common stock pursuant to
the terms of the 2007 Offering.
The Company engaged two brokerage firms to help in the fund raising efforts
of the 2007 Offering. Pursuant to the terms of the agreement with the brokerage
firms, the Company paid the brokerage firms a ten percent cash commission on all
funds that the brokerage firm helped raise. Accordingly, during the three months
ended September 30, 2008 and 2007, the Company incurred total cash fees payable
to the brokerage firms of $99,890 and $97,860. As of September 30, 2008, the
Company was current with respect to the amount owed the brokerage firms.
Other Commitments
The Company's other contractual obligations consist of commitments under an
operating lease and repayment of a loan payable to a stockholder.
20
As of September 30, 2008, the Company had an outstanding loan payable to a
stockholder with a principal amount of $7,500. The terms stockholder note is
described under "Note 6: Related Parties - Notes Payable to Stockholders."
As of September 30, 2008, the Company has future minimum lease payments of
approximately $21,735 under its operating leases.
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 obtain 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.
Off-Balance Sheet Arrangements
------------------------------
The Company has no off-balance sheet arrangements.
Recent Accounting Pronouncements
--------------------------------
See Note 3 to the Financial Statements in this Form 10-Q.
Item 4T. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of its Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of
the Company's disclosure controls and procedures (as defined in 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as of the end of the period covered by this report.
Based on that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed in the Company's periodic filings under the
Exchange Act is accumulated and communicated to the Company's management,
including the Chief Executive Officer and Chief Financial Officer, to
allow timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
21
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not aware of any legal proceedings contemplated by any
governmental authority or any other party involving the Company or its
properties. As of the date of this report, no director, officer or affiliate is
a party adverse to the Company in any legal proceeding or has an adverse
interest to the Company in any legal proceedings. The Company is not aware of
any other legal proceedings pending or that have been threatened against the
Company or its properties.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Common Stock
On June 21, 2007, the Company entered into a private placement offering
(the "2007 Offering") of 1,300,000 shares of common stock at $0.90 per share to
accredited investors. On October 4, 2007, the Board approved an increase in the
offering to 2,000,000 shares of common stock for a total offering price of
$1,800,000. On June 24, 2008, the Board determined that it was in the best
interests of the Company to extend the termination date of the 2007 Offering and
voted to extend the expiration date to August 15, 2008.
During the three months ended September 30, 2008, the Company raised
$998,903 under the terms of the 2007 Offering. Accordingly, the Company issued
1,109,885 shares of common stock pursuant to the terms of the 2007 Offering. The
issuance of the common stock is exempt from registration pursuant to Section
4(2) of the Securities Act and the stock certificates contained an appropriate
legend stating that such securities have not been registered under the
Securities Act and may not be offered or sold absent registration or an
exemption therefrom.
Convertible Debentures and Warrants
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. Delinquent interest payments bear interest at a rate of 12% per
annum. 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. Certain events of default will result in the Debentures being
redeemable by the Company upon demand of the holder.
Upon the purchase of, and for each $0.50 of the Debenture's principal
amount, the Company issued to each 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. The Warrants are exercisable at any time prior to the 5th
anniversary date of the redemption of the Debenture.
The 2003 Offering was exempt from the registration under Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act"), and Rule 506 of
Regulation D, promulgated by the SEC. In the 2003 Offering, no general
solicitation was made by the Company or any person acting on behalf of the
Company, the Debentures and Warrants were sold subject to transfer restrictions,
and the certificates for the Debentures and Warrants contained an appropriate
legend stating that such securities have not been registered under the
Securities Act and may not be offered or sold absent registration or an
exemption therefrom.
During the three months ended September 30, 2008, two investors exercised
their conversion right and converted their Debentures in the principal amount of
$50,000, pursuant to the terms of the 2003 Offering. Accordingly, the Company
issued 100,000 shares of common stock in accordance with the terms of the 2003
Offering.
Warrant Exercise
During the three months ended September 30, 2008, a stockholder exercised a
warrant to purchase 40,000 shares of common stock at $0.70 per share. The
issuance of the common stock is exempt from registration pursuant to Section
22
4(2) of the Securities Act and the stock certificate contained an appropriate
legend stating that such securities have not been registered under the
Securities Act and may not be offered or sold absent registration or an
exemption therefrom.
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.
See the Exhibit Index attached hereto following the signature page.
23
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities and Exchange Act, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
PROFILE TECHNOLOGIES, INC.
--------------------------
(Registrant)
Date: November 6, 2008 /s/ Henry E. Gemino
---------------------------
Henry E. Gemino
Chief Executive Officer and
Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
Exhibit 3.1 Articles of Incorporation (incorporated by reference
to Exhibit 3.1 to the Company's Registration
Statement on Form SB-2 filed with the Commission on
May 10, 1996).
Exhibit 3.2 Bylaws of the Company (incorporated by reference
to Exhibit 3.3 to the Company's Registration
Statement on Form SB-2 filed with the Commission on
May 10, 1996).
Exhibit 3.3 Amendment to Certificate of Incorporation
(incorporated by reference to Exhibit A to the
Company's Definitive Proxy Statement filed with the
Commission on October 28, 2002).
Exhibit 3.4 Amendment to Certificate of Incorporation
(incorporated by reference to Appendix A to the
Company's Preliminary Proxy Statement filed with the
Commission on September 13, 2006).
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of
Henry E. Gemino, as Chief Executive Officer and Chief
Financial Officer of the Company. *
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. *
--------------------
* Filed herewith.