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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 December 31, 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
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PROFILE TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 91-1418002
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Park Avenue, Suite 201
Manhasset, New York 11030
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(Address of principal executive offices) (Zip Code)
(516) 365-1909
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(Registrant's telephone number, including area code)
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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 |_| Smaller reporting company |X|
(Do not check if a smaller reporting company)
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 February 6, 2009.
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PROFILE TECHNOLOGIES, INC.
FORM 10-Q
For the Quarterly Period Ended December 31, 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............................................22
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........23
Item 3. Defaults Upon Senior Securities....................................23
Item 4. Submission of Matters to a Vote of Security Holders................23
Item 5. Other Information..................................................24
Item 6. Exhibits...........................................................24
Signatures
Certifications
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
PROFILE TECHNOLOGIES, INC.
Balance Sheets
(Unaudited)
December 31, June 30,
2008 2008
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 673,538 $ 294,113
Accounts receivable 18,670 16,872
Prepaid expenses and other current assets 8,925 11,557
------------ ------------
Total current assets 701,133 322,542
Equipment, net of accumulated depreciation of $8,026 and $12,791 3,861 7,567
Other assets 7,223 7,303
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Total assets $ 712,217 $ 337,412
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 146,549 $ 168,484
Notes payable to stockholders 7,500 7,500
Current portion of convertible debt, net of unamortized discount
of $30,723 and $7,488 29,277 67,512
Deferred wages 789,812 769,792
Accrued professional fees 245,150 232,150
Accrued interest 756 1,371
Other accrued expenses 12,644 12,644
------------ ------------
Total current liabilities 1,231,688 1,259,453
Long-term convertible debt, net of unamortized discount of $0 and $32,030 -- 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; 41,952 and 5,555 shares 42 6
Additional paid-in capital 17,267,034 15,466,797
Accumulated deficit (17,802,186) (16,406,198)
------------ ------------
Total stockholders' deficit (519,471) (925,011)
Commitments, contingencies and subsequent events
------------ ------------
Total liabilities and stockholders' deficit $ 712,217 $ 337,412
============ ============
See accompanying notes to financial statements.
3
PROFILE TECHNOLOGIES, INC.
Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2008 2007 2008 2007
------------ ------------ ------------ ------------
Revenue $ 10,098 $ 13,300 $ 27,281 $ 13,300
Cost of revenue (11,796) (18,834) (23,153) (18,834)
------------ ------------ ------------ ------------
Gross margin (1,698) (5,534) 4,128 (5,534)
Operating expenses:
Research and development 295,482 178,014 377,915 265,180
Selling 62,113 -- 84,563 --
General and administrative 716,622 692,204 921,930 879,676
------------ ------------ ------------ ------------
Total operating expenses 1,074,217 870,218 1,384,408 1,144,856
------------ ------------ ------------ ------------
Loss from operations (1,075,915) (875,752) (1,380,280) (1,150,390)
Loss on disposal of fixed assets -- -- (7,567) --
Interest expense (6,321) (2,740) (11,315) (20,058)
Interest income 692 6,010 3,174 9,035
------------ ------------ ------------ ------------
Net loss $ (1,081,544) $ (872,482) $ (1,395,988) $ (1,161,413)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.07) $ (0.06) $ (0.09) $ (0.09)
Weighted average shares outstanding used to
calculate basic and diluted net loss per share 15,657,471 13,946,117 15,394,577 13,629,912
See accompanying notes to financial statements.
4
PROFILE TECHNOLOGIES, INC.
Statements of Stockholders' Deficit
For the Six Months Ended December 31, 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 -- -- -- --
Stock compensation amortization expense -- -- -- --
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 -- -- 1,952 2
Issuance of common stock options for services to consultants -- -- -- --
Issuance of common stock options for services to employees
and board of directors -- -- -- --
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 stock options -- -- 40,000 40
Exercise of warrants 40,000 40 -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 2008 15,639,145 $ 15,639 41,952 $ 42
============ ============ ============ ============
Table continues below.
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 509,250 -- 509,250
Stock compensation amortization expense 16,626 16,626
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 2,687 -- 2,689
Issuance of common stock options for services to consultants 114,400 -- 114,400
Issuance of common stock options for services to employees
and board of directors 668,300 -- 668,300
Stock compensation amortization expense 11,126 -- 11,126
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 stock options 27,960 -- 28,000
Exercise of warrants 27,960 -- 28,000
Net loss -- (1,395,988) (1,395,988)
------------ ------------ ------------
Balance at December 31, 2008 $ 17,267,034 $(17,802,186) $ (519,471)
============ ============ ============
See accompanying notes to financial statements.
5
PROFILE TECHNOLOGIES, INC.
Statements of Cash Flows
(Unaudited)
Six Months Ended
December 31,
2008 2007
----------- -----------
Cash flows from operating activities:
Net loss $(1,395,988) $(1,161,413)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 773 1,310
Loss on disposal of fixed assets 7,567 --
Accreted discount on convertible debt 8,795 1,301
Amortization of convertible debt discount included in interest expense -- 14,802
Amortization of debt issuance costs 80 80
Equity issued for services to consultants 117,089 83,600
Equity issued for services to employees and board of directors 668,300 509,250
Stock compensation amortization expense 11,126 5,500
Changes in operating assets and liabilities:
Accounts receivable (1,798) (13,300)
Prepaid expenses and other current assets 2,632 (960)
Other assets -- 1,551
Accounts payable (21,935) (3,110)
Deferred wages 20,020 9,253
Accrued professional fees 13,000 10,000
Accrued interest (615) (172)
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Net cash used in operating activities (570,954) (542,308)
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) (117,150)
Proceeds from issuance of common stock 998,903 1,171,501
Proceeds from exercise of stock options and warrants 56,000 50,500
----------- -----------
Net cash provided by financing activities 955,013 1,104,851
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Increase in cash and cash equivalents 379,425 562,543
Cash and cash equivalents at beginning of period 294,113 119,585
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Cash and cash equivalents at end of period $ 673,538 $ 682,128
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,055 $ 3,053
Convertible debt converted into 100,000 and 30,000 shares
of common stock during the six months ended December 31, 2008 and 2007 $ 50,000 $ 15,000
See accompanying notes to financial statements.
6
PROFILE TECHNOLOGIES, INC
Notes to Financial Statements
(Unaudited)
December 31, 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 inspect remotely 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, refineries, utilities, and other facilities which have cased or
insulated pipe. The Company is actively marketing to these sectors. 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 17,802,186 through December 31, 2008, and had negative working capital of
$530,555 as of December 31, 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
December 31, 2008 and June 30, 2008, the results of operations for the three and
six months ended December 31, 2008 and 2007 and cash flows for the six months
ended December 31, 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.
Certain information and footnote disclosures normally included in the
quarterly 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
Application of Significant Accounting Policies
The preparation of the Company's financial statements requires management
to make estimates and use assumptions that affect the reported amounts of
assets, liabilities, revenues, and expenses. These estimates and assumptions are
affected by management's application of accounting policies. Critical accounting
policies for the Company include contract revenue recognition, accounting for
research and development costs, and accounting for stock-based compensation. On
an on-going basis, the Company evaluates its estimates. Actual results and
outcomes may differ materially from these estimates and assumptions.
7
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.
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 represent costs incurred to develop the
Company's technology. The Company charges all research and development expenses
to operations as they are incurred except for prepayments which are capitalized
and amortized over the applicable period.
During the three months ended December 31, 2008 and 2007, the Company
incurred $295,482 and $178,014 on research and development activities. During
the six months ended December 31, 2008 and 2007, the Company incurred $377,915
and $265,180 on research and development activities.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with SFAS
No. 123R Share-Based Payment ("SFAS 123R"). Under the fair value recognition
provisions of this statement, share-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as expense
over the requisite service period. Determining the fair value of share-based
awards at the grant date requires judgment, including estimating expected lives
and volatility. In addition, judgment is also required in estimating the amount
of share-based awards that are expected to be forfeited. If actual results
differ significantly from these estimates, stock-based compensation expense and
the Company's results of operations could be materially impacted.
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 December 31, 2008 and 2007, the Company incurred
cash fees payable to the scientists of $66,770 and $86,967. During the six
months ended December 31, 2008 and 2007, the Company incurred cash fees payable
to the scientists of $118,813 and $158,427.
As partial compensation for services rendered, on November 17, 2008, the
Company granted the scientists stock options to purchase a total of 50,000
shares of common stock at an exercise price of $1.70 per share, expiring
November 16, 2013. The 50,000 stock options had a fair value at the date of
grant of $52,000, which is included in research and development expense in the
Company's Statements of Operations for the three and six months ended December
31, 2008.
8
As partial compensation for services rendered, on November 16, 2007, the
Company granted the scientists stock options to purchase a total of 50,000
shares of common stock at an exercise price of $1.20 per share, expiring
November 15, 2012. The 50,000 stock options had a fair value at the date of
grant of $38,000, which is included in research and development expense in the
Company's Statements of Operations for the three and six months ended December
31, 2007.
Total cash and equity compensation expense incurred for settlement of
services rendered by the scientists totaled $118,770 and $170,813, or
approximately 40% and 45%, of research and development expense for the three and
six months ended December 31, 2008.
Total cash and equity compensation expense incurred for settlement of
services rendered by the scientists totaled $124,967 and $196,427, or
approximately 70% and 74%, of research and development expense for the three and
six months ended December 31, 2007.
As of December 31, 2008, the Company owed the consultant scientists a total
of $71,445, which is included in accounts payable.
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
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. The adoption of FSP 157-3 is not expected to
have a material effect on the Company's financial statements.
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 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 non-forfeitable 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". FSP EITF
03-06-1 did not have any impact on the Company's financial statements.
In June 2007, the Emerging Issues Task Force of the FASB issued EITF Issue
No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to
be Used in Future Research and Development Activities, ("EITF 07-3") which is
effective for new contracts entered into for fiscal years beginning after
9
December 15, 2007. EITF 07-3 requires that nonrefundable advance payments for
future research and development activities be deferred and capitalized. Such
amounts will be recognized as an expense as the goods are delivered or the
related services are performed. The Company adopted EITF 07-3 on July 1, 2008,
the beginning of its fiscal year 2009. The adoption of EITF 07-3 did not have a
material 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 its 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 its 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 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 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 Six Months Ended
December 31, December 31,
----------------------- -----------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
Risk-free interest rate 2.13% 3.60% 2.13% 3.66%
Volatility 134.11% 147.24% 134.11% 146.86%
Expected dividend yield 0% 0% 0% 0%
Expected life 4.5 years 4.5 years 4.5 years 4.5 years
Weighted average Black-Scholes value of options granted $1.40 $1.04 $1.40 $1.04
10
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 and six months ended December 31, 2008 and 2007:
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- --------------------
2008 2007 2008 2007
-------- -------- -------- --------
General and administrative $540,700 $506,250 $540,700 $527,100
Research and development 247,563 65,750 253,126 71,250
-------- -------- -------- --------
Total $788,263 $572,000 $793,826 $598,350
======== ======== ======== ========
Stock Option Plans
1999 Stock Plan
On November 16, 1998, the stockholders of the Company ("Stockholders")
approved and adopted the 1999 Stock Plan (the "1999 Stock Plan"). The 1999 Stock
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 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. In
accordance with the 1999 Stock Plan, no incentive stock options may be granted
more than ten years after the 1999 Stock Plan's effective date.
Since the inception of the 1999 Stock 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 Stock Plan.
2008 Stock Plan
On July 10, 2008, The Board approved and adopted the 2008 Stock Ownership
Incentive Plan ("2008 Stock Plan") and received Stockholder approval on November
17, 2008. Upon adoption of the 2008 Stock Plan by the Stockholders, the Company
may no longer grant stock options under the 1999 Stock Plan.
The 2008 Stock Plan is intended to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to employee and consultants, and to promote the success of the
Company's business. In accordance with the 2008 Stock Plan, the Company may
grant stock options to purchase up to 3,500,000 shares of common stock. The Plan
allows incentive stock options to be granted with an expiration date of a
maximum of five years and nonqualified stock options to be granted with an
expiration date of a maximum of ten years from the date of grant.
On November 17, 2008, the Board approved the issuance of stock options,
exercisable for a total of 525,000 shares of common stock pursuant to the 2008
Stock Plan to certain directors, officers, employees and consultants of the
Company. The grant date of the stock options was November 17, 2008 and they are
fully vested upon grant. The stock options granted to directors, officers, and
employees are exercisable until November 16, 2018. The stock options granted to
11
the consultants are exercisable until November 16, 2013. The exercise price of
the stock options granted to affiliates owning or controlling more than ten
percent of the Company's common stock was $1.87. The exercise price of the stock
options granted to non-affiliates was $1.70. On November 17, 2008, the date of
grant, the Company recognized $242,000 as research and development expense
related to the fair value of 175,000 of the stock options and $501,850 as
general and administrative expense related to the fair value of 350,000 of the
stock options. The fair value of the stock option grants that expire on November
16, 2018 was estimated using the Black-Scholes option pricing model with the
following weighted average assumptions: expected volatility of 141%, risk-free
interest rate of 2.32%, expected lives of five years, and a 0% dividend yield.
The fair value of the stock option grants that expire on November 16, 2013 was
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions: expected volatility of 107%, risk-free interest
rate of 1.53%, expected lives of 2.5 years, and a 0% dividend yield.
On December 1, 2008, the Board nominated John Agunzo to the Board of
Directors. The Board granted Mr. Agunzo an option to purchase 35,000 shares of
the Company's common stock, under the Company's 2008 Stock Plan. The exercise
price of the stock option was $1.26, the closing price of the Company's common
stock on December 2, 2008, the first day of active trading following the date of
grant. The stock option is fully vested upon grant and expires on November 30,
2018. In addition, Mr. Agunzo will receive $1,000 per month as compensation for
his services as a Board member, all of which is being deferred until the Company
determines that it has the resources to pay it. The Company recognized $38,850,
at the time of grant, as general and administrative expense for the fair value
of the option grant. The fair value of the option grant was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected volatility of 136%, risk-free interest rate of 1.71%,
expected life of five years, and a 0% dividend yield.
A summary of the Company's stock option activity for the six months ended
December 31, 2008 and related information follows:
Weighted
Weighted Average
Number Average Remaining Aggregate
Of Stock Exercise Contractual Intrinsic
Options (1) Price Term Value
----------- -------- ----------- ----------
Outstanding at June 30, 2008 3,755,000 $ 1.11
Grants 560,000 1.71
Exercises (40,000) 0.70
Expirations (70,000) 0.70
-----------
Outstanding at December 31, 2008 4,205,000 $ 1.20 6.50 years $1,400,850
===========
Exercisable at December 31, 2008 4,117,500 $ 1.20 6.54 years $1,365,475
===========
Available for grant at December 31, 2008 (2) 2,940,000
===========
(1) Consists of stock options outstanding under the 1999 Stock Plan, 2008
Stock Plan, and stock options outstanding that were granted outside of
the 1999 Stock Plan and the 2008 Stock Plan.
(2) Shares available for future stock option grants to employees,
officers, directors and consultants of the Company under the 2008
Stock 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 second
quarter of 2009 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 December 31, 2008. This amount changes based on the fair market
value of the Company's common stock.
As of December 31, 2008, the Company had $61,250 of total unrecognized
compensation cost related to unvested stock options, which is expected to be
recognized over a weighted average period of 2.77 years.
12
Cash received from stock options exercised during the six months ended
December 31, 2008 and 2007 was $28,000 and $0.
The following table summarizes information about stock options outstanding
at December 31, 2008:
Stock Options Outstanding Stock Options Exercisable
---------------------------------------- ---------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Number of Remaining Average Number of Remaining Average
Options Contractual Exercise Options Contractual Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Life (Years) Price
--------------- ----------- ------------ -------- ----------- ------------ --------
$ 0.50 20,000 0.37 $ 0.50 20,000 0.37 $ 0.50
0.86 435,000 7.87 0.86 435,000 7.87 0.86
0.95 140,000 7.87 0.95 140,000 7.87 0.95
1.05 150,000 2.91 1.05 112,500 2.36 1.05
1.12 285,000 5.46 1.12 285,000 5.46 1.12
1.13 50,000 4.17 1.13 -- -- --
1.16 1,850,000 5.45 1.16 1,850,000 5.45 1.16
1.20 350,000 7.31 1.20 350,000 7.31 1.20
1.21 150,000 6.95 1.21 150,000 6.95 1.21
1.26 35,000 9.92 1.26 35,000 9.92 1.26
1.32 200,000 8.88 1.32 200,000 8.88 1.32
1.50 15,000 8.70 1.50 15,000 8.70 1.50
1.70 390,000 8.47 1.70 390,000 8.47 1.70
1.87 135,000 9.88 1.87 135,000 9.88 1.87
------------- ------------
$ 0.50 - 1.87 4,205,000 6.50 $ 1.20 4,117,500 6.54 $ 1.20
============= ============
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 six months
ended December 31, 2008 and related information follows:
Number of Weighted
Warrants Average
Outstanding Exercise Price
----------- --------------
Outstanding at June 30, 2008 8,151,028 $ 0.75
Exercises (40,000) 0.70
---------
Outstanding at December 31, 2008 8,111,028 $ 0.75
=========
13
The following table summarizes information about warrants outstanding, all
of which are exercisable at December 31, 2008:
Weighted
Average
Number of Remaining Weighted
Exercise Warrants Contractual Life Average
Prices Outstanding (Years) Exercise Price
------ ----------- ---------------- --------------
$ 0.60 439,600 2.62 $ 0.60
0.75 7,100,000 2.40 0.75
0.86 450,000 7.87 0.86
1.00 50,000 3.28 1.00
1.05 71,428 3.35 1.05
-----------
$ 0.60-1.05 8,111,028 2.73 $ 0.75
===========
Cash received from warrants exercised during the six months ended December
31, 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
and six months ended December 31, 2008, because their effect would be
antidilutive, are stock options and warrants to acquire 12,316,028 shares of
common stock with a weighted-average exercise price of $.90 per share. Also
excluded from the computation of diluted net loss per share for the three and
six months ended December 31, 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
and six months ended December 31, 2007, because their effect would be
antidilutive, are stock options and warrants to acquire 11,916,028 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 and
six months ended December 31, 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 and six months ended December 31, 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
December 31, 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 and six months ended December 31, 2008, none and 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 and six months ended December 31, 2007, none and 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 six months ended December 31, 2007.
As of December 31, 2008, accrued interest on the Debentures was $756. 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 $5,430 and $8,795 for the three and six
months ended December 31, 2008. 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 $803
and $16,103 for the three and six months ended December 31, 2007. As of December
31, 2008 the carrying value of the current portion of the Debentures was
$29,277, net of unamortized debt discount of $30,723.
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 December
31, 2008, the Company has accrued $1,034,962 related to the deferred payment of
salaries and professional fees of which $789,812 is included under deferred
wages and $245,150 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 $1,034,962 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.
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.
During the three and six months ended December 31, 2008 the Company raised
none and $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 during the six months ended December 31, 2008. During the three and six
months ended December 31, 2007, the Company raised $193,201 and $1,171,501 under
the terms of the 2007 Offering. Accordingly, the Company issued 214,668 and
1,301,666 shares of common stock pursuant to the terms of the 2007 Offering
during the three and six months ended December 31, 2007.
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 and
six months ended December 31, 2008 the Company incurred total cash fees payable
to the brokerage firms of none and $99,890. During the three and six months
ended December 31, 2007 the Company incurred total cash fees payable to the
brokerage firms of $19,320 and $117,150. As of December 31, 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
--------------------------
Except for the historical information presented in this document, the
matters discussed in this Form 10-Q for the three months ended December 31,
2008, and specifically in the items entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations," or otherwise
incorporated by reference into this document, contain "forward-looking
statements" (as such term is defined in the Private Securities Litigation Reform
Act of 1995). These statements are identified by the use of forward-looking
terminology such as "believes," "plans," "intend," "scheduled," "potential,"
"continue," "estimates," "hopes," "goal," "objective," expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties.
The safe harbor provisions of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended,
apply to forward-looking statements made by the Company. The reader is cautioned
that no statements contained in this Form 10-Q should be construed as a
guarantee or assurance of future performance or results. These forward-looking
statements involve risks and uncertainties, including those identified within
this Form 10-Q. The actual results that the Company achieves may differ
materially from any forward-looking statements due to such risks and
uncertainties. These forward-looking statements are based on current
expectations, and the Company assumes no obligation to update this information.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this Form 10-Q and in the Company's other reports filed with
the Securities and Exchange Commission that attempt to advise interested parties
of the risks and factors that may affect the Company's business.
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
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.
16
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
Revenue consists of the inspection fee and reimbursement of costs incurred
to mobilize and demobilize field crews and inspection equipment to and from the
inspection site and other travel related costs.
Revenue for the three months ended December 31, 2008 and 2007 was $10,098
and $13,300. Revenue for the three months ended December 31, 2008 consisted of
pipeline inspections performed for two customers for a total of 9 casings. For
one of the customers, revenue earned during the three months ended December 31,
2008 represented only 13% of the total contractual amount. The other 87% was
recognized in the previous quarter, based on the percentage of completion
method. Revenue for the three months ended December 31, 2007 consisted of
pipeline inspections performed for one customer for a total of 2 casings.
Revenue for the six months ended December 31, 2008 and 2007 was $27,281 and
$13,300. Revenue for the six months ended December 31, 2008 consisted of
pipeline inspections performed for two customers for a total of 9 casings.
Revenue for the three months ended December 31, 2007 consisted of pipeline
inspections performed for one customer for a total of 2 casings.
17
Cost of revenue
Cost of revenue represents the travel expense 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.
Cost of revenue for the three months ended December 31, 2008 and 2007 was
$11,796 and $18,834, resulting in gross margins of (16.8) % and (41.7) %,
respectively. The Company continues to refine its EMW-C inspection technology
and methodology for interpreting the resulting data, resulting in increased
efficiencies and improved gross margins. Additionally, the Company continues to
train field crews who have a lower hourly rate than the Company's consulting
scientists.
Cost of revenues for the six months ended December 31, 2008 and 2007 was
$23,153 and $18,834, resulting in gross margins of 15.1 % and (41.7) %,
respectively. The gross margin improved for the reasons cited above.
Research and Development
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.
Research and development expense for the three months ended December 31,
2008 was $295,482 compared to $178,014 for the three months ended December 31,
2007.
During the three months ended December 31, 2008, the Company granted stock
options to its consulting scientists and two employees to purchase a total of
175,000 shares of common stock at an exercise price of $1.70 per share. The fair
value at the date of grant was $242,000, which is included in research and
development expense for the three months ended December 31, 2008. The remaining
$53,482 included in research and development for the three months ended December
31, 2008 consists of allocated employee salary and benefit costs and cash fees
incurred for services rendered by the consulting scientists as well as equipment
expense.
During the three months ended December 31, 2007, the Company granted stock
options to its consulting scientists and one employee to purchase a total of
75,000 shares of common stock at an exercise price of $1.20 per share. The fair
value at the date of grant was $65,750, which is included in research and
development expense for the three months ended December 31, 2007. The remaining
$112,264 included in research and development for the three months ended
December 31, 2007 consists of allocated employee salary and benefit costs and
cash fees incurred for services rendered by the consulting scientists as well as
equipment expense.
During the three months ended December 31, 2007, the company incurred
approximately $58,000 more in cash fees payable to the consulting scientists for
time spent on research and development activities than during the three months
ended December 31, 2008. During the prior year, the Company was in the process
of refining its EMW-C inspection technology whereas during the current year
there has been an increased shift to obtaining revenue generating contracts.
Research and development expense for the six months ended December 31, 2008
was $377,915, an increase of $112,735, compared to $265,180 for the three months
ended December 31, 2007. The increase from prior year is primarily due to an
increase in stock compensation of $181,876 offset by a decrease in cash fees
payable to the consulting scientists for time spent on research and development
activities of approximately $75,000.
Selling Expense
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.
18
Selling expense for the three and six months ended December 31, 2008 was
$62,113 and $84,563 compared to $0 for the three and six months ended December
31, 2007. The increase from prior year is substantially the result of the
Company providing field demonstrations to a prospective customer for the purpose
of obtaining a revenue generating contract as well as a shift in the Company
focusing on selling related activities rather than research and development
activities.
General and Administrative
General and administrative expense consists of costs incurred for
professional fees, wages and benefits for the executive team, travel and
entertainment, rent, and other administrative fees such as office supplies,
postage and printing costs.
General and administrative expense for the three months ended December 31,
2008 was $716,622, an increase of $24,418, compared to $692,204 for the three
months ended December 31, 2007. The increase is substantially due to an increase
in stock compensation of $34,450.
General and administrative expense for the six months ended December 31,
2008 was $921,930, an increase of $42,254, compared to $879,676 for the six
months ended December 31, 2007. The increase is primarily due to an increase in
stock compensation of $13,600 offset by decreases in travel and entertainment
and insurance premiums.
Loss on Disposal of Fixed Assets
The Company recorded a loss on disposal of fixed assets of $7,567 during
the six months ended December 31, 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
Interest expense for the three months ended December 31, 2008 and 2007 was
$6,321 and $2,740. The increase of $3,581 is substantially the result of an
increase in the accretion of the discount on the Debentures of $2,065.
Interest expense for the six months ended December 31, 2008 and 2007 was
$11,315 and $20,058. The decrease of $8,743 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 six
months ended December 31, 2008 as compared to one investor during the six months
ended December 31, 2007. The discount related to the Debentures converted during
the six months ended December 31, 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 six months ended December 31, 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 six months ended December 31, 2007. The decrease in interest expense
during the six months ended December 31, 2008 compared to the six months ended
December 31, 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 $8,795 for the six months ended December 31, 2008
as compared to $1,301 for the six months ended December 31, 2007.
Interest Income
Interest income for the three and six months ended December 31, 2008 was
$692 and $3,174 compared to $6,010 and $9,035 for the three and six months ended
December 31, 2007. Despite the higher average cash balance maintained during the
three and six months ended December 31, 2008 compared to the three and six
months ended December 31, 2007, interest income decreased as a result of the
sharp decline in the interest rate on the Company's interest-bearing cash
accounts.
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 $17,802,186 through December 31, 2008, and had negative working capital of
$530,555 as of December 31, 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.
19
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
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 December 31, 2008, the Company had cash and cash equivalents of
$673,538. 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 and proceeds received
from the exercise of stock options and warrants.
Net cash used in operating activities was $570,954 for the six months ended
December 31, 2008, compared to net cash used of $542,308 for the same period in
2007. The increase of $28,646 in cash used was partially the result of the
Company hiring a new employee in March 2008 (contributing to the increase by
approximately $29,000), an increases in employee benefits and insurance, an
increase in rent for the research and development facility in New Mexico and
increases travel and entertainment as well as supplies and equipment purchased
for the development of the inspection technologies. These increases were offset
by a decrease of $41,614 in cash fees paid to the consulting scientists.
Net cash used in investing activities was $4,634 for the six months ended
December 31, 2008, compared to $0 during the same period in 2007. During the six
months ended December 31, 2008, the Company purchased $4,634 of contract related
equipment.
Net cash provided by financing activities was $955,013 for the six months
ended December 31, 2008 compared to net cash provided by financing activities of
$1,104,851 for the same period in 2007. During the six months ended December 31,
2008, the Company raised net proceeds of $899,013 pursuant to the terms of the
2007 Offering compared to $1,054,351 during the six months ended December 31,
2007. Offsetting the decrease in cash provided by financing activities as a
result of proceeds received pursuant to the 2007 Offering was the increase in
proceeds from the exercise of stock options and warrants, which was $56,000
during the six months ended December 31, 2008 and $50,500 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 December
31, 2008, the Company has accrued $1,034,962 related to the deferred payment of
salaries and professional fees of which $789,812 is included under deferred
wages and $245,150 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 $1,034,962 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
20
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 and six months ended December 31, 2008, none and 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 and six months ended December 31, 2007, none and 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 six months ended December 31, 2007.
As of December 31, 2008, accrued interest on the Debentures was $756. 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 $5,430 and $8,795 for the three and six
months ended December 31, 2008. 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 $803
and $16,103 for the three and six months ended December 31, 2007. As of December
31, 2008 the carrying value of the current portion of the Debentures was
$29,277, net of unamortized debt discount of $30,723.
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.
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.
During the three and six months ended December 31, 2008 the Company raised
none and $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 during the six months ended December 31, 2008. During the three and six
months ended December 31, 2007, the Company raised $193,201 and $1,171,501 under
the terms of the 2007 Offering. Accordingly, the Company issued 214,668 and
1,301,666 shares of common stock pursuant to the terms of the 2007 Offering
during the three and six months ended December 31, 2007.
21
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 and
six months ended December 31, 2008 the Company incurred total cash fees payable
to the brokerage firms of none and $99,890. During the three and six months
ended December 31, 2007 the Company incurred total cash fees payable to the
brokerage firms of $19,320 and $117,150. As of December 31, 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
operating leases and repayment of a loan payable to a stockholder.
As of December 31, 2008, the Company had an outstanding loan payable to a
stockholder with a principal amount of $7,500. The terms of the stockholder note
are described under "Note 6: Related Parties - Notes Payable to Stockholders."
As of December 31, 2008, the Company has future minimum lease payments of
approximately $11,694 under its operating leases.
Off-Balance Sheet Arrangements
------------------------------
The Company has no off-balance sheet arrangements.
Recently Issued Accounting Pronouncements
-----------------------------------------
See Note 3 to the Financial Statements in this Form 10-Q.
Item 4T. 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.
22
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.
Exercise of Stock Options
During the three months ended December 31, 2008, two stockholders exercised
stock options to purchase a total of 40,000 shares of common stock at $0.70 per
share. 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.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders (the "Annual Meeting") of the Company
was held on November 17, 2008.
At the Annual Meeting, 10,548,013 shares were present in person or by
proxy. The following is a summary and tabulation of the matters that were voted
upon at the Annual Meeting:
Proposal 1.
The election of a board of directors to serve a term of one year or until
their respective successors are elected and qualified.
Votes For Votes Withheld
Henry E. Gemino 10,389,147 158,866
Murphy Evans 10,385,989 162,024
Charles Christenson 10,388,597 159,416
Richard Palmer 10,397,088 150,925
Proposal 2.
To approve an amendment to the Company's Certificate of Incorporation to
increase the number of authorized common shares from 35,000,000 to 40,000,000.
Votes For Votes Against Abstain
--------- ------------- -------
10,138,710 356,827 52,476
23
Proposal 3.
To approve the adoption of the Company's 2008 Stock Ownership Incentive
Plan authorizing the issuance of stock options committing up to 3,500,000 shares
of the Company's common stock
Votes For Votes Against Abstain
--------- ------------- -------
10,080,999 361,449 105,565
Item 5. Other Information.
None.
Item 6. Exhibits.
See the Exhibit Index attached hereto following the signature page.
24
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: February 12, 2009 /s/ Henry E. Gemino
-------------------
Henry E. Gemino
Chief Executive Officer and
Chief Financial Officer
25
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 3.5 Amendment to Certificate of Incorporation (incorporated by
reference to Appendix A to the Company's Preliminary Proxy
Statement filed with the Commission on September 18, 2008).
Exhibit 3.6 2008 Stock Ownership Incentive Plan (incorporated by reference to
Exhibit B to the Company's Preliminary Proxy Statement filed with
the Commission on September 18, 2008).
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.
26