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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 September 30, 2009
|_| 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 |_| Smaller reporting company |X|
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: 16,637,741 shares of Common
Stock as of November 2, 2009.
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PROFILE TECHNOLOGIES, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2009
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............................................23
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........24
Item 3. Defaults Upon Senior Securities....................................24
Item 4. Submission of Matters to a Vote of Security Holders................24
Item 5. Other Information..................................................25
Item 6. Exhibits...........................................................25
Signatures
Certifications
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
PROFILE TECHNOLOGIES, INC.
BALANCE SHEETS
SEPTEMBER 30, 2009 AND JUNE 30, 2009
(Unaudited)
September 30, June 30,
2009 2009
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 247,721 $ 270,906
Accounts receivable 42,417 19,226
Inventory 1,211 --
Prepaid expenses and other current assets 11,551 8,572
------------ ------------
Total current assets 302,900 298,704
Equipment, net of accumulated depreciation of $2,510 and $1,931 2,124 2,703
Other assets 12,050 13,059
------------ ------------
Total assets $ 317,074 $ 314,466
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 178,844 $ 165,716
Note payable to stockholder 7,500 7,500
Current portion of convertible debt, net of unamortized
discount of $0 and $13,641 25,000 21,359
Deferred wages 820,734 810,724
Accrued professional fees 290,150 268,250
Accrued interest 429 436
------------ ------------
Total current liabilities 1,322,657 1,273,985
Commitments and contingencies
Stockholders' deficit
Common stock, $0.001 par value: 40,000,000 shares authorized,
16,339,677 and 15,961,012 shares issued and outstanding
at September 30, 2009 and June 30, 2009 16,340 15,961
Common stock issuable; 76,398 and 68,618 shares 76 69
Additional paid-in capital 17,812,287 17,474,622
Accumulated deficit (18,834,286) (18,450,171)
------------ ------------
Total stockholders' deficit (1,005,583) (959,519)
------------ ------------
Total liabilities and stockholders' deficit $ 317,074 $ 314,466
============ ============
(The accompanying notes are an integral part of these financial statements)
3
PROFILE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)
Three Months Ended
September 30,
----------------------------
2009 2008
------------ ------------
Revenue $ 42,417 $ 17,183
Cost of revenue (53,168) (11,357)
------------ ------------
Gross margin (10,751) 5,826
Operating expenses
Research and development 115,291 82,433
Selling 51,419 22,450
General and administrative 192,721 205,308
------------ ------------
Total operating expenses 359,431 310,191
Loss from operations (370,182) (304,365)
Other income (expense)
Gain (loss) on sale (disposal) of equipment 300 (7,567)
Interest expense (14,252) (4,994)
Interest income 19 2,482
------------ ------------
Total other income (expense) (13,933) (10,079)
Net loss $ (384,115) $ (314,444)
============ ============
Net loss per share - basic and diluted $ (0.02) $ (0.02)
Weighted average shares outstanding used to
calculate basic and diluted net loss per share 16,249,550 15,131,683
(The accompanying notes are an integral part of these financial statements)
4
PROFILE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND THE YEAR ENDED JUNE 30, 2009
(Unaudited)
Common Stock Common Stock Issuable
--------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
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 100,000 100 1,952 2
Issuance of stock options for services to consultants -- -- -- --
Issuance of 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 related to the 2009 Offering 141,867 142 56,666 57
Common stock issuance costs related to the 2009 Offering -- -- -- --
Issuance of common stock upon conversion of convertible
debt to equity 140,000 140 10,000 10
Exercise of stock options 40,000 40 -- --
Exercise of warrants 40,000 40 -- --
Net loss for year ended June 30, 2009 -- -- -- --
------------ ------------ ------------ ------------
Balance at June 30, 2009 15,961,012 15,961 68,618 69
Issuance of common stock previously reported as "issuable" 56,666 57 (56,666) (57)
Issuance of stock options for services to consultants -- -- -- --
Stock compensation amortization expense -- -- -- --
Issuance of common stock related to the 2009 Offering 301,999 302 64,446 64
Common stock issuance costs related to the 2009 Offering -- -- -- --
Issuance of common stock upon conversion of convertible
debt to equity 20,000 20 -- --
Net loss for three months ended September 30, 2009 -- -- -- --
------------ ------------ ------------ ------------
Balance at September 30, 2009 16,339,677 $ 16,340 76,398 $ 76
============ ============ ============ ============
Table continues below.
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Deficit
------------ ------------ ------------
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 2,587 -- 2,689
Issuance of stock options for services to consultants 125,400 -- 125,400
Issuance of stock options for services to employees and
Board of Directors 668,300 -- 668,300
Stock compensation amortization expense 22,251 -- 22,251
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 related to the 2009 Offering 178,481 -- 178,680
Common stock issuance costs related to the 2009 Offering (17,868) -- (17,868)
Issuance of common stock upon conversion of convertible
debt to equity 74,850 -- 75,000
Exercise of stock options 27,960 -- 28,000
Exercise of warrants 27,960 -- 28,000
Net loss for year ended June 30, 2009 -- (2,043,973) (2,043,973)
------------ ------------ ------------
Balance at June 30, 2009 17,474,622 (18,450,171) (959,519)
Issuance of common stock previously reported as "issuable" -- -- --
Issuance of stock options for services to consultants 25,666 -- 25,666
Stock compensation amortization expense 5,563 -- 5,563
Issuance of common stock related to the 2009 Offering 329,436 -- 329,802
Common stock issuance costs related to the 2009 Offering (32,980) -- (32,980)
Issuance of common stock upon conversion of convertible
debt to equity 9,980 -- 10,000
Net loss for three months ended September 30, 2009 -- (384,115) (384,115)
------------ ------------ ------------
Balance at September 30, 2009 $ 17,812,287 $(18,834,286) $ (1,005,583)
============ ============ ============
(The accompanying notes are an integral part of these financial statements)
5
PROFILE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)
Three Months Ended
September 30,
----------------------
2009 2008
--------- ---------
Cash flows from operating activities
Net loss $(384,115) $(314,444)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 579 193
Loss (gain) on disposal (sale) of fixed assets (300) 7,567
Accreted discount on convertible debt 9,951 3,365
Amortization of convertible debt discount included in interest expense 3,690 --
Amortization of debt issuance costs -- 40
Equity issued for services to consultants 25,666 2,120
Stock compensation amortization expense 5,563 5,563
Changes in operating assets and liabilities:
Increase in accounts receivable (23,191) (5,784)
Increase in inventory (1,211) --
Increase in prepaid expenses and other current assets (2,979) (1,851)
Decrease in other assets 1,009 --
Increase in accounts payable 13,128 13,540
Increase in deferred wages 10,010 10,010
Increase in accrued professional fees 21,900 14,000
Decrease in accrued interest (7) (245)
--------- ---------
Net cash used in operating activities (320,307) (265,926)
--------- ---------
Cash flows from investing activities
Purchase of equipment -- (4,634)
Proceeds from sale of equipment 300 --
--------- ---------
Net cash provided by (used in) investing activities 300 (4,634)
--------- ---------
Cash flows from financing activities
Proceeds from issuance of common stock 329,802 998,903
Common stock issuance costs (32,980) (99,890)
Proceeds from exercise of warrants -- 28,000
--------- ---------
Net cash provided by financing activities 296,822 927,013
--------- ---------
(Decrease) increase in cash and cash equivalents (23,185) 656,453
Cash and cash equivalents at beginning of period 270,906 294,113
--------- ---------
Cash and cash equivalents at end of period $ 247,721 $ 950,566
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 619 $ 1,981
Convertible debt converted into 20,000 and 100,000 shares
of common stock during the three months ended September 30, 2009 and 2008 $ 10,000 $ 50,000
(The accompanying notes are an integral part of these financial statements)
6
PROFILE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
Note 1. Organization and Description of Business
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 above ground, 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 its
research and development of new applications for its patented technology,
including inspecting pipes for internal corrosion and other anomalies and direct
buried pipes for external corrosion and other anomalies.
Note 2. Going Concern Uncertainties
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company incurred cumulative losses of
$18,834,286 through September 30, 2009, does not have positive cash flows from
operating activities, and had negative working capital of $1,019,757 as of
September 30, 2009. 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. These financial statements do not give
effect to any adjustments which will be necessary should the Company be unable
to continue as a going concern and therefore be required to realize its assets
and discharge its liabilities in other than the normal course of business and at
amounts different from those reflected in the accompanying financial statements.
Note 3. 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, 2009 and June 30, 2009, the results of operations for the three
months ended September 30, 2009 and 2008 and cash flows for the three months
ended September 30, 2009 and 2008. 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 2009 Annual Report on Form 10-K.
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 2009 Annual Report on Form 10-K.
Note 4. Summary 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 service contract revenue and cost recognition,
7
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.
Service Contract Revenue and Cost Recognition
The Company recognizes revenue from service contracts using the proportional
performance method of accounting. Contract revenue earned is measured based on
the number of measurable units of pipelines inspected to the total number of
units contracted to be inspected. Revenue is recognized based on the completion
of such measurable units. The proportional performance method is used to
recognize revenue because management considers measurable units of completion to
be the best available measure of progress towards the completion of service
contracts. Changes in estimated revenue on service contracts are recognized
during the period in which the change in estimate becomes known.
Cost of revenue includes time incurred and materials used to plan the pipeline
inspections, mobilize and demobilize field crews, perform the inspection
services, analyze the resulting data and prepare the final inspection report.
Cost of revenue also includes any idle time incurred by personnel scheduled to
work on customer contracts. Costs are recognized as incurred as they are not an
indicator of the progress towards completion of the pipeline inspection
services.
Anticipated losses on service contracts, if any, are charged to earnings in
their entirety as soon as such losses can be estimated.
Research and Development
Research and development costs represent costs incurred to develop the Company's
technology, including employee and consultant time and material and equipment
expense. Research and development costs are expensed when incurred, except for
nonrefundable advance payments for future research and development activities
which are capitalized and recognized as expense as the related services are
performed.
During the three months ended September 30, 2009 and 2008, the Company incurred
$115,291 and $82,433 on research and development activities.
Stock-based Compensation
The Company measures all employee stock-based compensation awards using a fair
value method on the date of grant and recognizes such expense in its financial
statements over the requisite service period. The Company uses the Black-Scholes
pricing model to determine the fair value of stock-based compensation awards on
the date of grant. The Black-Scholes pricing model requires management to make
assumptions regarding the warrant and option lives, expected volatility, and
risk free interest rates. See Note 5. "Stock Based Compensation, Stock Options
and Warrants" for additional information on the Company's stock-based
compensation plans.
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, 2009 and 2008, the Company incurred fees for
work performed by the scientists of $90,060 and $52,043.
As of September 30, 2009, the Company owed the consultant scientists a total of
$100,161, which is included in accounts payable.
Recently Issued Accounting Standards
In June 2009, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 168, "The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principals, a replacement of FASB Statement No. 162" (SFAS 168). This statement
modifies the Generally Accepted Accounting Principles ("GAAP") hierarchy by
establishing only two levels of GAAP, authoritative and nonauthoritative
accounting literature. Effective July 2009, the FASB Accounting Standards
8
Codification ("ASC"), also known collectively as the "Codification," is
considered the single source of authoritative U.S. accounting and reporting
standards, except for additional authoritative rules and interpretive releases
issued by the SEC. Nonauthoritative guidance and literature would include, among
other things, FASB Concepts Statements, American Institute of Certified Public
Accountants Issue Papers and Technical Practice Aids and accounting textbooks.
The Codification was developed to organize GAAP pronouncements by topic so that
users can more easily access authoritative accounting guidance. It is organized
by topic, subtopic, section, and paragraph, each of which is identified by a
numerical designation. SFAS 168 is effective for interim and annual periods
ending after September 15, 2009. The Company adopted SFAS 168, effective July 1,
2009, the beginning of its first quarter ended September 30, 2009. All
accounting references have been updated, and therefore SFAS references have been
replaced with ASC references.
Note 5. Stock Based Compensation, Stock Options and Warrants
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 employees 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 2008
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.
The Company uses the Black-Scholes pricing model to determine the fair value of
stock-based compensation awards on the date of grant. The Black-Scholes pricing
model requires management to make assumptions regarding the warrant and option
lives, expected volatility, and risk free interest rates.
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. The Company uses the "simplified"
method for determining the expected term of its "plain vanilla" stock options.
The Company recognizes 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.
9
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, 2009 and 2008:
Three Months Ended
September 30,
-----------------
2009 2008
------- -------
Research and development $ 5,563 $ 5,563
Selling 25,666 --
------- -------
Total $31,229 $ 5,563
======= =======
A summary of the Company's stock option activity for the three months ended
September 30, 2009 and the year ended June 30, 2009 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 610,000 1.68
Exercises (40,000) 0.70
Expirations (90,000) 0.66
-----------
Outstanding at June 30, 2009 and September 30, 2009 (2) 4,235,000 $ 1.20 5.76 years $1,206,100
===========
Exercisable at September 30, 2009 4,147,500 $ 1.20 5.81 years $1,180,350
===========
Available for grant at September 30, 2009 (3) 2,890,000
===========
(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) The weighted average remaining contractual term and aggregate
intrinsic value are as of September 30, 2009.
(3) 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 fourth 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 September 30, 2009. This amount changes based on the fair market
value of the Company's common stock.
As of September 30, 2009, the Company had $51,894 of total unrecognized
compensation cost related to unvested stock options, which is expected to be
recognized over a weighted average period of 1.8 years.
10
The following table summarizes information about stock options outstanding and
exercisable at September 30, 2009:
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
------------------- -------------- -------------- ----------- ------------------ -------------- ----------
$ 0.86 435,000 7.12 $ 0.86 435,000 7.12 $ 0.86
0.95 140,000 7.12 0.95 140,000 7.12 0.95
1.05 150,000 2.16 1.05 125,000 2.01 1.05
1.12 285,000 4.71 1.12 285,000 4.71 1.12
1.13 50,000 3.42 1.13 12,500 3.42 1.13
1.16 1,850,000 4.70 1.16 1,850,000 4.70 1.16
1.20 350,000 6.56 1.20 350,000 6.56 1.20
1.21 150,000 6.20 1.21 150,000 6.20 1.21
1.26 35,000 9.17 1.26 35,000 9.17 1.26
1.30 50,000 4.73 1.30 25,000 4.73 1.30
1.32 200,000 8.13 1.32 200,000 8.13 1.32
1.50 15,000 7.95 1.50 15,000 7.95 1.50
1.70 390,000 7.72 1.70 390,000 7.72 1.70
1.87 135,000 9.13 1.87 135,000 9.13 1.87
-------------- ------------------
$ 0.50 - $ 1.87 4,235,000 5.76 $ 1.20 4,147,500 5.81 $ 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 three months ended
September 30, 2009 and the year ended June 30, 2009 follows:
Weighted
Number Average
Of Warrants Exercise
Outstanding Price
----------- --------
Outstanding at June 30, 2008 8,151,028 $ 0.75
Exercises (40,000) 0.70
-----------
Outstanding at June 30, 2009 and September 30, 2009 8,111,028 $ 0.75
===========
Exercisable at September 30, 2009 8,111,028 $ 0.75
===========
11
The following table summarizes information about warrants outstanding, all of
which are exercisable at September 30, 2009:
Weighted
Average
Number of Remaining Weighted
Exercise Warrants Contractual Life Average
Prices Outstanding (Years) Exercise Price
---------------- ------------------ -------------------- ----------------
$ 0.60 439,600 1.87 $ 0.60
0.75 7,100,000 1.65 0.75
0.86 450,000 7.12 0.86
1.00 50,000 2.53 1.00
1.05 71,428 2.61 1.05
------------------
$ 0.60-1.05 8,111,028 1.98 $ 0.75
==================
Note 6. 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, 2009 and 2008, because their effect would be antidilutive,
are stock options and warrants to acquire 12,346,028 and 11,866,028 shares of
common stock with weighted-average exercise prices of $0.91 and $0.86 per share,
respectively. Also excluded from the computation of diluted net loss per share
for the three months ended September 30, 2009 and 2008 are 50,000 and 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 8.
"Convertible Debt" because their effect would be antidilutive.
For the three months ended September 30, 2009 and 2008, additional potential
dilutive securities that were excluded from the diluted net loss per share
computation are the exchange rights discussed in Note 9. "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, 2009 and 2008.
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.
12
Following is the computation of basic and diluted net loss per share for the
three months ended September 30, 2009 and 2008:
Three Months Ended
September 30,
------------------------------
2009 2008
------------- -------------
Numerator - net loss $ (384,115) $ (314,444)
Denominator - weighted average number
of common shares outstanding 16,249,550 15,131,683
------------- -------------
Basic and diluted net loss per common share $ (0.02) $ (0.02)
============= =============
Note 7. Related Parties
Note Payable to Stockholder
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.
Note 8. 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, 2009, one investor exercised his
conversion right and converted his Debenture in the principal amount $10,000,
pursuant to the terms of the 2003 Offering. Accordingly the investor was issued
20,000 shares of common stock. The carrying value of the convertible debt was
reclassified as equity upon conversion. Since the Debentures included a
beneficial conversion feature at issuance the remaining unamortized discount of
$3,690 at the conversion date was recognized as interest expense during the
three months ended September 30, 2009.
13
During the three months ended September 30, 2008, two investors exercised their
conversion right and converted their Debentures in the aggregate principal
amount of $50,000, pursuant to the terms of the 2003 Offering. Accordingly the
investors were issued an aggregate of 100,000 shares of common stock. The
carrying value of the convertible debt was reclassified as equity upon
conversion.
As of September 30, 2009, accrued interest on the Debentures was $429. 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 $13,641 and $3,365 for the three months ended
September 30, 2009 and 2008. As of September 30, 2009 there was one outstanding
Debenture, which is considered current, with a carrying value of $25,000.
Note 9. 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, 2009, the Company has accrued $1,110,884 related to the deferred payment of
salaries and professional fees of which $820,734 is included under deferred
wages and $290,150 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 $1,110,884 deferred salaries
and accrued 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.
Note 10. 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 months ended September 30, 2008, the Company raised $998,903
and issued 1,109,885 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, the Company incurred total fees payable to the
brokerage firms of $99,890. As of September 30, 2009, the Company was current
with respect to the amount owed the brokerage firms.
Note 11. 2009 Private Placement Equity Offering
On April 2, 2009, the Company entered into a private placement offering (the
"2009 Offering") of 1,500,000 shares of common stock at $0.90 per share to
accredited investors for a total offering price of $1,350,000. On October 2,
2009, the Board determined that it was in the best interests of the Company to
extend the termination date of the 2009 Offering and voted to extend the
expiration date to December 2, 2009.
During the three months ended September 30, 2009, the Company raised gross
proceeds of $329,802 under the terms of the 2009 Offering. Accordingly, the
Company issued 366,445 shares of common stock pursuant to the terms of the 2009
Offering.
The Company engaged two brokerage firms to help in the fund raising efforts of
the 2009 Offering. Pursuant to the terms of the agreements with the brokerage
firms, the Company owes the brokerage firms a ten percent cash commission on all
14
funds that the brokerage firm helps raise. Accordingly, during the three months
ended September 30, 2009, the Company incurred total fees payable to the
brokerage firms of $32,980. As of September 30, 2009, the Company owed the
brokerage firms $6,080 of which $5,080 is included in accounts payable and
$1,000 in accrued professional fees.
Note 12. Subsequent Events
The Company has evaluated subsequent events through November 5, 2009, which is
the date on which these financial statements were issued. There have not been
any events subsequent to September 30, 2009, other than the extension of the
2009 Offering and proceeds received pursuant to the 2009 Offering and the
conversion of the Debenture, as disclosed in the following paragraphs, that
would require additional disclosure in the financial statements or that would
have a material impact on the Company's financial position, results of
operations, or cash flows for the three months ended September 30, 2009 and
2008.
On April 2, 2009, the Company entered into a private placement offering (the
"2009 Offering") of 1,500,000 shares of common stock at $0.90 per share to
accredited investors for a total offering price of $1,350,000. On October 2,
2009, the Board determined that it was in the best interests of the Company to
extend the termination date of the 2009 Offering and voted to extend the
expiration date to December 2, 2009. See Note 11. "2009 Private Placement Equity
Offering".
Subsequent to September 30, 2009, and as of the date of this report, the Company
has raised gross proceeds of $154,500 from the sale of 171,666 shares of common
stock in accordance with the terms of the 2009 Offering.
The Company engaged two brokerage firms to help in the fund raising efforts of
the 2009 Offering. Pursuant to the terms of the agreements with the brokerage
firms, the Company owes the brokerage firms a ten percent cash commission on all
funds that the brokerage firm helps raise. Accordingly, subsequent to the
September 30, 2009, the Company incurred total fees payable to the brokerage
firms of $15,450.
On October 26, 2009, an investor exercised his conversion right and converted
his Debenture in the principal amount of $25,000, pursuant to the terms of the
2003 Offering. Accordingly the investor was issued 50,000 shares of common
stock. See Note 8 "Convertible Debt".
15
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 September 30, 2009, and
specifically in the item 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
--------
The following Management's Discussion and Analysis ("MD&A") is intended to help
the reader understand the results of operations and financial condition of
Profile Technologies, Inc. The MD&A is provided as a supplement to, and should
be read in conjunction with the Company's financial statements and the
accompanying notes to the financial statements included in this Form 10-Q.
The Company's discussion and analysis of its financial condition and results of
operations is based on its financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses and related disclosures. The Company reviews its estimates on an
ongoing basis.
Because the Company is a smaller reporting company, certain disclosures
otherwise required to be made in a Form 10-Q are not required to be made by the
Company.
EMW-C(TM) External Inspection Process
-------------------------------------
The Company's core business is based on the technologies that it has developed
and patented for defect inspection of pipelines using electromagnetic waves
("EMW"). 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 the external surface
and surroundings of cased and thermally insulated pipelines. This service is
marketed by the Company as the EMW-C(TM).
The EMW-C(TM) inspection process is a non-destructive corrosion inspection
method patented by the Company, for long-range external assessment of cased and
insulated pipelines. The technique uses electromagnetic waves to locate and
identify corrosion and other anomalous conditions at distances down the length
of the pipeline. This non-intrusive and non-destructive method can be performed
without disturbing the pipeline casing or removing the protective insulation.
After the initial inspection is performed, permanent connectors may be left on
the pipeline to allow for repeat and periodic inspections or monitoring. In
addition, the EMW-C(TM) inspection process provides corrosion inspection over
long lengths of cased or insulated pipe sections from a single location, as
opposed to most other inspection methods, which may only provide for point or
localized inspections.
Commercially available since November of 2007, the latest generation of the
EMW-C(TM) inspection process incorporates enhancements in the process, hardware,
and software garnered from years of development and inspection experience. The
compact hardware can easily be transported to any job location and operated by a
16
crew of two trained technicians. The equipment is controlled wirelessly from a
laptop where all inspection data is collected and stored. The modification of
the equipment and its control has made for quicker inspections while improving
accuracy and efficiency. This portable system is designed to allow testing of
both underground and above-grade, cased and insulated pipelines with one test
set. The new rugged and environmentally protected equipment has been used for
many pipeline inspections and has proven to be a solid performer in conditions
otherwise unfavorable to electronics equipment.
Correlating pipeline corrosion information using the Company's technology
requires a combination of state-of-the-art instrumentation plus an understanding
of the physical phenomena that are being measured. Management believes that the
EMW-C(TM) measurement and analysis are on the leading edge of inspection
technology.
New Product Developments - Installation of Permanent Connectors, Inspection of
Wax-Filled Cased Pipelines, and Internal Inspection Process
------------------------------------------------------------------------------
During the beginning of fiscal year 2010, the Company began selling two
additional options with the EMW-C(TM) inspection service; permanent connectors
for recurring inspection and dielectric fill analysis. Adding these two features
increases the appeal of the EMW-C(TM) to the customer. The permanent connectors
are a relatively low cost option which allow for quick re-inspection of the
pipeline section at later times without the need for repeat excavation or
preparation by the customer. Consecutive inspections create a historical data
baseline and means to identify small but significant changes to the pipeline.
This equates to more sensitive inspection at lower total cost of EMW-C(TM)
inspection for the pipeline operator plus a permanent presence for the Company
and recurring inspection services.
The Company also now offers a modification to the EMW-C(TM) which inspects the
condition of wax or dielectric fill in cased pipelines. The filling of the void
between the casing and the pipe with wax as a means of additional corrosion
protection (the "wax-fill technology") has become popular in the oil and gas
pipeline industry with the onset of new Federal Regulations allowing its use.
The Company has worked closely with key participants in this technology to
refine and demonstrate the company's capability to perform the initial
inspection and long-term monitoring of wax-filled pipeline crossings in
combination with EMW-C(TM) permanent connectors. The Company is now in a unique
position to provide these services to all companies interested in the many
benefits of the wax-fill technology.
In addition to services for external pipeline inspection, 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. In fiscal year 2009, significant progress was made in the
advancement of the internal inspection process as a viable commercial product.
Trials were performed at a third party research facility where the results
exceeded the Company's expectations. Since the conclusion of these trials, the
Company has recognized a significant market for this technology and therefore
product development was accelerated. Demonstrations and field trials are being
scheduled with potential licensees and clients.
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 and more recently with internal inspection of pipelines, boiler, and heat
exchanger tubes. The Company believes that its EMW-C(TM) technologies possess
unique capabilities, are flexible in their applications and provide 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 technologies and their 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. This interest has
continued through 2009 with the addition of new customers and contracts for the
EMW-C(TM) service as well as the new permanent connector and wax-fill monitoring
options.
As revenue is generated, the Company will continue to manufacture its EMW-C(TM)
inspection equipment. The Company will also need to hire and train additional
technicians to provide inspection services as demand requires. The Company
expects that as additional 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
17
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 less than twelve 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
The Company recognizes revenue from service contracts using the proportional
performance method of accounting. Contract revenue earned is measured based on
the number of measurable units of pipelines inspected to the total number of
units contracted to be inspected. Revenue is recognized based on the completion
of such measurable units. The proportional performance method is used to
recognize revenue because management considers measurable units of completion to
be the best available measure of progress towards the completion of service
contracts. Changes in estimated revenue on service contracts are recognized
during the period in which the change in estimate becomes known.
Revenue consists of the pipeline inspection fee, reimbursement of costs incurred
to mobilize and demobilize field crews and inspection equipment to and from the
inspection site, proceeds from the sale of permanent connectors, and other
travel related costs.
Revenue for the three months ended September 30, 2009 and 2008 was $42,417 and
$17,183. Revenue for the three months ended September 30, 2009 and 2008
consisted of pipeline inspections performed for three customers and one
customer, respectively.
Cost of revenue
Cost of revenue includes time incurred and materials used to plan the pipeline
inspections, mobilize and demobilize field crews, perform the inspection
services, analyze the resulting data and prepare the final inspection report.
Cost of revenue also includes the cost of the materials to build the permanent
connectors as well as any idle time incurred by personnel scheduled to work on
customer contracts. Costs are recognized as incurred as they are not an
indicator of the progress towards completion of the pipeline inspection
services.
Cost of revenue for the three months ended September 30, 2009 and 2008 was
$53,168 and $11,357, resulting in gross margins of (25.3)% and 33.9%,
respectively. Cost of revenue for the three months ended September 30, 2009
includes $23,012 for service contracts for which pipeline inspections have not
been performed as of September 30, 2009. Excluding costs related to future
service contracts, cost of revenue for the three months ended September 30, 2009
was $30,156, resulting in an adjusted gross margin of $12,261 or 28.9%.
Research and Development
Research and development expense consists of fees paid to consulting scientists
to develop the Company's inspection technologies and related hardware, salary
and benefit costs for employees, including stock compensation, supplies and
testing equipment utilized for the development of the EMW inspection
technologies and other supply and travel expenses incurred pursuant to
performing research and development related activities.
Research and development expense for the three months ended September 30, 2009
was $115,291, an increase of $32,858, compared to $82,433 for the three months
ended September 30, 2008. The increase is substantially attributable to an
increase in fees incurred for work performed by the consulting scientists as a
result of additional resources spent developing the Company's internal pipeline
inspection technology, the development of permanent connectors for recurring
inspection, and modifications made to the EMW-C(TM) which inspects the condition
of wax or dielectric fill in cased pipelines.
18
Selling Expense
Selling expense is primarily comprised of salary and benefit expense for
employees who spend time meeting with prospective customers, costs that are
incurred by the Company to provide field demonstrations to prospective
customers, including that incurred by the Company's consulting scientists, and
costs incurred to attend conferences and trade shows.
Selling expense for the three months ended September 30, 2009 and 2008 was
$51,419, an increase of $28,969, compared to $22,450 for the three months ended
September 30, 2008. The increase from prior year is partially the result of the
Company providing more field demonstrations to prospective customers during the
quarter ended September 30, 2009 than in the same quarter of 2008, for the
purpose of obtaining revenue generating contracts. During the three months ended
September 30, 2009, sales related activities performed by the consulting
scientists was $10,750 more than in the previous year.
On June 23, 2009, the Company retained the services of an independent consultant
to assist the Company in seeking new customer opportunities, managing existing
customer relationships, and publicizing the Company's EMW inspection
technologies. As partial compensation, the Board approved a stock option grant
to the consultant to purchase 50,000 shares of the Company's common stock,
subject to certain vesting requirements, at an exercise price of $1.30, the fair
market value of the Company's common stock on the date of grant. The stock
option expires five years from the date of grant and vests as follows: (a)
25,000 shares after three months, and (b) 25,000 shares after six months. The
fair value of the 50,000 stock options granted was estimated at $0.88 each, for
a total of $44,000, using the Black-Scholes Option Pricing Model with the
following weighted average assumptions: dividend yield of 0%, expected
volatility of 106.8%, risk-free interest rate of 1.74%, and expected life of
3.25 years. During the three months ended September 30, 2009 the Company
recorded stock compensation expense of $25,666 for the amortization of this
stock option grant, which is included in selling expense.
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 September 30, 2009
and 2008 was $192,721 and $205,308. The decrease of $12,587 is substantially due
to a decrease of approximately $10,800 in legal fees. Legal fees fluctuate
depending on utilization by the Company for SEC and corporate matters.
Gain (Loss) on Sale (Disposal) of Equipment
The Company recorded a gain on sale of equipment of $300 during the three months
ended September 30, 2009 as a result of proceeds received from the sale of a
truck that was previously being utilized on the North Slope of Alaska. The cost
of the truck and the related accumulated depreciation had previously been
removed from the Company's financial statements as the truck was no longer in
service.
The Company recorded a loss on disposal of equipment 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
Interest expense for the three months ended September 30, 2009 and 2008 was
$14,252 and $4,994. The increase of $9,258 is partially the result of an
increase in the accretion of the discount on the Debentures of $3,586.
Additionally, during the three months ended September 30, 2009 one investor
exercised his conversion right pursuant to the Debentures which resulted in the
recognition of the related remaining unamortized discount of $3,690 at the
conversion date as interest expense during the three months ended September 30,
2009.
19
Interest Income
Interest income for the three months ended September 30, 2009 was $19 compared
to $2,482 for the three months ended September 30, 2008. The Company maintained
a higher average cash balance during the three months ended September 30, 2008
compared to the three months ended September 30, 2009, primarily as a result of
proceeds received pursuant to the 2007 Offering.
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
$18,834,286 through September 30, 2009, does not have positive cash flows from
operating activities, and had negative working capital of $1,019,757 as of
September 30, 2009. 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.
At September 30, 2009, the Company had cash and cash equivalents of $247,721.
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, funds received pursuant to the
2009 Offering ($508,482 as of September 30, 2009), and proceeds received from
the exercise of stock options and warrants.
Net cash used in operating activities was $320,307 for the three months ended
September 30, 2009, compared to net cash used in operating activities of
$265,926 for the same period in 2008. The increase of $54,381 in cash used in
operating activities was mainly attributable to increases in research and
development expense and costs of revenue not offset by the related revenue from
service contracts (see "Results of Operations" above).
Net cash provided by investing activities was $300 for the three months ended
September 30, 2009, compared to net used in investing activities of $4,634
during the same period in 2008. The Company recorded a gain on sale of equipment
of $300 during the three months ended September 30, 2009 as a result of proceeds
received from the sale of a truck that was previously being utilized on the
North Slope of Alaska. During the three months ended September 30, 2008, the
Company purchased $4,634 of contract related equipment.
Net cash provided by financing activities was $296,822 for the three months
ended September 30, 2009 compared to net cash provided by financing activities
of $927,013 for the same period in 2008. During the three months ended September
30, 2009, the Company raised net proceeds of $296,822 pursuant to the terms of
the 2009 Offering. During the three months ended September 30, 2008, the Company
raised net proceeds of $899,013 pursuant to the terms of the 2007 Offering.
Additionally, during the three months ended September 30, 2008, the Company
received proceeds of $28,000 from the exercise of warrants.
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, 2009, the Company has accrued $1,110,884 related to the deferred payment of
salaries and professional fees of which $820,734 is included under deferred
wages and $290,150 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 $1,110,884 deferred salaries
and accrued professional fees, the amount subject to the Conversion Right is
$111,500, resulting in the potential issuance of 223,000 options under the terms
20
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 $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, 2009, one investor exercised his
conversion right and converted his Debenture in the principal amount $10,000,
pursuant to the terms of the 2003 Offering. Accordingly the Company issued
20,000 shares of common stock. The carrying value of the convertible debt was
reclassified as equity upon conversion. Since the Debentures included a
beneficial conversion feature at issuance the remaining unamortized discount of
$3,690 at the conversion date was recognized as interest expense during the
three months ended September 30, 2009.
During the three months ended September 30, 2008, two investors exercised their
conversion right and converted their Debentures in the aggregate principal
amount of $50,000, pursuant to the terms of the 2003 Offering. Accordingly the
Company issued an aggregate of 100,000 shares of common stock. The carrying
value of the convertible debt was reclassified as equity upon conversion.
As of September 30, 2009, accrued interest on the Debentures was $429. 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 $13,641 and $3,365 for the three months ended
September 30, 2009 and 2008. As of September 30, 2009 there was one outstanding
Debenture, which is considered current, with a carrying value of $25,000.
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 months ended September 30, 2008, the Company raised $998,903
and issued 1,109,885 shares of common stock pursuant to the terms of the 2007
Offering.
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 months
ended September 30, 2008, the Company incurred total fees payable to the
brokerage firms of $99,890. As of September 30, 2009, the Company was current
with respect to the amount owed the brokerage firms.
2009 Private Placement Equity Offering
On April 2, 2009, the Company entered into a private placement offering (the
"2009 Offering") of 1,500,000 shares of common stock at $0.90 per share to
accredited investors for a total offering price of $1,350,000. On October 2,
2009, the Board determined that it was in the best interests of the Company to
extend the termination date of the 2009 Offering and voted to extend the
expiration date to December 2, 2009.
During the three months ended September 30, 2009, the Company raised gross
proceeds of $329,802 under the terms of the 2009 Offering. Accordingly, the
Company issued 366,445 shares of common stock pursuant to the terms of the 2009
Offering.
The Company engaged two brokerage firms to help in the fund raising efforts of
the 2009 Offering. Pursuant to the terms of the agreements with the brokerage
firms, the Company owes the brokerage firms a ten percent cash commission on all
funds that the brokerage firm helps raise. Accordingly, during the three months
ended September 30, 2009, the Company incurred total fees payable to the
brokerage firms of $32,980. As of September 30, 2009, the Company owed the
brokerage firms $6,080 of which $5,080 is included in accounts payable and
$1,000 in accrued professional fees.
Other Contractual Obligations
-----------------------------
The Company's other contractual obligations consist of commitments under
operating leases and repayment of a loan payable to a stockholder.
As of September 30, 2009, 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 7 Related Parties - Note Payable to Stockholder."
As of September 30, 2009, the Company has future minimum lease payments of
approximately $25,700 under its operating leases.
Off-Balance Sheet Arrangements
------------------------------
The Company has no off-balance sheet arrangements.
Recently Issued Accounting Pronouncements
-----------------------------------------
See Note 4. "Summary of Significant Accounting Policies" to the Financial
Statements in this Form 10-Q.
22
Item 4T. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial
Officer, the Company conducted an evaluation of the effectiveness of the
design and operation of its disclosure controls and procedures, as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(the "Exchange Act"), as of the end of the period covered by this quarterly
report. Based on this evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded as of September 30, 2009 that the
Company's disclosure controls and procedures were effective such that the
information required to be disclosed in the Company's United States
Securities and Exchange Commission (the "SEC") reports is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms, and is accumulated and communicated to the Company's
management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate 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.
23
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 April 2, 2009, the Company entered into a private placement offering (the
"2009 Offering") of 1,500,000 shares of common stock at $0.90 per share to
accredited investors for a total offering price of $1,350,000.
During the three months ended September 30, 2009, the Company raised gross
proceeds of $329,802 under the terms of the 2009 Offering. Accordingly, the
Company issued 366,445 shares of common stock pursuant to the terms of the 2009
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, 2009, one investor exercised his
conversion right and converted his Debenture in the principal amount $10,000,
pursuant to the terms of the 2003 Offering. Accordingly the Company issued
20,000 shares of common stock in accordance with the terms of the 2003 Offering.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the Company's security holders
during its fiscal first quarter of the year ended June 30, 2010.
24
Item 5. Other Information.
None.
Item 6. Exhibits.
See the Exhibit Index attached hereto following the signature page.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Profile Technologies, Inc.
(Registrant)
November 5, 2009 By: /s/ Henry E. Gemino
-----------------------
Henry E. Gemino
Chief Executive Officer and
Chief Financial Officer
26
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 3.8 Form of Subscription Agreement by and between Profile
Technologies, Inc. and investors in the 2009 Offering
(incorporated by reference to Exhibit 3.8 to the Company's
Quarterly Report on Form 10-Q filed with the Commission on
May 14, 2009).
Exhibit 31.1 Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934, As Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. *
Exhibit 32.1 Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to 18 USC. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 . *
--------------------
*Filed herewith.