UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:
September 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from __________________ to ________________
Commission file number
0-21151
PROFILE TECHNOLOGIES, INC.
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 91-1418002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2 Park Avenue, Suite 201
Manhasset, New York
(Address of Principal 11030
Executive Office) (Zip Code)
516-365-1909
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the part 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Applicable only to corporate issuers
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: On November 18, 2002, there were
5,457,661 shares of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
2
TABLE OF CONTENTS
Description Page Number
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
At September 30, 2002 (Unaudited) and At June 30, 2002...........4
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended September 30, 2002 and 2001...................5
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 2002 and 2001....................6
Notes to Condensed Consolidated Financial Statements (Unaudited)......7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................12
Item 3. Controls and Procedures.........................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceeding................................................21
Item 2. Changes in Securities...........................................21
Item 3. Defaults Upon Senior Securities.................................22
Item 4. Submission of Matters to a Vote of Security Holders.............22
Item 5. Other Information...............................................22
Item 6. Exhibits and Reports on Form 8-K................................22
SIGNATURES....................................................................23
CERTIFICATIONS................................................................23
3
PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements.
PROFILE TECHNOLOGIES, INC.
Condensed Balance Sheets
(unaudited)
September 30, June 30,
Assets 2002 2002
------ ----------- -----------
Current assets:
Cash and cash equivalents $ 57,374 $ 73,514
Accounts receivable 128,306 --
Contract work-in-progress 103,980 --
Prepaid expenses and other current assets 34,535 40,403
Total current assets 324,195 113,917
Equipment, net 172,356 196,351
Patents, net 124,752 145,900
Other assets 3,695 10,158
Total assets $ 624,998 $ 466,326
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable to stockholders $ 237,391 $ 123,362
Accounts payable 147,465 184,159
Accrued liabilities 147,000 113,200
Total current liabilities 531,856 420,721
Note payable to stockholder -- 15,000
Subscribed stock and warrants -- 231,250
Stockholders' equity:
Common stock, $0.001 par value. Authorized 10,000,000
shares; issued and outstanding 5,461,659 shares at
September 30, 2002 and 4,959,842 at June 30, 2002 5,462 4,960
Additional paid-in capital 8,336,983 7,983,338
Accumulated deficit (8,249,303)
(8,188,943)
Total stockholders' equity 93,142 (200,645)
Total liabilities and stockholders' equity $ 624,998 $ 466,326
See accompanying notes to condensed financial statements
4
PROFILE TECHNOLOGIES, INC.
Condensed Statements of Operations
(unaudited)
For the three months ended,
September 30,
---------------------------
2002 2001
----------- -----------
Revenues $ 334,913 $ 341,208
Cost of revenues 126,774 141,608
Gross profit 208,139 199,600
Operating expenses:
Research and development 54,652 72,843
General and administrative 204,449 290,833
Total operating expenses 259,101 363,676
Loss from operations (50,962) (164,076)
Interest income 6 816
Interest expense 9,404 --
Net loss $ (60,360) $ (163,260)
Basic and diluted net loss per share $ (0.01) $ (0.04)
Shares used to calculate basic and diluted
net loss per share 5,375,167 4,536,496
See accompanying notes to condensed financial statements
5
PROFILE TECHNOLOGIES, INC.
Condensed Statements of Cash Flows
(unaudited)
For the three months ended
September 30,
--------------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net loss $ (60,360) $(163,260)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 45,143 42,649
Accreted interest on notes payable 7,529 --
Stock compensation 2,875 --
Changes in certain assets and liabilities:
Accounts receivable (128,306) (160,394)
Contract work-in-progress (103,980) (176,185)
Prepaid expenses and other current assets 5,868 6,199
Other assets 6,463
Accounts payable - stockholder -- (3,262)
Other accounts payable (36,694) 24,281
Accrued liabilities 33,800 2,345
Net cash used in operating activities (227,662) (427,627)
Cash flows from investing activities - Purchase of equipment -- (26,780)
Cash flows from financing activities
Proceeds from issuance of common stock and warrants, net 105,022 217,258
Proceeds from issuance of notes payable 106,500
Net cash provided by financing activities 211,522 217,258
Net decrease in cash and cash equivalents (16,140) (237,149)
Cash and cash equivalents at beginning of the period 73,514 306,058
Cash and cash equivalents at end of the period $ 57,374 $ 68,909
Supplementary disclosure of cash flow information:
Note payable converted to common stock 15,000 --
Issuance of stock and warrants previously subscribed 231,250 --
See accompanying notes to condensed financial statements
6
PROFILE TECHNOLOGIES, INC
September 30, 2002
Notes to Condensed Financial Statements
1. Description of Business
Profile Technologies, Inc. (the "Company") is in the business of developing and
commercializing potential processes for the nondestructive, noninvasive testing
of both above ground and buried pipelines for the effectiveness of pipeline
cathodic protecting systems and coating integrity. The Company's future revenues
are currently dependent upon the market's acceptance of its sole developed
process.
2. Basis of Presentation
The unaudited interim condensed financial statements and related notes of the
Company have been prepared pursuant to the instructions to Form 10-QSB.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant to such
instructions. The condensed financial statements and related notes should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's annual report on form 10-KSB for the year ended June
30, 2002 (filed October 15, 2002). The information furnished reflects, in the
opinion of management, all adjustments, consisting of only normal recurring
items, necessary for fair presentation of the results of the interim periods
presented. Interim results are not necessarily indicative of results for a full
year.
3. Net Loss Per Share
Basic loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding during the period. Diluted loss per
share is computed by dividing the net loss by the weighted average number of
common and dilutive common equivalent shares outstanding during the period. As
the Company had a net loss attributable to common shareholders in each of the
periods presented, basic and diluted net loss per share are the same.
Excluded from the computation of diluted loss per share for the three months
ended September 30, 2002 are options and warrants to acquire 2,798,817 shares of
common stock with a weighted-average exercise price of $2.35 because their
effect would be antidilutive. For the three months ended September 30, 2002,
additional potential dilutive securities that were excluded from the diluted
loss per share computation are the exchange rights discussed in footnote 5 that
could result in options to acquire up to 286,850 shares of common stock with an
exercise price of $1.00. Excluded from the computation of diluted loss per share
for the three months ended September 30, 2001 are options and warrants to
acquire 1,859,167 shares of common stock with a weighted-average exercise price
of $3.47 because their effect would be antidilutive.
7
4. Notes Payable - Stockholders and Sale of Common Stock
On May 9, 2002, the Company entered into a $150,000 bridge loan agreement with
Murphy Evans, President and a director of the Company. Mr. Evans has currently
loaned the Company $126,000 pursuant to this bridge loan agreement. Pursuant to
the terms of the agreement, once Mr. Evans loaned the Company $125,000, the
Company will cancel 150,000 warrants, currently held by Mr. Evans, with exercise
prices ranging from $3.00 per share to $7.50 per share and issue to Mr. Evans
150,000 five-year warrants with an exercise price of $1.05. If the Company
raises $400,000 pursuant to the Offering within 90 days of May 9, 2002, the
entire loan amount will be converted into the Company's common stock in
accordance with the terms of the Offering (conversion price is based on $125,000
note /$0.70 per equity unit.) Each equity unit is comprised of one share of
common stock accompanied by a detachable five-year warrant to purchase an
additional share of common stock with an exercise price of $1.05. If the Company
is unsuccessful in raising $400,000 pursuant to the Offering within 90 days of
May 9, 2002, the Company will be obligated to begin monthly loan payments of
$25,000 per month with interest accruing at 6% per annum on the unpaid balance.
The Company's Board of Directors approved the terms of this loan.
The cancellation of the 150,000 warrants (old warrants) held by the officer with
exercise prices ranging from $3.00 to $7.50 per share and issuance of 150,000
warrants (new warrants) with an exercise price of $1.05 is an effective
repricing and is being accounted for as a "variable plan" until such time as the
warrants are exercised, expire or are forfeited. Variable plan accounting will
result in intrinsic value associated with the warrants being adjusted to
compensation expense based on each reporting period's ending stock value. As of
September 30, 2002, no intrinsic value had been recorded related to these
warrants as the stock price was below the exercise price.
As a result of the cancellation and reissuance of the warrants with a reduced
exercise price, the Company recorded an additional $15,000 discount on notes
payable and an increase in additional paid-in-capital based on the difference
between the fair value of the old warrants and the fair value of the new
warrants. The fair value of the old and new warrants on the day of cancellation
and issuance was based on an option pricing model with the following
assumptions: warrant lives ranging from 5 to 5.5 years, risk free interest rates
of 5.25%, volatility of 120% and a zero dividend yield. Corresponding interest
expense related to the note was $9,404 for the three months ended September 30,
2002.
As a result of the value allocated to the warrants associated with the
convertible bridge note payable, the note contains an embedded contingent
beneficial conversion feature, valued at $15,000. In accordance with EITF 98-5
and 00-27, the contingent beneficial conversion feature was based on the
intrinsic value and calculated as the difference between the conversion price
and the fair value of the common equity into which the note is convertible. The
contingent beneficial conversion feature will be recognized at the time and in
the event the $400,000 equity financing is raised and the note automatically
converts. The $15,000 amount would be accounted for as an increase in additional
paid-in-capital and interest expense. Ninety days after issuance, the $400,000
in equity financing had not been secured, however, the Company had agreed to
defer commencement of the $25,000 per month payments indefinitely.
8
In April 2002, the Company issued non-interest bearing bridge notes payable to
two officers in the amounts of $15,000 and $7,500, convertible into 21,428 and
10,714 equity units, respectively. Each equity unit is comprised of one share of
common stock accompanied by a detachable five-year warrant to purchase an
additional share of common stock with an exercise price of $1.05. To the extent
that the notes are not converted before maturity, both notes are payable in full
when the Company determines it has sufficient working capital to do so. The note
in the amount of $15,000 was converted to 21,428 equity units described above in
July, 2002.
During the three months ended September 30, 2002, the Company obtained $106,500
in non-interest bearing bridge notes payable to three stockholders of the
Company, convertible into 152,857 equity units. Each equity unit is comprised of
one share of common stock accompanied by a detachable five-year warrant to
purchase an additional share of common stock with an exercise price of $1.05. To
the extent that the notes are not converted before maturity, the loans are
payable in full when the Company determines it has sufficient working capital to
do so.
On March 18, 2002, the Board of Directors approved the 2002 Offering, an
offering of 1,000,000 shares of the Company's common stock at a price of $.70
per share, with attached warrants. Each warrant entitles the holder to purchase
one share of common stock at an exercise price of $1.05 per share until April 4,
2007. During the period from July 1, 2002 through September 30, 2002, the
Company raised a total of $105,022 from the issuance of 150,031 shares of its
common stock and warrants in connection with this Offering.
5. Liquidity
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company incurred cumulative losses of
$8,249,303 through September 30, 2002 and had negative working capital of
$207,661 as of September 30, 2002. Additionally, the Company has expended a
significant amount of cash in developing its technology and patented processes.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management recognizes that in order to meet the Company's
capital requirements, and continue to operate, additional financing, including
seeking industry-partner investment through joint ventures or other possible
arrangements, will be necessary. The Company is evaluating alternative sources
of financing to improve its cash position and is undertaking efforts to raise
capital. If the Company is unable to raise additional capital or secure
additional revenue contracts and generate positive cash flow, it is unlikely
that the Company will be able to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
To reduce cash outflows, certain of the Company's employees, officers and
directors have agreed to defer a portion of their salaries and consulting fees
from August 2001 until the Company has sufficient resources to pay the amounts
owed or to exchange such amounts into options as described below. At September
30, 2002, the Company accrued approximately $143,425 related to the deferred
payment of the salaries and consulting fees which is included under accrued
liabilities. On March 18, 2002, the Board of Directors approved a right whereby
for each dollar of deferred salary and fees, the employee, officer or director
could exchange their deferred amount for an option to purchase two shares of
common stock with a five-year term at an exercise price of $1.00 per share. No
conversions have occurred to date. As there was no intrinsic value associated
with these exchange rights, no additional compensation cost has been recorded.
9
6. NASDAQ Delisting
In June 2001, the Company announced that it received a Nasdaq Staff
Determination, indicating that the Company failed to comply with the minimum bid
price and net tangible asset/shareholder equity requirements of the Nasdaq
Marketplace Rules for continued listing set forth in Marketplace Rule
4310(c)(4), and that its securities were, therefore, subject to delisting from
the Nasdaq SmallCap Market. On August 10, 2001, the Nasdaq Stock Market
suspended trading in the Company's common stock. Effective Monday, August 13,
2001, the Company began trading on the Over the Counter Bulletin Board under the
symbol PRTK.
7. New Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141, "Business Combinations", and
Statement No. 142, "Goodwill and Other Intangible Assets". Statement No. 141
requires business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting, and specifies criteria for recognizing
intangible assets acquired in a business combination. Statement No. 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually. Intangible
assets with definite useful lives, such as the Company's patents which have a
net book value of $145,900 as of June 30, 2002, will continue to be amortized
over their respective estimated useful lives. Amortization expense related to
the patents for the three months ended September 30, 2002 was $21,148.
Additional amortization expense related to the patents for the remainder of
fiscal year 2003 is anticipated to be $63,444. Amortization expense related to
the patents for fiscal years 2004, 2005 and 2006 is anticipated to be $61,303.
The Company adopted the provisions of Statement No. 141 immediately and
Statement No. 142 effective July 1, 2002. The impact of adopting Statement No.'s
141 and 142 were not material.
In October, 2001 the FASB issued FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While Statement No. 144 supersedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", it
retains many of the fundamental provisions of that Statement. Statement No. 144
also supersedes the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a business. However,
it retains the requirement in Opinion No. 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. The Company adopted the provisions of Statement
No. 144 effective July 1, 2002. The adoption of this statement did not have a
material impact on the Company's financial statements.
10
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized at fair value when the liability is incurred. The Company
will be required to adopt this statement for any exit or disposal activities
initiated after December 31, 2002. The Company does not believe the adoption of
this statement will have a material impact on the Company's financial
statements.
11
Item 2. Management's Discussion and Analysis or Plan of Operation.
General
Since its formation in 1988, Profile Technologies, Inc., a Delaware
corporation (the "Company"), has been engaged in the business of researching and
developing a high speed scanning process, which is nondestructive and
noninvasive, to test remotely buried and insulated pipelines for corrosion. The
Company's electromagnetic wave inspection process, referred to as the Company's
"Inspection EMW(SM)" or "EMW," is a patented process of analyzing the waveforms
of electrical impulses in a way that extracts point-to-point information along a
segment of pipeline to illustrate the integrity of the entire pipeline. This
process involves sending an electrical pulse along the pipe being tested from
each of two locations toward varying intersecting points between the two
locations. One or more of the modified pulses is analyzed to determine whether
an anomaly exists at the intersecting location.
The EMW process is designed to detect external corrosion of pipelines
without the need for taking the line out of service, physically removing the
insulation, or uncovering the pipe, and then visually inspecting the outside of
the pipe for corrosion. The Company often can inspect the pipelines by using
various access points to the pipeline that already exist for other reasons.
Where such access is not already available, the Company's technology permits
inspection of pipelines with only a very minimal amount of disturbance of the
covering or insulation that is present on the pipeline. Finally, the Company's
technology permits an inspection of the entire pipeline, as opposed to other
technologies which only conduct inspections at the points selected for the
testing.
The Company's data interpretation process has been largely automated, and
the Company hopes to be able to complete this automation in the near future. The
Company's business model and strategy is heavily dependent on its ability to
automate the data interpretation process and fully implement its new technology.
If the Company is unable to automate the process and fully implement its
technology, the Company may not be able to implement a licensing and joint
venture business model and may not be able to secure additional contracts. As a
result, such failure may have a material adverse effect on the business and
financial condition of the Company.
Sales
The Company derives revenue solely from the sale of the EMW inspection
technology service. The Company relies upon several employees, including the
Chief Executive Officer, the Chief Operating Officer, the Vice President - Field
Operations, for the Company's sales functions. The Company relies solely upon
the employees of the Company to conduct its sales activities.
During the three months ended September 30, 2002, all of the Company's
sales were attributable to two customers. These customers individually accounted
for 35% and 65%, and 57% and 40%, of net sales during the three months ended
September 30, 2002 and 2001, respectively.
12
Marketing
The Company's sales and marketing strategy includes positioning the
Company's EMW technology as the method of choice to detect pipeline corrosion
where the pipelines are either inaccessible to other inspection tools or much
more costly to inspect with tools other than Profile's EMW inspection. Pending
completion of designed improvements to its buried pipe inspection equipment and
procedures, the Company intends to concentrate its marketing efforts on
above-grade insulated pipe such as is common in refineries and chemical plants
and on encased road and stream crossings.
Upon completion of its redesigned buried pipe product, which the Company
plans to accomplish during the fiscal year 2003, the Company intends to refocus
on the natural gas utility and pipeline market, particularly in so-called "high
consequence areas" (e.g., densely populated areas).
There can be no assurance that the Company will be successful in
concentrating its marketing efforts for the EMW technology on above-grade
insulated pipe or in the "high consequence areas" of the natural gas utility and
pipeline market.
Critical Accounting Estimates and Policies
The discussion and analysis of financial condition and results of
operations is based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including contract revenue recognition and impairment of long-lived
assets. The Company bases its estimates on historical experience and on various
other assumptions that the Company believes to be reasonable under the
circumstances, the results of which form its basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ materially from these estimates under
different assumptions and conditions, and such variations may be adverse.
The Company recognizes revenue from service contracts using the
percentage-of-completion method of contract accounting. Contract revenues earned
are measured using either the percentage-of-contract costs incurred to date to
total estimated contract costs or, when the contract is based on measurable
units of completion, revenue is based on the completion of such units.
Historically, the majority of the Company's revenue has been recognized based on
the completion of measurable units. Anticipated losses on contracts, if any, are
charged to earnings as soon as such losses can be estimated. Changes in
estimated profits on contracts are recognized during the period in which the
change in estimate is known. The Company records claims for additional
compensation on contracts upon revision of the contract to include the amount to
be received for the additional work performed. Contract costs include all direct
material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools and repairs, and
depreciation costs. Selling, general, and administrative costs are charged to
expense as incurred. Service contracts generally extend no more than six months.
13
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company assesses the
recoverability by determining whether the balance can be recovered through
forecasted future operations. The amount of impairment, if any, is measured
based on projected future results using a discount rate reflecting the Company's
assumed average cost of funds.
Results of Operations
The Company's operating results depend exclusively on its ability to market
its EMW inspection technology. If the Company is not able to automate completely
the EMW inspection process and fully implement its new technology, the Company
may not be able to obtain future contracts to sell or to license its EMW
technology. Since the Company's revenues are derived solely from the marketing
and sale of its EMW technology, any failure to obtain future contracts will have
a material adverse effect on the business and financial condition of the
Company.
Revenues for the three months ended September 30, 2002 were $334,913 which
represented a decrease of $6,295 or 2% as compared to revenues of $341,208 for
the three months ended September 30, 2001. In the previous year, the Company was
engaged for a small service project with a natural gas utility that generated
approximately $9,000 in revenue. The Company did not perform a similar service
project in the current period which was the primary cause of the nominal
decrease in revenue.
Cost of revenues decreased 11% to $126,774 for the three months ended
September 30, 2002 compared to $141,608 for the three months ended September 30,
2001. The decrease in cost of revenues is primarily due to greater operational
and production efficiencies in the Company's technology and business.
Gross profit increased to $208,139 for the three months ended September 30,
2002 from gross profit of $199,600 for the three months ended September 30,
2001. The increase in gross profit for the three months ended September 30, 2002
as compared to the same quarter of the previous year resulted from efficiencies
in the testing services performed.
Research and development expenses for the three months ended September 30,
2002 decreased 25% to $54,652 from $72,843 for the three months ended September
30, 2001, a decrease of $18,191. The decrease is due to a reduction in the
number of the Company's employees, and to the fact that the Company's current
employees have spent less time on research and development and more time on
revenue generating contracts.
General and administrative expenses decreased 30% to $204,449 for the three
months ended September 30, 2002 from $290,833 for the three months ended
September 30, 2001, a decrease of $86,434. The decrease is primarily due to a
reduction in discretionary expenditures, including a reduction in the number of
the Company's employees and the closure of two of the Company's offices.
14
Loss from operations decreased 69% to $50,962 for the three months ended
September 30, 2002 compared to $164,076 for the three months ended September 30,
2001. The decrease is primarily due to a reduction in discretionary
expenditures, including a reduction in the number of the Company's employees and
the closure of two of the Company's offices.
Interest income decreased to $6 for the three months ended September 30,
2002 down from $816 for the three months ended September 30, 2001. This decrease
was the result of declining cash and cash equivalent balances during the period
as the Company used such resources to sustain its commercial operations and
research and development activities.
Interest expense was $9,404 for the three months ended September 30, 2002.
This interest expense resulted from the issuance of a note payable by the
Company to Murphy Evans, the President and a director and shareholder of the
Company, as described in "Liquidity and Capital Resources" section below.
Net Loss decreased 63% to $60,360 for the three months ended September 30,
2002 compared to $163,260 for the three months ended September 30, 2001.
Liquidity and Capital Resources
The Company has incurred cumulative losses of $8,249,303 through September
30, 2002 and had negative working capital of $207,661 as of September 30, 2002.
During the three months ended September 30, 2002, the Company used $227,662 of
cash in operating activities primarily as a result of net losses. The Company's
cash and cash equivalents as of September 30, 2002 were $57,374. 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 will be necessary.
The Company is evaluating alternative sources of financing, including
seeking industry-partner investment through joint venture or other possible
arrangements, to improve its cash position and is also undertaking efforts to
raise capital from more conventional sources. Further, the Company is making
on-going efforts to reduce its on-going expense requirements including payroll.
If the Company is unable to raise additional capital or secure additional
revenue contracts and generate positive cash flow, the Company will be unable to
continue as a going concern.
For the year ended June 30, 2002, the Company raised $594,208 from a
private placement of its common stock, with attached warrants, and $126,000 from
a loan from its President, Murphy Evans as described further below. In addition,
the Company raised $22,500 from loan proceeds from Henry Gemino, its Chief
Executive Officer, Chief Financial Officer and a director and stockholder of the
Company, and G.L. Scott, its former Chairman of the Board of Directors, as
described below.
15
On March 18, 2002, the Board of Directors approved the 2002 Offering, an
offering of 1,000,000 shares of the Company's common stock at a price of $.70
per share, with attached warrants. Each warrant entitles the holder to purchase
one share of common stock at an exercise price of $1.05 per share until April 4,
2007. During the period from July 1, 2002 through September 30, 2002, the
Company raised a total of $105,022 from the issuance of 150,031 shares of its
common stock and warrants in connection with this Offering. There can be no
assurance that the Company will be able to raise additional equity capital from
this Offering.
In July, 2002, Henry Gemino, the Chief Executive Officer, Chief Financial
Officer and a director and stockholder of the Company, elected to convert a
$15,000 note payable into 21,428 equity units. Each equity unit is comprised of
one share of the Company's common stock, with a detached 5 year warrant to
purchase one additional share of the Company's common stock at an exercise price
of $1.05 per share.
Capital will be expended to support operations until the Company can
generate sufficient cash flows from operations. In order for the Company to
generate cash flows from operations, the Company must generate additional
revenue generating contracts. Management is currently directing the Company's
activities towards obtaining additional service contracts, which, if obtained,
will necessitate the Company attracting, hiring, training and outfitting
qualified technicians. If additional service contracts are obtained, it will
also necessitate additional field test equipment purchases in order to provide
the services. The Company's intention is to purchase such equipment for its
field crews for the foreseeable future, until such time as the scope of
operations may require alternate sources of financing equipment. The Company
expects that if additional contracts are secured, and revenues increase, working
capital requirements will increase. There can be no assurance that the Company's
process will gain widespread commercial acceptance within any particular time
frame, or at all. The Company will incur additional expenses as it hires and
trains field crews and support personnel related to the successful receipt of
commercial contracts. Additionally, the Company anticipates that cash will be
used to meet capital expenditure requirements necessary to develop
infrastructure to support future growth. There can be no assurance that the
Company will be able to secure additional revenue generating contracts to
provide sufficient cash.
The Company's contractual obligations consist of commitments under
operating leases, deferred salary and fees, and repayment of loans payable to
certain officers, directors and stockholders. Future minimum rental payments on
the operating leases are less than $15,000 for the remainder of the fiscal year
2003, with no further contractual obligations thereafter, although the Company
expects to continue to incur costs on leased properties, as the Company has
extended such leases in the past or will use alternate facilities. As of
September 30, 2002, deferred salary and fees were equal to $143,425, and the
salaries and fees will continue to be deferred until the Company has sufficient
resources to pay the amounts owed, or the employees, officers, or directors
exchange such amounts as described below. On March 18, 2002, the Board of
Directors approved a right under which any such employee, officer or director
could exchange each dollar of his or her deferred salary or fees for an option
to purchase two shares of the Company's common stock which may be exercised over
a five-year term at an exercise price of $1.00 per share. As of September 30,
2002, no conversions have occurred.
16
As of September 30, 2002, the Company had outstanding loans payable to
certain officers, directors and stockholders with principal amounts, in the
aggregate, equal to $237,391. The notes are described below.
On May 9, 2002, the Company entered into the Evans Loan, a $150,000 bridge
loan agreement with Murphy Evans, President and a director and stockholder of
the Company. Mr. Evans has currently loaned the Company $126,000, pursuant to
the Evans Loan. Under to the terms of the Evans Loan, once Mr. Evans loaned the
Company $125,000, the Company is obligated to cancel 150,000 warrants, currently
held by Mr. Evans, with exercise prices ranging from $3.00 per share to $7.50
per share, and issue to Mr. Evans 150,000 five-year warrants with an exercise
price of $1.05. If the Company had raised $400,000 pursuant to the Offering
within 90 days of May 9, 2002, the entire loan amount would have been converted
into the Company's common stock in accordance with the terms of the Offering.
However, the Company raised only $346,250, not $400,000, under the Offering
within 90 days of May 9, 2002. As a result, the Company is obligated to commence
making monthly loan payments to Mr. Evans in the amount of $25,000 per month,
with interest accruing at 6% per annum on the unpaid principal balance of the
Evans Loan. The Evans Loan has a discounted carrying value of $123,391 as of
September 30, 2002, but a stated amount of $126,000. The Company's Board of
Directors approved the terms of the Evans Loan. As of September 30, 2002, the
Company had not made any, and Mr. Evans has made no demand for, payments under
the Evans Loan.
During the three months ended September 30, 2002 the Company entered into
the Subsequent Evans Loan, representing certain non-interest bearing bridge
loans in the aggregate amount of $57,000 also payable to Murphy Evans. The terms
of the Subsequent Evans Loan provide for payment at such time as the Company
determines it has sufficient working capital to repay the principal balance of
the Subsequent Evans Loan and is convertible into 81,428 equity units at any
time prior to payment. Each equity unit is comprised of one share of the
Company's common stock, with a detached 5-year warrant to purchase one
additional share at an exercise price of 1.05 per share. The Subsequent Evans
Loan is exempt from registration under the Securities Act pursuant to Section
4(2) thereof. As of September 30, 2002, Mr. Evans had not converted the
Subsequent Evans Loans into equity units.
During the three months ended September 30, 2002, the Company entered into
two non-interest bearing bridge loans in the respective principal amounts of
$40,000 and $10,000 (the "Shareholder Loans") payable to two shareholders of the
Company. The terms of the Shareholder Loans provide for payment at such time as
the Company determines it has sufficient working capital to repay the principal
balance of the Shareholder Loans. The Shareholder Loans are convertible into
57,142 and 14,286 equity units, respectively, at any time prior to payment. Each
equity unit is comprised of one share of the Company's common stock, with a
detached 5-year warrant to purchase one additional share at an exercise price of
$1.05 per share. Each of the Shareholder Loans is exempt from registration under
the Securities Act pursuant to Section 4(2) thereof. As of September 30, 2002,
neither shareholder has converted either Shareholder Loan into equity units.
17
The remaining note represents a non-interest bearing bridge loan entered
into by the Company in April, 2002, in the principal amount of $7,500 (the
"Scott Loan") payable to G.L. Scott, the former Chairman of the Board of
Directors and stockholder of the Company. The Scott Loan is payable at such time
as the Company determines that it has sufficient working capital to repay the
principal balance of the Scott Loan and is convertible into 10,714 equity units
at any time prior to payment. Each equity unit is comprised of one share of the
Company's common stock, with a detached 5-year warrant to purchase one
additional share at an exercise price of $1.05 per share. On September 29, 2002,
Mr. Scott died unexpectantly from a stroke. As of September 30, 2002, neither
Mr. Scott nor his estate had converted the Scott Loan into equity units.
On September 25, 2002, the Company received notice from one of its Alaska
customers that the results of a blind test on large diameter above-grade pipe
were not satisfactory. Specifically, the customer indicated that, although the
Company located all areas of corrosion, the severity of the anomalies reported
did not match the severity of corrosion found on the pipe. As a result, the
customer canceled approximately two weeks of work for one of the Company's
crews, resulting in the loss of approximately $47,000 in expected, but not
accrued, revenue. This customer accounted for 65% of the Company's revenues for
the three months ended September 30, 2002.
The results that caused the customer the most concern were derived from
data that was inadvertently taken by the Company using a faulty piece of
grounding equipment. In the report provided to the customer, the Company
identified the grounding problem and recommended that the pipe should be
re-tested prior to verification.
The Company has recently completed and submitted a detailed, written
explanation of the equipment problem for the customer, including the steps
already taken by the Company to preclude the recurrence of the equipment
problem. The Company's service contract with the customer is still in place, and
the Company is hopeful that it will be included in the customer's inspection
plans for next year, although there can be no assurance that the customer will
engage the Company to provide inspection services at any time in the future.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains "forward-looking statements."
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes,"
"anticipates," "expects" or words of similar import. Similarly, statements that
describe the Company's projected future results, future plans, objectives or
goals or future conditions or events are also forward looking statements. Actual
results are inherently difficult to predict. Any such forward-looking statements
are subject to the risks and uncertainties that could cause actual results of
operations, financial condition, acquisitions, financing transactions,
operations, expenditures, expansion and other events to differ materially from
those expressed or implied in such forward-looking statements. Any such
forward-looking statements would be subject to a number of assumptions
regarding, among other things, future economic, competitive and market
conditions generally. Such assumptions would be based on facts and conditions as
they exist at the time such statements are made as well as predictions as to
future facts and conditions, the accurate prediction of which may be difficult
and involve the assessment of events beyond the Company's control.
18
The forward-looking statements contained in this report are based on
current expectations that involve a number of risks and uncertainties. Such
forward-looking statements are based on assumptions that the Company will obtain
or have access to adequate financing for each successive phase of its growth,
that the Company will market and provide products and services on a timely
basis, that there will be no material adverse competitive or technological
change with respect to the Company's business, demand for the Company's products
and services will significantly increase, that the Company's executive officers
will remain employed as such by the Company, that the Company's forecast
accurately anticipate market demand, and that there will be no material adverse
change in the Company's operations, business or governmental regulation
affecting the Company or its customers. The foregoing assumptions are based on
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control. Although the Company believes the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required under Rule 13a-15 and Rule 15d-15 under the Securities Exchange
Act of 1934 (the "Exchange Act"), within the 90 days prior to the filing date of
this Quarterly Report, the Company completed an evaluation of the effectiveness
of the design and operation of the Company's disclosure controls and procedures.
This evaluation was completed by the Chief Executive Officer, who also serves as
the Company's Chief Financial Officer, and the Chief Operating Officer. Based
upon that evaluation, the Company's Chief Executive Officer and Chief Operating
Officer have concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company required to be included in the Company's periodic filings with the
Commission. Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in the Company's reports filed under the Exchange Act
is accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Operating Officer, as appropriate, to allow timely
decisions regarding required disclosures.
19
Changes in Internal Controls.
There have been no changes in internal controls or to the Company's
knowledge, in other factors that could significantly affect the Company's
disclosure controls and procedures subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
20
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any pending or threatened legal proceedings.
Item 2. Changes in Securities.
On March 18, 2002, the Board of Directors approved an offering of 1,000,000
shares of the Company's common stock at a price of $0.70 per share, with
attached warrants (the "2002 Offering"). Each warrant entitles the holder to
purchase one share of common stock at an exercise price of $1.05 per share until
April 4, 2007. The Company did not incur or pay any commissions with respect to
offers and sales of securities under the 2002 Offering. As of September 30,
2002, the Company had raised a total of $351,272 from the 2002 Offering. All of
the investors were accredited investors. The 2002 Offering is exempt from
registration under the Securities Act pursuant to Section 4(2) thereof and Rule
506 promulgated thereunder. There can be no assurance that the Company will be
able to raise additional equity capital from this Offering.
On May 9, 2002, the Company entered into a $150,000 bridge loan agreement
with Murphy Evans, the President and a director and stockholder of the Company
(the "Evans Loan"). Mr. Evans has currently loaned the Company $126,000,
pursuant to the Evans Loan. Under the terms of the Evans Loan, once Mr. Evans
loaned the Company $125,000, the Company is obligated to cancel 150,000
warrants, currently held by Mr. Evans, with exercise prices ranging from $3.00
per share to $7.50 per share, and issue to Mr. Evans 150,000 five-year warrants
with an exercise price of $1.05. If the Company had raised $400,000 pursuant to
the Offering within 90 days of May 9, 2002, the entire loan amount would have
been converted into the Company's common stock in accordance with the terms of
the Offering. However, the Company raised only $346,250, not $400,000, under the
Offering within 90 days of May 9, 2002. As a result, the Company is obligated to
commence making monthly loan payments to Mr. Evans in the amount of $25,000 per
month, with interest accruing at 6% per annum on the unpaid principal balance of
the Evans Loan. The Company's Board of Directors approved the terms of the Evans
Loan. The Evans Loan is exempt from registration under the Securities Act
pursuant to Section 4(2) thereof. As of September 30, 2002, the Company has not
made any, and Mr. Evans has made no demand for, payments under the Evans Loan.
During the three months ended September 30, 2002, the Company entered into
two non-interest bearing bridge loans in the respective principal amounts of
$40,000 and $10,000 (the "Shareholder Loans") payable to two shareholders of the
Company. The terms of the Shareholder Loans provide for payment at such time as
the Company determines it has sufficient working capital to repay the principal
balances of the Shareholder Loans. The Shareholder Loans are convertible into
57,142 and 14,286 equity units, respectively, at any time prior to payment. Each
equity unit is comprised of one share of the Company's common stock, with a
detached 5-year warrant to purchase one additional share at an exercise price of
$1.05 per share. Each of the Shareholder Loans is exempt from registration under
the Securities Act pursuant to Section 4(2) thereof. As of September 30, 2002,
neither shareholder has converted either Shareholder Loan into equity units.
21
During the three months ended September 30, 2002, the Company entered into
certain non-interest bearing bridge loans in the aggregate amount of $57,000
(the "Subsequent Evans Loan") payable to Murphy Evans, the President and a
director and shareholder of the Company. The terms of the Subsequent Evans Loan
provide for payment at such time as the Company determines it has sufficient
working capital to repay the principal balance of the Subsequent Evans Loan and
is convertible into 81,428 equity units at any time prior to payment. Each
equity unit is comprised of one share of the Company's common stock, with a
detached 5-year warrant to purchase one additional share at an exercise price of
$1.05 per share. The Subsequent Evans Loan is exempt from registration under the
Securities Act pursuant to Section 4(2) thereof. As of September 30, 2002, Mr.
Evans had not converted the Subsequent Evans Loan into equity units.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
On September 29, 2002, G.L. Scott, the Company's Chairman of the Board of
Directors, tragically and unexpectantly died from a stroke. As of November 18,
2002, the Board of Directors has not appointed a successor Chairman of the
Board.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
99.1 Press Release dated September 30, 2002 (incorporated by reference
from Exhibit 99.1 to the Company's Annual Report on Form 10-KSB
filed with the Commission on October 15, 2002).
99.2 Certification under Section 906 of the Sarbanes-Oxley Act of 2002
99.3 Certification under Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
22
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROFILE TECHNOLOGIES, INC.
--------------------------
(Registrant)
Date: November 19, 2002 /s/ Henry E. Gemino
-------------------------------------
Henry E. Gemino
Chief Executive Officer and
Chief Financial Officer
CERTIFICATION
-------------
I, Henry E. Gemino, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Profile
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, is made known to us by others
within the entity, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within ninety (90) days prior to the filing of this
quarterly report (the "Evaluation Date"); and
23
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002 /s/ Henry E. Gemino
-----------------------------------
Henry E. Gemino
Chief Executive Officer and
Chief Financial Officer
CERTIFICATION
-------------
I, Philip L. Jones , certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Profile
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
24
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, is made known to us by others
within the entity, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within ninety (90) days prior to the filing of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002 /s/ Philip L. Jones
-----------------------------------
Philip L. Jones
Chief Operating Officer
25