UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(MarkOne)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended:
March 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from __________________ to ________________
Commission file number
0-21151
PROFILE TECHNOLOGIES, INC.
--------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 91-1418002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2 Park Avenue, Suite 201
Manhasset, New York
(Address of Principal 11030
Executive Office) (Zip Code)
516-365-1909
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the part 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
On March 31, 2003, there were 5,461,659 shares of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X ]
2
TABLE OF CONTENTS
Description Page Number
--------------------------------------------------------------------------------------
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets - (Unaudited)
At March 31, 2003 and At June 30, 2002.................................4
Condensed Statements of Operations (Unaudited) -
Three Months Ended and Nine Months ended March 31, 2003 and 2002.......5
Condensed Statements of Cash Flows (Unaudited) -
Nine Months Ended March 31, 2003 and 2002..............................6
Notes to Condensed Financial Statements (Unaudited).........................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................13
Item 3. Controls and Procedures...........................................22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................23
Item 2. Changes in Securities.............................................23
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 and Reports on Form 8-K..................................25
SIGNATURES..........................................................................26
CERTIFICATIONS......................................................................26
3
PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements.
PROFILE TECHNOLOGIES, INC.
Condensed Balance Sheets
(unaudited)
March 31, June 30,
Assets 2003 2002
----------- -----------
Current assets:
Cash and cash equivalents $ -- $ 73,514
Accounts receivable -- --
Prepaid expenses and other current assets 71,674 40,403
Total current assets 71,674 113,917
Equipment, net 131,774 196,351
Patents, net 82,455 145,900
Other assets 3,515 10,158
----------- -----------
Total assets $ 289,418 $ 466,326
----------- -----------
Liabilities and Stockholders' Deficit
Current liabilities:
Notes payable to stockholders $ 434,650 $ 123,362
Accounts payable 131,930 184,159
Accrued liabilities 336,212 113,200
Total current liabilities 902,792 420,721
Note payable to stockholder -- 15,000
Subscribed stock and warrants -- 231,250
Total Liabilities 902,792 666,971
Stockholders' deficit:
Common stock, $0.001 par value. Authorized 15,000,000
shares as of March 31, 2003 and 10,000,000 as of June 30,
2002; issued and outstanding 5,461,659 shares at March 31, 2003
and 4,959,842 at June 30, 2002 5,462 4,960
Additional paid-in capital 8,338,300 7,983,338
Accumulated deficit (8,957,136) (8,188,943)
Total stockholders' deficit (613,374) (200,645)
----------- -----------
Total liabilities and stockholders' deficit $ 289,418 $ 466,326
----------- -----------
See accompanying notes to condensed financial statements
4
PROFILE TECHNOLOGIES, INC.
Condensed Statement of Operations
(Unaudited)
For the Three months ended For the Nine months ended
March 31, March 31,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenue $ -- $ -- $ 339,609 $ 404,573
Cost of revenue 56,604 49,737 256,217 303,809
----------- ----------- ----------- -----------
Gross profit (loss) (56,604) (49,737) 83,392 100,764
----------- ----------- ----------- -----------
Operating Expenses:
Research and development 45,996 140,754 145,388 312,317
General and administrative 242,695 264,977 688,502 805,355
----------- ----------- ----------- -----------
Total operating expenses 288,691 405,731 833,890 1,117,672
----------- ----------- ----------- -----------
Loss from operations (345,295) (455,468) (750,498) (1,016,908)
----------- ----------- ----------- -----------
Interest income -- 12 6 995
Interest Expense 3,813 -- 17,701 --
Net loss $ (349,108) $ (455,456) $ (768,193) $(1,015,913)
----------- ----------- ----------- -----------
Basic and diluted net loss per share (0.06) (0.09) (0.14) (0.21)
Shares used to calculate basic and 5,461,659 4,954,875 5,432,618 4,753,633
diluted net loss per share
See accompanying notes to condensed financial statements
5
PROFILE TECHNOLOGIES, INC.
Condensed Statements of Cash Flows
(unaudited)
For the nine months ended
March 31,
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $ (768,193) $(1,015,913)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 124,038 124,352
Gain on disposal of fixed assets (4,556)
Stock issued for rent -- 5,500
Accreted interest on notes payable 10,138 --
Stock compensation 4,192 2,917
Changes in certain assets and liabilities:
Accounts receivable -- 32,129
Contract work-in-progress -- 17,850
Prepaid expenses and other current assets (31,271) (26,068)
Other assets 6,643 850
Accounts payable - stockholder -- (3,262)
Other accounts payable (52,229) 117,713
Accrued liabilities 223,012 107,058
----------- -----------
Net cash used in operating activities (488,226) (636,874)
Cash flows from investing activities:
Purchase of equipment -- (26,780)
Disposal of fixed assets 8,540 --
----------- -----------
Net cash provided by (used in) investing
activities 8,540 (26,780)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net 105,022 362,958
Proceeds from issuance of notes payable to stockholders 301,150 20,000
----------- -----------
Net cash provided by financing activities 406,172 382,958
----------- -----------
Net decrease in cash and cash equivalents (73,514) (280,696)
----------- -----------
Cash and cash equivalents at beginning of the period 73,514 306,058
----------- -----------
Cash and cash equivalents at end of the period $ -- $ 25,362
=========== ===========
Supplementary disclosure of non-cash financing information:
Note payable to stockholder 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
March 31, 2003
Notes to Condensed Financial Statements
(unaudited)
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 stockholders 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 and nine
months ended March 31, 2003 are options and warrants to acquire 2,853,817 shares
of common stock with a weighted-average exercise price of $2.32 because their
effect would be antidilutive. For the three and nine months ended March 31,
2003, 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 405,016 shares of common stock
with an exercise price of $1.00. Excluded from the computation of diluted loss
per share for the three and nine months ended March 31, 2002 are options and
warrants to acquire 1,381,000 shares of common stock with a weighted-average
exercise price of $4.19 because their effect would be antidilutive.
7
PROFILE TECHNOLOGIES, INC
March 31, 2003
Notes to Condensed Financial Statements
(unaudited)
4. Notes Payable - Stockholders and Sale of Common Stock
On May 9, 2002, the Company entered into a $150,000 bridge loan agreement (the
"Evans Loan") 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 cancelled 150,000 warrants held by Mr. Evans, with
exercise prices ranging from $3.00 per share to $7.50 per share and issued to
Mr. Evans 150,000 five-year warrants with an exercise price of $1.05. 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 is 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 Company did
not obtain the $400,000 in equity financing, but as of March 31, 2003, no
repayments of the loan have been made by the Company. The Company and Mr. Evans
had agreed to defer commencement of the $25,000 per month payments indefinitely.
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
March 31, 2003, no intrinsic value had been recorded related to these warrants
as the stock price was below the exercise price.
As a result of the cancellation and 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 $15,000 for the nine months ended March 31,
2003.
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
Abstract 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.
8
PROFILE TECHNOLOGIES, INC
March 31, 2003
Notes to Condensed Financial Statements
(unaudited)
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 nine months ended March 31, 2003, 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.
During the six months ended December 31, 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. As of March 6, 2003, Mr. Evans had not
converted the Subsequent Evans Loans into equity units.
From December 26, 2002 through March 31, 2003, Murphy Evans loaned $194,650 to
the Company (collectively, the "Non-Convertible Evans Loans"). The terms of the
Non-Convertible Evans Loans provide for payment at such time as the Company
determines it has sufficient working capital to repay the Non-Convertible Evans
Loans. Interest will accrue on the Non-Convertible Evans Loans at a rate of 5%
per annum. The Non-Convertible Evans Loans are not convertible into equity
units.
On March 6, 2003, the Company's Board of Directors approved the Loan Amendment
and Promissory Note (the "Amended Evans Loan") between the Company and Murphy
Evans. The Amended Evans Loan amends and supersedes the indebtedness under the
Evans Loan, Subsequent Evans Loan and Non-Convertible Evans Loan by aggregating
the debt thereunder into one promissory note bearing interest on the aggregate
principal balance at a rate of 5% per annum, payable on June 30 and December 31
of each year. The outstanding balance under the Amended Evans Loan is unsecured
and is due and payable in full on December 31, 2003. The Amended Evans Loan
supersedes and replaces all of the terms under the Evans Loan, Subsequent Evans
Loan and Non-Convertible Evans Loan, including the conversion feature under the
Subsequent Evans Loan. As of March 31, 2003, the Amended Evans Loan amounted to
$373,500.
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 December 31, 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 2002 Offering. This 2002 Offering
terminated on December 31, 2002.
On December 9, 2002, the shareholders approved an increase in the authorized
common shares of the Company from 10,000,000 to 15,000,000.
5. Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No.123, "Accounting for Stock-Based
Compensation" (SFAS 123), as amended by SFAS No. 148. Accordingly, the Company
accounts for stock-based compensation transactions with employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.25,
"Accounting for Stock Issued to Employees," (APB 25) and related
9
PROFILE TECHNOLOGIES, INC
March 31, 2003
Notes to Condensed Financial Statements
(unaudited)
interpretations. Compensation cost for employee stock options is measured as the
excess, if any, of the fair value of the Company's common stock at the date of
grant over the stock option exercise price. Compensation cost for awards to
non-employees is based on the fair value of the awards in accordance with SFAS
123 and related interpretations. The following table illustrates the effect on
net loss and net loss per share if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation.
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
---- ---- ---- ----
Net loss as reported $ 349,108 $ 455,456 $ 768,193 $1,015,913
Plus: stock-based employee compensation
expense included in reported net loss 0 2,917 6,358 2,917
Less: stock-based employee compensation
expense determined under fair value based
methods for all awards 0 0 9,600 110,500
--------- --------- --------- ----------
Pro forma net loss $ 349,108 $ 452,539 $ 771,435 $1,123,496
========= ========= ========= ==========
Net Loss Per Share
Basic and diluted - as reported $ (0.06) $ (0.09) $ (0.14) $ (0.21)
Basic and diluted - pro forma $ (0.06) $ (0.09) $ (0.14) $ (0.24)
6. Liquidity
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company incurred cumulative losses of
$8,957,136 through March 31, 2003 and had negative working capital of $831,118
as of March 31, 2003. Additionally, the Company has expended a significant
amount of cash in developing its technology and patented processes. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management recognizes that in order to meet the Company's capital
requirements, and continue to operate, additional financing, including seeking
industry-partner investment through joint ventures or other possible
arrangements, will be necessary. The Company is evaluating alternative sources
of financing to improve its cash position and is undertaking efforts to raise
capital. If the Company is unable to raise additional capital or secure
additional revenue contracts and generate positive cash flow, it is unlikely
that the Company will be able to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
To reduce cash outflows, certain of the Company's employees, officers and
directors have agreed to defer a portion of their salaries and consulting fees
from August 2001 until the Company has sufficient resources to pay the amounts
10
PROFILE TECHNOLOGIES, INC
March 31, 2003
Notes to Condensed Financial Statements
owed or to exchange such amounts into options as described below. As of March
31, 2003, approximately $202,508 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, with a five-year term, to purchase two shares of
common stock 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.
7. 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.
8. New Accounting Pronouncements
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,
11
PROFILE TECHNOLOGIES, INC
March 31, 2003
Notes to Condensed Financial Statements
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.
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.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of the disclosure requirements of FIN 45 did not have an
effect on the Company's financial position, results of operations, or cash
flows.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used, on reported
results. The Statement is effective for the Company's interim reporting periods
ending after December 31, 2002, and the disclosure requirements are presented in
this Form 10-QSB.
12
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.
Revenue
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 nine months ended March 31, 2003, all of the Company's revenue
were primarily attributable to two customers. These customers individually
accounted for 64% and 36%, and 36% and 52%, of revenue during the nine months
ended March 31, 2003 and 2002, respectively.
13
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.
The Company is in the process of seeking funding for the retooling of its
buried pipe product. Upon completion of its redesigned buried pipe product, 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). The Company estimates that if the Company is able to secure the
necessary funding, it will take 12 to 18 months from the date on which funding
is available to fabricate, fully test and commercially deploy a new buried pipe
inspection product. There can be no assurance that funding for this project will
be obtained.
Also, even if funding is obtained, 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.
Research and Development
On January 13, 2003, the Company entered into a research agreement with one
of its major oil company customers. The Company believes that this agreement
will enable the Company to apply the customer's patented pattern recognition
technology to the Company's EMW technology data in ways that will result in
increased accuracy in identifying EMW anomalies that are indicative of
corrosion; identify, if possible, other data patterns that will permit a more
precise grading of degrees and types of corrosion indicated by varying EMW
anomalies, and more fully automate the Company's data interpretation process.
While the Company has historically achieved a high degree of accuracy in
identifying corrosion, the Company and its customer are optimistic that
significant, additional technological improvements can be achieved through the
application of state-of-the-art pattern recognition technology. There can be no
assurance, however, that the Company and its customer will be able to achieve
these additional technological improvements to the EMW technology or that the
Company will be able to secure additional revenue generating contracts.
Since January 2002, the Company has been engaged in a comprehensive program
to improve its hardware, software and data acquisition methods. Management
believes that this effort has provided the Company with the ability to pursue
this research opportunity with its customer.
14
Recent Developments
On April 8, 2003, the Company entered into Amendment No. 3 to its contract
with ConocoPhillips Alaska, Inc. This amendment increases the maximum amount of
work that can be performed by the Company from $1,500,000 to $2,000,000 in a
calendar year without further written authorization by the Company, adds a day
rate for above-grade work for the first time, and extends the term of the
contract from December 31, 2003 to January 31, 2005. Although the Company
believes this Amendment will have a positive effect on the Company's operations,
there can be no assurance that that the Company will secure any particular work
project from ConocoPhillips Alaska at any time in the future.
One of the Company's customers, British Petroleum, has informed the Company
that it intends to extend its contract with the Company by awarding additional
work to the Company in the North Slope of Alaska during the summer of 2003.
There can be no assurance, however, that the Company will be able to secure
additional work from British Petroleum this summer or at any time in the future.
The Company has a crew on the North Slope of Alaska gathering additional
data on above-grade insulated pipelines on an unpaid demonstration basis in a
continuing effort to prove to both of these customers that the EMW technology is
a superior technology for testing such lines. However, there can be no assurance
that the Company will be able to secure any contracts for the testing of
above-grade insulated pipe, or generate any revenue, from either of these
customers as a result of these efforts at any time in the future.
Critical Accounting Estimates and Policies
The discussion and analysis of financial condition and results of
operations are 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
15
estimated profits on contracts are recognized during the period in which the
change in estimate is known. The Company records claims for additional
compensation on contracts upon revision of the contract to include the amount to
be received for the additional work performed. Contract costs include all direct
material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools and repairs, and
depreciation costs. Selling, general, and administrative costs are charged to
expense as incurred. Service contracts generally extend no more than six months.
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company assesses the
recoverability by determining whether the balance can be recovered through
forecasted future operations. The amount of impairment, if any, is measured
based on projected future results using a discount rate reflecting the Company's
assumed average cost of funds.
Results of Operations
The Company's operating results depend exclusively on its ability to market
its EMW inspection technology services. 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 sales 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.
Revenue decreased to $0 for the three months and $339,609 for the nine
months ended March 31, 2003, compared to $0 for the three months and $404,573
for the nine months ended March 31, 2002. The decrease for the nine months ended
March 31, 2003 was attributable to the fact that the Company left the North
Slope of Alaska earlier than it did in the prior year due to the cancellation of
approximately two weeks of work for one of the Company's crews. The events
surrounding this cancellation are described in detail below in "Liquidity and
Capital Resources." In addition, no revenues for the quarters ended March 31,
2003 and March 31, 2002 are attributable to the seasonality of the Company's
business. The Company typically does not generate revenue from testing contracts
until late spring or summer.
Cost of revenue increased to $56,604 for the three months and decreased
$256,217 for the nine months ended March 31, 2003, compared to $49,737 for the
three months and $303,809 for the nine months ended March 31, 2002. The slight
increase during the three months ended March 31, 2003 is due to the timing of
off-season work performed on revenue generating contracts. The decrease for the
nine months ended March 31, 2003 is a result of the overall reduction in the
number of contract work performed in comparison to last year.
Gross loss was $56,604 for the three months, and gross profit was $83,392
for the nine months ended March 31, 2003, compared to a gross loss of $49,737
for the three months, and gross profit of $100,764, for the nine months ended
March 31, 2002. The decrease in gross profit for the nine months ended March 31,
2002 as compared to the same period in the prior year is primarily due to the
shortened period of operations on the North Slope as mentioned above.
16
Research and development expenses decreased to $45,996 for the three months
and $145,388 for the nine months ended March 31, 2003, compared to $140,754 for
the three months and $312,317 for the nine months ended March 31, 2002. The
decrease for the three and the nine month period ended March 31, 2003, compared
to the three and the nine month period ended March 31, 2002, was due to a
reduction in the number of the Company's employees, and certain employees
spending less time on research and development and more time on
revenue-generating contracts.
General and administrative expenses decreased to $242,695 for the three
months and $688,502 for the nine months ended March 31, 2003, compared to
$264,977 for the three months and $805,355 for the three and the nine months
ended March 31, 2003. The decrease for the nine months ended March 31, 2003 is
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 in the fiscal year ended June 30, 2002.
Loss from operations decreased to $345,295 for the three months and
$750,498 for the nine months ended March 31, 2003, compared to $455,468 for the
three months and $1,016,908 for the nine months ended March 31, 2002. The
decrease for the nine months ended March 31, 2003 compared to the same period in
the prior year is due to a reduction in operating expenses as discussed above.
As a result of the Company's cost structure, which includes a significant amount
of fixed costs, fluctuations in revenue will significantly impact the Company's
gross margin and loss from operations.
Interest income was $0 for the three months and $6 for the nine months
ended March 31, 2003, down from $12 for the three months and $995 for the nine
months ended March 31, 2002. This decrease was the result of declining cash and
cash equivalent balances as the Company used these liquid resources to sustain
its commercial operations and research and development activities and lower
rates of return on invested funds.
Interest expense was $3,813 for the three months and $17,701 for the nine
months ended March 31, 2003 up from $0 for the three months and $0 for the nine
months ended March 31, 2002. The increase results from the interest accrued on
the notes payable to shareholders described below in "Liquidity and Capital
Resources."
Liquidity and Capital Resources
The Company has incurred cumulative losses of $8,957,136 through March 31,
2003 and had negative working capital of $831,118 as of March 31, 2003. During
the nine months ended March 31, 2003, the Company incurred a net loss of
$768,193 and used $488,226 of cash in operating activities. The Company's cash
and cash equivalents as of March 31, 2003 were $0. 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
17
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, a director and stockholder of the Company, Murphy
Evans as described further below. In addition, the Company raised $22,500 in
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 and stockholder, as described below.
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. The 2002 Offering terminated on December 31, 2002. As of December 31,
2002, the Company had raised a total of $351,272 from the 2002 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.
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, 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. On February 26, 2003, the Company extended its Ferndale,
Washington office lease through January 31, 2004.
As of March 31, 2003, deferred salary and fees amounted to $202,508, 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 March 31, 2003,
no conversions have occurred.
As of March 31, 2003, the Company had outstanding loans payable to certain
officers, directors and stockholders with principal amounts, in the aggregate,
equal to $434,650. The terms of the loans are described below.
18
On May 9, 2002, the Company entered into a $150,000 bridge loan agreement
with Murphy Evans (the "Evans Loan"). 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 cancelled 150,000 warrants
held by Mr. Evans, with exercise prices ranging from $3.00 per share to $7.50
per share, and issued to Mr. Evans 150,000 five-year warrants with an exercise
price of $1.05. 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 make
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 Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act"). As of March 31, 2003, Mr. Evans made
no demand for payments under the Evans Loan, and no repayments of the Evans Loan
have been made by the Company.
During the six months ended December 31, 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 Section 4(2) of the Securities Act. As of March 6, 2003, Mr.
Evans had not converted the Subsequent Evans Loans into equity units.
From December 26, 2002 through March 31, 2003, Murphy Evans loaned $194,650
to the Company (collectively, the "Non-Convertible Evans Loans"). The terms of
the Non-Convertible Evans Loans provide for payment at such time as the Company
determines it has sufficient working capital to repay the Non-Convertible Evans
Loans. Interest will accrue on the Non-Convertible Evans Loans at a rate of 5%
per annum. The Non-Convertible Evans Loans are not convertible into equity
units. The Non-Convertible Evans Loans are exempt from registration under
Section 4(2) of the Securities Act.
On March 6, 2003, the Company's Board of Directors approved the Loan
Amendment and Promissory Note (the "Amended Evans Loan") between the Company and
Murphy Evans. The Amended Evans Loan amends and supersedes the indebtedness
under the Evans Loan, Subsequent Evans Loan and Non-Convertible Evans Loan by
aggregating the debt thereunder into one promissory note bearing interest on the
aggregate principal balance at a rate of 5% per annum, payable on June 30 and
December 31 of each year. The outstanding balance under the Amended Evans Loan
is unsecured and is due and payable in full on December 31, 2003. The Amended
Evans Loan supersedes and replaces all of the terms under the Evans Loan,
Subsequent Evans Loan and Non-Convertible Evans Loan, including the conversion
feature under the Subsequent Evans Loan. As of March 31, 2003, the Amended Evans
Loan amounted to $373,500.
19
In addition, the terms of the Amended Evans Loan will apply to all future
loans that may be made to the Company by Murphy Evans. Due to the necessity by
the Company to obtain additional financing in the future to sustain the
Company's operations, the Board of Directors approved the terms of the Amended
Evans Loan. The Amended Evans Loan is exempt from registration under Section
4(2) of the Securities Act.
During the nine months ended March 31, 2003, the Company also 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
Section 4(2) the Securities Act. As of March 31, 2003, neither shareholder has
converted either Shareholder Loan into equity units.
The Company also incurred a non-interest bearing bridge loan 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. As of March 31, 2003, 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 remaining work for one of the
Company's crews, resulting in the loss of approximately $47,000 in expected, but
not accrued, revenue.
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 completed and submitted a detailed, written explanation of the
equipment problem to the customer, including the steps already taken by the
Company to preclude the recurrence of the problem. The Company's service
20
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.
The Company currently requires additional cash to sustain existing
operations and to meet current obligations (including those described above) and
the Company's ongoing capital requirements. The continuation of the Company's
operations is dependent in the short term upon its ability to obtain additional
financing and to secure additional contracts, and, in the long term, to generate
sufficient cash flow to meet its obligations on a timely basis, to obtain
additional financing as may be required, and ultimately to attain profitability.
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.
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.
21
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.
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.
22
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 December 31, 2002,
the Company had raised a total of $351,272 from the 2002 Offering. All of the
investors were accredited investors. The 2002 Offering terminated on December
31, 2002.
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. As of March 31, 2003, the Company has not made any, and Mr. Evans had made
no demand for, payments under the Evans Loan.
During the nine months ended March 31, 2003, the Company entered into two
non-interest bearing bridge loans in the respective principal amounts of $40,000
and $10,000 (the "Shareholder Loans") payable to two shareholders of the
Company. The terms of the Shareholder Loans provide for payment at such time as
the Company determines it has sufficient working capital to repay the principal
balances of the Shareholder Loans. The Shareholder Loans are convertible into
57,142 and 14,286 equity units, respectively, at any time prior to payment. Each
equity unit is comprised of one share of the Company's common stock, with a
detached 5-year warrant to purchase one additional share at an exercise price of
$1.05 per share. As of March 31, 2003, neither shareholder has converted either
Shareholder Loan into equity units.
During the nine months ended March 31, 2003, 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
23
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. As of March 31, 2003, Mr. Evans had not converted the
Subsequent Evans Loan into equity units.
From December 26, 2002 through March 31, 2003, Murphy Evans, the President
and a director and stockholder of the Company, loaned $194,650 to the Company
(collectively, the "Non-Convertible Evans Loans"). The terms of the
Non-Convertible Evans Loans provide for payment at such time as the Company
determines it has sufficient working capital to repay the Non-Convertible Evans
Loans. Interest will accrue on the Non-Convertible Evans Loans at a rate of 5%
per annum. The Non-Convertible Evans Loans are not convertible into equity
units.
On March 6, 2003, the Company's Board of Directors approved the Loan
Amendment and Promissory Note (the "Amended Evans Loan") between the Company and
Murphy Evans. The Amended Evans Loan amends and supersedes the indebtedness
under the Evans Loan, Subsequent Evans Loan and Non-Convertible Evans Loan by
aggregating the debt thereunder into one promissory note bearing interest on the
aggregate principal balance at a rate of 5% per annum, payable on June 30 and
December 31 of each year. The outstanding balance under the Amended Evans Loan
is due and payable in full on December 31, 2003. The Amended Evans Loan
supersedes and replaces all of the terms under the Evans Loan, Subsequent Evans
Loan and Non-Convertible Evans Loan, including the conversion feature under the
Subsequent Evans Loan.
In addition, the terms of the Amended Evans Loan will apply to all future
loans that may be made to the Company by Murphy Evans. Due to the necessity by
the Company to obtain additional financing in the future to sustain the
Company's operations, the Board of Directors approved the terms of the Amended
Evans Loan. The Amended Evans Loan is exempt from registration under Section
4(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
24
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 May 14, 2003,
the Board of Directors has not appointed a successor Chairman of the Board.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Loan Amendment and Promissory Note dated March 6, 2003, between
the Company and Murphy Evans.
10.2 ConocoPhillips Alaska, Inc., Contract No. AK990156, Amendment No.
3 dated February 1, 2003, between the Company and ConocoPhillips
Alaska, Inc.
99.1 Certification by Henry E. Gemino under Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification by Phillip L. Jones under Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
25
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: May 20, 2003 /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
26
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: May 20, 2003 /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;
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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: May 20, 2003 /s/ Philip L. Jones
-------------------
Philip L. Jones
Chief Operating Officer
28