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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 December 31, 2001
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission file number 0-21151
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PROFILE TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 91-1418002
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Two Park Avenue, Suite 201, Manhasset, NY 11030
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(Address of principal executive offices) (Zip Code)
516-365-1909
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(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
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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 February 7, 2002, there were
4,957,092 shares of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X ]
PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements.
PROFILE TECHNOLOGIES, INC.
Condensed Balance Sheets
(unaudited)
December 31, June 30,
Assets 2001 2001
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Current assets:
Cash and cash equivalents $ 125,641 $ 306,058
Accounts receivable 171,982 32,129
Contract work-in-progress -- 17,850
Prepaid expenses and other current assets 11,276 31,969
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Total current assets 308,899 388,006
Equipment, net 196,919 212,544
Patents, net 188,196 230,492
Other assets 12,108 11,008
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Total assets $ 706,122 $ 842,050
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable - stockholder $ -- $ 3,262
Other accounts payable 70,799 52,524
Accrued liabilities 72,569 21,511
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Total current liabilities 143,368 77,297
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Stockholders' equity:
Common stock, $0.001 par value. Authorized 10,000,000
shares; issued an outstanding 4,949,592 shares at
December 31, 2001 and 4,285,092 at June 30, 2001 4,950 4,285
Additional paid-in capital 7,943,623 7,585,830
Accumulated deficit (7,385,819) (6,825,362)
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Total stockholders' equity 562,754 764,753
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Total liabilities and stockholders' equity $ 706,122 $ 842,050
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See accompanying notes to condensed financial statements.
PROFILE TECHNOLOGIES, INC.
Condensed Statements of Operations
(unaudited)
For the three months ended For the six months ended
December 31, December 31,
2001 2000 2001 2000
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Revenue $ 63,365 $ 31,329 $ 404,573 $ 277,750
Cost of revenue 112,464 102,989 254,072 253,539
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Gross profit (loss) (49,099) (71,660) 150,501 24,211
Operating Expenses:
Research and development 98,720 93,741 171,563 126,221
Selling, general and administrative 249,545 283,469 540,378 533,714
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Total operating expenses 348,265 377,210 711,941 659,935
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Loss from operations (397,364) (448,870) (561,440) (635,724)
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Interest income 167 17,665 983 39,829
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Net loss $ (397,197) $ (431,205) $ (560,457) $ (595,895)
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Basic and diluted net loss per share $ (0.08) $ (0.10) $ (0.12) $ (0.14)
Shares used to calculate basic and diluted
net loss per share 4,773,904 4,285,092 4,655,200 4,285,092
See accompanying notes to condensed financial statements.
PROFILE TECHNOLOGIES, INC.
Condensed Statements of Cash Flows
(unaudited)
For the six months ended
December 31,
2001 2000
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Cash flows from operating activities:
Net loss $ (560,457) $ (595,895)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 84,701 71,631
Stock compensation expense -- 6,416
Changes in certain assets and liabilities:
Accounts receivable (139,853) (130,000)
Contract work-in-progress 17,850 69,779
Prepaid expenses and other current assets 20,693 37,186
Other assets (1,100) --
Accounts payable - stockholder (3,262) (1,178)
Other accounts payable 18,275 (47,735)
Accrued liabilities 51,058 (19,548)
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Net cash used in operating activities (512,095) (609,344)
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Cash flows from investing activities-purchases of equipment (26,780) (16,530)
Cash flows from financing activities- issuance of common stock
and warrants, net of offering costs 358,458 --
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Net decrease in cash and cash equivalents (180,417) (625,874)
Cash and cash equivalents at beginning of the period 306,058 1,744,032
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Cash and cash equivalents at end of the period $ 125,641 $ 1,118,158
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See accompanying notes to condensed financial statements.
PROFILE TECHNOLOGIES, INC
December 31, 2001
Notes to Unaudited 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, 2001 (filed September 28, 2001). 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 is the same.
Excluded from the computation of diluted loss per share for the three and six
months ended December 31, 2001 are options and warrants to acquire approximately
2,295,000 shares of common stock with a weighted-average exercise price of
$3.03 because their effect would be antidilutive. Excluded from the computation
of diluted loss per share for the three and six months ended December 31, 2000
are options and warrants to acquire approximately 1,381,000 shares of common
stock with a weighted-average exercise price of $4.19 because their effect would
be antidilutive.
4. Sale of Common Stock
During the six months ended December 31, 2001, the Company raised gross proceeds
of $398,700 from the sale of 664,500 shares of common stock and issued one
warrant in connection with each share of common stock sold. The warrants are
exercisable at $1.00 per share until September, 2006. Each share of common stock
and warrant was sold for a total of $0.60. Directors and related parties to the
directors purchased a total of apaproximately 300,000 shares of common stock.
5. Liquidity
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company incurred cumulative losses of
$7,385,819 through December 31, 2001 and has working capital of $165,531 as of
December 31, 2001. The Company has expended a significant amount of cash in
developing its technology and patented processes. Management recognizes that in
order to meet the Company's ongoing operating and capital requirements,
additional financing will be necessary over the next two to three months to
continue as a going concern. 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, there can be no
assurance 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 through December 2001 until the Company has sufficient
resources to pay the amounts owed. At December 31, 2001, the Company accrued
approximately $70,000 related to the deferred payment of the salaries and
consulting fees which is included under accrued liabilities.
6. NASDAQ Delisting
On June 27, 2001, the Company announced that it received a Nasdaq Staff
Determination on June 20, 2001, 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 $188,196 as of December 31, 2001, will continue to be
amortized over their respective estimated useful lives. The Company is required
to adopt the provisions of Statement No. 141 immediately and Statement No. 142
effective July 1, 2002. The impact of adopting Statement No. 141 was not
material. The adoption of Statement No. 142 is not expected to have a material
impact on the Company's financial statements.
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 is required and plans to adopt the
provisions of Statement No. 144 for the fiscal year beginning July 1, 2002. The
adoption of this statement is not expected to have a material impact on the
Company's financial statements.
Item 2. Management's Discussion and Analysis or Plan of Operation.
GENERAL
Since its inception in 1988, Profile Technologies, Inc. (the "Company"), a
Delaware corporation, 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 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. At least one of the
modified pulses is analyzed to determine whether an anomaly exists at the
intersecting location.
This 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. Often the Company 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.
Sales
We derive revenue from the sale of the EMW inspection service and from
research and development activities that have been sponsored by large
multinational oil companies and large utilities. The Company relies upon several
employees, including the Chief Executive Officer, the Chief Operating Officer
and 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 six months ended December 31, 2001 and 2000, all of the
Company's sales were attributable to four and five customers, respectively. Two
of the Company's customers individually accounted for 36% and 52% of net sales
for the six months ended December 31, 2001, and one customer accounted for 89%
of net sales for the six months ended December 30, 2000.
Marketing
The Company's sales and marketing strategy includes positioning the
Company's EMW 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 the Company's EMW inspection. The Company does
not have a designated sales force, but currently relies upon several employees,
including the Chief Executive Officer, the Chief Operating Officer and the Vice
President - Field Operations, for the Company's sales functions.
RESULTS OF OPERATIONS
Revenue increased to $63,365 for the three months and $404,573 for the six
months ended December 31, 2001, compared to $31,329 for the three months and
$277,750 for the six months ended December 31, 2000. This increase was primarily
due to additional work performed on the North Slope of Alaska. The Company's
revenues have historically been fairly seasonal with revenues lowest during the
winter months.
Cost of revenue increased to $112,464 for the three months and $254,072 for
the six months ended December 31, 2001, compared to $102,989 for the three
months and $253,539 for the six months ended December 31, 2000.
Gross loss was $49,099 for the three months and gross profit was $150,501
for the six months ended December 31, 2001, compared to a gross loss of $71,660
for the three months and gross profit of $24,211 for the six months ended
December 31, 2000. The increase in gross profit for the six months ended
December 31, 2001 as compared to the same period in the prior year is primarily
due to efficiencies in the testing services performed and certain fixed costs
that do not fluctuate based on revenue.
Research and development expenses increased to $98,720 for the three months
and $171,563 for the six months ended December 31, 2001, compared to $93,741 for
the three months and $126,221 for the six months ended December 31, 2000. The
increase for the six month period ended December 31, 2001, compared to the six
month period ended December 31, 2000, was due to certain employees spending more
time on research and development and less time on revenue generating contracts.
General and administrative expenses decreased to $249,545 for the three
months and $540,378 for the six months ended December 31, 2001, compared to
$283,469 for the three months and $533,714 for the six months ended December 31,
2000. The decrease for the three months ended December 31, 2001 is due to the
Company incurring higher recruiting and training costs in the prior year related
to the Company's efforts to increase the size of its operations.
Loss from operations decreased to $397,364 for the three months and
$561,440 for the six months ended December 31, 2001, compared to $448,870 for
the three months and $635,724 for the six months ended December 31, 2000. The
decrease for the three months ended December 31, 2001 compared to the same
period in the prior year is due to higher revenues. As a result of the Company's
cost structure including a significant amount of fixed costs, fluctuations in
revenue will significantly impact the Company's gross margin and loss from
operations.
Interest income decreased to $167 for the three months and $983 for the six
months ended December 31, 2001, down from $17,665 for the three months and
$39,829 for the six months ended December 31, 2000. This decrease was the result
of declining cash and cash equivalent balances as the Company used such
resources to sustain its commercial operations and research and development
activities and lower rates of return on invested funds.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $512,095 for the six months ended
December 31, 2001, compared with $609,344 for the six months ended December 31,
2000. The decrease in the cash used in operating activities is primarily as a
result of an agreement by certain employees, officers and directors of the
Company to defer the payment of a portion of their salaries and consulting fees
until the Company has sufficient resources to pay the amounts accrued. At
December 31, 2001, the Company has accrued approximately $70,000 related to the
deferred payment of the salaries and consulting fees which is included under
accrued liabilities.
Net cash used in investing activities was $26,780 for the six months ended
December 31, 2001, compared with $16,530 for the six months ended December 31,
2000. The Company's investing activities consisted of the purchase of additional
office and field equipment.
Net cash from financing activities was $358,458 for the six months ended
December 31, 2001, compared to $0 for the six months ended December 31, 2000.
The net cash provided by financing activities was due to the sale of common
stock and warrants.
The Company's cash and cash equivalents as of December 31, 2001 were
$125,641, compared to $306,058 as of June 30, 2001 and $1,118,158 as of December
31, 2000, and the Company had no material long-term commitments or material
commitments for capital expenditures.
Management is currently directing the Company's activities towards
obtaining additional service contracts, which will necessitate the Company
attracting, hiring, training and outfitting qualified technicians. 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. 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. At the present time the Company anticipates that it may need one
additional crew to service future contracts, but it cannot be certain until
contract negotiations are complete.
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 secure additional revenue
generating contracts. The Company expects that accounts receivable and contract
work-in-progress will continue to increase to the extent revenues rise. Any such
increase that occurs at the same time or at a greater rate than an increase in
revenue can be expected to reduce cash. Additionally, the Company anticipates
that cash will be used to meet capital expenditure requirements necessary to
develop infrastructure to support the 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 has incurred cumulative losses of $7,385,819 through December
31, 2001 and had working capital of only $165,531 as of December 31, 2001.
During the six months ended December 31, 2001, the Company used $512,095 of cash
in operating activities. With working capital of only $165,531 at December 31,
2001, the Company will need additional financing over the next two to three
months to be able to continue as a going concern. Management recognizes that in
order to meet the Company's on-going capital and operating expense requirements,
additional financing, in addition to the net proceeds of $145,750 raised from
October 1, 2001 through December 31, 2001 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, there can be no assurance that the Company will be able to
continue as a going concern.
FORWARD-LOOKING STATEMENTS
Some of the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Report and
in the Company's periodic filings with the Securities and Exchange Commission
constitute forward-looking statements. These statements involve known and
unknown risks, significant uncertainties and other factors that may cause actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of such terms or other comparable terminology.
The forward-looking statements herein 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 in condition of the
Company's business, that 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 forecasts 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 we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements.
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.
In connection with a confidential offering memorandum dated July 9, 2001,
as supplemented, the Company raised, between October 1, 2001 and the date of
this filing $145,750 through stock subscriptions for 242,833 shares of our
common stock and warrants to acquire 242,833 shares of our common stock in a
private placement of securities. The warrants have an exercise price of $1.00
and can be exercised prior to November 30, 2006. The shares and the warrants
were offered directly by the Company, the Talisman Group and R.F. Lafferty. The
Talisman Group and R.F. Lafferty did not place any of the shares and warrants.
All of the investors were accredited investors. We relied on Section 4(2) of the
Securities Act and on Rule 506 of Regulation D in selling the shares and
warrants without registering the offering under the Securities Act.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of the Company's shareholders was held on November
13, 2001.
(b) At such annual meeting, the stockholders of the Company elected G. L.
Scott, Henry E. Gemino, Murphy Evans, John Tsungfen Kuo, Charles Christenson and
William A. Krivsky as directors for one-year terms. The elections were approved
by the following votes:
Directors For Withheld
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G. L. Scott 3,652,999 259,712
Henry E. Gemino 3,628,999 283,712
Murphy Evans 3,639,999 272,712
John Tsungfen Kuo 3,062,799 849,912
Charles Christenson 3,653,799 258,912
William A. Krivsky 3,653,799 258,912
Item 5. Other Information.
Effective January 1, 2002, Dr. John T. Kuo retired as Chief Technology
Officer. However, Dr. Kuo will remain on the Company's Board as Vice Chairman
and, in that capacity, will help guide the further development of the Company's
technology. In this connection, the Company has retained Dr. Marcus Zahn of
M.I.T. to model the Company's data interpretation process mathematically in what
it is hoped will be the first step in a successful automation of that process.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K
None
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.
/s/ PROFILE TECHNOLOGIES, INC.
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(Registrant)
Date: February 14, 2002 /s/ Henry E. Gemino
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Henry E. Gemino
Chief Executive Officer;
Chief Financial Officer