UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:
December 31, 2004
[ ] TRANSITION REPORT PURSUANT TO 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 11030
------------------- -----
(Address of Principal (Zip Code)
Executive Office)
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 past 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 [ ]
As of January 31, 2005, the number of shares outstanding of the issuer's common
stock, the only class of common equity, were 5,795,705.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X ]
TABLE OF CONTENTS
Description Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheet (Unaudited) -
At December 31, 2004..................................................3
Condensed Statements of Operations (Unaudited) -
Three Months Ended and Six Months Ended December 31, 2004 and 2003....4
Condensed Statements of Cash Flows (Unaudited) -
Six Months Ended December 31, 2004 and 2003...........................5
Notes to Condensed Financial Statements (Unaudited)........................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................11
Item 3. Controls and Procedures..............................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..........17
Item 3. Defaults Upon Senior Securities......................................18
Item 4. Submission of Matters to a Vote of Shareholders......................18
Item 5. Other Information....................................................19
Item 6. Exhibits and Reports on Form 8-K.....................................19
SIGNATURES.........................................................................21
CERTIFICATIONS.....................................................................22
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
PROFILE TECHNOLOGIES, INC.
Condensed Balance Sheet
(unaudited)
December 31,
2004
------------
Assets
Current assets:
Cash $ 29,202
Prepaid expenses and other current assets 19,649
------------
Total current assets 48,851
------------
Equipment, net of accumulated depreciation 11,752
Deferred financing fees 12,780
Other assets 2,415
------------
Total assets $ 75,798
============
Liabilities and Stockholders' Deficit
Current Liabilities:
Accounts payable $ 274,306
Notes payable to stockholders 911,881
Current portion of convertible debt 137,500
Deferred wages 532,139
Accrued professional fees 161,720
Accrued interest 80,814
Other accrued expenses 14,344
------------
Total current liabilities 2,112,704
------------
Long-term convertible debt, net of unamortized discount of $265,486
at December 31, 2004 14
Stockholders' deficit:
Common stock, $0.001 par value. Authorized 25,000,000
shares; issued and outstanding 5,695,705 shares at
December 31, 2004 5,696
Common stock issuable; 100,000 shares 100
Additional paid-in capital 8,962,562
Accumulated deficit (11,005,278)
------------
Total stockholders' deficit (2,036,920)
Commitments, contingencies and subsequent events
============
Total liabilities and stockholders' deficit $ 75,798
============
See accompanying notes to condensed financial statements.
3
PROFILE TECHNOLOGIES, INC.
Condensed Statements of Operations
(unaudited)
For the three months ended, For the six months ended,
December 31, December 31,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenue $ -- $ 86,429 $ -- $ 222,579
Cost of revenues -- 39,556 -- 164,504
----------- ----------- ----------- -----------
Gross profit -- 46,873 -- 58,075
----------- ----------- ----------- -----------
Operating expenses:
Research and development 14,659 25,518 37,529 67,866
General and administrative 190,075 226,014 370,677 444,542
----------- ----------- ----------- -----------
Total operating expenses 204,734 251,532 408,206 512,408
----------- ----------- ----------- -----------
Loss from operations (204,734) (204,659) (408,206) (454,333)
----------- ----------- ----------- -----------
Interest expense 33,186 12,501 138,949 23,453
Other income -- -- -- 1,762
----------- ----------- ----------- -----------
Net loss $ (237,920) $ (217,160) $ (547,155) $ (476,024)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.04) $ (0.04) $ (0.10) $ (0.09)
Weighted average shares outstanding used to calculate
basic and diluted net loss per share 5,663,966 5,461,659 5,589,911 5,461,659
See accompanying notes to condensed financial statements.
4
PROFILE TECHNOLOGIES, INC.
Condensed Statements of Cash Flows
(unaudited)
For the six months ended
December 31,
2004 2003
--------- ---------
Cash flows from operating activities:
Net loss $(547,155) $(476,024)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 4,206 53,541
Accreted discount on convertible debt 14 1,375
Amortization of convertible debt discount included in interest expense 100,522 --
Amortization of debt issuance costs 3,820 --
Equity issued for services 35,000 16,500
Changes in operating assets and liabilities:
Contract work-in progress -- 11,310
Prepaid expenses and other current assets (377) 37,502
Accounts payable 16,115 45,513
Deferred wages 148,813 99,174
Accrued professional fees 17,570 (18,595)
Accrued interest 22,567 19,367
Other accrued expenses (2,827) (10,000)
--------- ---------
Net cash used in operating activities (201,732) (220,337)
--------- ---------
Cash flows from investing activies:
Purchases of equipment -- (1,820)
--------- ---------
Net cash used in investing activities -- (1,820)
--------- ---------
Cash flows from financing activies:
Allocated proceeds from issuance of convertible debt 56,023 12,987
Allocated proceeds from issuance of warrants attached to convertible debt 101,977 12,013
Proceeds from issuance of notes payable to stockholders 13,121 199,000
--------- ---------
Net cash provided by financing activities 171,121 224,000
--------- ---------
Increase (decrease) in cash (30,611) 1,843
Cash at beginning of period 59,813 --
--------- ---------
Cash at end of period $ 29,202 $ 1,843
========= =========
Supplemental disclosure of cash flow information:
Debt discount recorded for beneficial conversion feature $ 56,023 $ 7,013
Cash paid for interest $ 8,596 $ --
See accompanying notes to condensed financial statements.
5
PROFILE TECHNOLOGIES, INC
December 31, 2004
Notes to Condensed Financial Statements (Unaudited)
1. Description of Business
Profile Technologies, Inc. (the "Company"), was incorporated in 1986
and commenced operations in fiscal year 1988. The Company is in the business of
researching and developing a high speed scanning process, which is
nondestructive and noninvasive, to test remotely buried, encased and insulated
pipelines for corrosion, utilizing electromagnetic waves.
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 preparation of financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses. On an on-going basis, the Company evaluates
its estimates, including contract revenue recognition and impairment of
long-lived assets. Actual results and outcomes may differ materially from these
estimates and assumptions.
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, 2004. 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. Significant Accounting Policies
Contract Revenue Recognition
The Company recognizes revenue from service contracts using the
percentage of completion method of accounting. Contract revenues earned are
measured using either the percentage of contract costs incurred to date to total
estimated contract costs or, when the contract is based on measurable units of
completion, revenue is based on the completion of such units. This method is
used because management considers total cost or measurable units of completion
to be the best available measure of progress on contracts. Because of the
inherent uncertainties in estimating costs, it is at least reasonably possible
that the estimates used may change in the near term.
Anticipated losses on contracts, if any, are charged to earnings as
soon as such losses can be estimated. Changes in estimated profits on contracts
are recognized during the period in which the change in estimate is known.
Cost of revenues include contract costs incurred to date as well as
any idle time incurred by personnel scheduled to work on customer contracts.
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.
Research and Development
Research and development costs are expensed when incurred.
6
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews long-lived assets, such as equipment, and
purchased intangibles subject to amortization, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
Valuation of Warrants and Options
The Company estimates the value of warrants and option grants using a
Black-Scholes pricing model based on management assumptions regarding the
expected volatility and risk free interest rates.
4. Stock Based Compensation
The Company has elected to follow the measurement principles of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its employee stock
options rather than the alternative fair value accounting provided for by
Statements of Financial Accounting Standards No. 123 (SFAS No. 123), Accounting
for Stock Based Compensation. Compensation cost for stock options issued to
employees is measured as the excess, if any, of the fair market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock. Had compensation cost for the Company's option and warrant
awards been determined consistent with SFAS No. 123, the Company's net loss
would have been increased to the proforma amounts indicated below:
Three months ended Six months ended
December 31, December 31,
------------------------ ------------------------
2004 2003 2004 2003
----------- --------- ----------- ---------
Net loss:
As reported $ (237,920) $(217,160) $ (547,155) $(476,024)
Plus: stock-based employee compensation
expense included in reported net loss -- -- -- --
Less: stock based compensation expense
determined under fair value based method for
all employee rewards -- (21,600) -- (21,600)
----------- --------- ----------- ---------
Net loss $ (237,920) $(238,760) $ (547,155) $(497,624)
----------- --------- ----------- ---------
Net loss per share
Basic and diluted - as reported $ (0.04) $ (0.04) $ (0.10) $ (0.09)
Basic and diluted - pro forma $ (0.04) $ (0.04) $ (0.10) $ (0.09)
5. Net Loss Per Share
Basic loss per share is computed by dividing the net loss by the
weighted average number of common shares outstanding during the period. Diluted
loss per share is computed by dividing the net loss by the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. As the Company had a net loss attributable to common shareholders in
each of the periods presented, basic and diluted net loss per share are the
same.
Excluded from the computation of diluted loss per share for the three
and six months ended December 31, 2004, because their effect would be
antidilutive, are options and warrants to acquire 3,834,818 shares of common
stock with a weighted-average exercise price of $1.59 per share. Excluded also
from the computation of diluted loss per share for the three and six months
ended December 31, 2003, because their effect would be antidilutive, are options
and warrants to acquire 3,133,817 shares of common stock with a weighted-average
7
exercise price of $2.17 per share. For the three and six months ended December
31, 2004 and 2003, additional potential dilutive securities that were excluded
from the diluted loss per share computation are the exchange rights discussed in
footnote 7 that could result in options to acquire up to 223,000 shares of
common stock with an exercise price of $1.00 per share at December 31, 2004 and
2003. During the quarter ended December 31, 2004, the Company granted 100,000
restricted shares of common stock as compensation for consulting services
provided by a firm. The 100,000 restricted shares of common stock were issued in
January 2005. For purposes of earnings per share computations, all of these
shares have bee included as outstanding as of November 1, 2004, the original
date of the consulting agreement (see Note 7).
6. Notes Payable - Stockholders
In April 2002, the Company issued a non-interest bearing bridge note
payable to an officer of the Company in the amount of $7,500. The note is
payable in full when the Company determines it has sufficient working capital to
do so. On September 29, 2002, the officer who was owed the $7,500 died.
The Company has entered into various loan agreements with Murphy
Evans, President, a director and stockholder of the Company. 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 aggregates all previous debt and supercedes and replaces all of the
terms of the previous loans with Mr. Evans, including any conversion features.
The Amended Evans Loan bears interest on the aggregate principal balance at a
rate of 5% per annum, payable on June 30 and December 31 of each year, with the
principal balance due and payable in full on December 31, 2003. The Amended
Evans Loan is exempt from registration under Section 4(2) of the Securities Act.
Accrued interest and the outstanding principal balance of the Amended
Evans Loan were $72,692 and $846,990, respectively as of December 31, 2004. Due
to insufficient funds, the Company has not made the interest payments due on the
Amended Evans Loan on June 30, 2003, December 31, 2003, June 30, 2004, and
December 31, 2004 and did not repay the outstanding principal balance.
Corresponding interest expense related to the Amended Evans Loan was $11,167 and
$21,897 for the three and six months ended December 31, 2004, respectively.
Interest expense related to the Amended Evans Loan was $9,355 and $17,994 for
the three and six months ended December 31, 2003, respectively. All advances
from Mr. Evans are convertible into any debt or equity offerings made by the
Company. Mr. Evans has not made any demand for payment, or exercised any of his
remedies, under the Amended Evans Loan.
On May 9, 2002, the Company cancelled 150,000 warrants held by Mr.
Evans with exercise prices ranging from $3.00 per share to $7.50 per share
issued under the terms of a previous loan with Mr. Evans ("Old Warrants"), and
issued to Mr. Evans 150,000 five-year warrants with an exercise price of $1.05
per share, which expire on May 13, 2007.
The cancellation of the Old Warrants is an effective re-pricing and
will be 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 December 31,
2004, no intrinsic value had been recorded related to these warrants as the
stock price was below the exercise price.
In September 2002, the Company entered into two non-interest bearing
bridge loans in the respective principal amounts of $40,000 and $10,000 (the
"Stockholder Loans") payable to two stockholders of the Company. The terms of
the Stockholder Loans provide for payment at such time as the Company determines
it has sufficient working capital to repay the principal balances of the
8
Stockholder Loans. The Stockholder Loans are convertible into 57,142 and 14,286
equity units, respectively, at any time prior to re-payment. Each equity unit is
comprised of one share of the Company's common stock, with a detachable 5-year
warrant to purchase one additional share at an exercise price of $1.05 per
share. Neither stockholder has converted either Stockholder Loan into equity
units.
On June 19, 2003, the Board of Directors approved a promissory note
(the "2003 Gemino Note") in the principal amount of $34,047 payable to Henry E.
Gemino, the Chief Executive Officer, Chief Financial Officer and a director and
stockholder of the Company. The 2003 Gemino Note bears interest at the rate of
5% per annum, payable on June 30 and December 31 of each year. The outstanding
balance under the 2003 Gemino Note was due and payable in full on December 31,
2003. Since the inception of the 2003 Gemino Note, Mr. Gemino has loaned the
Company additional money under the terms of the 2003 Gemino Note and the Company
has repaid part of the principal of the 2003 Gemino Note. During the three
months ended December 31, 2004, the Company repaid Mr. Gemino $30,400. As of
December 31, 2004, accrued interest of $3,625 and the outstanding principal
balance of $7,391 on the 2003 Gemino Note were due and payable. Corresponding
interest expense related to the 2003 Gemino Note was $308 and $860 for the three
and six months ended December 31, 2004, respectively. Interest expense related
to the 2003 Gemino Note was $686 and $1,334 for the three and six months ended
December 31, 2003, respectively. The Company has not made the interest payments
due on June 30, 2003, December 31, 2003, June 30, 2004, and December 31, 2004
and has not repaid the outstanding principal balance. Mr. Gemino has not made
any demand for payment, or exercised any of his remedies under the 2003 Gemino
Note.
The following is a summary of notes payable to stockholders as of
December 31, 2004.
Amended Evans Loan $846,990
2003 Gemino Note 7,391
Deceased Officer Note 7,500
Stockholder Loans 50,000
--------
Total $911,881
========
7. Liquidity and Subsequent Events
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company incurred cumulative losses
of $11,005,278 through December 31, 2004 and had negative working capital of
$2,063,853 as of December 31, 2004. 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.
Deferred Wages and Accrued Professional Fees
To reduce cash outflows, certain of the Company's employees, officers,
consultants, and directors have agreed to defer a portion of their salaries and
professional fees until the Company has sufficient resources to pay the amounts
owed or to exchange such amounts into options as described below. At December
31, 2004, the Company has accrued approximately $693,859 related to the deferred
payment of salaries and professional fees of which $532,139 is included under
deferred wages and $161,720 in accrued professional fees. On March 18, 2002, the
Board approved a conversion right on all deferred wages and accrued professional
fees deferred as of March 18, 2002. Pursuant to this conversion right,
employees, officers, consultants, and directors may elect to convert $1.00 of
fees owed to them as of March 18, 2002 for an option to purchase two shares of
the Company's common stock, at an exercise price of $1.00 per share for a term
of five years. Deferred salaries and fees as of March 18, 2002 were $111,500,
resulting in the potential issuance of 223,000 options under the terms mentioned
above. No conversions have occurred to date. As there was no intrinsic value
associated with these exchange rights, no additional compensation cost has been
recorded.
9
Long-Term Convertible Debt
On June 19, 2003, the Board of Directors approved the offering (the
"2003 Offering") of $1,000,000 in convertible debentures (the "Debentures"). The
Debentures are convertible into that number of shares of the Company's common
stock equal to the amount of the converted indebtedness divided by $0.50 per
share. The Debentures bear interest at a rate of 5% per annum, payable
quarterly. Delinquent interest payments bear interest at a rate of 12% per
annum. The Company is required to redeem each Debenture on the 5th anniversary
of the date of the Debenture. The Company may, in its discretion, redeem any
Debenture at any time prior to the mandatory redemption date of the Debenture by
providing no less than 60 days' prior written notice to the holder of the
Debenture. Certain events of default will result in the Debentures being
redeemable by the Company upon demand of the holder.
Upon the purchase of, and for each $0.50 of the Debenture's principal
amount, the Company will issue to an investor a warrant (the "Warrant") to
purchase one (1) share of the Company's common stock at an exercise price of
$0.75 per share. The Warrants will be exercisable at any time prior to the 5th
anniversary date of the redemption of the Debenture.
As of December 31, 2004, the Company had raised $503,000 from the 2003
Offering.
Warrants issued in connection with the 2003 Offering were recorded
based on their relative fair value as compared to the fair value of the debt at
issuance. The relative fair value of the warrants were recorded as paid-in
capital, estimated at $287,846. The fair value of the warrants were determined
based on an option pricing model with the following assumptions: warrant lives
of 10 years, risk free interest rates ranging from 3.74% to 4.72%, volatility of
120%, and a zero dividend yield. The intrinsic value of the Debentures results
in a beneficial conversion feature that reduces the book value of the
convertible debt to not less than zero. Accordingly, the Company recorded a
$451,023 discount on the convertible debt issued under the 2003 Offering. The
Company amortizes the discount using the effective interest method over the
five-year life of the Debentures.
As of December 31, 2004, accrued interest on the Debentures was
$4,498. The Company recorded interest expense related to the accretion of the
discount on the Debentures of $10 and $14 for the three and six months ended
December 31, 2004 and $0 and $1,375 for the three and six months ended December
31, 2003. As of December 31, 2004 the carrying value of the long-term debt
debenture was $14, net of unamortized debt discount of $265,486.
During the three months ended December 31, 2004, one investor
exercised their conversion right under the terms of the Debentures. Accordingly,
the carrying value of the convertible debt was reclassified as equity upon
conversion. Since the convertible debt instruments include a beneficial
conversion feature, the remaining unamortized discount of $14,998 at the
conversion date was recognized as interest expense.
The Board of Directors approved an extension of the 2003 Offering
through March 15, 2005. Subsequent to December 31, 2004, the Company has not
raised any additional funds from the 2003 Offering
Consulting Agreement
On November 1, 2004, the Company entered into a two-year consulting
agreement ("Consulting Agreement") with a firm ("Consultant") to provide
consulting services and assist in obtaining additional financing. As
compensation, upon execution of the Consulting Agreement, the Company issued
100,000 restricted shares of common stock to the Consultant. Based on valuation
methods, the Company recorded $35,000 of consulting expense, which is included
in general and administrative expenses.
On February 9, 2005, the Board of Directors approved an increase in
the number of shares of common stock that may be issued under the Company's 1999
Stock Plan (the "Plan") from 500,000 to 2.5 million shares. On February 9, 2005,
the Board also approved the issuance of options exercisable for 1,850,000 shares
of common stock pursuant to the Plan to certain directors, officers, an employee
and two consultants of the Company. The options will be granted by the Company
on February 16, 2005. Directors, officers, and an employee will be granted
options exercisable for 1,600,000 shares of common stock and will have a
ten-year term. Options exercisable for the remaining 250,000 shares of common
stock will be granted to two of the Company's consultants and will have a
five-year term. The exercise price of the options will be ten percent over the
closing bid price of the Company's common stock as quoted on the Over the
Counter Bulletin Board on the grant date, February 16, 2005. The Company
estimates the value of options granted to non-employees using a Black-Scholes
pricing model based on management assumptions regarding the expected volatility,
risk free interest rates, exercise price of the option, and the fair market
value on the date of grant.
10
8. 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 August 13, 2001, the
Company began trading on the Over the Counter Bulletin Board under the symbol
PRTK.OB.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
Profile Technologies, Inc. (the "Company"), a Delaware corporation,
was incorporated in 1986 and commenced operations in fiscal year 1988. The
Company is in the business of researching and developing a high speed scanning
process, which is nondestructive and noninvasive, to test remotely buried,
encased and insulated pipelines for corrosion, utilizing electromagnetic waves.
The Company's electromagnetic wave ("EMW") inspection process 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 electromagnetic
pulses along the pipe being tested from either one (Single-Pulse) or two
(Dual-Pulse) directions. In Dual-Pulse, the intersecting point between the
two-pulser locations is moved down the pipe being tested by computerized delays
of one pulse. In Dual-Pulse mode, one or more of the modified pulses is analyzed
to determine whether an anomaly exists at the intersecting location and whether
such anomaly is likely to be identified with corrosion or some other pipeline
feature.
The EMW process is designed to detect external corrosion of pipelines
which occurs under pipe insulation and on buried pipes, without the need for
taking the lines out of service, physically removing the insulation or digging
up pipes, 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 pipelines that already exist for other reasons. Where such access is not
already available, the Company's technology permits the inspection of pipelines
with a minimal amount of disturbance to the coating or insulation on the
pipeline. In addition, the Company's technology permits an inspection of the
entire pipeline, as opposed to other technologies, which only conduct
inspections at points selected for the testing. Such "spot inspections" are not
necessarily accurate in indicating the overall condition of a pipe segment.
The most common forms of pipeline corrosion under insulation are
localized corrosion of carbon steel and chloride stress corrosion cracking of
stainless steel. Refineries, chemical plants, utilities, natural gas
transmission companies and the petroleum industry have millions of miles of
pipeline, and much of this pipeline is exposed to harsh and severe environments.
As a result, there is an on-going effort by these industries to ensure that the
quality of the pipe meets standards established by regulatory bodies and the
industry to protect operating personnel and the environment.
During the summer of 1998, the Company completed its first commercial
contract on the North Slope of Alaska, testing approximately 100 road and
caribou crossings on British Petroleum pipelines under a contract with ASCG
Inspection, Inc.
During the summer of 1999, the Company followed up its initial Alaska
work under a contract with another large multi-national oil company to test
approximately 250 below-grade pipes. During the summer of 2000, the Company
expanded its Alaska efforts by testing a total of 372 below-grade pipes. In
2001, the Company tested 441 lines in Alaska. In 2002, the Company inspected 364
lines.
Based on estimates provided by its customers, the Company originally
planned to inspect between 400 and 500 below-grade lines in Alaska during the
2003 calendar year. However, based on the Company's final work scopes, the
Company successfully tested 250 below-grade pipes during the 2003 calendar year.
In 2003, the Company's Alaska customers completed a five-year program
of inspecting road-crossings and caribou-crossings. This program was not
budgeted for during 2004, although it may be restored in future years.
11
In anticipation of this possibility, the Company designed, fabricated,
and has been testing new hardware for the inspection of direct-buried pipe in
the lower-48 states. The new hardware has been designed with a view toward
improving efficiency, ease of use, portability, accuracy of test data and
customer acceptance.
More importantly, the new hardware provides a different pulse waveform
specifically tailored to the buried pipe requirement. The improved waveform has
increased low frequency energy content, which enables efficient wave propagation
through sand, soil, and moist earth.
The new hardware was designed to be much smaller than the previous
generation hardware used in Alaska. The entire test hardware package weighs less
than 25 pounds including data acquisition digitizer and battery power supply.
The new hardware can be hand-carried and operated by a single person and does
not require the gasoline powered AC generator, utility trailer, and external
computer data acquisition system which were necessary with the previous
generation hardware. The portable system is designed to allow testing of both
underground and above-grade pipelines with one test set.
The buried pipe inspection hardware is currently being tested at the
Company's Ferndale, Washington pipe test facility. The new hardware has
demonstrated good results in initial testing. Proper pulse waveforms have been
transmitted through several hundred feet of pipe buried in moist earth. The
hardware is now being optimized and evaluated for ability to detect various
types of anomalies. This work is currently the focus of the research effort at
Ferndale. When this work is successfully completed, the improved highly portable
system will increase field productivity, reduce operator training time, and
significantly reduce the cost of field operations. The new system will also be
compatible with production in quantity and operation with minimal training,
enabling licensing of the technology to the industry.
Although several important milestones have been achieved in the
fabrication and testing of this new hardware, there can be no assurance that the
remaining portion of the testing program can be funded or that the new hardware
can be successfully tested and deployed on a commercial basis. Failure to do so
could have a serious and material effect on the business and financial condition
of the Company.
On December 15, 2003, the U.S Department of Transportation ("DOT")
issued regulations under the Pipeline Safety Improvement Act of 2002 requiring
regulated companies to gather baseline integrity data on pipelines in so-called
"high consequence areas" ("HCA's") (e.g., populated areas) initially over a
ten-year period and then every seven years thereafter. Based on consultations
with industry representatives, the Company believes that its new buried pipe
inspection hardware will provide such regulated companies with a superior tool
for gathering required baseline integrity data.
Pending the deployment of its new hardware and the receipt of new
contracts, and in an effort to reduce its out-of-pocket expenses to the lowest
practicable level, the Company has furloughed all of its field crews. If and
when commercial contracts are obtained, the Company may re-hire former crew
personnel or may hire and train new crews.
Revenues
The Company derives revenue solely from the sale of the EMW inspection
technology service. The Company relies upon several employees, including its
Chief Executive Officer and the Chief Operating Officer for the Company's sales
functions.
The Company did not have revenues during the three and six months
ended December 31, 2004. During the three months ended December 31, 2003, all of
the Company's revenues were attributable to one customer. During the six months
ended December 31, 2003, all of the Company's revenues were attributable to two
customers. These customers individually accounted for 9% and 91% of revenues for
the six months ended December 31, 2003.
Sales and Marketing
The Company's sales and marketing strategy has been to position the
Company's EMW inspection process 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
12
technology. Pipelines are commonly found in refinery and chemical plants (such
as insulated, overhead pipes), natural gas distribution systems (such as pipes
buried in city streets), and natural gas transmission systems (such as road,
bridge and stream crossings and concrete-encased pipes).
As described above, the Company has fabricated new buried pipe
inspection hardware and is actively seeking industry and other financing sources
in order to rigorously and scientifically test that hardware. In order to obtain
additional revenue generating contracts, the Company intends to emphasize the
reliability of its buried pipeline testing method, the flexibility of the
method's application, and its cost effectiveness as compared to other methods.
The Company intends to concentrate its calendar year 2005 marketing efforts on
the pipeline and utility buried pipe inspection markets in the lower-48 states,
particularly in HCA's. However, there can be no assurance that the Company will
be successful in concentrating its marketing efforts for the EMW technology on
natural gas utility and pipeline markets.
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
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.
Revenues for the three and six months ended December 31, 2004 were $0,
as compared to $86,429 and $222,579 for the three and six months ended December
31, 2003. The Company did not generate any revenues during the three and six
months ended December 31, 2004 because during calendar year 2003, the Company's
Alaska customers completed a five-year program of inspecting road-crossings and
caribou crossings. Upon completion of this initial program, the inspections were
not budgeted for. Revenues generated during the three and six months ended
December 31, 2003 were derived from the work performed on the North Slope of
Alaska under the initial program.
Cost of revenues for the three and six months ended December 31, 2004
were $0, as compared to $39,556 and $164,504 for the three and six months ended
December 31, 2003. During the three and six months ended December 31, 2004, the
Company did not have any employees working in the field because the Company did
not have any revenue generating contracts during these periods. Additionally,
during the quarter ended June 30, 2004, the Company recorded an impairment
charge to write-down all of the Company's field equipment to $0. Depreciation
expense related to equipment used in the field was previously reported as cost
of revenues.
The Company did not have a gross profit or loss for the three and six
months ended December 31, 2004. The Company generated a gross profit of $46,873
and $58,075 for the three and six months ended December 31, 2003. The decrease
in gross profit is due to the completion of the inspection program on the North
Slope of Alaska during calendar year 2003.
Research and development expenses for the three and six months ended
December 31, 2004 were $14,659, and $37,529 as compared to $25,518 and $67,866
for the three and six months ended December 31, 2003. Due to the decrease in the
overall work scope, the Company furloughed several key employees during the
quarter ended March 31, 2004 who were previously spending time on research and
development activities and revenue generating contracts. Payroll expenses
related to these employees were previously classified as research and
development expenses and cost of revenues.
General and administrative expenses for the three and six months ended
December 31, 2004 were $190,075 and $370,677, as compared to $226,014 and
$444,542 for the three and six months ended December 31, 2003. The decrease of
$35,939 for the three months ended December 31, 2004 as compared to the three
months ended December 31, 2003 is predominantly due to a reduction in
compensation and benefits expense as a result of the furlough of certain
employees during the quarter ended March 31, 2004. Compensation and benefits
expense decreased by approximately $72,500 for the three months ended December
31, 2004 as compared to the three months ended December 31, 2003. Depreciation
13
and amortization decreased by approximately $7,000 for the three months ended
December 31, 2004 as compared to the three months ended December 31, 2003 as a
result of certain equipment and patents being fully amortized during the quarter
ended June 30, 2004. The decrease in compensation and benefits expense and
depreciation and amortization were offset by an increase in consulting and
professional fees of approximately $43,500 for the three months ended December
31, 2004 as compared to the three months ended December 31, 2003.
The decrease in general and administrative expenses of $73,865 for the
six months ended December 31, 2004 as compared to the six months ended December
31, 2003 is predominantly due to a reduction in compensation and benefits
expense as a result of the furlough of certain employees during the quarter
ended March 31, 2004. Compensation and benefits expense decreased by
approximately $99,800 for the six months ended December 31, 2004 as compared to
the six months ended December 31, 2003. Depreciation and amortization decreased
by approximately $17,000 as a result of certain equipment and patents being
fully amortized during the quarter ended June 30, 2004. The decrease in
compensation and benefits expense and depreciation and amortization were offset
by an increase in professional fees of approximately $43,100.
Loss from operations for the three and six months ended December 31,
2004 was $204,734 and $408,206, as compared to $204,659 and $454,333 for the
three and six months ended December 31, 2003. Loss from operations remained
relatively unchanged for the three months ended December 31, 2004 as compared to
the three months ended December 31, 2003 as a result of the gross profit for the
three months ended December 31, 2003 offsetting the higher operating expenses
for the same period. The decrease in loss from operations for the six months
ended December 31, 2004 as compared to December 31, 2003 is primarily due to a
reduction in operating expenses as discussed above.
Interest expense for the three and six months ended December 31, 2004
was $33,186 and $138,949, as compared to $12,501 and $23,453 for the three and
six months ended December 31, 2003. The increase of $20,685 for the three months
ended December 31, 2004 as compared to the three months ended December 31, 2003
is substantially the result of one investor who exercised their conversion right
under the terms of the Convertible Debentures during the three months ended
December 31, 2004. The convertible debt includes a beneficial conversion
feature. As such, the Company recorded interest expense of approximately $15,000
during the quarter ended December 31, 2004 to expense the unamortized debt
discount remaining at the date of conversion. As a result of a larger aggregate
principal balance outstanding on the Convertible Debentures during the three
months ended December 31, 2004 as compared to the three months ended December
31, 2003, the Company recorded approximately $4,200 more in interest expense
related to the Convertible Debentures during the three months ended December 31,
2004 than during the same period in 2003.
The increase in interest expense of $115,496 for the six months ended
December 31, 2004 as compared to the six months ended December 31, 2003 is
predominantly the result of five investors who exercised their conversion right
under the terms of the Convertible Debentures during the six months ended
December 31, 2004. The convertible debt includes a beneficial conversion
feature. As such, the Company recorded interest expense of approximately
$101,500 during the six months ended December 31, 2004 to expense the
unamortized debt discount remaining at the date of conversion. As a result of a
larger aggregate principal balance outstanding on the Convertible Debentures
during the six months ended December 31, 2004 as compared to the six months
ended December 31, 2003, the Company recorded approximately $8,600 more in
interest expense related to the Convertible Debentures during the six months
ended December 31, 2004 than during the same period in 2003. The Company also
accrued approximately $3,700 more interest expense on the notes payable to
stockholders during the six months ended December 31, 2004 than during the same
period in 2003.
Liquidity and Capital Resources
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company incurred cumulative losses
of $11,005,278 through December 31, 2004, and had negative working capital of
$2,063,853 as of December 31, 2004. 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
14
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.
Deferred Wages and Accrued Professional Fees
To reduce cash outflows, certain of the Company's employees, officers,
consultants, and directors have agreed to defer a portion of their salaries and
professional fees until the Company has sufficient resources to pay the amounts
owed or to exchange such amounts into options as described below. At December
31, 2004, the Company has accrued approximately $693,859 related to the deferred
payment of salaries and professional fees of which $532,139 is included under
deferred wages and $161,720 in accrued professional fees. On March 18, 2002, the
Board approved a conversion right on all deferred wages and accrued professional
fees deferred as of March 18, 2002. Pursuant to this conversion right,
employees, officers, consultants, and directors may elect to convert $1.00 of
fees owed to them as of March 18, 2002 for an option to purchase two shares of
the Company's common stock, at an exercise price of $1.00 per share for a term
of five years. Deferred salaries and fees as of March 18, 2002 were $111,500,
resulting in the potential issuance of 223,000 options under the terms mentioned
above. No conversions have occurred to date. As there was no intrinsic value
associated with these exchange rights, no additional compensation cost has been
recorded.
Long-Term Convertible Debt
On June 19, 2003, the Board of Directors approved the offering (the
"2003 Offering") of $1,000,000 in convertible debentures (the "Debentures"). The
Debentures are convertible into that number of shares of the Company's common
stock equal to the amount of the converted indebtedness divided by $0.50 per
share. The Debentures bear interest at a rate of 5% per annum, payable
quarterly. Delinquent interest payments bear interest at a rate of 12% per
annum. The Company is required to redeem each Debenture on the 5th anniversary
of the date of the Debenture. The Company may, in its discretion, redeem any
Debenture at any time prior to the mandatory redemption date of the Debenture by
providing no less than 60 days' prior written notice to the holder of the
Debenture. Certain events of default will result in the Debentures being
redeemable by the Company upon demand of the holder.
Upon the purchase of, and for each $0.50 of the Debenture's principal
amount, the Company will issue to an investor a warrant (the "Warrant") to
purchase one (1) share of the Company's common stock at an exercise price of
$0.75 per share. The Warrants will be exercisable at any time prior to the 5th
anniversary date of the redemption of the Debenture.
As of December 31, 2004, the Company had raised $503,000 from the 2003
Offering.
Warrants issued in connection with the 2003 Offering were recorded
based on their relative fair value as compared to the fair value of the debt at
issuance. The relative fair value of the warrants were recorded as paid-in
capital, estimated at $287,846. The fair value of the warrants were determined
based on an option pricing model with the following assumptions: warrant lives
of 10 years, risk free interest rates ranging from 3.74% to 4.72%, volatility of
120%, and a zero dividend yield. The intrinsic value of the Debentures results
in a beneficial conversion feature that reduces the book value of the
convertible debt to not less than zero. Accordingly, the Company recorded a
$451,023 discount on the convertible debt issued under the 2003 Offering. The
Company amortizes the discount using the effective interest method over the
five-year life of the Debentures.
As of December 31, 2004, accrued interest on the Debentures was
$4,498. The Company recorded interest expense related to the accretion of the
discount on the Debentures of $10 and $14 for the three and six months ended
December 31, 2004 and $0 and $1375 for the three and six months ended December
31, 2003. As of December 31, 2004 the carrying value of the long-term debt
debenture was $14, net of unamortized debt discount of $265,486.
15
During the three months ended December 31, 2004, one investor
exercised their conversion right under the terms of the Debentures. Accordingly,
the carrying value of the convertible debt was reclassified as equity upon
conversion. Since the convertible debt instruments include a beneficial
conversion feature, the remaining unamortized discount of $14,998 at the
conversion date was recognized as interest expense.
The Board of Directors approved an extension of the 2003 Offering
through March 15, 2005. Subsequent to December 31, 2004, the Company has not
raised any additional funds from the 2003 Offering
The Company's other contractual obligations consist of commitments
under an operating lease and repayment of loans payable to certain officers,
directors and stockholders.
As of to December 31, 2004, the Company had outstanding loans payable
to certain officers, directors and stockholders with principal amounts, in the
aggregate, equal to $911,881. The terms of the various notes are described above
under "Note 6: Notes Payable - Stockholders."
As of to December 31, 2004, the Company has future minimum lease
payments of approximately $2,068 under its operating lease.
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.
Pending the deployment of the Company's new hardware (as discussed in
the "General" section) and the receipt of new contracts, and in an effort to
reduce its out-of-pocket expenses to the lowest practicable level, the Company
has furloughed all of its field crews. If and when revenue-generating contracts
are obtained, the Company will re-hire former crew personnel or may hire and
train new crews. The Company was not obligated to make any severance payments
for salaries, health benefits or accrued vacation and sick time related to the
termination of any of its employees.
Off Balance Sheet Arrangements
None
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.
16
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 to continue its operations, 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 will be able to secure
additional fee-for-services or licensing contracts, 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
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. The Company's executive officers, including the
Company's Chief Executive Officer, who also serves as Chief Financial Officer,
and the Chief Operating Officer, are responsible for establishing and
maintaining disclosure controls and procedures for the Company. These executives
have designed such controls to ensure that all material information related to
the Company is made known to them by others within the organization. As of
December 31, 2004, the Company's Chief Executive Officer and Chief Operating
Officer completed an evaluation of the Company's disclosure controls and
procedures, and such evaluation has provided them with reasonable assurance that
the Company's disclosure controls and procedures are effective in alerting them
in a timely manner to material information required to be included in the
Company's periodic filings with the SEC. They did not discover any significant
deficiencies or material weaknesses within the controls and procedures that
require modification, other than as disclosed in the Form 8-K filed on November
9, 2004. There were no changes in the Company's internal control over financial
reporting identified in connection with the Company's evaluation that occurred
during the fiscal quarter ended to December 31, 2004 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended to December 31, 2004, the Company raised
$88,000 from the sale of convertible debentures pursuant to the 2003 Offering
(see "Note 7. Liquidity and Subsequent Events, Long-Term Convertible Debt" in
the "Notes to Condensed Financial Statements"). Such debentures are convertible
into 176,000 shares of the Company's common stock. In connection with such sales
and in compliance with the terms of the 2003 Offering, the Company granted
investors warrants to purchase 176,000 shares of the Company's common stock at
an exercise price of $0.75 per share. These securities were offered and sold by
the Company in reliance on exemptions from registration provided by Section 4(2)
of the Securities Act and Regulation D promulgated there under. The investors
were provided a confidential offering memorandum and executed individual
subscription agreements in which they made representations regarding their
sophistication and qualifications as accredited investors.
17
On November 1, 2004, the Company entered into a two-year consulting
agreement ("Consulting Agreement") with a firm ("Consultant") to provide
consulting services and assist in obtaining additional financing. As
compensation, upon execution of the Consulting Agreement, the Company issued
100,000 restricted shares of common stock to the Consultant. These securities
were issued in reliance on exemptions from registration provided by Section 4(2)
of the Securities Act.
On February 9, 2005, the Board approved the issuance of options
exercisable for 1,850,000 shares of common stock pursuant to the 1999 Stock
Option Plan to certain directors, officers, an employee and two consultants of
the Company. The options will be granted by the Company on February 16, 2005.
Directors, officers, and an employee will be granted options exercisable for
1,600,000 shares of common stock and will have a ten-year term. Options
exercisable for the remaining 250,000 shares of common stock will be granted to
two of the Company's consultants and will have a five-year term. The exercise
price of the options will be ten percent over the closing bid price of the
Company's common stock as quoted on the Over the Counter Bulletin Board on the
grant date, February 16, 2005. These securities were issued in reliance on
exemptions from registration provided by Section 4(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities.
As of to December 31, 2004, the outstanding principal balance of the
Amended Evans Loan (see "Note 6. Notes Payable - Stockholders" in the "Notes to
Condensed Financial Statements") was equal to $846,990. The Company has not made
the interest payments in the amounts of $13,061, $17,692, $20,043, and $21,896,
which were due and payable to Mr. Evans on June 30, 2003, December 31, 2003,
June 30, 2004, and December 31, 2004, respectively. As of to December 31, 2004,
the Company's total arrearage under the Amended Evans Loan with respect to
accrued interest payments was equal to $72,692. Mr. Evans has not made any
demand for payment, or exercised any of his remedies, under the Amended Evans
Loan.
As of to December 31, 2004, the outstanding principal balance of the
2003 Gemino Note (see "Note 6. Notes Payable - Stockholders" in the "Notes to
Condensed Financial Statements") was equal to $7,391. The Company has not made
the interest payments in the amounts of $0, $1,334, $1,430, and $861, which were
due and payable to Mr. Gemino on June 30, 2003, December 31, 2003, June 30,
2004, and December 31, 2004 respectively. As of to December 31, 2004, the
Company's total arrearage on the 2003 Gemino Note with respect to accrued
interest payments was equal to $3,625. Mr. Gemino has not made any demand for
payment, or exercised any of his remedies, under the 2003 Gemino Note.
Item 4. Submission of Matters to a Vote of Shareholders.
The Annual Meeting of Stockholders (the "Annual Meeting") of the
Company was held on December 13, 2004.
At the Annual Meeting, 4,667,833 shares were present in person or by
proxy. The following is a summary and tabulation of the matters that were voted
upon at the Annual Meeting:
Proposal I.
The election of a board of directors to serve a term of one year or
until their respective successors are elected and qualified.
Votes For Votes Withheld
--------- --------------
Henry E. Gemino 4,577,018 90,815
Murphy Evans 4,577,018 90,815
Charles Christenson 4,590,368 77,465
William A. Krivsky 4,590,368 77,465
Proposal II.
A proposal to increase the Company's authorized number of shares of
common stock, par value $0.001 per share, from 15,000,000 to 25,000,000, passed
with the following results:
Votes For Votes Against Abstain
--------- ------------- -------
4,573,268 94,100 465
18
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits The following exhibits were filed with or incorporated by
reference into this report.
Exhibit No. Description of Exhibit
----------- ----------------------
Exhibit 3.i Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's
Registration Statement on Form SB-2 filed with the
Commission on May 10, 1996).
Exhibit 3.ii Bylaws of the Company (incorporated by reference
to Exhibit 3.3 to the Company's Registration
Statement on Form SB-2 filed with the Commission
on May 10, 1996).
Exhibit 3.iii Amendment to Certificate of Incorporation
(incorporated by reference to Exhibit A to the
Company's Definitive Proxy Statement filed with
the Commission on October 28, 2002).
Exhibit 10.1 Service Agreement dated as of August 16, 2001
between Profile Technologies, Inc. and BP
Exploration (Alaska) Inc. (incorporated by
reference to Exhibit 10.1 to the Company's Annual
Report on Form 10-KSB filed with the Commission on
September 28, 2001).
Exhibit 10.2 Loan Agreement dated March 6, 2003, by and between
the Company and Murphy Evans (incorporated by
reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-QSB filed with the
Commission on May 15, 2003).
Exhibit 10.3 Loan Amendment and Promissory Note dated March 6,
2003, by and between the Company and Murphy Evans
(incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB filed
with the Commission on May 20, 2003).
Exhibit 10.4 Lease Agreement dated January 26, 2001 by and
between the Company and Fatum LLC (incorporated by
reference to Exhibit 10.4 to the Company's Annual
Report on Form 10-KSB filed with the Commission on
October 12, 2004).
Exhibit 10.5 Lease Extension dated February 26, 2003 by and
between the Company and Fatum LLC (incorporated by
reference to Exhibit 10.5 to the Company's Annual
Report on Form 10-KSB filed with the Commission on
October 12, 2004).
Exhibit 10.6 Royalty Agreement (incorporated by reference to
Exhibit 10.1 to the Company's Registration
Statement on Form SB-2 filed with the Commission
on May 10, 1996).
Exhibit 10.7 Assignment of Patent Rights (incorporated by
reference to Exhibit 10.2 to the Company's
Registration Statement on Form SB-2 filed with the
Commission on May 10, 1996).
19
Exhibit 10.8 ConocoPhillips Alaska, Inc., Contract No. AK
990156, Amendment No. 3 dated February 1, 2003, by
and between the Company and ConocoPhillips Alaska,
Inc. (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-QSB
filed with the Commission on May 20, 2003).
Exhibit 10.9 1999 Stock Option Plan (incorporated by reference
to Exhibit 10.9 to the Company's Annual Report on
Form 10-KSB filed with the Commission on October
12, 2004).
Exhibit 14 Code of Ethics (incorporated by reference to
Exhibit 14 to the Company's Annual Report on Form
10-KSB filed with the Commission on October 12,
2004).
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of Henry E.
Gemino, as Chief Executive Officer and Chief
Financial Officer of the Company.
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of Philip
L. Jones, as Chief Operating Officer and Executive
Vice President of the Company.
Exhibit 32.1 Certification under Section 906 of the
Sarbanes-Oxley Act of 2002 by Henry E. Gemino, as
Chief Executive Officer and Chief Financial
Officer of the Company.
Exhibit 32.2 Certification under Section 906 of the
Sarbanes-Oxley Act of 2002 by Philip L. Jones, as
Chief Operating Officer and Executive Vice
President of the Company.
(b) Reports on Form 8-K
On November 9, 2004, the Company filed a Report on Form 8-K to report
as required a change to the Company's independent accountant.
20
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: February 14, 2005 /s/ Henry E. Gemino
-------------------------------------
Henry E. Gemino
Chief Executive Officer and
Chief Financial Officer
21