SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1998
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 No.)
1077 Northern Blvd., Roslyn, NY 11576
(Address of principal executive offices) (Zip Code)
516-365-1909
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the 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
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
There were 4,275,092 shares of common stock issued and outstanding
on October 20, 1998.
Transitional Small Business Disclosure Format
(Check one):
Yes No X
<PAGE>
Item 1. Financial Statements
PROFILE TECHNOLOGIES, INC.
Condensed Balance Sheets
September 30, June 30,
1998 1998
---- ----
(unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 4,036,660 4,167,951
Accounts receivable 48,155 --
Prepaid expenses 51,222 59,645
----------- -----------
Total current assets 4,136,037 4,227,596
Property and equipment, net 121,269 113,173
Patents, net 245,155 204,037
Other assets 3,530 3,530
----------- -----------
Total assets $ 4,505,991 4,548,336
----------- -----------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable - stockholder 8,424 21,737
Other accounts payable 11,668 19,553
Other accrued liabilities 152,311 134,322
----------- -----------
Total current liabilities 172,403 175,612
----------- -----------
Stockholders' equity:
Common stock, $0.001 par value
Authorized 10,000,000 shares;
issued and outstanding 4,275,092
shares at September 30, 1998 and
4,262,600 shares at June 30, 1998 4,275 4,263
Additional paid-in capital 7,561,758 7,514,145
Accumulated deficit (3,232,445) (3,145,684)
----------- -----------
Total stockholders' equity 4,333,588 4,372,724
=========== ===========
Total liabilities and stockholders' equity $ 4,505,991 4,548,336
=========== ===========
See accompanying notes to condensed financial statements
1
<PAGE>
PROFILE TECHNOLOGIES, INC.
Condensed Statements of Operations
(unaudited)
Three months ended
September 30
--------------------------
1998 1997
---- ----
Revenues - services $ 138,985 30,000
----------- -----------
Cost of services 42,211 24,270
----------- -----------
Gross profit 96,774 5,730
----------- -----------
Operating expenses:
Research and development 68,850 60,774
General and administrative 168,950 136,210
----------- -----------
Total operating expenses 237,800 196,984
----------- -----------
Loss from operations (141,026) (191,254)
----------- -----------
Interest income 54,265 67,349
----------- -----------
Net loss $ (86,761) (123,905)
----------- -----------
Basic and diluted loss per share (0.02) (0.03)
Weighted average basic and diluted common
and common share equivalents outstanding 4,269,430 4,262,600
=========== ===========
See accompanying notes to condensed financial statements
2
<PAGE>
<TABLE>
<CAPTION>
PROFILE TECHNOLOGIES, INC.
Condensed Statements of Cash Flows
(unaudited)
Three months ended
September 30
--------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (86,761) (123,905)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 21,316 8,272
Changes in assets and liabilities:
Accounts receivable (48,155) (50,000)
Contract work-in-progress -- 20,000
Accounts receivable/payable - stockholder (13,313) (2,500)
Prepaid expenses 8,423 22,140
Other assets -- (180)
Other accounts payable (7,885) 10,188
Accrued wages -- (14,094)
Other accrued liabilities 17,989 (19,010)
----------- -----------
Net cash used in operating activities (108,386) (149,089)
----------- -----------
Cash flows from investing activities:
Patents (49,572) --
Purchase of property and equipment (20,958) (45,465)
----------- -----------
Net cash used in investing activities (70,530) (45,465)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of common stock purchase warrants 47,625 --
----------- -----------
Net cash provided by financing activities 47,625 --
----------- -----------
Increase (decrease) in cash and cash equivalents (131,291) (194,554)
Cash and cash equivalents at beginning of period 4,167,951 4,936,600
----------- -----------
Cash and cash equivalents at end of period 4,036,660 4,742,046
----------- -----------
See accompanying notes to condensed financial statements
3
</TABLE>
<PAGE>
PROFILE TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
1. Description of Business
Profile Technologies, Inc. (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 developed process.
From 1986 (incorporation) through June 30, 1998, the Company was considered to
be in the development stage as the Company had not generated significant
revenues from its research and development efforts and related service contracts
with respect to the above process, and operations, consisting principally of
product development and administrative activities, had primarily been financed
through the issuance of common stock.
During the quarter ended September 30, 1998, the Company commenced work on its
initial commercial contracts for corrosion inspection services of pipeline and
has emerged from the development stage. There can be no assurances that the
Company will be able to obtain additional commercial contracts in the future.
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 10QSB.
Accordingly, certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such instructions. The
accompanying condensed financial statements and related notes should be read in
conjunction with the audited financial statements and notes thereto included in
the annual report FORM 10KSB for the year ended June 30, 1998. 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. Certain reclassifications have been made to the
September 30, 1997 information to conform with the September 30, 1998
presentation.
3. Net Loss Per Share
Basic earnings per share is computed by dividing the net loss by the weighted
average number of common shares outstanding during the period. Diluted earnings
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.
4
<PAGE>
Excluded from the computation of diluted loss per share for the quarter ended
September 30, 1997 are warrants to acquire 1, 120,000 shares of common stock
with a weighted-average exercise price of $3.41 because their effect would be
antidilutive. Excluded from the computation of diluted loss per share for the
quarter ended September 30, 1998 are warrants to acquire 1, 140,000 shares of
common stock with a weighted-average exercise price of $3.59 because their
effect would be antidilutive.
4. Product Development Costs - New Accounting Pronouncement
Product development costs are charged to operations as incurred. In March 1998,
the AICPA issued Statement of Position (SOP) No. 98.1, Accounting for the Costs
of computer Software Developed or Obtained for Internal Use, which requires
capitalization of certain software development costs for software developed for
internal use.
Costs incurred during the application development stage should be capitalized.
The Company adopted SOP No. 98-1 beginning July 1, 1998. The implementation of
the provisions of SOP No. 98-1 did not have a significant impact on the Company.
5. Stock Option Plan and Stock Purchase Warrant
In October, 1998:
* the Board approved a Stock Option Plan, subject to shareholder approval,
and reserved for issuance of stock options 500,000 shares of common stock;
* the Company granted a warrant to purchase 85,000 shares of common stock to
its President with an exercise price of $7.50 per share.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
GENERAL
The Company is in the business of developing and commercializing potential
processes for the non-destructive, non-invasive testing of both above ground and
buried pipeline to evaluate the condition and integrity of the pipeline. The
development of its pulse propagation analyzer process and the further refinement
of the technology associated therewith has progressed to the point where it is
now being utilized commercially. The Company has begun to obtain revenues from
its commercial activities but has not yet reached profitability. There can be no
assurance that the Company will obtain commercial contracts in the future which
would produce operating revenues sufficient to attain profitability. The
Company's process identifies areas of corrosion, areas that lack cathodic
protection and areas that may have defective coating on both below ground and
above ground pipes. The pulse propagation analyzer consists of a computer,
software to enhance collection and processing of data, a precision multi-channel
pulse generator and a signal analyzer. The Company believes that it attained
technological feasibility of its process with the completion of its research and
development activity in a controlled environment in July of 1996.
In order for the Company to obtain significant revenues from the use of its
technology, the Company must establish a sales and marketing organization that
is effective and obtains customers for its pulse propagation analyzer. The
Company must also be able to supply and train work crews in sufficient numbers
to satisfy the requirements of its customers. From inception through September
30, 1998, the Company incurred losses of $3,232,445 and losses are expected to
continue at least through the second quarter of the year ending June 30, 1999;
no assurances can be given that losses will not continue thereafter.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1998 Compared to the
Quarter Ended September 30, 1997
The Company had revenues of $138,985 for the quarter ended September 30,
1998 compared to $30,000 for the quarter ended September 30, 1997, an increase
of $108,985. This 463% increase in operating revenues was the result of the
Company completing its first two commercial contracts on the North Slope of
Alaska. The loss from operations for the quarter ended September 30, 1998 was
$141,026 compared to a loss from operations of $191,254 for the quarter ended
September 30, 1997. The operating loss for the quarter ended September 30, 1998
was offset somewhat by interest income in the amount of $54,265 representing
interest earned primarily from proceeds of the Company's public offering which
was completed in February of 1997. This resulted in a net loss of $86,761 for
the quarter ended September 30, 1998 compared to a net loss of $123,905 for the
quarter ended September 30, 1997. Cost of services increased to $42,211 for the
quarter ended September 30, 1998 compared to $24,270 for the quarter ended
September 30, 1997. The resulting gross profit margin in the quarter ended
September 30, 1998 was 70 percent. Research and development expenses increased
slightly to $68,850 for the quarter ended September 30, 1998 compared to $60,774
for the quarter ended September 30, 1997. General and administrative expenses
increased to $168,950 for the quarter ended September 30, 1998 from $136,210 for
the quarter ended September 30, 1997, primarily because of increased personnel
expenses.
6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company since inception has funded its operations and research and
development activities through private placement equity offerings and proceeds
from the Company's initial public offering. The Company completed work on its
first commercial contracts during the three months ended September 30, 1998 and
has emerged from development stage activities. Net cash used in operating
activities totaled $108,386 in the three months ended September 30, 1998 and the
Company expects that additional operating activities will result in cash
outflows in the near term while the Company pursues additional commercial
contracts, marketing activities, and research and development. Cash outflows
from operations are expected to continue at least through the quarter ending
December 31, 1998; no assurances can be given that operating activities will
generate positive cash flows thereafter.
In February of 1997, the Company completed an initial public offering of
its common stock, selling 1,000,000 shares at a price of $6.00 per share, as
well as an Underwriter's overallotment option of 50,000 shares, also at a price
of $6.00 per share. Net offering proceeds of approximately $5,172,000 were
realized by the Company from this public offering. The Company, pending
utilization of the net proceeds in operations, has invested such proceeds in
short-term, high grade, interest-bearing instruments.
The Company's available cash and equivalents as of September 30, 1998 were
$4,036,660. At September 30, 1998, the Company had working capital of $3,963,634
and no material long term commitments or material commitments for capital
expenditures.
The Company believes that its current capital resources and liquidity are
adequate for at least the next twelve months. Other than equipment purchases for
field crews if the Company is successful in obtaining additional commercial
contracts and the expenses associated with the hiring and training of such field
crews, the Company does not have any plans for significant capital expenditures
above its current level.
RESOURCES
As of September 30, 1998 the Company did not have any material commitments
for capital expenditures. However, management is currently directing the
Company's activities towards obtaining additional fee for 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 the
operations may require alternate sources of financing such equipment. The timing
of these events is dependent upon the Company's ability to obtain additional fee
for service contracts, which is dependent upon the Company's continuing ability
to demonstrate the effectiveness of its technology. The Company believes that
its cash position is sufficient to satisfy its operating needs for the next
twelve months. Management believes it is well on the way to reaching these
milestones, but 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 personnel expenses as it hires and trains
field crews and support personnel related to the successful receipt of
commercial contracts.
7
<PAGE>
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000" problem
is concerned with whether computer systems will properly recognize date
sensitive information when the year changes to 20000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Year 2000 problems pervasive and complex as virtually every
company's computer operation will be affected in some way. The Company's
computer programs which process it's field data as well as operation and
financing transactions, were designed and developed without considering the
impact of the upcoming change in century. Nevertheless, as a result of the
Company's analysis of it's computer programs and operations, it has reached the
conclusion that "Year 2000" problems will not seriously impact or have a
material adverse effect on the Company's expenses, business, including data
gathering and interpretation, or it's operations.
It is possible, however, that "Year 2000" problems incurred by the
customers or suppliers of the Company could have a negative impact on future
operations and financial performance of the Company, although the Company has
not been able to specifically identify any such problems among its suppliers.
The Company believes that it will not be dependent upon any single supplier for
its equipment or machinery in the Year 2000, and therefore has made a
determination not to contact its primary suppliers to determine if they are
developing plans to address processing transactions which may impact the Company
in the year 2000. However, there can be no assurance that Year 2000 problems
will not occur with respect to the Company's computer systems. Furthermore, the
Year 2000 problem may impact other entities with which the Company transacts
business and the Company cannot predict the effect of the Year 2000 problem on
such entities or the resulting effect on the Company. The Company has not yet
developed a contingency plan to operate in the event that any non-compliant
customer or supplier systems that materially impact the Company are not remedies
by January 1, 2000 and has not yet determined a time table for developing such a
plan. As a result, if preventative and/or corrective actions by the Company or
those entities with which the Company does business are not made in a timely
manner, the Year 2000 issue could have a material adverse effect on the
Company's business, financial condition and results of operations.
8
<PAGE>
PART II
Item 1. Legal Proceedings.
The Company is not a party to any pending or threatened legal proceedings.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
On October 17, 1998, the Company restructured its management team. Murphy
Evans, an outside director, was named President of the Company. Henry Gemino was
named co-chairman of the Board of Directors. Dr. John Tsungfen Kuo, an outside
director and the Company's Chief Technical Consultant and Gale D. Burnett, the
Company's former President, were named Vice- Chairmen of the Board of Directors.
At the same time, Mr. Evans was granted 85,000 common stock purchase warrants
exercisable at $7.50 per share. Half are exercisable immediately and half are
exercisable in one year if prior to that date Mr. Evans has not resigned as
President. All of such warrants expire October 31, 2004.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial Data Schedule
27.2 Financial Data Schedule Restated
(b) Reports on Form 8-K.
None
9
<PAGE>
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: October 20, 1998 /s/ G.L. Scott
------------------------------------
G.L. SCOTT
Chief Executive Officer
/s/Henry Gemino
------------------------------------
HENRY GEMINO
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,036,660
<SECURITIES> 0
<RECEIVABLES> 48,155
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,136,037
<PP&E> 285,468
<DEPRECIATION> (164,199)
<TOTAL-ASSETS> 4,505,991
<CURRENT-LIABILITIES> 172,403
<BONDS> 0
0
0
<COMMON> 4,275
<OTHER-SE> 4,329,313
<TOTAL-LIABILITY-AND-EQUITY> 4,505,991
<SALES> 138,985
<TOTAL-REVENUES> 138,985
<CGS> 0
<TOTAL-COSTS> 42,211
<OTHER-EXPENSES> 237,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (86,761)
<INCOME-TAX> 0
<INCOME-CONTINUING> (86,761)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (86,761)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,742,046
<SECURITIES> 0
<RECEIVABLES> 50,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,822,704
<PP&E> 193,647
<DEPRECIATION> 121,513
<TOTAL-ASSETS> 5,087,405
<CURRENT-LIABILITIES> 125,759
<BONDS> 0
0
0
<COMMON> 4,263
<OTHER-SE> 4,957,383
<TOTAL-LIABILITY-AND-EQUITY> 5,087,405
<SALES> 30,000
<TOTAL-REVENUES> 30,000
<CGS> 0
<TOTAL-COSTS> 24,270
<OTHER-EXPENSES> 196,984
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (123,905)
<INCOME-TAX> 0
<INCOME-CONTINUING> (123,905)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (123,905)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
