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 December 31, 1997
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 4,262,600 shares of common stock issued and outstanding on
January 15, 1998.
Transitional Small Business Disclosure Format
(Check one):
Yes No X
----- -----
<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
Company believes that the development of its pulse propagation analyzer process
and the further refinement of the technology associated therewith has progressed
to the point where it believes commercial utilization is now feasible. The
Company has not, as of yet, obtained significant revenues from its planned
primary source of revenues and has no commercial contracts in place for the use
of its process or technology. The goal of the Company has been the establishment
of technological feasibility associated with its services to electronically
measure corrosion in piping of all kinds. 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. During fiscal 1996, the Company began to see rapid progress in the
development of its technology and its ability to meet the expectations of
potential customers. By that time, the Company had begun to accelerate its
efforts and expend more resources to develop its technology faster. Thus,
expenses have been generally increasing at a faster pace than in prior periods.
The Company expects these trends to continue as its technological development
continues at this accelerated pace. 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 December
31, 1997, the Company incurred losses of $2,749,619 and losses are expected to
continue at least through the third quarter of the year ending June 30, 1998; no
assurances can be given that losses will not continue thereafter.
RESULTS OF OPERATIONS
Quarter Ended December 31, 1997 Compared to the Quarter Ended December 31, 1996
- - -------------------------------------------------------------------------------
The Company had no revenues for either of the quarters ended December 31,
1997 or December 31, 1996. The loss from operations for the quarter ended
December 31, 1997 was $257,122 compared to a loss from operations of $645,538
for the quarter ended December 31, 1996. The loss for the quarter ended December
31, 1997 decreased by $388,416 over the comparable quarter ended December 31,
1996, primarily because of a non-cash expense of $559,154 which was incurred in
the quarter ended December 31, 1996 related to the issuance or extension of
common stock purchase warrants issued to management and consultants. Excluding
this non-cash expense, operating losses for the quarter ended December 31, 1997
were actually $170,738 greater than for the quarter ended December 31, 1996. The
2
<PAGE>
operating loss for the quarter ended December 31, 1997 was offset somewhat by
interest income in the amount of $64,265 representing interest earned from
proceeds of the Company's public offering which was completed in February of
1997. This resulted in a net loss of $192,857 for the quarter ended December 31,
1997 compared to a net loss of $645,251 for the quarter ended December 31, 1996.
Research and development expenses increased significantly to $75,131 for the
quarter ended December 31, 1997 compared to $51,573 for the quarter ended
December 31, 1996. General and administrative expenses increased substantially
to $181,991 for the quarter ended December 31, 1997 from $34,811 for the quarter
ended December 31, 1996, primarily because of increased expenses associated with
setting up new corporate offices in New York and the establishment of a research
and development facility in Ferndale, Washington following the completion of the
public offering. The Company also incurred increased salary expense because it
was in the financial position to pay the salaries and consulting fees that it
had been limited in paying in the quarter ended December 31, 1996.
Six Months Ended December 31, 1997 Compared to Six Months Ended December 31,
- - --------------------------------------------------------------------------------
1996.
- - -----
Revenues remained constant at $30,000 for the six months ended March 31,
1997 compared to the six months ended December 31, 1996. Revenues in both six
month periods were derived from research and development contracts or
demonstration contracts with two large multi-national oil companies. Total costs
and expenses for the six months ended December 31, 1997 were $478,376 compared
to total costs and expenses of $738,261 for the six months ended December 31,
1996. However, of the total costs and expenses for the six months ended December
31, 1996, $559,154, or 75.7% were for noncash, nonrecurring charges associated
with the issuance or extension of common stock purchase warrants. Excluding this
non-cash expense, operating losses for the six months ended December 31, 1997
were actually $299,269 greater than for the six months ended December 31, 1996.
This represents an increase of 167.1%. Research and development expenses
increased to $154,675 for the six months ended December 31, 1997 from $118,166
for the six months ended December 31, 1996, an increase of $36,509 or 30.9%. The
increase is primarily due to an increase in research and development activity.
General and administrative expenses increased for the six months ended December
31, 1997 to $323,701, compared to $60,941 for the six months ended December 31,
1996.
Management believes that both revenues and expenses of the Company are
likely to increase during the fiscal year ending June 30, 1998 compared to the
fiscal year ended June 30, 1997 if it is able to secure contracts with
customers, of which there is no assurance. The revenues earned by the Company to
date principally relate to research and development activities that have been
sponsored by large multi-national oil companies and large utilities. These
activities included field research and development at such companies'
facilities. These activities are likely to continue during the year ending June
30, 1998 and for the foreseeable future. Management is also working towards
obtaining fee for service contracts, which are hoped to be the major source of
the Company's revenues. If fee for service contracts are obtained, management
expects its expenditures associated with personnel and testing equipment will
begin to rise. In addition, as the Company begins to actually provide fee for
service work, additional administrative support activities will increase
together with related expenses.
3
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Revenues for the period from July 1, 1988 (inception) through December 31,
1997, were $512, 189 while expenses were $3,501,965, resulting in a loss from
operations, since inception, of $2,989,776. Net cash used in operating
activities from inception through December 31, 1997 was $1,668,650. Of this
amount, $148,227 was spent in the three month period ended December 31, 1997.
Thus, while the revenues derived from research and development activities funded
by multi-national oil companies and major utilities have been indicative of
financial support for the Company's efforts to develop its technology, they have
not been sufficient to cover expenses. Accordingly, the Company has maintained
adequate liquidity and cash reserves through the private placement and public
offering of its common stock. Such private placements, from inception through
the period ended March 31, 1996, totaled $1,471,567. The Company has not
conducted any private placements of its common stock since that date. Noncash
expenses relating to the issuance of new common stock warrants or the extension
of previously issued warrants in the amount of $559,154 were incurred in the
quarter ended December 31, 1996. These transactions had no effect on aggregate
stockholders' equity. At December 31, 1997, the Company had working capital of
$4,478,354 and no material long term commitments or material commitments for
capital expenditures.
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 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 commercial contracts, the Company does not have any
plans for significant capital expenditures. To date, the Company has only
obtained small research and development contracts, the proceeds of which were
used to defray a portion of the Company's research and development costs.
RESOURCES
As of December 31, 1997 the Company did not have any material commitments
for capital expenditures. However, it is management's intention to direct the
Company's activities towards obtaining 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 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,
4
<PAGE>
but there can be no assurance that the Company's process will be accepted within
any particular time frame, or at all. The Company recently acquired commercial
office space in the NewYork City area as well as space to carry out research and
development activities in Ferndale, Washington. The Company will continue to
incur increased expenses associated with the leasing of such space. The Company
will also incur additional personnel expenses as it hires and trains field crews
and support personnel related to the successful receipt of commercial contracts.
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.
On November 14, 1997 the Company held its annual meeting of shareholders in
New York, NY. The only agenda item at the meeting was the election of a
Board of Directors. Henry Gemino, Gale D. Burnett, G.L. Scott, Murphy
Evans, John Tsungfen Kuo and Allen G. Reeves were all elected as directors
to serve until the next annual shareholder's meeting.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
5
<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: January 21, 1998 /s/ G.L. Scott
---------------------------------------
G.L. SCOTT
Chief Executive Officer
/s/ Henry Gemino
---------------------------------------
HENRY GEMINO
Chief Financial Officer
6
<PAGE>
Item 1. Financial Statements
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Condensed Balance Sheets
==============================================================================
December 31, June 30,
1997 1997
==============================================================================
Assets
------
(unaudited)
Current assets:
Cash and cash equivalents $ 4,558,813 4,936,600
Contract work-in-progress -- 20,000
Prepaid expenses 16,483 52,798
--------------------------
Total current assets 4,575,296 5,009,398
Property and equipment, net 82,868 34,941
Patents 204,037 189,037
Other assets 3,530 3,350
--------------------------
Total assets $ 4,865,731 5,236,726
--------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable - stockholder 18,069 2,500
Other accounts payable 1,528 5,919
Accrued wages -- 20,614
Other accrued liabilities 77,345 122,142
-------------------------
Total current liabilities 96,942 151,175
-------------------------
Stockholders' equity:
Common stock, $0.001 par value. Authorized
10,000,000 shares; issued and outstanding
4,262,600 shares at December 31, 1997
at June 30, 1997 4,263 4,263
Additional paid-in capital 7,514,145 7,514,145
Deficit accumulated during the development
stage (2,749,619) (2,432,857)
-------------------------
Total stockholders' equity 4,768,789 5,085,551
==============================================================================
Total liabilities and stockholders'
equity $ 4,865,731 $ 5,236,726
==============================================================================
See accompanying notes to condensed financial statements
<PAGE>
<TABLE>
<CAPTION>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Condensed Statements of Operations
(unaudited)
==============================================================================================================================
Period from
July 1, 1988
(inception) through Three months ended Six months ended
December 31, December 31, December 31,
--------------- --------------------- --------------------
1997 1997 1996 1997 1996
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Revenues - testing services and
research and development fees $ 512,189 -- -- 30,000 30,000
-------------------------------------------------------------------------------
Costs and expenses:
Research and development 1,512,365 75,131 51,573 154,675 118,166
General and administrative 1,130,446 181,991 34,811 323,701 60,941
Excess of fair market value
over exercise price of extended
and assigned existing common
stock purchase warrants 350,000 -- 50,000 -- 50,000
Fair value of common stock purchase
warrants granted to consultants 509,154 -- 509,154 -- 509,154
-------------------------------------------------------------------------------
Total costs and expenses 3,501,965 257,122 645,538 478,376 738,261
-------------------------------------------------------------------------------
Loss from operations (2,989,776) (257,122) (645,538) (448,376) (708,261)
-------------------------------------------------------------------------------
Interest income 240,057 64,265 287 131,614 1,342
Other income 100 -- -- -- --
-------------------------------------------------------------------------------
Net loss $(2,749,619) (192,857) (645,251) (316,762) (706,919)
-------------------------------------------------------------------------------
Basic and diluted loss per share $ (0.05) (0.17) $ (0.07) (0.19)
Weighted average common and common
share equivalents outstanding 4,262,600 3,756,350 4,262,600 3,756,350
==============================================================================================================================
See accompanying notes to condensed financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Statements of Stockholders' Equity
(unaudited)
=============================================================================================================================
Deficit
accumulated Total
Common stock Additional during the Stock-
----------------------- paid-in development holders'
Shares Amount capital stage equity
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
Sale at inception (July 1, 1988),
$.0005 per share 1,000,000 $ 500 -- -- 500
Sale of common stock in July,
$.0005 per share 600,000 300 -- -- 300
Sale of common stock in September,
$.25 per share 400,000 1,200 98,800 -- 100,000
Net loss -- -- -- (85,749) (85,749)
--------------------------------------------------------------------
Balances at June 30, 1989 2,000,000 2,000 98,800 (85,749) 15,051
Sale of common stock in September,
$.25 per share 80,000 80 19,920 -- 20,000
Net loss -- -- -- (13,683) (13,683)
--------------------------------------------------------------------
Balances at June 30, 1990 2,080,000 2,080 118,720 (99,432) 21,368
Sale of common stock in October,
$.25 per share 114,000 114 28,386 -- 28,600
Issuance of common stock for services
in November, $.25 per share 40,000 40 9,960 -- 10,000
Net loss -- -- -- (30,593) (30,593)
--------------------------------------------------------------------
Balances at June 30, 1991 2,234,000 2,234 157,068 (130,025) 29,275
Sale of common stock in September,
$.625 per share 296,000 296 184,704 -- 185,000
Sale of common stock in May,
$1.50 per share 141,268 141 211,761 -- 211,902
Net loss -- -- -- (267,186) (267,186)
--------------------------------------------------------------------
Balances at June 30, 1992 2,671,268 2,671 553,531 (397,211) 158,991
Sale of common stock in January,
$1.50 per share 51,000 51 76,449 -- 76,600
Net loss -- -- -- (132,905) (132,905)
--------------------------------------------------------------------
Balances at June 30, 1993 2,722,268 2,722 629,980 (530,116) 102,586
Net loss -- -- -- (13,503) (13,503)
--------------------------------------------------------------------
Balances at June 30, 1994 2,722,268 2,722 629,980 (543,619) 89,083
Repurchases of common stock in October (16,000) (15) (13,984) -- (14,000)
Sale of common stock in December, $1.75
per share, net of issuance costs
of $22,115 268,332 269 447,196 -- 447,465
Excess of fair value over exercise price of
existing common stock purchase warrants
extended in December -- -- 210,000 -- 210,000
Net loss -- -- -- (453,382) (453,382)
--------------------------------------------------------------------
Balances at June 30, 1995 2,974,600 2,975 1,273,192 (997,001) 279,166
Issuance of common stock for services in October,
$1.00 per share 20,000 20 19,980 -- 20,000
Sale of common stock in December - March, $2.00
per share, net of issuance costs of $34,600 218,000 218 401,182 -- 401,400
Excess of fair value over exercise price of
existing common stock purchase warrants
extended in March -- -- 90,000 -- 90,000
Net loss -- -- -- (400,853) (400,853)
--------------------------------------------------------------------
(Continued on next page)
<PAGE>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Statements of Stockholders' Equity
(unaudited)
(continued)
=============================================================================================================================
Deficit
accumulated Total
Common stock Additional during the Stock-
----------------------- paid-in development holders'
Shares Amount capital stage equity
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1996 3,212,600 3,213 1,784,354 (1,397,854) 389,713
Fair value of common stock purchase warrants
granted to consultants -- -- 509,154 -- 509,154
Excess of fair market value over exercise price
of existing common stock purchase warrants
assigned by principal stockholder to others -- -- 90,000 -- 50,000
Sale of common stock in February - March, $6.00
per share, net of issuance costs of $1,128,313 1,050,000 1,050 5,170,637 -- 5,171,687
Net loss -- -- -- (1,035,003) (1,035,003)
--------------------------------------------------------------------
Balances at June 30, 1997 4,262,800 4,263 7,514,145 (2,432,857) 5,085,551
Net loss -- -- -- (316,762) (316,762)
=============================================================================================================================
Balances at December 31, 1997 4,262,600 4,263 7,514,145 (2,749,619) 4,768,789
=============================================================================================================================
See accompanying notes to condensed financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROFILE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Condensed Statements of Cash Flows
(unaudited)
===================================================================================================================
Period from
July 1, 1988
(inception) through Six months ended
December 31, December 31,
------------------- -----------------------
1997 1997 1996
===================================================================================================================
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,749,619) (316,762) (706,919)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 134,886 17,544 10,301
Services received in exchange for
common stock 10,000 -- --
Excess of fair value over exercise
price of extended and assigned
existing common stock purchase warrants 350,000 -- 50,000
Fair value of common stock purchase
warrants granted to consultants 509,154 -- 509,154
Changes in assets and liabilities:
Contract work-in-progress -- 20,000 (30,000)
Accounts receivable/payable - stockholder 18,069 15,569 (12,154)
Prepaid expenses (16,483) 36,315 (281)
Other assets (3,530) (180) --
Other accounts payable 1,528 (4,391) (2,005)
Accrued wages -- (20,614) 15,750
Other accrued liabilities 77,345 (44,797) 10,974
---------------------------------------------------
Net cash used in operating activities (1,668,650) (297,316) (155,180)
---------------------------------------------------
Cash flows from investing activities:
Patents (184,037) (15,000) (452)
Purchase of property and equipment (213,653) (65,471) (345)
---------------------------------------------------
Net cash used in investing activities (397,690) (80,471) (797)
---------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock,
net of issuance costs 6,643,254 -- --
Repurchase of common stock (14,000) -- --
Deferred IPO costs -- -- (31,635)
Organizational costs (4,101) -- --
---------------------------------------------------
Net cash provided by (used in) financing activities 6,625,153 -- (31,635)
---------------------------------------------------
Increase (decrease) in cash and cash equivalents 4,558,813 (377,787) (187,612)
Cash and cash equivalents at beginning of period -- 4,936,600 212,689
---------------------------------------------------
Cash and cash equivalents at end of period 4,558,813 4,558,813 25,077
---------------------------------------------------
Supplemental disclosure of noncash financing
and investing activities -
Patent costs in exchange for common stock $ 20,000 -- --
===================================================================================================================
See accompanying notes to condensed financial statements
</TABLE>
<PAGE>
DRAFT 1/26/98 PRELIMINARY & TENTATIVE
FOR DISCUSSION PURPOSES ONLY
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Notes to Condensed Financial Statements
---------------------------
(1) Basis of Presentation
The unaudited interim condensed financial statements and related notes of
Profile Technologies, Inc. (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, 1997
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.
(2) Net Loss Per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share during the quarter ended December 31,
1997. This statement establishes standards for the computation,
presentation and disclosure of earnings per share (EPS), replacing the
presentation currently required Primary EPS with a presentation of Basic
EPS. It also requires dual presentation of Basic EPS and Diluted EPS on the
face of the income statement for entities with complex capital structures
and requires restatement of all prior EPS figures. Basic EPS is based on
the weighted-average number of common shares outstanding during the period.
Diluted EPS is based on the potential dilution that would occur, upon
exercise or conversion of securities into common stock using the treasury
stock method. Restatement of EPS amounts reported for the three months and
six months ended December 31, 1997 and 1996 resulted in no change to the
previously presented amounts. Additionally, for fiscal year 1997, common
and common equivalent shares issued during the twelve months immediately
preceding the date of the Company's initial public offering have been
included in the calculation of common and common equivalent shares as if
they were outstanding for all periods presented, including loss years where
the impact of the incremental share is antidilutive, using the treasury
stock method and the anticipated initial public offering price.
1
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 4,558,813
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,575,296
<PP&E> 213,653
<DEPRECIATION> (130,785)
<TOTAL-ASSETS> 4,865,731
<CURRENT-LIABILITIES> 96,942
<BONDS> 0
0
0
<COMMON> 4,263
<OTHER-SE> 4,764,526
<TOTAL-LIABILITY-AND-EQUITY> 4,865,731
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 257,122
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (192,857)
<INCOME-TAX> 0
<INCOME-CONTINUING> (192,857)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (192,857)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> 0
</TABLE>
