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 March 31, 1999
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 (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
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has be
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 outstanding on April 29, 1999.
Transitional Small Business Disclosure Format
(Check one):
Yes No X
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Item 1. Financial Statements
PROFILE TECHNOLOGIES, INC.
Condensed Balance Sheets
- --------------------------------------------------------------------------------
March 31, June 30,
1999 1998
- --------------------------------------------------------------------------------
(unaudited)
Assets
------
Current assets:
Cash and cash eqivalents $ 3,470,882 4,167,951
Accounts receivable 30,934 --
Prepaid expenses 31,802 59,645
--------------------------
Total current assets 3,533,618 4,227,596
Property and equipment, net 129,914 113,173
Patents, net 214,865 204,037
Other assets 3,530 3,530
--------------------------
Total assets $ 3,881,927 4,548,336
--------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable - stockholders $ -- 21,737
Other accounts payable 14,800 19,553
Other accrued liabilities 42,151 134,322
--------------------------
Total current liabilities 56,951 175,612
--------------------------
Stockholders' equity:
Common Stock, $0.01 par value. Authorized
10,000,000 shares; issued and outstanding
4,275,092 shares at March 31, 1999 and
4,262,600 shares at June 30, 1998 4,275 4,263
Additional paid-in capital 7,561,758 7,514,145
Accumulated deficie (3,741,057) (3,145,684)
--------------------------
Total stockholders' equity 3,824,976 4,372,724
- --------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 3,881,927 4,548,336
- --------------------------------------------------------------------------------
See accompanying notes to condensed financial statements.
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<TABLE>
<CAPTION>
PROFILE TECHNOLOGIES, INC.
Condensed Statements of Operations
(unaudited)
- ----------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
March 31, March 31,
-----------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues - services $ -- 15,000 178,910 45,000
-----------------------------------------------------------------
Cost of services -- 4,450 53,085 13,352
-----------------------------------------------------------------
Gross profit -- 10,550 125,825 31,648
-----------------------------------------------------------------
Operating expenses:
Research and development 82,963 78,913 229,740 230,722
General and administrative 229,017 172,672 634,210 490,337
-----------------------------------------------------------------
Total operating expenses 311,980 251,585 863,950 721,059
-----------------------------------------------------------------
Loss from operations (311,980) (241,035) (738,125) (689,411)
-----------------------------------------------------------------
Interest income 40,879 58,872 142,752 190,486
-----------------------------------------------------------------
Net loss $ (271,101) (182,163) (595,373) (498,925)
-----------------------------------------------------------------
Basic and diluted net loss per share (0.06) (0.04) (0.14) (0.12)
Weighted average basic and diluted common
and common share equivalents outstanding 4,275,092 4,262,600 4,273,205 4,262,600
======================================================================================================================
See accompanying notes to condensed financial statements.
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PROFILE TECHNOLOGIES, INC.
Condensed Statements of Cash Flows
(unaudited)
- ------------------------------------------------------------------------------------------------------------
Nine months ended
March 31,
--------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (595,373) (498,925)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 74,823 27,134
Changes in assets and liabilities:
Accounts receivable (30,934) --
Contract work-in-progress -- 20,000
Accounts receivable/payable - stockholder (21,737) 1,790
Prepaid expenses 27,843 (13,807)
Other assets -- (180)
Other accounts payable (4,753) 3,010
Accrued wages -- (20,614)
Other accrued liabilities (92,171) (18,514)
------------------------------------
Net cash used in operating activities (642,302) (500,106)
------------------------------------
Cash flows from investing activities:
Patents (44,383) (15,000)
Purchase of property and equipment (58,009) (71,836)
------------------------------------
Net cash used in investing activities (102,392) (86,836)
------------------------------------
Cash flows from financing activities:
Proceeds from exercise of common
stock purchase warrants 47,625 --
------------------------------------
Net cash provided by financing activities 47,625 --
------------------------------------
Decrease in cash and cash equivalents (697,069) (586,942)
Cash and cash equivalents at beginning of period 4,167,951 4,936,600
------------------------------------
Cash and cash equivalents at end of period 3,470,882 4,349,658
------------------------------------
See accompanying notes to condensed financial statements.
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</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 sole 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 nine months ended March 31, 1999, 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 March
31, 1998 information to conform with the March 31, 1999 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.
Excluded from the computation of diluted loss per share for the three months and
nine months ended March 31, 1998 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 three months and nine months ended March 31, 1999 are warrants and
options to acquire 1,237,508 shares of common stock with a weighted-average
exercise price of $3.99 because their effect would be antidilutive.
4
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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 have 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 that
would produce operating revenues sufficient to attain profitability. The
Company's process identifies electromagnetic anomalies that may be indicative of
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.
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 March 31,
1999, the Company incurred losses of $3,741,057 and losses are expected to
continue at least through the fourth quarter of the year ending June 30, 1999;
no assurances can be given that losses will not continue thereafter.
RESULTS OF OPERATIONS
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998.
- --------------------------------------------------------------------------
The Company had no revenues for the quarter ended March 31, 1999 compared
to revenues of $15,000 for the quarter ended March 31, 1998. The loss from
operations for the quarter ended March 31, 1999 was $311,980 compared to a loss
from operations of $241,035 for the quarter ended March 31, 1998. The loss from
operations in the quarter ended March 31, 1999 increased by $70,945 over the
comparable quarter ended March 31, 1998 primarily because of increased general
and administrative expenses of $229,017 compared to $172,672 incurred in the
quarter ended March 31, 1998. The operating loss for the quarter ended March 31,
1999 was offset somewhat by interest income in the amount of $40,879
representing interest earned from proceeds of the Company's public stock
offering which was completed in February of 1997. This resulted in a net loss of
$271,101 for the quarter ended March 31, 1999 compared to a net loss of $182,163
for the quarter ended March 31, 1998. Research and development expenses
increased slightly to $82,963 for the quarter ended March 31, 1999 compared to
$78,913 for the quarter ended March 31, 1998. General and administrative
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expenses increased by $56,345 for the quarter ended March 31, 1999 from the
quarter ended March 31, 1998 primarily because of increased salary expenses
associated with hiring a new President and additional personnel, and an
associated increase in travel expenses.
Nine Months Ended March 31, 1999 Compared to Nine Months Ended March 31, 1998.
- ------------------------------------------------------------------------------
In spite of a lack of revenues in the third quarter, revenues increased
significantly to $178,910 for the nine months ended March 31, 1999 compared to
$45,000 for the nine months ended March 31, 1998. Revenues in the nine month
period ended March 31, 1999 were derived from both commercial contracts and
demonstration projects whereas revenues for the nine months ended March 31, 1998
were derived from demonstration projects and/or research and development
contracts with two large multi-national oil companies. Total operating expenses
for the nine months ended March 31, 1999 were $863,950 compared to total
operating expenses of $721,059 for the nine months ended March 31, 1998, an
increase of $142,891 or 20%. Research and development expenses decreased
slightly to $229,740 for the nine months ended March 31, 1999 from $230,722 for
the nine months ended March 31, 1998, a decrease of $982 or less than one
percent. General and administrative expenses increased for the nine months ended
March 31, 1999 to $634,210 compared to $490,337 for the nine months ended March
31, 1998, primarily as a result of increased salary for additional personnel and
travel expenses.
Management believes that both revenues and expenses of the Company are
likely to continue to increase during the remainder of the fiscal year ending
June 30, 1999 compared to the fiscal year ended June 30, 1998 if it is able to
secure additional contracts with customers, of which there is no assurance. The
revenues earned by the Company to date have often included 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 and are likely to continue during the
year ending June 30, 1999 and for the foreseeable future. Management is also
working towards obtaining additional fee for service contracts that are expected
to be the major source of the Company's revenues. If such contracts are
obtained, management expects that 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 on a larger scale, additional
administrative support activities will increase together with related expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed work on its first commercial contracts during the
nine months ended March 31, 1999 and has emerged from development stage
activities. Net cash used in operating activities totaled $642,302 in the nine
months ended March 31, 1999 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 June 30, 1999; no assurances can be given that
operational activities will generate positive cash flows thereafter.
7
<PAGE>
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 March 31, 1999 were
$3,470,882. At March 31, 1999, the Company had working capital of $3,476,667 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 March 31, 1999 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.
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 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Year 2000 problem is pervasive and complex since virtually
every company's computer operation will be affected in some way. The Company's
computer programs which process its field data as well as operation and
financing transactions were designed and developed without considering the
8
<PAGE>
impact of the upcoming change in century. Nevertheless, as a result of the
Company's analysis of its computer programs and operations, the Company believes
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 its 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 remedied
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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any pending or threatened legal proceedings.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROFILE TECHNOLOGIES, INC.
(Registrant)
Date: May 13, 1999 /s/ G. L. Scott
--------------------------------------
G. L. SCOTT
Chief Executive Officer
/s/ Henry Gemino
---------------------------------------
HENRY GEMINO
Chief Financial Officer
10
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,470,882
<SECURITIES> 0
<RECEIVABLES> 30,934
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,553,618
<PP&E> 322,519
<DEPRECIATION> 192,605
<TOTAL-ASSETS> 3,881,927
<CURRENT-LIABILITIES> 56,951
<BONDS> 0
0
0
<COMMON> 4,275
<OTHER-SE> 3,820,701
<TOTAL-LIABILITY-AND-EQUITY> 3,824,976
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 311,980
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (271,101)
<INCOME-TAX> 0
<INCOME-CONTINUING> (271,101)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (271,101)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
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