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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2008
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 000-29196
PROFILE TECHNOLOGIES, INC.
--------------------------
(Name of Small Business Issuer in Its Charter)
Delaware 91-1418002
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Park Avenue, Suite 201 11030
Manhasset, New York -----
------------------------ (Zip Code)
(Address of principal executive offices)
(516) 365-1909
--------------
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001
par value
Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. |_|
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 |_|
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes|_| No |X|
i
The issuer's revenues for the fiscal year ended June 30, 2008 were $30,172.
The aggregate market value, based on the average bid and asked prices on
the OTC Bulletin Board on September 11, 2008, of the voting common stock, $0.001
par value per share, held by non-affiliates of the issuer as of September 11,
2008 was approximately $24,570,282.
There were 15,634,160 shares of common stock, $0.001 par value per share,
outstanding as of September 11, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
The information contained in Items 9, 10, 11, 12, and 14 of Part III of this
Form 10-KSB have been incorporated by reference to the issuer's Definitive Proxy
Statement on Form 14A for its Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission within 120 days after the close of the
fiscal year ended June 30, 2008.
Transitional Small Business Disclosure Format. Yes |_| No |X|.
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ii
Profile Technologies, Inc.
Form 10-KSB
Year Ended June 30, 2008
TABLE OF CONTENTS
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Description Page Number
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS...........................................1
ITEM 2. DESCRIPTION OF PROPERTY...........................................4
ITEM 3. LEGAL PROCEEDINGS.................................................4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS...............................................4
PART II
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ITEM 5. MARKET FOR COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES....................5
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION.................................................8
ITEM 7. FINANCIAL STATEMENTS.............................................13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................31
ITEM 8A(T). CONTROLS AND PROCEDURES..........................................31
ITEM 8B. OTHER INFORMATION................................................31
PART III
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,
CONTROL PERSONS AND CORPORATE GOVERNANCE;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT................31
ITEM 10. EXECUTIVE COMPENSATION...........................................32
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS...................32
ITEM 12. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE........................................32
ITEM 13. EXHIBITS.........................................................33
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................34
SIGNATURES....................................................................35
EXHIBIT INDEX.................................................................36
CERTIFICATIONS
iii
Preliminary Note Regarding Certain Risks
and Forward-Looking Statements
This Annual Report on Form 10-KSB 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.
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.
iv
PART I
Item 1. Description of Business.
Business Overview
Profile Technologies, Inc. (the "Company"), was incorporated in 1986 and
commenced operations in fiscal year 1988. The Company is in the business of
providing pipeline inspection services to locate corrosion and other anomalies
that require assessment to verify pipeline integrity. The Company has developed
a patented, non-destructive and non-invasive, high speed scanning process that
uses electromagnetic waves to remotely inspect buried and above ground, cased
and insulated pipelines for corrosion and other anomalies. The Company's
inspection services are available to owners and operators of natural gas and oil
pipelines, power plants and refineries, utilities, and other facilities which
have cased or insulated pipe. The Company is actively marketing to this sector.
In conjunction with providing inspection services, the Company continues
research and development of the application of its patented technologies to
inspect pipelines for internal corrosion and anomalies as well as for those
pipelines that are directly buried.
The Company completed its first commercial inspection contract to test
various insulated pipeline road-crossings at the North Slope of Alaska in 1998.
After additional expanded contracts in Alaska through 2003, the Company
identified additional markets in buried cased pipelines. Using the Company's
experience gained in Alaska and in response to regulatory changes that occurred
in 2003 and thereafter, the Company focused its technology development efforts
to address the cased pipeline inspection needs of pipeline operators throughout
North America. Since that time, significant enhancements have been incorporated
into the Company's hardware, software and testing methods. As a result, new
patents and intellectual property in pipeline inspection and other industries
have developed.
While the primary objective is to continue to provide inspection services
for cased and insulated pipelines using the Company's patented process and
equipment, development continues for similar services. Using similar principles
as the existing cased and insulated pipe inspection process, the Company
believes that pipeline internals and direct buried (i.e. non-cased) pipelines
can be inspected and monitored for corrosion and other anomalous conditions as
well. The Company seeks to commercially develop these additional processes as
secondary objectives with the intent to expand the potential market size and
financial standing by broadening the scope of inspection services offered.
Industry Overview
Refineries, chemical plants, utilities, and the oil and natural gas
industries own and operate millions of miles of pipeline, most of which are
exposed to environments that lead to corrosion of the pipeline. The ongoing
threat of corrosion requires these companies to continually inspect, monitor,
and maintain their pipeline infrastructure to ensure that the integrity of its
pipeline meets applicable federal, state, and industry standards established by
relevant regulatory bodies to protect the public, operating personnel, and the
environment.
The Pipeline and Hazardous Materials Safety Administration (PHMSA), an
agency of the U.S. Department of Transportation, is the federal safety authority
responsible for the oversight of the interstate natural gas and hazardous liquid
pipelines that make up a portion of the 2.3 million miles in the United States.
The remaining intrastate pipelines are also regulated by the state in which the
pipeline is located. Typically, all such pipelines are required to be inspected
periodically for corrosion and other defects. In addition, federal regulations
enacted in 2003 have created additional periodic inspection and monitoring
requirements for the external and internal surfaces of many hazardous liquid and
natural gas pipelines.
As regulations change and the nation's pipeline infrastructure ages,
pipeline companies are constantly searching for new and efficient inspection
technologies to assist them in fulfilling their regulatory obligations. With no
exception to the inspection requirements, the geometry and design of cased and
thermally insulated pipelines limit the available inspection options. The
Company feels its EMW inspection process for cased and thermally insulated
pipelines, marketed as the EMW-C(TM), provides certain advantages over competing
technologies, including greater inspection range, the ability to detect
anomalous conditions and features undetectable by other methods, and lower cost
long-term monitoring capabilities. Accordingly, the Company is, for the near
future, concentrating its marketing efforts on cased and thermally insulated
pipelines.
1
The Company's EMW-C(TM) Inspection Process
The EMW-C(TM) Inspection Process is a non-destructive corrosion inspection
method patented by the Company, for long range assessment of cased and insulated
pipelines. The technique uses electromagnetic waves to locate and identify
corrosion and other anomalous conditions at distances down the length of the
pipeline. This non-intrusive and non-destructive method can be performed without
disturbing the pipeline casing or removing the protective insulation. After the
initial inspection is performed, connectors may be left on the pipeline to allow
for repeat and periodic inspections or monitoring. In addition, the EMW-C(TM)
Inspection Process provides corrosion inspection over long lengths of the cased
or insulated pipeline section from a single location, as opposed to most other
inspection methods, which may only provide for spot point or localized
inspections.
Commercially available since November of 2007, the latest generation of the
inspection process, the EMW-C(TM), named for Electromagnetic Wave inspection of
Cased pipelines, incorporates enhancements in the process, hardware, and
software garnered from years of development and inspection experience. The
compact hardware can easily be transported to any job location and operated by a
crew of two trained technicians. The equipment is controlled wirelessly from a
laptop where all inspection data is collected and stored. The modification of
the equipment and its control has made for quicker inspections while improving
accuracy and efficiency. This portable system is designed to allow testing of
both underground and above-grade, cased and insulated pipelines with one test
set. The new rugged and environmentally protected equipment has been used at
several pipeline inspections and has proven to be a solid performer in
conditions otherwise unfavorable to electronics equipment.
Correlating pipeline corrosion information using the Company's technology
requires a combination of state-of-the-art instrumentation plus an understanding
of the physical phenomena that are being measured. Management believes that the
EMW measurement and analysis are on the leading edge of inspection technology.
The Company also believes that its technology has at least two significant
competitive advantages. First, it can inspect certain pipelines that are
inaccessible to other testing methods. Second, with respect to facilities that
are accessible to other inspection methods, the Company's technology requires
little excavation and the removal of only a small area of coating. Accordingly
the Company's technology will typically have a lower cost of site preparation
that results in a significant cost advantage.
While the Company has obtained some commercial contracts and prospects for
expanded commercial contracts in the future appear strong, there can be no
assurance that such acceptance will continue to grow or that competitors will
not develop newer and better technologies than the EMW-C(TM). There is no
assurance that the Company can secure enough inspection contracts to be
commercially successful.
Revenues and Customers
The Company derives revenue solely from the sale of the EMW-C(TM)
inspection technology service.
The Company released the latest generation of its cased insulated pipe
inspection service, the EMW-C(TM) in November of 2007. The Company is currently
marketing the EMW-C(TM) to pipeline operators while continuing ongoing efforts
to develop other similar technologies. Customers may include owners and
operators of pipelines including but not limited to refineries, chemical plants,
utilities, and the oil and natural gas industries.
Revenue for the year ended June 30, 2008 was $30,172.
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 and anomalous conditions where the pipelines are either inaccessible
to other inspection tools, or much more costly to inspect with tools other than
the Company's EMW 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 and oil
transmission systems (such as road, bridge and stream crossings and
concrete-encased pipes).
As described above, the Company has fabricated new pipe inspection hardware
for the inspection of cased and insulated pipelines and is actively seeking
industry acceptance and other financing sources in order to rigorously promote
the inspection process. In order to obtain additional revenue generating
contracts, the Company intends to emphasize the unique capabilities of its cased
2
and insulated pipeline testing method, the flexibility of the method's
application, and its cost effectiveness as compared to other methods. In fiscal
year 2009, the Company intends to continue its marketing efforts in the pipeline
inspection markets in North America, particularly in "high consequence areas" as
defined in the federal Department of Transportation's regulations. 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.
Patents, Intellectual Property and Licensing
The Company pursues a policy of generally obtaining patent protection both
in the United States and abroad for patentable subject matter in its proprietary
technology. As of June 30, 2008, the Company had 12 issued and pending U.S.
patents and 9 issued and pending foreign patents.
The Company's success depends in large part upon its ability to protect its
process and technology under United States and international patent laws and
other intellectual property laws. U.S. patents have a term of 17 years from date
of issuance or, for more recently filed patent applications, 20 years from the
filing of such applications, and patents in most foreign countries have a term
of 20 years from the proprietary filing date of the patent application.
The Company believes that it owns and has the right to use or license all
proprietary technology necessary to license and market its EMW process under
development. The Company is not aware of the issuance of any patents or the
filing of any patent applications which relate to processes or products which
utilize the Company's proprietary technology in a manner which could be similar
to or competitive with the Company's products or processes. The Company has no
knowledge that it is infringing on any existing patent such that it would be
prevented from marketing or licensing products or services currently being
developed by the Company.
The Company may decide for business reasons to retain a patentable
invention as a trade secret. In such event or if patent protection is not
available, the Company must rely upon trade secrets, internal knowledge and
continuing technological innovation to develop and maintain its competitive
position. The Company's employees and consultants have access to the Company's
proprietary information and have signed confidentiality agreements. However,
even inadvertent disclosure of such a trade secret without a promise of
confidentiality could destroy trade secret protection. There can be no assurance
that inadvertent disclosures might not occur. If the Company's proprietary
information is disclosed to competitors, it may have a material adverse effect
on the Company's business.
Competition
Although a number of inspection technologies have been developed to aid in
ascertaining the condition of piping throughout the pipeline corrosion control
industry, information needed to determine the integrity of these critical
systems is often difficult and costly to acquire. The Company has numerous
indirect competitors, but the Company believes that its inspection services have
significant competitive advantages over other services provided by competitors.
The Company's EMW inspection service is designed to help pipeline operators
quickly and less expensively screen cased, insulated, or hard to-access piping
for external corrosion. Although its technology does not provide pipeline and
plant operators with all the data they will require to manage and remediate
corrosion, when used as a "front-end" screening tool in combination with one or
more spot inspection tools, it can dramatically lower the cost of acquiring all
of the data necessary to manage corrosion risks to their piping systems. There
can be no assurances, however, that the Company's competitors will not develop
newer, more efficient and less costly technologies.
Research and Development Expenditures
During the last year, the Company has re-developed and improved the
hardware and software it uses to detect corrosion on cased and insulated pipe.
As a result of such re-development and improvement, the Company believes that
its technology is now ready to obtain broad acceptance in the U.S pipeline and
utility industry segments. However, additional funding and certifications must
be acquired to gain significant market share in the Company's target markets.
Research and development expenses for the years ended June 30, 2008 and
2007 were $420,674 and $458,911.
Employees and Consultants
As of June 30, 2008, the Company had six full-time employees.
The Company relies on the expertise of two consultant scientists to
facilitate the development and testing of the Company's hardware and software.
These scientists are also instrumental in compiling and interpreting the data
captured during the use of the hardware and software. The loss of the
3
specialized knowledge provided by the scientists could have an adverse effect on
the ability of the Company to successfully market its hardware and software.
During the years ended June 30, 2008 and 2007, the Company incurred cash fees
payable to the scientists of $299,799 and $266,968.
As partial compensation for services rendered, on November 16, 2007, the
Company granted the scientists stock options to purchase a total of 50,000
shares of common stock at an exercise price of $1.20 per share, expiring
November 15, 2012. The 50,000 stock options had a fair value at the date of
grant of $38,000, which is included in research and development expense in the
Company's Statements of Operations for the year ended June 30, 2008.
As partial compensation for services rendered, on November 13, 2006, the
Company granted the scientists stock options to purchase a total of 100,000
shares of common stock at an exercise price of $0.86 per share, expiring
November 12, 2016. The 100,000 stock options had a fair value at the date of
grant of $77,000, which is included in research and development expense in the
Company's Statements of Operations for the year ended June 30, 2007.
As partial compensation for services rendered, on July 13, 2006, the
Company granted one of the scientists a stock option to purchase 100,000 shares
of common stock at an exercise price of $1.05 per share, expiring July 12, 2011.
The 100,000 stock options had a fair value at the date of grant of $89,000,
which is included in research and development expenses in the Company's
Statements of Operations for the year ended June 30, 2007.
Total cash and equity compensation expense incurred for settlement of
services rendered by the scientists totaled $337,799 and $432,968 for the years
ended June 30, 2008 and 2007.
As of June 30, 2008, the Company owed the consultant scientists a total of
$84,761, which is included in accounts payable at June 30, 2008.
Research and Development Expenditures
During the last year, the Company has re-developed and improved the
hardware and software it uses to detect corrosion on cased and insulated pipe.
As a result of such re-development and improvement, the Company believes that
its technology is now ready to obtain broad acceptance in the U.S pipeline and
utility industry segments. However, additional funding and certifications must
be acquired to gain significant market share in the Company's target markets.
Research and development expenses for the years ended June 30, 2008 and
2007 were $420,674 and $458,911.
Item 2. Description of Property.
The Company's corporate office is located at 2 Park Avenue, Suite 201,
Manhasset, NY 11030. On February 8, 2008, the Company entered into an amendment
to their existing operating lease, extending the lease for a period of one year
commencing on March 1, 2008 and terminating on February 28, 2009. The annual
rent is $10,164.
On May 14, 2008, the Company entered into a one year operating lease
agreement with a non-affiliate to lease 918 square feet of office space, 2,576
square feet of warehouse space and 7,500 square feet of yard space in
Albuquerque, New Mexico. This facility is used for the research and development
of its pipeline inspection technology. The Company paid a refundable security
deposit of $2,000 and last month rent deposit of $2,500. Monthly rent is $2,500
plus monthly triple net costs of $350. The lease expires on May 30, 2009.
The Company does not own any real estate.
Item 3. Legal Proceedings.
The Company is not aware of any legal proceedings contemplated by any
governmental authority or any other party involving the Company or its
properties. As of the date of this report, no director, officer or affiliate is
a party adverse to the Company in any legal proceeding or has an adverse
interest to the Company in any legal proceedings. The Company is not aware of
any other legal proceedings pending or that have been threatened against the
Company or its properties.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended June 30, 2008.
4
PART II
Item 5. Market for Common Equity, Related Stockholder Matters, and Small
Business Issuer Purchases of Equity Securities.
Market Information
The Company's common stock traded on the NASDAQ Small Cap market from the
date it began to be publicly traded in February 1997 until August 10, 2001 under
the symbol PRTK. On August 13, 2001, the Company's common stock was delisted
from the NASDAQ Small Cap market and began trading on the Over the Counter
Bulletin Board (the "OTCBB") under the same symbol. The Company's common stock
continues to be traded on the OTCBB.
The following table sets forth the high and low bid prices for the
Company's common stock for each quarter within the past two fiscal years as
reported by the OTCBB. The quotations reflect inter-dealer prices, with retail
mark-up, mark-down or commissions, and may not represent actual transactions.
Range of
Bid Prices
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High Low
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Fiscal Year 2008
First Quarter $1.90 $1.05
Second Quarter $1.80 $1.01
Third Quarter $1.40 $0.90
Fourth Quarter $1.50 $0.90
Fiscal Year 2007
First Quarter $1.39 $0.60
Second Quarter $1.35 $0.66
Third Quarter $1.19 $0.93
Fourth Quarter $1.30 $0.86
As of June 30, 2008, the Company had approximately 1,070 holders of record
of the Company's common stock.
Dividends
The payment of dividends by the Company is within the discretion of its
Board of Directors and depends in part upon the Company's earnings, capital
requirements, debt covenants and financial condition. Since its inception, the
Company has not paid any dividends on its common stock and does not anticipate
paying such dividends in the foreseeable future. The Company intends to retain
earnings, if any, to finance its operations.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information regarding the common
stock that may be issued upon the exercise of options, warrants and other rights
that have been or may be granted to employees, directors or consultants under
all of the Company's existing equity compensation plans, as of June 30, 2008.
5
Number of
securities
remaining
available for
Number of future issuance
securities to be Weighted-average under equity
issued upon exercise price compensation
exercise of of outstanding plans (excluding
outstanding options, securities
options, warrants warrants and reflected in
Plan Category and rights rights column (a))
------------- ---------- ------ -----------
(a) (b) (c)
------------- ---------- ------ -----------
Equity compensation plans 1,370,000 $1.03 2,030,000
approved by security holders (1)
Equity compensation plans not 3,364,600(3) $1.03 N/A
approved by security holders(2)
Total 4,734,600 $1.03 2,030,000
----------
(1) Consists of grants under the Company's 1999 Stock Option Plan.
(2) Consists of grants under individual compensation arrangements approved
separately by the Board of Directors and are not part of any written or
formal plan under which the Company will be obligated to issue equity
compensation in the future.
(3) Includes non-qualified stock options granted to officers, directors, and
consultants to purchase 2,385,000 shares of common stock and warrants to
purchase 979,600 shares of common stock.
The stock options granted to officers, directors, and consultants were
granted with an exercise price at or greater than the fair value of the
Company's common stock on the date of grant as reported by the OTCBB.
Compensatory stock options granted outside of the 1999 Stock Option Plan
consists of the following: (a) 1,850,000 options at an exercise price of
$1.155, of which 1,600,000 expire on February 15, 2015 and 250,000 expire
on February 15, 2010, (b) 200,000 options at an exercise price of $1.12 per
share, expiring on December 12, 2015, (c) 150,000 options at an exercise
price of $1.21 per share, expiring on December 12, 2015, (d) 85,000 options
at an exercise price of $1.12, expiring on December 12, 2010, and (e)
100,000 options at $1.05, expiring on July 12, 2011.
Compensatory warrants consists of the following: (a) 439,600 warrants at an
exercise price of $0.60 per share, expiring on August 14, 2011, (b) 40,000
warrants at an exercise price of $0.70 per share, expiring on December 16,
2008, (c) 450,000 warrants at an exercise price of $0.86 per share,
expiring on November 12, 2006, and (d) 50,000 warrants at an exercise price
of $1.00 per share, expiring on April 10, 2012.
Recent Sales of Unregistered Securities
Convertible Debentures and Warrants
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
6
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 issued to each 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 are exercisable at any time prior to the 5th
anniversary date of the redemption of the Debenture.
The 2003 Offering was exempt from the registration under Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act"), and Rule 506 of
Regulation D, promulgated by the SEC. In the 2003 Offering, no general
solicitation was made by the Company or any person acting on behalf of the
Company, the Debentures and Warrants were sold subject to transfer restrictions,
and the certificates for the Debentures and Warrants contained an appropriate
legend stating that such securities have not been registered under the
Securities Act and may not be offered or sold absent registration or an
exemption therefrom.
During the year ended June 30, 2008, one investor exercised his conversion
right under the Debenture and converted $15,000 of principal pursuant to the
terms of the 2003 Offering. Accordingly, the Company issued 30,000 shares of
common stock in accordance with the conversion terms of the Debentures. In
addition, during the year ended June 30, 2008 one investor exercised his warrant
related to the Debenture and purchased 60,000 shares of common stock at $0.75
per share. The issuance of the common stock is exempt from registration pursuant
to Section 4(2) of the Securities Act and the stock certificate contained an
appropriate legend stating that such securities have not been registered under
the Securities Act and may not be offered or sold absent registration or an
exemption therefrom.
Common Stock
On June 21, 2007, the Company entered into a private placement offering
(the "2007 Offering") of 1,300,000 shares of common stock at $0.90 per share to
accredited investors. On October 4, 2007, the Board approved an increase in the
offering to 2,000,000 shares of common stock for a total offering price of
$1,800,000.
During the year ended June 30, 2008, the Company raised $1,296,501 under
the terms of the 2007 Offering. Accordingly, the Company issued 1,440,554 shares
of common stock. The issuance of the common stock is exempt from registration
pursuant to Section 4(2) of the Securities Act and the stock certificates
contained an appropriate legend stating that such securities have not been
registered under the Securities Act and may not be offered or sold absent
registration or an exemption therefrom.
Warrants
On December 8, 2007, a consultant exercised a warrant to purchase 10,000
shares of common stock at $0.55 per share. The issuance of the common stock is
exempt from registration pursuant to Section 4(2) of the Securities Act and the
stock certificates contained an appropriate legend stating that such securities
have not been registered under the Securities Act and may not be offered or sold
absent registration or an exemption therefrom.
Stock Options
Stock Option Grants
On November 13, 2007, the Board approved the issuance of stock options,
exercisable for a total of 550,000 shares of common stock pursuant to the 1999
Stock Option Plan to certain directors, officers, employees and four consultants
of the Company. The grant date of the stock options was November 16, 2007 and
they were fully vested upon grant. The stock options granted to directors,
officers, and employees are exercisable until November 15, 2017. The stock
options granted to the consultants are exercisable until November 15, 2012. The
exercise price of the stock options granted to affiliates owning or controlling
more than ten percent of the Company's common stock was $1.32. The exercise
price of the stock options granted to non-affiliates was $1.20. The common stock
underlying the stock option is exempt from registration pursuant to Section 4(2)
of the Securities Act and the stock option certificate contained an appropriate
legend stating that such securities have not been registered under the
Securities Act and may not be offered or sold absent registration or an
exemption therefrom.
On September 4, 2007, pursuant to an employment agreement, the Board
granted Robert C. Geib, the Company's Chief Operating Officer, a stock option to
purchase 50,000 shares of the Company's common stock at an exercise price of
$1.05 per share, under the Company's 1999 Stock Option Plan. In addition,
7
pursuant to the same employment agreement, on March 4, 2008, the Board granted
Mr. Geib an additional stock option to purchase 50,000 shares of common stock at
an exercise price of $1.13 per share. Each of the two option grants vest 25% on
the first anniversary of the grant dates, with the remainder vesting at 25% on
each of the three subsequent anniversaries of the grant dates until the options
are fully vested. The common stock underlying the stock options is exempt from
registration pursuant to Section 4(2) of the Securities Act and the stock option
certificate contained an appropriate legend stating that such securities have
not been registered under the Securities Act and may not be offered or sold
absent registration or an exemption therefrom.
On September 12, 2007, in recognition for being elected to the Board, the
Board granted Richard L. Palmer an option to purchase 15,000 shares of the
Company's common stock at an exercise price of $1.50 per share, under the
Company's 1999 Stock Option Plan. The stock option was fully vested upon grant
and expires on September 11, 2017.
Stock Option Exercises
On May 29, 2008, a consulting scientist exercised a stock option to
purchase a total of 50,000 shares of the Company's common stock at $0.55 per
share. The issuance of the common stock is exempt from registration pursuant to
Section 4(2) of the Securities Act and the stock certificates contained an
appropriate legend stating that such securities have not been registered under
the Securities Act and may not be offered or sold absent registration or an
exemption therefrom.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Plan of Operation
The Company's core business is based on the technologies that it has
developed and patented for inspection of pipelines using electromagnetic waves.
Born from these technologies, the Company has researched and developed
inspection methods that have become commercial or near commercial products and
services. The Company currently offers a service to inspect cased and thermally
insulated pipelines. This service is marketed by the Company as the EMW-C(TM).
The Company is also in the process of adapting its technology to inspect
pipeline internals for corrosion and other anomalous conditions and has filed
patents for this adaptation. Other applications including inspection of direct
buried pipelines and expansion to other non-pipeline industries are also in
consideration for development.
Capital will be expended to support operations until the Company can
generate sufficient cash flows from operations. In order to do so, the Company
must obtain additional revenue generating contracts for the use of its
commercially available EMW-C(TM) service. The Company has identified a
significant need for cased and insulated pipeline inspection services throughout
North America and abroad. The Company believes that its EMW technology possesses
unique capabilities, is flexible in its application and provides a cost
efficient solution to obtaining valuable information about the condition of the
pipeline that is otherwise difficult to obtain. The Company is working to
position itself as the preferred inspection method by working with pipeline
operators, associations, and regulatory agencies to provide them with an
understanding of the Company's EMW technology and its advantages. The Company
has, and will continue to provide demonstrations, visit with pipeline operators,
and provide presentations at industry conferences. Since the availability of the
EMW-C(TM) in November of 2007, this effort has already resulted in several field
demonstrations and revenue generating contracts and has likewise raised interest
for additional field inspections.
As revenue is generated, the Company will continue to manufacture its EMW
inspection equipment. The Company will also need to hire and train additional
technicians to provide inspection services as demand requires. The Company
expects that if revenue contracts are secured, working capital requirements will
increase. 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. In time, with increased sales, the
Company may consider its position as a service provider and alternatively sell
or lease its service to pipeline operators and/or inspection service providers
while maintaining the intellectual rights to the technology and equipment.
At times when resources and funds are available, the Company will continue
to further develop its secondary technologies with the intent to offer them
commercially. The internal pipeline inspection method is best suited as the next
potential product as patents have already been filed and the development closely
aligns with that of the existing cased and insulated pipeline inspection method.
The Company has already fielded inquires about this new method from potential
8
customers and expects the development time to be 12 to 24 months, building upon
the previous research already conducted. However, the Company does not expect to
proceed to full time development of this method until greater revenues are
achieved from the EMW-C(TM) or alternate funding and resources are made
available.
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. On August 15, 2008,
the Company closed a private offering of its common stock, raising gross
proceeds of $2,295,404 from the sale of 2,550,440 shares of common stock (see
Note 9, "2007 Private Placement Equity Offering"). However, management
recognizes that in order to meet the Company's capital requirements and
continues to operate, it may require additional financing, perhaps through
industry-partner investment or through joint ventures or other possible
arrangements within the next twelve months. The Company is evaluating
alternative sources of financing to improve its cash position. If the Company is
unable to raise additional capital or secure revenue contracts and generate
positive cash flow, it is unlikely that the Company will be able to continue as
a going concern.
Results of Operations
Revenue for the years ended June 30, 2008 and 2007 was $30,172 and $0.
Revenue for the year ended June 30, 2008 consists of pipeline inspections
performed for two customers. Prior to obtaining these revenue generating
contracts, the Company was engaged solely in the redevelopment and improvement
of its testing hardware and software.
Cost of revenue for the years ended June 30, 2008 and 2007 was $46,266 and
$0. Cost of revenue for the year ended June 30, 2008 includes travel expenses to
mobilize and demobilize field crews to and from the inspection site and employee
and consultant compensation expense to prepare for the job, inspect the
pipelines, and interpret and report the related data to the customer.
Research and development expense for the year ended June 30, 2008 was
$420,674 as compared to $458,911 for the year ended June 30, 2007. The decrease
of $38,237 is substantially the result of a decrease in the fair value of equity
compensation granted to consultants and employees during the year ended June 30,
2008 as compared to the year ended June 30, 2007. Included in research and
development expense for the year ended June 30, 2008 is $82,375 for the fair
value of 175,000 stock options (of which only 87,500 stock options are vested at
June 30, 2008). Included in research and development expense for the year ended
June 30, 2007 is $166,000 for the fair value of 200,000 stock options (all fully
vested). The decrease of $83,625 in research and development expense due to the
decrease in the fair value of equity compensation was offset by an increase of
$32,830 in research and development related consulting fees for the year ended
June 30, 2008 compared to 2007. The increase in consulting related fees during
the year ended June 30, 2008 was due to the Company's increased efforts to reach
commercial viability for its pipeline inspection technology.
Selling expense for the year ended June 30, 2008 was $92,199 as compared to
$0 for the year ended June 30, 2007. Selling expense is primarily comprised of
salary expense for employees who spend time meeting with prospective customers,
costs that are incurred by the Company to provide field demonstrations to
prospective customers, and costs incurred to attend conferences and trade shows.
General and administrative expenses for the year ended June 30, 2008 were
$1,209,567 as compared to $1,350,186 for the year ended June 30, 2007. The
decrease is primarily due to $346,500 recorded in the year ended June 30, 2007
for the Board approved issuance of warrants exercisable for a total of 450,000
shares of common stock to certain directors and officers of the Company. This
decrease was offset by increases in equity compensation expense of $161,350 and
professional fees of $80,598 for the year ended June 30, 2008 compared to 2007.
The increase in professional fees was primarily due to increased patent and
legal fees. Also contributing to the decrease in general and administrative
expenses for the year ended June 30, 2008 as compared to 2007 is a decrease in
rent expense of $14,586 due to the termination of the Ferndale, WA facility
lease in September 2007.
Loss from operations for the year ended June 30, 2008 was $1,738,534 as
compared to $1,809,097 for the year ended June 30, 2007. The decrease of
$70,563, or 4%, is primarily due to the decrease in research and development and
general and administrative expenses resulting from an overall decrease in equity
compensation issued to the Company's employees, directors and consultants during
the year ended June 30, 2008 as compared to the year ended June 30, 2007.
Offsetting these increases is an increase in selling expense due to the Company
providing demonstrations, visiting with pipeline operators, and providing
presentations at industry conferences in anticipation of obtaining revenue
generating contracts.
Interest expense for the year ended June 30, 2008 was $27,281 as compared
to $19,083 for the year ended June 30, 2007. The increase of $8,198 is
substantially the impact of investors exercising their conversion right in
9
accordance with the terms of the 2003 Offering. One investor exercised his
conversion right during the year ended June 30, 2008 as compared to three
investors during the year ended June 30, 2007. However, the unamortized discount
recognized as interest expense upon conversion was $14,802 during the year ended
June 30, 2008 as compared to $7,365 during the year ended June 30, 2007. The
accretion of the discount on the Debentures also contributed to the increase in
interest expense. Accreted interest on the Debentures was $4,681 for the year
ended June 30, 2008 as compared to $945 for the year ended June 30, 2007. These
increases were offset by a decrease in interest expense on the 5% interest
bearing Debentures as a result of the reduction in the outstanding principal
balance due to investors exercising their conversion right and converting their
Debentures to equity.
Interest income for the year ended June 30, 2008 was $14,673 as compared to
$3,596 for the year ended June 30, 2007. The increase of $11,077 is entirely
attributable to the interest earned on the $1,296,501 received under the terms
of the 2007 Offering during the year ended June 30, 2008. There were no funds
received under the terms of the 2007 Offering during the year ended June 30,
2007.
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 $16,406,198 through June 30, 2008, and had negative working capital of
$936,911 as of June 30, 2008. 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 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 June 30,
2008, the Company has accrued $1,001,942 related to the deferred payment of
salaries and professional fees of which $769,792 is included under deferred
wages and $232,150 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 (the "Conversion Right"). Pursuant to the
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. Of the total $1,001,942 deferred salaries
and professional fees, the amount subject to the Conversion Right is $111,500,
resulting in the potential issuance of 223,000 options under the terms mentioned
above. No conversions have occurred to date. At March 18, 2002, there was no
intrinsic value associated with these exchange rights. As such, no additional
compensation cost was recorded.
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 issued to each 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 are exercisable at any time prior to the 5th
anniversary date of the redemption of the Debenture.
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 was recorded as paid-in capital. The
intrinsic value of the Debentures results in a beneficial conversion feature,
10
recorded as a discount against the Debentures, which reduces the book value of
the convertible debt to not less than zero. The Company amortizes the discount
using the effective interest method over the five-year life of the Debentures.
During the quarter ended March 31, 2005, the Board of Directors terminated
the 2003 Offering. As of the closing date of the 2003 Offering, the Company had
raised $503,000 from the 2003 Offering.
During the year ended June 30, 2008, one investor exercised his conversion
right and converted his Debenture in the principal amount of $15,000, pursuant
to the terms of the 2003 Offering. Accordingly the investor was issued 30,000
shares of common stock. 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
$14,802 at the conversion date was recognized as interest expense during the
year ended June 30, 2008.
During the year ended June 30, 2007 three investors exercised their
conversion right and converted Debentures in the combined principal amount of
$50,000, pursuant to the terms of the 2003 Offering. Accordingly the investors
were issued a total of 100,000 shares of common stock. The carrying value of the
convertible debt was reclassified as equity upon conversion. Of the $50,000
converted during the year ended June 30, 2007, $7,500 was recorded as long-term
convertible debt on the balance sheet at the time of conversion. Accordingly,
upon conversion, the remaining unamortized discount of $7,365 related to the
long-term portion of the convertible debt at the conversion date was recognized
as interest expense and is included in interest expense for the year ended June
30, 2007. The discount related to the remaining principal amount of $42,500 was
previously expensed as interest expense during the quarter ended June 30, 2004
when the Company was deemed to be in default with respect to the interest
payment terms.
As of June 30, 2008, accrued interest on the Debentures was $1,371. The
Company recorded interest expense related to the accretion of the discount on
the Debentures and amortization of the convertible debt discount as a result of
the conversions discussed above of $19,483 and $8,310 for the years ended June
30, 2008 and 2007. As of June 30, 2008 the carrying value of the long-term
portion of the Debentures was $2,970, net of unamortized debt discount of
$32,030. As of June 30, 2008 the carrying value of the current portion of the
Debentures was $67,512, net of unamortized debt discount of $7,488.
2007 Private Placement Equity Offering
On June 21, 2007, the Company entered into a private placement offering
(the "2007 Offering") of 1,300,000 shares of common stock at $0.90 per share to
accredited investors. On October 4, 2007, the Board approved an increase in the
offering to 2,000,000 shares of common stock for a total offering price of
$1,800,000. On June 24, 2008, the Board determined that it was in the best
interests of the Company to extend the termination date of the 2007 Offering and
voted to extend the expiration date to August 15, 2008.
During the year ended June 30, 2008, the Company raised $1,296,501 under
the terms of the 2007 Offering. Accordingly, the Company issued 1,440,554 shares
of common stock.
The Company engaged a brokerage firm to help in the fund raising efforts of
the 2007 Offering. Pursuant to the terms of the agreement with the brokerage
firm, the Company pays the brokerage firm a ten percent cash commission on all
funds that the brokerage firm helps raise. Accordingly, during the year ended
June 30, 2008, the Company incurred cash fees payable to the brokerage firm of
$129,650. As of June 30, 2008, the Company was current with respect to the
amount owed the brokerage firm.
Other Commitments
The Company's other contractual obligations consist of commitments under an
operating lease and repayment of a loan payable to a stockholder.
As of June 30, 2008, the Company had an outstanding loan payable to a
stockholder with a principal amount of $7,500. The terms stockholder note is
described under "Note 6: Related Parties - Notes Payable to Stockholders."
As of June 30, 2008, the Company has future minimum lease payments of
approximately $31,776 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 obtain additional revenue
generating contracts. Management is currently directing the Company's activities
11
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.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
12
Item 7. Financial Statements
Profile Technologies, Inc.
Table of Contents
Page
Report of Independent Registered Public Accounting Firm 14
Balance Sheets as of June 30, 2008 and 2007 15
Statements of Operations for Years Ended June 30, 2008 and 2007 16
Statements of Stockholders' Deficit for Years Ended June 30, 2008 and 2007 17
Statements of Cash Flows for Years Ended June 30, 2008 and 2007 18
Notes to Financial Statements 19
13
--------------------------------------------------------------------------------
PETERSON SULLIVAN PLLC
--------------------------------------------------------------------------------
Certified Public Accountants Tel 206.382.7777 * Fax 206.382.7700
601 Union Street, Suite 2300 http://www.pscpa.com
Seattle, Washington 98101
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
The Board of Directors
Profile Technologies, Inc.
We have audited the accompanying balance sheets of Profile Technologies, Inc. as
of June 30, 2008 and 2007, and the related statements of operations,
stockholders' deficit, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company has determined that it
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Profile Technologies, Inc. as
of June 30, 2008 and 2007, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred cumulative losses and had
negative working capital of $936,911 at June 30, 2008. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plan regarding those matters is also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/ s / PETERSON SULLIVAN PLLC
Seattle, Washington
September 10, 2008
14
PROFILE TECHNOLOGIES, INC.
Balance Sheets
June 30, June 30,
2008 2007
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 294,113 $ 119,585
Accounts receivable 16,872 --
Prepaid expenses and other current assets 11,557 11,372
------------ ------------
Total current assets 322,542 130,957
Equipment, net of accumulated depreciation of $12,791 and $10,170 7,567 10,188
Other assets 7,303 3,504
------------ ------------
Total assets $ 337,412 $ 144,649
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 168,484 $ 157,225
Notes payable to stockholders 7,500 7,500
Current portion of convertible debt, net of unamortized discount of $7,488 and $0 67,512 65,000
Deferred wages 769,792 739,683
Accrued professional fees 232,150 210,150
Accrued interest 1,371 1,558
Other accrued expenses 12,644 12,644
------------ ------------
Total current liabilities 1,259,453 1,193,760
Long-term convertible debt, net of unamortized discount of $32,030 and $59,001 2,970 999
Stockholders' deficit:
Common stock, $0.001 par value: 35,000,000 shares authorized,
14,383,705 and 12,798,706 shares issued and outstanding 14,384 12,799
Common stock issuable; 5,555 and no shares 6 --
Additional paid-in capital 15,466,797 13,599,061
Accumulated deficit (16,406,198) (14,661,970)
------------ ------------
Total stockholders' deficit (925,011) (1,050,110)
Commitments, contingencies and subsequent events
------------ ------------
Total liabilities and stockholders' deficit $ 337,412 $ 144,649
============ ============
See accompanying notes fo financial statements.
15
PROFILE TECHNOLOGIES, INC.
Statements of Operations
Years Ended
June 30,
2008 2007
------------ ------------
Revenue $ 30,172 $ --
Cost of revenue (46,266) --
------------ ------------
Gross margin (16,094) --
Operating expenses:
Research and development 420,674 458,911
Selling 92,199 --
General and administrative 1,209,567 1,350,186
------------ ------------
Total operating expenses 1,722,440 1,809,097
------------ ------------
Loss from operations (1,738,534) (1,809,097)
Gain on sale of fixed assets 6,914 --
Interest expense (27,281) (19,083)
Interest income 14,673 3,596
------------ ------------
Net loss $ (1,744,228) $ (1,824,584)
============ ============
Basic and diluted net loss per share $ (0.12) $ (0.14)
Weighted average shares outstanding used to
calculate basic and diluted net loss per share 13,980,993 12,596,188
See accompanying notes fo financial statements.
16
PROFILE TECHNOLOGIES, INC.
Statements of Stockholders' Deficit
For the Years Ended June 30, 2008 and 2007
Common Stock Common Stock Issuable
--------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Balance at June 30, 2006 12,111,445 $ 12,111 345,000 $ 345
Issuance of common stock previously reported as "issuable" 345,000 345 (345,000) (345)
Issuance of common stock for services 100,000 100 -- --
Issuance of common stock warrants and options
for services to consultants -- -- -- --
Issuance of common stock warrants and options
for services to employees and board of directors -- -- -- --
Issuance of common stock upon conversion
of notes payable to stockholders to equity 71,428 72 -- --
Issuance of common stock upon conversion
of convertible debt to equity 100,000 100 -- --
Exercise of stock options 50,000 50 -- --
Exercise of warrants 20,833 21 -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at June 30, 2007 12,798,706 $ 12,799 -- $ --
Issuance of common stock warrants and options
for services to consultants -- -- -- --
Issuance of common stock warrants and options
for services to employees and board of directors -- -- -- --
Issuance of common stock related to the 2007 Offering 1,434,999 1,435 5,555 6
Common stock issuance costs related to the 2007 Offering -- -- -- --
Issuance of common stock upon conversion
of convertible debt to equity 30,000 30 -- --
Exercise of stock options 50,000 50 -- --
Exercise of warrants 70,000 70 -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at June 30, 2008 14,383,705 $ 14,384 5,555 $ 6
============ ============ ============ ============
Table continues below.
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Deficit
------------ ------------ ------------
Balance at June 30, 2006 $ 12,452,321 $(12,837,386) $ (372,609)
Issuance of common stock previously reported as "issuable" -- -- --
Issuance of common stock for services 104,900 -- 105,000
Issuance of common stock warrants and options
for services to consultants 195,450 -- 195,450
Issuance of common stock warrants and options
for services to employees and board of directors 685,300 -- 685,300
Issuance of common stock upon conversion
of notes payable to stockholders to equity 49,928 -- 50,000
Issuance of common stock upon conversion
of convertible debt to equity 49,900 -- 50,000
Exercise of stock options 40,450 -- 40,500
Exercise of warrants 20,812 -- 20,833
Net loss -- (1,824,584) (1,824,584)
------------ ------------ ------------
Balance at June 30, 2007 $ 13,599,061 $(14,661,970) $ (1,050,110)
Issuance of common stock warrants and options
for services to consultants 83,600 -- 83,600
Issuance of common stock warrants and options
for services to employees and board of directors 525,876 -- 525,876
Issuance of common stock related to the 2007 Offering 1,295,060 -- 1,296,501
Common stock issuance costs related to the 2007 Offering (129,650) -- (129,650)
Issuance of common stock upon conversion
of convertible debt to equity 14,970 -- 15,000
Exercise of stock options 27,450 -- 27,500
Exercise of warrants 50,430 -- 50,500
Net loss -- (1,744,228) (1,744,228)
------------ ------------ ------------
Balance at June 30, 2008 $ 15,466,797 $(16,406,198) $ (925,011)
============ ============ ============
See accompanying notes fo financial statements.
17
PROFILE TECHNOLOGIES, INC.
Statements of Cash Flows
Years Ended
June 30,
2008 2007
----------- -----------
Cash flows from operating activities:
Net loss $(1,744,228) $(1,824,584)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,621 5,442
Gain on sale of fixed assets (6,914) --
Accreted discount on convertible debt 4,681 945
Amortization of convertible debt discount included in interest expense 14,802 7,365
Amortization of debt issuance costs 160 520
Equity issued for services to consultants 83,600 300,450
Equity issued for services to employees and board of directors 525,876 685,300
Changes in operating assets and liabilities:
Accounts receivable (16,872) --
Prepaid expenses and other current assets (185) 1,350
Other assets (3,959) (1,634)
Accounts payable 11,259 (14,828)
Deferred wages 30,109 28,082
Accrued professional fees 22,000 18,000
Accrued interest (187) (624)
----------- -----------
Net cash used in operating activities (1,077,237) (794,216)
Cash flows from investing activities:
Proceeds from sale of fixed assets 6,914 --
----------- -----------
Net cash provided by investing activities 6,914 --
Cash flows from financing activities:
Common stock issuance costs (129,650) --
Proceeds from issuance of common stock 1,296,501 --
Proceeds from exercise of stock options and warrants 78,000 61,333
----------- -----------
Net cash provided by financing activities 1,244,851 61,333
----------- -----------
Increase (decrease) in cash 174,528 (732,883)
Cash at beginning of period 119,585 852,468
----------- -----------
Cash at end of period $ 294,113 $ 119,585
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 7,785 $ 10,709
Convertible debt and related accrued interest converted into 30,000 and 100,000 shares
of common stock during the years ended June 30, 2008 and 2007 $ 15,000 $ 50,000
Notes payable to stockholders converted into 71,428 shares of common stock
during the year ended June 30, 2007 $ -- $ 50,000
See accompanying notes fo financial statements.
18
Note 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
providing pipeline inspection services to locate corrosion and other anomalies
that require assessment to verify pipeline integrity. The Company has developed
a patented, non-destructive and non-invasive, high speed scanning process that
uses electromagnetic waves to remotely inspect buried and aboveground, cased and
insulated pipelines for corrosion and other anomalies. The Company's inspection
services are available to owners and operators of natural gas and oil pipelines,
power plants and refineries, utilities, and other facilities which have cased or
insulated pipe. The Company is actively marketing to this sector. In conjunction
with providing inspection services, the Company continues research and
development of the application of its patented technologies to inspect pipelines
for internal corrosion and anomalies as well as for those pipelines that are
directly buried.
Note 2: Liquidity
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company incurred cumulative losses
of $16,406,198 through June 30, 2008, and had negative working capital of
$936,911 as of June 30, 2008. 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 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.
Note 3: Summary of Significant Accounting Policies
Cash and cash equivalents
Cash and cash equivalents includes highly liquid investments with original
maturities of three months or less. On occasion, the Company has amounts
deposited with financial institutions in excess of federally insured limits.
Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate
made for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Management determines the allowance for doubtful accounts by
regularly evaluating individual customer receivables and considering a
customer's financial condition and credit history and economic conditions. To
date, the Company has not deemed it necessary to record an allowance for
doubtful accounts.
Concentration of Credit Risk and Fair Value of Financial Instruments
The Company extends credit to customers based on an evaluation of their
financial condition. The Company does not require any collateral.
Revenue for the year ended June 30, 2008 consisted of pipeline inspections
performed for two customers. The Company cannot be assured that additional
revenue generating contracts will be secured in the future.
The Company has the following financial instruments: cash, accounts
payable, notes payable to stockholders, and convertible debt. The carrying value
of these instruments, other than the convertible debt, approximates fair value
based on their liquidity. The fair value of the convertible debt was determined
as the excess of the proceeds over the fair value of the warrants.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Deferred Financing Fees
The Company records costs incurred related to debt financings as deferred
financing fees and amortizes, on a straight-line basis, the costs incurred over
the life of the related debt. The amortization is recognized as interest in the
financial statements. Upon conversion into equity or extinguishment of the
related debt, the Company recognizes any unamortized portion of the deferred
financing fees as interest expense.
19
Deferred Contract Costs
The Company defers costs that are incurred related to future contracts only
if the costs can be directly associated with a specific anticipated contract and
if their recoverability from that contract is probable. The Company evaluates
evidence of recoverability by reviewing signed contracts, written communication,
approved proposals and historical customer relationships in determining the
probability of obtaining a revenue generating contract. If there is uncertainty
surrounding the attainment of a contract, all expenses incurred related to the
contract are expensed as incurred. Upon execution of an anticipated contract,
deferred contract costs are expensed as cost of revenue using the percentage of
completion method of accounting. See "Contract Revenue Recognition" below.
Selling Expenses
Selling expense is primarily comprised of salary expense for employees who
spend time meeting with prospective customers, costs that are incurred by the
Company to provide field demonstrations to prospective customers, and costs
incurred to attend conferences and trade shows.
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 revenue includes contract costs incurred to date as well as any
idle time incurred by personnel scheduled to work on customer contracts.
The Company records revenue from claims and change orders upon customer
approval of revisions to the contract. 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. During the years
ended June 30, 2008 and 2007, the Company incurred $420,674 and $458,911 on
research and development activities.
Equipment
Equipment is stated at cost and is depreciated using the straight-line
method over estimated useful lives of three to seven years. Contract related
assets are used for inspecting pipelines for corrosion. Contract related assets
are depreciated based on the number of pipelines that the Company anticipates
inspecting over the estimated useful life of the asset, not to exceed three
years.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews long-lived assets, such as equipment and intangibles,
for impairment at least annually or 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
warrant and option lives, expected volatility, and risk free interest rates.
20
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Fnancial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes
("SFAS 109") as clarified by FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"). Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to the differences
between the tax bases of assets and liabilities and their carrying amount for
financial reporting purposes, as measured by the enacted tax rates which will be
in effect when these differences are expected to reverse. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. In assessing the realizability of
deferred income tax assets, the Company considers whether it is "more likely
than not," according to the criteria of SFAS 109, that some portion or all of
the deferred income tax assets will be realized. The ultimate realization of
deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. FIN 48 requires that the Company recognize the financial statement
benefit of a tax position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit. For tax
positions meeting the more likely than not threshold, the amount recognized in
the financial statements is the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the relevant tax
authority.
Patents, Proprietary Technology, and Other Intellectual Property
The Company pursues a policy of generally obtaining patent protection both
in the United States of America and abroad for patentable subject matter in its
proprietary technology. The Company's success depends in a large part upon its
ability to protect its products and technology under United States of America
and international patent laws and other intellectual property laws. U.S. patents
have a term of 17 years from date of issuance or, for more recently filed patent
applications, 20 years from the filing of such applications, and patents in most
foreign countries have a term of 20 years from the proprietary filing date of
the patent application.
The Company believes that it owns and has the right to use or license all
proprietary technology necessary to license and market its products under
development. The Company is not aware of the issuance of any patents or the
filing of any patent applications, which relate to processes or products which
utilize the Company's proprietary technology in a manner which could be similar
to or competitive with the Company's products or processes. The Company has no
knowledge that it is infringing on any existing patent such that it would be
prevented from marketing or licensing products or services currently being
developed by the Company.
Vendor Concentration
Consultant Scientist Fees
The Company relies on the expertise of two consultant scientists to
facilitate the development and testing of the Company's hardware and software.
These scientists are also instrumental in compiling and interpreting the data
captured during the use of the hardware and software. The loss of the
specialized knowledge provided by the scientists could have an adverse effect on
the ability of the Company to successfully market its hardware and software.
During the years ended June 30, 2008 and 2007, the Company incurred cash fees
payable to the scientists of $299,799 and $266,968.
As partial compensation for services rendered, on November 16, 2007, the
Company granted the scientists stock options to purchase a total of 50,000
shares of common stock at an exercise price of $1.20 per share, expiring
November 15, 2012. The 50,000 stock options had a fair value at the date of
grant of $38,000, which is included in research and development expense in the
Company's Statements of Operations for the year ended June 30, 2008.
As partial compensation for services rendered, on November 13, 2006, the
Company granted the scientists stock options to purchase a total of 100,000
shares of common stock at an exercise price of $0.86 per share, expiring
November 12, 2016. The 100,000 stock options had a fair value at the date of
grant of $77,000, which is included in research and development expense in the
Company's Statements of Operations for the year ended June 30, 2007.
As partial compensation for services rendered, on July 13, 2006, the
Company granted one of the scientists a stock option to purchase 100,000 shares
of common stock at an exercise price of $1.05 per share, expiring July 12, 2011.
The 100,000 stock options had a fair value at the date of grant of $89,000,
which is included in research and development expenses in the Company's
Statements of Operations for the year ended June 30, 2007.
Total cash and equity compensation expense incurred for settlement of
services rendered by the scientists totaled $337,799 and $432,968 for the years
ended June 30, 2008 and 2007.
As of June 30, 2008, the Company owed the consultant scientists a total of
$84,761, which is included in accounts payable at June 30, 2008.
21
Segment Reporting
The Company has one operating segment. Expenses incurred to date are
reported according to their expense category.
Comprehensive Income (Loss)
Comprehensive income (loss) is equal to net income (loss) for the years
ended June 30, 2008 and 2007.
Recently Issued Accounting Standards Not Yet Adopted
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements but does not require any new fair
value measurements. FASB Staff Position No. SFAS 157-2 was issued in February
2008. SFAS 157-2 delayed the application of SFAS 157 for non-financial assets
and non-financial liabilities, except items that are recognized or disclosed at
fair value in the financial statements on a recurring basis, until fiscal years
beginning after November 15, 2008. The Company does not expect the application
of SFAS No. 157 to have a material effect on the Statements of Operations and
Balance Sheet.
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities ("SFAS No. 159"). SFAS No.
159 permits an instrument by instrument election to account for selected
financial assets and liabilities at fair value. This election is irrevocable.
SFAS No. 159 provides an opportunity to mitigate volatility in reported earnings
that is caused by measuring hedged assets and liabilities that were previously
required to use a different accounting method than the related hedging contracts
when the complex hedge accounting provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, are not met. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact SFAS No. 159 will have on the Statements of
Operations and Balance Sheet.
Note 4: Stock Based Compensation, Stock Options and Warrants
On January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123R Share-Based Payment ("SFAS 123R"). Prior to January
1, 2006, the Company accounted for stock-based awards under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), and related Interpretations, as permitted by SFAS 123. In
accordance with APB 25, no compensation expense was required to be recognized
for stock options granted that had an exercise price equal to or greater than
the fair market value of the underlying common stock on the date of grant.
The Company adopted SFAS 123R using the modified-prospective application
method, which requires measurement of compensation cost for all stock-based
awards at fair value on the date of grant and recognition of compensation over
the requisite service period. The Company grants stock options that are either
fully vested upon grant or have a four-year vesting period (defined by SFAS 123R
as the requisite service period), and no performance or service conditions,
other than continued employment. Stock compensation cost related to options that
are fully vested upon grant is recognized immediately. Stock compensation cost
related to options that have a vesting period is amortized ratably over the
requisite service period.
The fair value of stock options is based on the price of a share of the
Company's common stock on the date of grant. In determining fair value of stock
options, the Company uses the Black-Scholes option pricing model that employs
the following key weighted average assumptions:
Year Ended
June 30,
-----------------------
2008 2007
---- ----
Risk-free interest rate 3.53% 4.67%
Expected Volatility 145.50% 172.81%
Expected dividend yield 0% 0%
Expected life 4.5 years 4.6 years
Weighted average Black-Scholes value of options granted $1.03 $0.81
The risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time of grant for a bond with a similar term. The Company does not
anticipate declaring dividends in the foreseeable future. Volatility is
calculated based on the historical weekly closing stock prices for the same
period as the expected life of the option. As permitted by SAB 107, the Company
22
uses the "simplified" method for determining the expected term of its "plain
vanilla" stock options. SFAS 123R also requires that the Company recognize
compensation expense for only the portion of stock options that are expected to
vest. Therefore, the Company applies an estimated forfeiture rate that is
derived from historical employee termination data and adjusted for expected
future employee turnover rates. To date, the Company has not experienced any
forfeitures. If the actual number of forfeitures differs from those estimated by
the Company, additional adjustments to compensation expense may be required in
future periods. The Company's stock price volatility, option lives and expected
forfeiture rates involve management's best estimates at the time of such
determination, all of which impact the fair value of the option calculated under
the Black-Scholes methodology and, ultimately, the expense that will be
recognized over the life of the option.
The following table sets forth the share-based compensation cost resulting
from stock option grants that was recorded in the Company's Statements of
Operations for the years ended June 30, 2008 and 2007:
Year Ended
June 30,
-------------------
2008 2007
-------- --------
General and administrative $527,100 $365,750
Research and development 82,376 166,000
-------- --------
Total $609,476 $531,750
======== ========
1999 Stock Option Plan
During 1999, the Company adopted a stock option plan (the "1999 Plan"). The
1999 Plan provides for both incentive and nonqualified stock options to be
granted to employees, officers, directors, and consultants. The 1999 Plan
originally provided for the granting of options to purchase a maximum of 500,000
shares of common stock with expiration dates of a maximum of five years from the
date of grant. In November 2006, the Board of Directors amended, and the
Company's stockholders approved, an increase in the maximum number of shares of
common stock available for grant to 3,500,000 and an increase in the period of
time for which stock options may be exercisable to ten years from the date of
grant.
Since the inception of the 1999 Plan, and prior to the amendment approved
in November 2006, the Company made various stock option grants that had
expiration dates exceeding five years from the date of grant. These stock option
grants were deemed to be granted outside of the 1999 Plan.
A summary of the Company's stock option activity for the years ended June
30, 2008 and 2007 and related information follows:
Weighted
Weighted Average
Number Average Remaining Aggregate
of Exercise Contractual Intrinsic
Options (1) Price Term Value
---------- --------- ----------- ---------
Outstanding at June 30, 2006 2,700,000 $ 1.18
Grants 675,000 0.91
Exercises (50,000) 0.81
Cancellations (30,000) 0.55
Expirations (115,000) 1.05
----------
Outstanding at June 30, 2007 3,180,000 $ 1.14
Grants 665,000 1.23
Exercises (50,000) 0.55
Expirations (40,000) 6.50
----------
Outstanding at June 30, 2008 3,755,000 $ 1.11 6.45 years $1,277,450
==========
Exercisable at June 30, 2008 3,655,000 $ 1.11 6.50 years $1,257,450
==========
Available for grant at June 30, 2008 (2) 2,030,000
==========
23
(1) Consists of stock options outstanding under the 1999 Plan and stock options
outstanding that were granted outside of the 1999 Plan.
(2) Shares available for future stock option grants to employees, officers,
directors and consultants of the Company under the 1999 Plan.
The aggregate intrinsic value of the table above represents the total
pretax intrinsic value for all "in-the-money" options (i.e., the difference
between the Company's closing stock price on the last trading day of its fourth
quarter of 2008 and the exercise price, multiplied by the number of shares) that
would have been received by the option holders had all option holders exercised
their options on June 30, 2008. This amount changes based on the fair market
value of the Company's stock.
The aggregate intrinsic value of stock options exercised during the years
ended June 30, 2008 and 2007 was $25,000 and $14,500.
As of June 30, 2008, the Company had approximately $72,000 of total
unrecognized compensation cost related to unvested stock options, which is
expected to be recognized over a weighted average period of 3.27 years.
The following table summarizes information about stock options outstanding
at June 30, 2008:
Options outstanding Options exercisable
------------------------------------ -------------------------------------
Weighted Weighted
average Weighted average Weighted
Number of remaining average Number of remaining average
options contractual exercise options contractual exercise
Exercise prices outstanding life (years) price exercisable life (years) price
--------------- ----------- ------------ -------- ----------- ------------ --------
$ 0.50 20,000 0.87 $ 0.50 20,000 0.87 $ 0.50
0.70 110,000 0.46 0.70 110,000 0.46 0.70
0.86 435,000 8.38 0.86 435,000 8.38 0.86
0.95 140,000 8.38 0.95 140,000 8.38 0.95
1.05 150,000 3.42 1.05 100,000 3.03 1.05
1.12 285,000 5.96 1.12 285,000 5.96 1.12
1.13 50,000 4.68 1.13 -- -- --
1.16 1,850,000 5.96 1.16 1,850,000 5.96 1.16
1.20 350,000 7.81 1.20 350,000 7.81 1.20
1.21 150,000 7.45 1.21 150,000 7.45 1.21
1.32 200,000 9.38 1.32 200,000 9.38 1.32
1.50 15,000 9.21 1.50 15,000 9.21 1.50
----------- ------------
$ 0.50 - 1.50 3,755,000 6.45 $ 1.11 3,655,000 6.50 $ 1.11
=========== ============
Stock Options
Stock Option Grants
On November 13, 2007, the Board approved the issuance of stock options,
exercisable for a total of 550,000 shares of common stock pursuant to the 1999
Stock Option Plan to certain directors, officers, employees and four consultants
of the Company. The grant date of the stock options was November 16, 2007 and
they were fully vested upon grant. The stock options granted to directors,
officers, and employees are exercisable until November 15, 2017. The stock
options granted to the consultants are exercisable until November 15, 2012. The
exercise price of the stock options granted to affiliates owning or controlling
more than ten percent of the Company's common stock was $1.32. The exercise
price of the stock options granted to non-affiliates was $1.20. On November 16,
2007, the date of grant, the Company recognized $65,750 as research and
development expense related to the fair value of 75,000 of the stock options and
$506,250 as general and administrative expense related to the fair value of
475,000 of the stock options. The fair value of the stock option grants that
expire on November 15, 2012 was estimated using the Black-Scholes option pricing
model with the following weighted average assumptions: expected volatility of
111%, risk-free interest rate of 3.30%, expected lives of 2.5 years, and a 0%
dividend yield. The fair value of the stock option grants that expire on
November 15, 2017 was estimated using the Black-Scholes option pricing model
with the following weighted average assumptions: expected volatility of 156%,
risk-free interest rate of 3.68%, expected lives of five years, and a 0%
dividend yield.
On September 4, 2007, pursuant to an employment agreement, the Board
granted Robert C. Geib, the Company's Chief Operating Officer, a stock option to
purchase 50,000 shares of the Company's common stock at an exercise price of
$1.05 per share, under the Company's 1999 Stock Option Plan. In addition,
24
pursuant to the same employment agreement, on March 4, 2008, the Board granted
Mr. Geib an additional stock option to purchase 50,000 shares of common stock at
an exercise price of $1.13 per share. Each of the two option grants vest 25% on
the first anniversary of the grant dates, with the remainder vesting at 25% on
each of the three subsequent anniversaries of the grant dates until the options
are fully vested. The fair value of the option grant on March 4, 2008 was
$45,000 at the time of grant. The fair value was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected volatility of 129%, risk-free interest rate of 1.86%,
expected life of 3.75 years, and a 0% dividend yield. The fair value of the
option grant on September 4, 2007 was $44,000 at the time of grant. The fair
value was estimated using the Black-Scholes option pricing model with the
following weighted average assumptions: expected volatility of 140%, risk-free
interest rate of 4.16%, expected life of 3.75 years, and a 0% dividend yield.
The Company recognized amortization expense of $16,626, during the year ended
June 30, 2008, as research and development expense related to these stock option
grants.
On September 12, 2007, in recognition for being elected to the Board, the
Board granted Richard L. Palmer an option to purchase 15,000 shares of the
Company's common stock at an exercise price of $1.50 per share, under the
Company's 1999 Stock Option Plan. The stock option was fully vested upon grant
and expires on September 11, 2017. The Company recognized $20,850, at the time
of grant, as general and administrative expense for the fair value of the option
grant. The fair value of the option grant was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
volatility of 155%, risk-free interest rate of 4.11%, expected life of five
years, and a 0% dividend yield.
On November 13, 2006, the Board approved the issuance of stock options
exercisable for a total of 575,000 shares of common stock pursuant to the 1999
Plan to certain directors, officers, employees and four consultants of the
Company. The stock options were fully vested upon grant and are exercisable
until November 12, 2016. The exercise price of the stock options granted
affiliates owning or controlling more than ten percent of the Company's common
stock was $0.95. The exercise price of the stock options granted to
non-affiliates was $0.86. On November 13, 2006, the date of grant, the Company
recognized $77,000 as research and development expense related to the fair value
of 100,000 of the stock options and $365,750 as general and administrative
expense related to the fair value of 475,000 of the stock options. The fair
value of the stock option grants were estimated using the Black-Scholes option
pricing model with the following weighted average assumptions: expected
volatility of 142%, risk-free interest rate of 4.60%, expected lives of five
years, and a 0% dividend yield.
On July 13, 2006, the Board approved an option grant to a consultant to
purchase 100,000 shares of the Company's common stock at an exercise price of
$1.05 per share. The option was granted in consideration for consulting services
and was not granted pursuant to the 1999 Plan. The option was fully vested upon
grant and is exercisable until July 13, 2011. The Company recognized $89,000, at
the time of grant, as research and development expense for the fair value of the
option grant. The fair value of the option grant was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected volatility of 160%, risk-free interest rate of 5.04%,
expected life of five years, and a 0% dividend yield.
The weighted average grant date fair value per share of the stock option
grants made during the years ended June 30, 2008 and 2007 were $1.03 and $0.79.
Stock Option Exercises
On May 29, 2008, a consulting scientist exercised a stock option to
purchase a total of 50,000 shares of the Company's common stock at $0.55 per
share.
On October 18, 2006, a non-employee Board member exercised stock options to
purchase a total of 50,000 shares of the Company's common stock. The following
is a summary of the stock options exercised on October 18, 2006 by the
non-employee Board member:
Number of Shares of Exercise Price of Stock
Common Stock Acquired Option
--------------------- -----------------------
Stock Option 20,000 $1.05
Stock Option 10,000 $0.55
Stock Option 20,000 $0.70
Cash received from stock options exercised during the years ended June 30,
2008 and 2007 was $27,500 and $40,500.
25
Warrants
The Company has granted warrants to compensate key employees, consultants,
and board members for past and future services and as incentives during
placements of stock and convertible debt.
A summary of warrant-related activity follows:
Number of Weighted
warrants average
outstanding exercise price
----------- --------------
Outstanding at June 30, 2006 9,943,418 $ 0.97
Grants 571,428 0.90
Expirations (1,181,557) 1.02
Cancellations (425,000) 1.44
Exercises (20,833) 1.00
-----------
Outstanding at June 30, 2007 8,887,456 $ 0.94
Expirations (666,428) 3.24
Exercises (70,000) 0.72
-----------
Outstanding at June 30, 2008 8,151,028 $ 0.75
===========
The following table summarizes information about warrants outstanding, all
of which are exercisable at June 30, 2008:
Weighted
average
Number of remaining Weighted
Exercise warrants contractual life average
prices outstanding (years) exercise price
------ ----------- ------- --------------
$ 0.60 439,600 3.12 $ 0.60
0.70 40,000 0.46 0.70
0.75 7,100,000 2.91 0.75
0.86 450,000 8.38 0.86
1.00 50,000 3.78 1.00
1.05 71,428 3.86 1.05
-----------
$0.60-1.05 8,151,028 3.22 $ 0.75
===========
In May 2007, the two stockholders converted their respective Stockholder
Loans into a total 71,428 shares of common stock and received warrants to
purchase a total of 71,428 shares of common stock at $1.05, expiring in May
2012. See Note 6, "Related Parties - Notes Payable to Stockholders."
On November 13, 2006, the Board approved the issuance of warrants
exercisable for a total of 450,000 shares of common stock to certain directors
and officers of the Company. The warrants are fully vested upon grant and are
exercisable until November 12, 2016. The exercise price of the warrants was
$0.86, which was the closing bid price of the Company's common stock as quoted
on the Over the Counter Bulletin Board on the grant date, November 13, 2006.
During the three months ended December 31, 2006, the Company recognized $346,500
as general and administrative expense related to the fair value of the warrants.
The fair value of the warrant grants was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
volatility of 142%, risk-free interest rate of 4.60%, expected lives of five
years, and a 0% dividend yield.
On April 11, 2007, the Company entered into a three-year consulting
agreement ("Consulting Agreement") with R.F. Lafferty & Co., Inc. ("Lafferty")
to provide consulting services and assist in obtaining both short and long-term
26
financing. As compensation, upon execution of the Consulting Agreement, the
Company issued to Lafferty 100,000 shares of common stock with a fair market
value of $105,000 on the date of grant and a warrant to purchase 50,000 shares
of common stock at an exercise price of $1.00 per share. The warrant expires on
April 10, 2012. On the date of grant, the Company recognized $2,500 as general
and administrative expense related to the fair value of the warrants. The fair
value of the warrant grants were estimated using the Black-Scholes option
pricing model with the following weighted average assumptions: expected
volatility of 121%, risk-free interest rate of 4.66%, expected life of three
years, and a 0% dividend yield.
The weighted average fair value per share of the warrant grants made during
the year ended June 30, 2007 was $0.70.
Cash received from warrants exercised during the year ended June 30, 2008
and 2007 was $50,500 and $20,833.
Note 5: Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the
weighted average number of common shares outstanding during the period. Diluted
net 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 stockholders in
each of the periods presented, basic and diluted net loss per share are the
same.
Excluded from the computation of diluted net loss per share for the year
ended June 30, 2008, because their effect would be antidilutive, are stock
options and warrants to acquire 11,906,028 shares of common stock with a
weighted-average exercise price of $0.86 per share. Also excluded from the
computation of diluted net loss per share for the year ended June 30, 2008 are
220,000 shares of common stock that may be issued if investors exercise their
conversion right under the Debentures related to the 2003 Offering as discussed
in Note 7 "Convertible Debt" because their effect would be antidilutive.
Excluded from the computation of diluted net loss per share for the year
ended June 30, 2007, because their effect would be antidilutive, are stock
options and warrants to acquire 12,067,456 shares of common stock with a
weighted-average exercise price of $0.99 per share. Also excluded from the
computation of diluted net loss per share for the year ended June 30, 2007 are
250,000 shares of common stock that may be issued if investors exercise their
conversion right under the Debentures related to the 2003 Offering as discussed
in Note 7 "Convertible Debt" because their effect would be antidilutive.
For the years ended June 30, 2008 and 2007, additional potential dilutive
securities that were excluded from the diluted net loss per share computation
are the exchange rights discussed in Note 8 "Deferred Wages and Accrued
Professional Fees" 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 June 30, 2008 and
2007.
For purposes of earnings per share computations, shares of common stock
that are issuable at the end of a reporting period are included as outstanding.
Note 6: Related Parties
Notes Payable to 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.
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 determined
it had sufficient working capital to repay the principal balances of the
Stockholder Loans. The Stockholder Loans were convertible into 57,142 and 14,286
equity units, respectively, at any time prior to re-payment. Each equity unit
was 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. In May 2007, the two stockholders converted their respective
Stockholder Loans into a total 71,428 shares of common stock and received
warrants to purchase a total of 71,428 shares of common stock at $1.05, expiring
in May 2012.
Royalty Arrangement
In September, 1988, at the time Gale D. Burnett, a beneficial stockholder
of more than 10% of the Company's common stock, first transferred certain
technology, know-how and patent rights to the Company, a royalty interest of 4%
of all pre-tax profits derived from the technology and know-how transferred was
granted to Northwood Enterprises, Inc., a family-owned company controlled by Mr.
Burnett. Northwoods Enterprises subsequently assigned such royalty interest back
27
to Mr. Burnett. On April 8, 1996, Mr. Burnett assigned 2% of this royalty
interest to certain stockholders of the Company, 1 1/4% of which was assigned to
Henry Gemino, currently the Chief Executive Officer and Chief Financial Officer,
and a director of the Company. This royalty arrangement also applies to all
future patent rights and technology developed by Mr. Burnett and assigned to the
Company. To date, no royalty payments have been made or earned under the above
described arrangement.
Note 7: 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 issued to each 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 are exercisable at any time prior to the 5th
anniversary date of the redemption of the Debenture.
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 was recorded as paid-in capital. The
intrinsic value of the Debentures results in a beneficial conversion feature,
recorded as a discount against the Debentures, which reduces the book value of
the convertible debt to not less than zero. The Company amortizes the discount
using the effective interest method over the five-year life of the Debentures.
During the quarter ended March 31, 2005, the Board of Directors terminated
the 2003 Offering. As of the closing date of the 2003 Offering, the Company had
raised $503,000 from the 2003 Offering.
During the year ended June 30, 2008, one investor exercised his conversion
right and converted his Debenture in the principal amount of $15,000, pursuant
to the terms of the 2003 Offering. Accordingly the investor was issued 30,000
shares of common stock. 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
$14,802 at the conversion date was recognized as interest expense during the
year ended June 30, 2008.
During the year ended June 30, 2007 three investors exercised their
conversion right and converted Debentures in the combined principal amount of
$50,000, pursuant to the terms of the 2003 Offering. Accordingly the investors
were issued a total of 100,000 shares of common stock. The carrying value of the
convertible debt was reclassified as equity upon conversion. Of the $50,000
converted during the year ended June 30, 2007, $7,500 was recorded as long-term
convertible debt on the balance sheet at the time of conversion. Accordingly,
upon conversion, the remaining unamortized discount of $7,365 related to the
long-term portion of the convertible debt at the conversion date was recognized
as interest expense and is included in interest expense for the year ended June
30, 2007. The discount related to the remaining principal amount of $42,500 was
previously expensed as interest expense during the quarter ended June 30, 2004
when the Company was deemed to be in default with respect to the interest
payment terms.
As of June 30, 2008, accrued interest on the Debentures was $1,371. The
Company recorded interest expense related to the accretion of the discount on
the Debentures and amortization of the convertible debt discount as a result of
the conversions discussed above of $19,483 and $8,310 for the years ended June
30, 2008 and 2007. As of June 30, 2008 the carrying value of the long-term
portion of the Debentures was $2,970, net of unamortized debt discount of
$32,030. As of June 30, 2008 the carrying value of the current portion of the
Debentures was $67,512, net of unamortized debt discount of $7,488.
Note 8: 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 June 30,
2008, the Company has accrued $1,001,942 related to the deferred payment of
salaries and professional fees of which $769,792 is included under deferred
wages and $232,150 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 (the "Conversion Right"). Pursuant to the
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
28
purchase two shares of the Company's common stock, at an exercise price of $1.00
per share for a term of five years. Of the total $1,001,942 deferred salaries
and professional fees, the amount subject to the Conversion Right is $111,500,
resulting in the potential issuance of 223,000 options under the terms mentioned
above. No conversions have occurred to date. At March 18, 2002, there was no
intrinsic value associated with these exchange rights. As such, no additional
compensation cost was recorded.
Note 9: 2007 Private Placement Equity Offering
On June 21, 2007, the Company entered into a private placement offering
(the "2007 Offering") of 1,300,000 shares of common stock at $0.90 per share to
accredited investors. On October 4, 2007, the Board approved an increase in the
offering to 2,000,000 shares of common stock for a total offering price of
$1,800,000. On June 24, 2008, the Board determined that it was in the best
interests of the Company to extend the termination date of the 2007 Offering and
voted to extend the expiration date to August 15, 2008.
During the year ended June 30, 2008, the Company raised $1,296,501 under
the terms of the 2007 Offering. Accordingly, the Company issued 1,440,554 shares
of common stock.
The Company engaged a brokerage firm to help in the fund raising efforts of
the 2007 Offering. Pursuant to the terms of the agreement with the brokerage
firm, the Company pays the brokerage firm a ten percent cash commission on all
funds that the brokerage firm helps raise. Accordingly, during the year ended
June 30, 2008, the Company incurred cash fees payable to the brokerage firm of
$129,650. As of June 30, 2008, the Company was current with respect to the
amount owed the brokerage firm.
Note 10: Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets at June 30, 2008 and 2007 are as follows:
Years Ended June 30,
2008 2007
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 4,256,229 $ 3,902,377
Depreciation and amortization -- 1,377
Wages and professional fees 302,750 252,232
Stock compensation 884,655 747,065
Research and development credit carry forwards 77,686 86,033
----------- -----------
Total deferred tax assets 5,521,320 4,989,084
Less: valuation allowance (5,521,320) (4,989,084)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The net increase in the valuation allowance for deferred tax assets was
$532,236 and $575,770 for the years ended June 30, 2008 and 2007. The increases
were primarily due to an increase in net operating loss carry forwards, stock
compensation and wages and professional fees, the realization of which was
uncertain.
For federal income tax purposes, the Company has net operating loss carry
forwards at June 30, 2008 available to offset future federal taxable income, if
any, of approximately $12,518,321 which began expiring during the fiscal year
ended June 30, 2005 and may be carried forward to the fiscal year ended June 30,
2028. In addition, the Company has research and development tax credit carry
forwards of approximately $77,686 at June 30, 2008, which are available to
offset federal income taxes and began to expire during the year ended June 30,
2006.
The utilization of the tax net operating loss carry forwards may be limited
due to ownership changes that have occurred as a result of sales of common
stock.
The effects of state income taxes were insignificant for the years ended
June 30, 2008 and 2007.
Note 11: Operating Leases
The Company's corporate office is located at 2 Park Avenue, Suite 201,
Manhasset, NY 11030. On February 8, 2008, the Company entered into an amendment
to its Agreement to Lease dated March 1, 2007 ("Lease Amendment"). The Lease
Amendment is a one year operating lease for its corporate office, commencing
March 1, 2008. The monthly rent is $847.
29
The Company's research and development facility was located in Ferndale,
Washington. Pursuant to an operating lease that expired on January 31, 2007, the
Company leased 1,800 square feet of space from a non-affiliate at a monthly cost
of approximately $2,100. In October 2006, the Company provided written
notification to the landlord of the Ferndale property that it would not be
renewing the operating lease in January 2007. The Company continued to lease, on
a month-to-month basis a storage facility at the Ferndale location and therefore
continued to incur the monthly rental fee of approximately $2,100 through
September 2007, at which time the Company vacated the premises.
On May 14, 2008 the Company entered into a 12.5 month operating lease for
918 square feet of office space, 2,576 square feet of warehouse space and 7,500
square feet of yard space in Albuquerque, New Mexico. Upon execution of the
lease, the Company paid a refundable lease deposit of $2,000 and last months
rent deposit of $2,500. Monthly rent expense is $2,500.
As of June 30, 2008, the Company has future minimum lease payments of
$31,776.
Total rent expense under operating leases with third parties was $21,781
and $36,342 during the years ended June 30, 2008 and 2007.
Note 12: Subsequent Events
On June 21, 2007, the Company entered into a private placement offering
(the "2007 Offering") of 1,300,000 shares of common stock at $0.90 per share to
accredited investors. On October 4, 2007, the Board approved an increase in the
offering to 2,000,000 shares of common stock for a total offering price of
$1,800,000. On June 24, 2008, the Board determined that it was in the best
interests of the Company to extend the termination date of the 2007 Offering and
voted to extend the expiration date to August 15, 2008. See Note 9 "2007 Private
Placement Equity Offering".
On July 30, 2007, the Board approved an increase in the 2007 Offering to
2,555,555 shares of common stock for a total offering price of $2,299,999.
On August 15, 2008, the Company closed the 2007 Offering. The Company
raised gross proceeds of $2,295,404 from the sale of 2,550,440 shares of common
stock in accordance with the terms of the 2007 Offering.
The Company engaged two brokerage firms to help in the fund raising efforts
of the 2007 Offering. Pursuant to the terms of the agreements with the brokerage
firms, they are entitled to receive a commission equal to ten percent of sales
that resulted from their brokerage-dealer services.
On July 10, 2008, the Board approved and adopted the 2008 Stock Ownership
Incentive Plan (the "2008 Stock Plan") as filed as Appendix B to the Company's
Preliminary Proxy Statement as filed with the SEC on September 18, 2008. In
accordance with Section 17 of the 1999 Stock Plan, no incentive stock options
may be granted more than ten years after the 1999 Stock Plan's effective date of
November 16, 1998. The Company is seeking approval of the 2008 Stock Plan by the
Stockholders through its proxy solicitation. Stockholder approval is necessary
to permit the 2008 Stock Plan to qualify as an incentive stock option plan under
applicable provisions of the Internal Revenue Code. The affirmative vote of the
holders of a majority of the shares of the Company's common stock is required
for approval. Upon adoption of the 2008 Stock Plan by the Stockholders, the
Company will no longer grant stock options under the 1999 Stock Plan.
Subsequent to June 30, 2008, two investors exercised their conversion
right, pursuant to the terms of the 2003 Offering and converted their Debentures
in the total principal amount of $50,000 pursuant to the terms of the 2003
Offering. Accordingly, the Company issued 100,000 shares of common stock in
accordance with the terms of the 2003 Offering.
Subsequent to June 30, 2008, a consulting scientist exercised a warrant to
purchase a total of 40,000 shares of the Company's common stock at $0.70 per
share.
30
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 8A (T). Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of its Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as of the end of the period covered by this report. Based on that
evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective to provide reasonable assurance that information required to be
disclosed in the Company's periodic filings under the Exchange Act is
accumulated and communicated to the Company's management, including the
Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.
(b) Management's Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining
effective internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f). Under the supervision and with the
participation of the Company's management, including its Chief Executive
Officer and Chief Financial Officer, the Company conducted an evaluation of
the effectiveness of its internal control over financial reporting based on
the framework in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation, management concluded that the Company's internal control
over financial reporting was effective as of June 30, 2008.
This annual report does not include an attestation report of the Company's
independent registered public accounting firm regarding internal control
over financial reporting. Management's report was not subject to
attestation by the Company's independent registered public accounting firm
pursuant to the rules of the Securities and Exchange Commission that permit
the Company to provide only management's report in this annual report.
(c) Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Item 8B. Other Information.
None.
PART III
Item 9. Directors and Executive Officers.
Directors, Executive Officers, Promoters and Control Persons
The information regarding directors contained under the caption "Proposal
One: Election of Directors" in the Company's Proxy Statement for the 2008 Annual
Meeting of Stockholders, which will be filed with the Commission not later than
120 days after the end of the fiscal year covered by this report, is
incorporated herein by reference.
Executive Officers of the Company
In addition to Murphy Evans and Henry Gemino, who also serve as directors,
the following constitutes the executive officers of the Company:
Positions Held and Principal
Name Age Occupations During the Past 5 Years
---- --- -----------------------------------
Philip L. Jones 65 Mr. Jones has served as the Chief Operating Officer and
Executive Vice President for the Company during the past
five fiscal years. Effective September 4, 2007, the
Board elected Robert C. Geib to serve as the Company's
Chief Operating Officer. Previous to his employment with
the Company, Mr. Jones provided energy consulting
services to certain utility companies for a period of
one year. Prior to that time, Mr. Jones held various
executive positions with Consolidated Natural Gas
Company before retiring in April 2000.
31
Positions Held and Principal
Name Age Occupations During the Past 5 Years
---- --- -----------------------------------
Robert C. Geib 37 Mr.Geib was elected by the Board to serve as the
Company's Chief Operating Officer, effective September
4, 2007. Prior to joining the Company, Mr. Geib was the
Director of Operations Services for the Northeast Gas
Association in New York, NY. From 1999 to 2005, Mr. Geib
worked at Southwest Gas Corporation in Las Vegas, NV as
a supervisor and a distribution engineer.
Compliance with Section 16(a) of the Exchange Act
The information regarding reports required under Section 16(a) of the
Securities Exchange Act of 1934, as amended, contained under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement for the 2008 Annual Meeting of Stockholders, which will be filed with
the Commission not later than 120 days after the end of the fiscal year covered
by this report, is incorporated herein by reference.
Code of Ethics
The Company has adopted a Code of Ethics applicable to its chief executive
officer, chief operating officer, chief financial officer, president and other
finance leaders. A copy of the Code of Ethics may be obtained by any person
without charge, upon request, by contacting the principle office of the Company.
Audit Committee
The information contained under the caption "Board of Directors and
Committees" in the Company's Proxy Statement for the 2008 Annual Meeting of
Stockholders, which will be filed with the Commission not later than 120 days
after the end of the fiscal year covered by this report, is incorporated herein
by reference.
Item 10. Executive Compensation.
The information contained under the caption "Executive Compensation" in the
Company's Proxy Statement for the 2008 Annual Meeting of Stockholders, which
will be filed with the Commission not later than 120 days after the end of the
fiscal year covered by this report, is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement for the 2008
Annual Meeting of Stockholders, which will be filed with the Commission not
later than 120 days after the end of the fiscal year covered by this report, is
incorporated herein by reference.
Information regarding securities authorized for issuance under equity
compensation plans is hereby incorporated by reference to Item 5 of Part II of
this Annual Report on Form 10-KSB, under the heading "Securities Authorized for
Issuance Under Equity Compensation Plans."
Item 12. Certain Relationships and Related Transactions.
The information contained under the caption "Certain Relationship and
Related Transactions" in the Company's Proxy Statement for the 2008 Annual
Meeting of Stockholders, which will be filed with the Commission not later than
120 days after the end of the fiscal year covered by this report, is
incorporated herein by reference.
32
Item 13. Exhibits.
The following exhibits were filed with or incorporated by reference into this
report.
Exhibit No. Description of Exhibit
----------- ----------------------
Exhibit 3.1 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 3.2 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 3.3 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 3.4 Amendment to Certificate of Incorporation (incorporated by
reference to Appendix A to the Company's Preliminary Proxy
Statement filed with the Commission on September 13, 2006).
Exhibit 10.1 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 10.2 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).
Exhibit 10.3 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 10.4 First Amendment to the 1999 Stock Option Plan (incorporated by
reference to Appendix B to the Company's Preliminary Proxy
Statement filed with the Commission on September 13, 2006).
Exhibit 10.5 Amendment to Lease dated February 8, 2008 by and between the
Company and Long Island Property Management LP. (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on
Form 10-QSB filed with the Commission on May 15, 2008).
Exhibit 10.6 Consulting Agreement dated April 11, 2007, by and between the
Company and R.F. Lafferty. (incorporated by reference to Exhibit
10.9 to the Company's Quarterly Report on Form 10-QSB filed with
the Commission on May 9, 2007).
Exhibit 10.7 Lease dated May 14, 2008 by and between the Company and Teague
Properties, LLC. *
Exhibit 10.8 2008 Stock Ownership Incentive Plan. (incorporated by reference
to Appendix B to the Company's Preliminary Proxy Statement filed
with the Commission on September 18, 2008).
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 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. *
-----------
*Filed herewith.
33
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated by reference to the
sections entitled "Independent Public Accountants" and "Principal Accountant
Fees and Services" in the Company's Proxy Statement for the 2008 Annual Meeting
of Stockholders, which will be filed with the Commission not later than 120 days
after the end of the fiscal year covered by this report, is incorporated herein
by reference.
34
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROFILE TECHNOLOGIES, INC.
September 25, 2008 By /s/ Henry E. Gemino
------------------------------
Henry E. Gemino
Chief Executive Officer
and Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant in the capacities and as of
the dates indicated:
Signature Title Date
--------- ----- ----
/s/Charles Christenson Director September 25, 2008
----------------------
Charles Christenson
/s/Murphy Evans Director September 25, 2008
---------------
Murphy Evans
/s/Henry E. Gemino Director September 25, 2008
------------------
Henry E. Gemino
/s/Richard L. Palmer Director September 25, 2008
--------------------
Richard L. Palmer
35
Exhibit No. Description of Exhibit
----------- ----------------------
Exhibit 3.1 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 3.2 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 3.3 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 3.4 Amendment to Certificate of Incorporation (incorporated by
reference to Appendix A to the Company's Preliminary Proxy
Statement filed with the Commission on September 13, 2006).
Exhibit 10.1 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 10.2 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).
Exhibit 10.3 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 10.4 First Amendment to the 1999 Stock Option Plan (incorporated by
reference to Appendix B to the Company's Preliminary Proxy
Statement filed with the Commission on September 13, 2006).
Exhibit 10.5 Amendment to Lease dated February 8, 2008 by and between the
Company and Long Island Property Management LP. (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on
Form 10-QSB filed with the Commission on May 15, 2008).
Exhibit 10.6 Consulting Agreement dated April 11, 2007, by and between the
Company and R.F. Lafferty. (incorporated by reference to Exhibit
10.9 to the Company's Quarterly Report on Form 10-QSB filed with
the Commission on May 9, 2007).
Exhibit 10.7 Lease dated May 14, 2008 by and between the Company and Teague
Properties, LLC. *
Exhibit 10.8 2008 Stock Ownership Incentive Plan. (incorporated by reference
to Appendix B to the Company's Preliminary Proxy Statement filed
with the Commission on September 18, 2008).
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 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. *
-----------
*Filed herewith.
36