------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2006
|_| 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 0-21151
PROFILE TECHNOLOGIES, INC.
--------------------------
(Name of Small Business Issuer in Its Charter)
Delaware 91-1418002
-------- ----------
(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: (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 |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes|_| No |X|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 12,627,278 shares of common stock as
of February 6, 2007.
Transitional Small Business Disclosure Format (check one): Yes|_| No |X|
TABLE OF CONTENTS
Description Page Number
--------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet (Unaudited) -
At December 31, 2006.............................................3
Statements of Operations (Unaudited) -
Three and Six Months Ended December 31, 2006 and 2005............4
Statements of Cash Flows (Unaudited) -
Six Months Ended December 31, 2006 and 2005......................5
Notes to Financial Statements (Unaudited).............................6
Item 2. Management's Discussion and Analysis or Plan of Operations......14
Item 3. Controls and Procedures.........................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.....18
Item 3. Defaults Upon Senior Securities.................................18
Item 4. Submission of Matters to a Vote of Shareholders.................18
Item 5. Other Information...............................................19
Item 6. Exhibits........................................................19
SIGNATURES....................................................................22
CERTIFICATIONS
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
PROFILE TECHNOLOGIES, INC.
Balance Sheet
(unaudited)
December 31,
2006
------------
Assets
Current assets:
Cash $ 502,640
Prepaid expenses and other current assets 9,049
------------
Total current assets 511,689
Equipment, net of accumulated depreciation of $547,566 12,104
Deferred financing fees 700
Other assets 1,550
------------
Total assets $ 526,043
============
Liabilities and Stockholders' Deficit
Current Liabilities:
Accounts payable $ 140,483
Notes payable to stockholders 57,500
Current portion of convertible debt 82,500
Deferred wages 732,054
Accrued professional fees 204,150
Accrued interest 1,952
Other accrued expenses 12,644
------------
Total current liabilities 1,231,283
Long-term convertible debt, net of unamortized discount of $66,690 510
Stockholders' deficit:
Common stock, $0.001 par value. Authorized 25,000,000
shares; issued and outstanding 12,577,278 shares 12,577
Additional paid-in capital 13,416,783
Accumulated deficit (14,135,110)
------------
Total stockholders' deficit (705,750)
Commitments, contingencies and subsequent events
------------
Total liabilities and stockholders' deficit $ 526,043
============
See accompanying notes to financial statements.
3
PROFILE TECHNOLOGIES, INC.
Statements of Operations
(unaudited)
For the three months ended For the six months ended
December 31, December 31,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenue $ -- $ -- $ -- $ --
Cost of revenues -- -- -- --
------------ ------------ ------------ ------------
Gross profit -- -- -- --
------------ ------------ ------------ ------------
Operating expenses:
Research and development 125,233 189,766 314,722 246,866
General and administrative 865,573 175,138 976,924 335,444
------------ ------------ ------------ ------------
Total operating expenses 990,806 364,904 1,291,646 582,310
------------ ------------ ------------ ------------
Loss from operations (990,806) (364,904) (1,291,646) (582,310)
Interest expense 3,013 30,675 6,078 225,332
------------ ------------ ------------ ------------
Net loss $ (993,819) $ (395,579) $ (1,297,724) $ (807,642)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.08) $ (0.05) $ (0.10) $ (0.10)
Weighted average shares outstanding used to
calculate basic and diluted net loss per share 12,554,950 8,674,869 12,505,698 7,964,459
See accompanying notes to financial statements.
4
PROFILE TECHNOLOGIES, INC.
Statements of Cash Flows
(unaudited)
For the six months ended
December 31,
2006 2005
----------- -----------
Cash flows from operating activities:
Net loss $(1,297,724) $ (807,642)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 3,526 2,598
Accreted discount on convertible debt 321 57
Amortization of convertible debt discount included in interest expense -- 189,954
Accrued interest on convertible debt converted to equity -- 370
Accrued interest on notes payable to stockholders converted to equity -- 30,746
Amortization of debt issuance costs 140 10,380
Equity issued for services to consultants 192,950 85,850
Equity issued for services to employees and board of directors 685,300 --
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 3,673 3,400
Other assets -- 865
Accounts payable (31,570) (12,786)
Deferred wages 20,453 42,874
Accrued professional fees 12,000 12,000
Accrued interest (230) (17,516)
Other accrued expenses -- 6,550
----------- -----------
Net cash used in operating activities (411,161) (452,300)
Cash flows from financing activies:
Common stock issuance costs -- (71,350)
Allocated proceeds from issuance of common stock -- 262,408
Allocated proceeds from issuance of warrants attached to issuance of common stock -- 493,092
Proceeds from issuance of notes payable to stockholders -- 83,754
Proceeds from exercise of stock options and warrants 61,333 --
----------- -----------
Net cash provided by financing activities 61,333 767,904
----------- -----------
Increase (decrease) in cash (349,828) 315,604
Cash at beginning of period 852,468 27,045
----------- -----------
Cash at end of period $ 502,640 $ 342,649
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 4,387 $ 8,269
Convertible debt and related accrued interest converted into 50,000 and 440,740 shares of
common stock during the six months ended December 31, 2006 and 2005, respectively $ 25,000 $ 220,370
Notes payable to stockholder converted into 1,456,508 shares of common stock
during the six months ended December 31, 2005 $ -- 732,754
Accrued interest on notes payable to stockholder converted into 61,492 shares of common stock
during the six months ended December 31, 2005 $ -- 30,746
See accompanying notes to financial statements.
5
PROFILE TECHNOLOGIES, INC
December 31, 2006
Notes to Financial Statements (Unaudited)
1. Description of Business
Profile Technologies, Inc. (the "Company"), was incorporated in 1986 and
commenced operations in fiscal year 1988. The Company is in the business of
inspecting pipelines for corrosion and has developed a patented, non-destructive
and non-invasive, high speed scanning process, using electro magnetic waves to
remotely inspect buried, encased and insulated pipelines for corrosion. The
Company is now actively marketing its inspection services for encased and
insulated pipelines; however, over the next four to six months, the Company
intends to perform additional development work prior to marketing its services
for direct buried pipe.
2. Basis of Presentation
The unaudited interim financial statements and related notes of the Company
have been prepared pursuant to the instructions to Form 10-QSB. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such instructions.
The preparation of financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues,
and expenses. On an on-going basis, the Company evaluates its estimates,
including contract revenue recognition and impairment of long-lived assets.
Actual results and outcomes may differ materially from these estimates and
assumptions.
The financial statements and related notes should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's annual report on Form 10-KSB for the year ended June 30, 2006. The
information furnished reflects, in the opinion of management, all adjustments,
consisting of only normal recurring items, necessary for fair presentation of
the results of the interim periods presented. Interim results are not
necessarily indicative of results for a full year.
3. Liquidity
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company incurred cumulative losses
of $14,135,110 through December 31, 2006, and had negative working capital of
$719,594 as of December 31, 2006. 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.
4. Summary of Significant Accounting Policies
Cash
Cash 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.
Fair Value of Financial Instruments
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.
6
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.
Contract Revenue Recognition
The Company recognizes revenue from service contracts using the percentage
of completion method of accounting. Contract revenues earned are measured using
either the percentage of contract costs incurred to date to total estimated
contract costs or, when the contract is based on measurable units of completion,
revenue is based on the completion of such units. This method is used because
management considers total cost or measurable units of completion to be the best
available measure of progress on contracts. Because of the inherent
uncertainties in estimating costs, it is at least reasonably possible that the
estimates used may change in the near term.
Anticipated losses on contracts, if any, are charged to earnings as soon as
such losses can be estimated. Changes in estimated profits on contracts are
recognized during the period in which the change in estimate is known.
Cost of revenues include contract costs incurred to date as well as any
idle time incurred by personnel scheduled to work on customer contracts.
The Company records claims for additional compensation on contracts upon
revision of the contract to include the amount to be received for the additional
work performed. Contract costs include all direct material and labor costs and
those indirect costs related to contract performance, such as indirect labor,
supplies, tools and repairs, and depreciation costs. Selling, general, and
administrative costs are charged to expense as incurred. Service contracts
generally extend no more than six months.
Research and Development
Research and development costs are expensed when incurred. During the three
months ended December 31, 2006 and 2005, the Company incurred $125,233 and
$189,766 on research and development activities. During the six months ended
December 31, 2006 and 2005, the Company incurred $314,722 and $246,866 on
research and development activities.
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.
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.
Recently Issued Accounting Standards Not Yet Adopted
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainties in Income Taxes, ("FIN 48").
FIN 48 clarifies the accounting for uncertainty in income taxes and prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 is effective for financial statements as of January 1, 2007.
The Company has not yet determined the impact of applying FIN 48.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements ("SFAS 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. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The Company has not yet determined the impact of applying
SFAS No. 157.
In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 108 (SAB 108). Due to diversity in practice among
registrants, SAB 108 expresses SEC staff views regarding the process by which
misstatements in financial statements are evaluated for purposes of determining
whether financial statement restatement is necessary. SAB 108 is effective for
fiscal years ending after November 15, 2006, and early application is
encouraged. The Company does not expect any material impact from applying SAB
108.
7
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 testing 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 three and six months ended December 31, 2006, the Company incurred
cash fees payable to the scientists of $45,695 and $131,989, which are included
in research and development expense in the Company's Statements of Operations.
During the three and six months ended December 31, 2005, the Company incurred
cash fees payable to the scientists of $74,042 and $100,538, which are included
in research and development expense in the Company's Statements of Operations.
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 three and six months ended December
31, 2006.
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 three and six months ended December 31, 2006.
As partial compensation for services rendered, on December 12, 2005, the
Company granted one of the scientists a stock option to purchase 50,000 shares
of common stock at an exercise price of $1.12 per share, expiring December 12,
2010. The 50,000 stock options had a fair value at the date of grant of $50,500,
which is included in research and development expense in the Company's
Statements of Operations for the three and six months ended December 31, 2005.
Total cash and equity compensation expense incurred for settlement of
services rendered by the scientists totaled $122,695 and $297,989 , or
approximately 98% and 95%, of research and development expense for the three and
six months ended December 31, 2006.
Total cash and equity compensation expense incurred for settlement of
services rendered by the scientists totaled $124,542 and $151,038, or
approximately 66% and 61%, of research and development expense for the three and
six months ended December 31, 2005.
As of December 31, 2006, the Company owed the scientists a total of
$69,693, which is included in accounts payable at December 31, 2006.
5. Stock Based Compensation
Prior to January 1, 2006, the Company accounted for stock-based awards
under the intrinsic value method, which followed the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. The intrinsic value method of accounting resulted in
compensation expense for stock options to the extent that the exercise prices
were set below the fair market price of the Company's stock at the date of
grant.
As of January 1, 2006, the Company adopted SFAS No. 123(R) using the
modified prospective method, which requires measurement of compensation cost for
all stock-based awards at fair value on date of grant and recognition of
compensation over the service period for awards expected to vest. The fair value
of stock options is determined using the Black-Scholes valuation model, which is
8
consistent with the Company's valuation techniques previously utilized for
options in footnote disclosures required under SFAS No. 123, Accounting for
Stock Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. Such value is recognized as expense
over the service period. To date, all stock option grants have been fully vested
upon grant.
The application of SFAS 123(R) had the following effect on net loss as
reported:
Three Months Ended Six Months Ended
December 31, December 31,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net loss:
As reported $ (993,819) $ (395,579) $(1,297,724) $ (807,642)
Plus: stock-based employee compensation
expense included in reported net loss --(1) -- --(1) --
Less: stock based compensation expense
determined under fair value based method
for all employee awards --(1) (352,000) --(1) (352,000)
----------- ----------- ----------- -----------
Net loss $ (993,819) $ (747,579) $(1,297,724) $(1,159,642)
=========== =========== =========== ===========
Net loss per share
Basic and diluted - as reported $ (0.08) $ (0.05) $ (0.10) $ (0.10)
Basic and diluted - pro forma $ (0.08)(1) $ (0.09) $ (0.10)(1) $ (0.15)
(1) The Company applied SFAS No. 123(R) for the three and six months ended
December 31, 2006, therefore net loss as reported and basic and diluted net loss
per share as reported are the same as the Company's pro forma net loss and pro
forma basic and diluted net loss per share as determined in accordance with SFAS
No. 123(R).
6. 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 shareholders 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 three
and six months ended December 31, 2006, because their effect would be
antidilutive, are stock options and warrants to acquire 12,481,417 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 three and
six months ended December 31, 2006 are 300,000 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 8 because their effect would
be antidilutive.
Excluded from the computation of diluted net loss per share for the three
and six months ended December 31, 2005, because their effect would be
antidilutive, are stock options and warrants to acquire 9,343,018 shares of
common stock with a weighted-average exercise price of $1.16 per share. Also
excluded from the computation of diluted net loss per share for the three and
six months ended December 31, 2005 are 366,000 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 8 because their effect would
be antidilutive.
For the three and six months ended December 31, 2006 and 2005, additional
potential dilutive securities that were excluded from the diluted net loss per
share computation are the exchange rights discussed in Note 9 that could result
in options to acquire up to 223,000 shares of common stock with an exercise
price of $1.00 per share at December 31, 2006 and 2005.
9
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.
7. Related Parties
Notes Payable - Stockholders
In April 2002, the Company issued a non-interest bearing bridge note
payable to an officer of the Company in the amount of $7,500. The note is
payable in full when the Company determines it has sufficient working capital to
do so. On September 29, 2002, the officer who was owed the $7,500 died.
The Company entered into various loan agreements with Murphy Evans,
President, a director and stockholder of the Company. On March 6, 2003, the
Company's Board of Directors approved the Loan Amendment and Promissory Note
(the "Amended Evans Loan") between the Company and Murphy Evans. The Amended
Evans Loan aggregated all previous debt and superseded and replaced all of the
terms of the previous loans with Mr. Evans, including any conversion features.
The Amended Evans Loan bore interest on the aggregate principal balance at a
rate of 5% per annum, payable on June 30 and December 31 of each year, with the
principal balance due and payable in full on December 31, 2003. The Amended
Evans Loan was exempt from registration under Section 4(2) of the Securities
Act.
In January 2006, Mr. Evans converted the entire then outstanding principal
and accrued interest on the Amended Evans Loan pursuant to the terms of the 2005
Offering as defined below.
Interest expense related to the Amended Evans Loan was $7,136 and $15,870
for the three and six months ended December 31, 2005.
In September 2002, the Company entered into two non-interest bearing bridge
loans in the respective principal amounts of $40,000 and $10,000 (the
"Stockholder Loans") payable to two stockholders of the Company. The terms of
the Stockholder Loans provide for payment at such time as the Company determines
it has sufficient working capital to repay the principal balances of the
Stockholder Loans. The Stockholder Loans are convertible into 57,142 and 14,286
equity units, respectively, at any time prior to re-payment. Each equity unit is
comprised of one share of the Company's common stock, with a detachable 5-year
warrant to purchase one additional share at an exercise price of $1.05 per
share. Neither stockholder has converted either Stockholder Loan into equity
units.
The following is a summary of notes payable to stockholders as of December
31, 2006:
Deceased Officer Note $ 7,500
Stockholder Loans 50,000
-------
Total $57,500
=======
8. 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.
10
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 three and six months ended December 31, 2006, one investor
exercised their conversion right under the terms of the Debentures. Accordingly,
the carrying value of the convertible debt was reclassified as equity upon
conversion. The discount related to this Debenture 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.
During the three and six months ended December 31, 2005, one and five
investors, respectively, exercised their conversion right under the terms of the
Debentures. Accordingly, the carrying value of the convertible debt was
reclassified as equity upon conversion. Since the convertible debt instruments
include a beneficial conversion feature, the remaining unamortized discount of
$19,993 and $189,954 at the conversion date was recognized as interest expense
during the three and six months ended December 31, 2005.
As of December 31, 2006, accrued interest on the Debentures was $1,952. The
Company recorded interest expense related to the accretion of the discount on
the Debentures of $197 and $321 for the three and six months ended December 31,
2006. 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 $20,026 and $190,011 for the
three and six months ended December 31, 2005. As of December 31, 2006 the
carrying value of the long-term portion of the Debentures was $510, net of
unamortized debt discount of $66,990.
9. Deferred Wages and Accrued Professional Fees
To reduce cash outflows, certain of the Company's employees, officers,
consultants, and directors have agreed to defer a portion of their salaries and
professional fees until the Company has sufficient resources to pay the amounts
owed or to exchange such amounts into options as described below. At December
31, 2006, the Company has accrued $936,204 related to the deferred payment of
salaries and professional fees of which $732,054 is included under deferred
wages and $204,150 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 $936,204 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.
10. Common Stock and Warrants
On January 19, 2005, the Board of Directors approved the offering (the
"2005 Offering") of 2,000,000 units (the "Units") to accredited investors for a
total offering price of $1,000,000. Each Unit consists of one share of common
stock and a warrant to acquire common stock. On November 21, 2005, the Board of
Directors approved an increase in the number of Units offered in the 2005
Offering to 6,000,000 Units, for a total offering price of $3,000,000. The
purchase price of one Unit is $0.50. Each Unit consists of one share of common
stock and a warrant to purchase one share of common stock at an exercise price
of $0.75. The warrants are exercisable at any time prior to the fifth
anniversary from the date of their issuance.
11
The 2005 Offering was terminated on June 9, 2006. As of the closing date of
the 2005 Offering, the Company had raised $1,801,000 from the 2005 Offering.
The Company engaged a brokerage firm to help in the fund raising efforts of
the 2005 Offering. Pursuant to the terms of the agreement with the brokerage
firm, the Company paid the brokerage firm a ten percent cash commission on all
funds that the brokerage firm helped raise. During the three and six months
ended September 30, 2005, the Company incurred $19,700 and $71,350 of fees that
were paid in cash to the brokerage firm. The brokerage firm and the Company also
agreed that the Company would issue warrants to purchase a total of 439,600
shares of common stock at an exercise price of $0.60. The warrants are
exercisable for up to five years from the date of issuance, which is the date
the proceeds were received under the 2005 Offering. Of the total 439,600
warrants that the brokerage firm received, 39,400 were earned during the three
months ended December 31, 2005 as a result of the funds raised by the brokerage
firm during that period. Accordingly, during the three months ended December 31,
2005, the Company recorded $39,006 as a reduction to paid-in capital for the
fair value of the 39,400 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 376.16%, risk-free interest
rate of 4.14%, expected lives of five years, and a 0% dividend yield.
Of the total 439,600 warrants that the brokerage firm received, 142,700
were earned during the six months ended December 31, 2005 as a result of the
funds raised by the brokerage firm during that period. Accordingly, during the
six months ended December 31, 2005, the Company recorded $107,184 as a reduction
to paid-in capital for the fair value of the 142,700 warrants. The fair value of
the warrants issued to the brokerage firm during the six months ended December
31, 2005 were estimated using the Black-Scholes option pricing model with the
following weighted average assumptions: expected volatility ranging from 353.30%
to 376.15%, risk-free interest rates ranging from 4.14% to 4.35%, expected lives
of five years, and a 0% dividend yield.
11. Stock Options and Warrants
Stock Options
Stock Option Grants
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
Stock Option Plan to certain directors, officers, employees and four consultants
of the Company. The stock options are fully vested upon grant and are
exercisable until November 12, 2016. The exercise price of the stock options
granted to insiders owning or controlling more than ten percent of the Company's
common stock was $0.95, which is ten percent over the closing bid price of the
Company's common stock as quoted on the Over the Counter Bulletin Board on the
grant date, November 13, 2006. The exercise price of the stock options granted
to non-insiders 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 work the consultant
is performing for the Company and was not granted pursuant to the 1999 Stock
Option 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.
12
Stock Option Cancellations
On November 13, 2006, the Board cancelled 30,000 stock options that were
originally granted on December 9, 2002 with an exercise price of $0.55 per
share.
Stock Option Exercises
On October 18, 2006, a non-employee Board member exercised stock options to
purchase 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
A summary of stock option-related activity follows:
Options outstanding
----------------------
Weighted
Shares average
available for Number of exercise
grant (1) shares (2) price
---------- ---------- -------
Balance at June 30, 2006 115,000 2,700,000 $ 1.18
Increase in authorized stock options
available for grant 2,000,000
Grants (575,000) 675,000 0.91
Cancellations 30,000 (30,000) 0.55
Exercises 50,000 (50,000) 0.81
Expirations 110,000 (110,000) 1.05
---------- ----------
Balance at December 31, 2006 1,730,000 3,185,000 $ 1.14
========== ==========
(1) Consists of stock options available for grant under the Company's 1999
Stock Option Plan.
(2) Consists of stock options outstanding under the Company's 1999 Stock
Option Plan and stock options outstanding that were granted outside of
the 1999 Stock Option Plan.
Warrants
Warrant Grants
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 is 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
13
general and administrative expense related to the fair value of the warrants.
The fair value of the warrants 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.
Warrant Cancellations
On November 13, 2006, the Board cancelled the following warrants: 5,000
warrants at an exercise price of $0.55 per share, 150,000 warrants at an
exercise price of $1.05 per share, 190,000 warrants at an exercise price of
$1.125 per share, and 80,000 warrants at an exercise price of $3.00 per share.
Warrant Exercises
On October 18, 2006, a non-employee Board member exercised a warrant to
purchase 20,833 shares of the Company's common stock at an exercise price of
$1.00 per share.
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 450,000 0.86
Cancellations (425,000) 1.44
Exercises (20,833) 1.00
Expirations (651,168) 1.00
-----------
Outstanding at December 31, 2006 9,296,417 $ 0.94
===========
12. Subsequent Events
Subsequent to December 31, 2006, two investors exercised their conversion
right, pursuant to the terms of the 2003 Offering and converted Debentures in
the combined principal amount of $25,000 pursuant to the terms of the 2003
Offering. Accordingly, the Company issued 50,000 shares of common stock in
accordance with the terms of the 2003 Offering.
Item 2. Management's Discussion and Analysis or Plan of Operations.
Plan of Operations
In recent years, the Company has focused on the buried pipe market in the
United States. It has redesigned and improved the hardware underlying its EMW
Inspection Process. It has also performed lab and field testing of this new
hardware and has developed computer models to better predict and interpret field
conditions.
The Company has filed a patent application covering the work of its
consulting scientists during the last several years. It has recently received a
Notice of Allowance from the patent office in this matter.
The Company is now actively marketing a cased pipe inspection service;
however, there can be no assurance that contracts for this service will be
obtained. Failure to obtain such contracts could have a serious and material
effect on the business and financial condition of the Company.
14
The Company also continues to work on direct buried (uncased) pipe
inspections. Additional work needs to be done to adjust the Company's hardware
and software to account for the effects of varying soil conditions before the
Company can actively market a direct buried pipe inspection service.
While the Company has, in the past, inspected only for external corrosion,
it has recently filed a patent application covering the adaptation of its
technology for internal pipe inspections. However, significant design,
fabrication and testing must be done before the Company will be able to offer
internal pipe inspection services.
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 revenue generating
contracts. Management is currently directing the Company's activities towards
obtaining service contracts, which, if obtained, will necessitate the Company
attracting, hiring, training and outfitting qualified technicians. If service
contracts are obtained, it will also necessitate additional field test equipment
purchases in order to provide the services. 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.
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 within the next twelve months. 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.
Liquidity and Capital Resources
Deferred Wages and Accrued Professional Fees
To reduce cash outflows, certain of the Company's employees, officers,
consultants, and directors have agreed to defer a portion of their salaries and
professional fees until the Company has sufficient resources to pay the amounts
owed or to exchange such amounts into options as described below. At December
31, 2006, the Company has accrued $936,204 related to the deferred payment of
salaries and professional fees of which $732,054 is included under deferred
wages and $204,150 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 $936,204 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
15
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 three and six months ended December 31, 2006, one investor
exercised their conversion right under the terms of the Debentures. Accordingly,
the carrying value of the convertible debt was reclassified as equity upon
conversion. The discount related to this Debenture 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.
During the three and six months ended December 31, 2005, one and five
investors, respectively, exercised their conversion right under the terms of the
Debentures. Accordingly, the carrying value of the convertible debt was
reclassified as equity upon conversion. Since the convertible debt instruments
include a beneficial conversion feature, the remaining unamortized discount of
$19,993 and $189,954 at the conversion date was recognized as interest expense
during the three and six months ended December 31, 2005.
As of December 31, 2006, accrued interest on the Debentures was $1,952. The
Company recorded interest expense related to the accretion of the discount on
the Debentures of $197 and $321 for the three and six months ended December 31,
2006. 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 $20,026 and $190,011 for the
three and six months ended December 31, 2005. As of December 31, 2006 the
carrying value of the long-term portion of the Debentures was $510, net of
unamortized debt discount of $66,990.
Other Commitments
The Company's other contractual obligations consist of commitments under an
operating lease and repayment of loans payable to certain stockholders.
As of December 31, 2006, the Company had outstanding loans payable to
certain stockholders with principal amounts, in the aggregate, equal to $57,500.
The terms of the various notes are described above under "Note 7: Related
Parties: Notes Payable - Stockholders."
The Company's research and development facility is located in Ferndale,
Washington. Pursuant to an operating lease that expires on January 31, 2007, the
Company leases 1,800 square feet of space from a non-affiliate at a monthly cost
of approximately $2,107. 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. As of December 31, 2006, the
Company has future minimum lease payments of approximately $2,107, representing
the last month's rent for January 2007.
Off Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
16
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains "forward-looking statements."
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes,"
"anticipates," "expects" or words of similar import. Similarly, statements that
describe the Company's projected future results, future plans, objectives or
goals or future conditions or events are also forward looking statements. Actual
results are inherently difficult to predict. Any such forward-looking statements
are subject to the risks and uncertainties that could cause actual results of
operations, financial condition, acquisitions, financing transactions,
operations, expenditures, expansion and other events to differ materially from
those expressed or implied in such forward-looking statements. Any such
forward-looking statements would be subject to a number of assumptions
regarding, among other things, future economic, competitive and market
conditions generally. Such assumptions would be based on facts and conditions as
they exist at the time such statements are made as well as predictions as to
future facts and conditions, the accurate prediction of which may be difficult
and involve the assessment of events beyond the Company's control.
The forward-looking statements contained in this report are based on
current expectations that involve a number of risks and uncertainties. Such
forward-looking statements are based on assumptions that the Company will obtain
or have access to adequate financing to continue its operations, that the
Company will market and provide products and services on a timely basis, that
there will be no material adverse competitive or technological change with
respect to the Company's business, demand for the Company's products and
services will significantly increase, that the Company will be able to secure
additional fee-for-services or licensing contracts, that the Company's executive
officers will remain employed as such by the Company, that the Company's
forecast accurately anticipate market demand, and that there will be no material
adverse change in the Company's operations, business or governmental regulation
affecting the Company or its customers. The foregoing assumptions are based on
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control. Although the Company believes the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements.
Item 3. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). This term refers to the controls and procedures of a
company that are designed to ensure that information required to be
disclosed by a company in the reports that it files under the Exchange Act
is recorded, processed, summarized, and reported within the required time
periods. The Company's Chief Executive Officer and Chief Financial Officer
have evaluated the effectiveness of the Company's disclosure controls and
procedures as of the end of the period covered by this report. They have
concluded that, as of that date, the Company's disclosure controls and
procedures were effective at ensuring that required information will be
disclosed on a timely basis in the Company's reports filed under the
Exchange Act.
(b) Changes in Internal Control over Financial Reporting
No change in the Company's internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) 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.
17
PART II -- OTHER INFORMATION
Item 1. 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 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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. 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 is exempt
from registration under Section 4(2) of the Securities Act.
On October 18, 2006, an investor exercised their conversion right, pursuant
to the terms of the 2003 Offering and converted a Debenture in the principal
amount of $25,000 pursuant to the terms of the 2003 Offering. Accordingly, the
Company issued 50,000 shares of common stock in accordance with the terms of the
2003 Offering.
Stock Options
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
Stock Option Plan to certain directors, officers, employees and four consultants
of the Company. The stock options are fully vested upon grant and are
exercisable until November 12, 2016. The exercise price of the stock options
granted to insiders owning or controlling more than ten percent of the Company's
common stock was $0.95, which is ten percent over the closing bid price of the
Company's common stock as quoted on the Over the Counter Bulletin Board on the
grant date, November 13, 2006. The exercise price of the stock options granted
to non-insiders was $0.86. These securities were issued in reliance on
exemptions from registration provided by Section 4(2) of the Securities Act.
Warrants
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 is 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. These
securities were issued in reliance on exemptions from registration provided by
Section 4(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Shareholders.
The Annual Meeting of Stockholders (the "Annual Meeting") of the Company
was held on November 13, 2006.
18
At the Annual Meeting, 7,224,243 shares were present in person or by proxy.
The following is a summary and tabulation of the matters that were voted upon at
the Annual Meeting:
Proposal I.
The election of a board of directors to serve a term of one year or until
their respective successors are elected and qualified.
Votes For Votes Withheld
--------- --------------
Henry E. Gemino 7,127,352 96,891
Murphy Evans 7,127,294 96,949
Charles Christenson 7,109,407 114,836
William A. Krivsky 7,137,693 86,550
Proposal II.
To approve an amendment to the Company's Certificate of Incorporation to
increase the number of authorized common shares from 25,000,000 to 35,000,000.
Votes For Against Abstain
--------- ------- -------
7,034,665 188,578 1,000
Proposal III.
To approve amendments to the Company's 1999 Stock Plan to increase the
maximum period of time for which stock options are exercisable from five years
to ten years and to increase the aggregate number of shares of common stock
which may be issued pursuant to the 1999 Stock Plan from 500,000 to 3,500,000.
Votes For Against Abstain Not Voted
--------- ------- ------- ---------
5,003,942 122,000 1,900 2,096,401
Item 5. Other Information.
None.
Item 6. Exhibits.
The following exhibits are 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).
19
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 Loan Agreement dated March 6, 2003, by and between the
Company and Murphy Evans (incorporated by reference to
Exhibit 4.1 to the Company's Quarterly Report on Form 10-QSB
filed with the Commission on May 15, 2002).
Exhibit 10.2 Loan Amendment and Promissory Note dated March 6, 2003, by
and between the Company and Murphy Evans (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-QSB filed with the Commission on May 20, 2003).
Exhibit 10.3 Lease Agreement dated January 26, 2001 by and between the
Company and Fatum LLC (incorporated by reference to Exhibit
10.4 to the Company's Annual Report on Form 10-KSB filed
with the Commission on October 12, 2004).
Exhibit 10.4 Lease Extension dated February 26, 2003 by and between the
Company and Fatum LLC (incorporated by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-KSB filed
with the Commission on October 12, 2004).
Exhibit 10.5 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 10.6 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 10.7 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 10.8 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 31.1 Rule 13a-14(a)/15d-14(a) Certification of Henry E. Gemino,
as Chief Executive Officer and Chief Financial Officer of
the Company. *
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of Philip L. Jones,
as Chief Operating Officer and Executive Vice President of
the Company. *
Exhibit 32.1 Certification under Section 906 of the Sarbanes-Oxley Act of
2002 by Henry E. Gemino, as Chief Executive Officer and
Chief Financial Officer of the Company. *
Exhibit 32.2 Certification under Section 906 of the Sarbanes-Oxley Act of
2002 by Philip L. Jones, as Chief Operating Officer and
Executive Vice President of the Company. *
--------------------
*Filed herewith.
20
EXHIBIT INDEX
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of Henry E. Gemino,
as Chief Executive Officer and Chief Financial Officer of
the Company.*
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of Philip L. Jones,
as Chief Operating Officer and Executive Vice President of
the Company.*
Exhibit 32.1 Certification under Section 906 of the Sarbanes-Oxley Act of
2002 by Henry E. Gemino, as Chief Executive Officer and
Chief Financial Officer of the Company.*
Exhibit 32.2 Certification under Section 906 of the Sarbanes-Oxley Act of
2002 by Philip L. Jones, as Chief Operating Officer and
Executive Vice President of the Company.*
--------------------
*Filed herewith.
21
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROFILE TECHNOLOGIES, INC.
(Registrant)
Date: February 8, 2007 /s/ Henry E. Gemino
-----------------------------------
Henry E. Gemino
Chief Executive Officer and
Chief Financial Officer
22