UNITED STATES SECURITIES AND EXCHANGE
Washington, D.C. 20549
Form 10-K
| x | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | |
| | | For the fiscal year ended September 30, 2008 |
| | | |
| | | or |
| | | |
| o | | 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: 000-30819
Particle Drilling Technologies, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | | 20-1563395 |
| (State of incorporation) | | (I.R.S. Employer Identification No.) |
5611 Baird Court Houston, Texas 77041 (Address of principal executive offices) |
Registrant’s telephone number, including area code:
713-223-3031
Securities registered Pursuant to Section 12(b) of the Act:
Securities registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)
Large accelerated filer o | | Accelerated filer x | | Non-accelerated filer o | | Smaller reporting company o |
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $72,366,621 as of March 31, 2008 (based on the last sale price of such stock as quoted on the NASDAQ Capital Market).
As of December 1, 2008, there were 35,763,932 shares of the registrant’s common stock, par value $0.001 per share, outstanding.
Documents incorporated by reference: None
Unless the context otherwise requires, all references in this report to the “Company,” “we,” “us,” or “our” are to Particle Drilling Technologies, Inc. and its subsidiary.
General
Particle Drilling Technologies, Inc., a Nevada corporation, is a holding company organized on June 14, 2002 and was formerly known as MedXLink Corp. We changed our name to Particle Drilling Technologies, Inc. on January 25, 2005, following the merger on January 14, 2005 of our wholly-owned subsidiary with and into Particle Drilling Technologies, Inc., a Delaware corporation (“PDTI”). Prior to our acquisition of PDTI, we were a shell company. Currently our business consists of one segment and is conducted solely in the United States. Information about our net loss and total assets is located under “Item 8. Financial Statements and Supplementary Data.” We are a development-stage company and have a limited operating history.
PDTI was formed in March 2004 for the purpose of raising capital and to acquire Particle Drilling, Inc., a Texas corporation. Particle Drilling, Inc. (formerly known as ProDril Acquisition Corp.) was formed in June 2003 for the purpose of acquiring certain assets, patents and other intellectual property, and certain liabilities related to the Particle Impact Drilling technology, which we refer to as the “PID technology” or the “PID System.” Particle Drilling, Inc. was merged with and into PDTI in June 2004.
The patented PID System utilizes a specially-designed “fit for purpose” drill bit fitted with jetting nozzles and polycrystalline diamond compact cutting structures. We refer to this bit as the “PID bit.” The nozzles in the PID bit serve to accelerate hardened steel particles entrained within ordinary drilling mud to fracture and remove the formation ahead of the bit. The particles flow back up the well bore annulus along with the drilling mud and formation cuttings to the surface where the PID System separates and re-circulates the steel particles. The PID System is operated primarily utilizing hydraulic energy that is available on drilling rigs used today in combination with the PID System equipment. Each particle is driven into the rock formation at a high velocity and delivers a force many times greater than the compressional strength of the rock, even in formations that exist in the subsurface at elevated hardness and stress. Depending on the volume of particles introduced into the drilling mud, the number of particle strikes on the formation is typically in excess of four million per minute, thereby yielding a higher rate of penetration than conventional drill bits in suitable formations. By comparison, conventional drilling methods rely on mechanical energy created by the weight and torque applied to a bit, and the amount of total rotational mechanical energy available on drilling rigs is limited. The result is that the bit gouges out smaller volumes of rock as the compressional strength of the rock increases with depth and pressure. We believe the volume of rock excavated by the PID System is less affected by rock hardness or depth. We are still developing this technology, and to date, we have not generated any revenues from our operations. Currently, we have limited liquidity and therefore our business activities have been curtailed.
In management’s opinion, based on available cash and cash equivalents on hand as of September 30, 2008, we do not have the ability to maintain sufficient liquidity to meet our working capital and capital expenditure requirements for the next 12 months. Management must raise additional capital in order to continue our operations. The equity and debt capital markets have recently experienced adverse conditions and extreme volatility which may, if such conditions persist, impair our ability to raise capital on satisfactory terms, or at all. Our continued existence depends on our ability to raise additional outside capital and the successful development of the PID technology and our ability to successfully commercialize this technology.
Recent Developments
On September 16, 2008, we announced that our Board of Directors formed a special committee to evaluate and pursue strategic alternatives, including a strategic industry joint venture, technology licensing arrangement, sale of the company and other available alternatives. Our hope is that we could gain access to additional technical and financial resources to accelerate the development and commercialization of the PID technology. Our Board of Directors has determined it would be in the best interest of the Company and its shareholders to evaluate all available strategic alternatives. Accordingly, the Special Committee has retained the services of Parks Paton Hoepfl & Brown, LLP to serve as its financial advisor. We have yet to determine which particular strategic alternative to pursue, if any, and do not intend to disclose developments with respect to this evaluation unless and until the Board of Directors has approved a course of action or
otherwise deemed disclosure appropriate.
On December 8, 2008, we announced that we have entered into an agreement with a fully integrated, multi-national energy company (the “Operator”). The contract has a total potential value to us of up to $818,000 in connection with the performance of up to three field trials. Pursuant to this contract, the Operator will provide us funding to develop and manufacture one or more smaller bit designs apart from those bits we normally use, and for us to provide those bits along with our patented PID System to provide as many as three trials at one of Operator’s drilling areas in the onshore United States. The contract specifies that an initial $350,000 will be paid in advance of the first field trial. The initial term of the agreement runs from December 1, 2008 through November 30, 2010, but is terminable by the Operator at any time. At any time within two years following the completion of the initial field trial, the Operator has preferred access to the initial two PID Systems for a 2-year period, subject to the satisfaction of certain minimum utilization requirements. Currently we only have one prototype PID System.
Business Strategy and Plan of Operation
Our initial target customers will continue to be oil and gas operators drilling onshore wells in geologic basins of the U.S. and Canada known to have hard rock and/or highly abrasive formations. We will initially focus our marketing and sales efforts on operators with multi-well drilling programs centered in a few basins. Additionally, we will target customers that exhibit a willingness to embrace emerging technologies.
We expect to deliver value to our customers as a specialty service provider utilizing our patented technology in combination with proprietary equipment executed by our engineering and field personnel. Based on the experience of our management team in the oilfield services industry, we believe that no other company is currently attempting to deliver a comparable drilling service utilizing technology that is similar to the PID System and that is targeted to serve the hard rock drilling market. Instead, we believe suppliers generally design and sell products for hard rock environments that are based on conventional drilling technology.
We expect to operate in a fashion more comparable to a directional drilling or well stimulation service provider. We will provide our system and field personnel to exploration and production operators, service companies and drilling contractors to operate our system as an integral component of the drilling operation. The PID System is expected to result in higher rates of penetration, thereby reducing drilling costs and lowering finding and development costs to improve the overall economics of the oil and gas industry in certain geologic intervals. In addition, we believe that our customer’s ability to reduce drilling days on their hard rock intervals will translate into more efficient rig utilization, which in turn should allow our customers to drill more wells per year per drilling rig. We believe there are multiple revenue models available to us given the potential performance improvement and price our products and services in the manner that we believe will deliver the highest returns to our shareholders.
Industry
Oil and natural gas prices reached record highs during 2008, with the price of crude oil peaking at over $140 per barrel during July 2008 and natural gas wellhead prices averaging $8.92 per mcf through August 2008. Prices have recently dropped precipitously to $40.81 per barrel of oil, and $5.99 per mcf of gas as of December 8, 2008. However, as of December 8, 2008, the Baker Hughes U.S. land rig count was at 1,852, a 3% increase from a year earlier. While land rig activity currently remains at a high level, several public exploration and production companies have recently announced plans to reduce capital expenditure budgets in 2009 signaling a possible weakening of rig utilization in the coming months, primarily in the unconventional shale plays.
Many industry analysts have opined, and we agree, that despite the current economic slowdown, worldwide oil supply growth will ultimately struggle to keep up with demand over the long term. As drilling activity slows, the resulting lower prices should stimulate demand eventually leading to a rebound in drilling activity and capital expenditure levels of exploration and production companies. Thus, we view the longer-term fundamentals in favor of continued robust commodity prices and activity levels in the oil and gas services sector.
We do not believe the current conventional drilling process using traditional rotary rig equipment and conventional drill bits has fundamentally changed for many years. Typically, gains in rates of penetration and absolute drilling efficiency were very small and incremental until 1989. At that time, fixed cutter polycrystalline diamond compact bits, or “PDC bits,” became a functional alternative to roller cone bits for a limited but growing segment of the drilling market. This technology was focused on wells drilled in softer formations as PDC bits could achieve higher rates of penetration and longer run times, both of which achieved appreciable cost savings by reducing drilling time. The industry has adopted PDC bits for these specific applications, although a PDC bit often costs several times more than a comparable roller cone bit. Despite the increased effectiveness of the PDC bit and other technologies, we believe that operators continue to actively seek ways to
improve rates of penetration, particularly in hard rock and abrasive formations, and are very receptive to using promising new technologies to reduce well construction cost.
The PID System
Particle Surface Equipment – The PID System utilizes a mobile particle delivery and recovery system capable of operating with conventional drilling rigs used in our target markets. Our system is designed to entrain, circulate, and recover the particles without allowing the material to pass through the rig pumps. Previous particle abrasive drilling systems did not have the ability to circulate, separate, and re-inject the abrasive or abrading particles and the material passed through the normal rig pumps. An example is the system known as “Abrasive-Jet Drilling” used by Gulf Research and Development Co., a division of Gulf Oil Corporation (“Gulf”), in the 1960’s and 1970’s. Gulf made a number of significant advances in the technology of delivering particles under pressure for the purpose of increasing rate of penetration. Basically, the Gulf system used fine particle abrasives to abrade the formations in order to remove it. This technology requires very high surface pressures of up to 11,000 psi in order to give the small particle the velocity to abrade the formation ahead of the drill bit. In contrast, the PID System utilizes larger particles at normal rig pressures to fracture the formation ahead of the drill bit.
Rig Integration — The PID System is designed to connect to and service an operational well in progress with minimal interference to normal drilling operations. All PID System equipment is either mounted on skids or trailers, and can be coupled to a conventional drilling rig during a scheduled bit trip. A good portion of the PID System is mobilized and rigged up offline so as not to interfere with the drilling operation in progress. Once the operator is finished with the PID interval, the PID System can generally be taken offline during a bit trip without interfering with normal drilling operations. We believe this operational transparency is extremely important for industry acceptance of the PID System.
PID Bit – We are continuing the development of our fit-for-purpose PID bit. The PID bit is a fixed-cutter and nozzle bit designed with a PDC cutting structure. To date, we have developed and tested a 7 7/8 inch PID bit and an 8 1/2 inch PID bit and have completed the investment casting process on both PID bits so that we can mass produce PID bits at a cost that is less than half the cost of our previous PID bits. Further, we have initiated the design of a 6 1/2 inch PID bit in order to address other markets identified to us by prospective customers.
The PID System is designed to entrain, circulate, and recover the particles in the mud system without allowing the particles to circulate through the rig pumps. The PID System is designed as a mobile service that we expect to be provided to the oil and gas operator as part of the normal drilling process and is configured to service a well in progress with minimal interference. The particle injection system used on commercial trials prior to 2008 consisted of a stage one and stage two eductor mechanism which was powered by a high horsepower quintaplex frac pump. As we gained more experience with PID drilling and after running the system for longer periods of time, we determined that the continuously increasing and fluctuating well pressure encountered on these trials resulted in unexpected levels of maintenance on the frac pump and caused difficulty in maintaining a continuous flow of particles to the drill bit.
Testing of the PID System
We have now completed five full scale commercial trials using the PID technology. The first three trials were conducted in the Uinta basin in Utah with Gasco Energy, Inc. The first of these trials was completed in April of 2006 and the last of these trials was completed in December 2006. During these trials, we deployed for the first time the patented PID System on an actual gas well drilling at depths below 10,000 feet. During these three tests, we demonstrated (i) the PID System was capable of delivering rates of penetration that were in-line with or greater than our target penetration rates, which are three times faster than conventional drilling techniques, (ii) we could inject particles while drilling and (iii) we could successfully recover steel particles from the well bore. Due to the age and condition of the drilling rig used on the first trial in April 2006, we experienced certain rig integration issues which were resolved prior to the completion of the first trial. We also demonstrated our ability to recover the steel particles from the well bore even following a complete rig pump shut down. During this trial, we demonstrated on multiple occasions that the PID technology does not damage the well bore, even in situations where several thousand pounds of steel particles settle on top of the PID bit.
In order to achieve continuous PID drilling operations, it is critical to continuously inject and recover the injected particles from the well bore, process them and prepare them for re-injection. During the first field trial, the PID System particle recovery unit became overrun with steel particles and was no longer capable of recovering the particles for re-injection. This accounted for 90% of the PID System’s downtime. Based on this experience and the likelihood for this particle recovery unit to cause problems on future wells, we designed a completely new particle recovery unit that was tested successfully on all subsequent field trials.
In November 2006, we completed our second commercial trial with Gasco. On this trial, we entered the well at a depth of 11,535 feet and drilled approximately 92 feet in 7 hours during the first day of drilling. Certain issues with our frac pump driven injector system limited our drilling performance on the second day and the trial was concluded after drilling a total of 118 feet. The subsequent conventional bit averaged 90 feet in each 24-hour period during the following five days.
In December 2006, we completed our third commercial trial with Gasco. On this trial, we further improved our performance by drilling approximately 121 feet in 8 hours during a 24-hour period. This was our best performance to date, although the frac pump suffered maintenance issues and we were forced to suspend drilling.
In February 2007, we signed a one-year contract with a large independent oil and gas company that is operating in the United States to conduct a series of commercial trials in the Travis Peak formation in east Texas. During 2008, this contract was extended through October 15, 2008 and has now expired. In March 2007, we completed the assembly of our new PID System that included a second frac pump. The new PID System is skid mounted, which allows for quicker rig-up and rig-down. It is also fully automated, based on a variable frequency electric drive system and contains several redundant components further minimizing the risk of disruption.
In March 2007, we conducted our first field trial with this operator in the Travis Peak Formation, which we believe is one of the most abrasive and hard formations in the world. During this field trial, we drilled approximately 212 feet in 12 hours during our first 24 hours of drilling, a substantial improvement from our prior field trials. This trial was suspended as a result of our inability to continue particle injection because of injector related issues among other things.
The frac pump suffered a number of performance related issues on several of the commercial trials. For example, once drilling reached a total depth of approximately 12,500 feet on the Travis Peak trial, the frac pump was unable to generate enough pressure to continue consistent particle injection rates though it was running at close to its peak sustainable performance level.
Despite the successful improvement in drilling performance from well to well, we determined in April 2007 to focus on the continued development and testing of a new particle injection system and notified our customers that we would not conduct any further field trials until such time as a new injection system was field ready.
After evaluating several alternatives, a new extruder based particle injection system was tested successfully and a field unit was designed, constructed and modified before we declared it field ready in May 2008. In August 2008, we conducted our fifth commercial trial in the Travis Peak formation in East Texas. We entered the well at 11,342 feet and drilled approximately 135 feet in 7.3 hours during the first 24 hours of drilling. Due to slow particle returns from the wellbore as a result of non-conventional mud properties and certain first-time-through issues with the surface equipment, our productive drilling time was far less then expected. As a result, the fifth commercial trial was not a commercial success.
We believe that the minor modifications made to our surface system combined with an improvement in mud properties should yield a better performance on future field trials. Further, we believe that the modifications made to our PID bit need to be evaluated in a drilling laboratory prior to field deployment and therefore would prefer not to return to the field with the 8 ½” inch PID bit until we can better evaluate the bottom hole pattern delivered by the current bit. We can provide no assurances, however, that we will be able to successfully commercialize the PID System and resolve all of the technical issues we have encountered with the PID System.
Our primary products still need to demonstrate commercial reliability in order to fully realize the potential of the PID technology. Further, we believe we need to obtain a better understanding of the drill bit cutting pattern in order to further improve the drilling performance. Our operations plan calls for the construction of a small drill bit test facility to allow us to better evaluate the bottom hole pattern, the development of a new smaller PID bit, testing of that bit and a field trial using the preferred bit design. Poor performance of our new particle injection system or other unexpected events while conducting future commercial trials could further extend the shop and laboratory testing phase, which would delay the full commercialization of the PID System and increase the funds needed to complete our research and development. This would have the effect of slowing our advancement as funds otherwise intended to build new PID Systems and expand our operations may be needed to conduct additional research and development.
Competition
We believe that no other company is currently attempting to deliver a comparable drilling service utilizing technology
that is similar to the PID System and that is targeted to serve the hard rock drilling market. It is important to note that the oilfield services industry is highly competitive, and most of our potential competitors have greater financial resources than we do. Many of our potential competitors have been in the oilfield service business for many years and have well-established business contacts with exploration and production companies. Competitors may enter markets served or proposed to be served by us, and we may not be able to compete successfully against such companies or have adequate funds to compete effectively. Recent developments in PDC bits have made them more durable and capable of drilling in certain hard rock environments; however, many customers operating in our target markets continue to utilize conventional bits. In addition, certain techniques have been developed using conventional drill bits which have been effective at increasing performance in certain formations where the use of water or light mud does not pose a significant safety risk.
Patents
Our predecessor company acquired the intellectual property and certain assets and assumed certain liabilities underlying the PID technology in January 2004 pursuant to certain acquisition agreements in which we agreed to (1) purchase certain of the assets and assume certain of the liabilities of ProDril Services Inc. (“PSI”) and ProDril Services International, Ltd. (“PSIL”) related to the PID technology, (2) purchase certain patents related to the PID technology from Curlett Family Limited Partnership, Ltd. (“CFLP”), (3) acquire certain technology licenses from CCORE Technology and Licensing, Ltd. (“CTL”), (4) continue the funding of initial research and development expenses with respect to the technology acquired, and (5) take steps towards the commercialization of the PID technology.
Pursuant to such acquisition agreements with CFLP, we acquired from CFLP their entire right, title and interest throughout the world in and to patents related to the PID technology, including all CFLP inventions and the following patents:
• U.S. Patent No. 6,386,300, issued May 14, 2002, entitled “Formation cutting method and system.”
• Patents in Canada, Australia, and Great Britain that correspond to U.S. Patent No. 6,386,300
• U.S. Patent No. 6,581,700, issued June 24, 2003, entitled “Formation cutting method and system.”
• U.S. Patent No. 7,258,176, issued April 21, 2007, entitled “Drill Bit.”
In addition to the inventions embodied in the CFLP patents described above, we have made system improvements and inventions apart from the CFLP agreement. Accordingly, we have since made numerous other applications for patents, including provisional, utility and continuation-in-part patent applications for various PID System components and apparatuses. There are presently 41 pending patent applications: 15 in the United States and 26 outside of the United States. One of the United States applications was recently allowed and is in the process of being formally issued by the United States patent office and all others are pending.
In connection with our acquisition of the PID technology, we agreed to make certain royalty payments to PSI and PSIL. Under our agreement with PSI, we are obligated to pay PSI a royalty on a quarterly basis equal to 18.0% of our earnings before interest, income taxes, depreciation and amortization (“EBITDA”) derived from the use of the PID technology for such quarter until an aggregate of $67,500,000 has been paid to PSI. Under our agreement with PSIL, we are obligated to pay PSIL a royalty on a quarterly basis equal to 2.0% of our EBITDA derived from the use of the PID technology for such quarter until an aggregate of $7,500,000 has been paid. We have also entered into additional royalty agreements that require us to pay a total of 4.0% of our quarterly gross revenue derived from the use of the PID technology to certain entities from which we acquired the PID technology. These royalty obligations will have the effect of limiting our liquidity and our profitability. As of September 30, 2008, no payments had been made or accrued with respect to these royalty obligations.
We have continued to enhance and improve upon the PID technology and to develop additional technology and know-how in the application of the PID technology. The PID technology and related technologies remain core to our business, and we have continued to seek patent protection in the United States and other countries in which we expect there to be a significant market for our technology.
Research and Development
We are in the early phase of commercial deployment and will continue to invest in research and development. Our research and development program is intended to improve existing products and processes, develop new products and processes, and improve engineering standards and practices that will serve the changing needs of our customers. Our expenditures for research and development activities were $6,074,173 in 2008, $5,894,101 in 2007, and $5,964,438 in 2006.
In our effort to enhance the PID technology, we will continue to seek less expensive ways to manufacture PID bits and other key components of our system and to identify efficiencies going forward. Further, we intend to continue investing in
research and development, subject to available liquidity, in order to expand the market opportunities for PID technology. Currently, we have limited liquidity available to us and may not be able to access additional capital in order to fund additional research and development of the PID system.
Environmental Regulations
We are subject to numerous and changing local, state, and federal laws and regulations concerning the use, storage, treatment, disposal and general handling of materials, some of which may be considered to be hazardous substances and wastes, and restrictions concerning the release of pollutants and contaminants into the environment. These laws and regulations may require us to obtain and maintain certain permits and other authorizations mandating procedures under which we must operate and restrict emissions and discharges. Many of these laws and regulations provide for strict joint and several liabilities for the costs of cleaning up contamination resulting from releases of regulated materials, substances and wastes into the environment. Violation of these laws and regulations as well as terms and conditions of operating permits issued to us may result in the imposition of administrative, civil, and criminal penalties and fines, remedial actions or, in more serious situations, shutdowns or revocation of permits or authorizations. We believe that future compliance by our operating businesses with existing laws and regulations will not have a material adverse effect on us and that future capital expenditures for environmental remediation will not be material.
We regularly monitor and review our operations, procedures and policies for compliance with environmental laws and regulations and our operating permits. There can be no assurance that a review of our past, present or future operations by courts or federal, state, local or foreign regulatory authorities will not result in determinations that could have a material adverse effect on us. In addition, the revocation of any of our material operating permits, the denial of any material permit application or the failure to renew any interim permit, could have a material adverse effect on us. In addition, compliance with more stringent environmental laws and regulations, more vigorous enforcement policies, or stricter interpretations of current laws and regulations, or the occurrence of an industrial accident, could have a material adverse effect on us.
Employees
As of November 25, 2008, we had 19 employees. None of our employees are covered by collective bargaining agreements. We believe that relationships with our employees are satisfactory.
Website
Our website is www.particledrilling.com. The filings we make with the Securities and Exchange Commission (“SEC”), such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, are available free of charge through our website as soon as reasonably practicable after they have been filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (the “1934 Act”). Forms 3, 4 and 5 filed with respect to equity securities under Section 16(a) of the 1934 Act are also available on our website. All of these materials are located at the “Investor Relations” link on our website.
Our website also includes the following corporate governance materials, at the link “Corporate Governance”: the Code of Business Conduct & Ethics and charters of each Board committee, consisting of the Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee. You may also obtain a printed copy of any of the materials referenced above by contacting us through our website or at the following address: Particle Drilling Technologies, Inc., 5611 Baird Court, Houston, Texas 77041.
Item 1A. Risk Factors
We have limited sources of liquidity and may not be able to obtain sufficient funding to realize positive cash flows. The recent deterioration in the credit and capital markets may adversely affect our ability to raise sufficient capital to meet our liquidity needs.
We require substantial capital to pursue our operating strategy and execute our business plan. As we have no revenue and therefore limited sources of cash, we will continue to rely on external sources for liquidity, and for the foreseeable future, our principal source of working capital will be from capital we have raised through private placements of our securities and other external sources. In management’s opinion, based on available cash and cash equivalents on hand as of September 30, 2008, we do not have sufficient liquidity to meet our working capital and capital expenditure requirements for the next 12 months. Because we currently do not generate any cash flow, even if we reduce our overhead and research and development costs as compared to previous years, we will still need to raise additional outside capital in order to maintain sufficient liquidity to meet our working capital and capital expenditure requirements for the next 12 months. Our current monthly operating overhead is approximately $350,000, excluding research and development project costs and non-cash expenses such as depreciation, stock-based compensation and other non-cash expenses, and we expect that such amount could increase if we
choose to expand our operations.
Global financial markets and economic conditions have been, and continue to be, disrupted and volatile. The debt and equity capital markets have been exceedingly distressed. These issues, along with significant write-offs in the financial services sector, the re-pricing of credit risk and the current weak economic conditions have made, and will likely continue to make it difficult to obtain funding from external sources.
In particular, the cost of raising money in the debt and equity capital markets has increased substantially while the availability of funds from those markets generally has diminished significantly. Also, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets generally has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards, refused to refinance existing debt at maturity at all or on similar terms and reduced and, in some cases, ceased to provide funding to borrowers. Given the deterioration in economic conditions and the debt and equity markets, there is a heightened risk that we may not be able to raise sufficient capital or raise capital on acceptable terms to meet our liquidity needs which would ultimately result in our liquidation or bankruptcy.
Even if we are able to demonstrate full commercial success with our products, substantial time may pass before we realize revenues and, as a result, we may require additional capital in the future to produce our products in sufficient commercial quantities in order for us to realize positive cash flows. Any such additional capital may lead to additional dilution of our shareholders. Additionally, it may be difficult for us to raise such additional capital in sufficient quantities or at all.
Our Board of Directors has formed a Special Committee in order to evaluate potential strategic alternatives that may be available to us, including joint ventures, licensing arrangements or a sale of the company. Our Special Committee may not be able to identify any suitable strategic alternative or any identified strategic alternative or transaction may not be completed or successful.
On September 16, 2008, we announced that our Board of Directors formed a Special Committee to evaluate and pursue potential strategic alternatives that may be available to us, including joint ventures with other participants in our industry, technology licensing arrangements, a sale of the company or any other available alternatives. Our Special Committee has retained the services of a financial advisor to assist it in the evaluation process. This process is ongoing and can be lengthy and has inherent costs and risks. We have not determined to pursue any specific strategic alternative at this time, whether we will elect to pursue any such strategic alternative, or what impact any particular strategic alternative will have on our operations or stock price if so pursued. There can be no assurance that our exploration of various strategic alternatives will result in any specific action or transaction. Further, any such strategic alternative may not ultimately be successful or enhance shareholder value.
Uncertainties and risks related to our evaluation and pursuit of potential strategic alternatives include:
| · | the distraction of management and potential disruption of operations, which could have an adverse effect on our ongoing operations; |
| · | the inability to successfully achieve the benefits of any strategic alternative undertaken by us; |
| · | the potential loss of business opportunities as management focuses on the pursuit of various strategic alternatives; and |
| · | perceived uncertainties as to our future as a going concern that can result in loss of potential customers and difficulties motivating, recruiting and retaining personnel. |
Since we announced our formation of a Special Committee, the market price of our stock has been volatile, and such volatility may continue or become more severe if and when any transaction or business arrangement is announced or we announce that we are no longer exploring strategic alternatives. In addition, the recent deterioration in the capital markets and general economic conditions has made it more difficult to obtain financing, which could impair our ability to successfully consummate a strategic transaction. Furthermore, the recent declines in oil and natural gas prices have caused a significant decrease in the demand for oilfield services, including drilling services, which also could impair our ability to complete a strategic transaction. Because of our current lack of liquidity and need for additional capital, our failure to successfully pursue and complete a strategic transaction could result in our liquidation or bankruptcy.
We have a limited operating history and no revenues and are subject to risks inherent in a new business enterprise. As a result, we have not demonstrated to date that we can fully implement our business plan or that the PID technology will be profitable in a commercial application.
The business of PDTI was originally established in June 2003 to: (1) purchase certain of the assets and assume certain of the liabilities of PSI and PSIL related to the PID technology; (2) purchase certain patents underlying the PID technology from CFLP; (3) acquire certain technology licenses related to the PID technology from CTL; (4) continue the funding of research and development expenses with respect to the technology acquired; and (5) take steps towards the commercialization of the PID technology. To date, the business has not generated revenue from its operations and our company does not have sufficient liquidity to remain as a going concern for the next 12 months. We may not be able to fully commercialize our product or generate profitable revenues. Additionally, we and our business have a limited operating history that investors can analyze to aid them in making an informed judgment as to the merits of an investment in us. Any investment in us should be considered a high risk investment because you will be investing in a company with unforeseen costs, expenses, competition, and other problems to which new ventures are often subject. In addition, the technology we acquired is still in the early stage of development for commercial use and has produced only limited results in a commercial setting. Because we are an early stage company, our prospects must be considered in light of the risks, expenses, and difficulties encountered in establishing a new business in a highly competitive industry.
If we are able to commercialize the PID technology, we expect that demand for our PID System will depend on oil and natural gas industry activity and expenditure levels that are directly affected by trends in oil and natural gas prices and other factors.
If we are able to commercialize the PID technology, we expect that demand for our PID System will be substantially dependent on the level of exploration, development and production activity of, and the corresponding capital spending by, oil and natural gas companies. Oil and natural gas companies typically reduce exploration and development activity during periods of low or volatile oil and natural gas prices. The markets for oil and natural gas historically have been volatile and are likely to continue to be so in the future. Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of other factors that are beyond our control. Recently, oil and natural gas prices have experienced a precipitous decline which has led many oil and gas companies to reduce their planned capital expenditures and drilling activity. If this reduction in prices and drilling activity continues over a prolonged period of time, it will result in a decrease in the demand for our PID System and could have a material adverse effect on our financial condition or results of operations. The recent decline in oil and natural gas prices and the resulting decrease in capital expenditures by exploration and production companies has caused a significant decrease in the demand for oilfield services, including drilling services.
Factors affecting the prices of oil and natural gas include:
| | • | the level of demand for oil and natural gas; |
| | • | worldwide political, military and economic conditions, including, but not limited to, the ability of the Organization of Petroleum Exporting Countries to set and maintain production levels and prices for oil; |
| | • | oil and natural gas production/inventory levels; |
| | • | the policies of governments regarding the exploration for and production and development of their oil and natural gas reserves; |
| | • | global weather conditions; |
| | • | interest rates and cost of capital; and |
The PID System is a new technology and it may not be fully accepted in the marketplace to the degree anticipated by management.
The PID technology has only been used or deployed in limited commercial gas wells. To management’s knowledge, no
company has yet marketed a salable product using the technology we are developing. Market acceptance of our products will largely depend upon our ability to demonstrate the PID System’s efficiency, cost effectiveness, safety features and ease of use. We may not be able to demonstrate that the PID System can effectively be deployed on a significant number of commercial oil and gas wells in a safe and cost-effective manner. In addition, we may not have sufficient liquidity to complete the development and commercialization of the PID System. The use of the PID technology will also depend upon concerted sales efforts by our management team. The PID System may never be fully accepted in the market in preference to other competing technologies that currently exist or that may subsequently be developed. If our products are not fully accepted by the marketplace, we may not realize sufficient revenues or cash flow to execute our operations plan and we may be forced to pursue a different strategy or liquidate our company.
In order to enter the oilfield services market on a full scale basis, we must successfully complete additional research and development, the cost of which may exceed the amounts we have budgeted in our operations plan. Any such cost overruns could exhaust our available capital and force us to raise additional capital, which capital may not be available or may lead to additional dilution of our shareholders.
Our primary products must demonstrate satisfactory performance in a significant number of oil and gas wells. Our operations plan calls for further research and development, including the development of different bit sizes and certain minor modifications to our particle injection system. Poor performance of the PID bit or other components of the PID System while conducting commercial trials could reveal additional unidentified issues and further extend the shop and laboratory testing phase, which could further delay the full commercialization of the PID System and increase the funds needed to complete our research and development. Further, in order to fully implement our business plan, we will be required to hire and train a substantial number of new employees. During periods of higher demand for oilfield services, such as ours, the oilfield services industry often operates at near capacity from a human resource perspective, which could limit our ability to hire and train adequate qualified personnel in the future. These circumstances would have the effect of slowing our advancement as funds otherwise intended to build new PID Systems and expand our operations may be needed to conduct additional research or procure and train adequate human resources.
Regardless of the success of the initial research and development, we will require additional research and development and capital spending to continuously improve our service capabilities and expand our operations. In addition, regardless of the amount of research and development completed by us, our products may never be fully adopted in a significant number of oil and gas wells.
We are obligated to make certain royalty payments that will limit our profitability.
In connection with our acquisition of the PID technology, we agreed to make certain royalty payments to PSI and PSIL. Under our agreement with PSI, we are obligated to pay PSI a royalty on a quarterly basis equal to 18.0% of EBITDA derived from the use of the PID technology for such quarter until an aggregate of $67,500,000 has been paid to PSI. Under our agreement with PSIL, we are obligated to pay PSIL a royalty on a quarterly basis equal to 2.0% of our EBITDA derived from the use of the PID technology for such quarter until an aggregate of $7,500,000 has been paid. We have also entered into additional royalty agreements that require us to pay a total of 4.0% of our quarterly gross revenue derived from the use of the PID technology to certain entities from which we acquired the PID technology. If we are able to generate earnings, these royalty obligations will have the effect of limiting our liquidity and our profitability.
We rely on the intellectual property rights we acquired to the PID technology and we may not be able to successfully protect or defend our intellectual property rights. Our competitive position depends to a significant extent on our ability to assert and defend our intellectual property rights in order to restrict other competitors from offering similar services.
Our success depends on certain patents and patent applications that we purchased from CFLP, CTL, PSI and PSIL, along with other proprietary intellectual property rights we have developed or intend to develop. We rely on a combination of nondisclosure and other contractual arrangements and trade secret, patent, copyright, and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property. The steps we have taken to protect our rights may not be adequate to deter misappropriation of our proprietary information. We also may not be able to detect unauthorized use of and take appropriate steps to enforce our intellectual property rights. In addition, the laws of some foreign countries may not protect our proprietary rights as fully or in the same manner as do the laws of the United States. Also, despite the steps taken by us to protect our proprietary rights, others may develop technologies that are similar or superior to the PID technology and/or design around the proprietary rights we own.
We are also subject to the risk of litigation alleging infringement of third-party intellectual property rights. Any such claims could require us to spend significant sums in litigation, pay damages, develop non-infringing intellectual property or acquire licenses to the intellectual property which is the subject of the asserted infringement. If we are unable to successfully
enforce our intellectual property rights, or if claims are successfully brought against us for infringing the intellectual property rights of others, such events could cause us to pay substantial damages, cause us to lose a key competitive advantage, force us to conduct additional research to develop non-infringing technology or cause us to have to pursue a different business strategy.
We may face intense competition in our industry from companies with a more established reputation and greater financial resources than us.
The oilfield services industry is highly competitive, and most of our potential competitors have greater financial resources than we do. Many of our potential competitors have been in the oilfield drilling business for many years and have well-established business contacts with exploration and production companies. Competitors may enter markets served or proposed to be served by us, and we may not be able to compete successfully against such companies or have adequate funds to compete effectively.
Because our PID System is used in potentially hazardous applications and operations, our business is subject to risks associated with events that result in personal injuries, loss of life, damage to or destruction of property, equipment or the environment and suspension of operations.
Our PID System is used in potentially hazardous drilling applications. These activities are dangerous and accidents can result in:
| | • | damage to or destruction of property, equipment and the environment; and |
| | • | suspension of operations. |
Litigation arising from a catastrophic occurrence at a location where our PID System is used may result, in the future, in our being named as a defendant in lawsuits asserting potentially large claims.
The frequency and severity of any of these incidents would affect our operating costs, insurability and relationships with customers, employees and regulators. Any increase in the frequency or severity of these incidents, or the general level of compensation awards resulting from these incidents, could affect our ability to obtain projects from oil and natural gas companies or insurance covering these incidents.
Compliance with environmental and other government regulations could adversely affect our business.
Our business is significantly affected by federal, state and local laws and regulations relating to:
| | • | the oil and natural gas industry; and |
| | • | worker safety and environmental protection. |
If we are able to successfully commercialize the PID technology, we expect that demand for our PID System will be affected by a variety of factors, including taxes, price controls and the adoption or amendment of laws and regulations. For example, the adoption of laws and regulations curtailing the exploration and development of oil and natural gas in our expected areas of operation for economic, environmental or other policy reasons could adversely affect our operations by limiting demand for our products and services.
The technical requirements of the foreign, federal, state and local laws and regulations affecting our businesses are becoming increasingly complex and stringent. For instance, some environmental laws may provide for “strict liability” for damages to natural resources or threats to public health and safety, rendering a party liable for environmental damage without regard to negligence or fault on the part of the party. Sanctions for noncompliance with these laws and regulations may include:
| | • | issuance of corrective action orders; |
| | • | assessment of administrative, civil or criminal penalties; and |
| | • | issuance of injunctions restricting or prohibiting our operations. |
Some environmental laws provide for joint and several strict liability for remediation of spills and releases of hazardous substances. In addition, we may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances, as well as damage to natural resources. These laws and regulations also may expose us to liability for the conduct of, or conditions caused by, others, or for our acts that were in compliance with applicable laws at the time the acts were performed.
Our stockholders may experience substantial dilution as a result of the exercise of outstanding options and warrants to purchase our common stock or future issuances of additional shares of our common stock, any of which could have an adverse effect on the market price of our common stock.
In connection with our acquisition of our subsidiary, Particle Drilling Technologies, Inc., a Delaware corporation, we assumed warrants to purchase 74,141 shares of common stock and options issued under PDTI’s 2004 Incentive Stock Plan to purchase 2,760,000 shares of common stock. In connection with the private placement of our common stock in February 2005, we granted the placement agent warrants to purchase 1,500,000 shares of our common stock, of which 205,000 were still outstanding as of September 30, 2008. In connection with the private placement of our common stock in October 2006, we granted the investors warrants to purchase 1,500,000 shares of our common stock at $3.25 per share. Since our acquisition of PDTI, we have issued options to purchase an additional 1,193,584 shares of our common stock under our equity incentive plans. The common stock issuable upon exercise of these options and warrants represents approximately 8% of our outstanding shares of common stock on a fully-diluted basis. The exercise of these options and warrants would result in substantial dilution to our existing stockholders and any sales of these shares of common stock, or the perception that these sales might occur, could lower the market price of our common stock.
We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for common stock in connection with the hiring of personnel, future acquisitions, future public offerings or private placements of our securities for capital raising purposes, or for other business purposes. Future sales of substantial amounts of our common stock, or the perception that sales could occur, could have a material adverse effect on the market price of our common stock.
Our common stock has experienced, and may continue to experience, price volatility. The limited trading volume of our common stock may contribute to this price volatility.
The trading price of our common stock has been, and may continue to be, highly volatile. We believe this volatility is due to, among other things, our lack of revenues, current expectations of our future financial performance and the volatility of the stock market in general.
Moreover, our common stock, which began trading on The NASDAQ Capital Market® on June 28, 2005, does not have substantial trading volume. During the year ended September 30, 2008, the average daily trading volume of our common stock as reported by The NASDAQ Capital Market® was approximately 138,190 shares, which represents less than 1% of our outstanding shares of common stock. As a result, relatively small trades of our common stock may have a significant impact on the price of our common stock and, therefore, may contribute to the price volatility of our common stock.
Because of the limited trading volume in our common stock and the price volatility of our common stock, you may be unable to sell your shares of common stock when you desire or at the price you desire. Moreover, the inability to sell your shares in a declining market because of such illiquidity or at a price you desire may substantially increase your risk of loss.
We presently do not intend to pay cash dividends on our common stock.
We currently anticipate that no cash dividends will be paid on our common stock in the foreseeable future. While our dividend policy will be based on the operating results and capital needs of the business, we anticipate that all earnings, if any, will be retained to finance the future expansion of our company.
Item 1B. Unresolved Staff Comments
None Applicable
We currently lease our 48,750 square foot executive office and industrial facility located at 5611 Baird Court, Houston, Texas 77041. The term of this lease is for 60 months and commenced in September 2007.
We believe that our property is generally in good condition, is well maintained, and is generally suitable and adequate to conduct our business.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of fiscal year 2008 to a vote of the holders of our common stock, through the solicitation of proxies or otherwise.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock trades on the NASDAQ Capital Market under the symbol PDRT. The following table sets forth the high and low bid prices per share of our common stock for the fiscal years ended September 30, 2008 and 2007.
| | | High | | | Low | |
| Fiscal Year Ended September 30, 2007 | | | | | | |
| First Quarter | | $ | 4.50 | | | $ | 2.37 | |
| Second Quarter | | $ | 4.39 | | | $ | 3.34 | |
| Third Quarter | | $ | 4.25 | | | $ | 2.05 | |
| Fourth Quarter | | $ | 3.42 | | | $ | 1.91 | |
| | | | | | | | | |
| Fiscal Year Ended September 30, 2008 | | | | | | | | |
| First Quarter | | $ | 3.70 | | | $ | 2.30 | |
| Second Quarter | | $ | 2.70 | | | $ | 1.40 | |
| Third Quarter | | $ | 3.20 | | | $ | 1.75 | |
| Fourth Quarter | | $ | 2.83 | | | $ | 0.01 | |
Holders
The approximate number of holders of record of the shares of our common stock was 248 as of December 1, 2008.
Dividends
Holders of shares of common stock will be entitled to receive cash dividends when, as and if declared by our Board of Directors, out of funds legally available for payment thereof. However, if dividends are not declared by our Board of Directors, no dividends shall be paid. We have not paid any dividends on our common stock during our two most recent fiscal years.
We do not anticipate that any cash dividends will be paid in the foreseeable future. While our dividend policy will be based on the operating results and capital needs of the business, we anticipate that all earnings, if any, will be retained to finance our future expansion. Therefore, prospective investors who anticipate the need for immediate income by way of cash dividends from their investment should not purchase our securities.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes, as of September 30, 2008, certain information regarding equity compensation to our employees, officers, directors and other persons under our equity compensation plans:
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | (a) | | (b) | | (c) |
| Equity compensation plans approved by security holders* | 175,000 | | 2.21 | | 631,750 |
| Equity compensation plans not approved by security holders** | 5,585,716 | | $ | 1.91 | | 34,750 |
| | | | | | |
| Total | 5,760,716 | | $ | 1.92 | | 666,500 |
| * | In March 2007, our shareholders approved and adopted the Particle Drilling Technologies, Inc. 2007 Stock Incentive Plan. This plan provides for the issuance of up to 1,500,000 shares of common stock pursuant to incentive stock options, non-statutory stock options and restricted stock grants to our directors, employees and consultants. Awards may be granted at not less than the fair market value (as defined in this plan) on the date the awards are granted. The options expire ten years after the date of grant unless otherwise specified in the award agreement. |
| ** | The following equity compensation plans have not been approved by security holders: |
| | • | In April 2004, the Board of Directors of Particle Drilling, Inc. approved and adopted the 2004 Stock Plan. The stockholders of PDTI adopted this plan in August 2004. This plan provides for the issuance of incentive stock options, non-statutory stock options and restricted stock grants to our directors, employees and consultants. This plan provides for the issuance of options and restricted stock awards to purchase or issue up to 3,500,000 shares of common stock. Awards may be granted at not less than the fair market value (as defined in this plan) on the date such awards are granted. The options expire ten years from the date granted unless otherwise specified in the award agreement. |
| | • | In March 2005, our Board of Directors approved and adopted the Particle Drilling Technologies, Inc. 2005 Stock Incentive Plan. This plan provides for the issuance of non-statutory stock options and restricted stock grants to our directors, employees and consultants. This plan provides for the issuance of options and restricted stock awards to purchase or issue up to 2,000,000 shares of common stock. Awards may be granted at not less than the fair market value (as defined in this plan) on the date the awards are granted. The options expire ten years after date of grant unless otherwise specified in the award agreement. |
| | • | On April 30, 2004, Particle Drilling, Inc. granted warrants to ten consultants as consideration for services provided to Particle Drilling, Inc. Pursuant to these warrants, the ten consultants have the right to purchase up to an aggregate of 19,000 shares of common stock of Particle Drilling, Inc. (consisting of warrants to purchase 5,000 shares, 5,000 shares, 5,000 shares, and 4,000 shares). On June 17, 2004, Particle Drilling, Inc. granted warrants to an additional consultant for services provided to Particle Drilling, Inc., pursuant to which such consultant has the right to purchase up to 10,000 shares of common stock of Particle Drilling, Inc. The warrants described in this paragraph have an exercise price of $0.12 and a maximum term of five years from the date granted. All of these warrants were converted into warrants to purchase common stock of PDTI in connection with the merger of Particle Drilling, Inc. into PDTI, and were then assumed by our company in connection with our acquisition of PDTI. |
| | | On November 1, 2004, PDTI granted warrants to two consultants as consideration for services provided to PDTI, pursuant to which such consultants have the right to purchase up to 10,000 shares and 2,500 shares, respectively, of common stock of PDTI. The warrants described in this paragraph have an exercise price of $3.00 per share and maximum term of five years from the date granted. In connection with our acquisition of PDTI, we assumed these warrants. |
| | • | On January 11, 2005, PDTI granted warrants to eight parties affiliated with the placement agent as compensation for their services in connection with the private placement of PDTI Series A preferred stock in January 2005. Pursuant to these warrants, the parties affiliated with the placement agent have the right to purchase up to an aggregate of 42,641 shares of our common stock (consisting of warrants to purchase 32,641 shares and 10,000 shares). The warrants described in this paragraph have an exercise price of $2.00 and a maximum term of five years from the date granted. In connection with our acquisition of PDTI, we assumed these warrants. |
| | | On February 9, 2005, we granted warrants to seven parties affiliated with the placement agent in connection with the private placement of our common stock in February 2005 as consideration for services provided to us. Pursuant to these warrants, the parties affiliated with the placement agent have the right to purchase up to an aggregate of 205,000 shares of our common stock (consisting of warrants to purchase 135,000 shares, 30,000 shares, 25,000 shares and 15,000 shares). The warrants described in this paragraph have an exercise price of $2.00 per share and a maximum term of ten years from the date granted. |
| | | On October 17, 2006, we granted warrants to parties in connection with the private placement of our common stock in October 2006. Pursuant to these warrants, the parties affiliated with the placement agent have the right to purchase up to an aggregate of 1,500,000 shares of our common stock. The warrants described in this paragraph have an exercise price of $3.25 per share and a maximum term of ten years from the date granted. |
Unregistered Sales of Equity Securities
None.
Item 6. Selected Financial Data
The following table sets forth our selected financial data derived from our consolidated financial statements. The selected financial data should be read in conjunction with our consolidated financial statements and notes thereto, included elsewhere in this report.
| | | Year Ended September 30, | | | | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | | | | |
| Statement of Operations Data: | | | | | | | | | | | | | | | |
| Revenues | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Operating expenses: | | | — | | | | — | | | | — | | | | — | | | | — | |
| Research and development | | | 6,074,173 | | | | 5,894,101 | | | | 5,964,438 | | | | 2,802,155 | | | | 621,752 | |
| General and administrative | | | 5,050,508 | | | | 4,942,621 | | | | 4,581,604 | | | | 3,182,313 | | | | 2,683,024 | |
| Impairment of asset | | | — | | | | 295,260 | | | | — | | | | — | | | | — | |
| Gain on sale of assets | | | (756,469 | ) | | | — | | | | — | | | | — | | | | — | |
| Loss from operations | | | (10,368,212 | ) | | | (11,131,982 | ) | | | (10,546,042 | ) | | | (5,984,468 | ) | | | (3,304,776 | ) |
| Other income (expenses) | | | 81,273 | | | | 377,713 | | | | 356,455 | | | | 260,050 | | | | (26,224 | ) |
| Net loss | | $ | (10,286,939 | ) | | $ | (10,754,269 | ) | | $ | (10,189,587 | ) | | $ | (5,724,418 | ) | | $ | (3,331,000 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Basic and Diluted Net Loss Per Share: | | | | | | | | | | | | | | | | | | | | |
| Loss from operations | | $ | (0.32 | ) | | $ | (0.37 | ) | | $ | (0.43 | ) | | $ | (0.27 | ) | | $ | (0.257 | ) |
| Net loss | | $ | (0.32 | ) | | $ | (0.36 | ) | | $ | (0.42 | ) | | $ | (0.26 | ) | | $ | (0.25 | ) |
| Weighted average shares outstanding | | | 32,490,392 | | | | 30,185,030 | | | | 24,520,619 | | | | 22,150,365 | | | | 13,364,183 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cash Flow Data: | | | | | | | | | | | | | | | | | | | | |
| Net cash used in operating activities | | $ | (7,769,269 | ) | | $ | (6,870,071 | ) | | $ | (7,192,123 | ) | | $ | (4,625,184 | ) | | $ | (1,714,691 | ) |
| Net cash provided by (used in) investing activities | | | 521,215 | | | | (1,629,629 | ) | | | (843,515 | ) | | | (1,723,254 | ) | | | (267,546 | ) |
| Net cash (used in) provided by financing activities | | | 5,082,268 | | | | 10,670,043 | ) | | | (177,422 | ) | | | 16,832,721 | | | | 1,999,098 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet Data (at end of period): | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 2,296,143 | | | $ | 4,461,929 | | | $ | 2,291,586 | | | $ | 10,504,646 | | | $ | 20,363 | |
| Working capital surplus (deficiency) | | | 1,259,076 | | | | 4,329,347 | | | | 1,411,485 | | | | 9,386,096 | | | | (1,301,027 | ) |
| Total assets | | | 5,364,157 | | | | 7,827,079 | | | | 5,483,362 | | | | 13,548,413 | | | | 1,570,585 | |
| Long-term debt | | | 15,381 | | | | 24,537 | | | | 15,305 | | | | 9,463 | | | | 20,201 | |
| Total stockholders’ equity | | | 3,915,492 | | | | 6,491,247 | | | | 3,967,629 | | | | 12,148,107 | | | | 118,459 | |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read together with the unaudited consolidated financial statements and related notes that are included elsewhere in this report.
Overview
On January 14, 2005, we acquired Particle Drilling Technologies, Inc., a privately-held Delaware corporation (“PDTI”). As a result of this acquisition, our company, which previously had no material operations, acquired the business of PDTI and we are now engaged in the development of the Particle Impact Drilling System, a patented system utilizing a specially designed “fit for purpose” drill bit fitted with jetting nozzles and polycrystalline diamond compact cutting structures for use in the oil and gas drilling industry.
We are a development-stage company and have a limited operating history. Our predecessor company for financial reporting purposes was formed on June 9, 2003 to acquire the technology related to the Particle Impact Drilling System (the “PID System” or “PID technology”). We are still developing this technology, and to date, we have not generated any revenues from our operations. Currently, we have limited liquidity and therefore our business activities have been curtailed. We are currently reviewing strategic alternatives and hope that any such transaction would assist us in accelerating the commercialization of our technology. Our Board of Directors has determined it would be in the best interest of the Company and its shareholders to evaluate all available strategic alternatives, including a strategic industry joint venture, technology licensing arrangement, sale of the company, and other available alternatives. If we are able to identify a strategic partner that can provide additional capital, resources, test facilities and drilling opportunities, we will continue to execute our operations plan which will likely result in increases to our development and operating expenses.
In management’s opinion, based on available cash and cash equivalents on hand as of September 30, 2008, we do not have the ability to maintain sufficient liquidity to meet our working capital and capital expenditure requirements for the next 12 months. We must raise additional capital in order to continue our operations. The equity and debt capital markets have recently experienced adverse conditions and extreme volatility which may, if such conditions persist, impair our ability to raise capital on satisfactory terms, or at all. Our continued existence depends on our ability to raise additional outside capital and the successful development of the PID technology and our ability to successfully commercialize this technology.
Research and development. We have made and possibly will continue to make substantial investments in research and development activities in order to develop and market the PID technology. Research and development costs consist primarily of general and administrative and operating expenses related to research and development activities. We expense research and development costs as incurred except for property, plant and equipment related to research and development activity that have an alternative future use. Property, plant and equipment for research and development activity that have an alternative future use are capitalized and the related depreciation is expensed as research and development costs.
General and administrative. General and administrative expenses consist primarily of salaries and benefits, office expense, professional services, and other corporate overhead costs. We have experienced and if successful with the development of the PID technology, would expect to continue to experience increases in general and administrative expenses as a result of: (1) being subject to reporting and compliance obligations applicable to publicly-held companies; (2) our continuing efforts to develop, test and prepare the PID technology for commercialization; and (3) the hiring of additional personnel. Given our current liquidity situation, we expect near term general and administrative expenses to decrease as compared to prior years.
Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents. We are devoting substantially all of our efforts to product development and commercializing the PID technology. In the course of our development activities, we have sustained operating losses and expect such losses to continue into fiscal 2009. We intend to finance our operations primarily through cash and cash equivalents on hand, through cashflow from operations if we are able to successfully engage in commercial operations that generate revenue, and other potential capital raising transactions. However, we have yet to generate any revenues, and can provide no assurance of future revenues. To management’s knowledge, no company has yet marketed a salable product using the technology we are developing. Even if marketing efforts are successful, substantial time may pass before revenues are realized.
In management’s opinion, based on available cash and cash equivalents on hand as of September 30, 2008, we do not have the ability to maintain sufficient liquidity to meet our working capital and capital expenditure requirements for the next 12 months. Management must raise additional outside capital in order to improve our liquidity position. The equity and debt capital markets have recently experienced adverse conditions and extreme volatility which may, if such conditions persist, impair our ability to raise capital on satisfactory terms, or at all. Our continued existence depends on our ability to raise additional outside capital and the successful development of the PID technology and our ability to successfully commercialize this technology.
Since inception on June 9, 2003 through September 30, 2008, we have financed our operations through private sales of our equity and the issuance of convertible notes, totaling net proceeds of $35,397,913. As of September 30, 2008, we had $2,296,143 in cash and cash equivalents. On April 21, 2008, we completed a subscription rights offering to sell approximately 3.5 million shares of common stock at $1.50 per share. Gross proceeds totaled approximately $5.25 million. In the subscription rights offering, all common shareholders received one non-transferable right to purchase 0.11025 shares of our common stock for each share that they held of record as of 5:00 p.m., central time, on March 17, 2008. These subscription rights expired if not exercised by 5:00 p.m., central time, on April 16, 2008.
Cash Flows from Operating Activities. Cash flow used for operations is primarily affected by our research and development progress and business development. Net cash flows used in operating activities during the fiscal year ended September 30, 2008 were $(7,769,269) compared to $(6,870,071) during the fiscal year ended September 30, 2007. The increase from fiscal 2007 to fiscal 2008 was mainly the result of increased cash spending on research and development activities associated with the PID System development and a gain on the sale of certain non-core assets.
Cash Flows from Investing Activities. Cash flow provided by (used in) investing activities during the fiscal year ended September 30, 2008 was $521,215 compared to $(1,629,629) during the fiscal year ended September 30, 2007. During the fiscal year ended September 30, 2008, we sold various non-core assets for net proceeds of $851,617. Offsetting this amount was $290,504 paid for the purchase of acquiring and servicing patents.
Cash Flow from Financing Activities. Net cash provided by financing activities during the fiscal year ended September 30, 2008 was $5,082,268 compared to $10,670,043 during the fiscal year ended September 30, 2007. On April 21, 2008, we completed the previously-described subscription rights offering to sell approximately 3.5 million shares of common stock at $1.50 per share. Gross proceeds totaled approximately $5.25 million.
Contractual Obligations. In April 2007, we entered into a 60 month lease agreement that commenced in September 2007 for a new corporate office and operating facility and delivered to the lessor a security deposit of $41,144. The new facility combined the corporate office personnel and the operations personnel into one location at 5611 Baird Court, Houston, Texas 77041. The total future minimum lease payments under this lease are $1,849,132.
| | | Payments Due by Period | |
| Contractual Obligations | | Total | | | Less than 1 year | | | 1 - 3 years | | | 3 - 5 years | | | More than 5 years | |
| | | | | | | | | | | | | | | | |
| Long-Term Debt Obligation and Short Term Notes Payable (including current portion) | | $ | 108,309 | | | $ | 92,928 | | | $ | 15,381 | | | $ | — | | | $ | — | |
| Equipment Purchase Commitments | | | 59,002 | | | | 59,002 | | | | — | | | | — | | | | — | |
| Operating Lease Obligations | | | 1,849,132 | | | | 432,257 | | | | 1,416,875 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 2,016,443 | | | $ | 584,187 | | | $ | 1,432,256 | | | $ | — | | | $ | — | |
Results of Operations
Comparison of Year Ended September 30, 2008 with Year Ended September 30, 2007
Research and development. Research and development expenses were $6,074,173 and $5,894,101 for the fiscal years ended September 30, 2008 and 2007, respectively, representing an increase of $180,072. During the fiscal year ended September 30, 2008, we incurred approximately $280,000 less in direct research and development costs associated with the construction and testing of the new particle injection system as compared to fiscal year ended September 30, 2007. While these direct costs decreased, the research and development costs relating to overhead increased from the fiscal year ended
September 30, 2007 to the fiscal year ended September 30, 2008. Employee related costs increased approximately $180,000, including an increase of approximately $100,000 in stock based compensation charges. In addition, general liability insurance increased approximately $60,000 and rent expense increased approximately $130,000.
General and administrative. General and administrative expenses were $5,050,508 and $4,942,621 for the fiscal years ended September 30, 2008 and 2007, respectively, representing an increase of $107,887. Employee related costs increased approximately $101,000, including a decrease of approximately $38,000 related to stock based compensation charges. Additional expenses included an increase in rent of approximately $62,000 and property taxes of approximately $97,000 from fiscal 2007 to fiscal 2008. This increase was partially offset by a decrease in investor relations expense which decreased approximately $57,000 as well as a decrease in SEC filing fees of approximately $60,000.
Impairment of asset. In January 2007, we purchased a quintaplex frac pump for approximately $1.4 million. In September 2007, management decided to place this frac pump on the market for sale as a result of the development of the new extruder-based injection system being constructed that is meant to replace the frac pump based injection system. We commenced our selling efforts during September 2007 at which time the carrying amount of the frac pump was reclassified as an asset held for sale. We recognized an impairment on the asset of $295,260, and the net book value of the frac pump at September 30, 2007 was reduced to $900,000, reflecting management’s estimate of the realizable value of the frac pump. The asset was subsequently placed back into assets held for use when we sold our other frac pump and it was determined by management that we would need this frac pump to continue research and development testing. There were no such impairment charges in fiscal 2008. In November 2008, this frac pump was sold for $840,000.
Gain on sale of asset. During fiscal 2008, we sold various non-core assets including a lathe, an OPI triplex pump and a frac pump. Proceeds from the sale of these non-core assets totaled $851,617 yielding a gain on sale of assets of $756,469. There were no such sales of non-core assets in fiscal 2007.
Other income. Other income was $81,273 and $377,713 for the years ended September 30, 2008 and 2007, respectively, representing a decrease in other income of $296,440. The increase was primarily attributable to a decrease in interest income from a smaller average cash balance throughout fiscal 2008 compared to fiscal 2007.
Comparison of Year Ended September 30, 2007 with Year Ended September 30, 2006
Research and development. Research and development expenses were $5,894,101 and $5,964,138 for the fiscal years ended September 30, 2007 and 2006, respectively, representing a decrease of $70,037. During the fiscal year ended September 30, 2006, we conducted a test program with the PID System at Catoosa in November 2005 resulting in costs of approximately $385,000. A commercial trial with a customer in May 2006 resulted in job differential time charges of approximately $135,000, and a second attempted commercial trial with the same customer in September 2006 resulted in job differential time charges of approximately $81,000. We incurred other field charges of approximately $511,000 associated with the two customer trials during the fiscal year ended September 30, 2006. During the fiscal year ended September 30, 2007, we only incurred approximately $74,000 in job differential time charges and there have been no additional test programs of the PID System at Catoosa. Further, during the period from October 2006 to September 30, 2007, we incurred costs of approximately $380,000 related to the design, engineering, construction and testing of two alternative particle injection systems and approximately $500,000 related to the completion of the second PID Unit. These increases in research and development costs that are present in the current fiscal year were offset by a decrease of approximately $585,000 in consulting expenses.
General and administrative. General and administrative expenses were $4,942,621 and $4,581,604 for the fiscal years ended September 30, 2007 and 2006, respectively, representing an increase of $361,017. Employee related costs increased approximately $912,000, including an increase of approximately $600,000 related to stock based compensation charges. Additional charges for services related to directors’ compensation increased approximately $100,000, which consists mostly of stock based compensation charges. This increase was partially offset by a decrease in legal and litigation expenses which decreased $307,000. Other decreases are primarily related to marketing, Sarbanes-Oxley compliance, and advisory fees, all of which were substantially lower this year due to better terms or lack of similar expenses incurred in the most recently completed fiscal year.
Impairment of asset. In January 2007, we purchased a quintaplex frac pump for approximately $1.4 million. In September 2007, management decided to place this frac pump on the market for sale as a result of the development of the new extruder-based injection system being constructed that is meant to replace the frac pump based injection system. We commenced our selling efforts during September 2007 at which time the carrying amount of the frac pump was reclassified
as an asset held for sale, as reflected on the accompanying September 30, 2007 consolidated balance sheet. We recognized an impairment on the asset of $295,260, and the net book value of the frac pump at September 30, 2007 was reduced to $900,000, reflecting management’s estimate of the realizable value of the frac pump. There were no such impairment charges in fiscal 2006.
Other income. Other income was $377,713 and $356,455 for the fiscal years ended September 30, 2007 and 2006, respectively, representing an increase in other income of $21,258. The increase was primarily attributable to an increase in interest income from a larger average cash balance throughout fiscal 2007 compared to fiscal 2006.
Off-Balance Sheet Arrangements
In connection with the acquisition of the PID technology in January 2004, PDTI entered into a Royalty Agreement with ProDril Services, Incorporated (“PSI”) pursuant to which we are obligated to pay PSI a royalty on a quarterly basis equal to 18% of our EBITDA derived from the use of the PID technology, until an aggregate of $67,500,000 has been paid. PDTI also entered into a Royalty Agreement in January 2004 with PSIL pursuant to which we are obligated to pay PSIL a royalty on a quarterly basis equal to 2% of our EBITDA derived from the use of the PID technology, until an aggregate of $7,500,000 has been paid. In addition, we are obligated to pay CTL, PSI and PSIL a royalty equal to 1.6%, 1.2% and 1.2%, respectively, of our quarterly gross revenue, derived from the use of the PID technology. As of September 30, 2008, we had no revenues or EBITDA; therefore no royalties have been paid or accrued.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our most significant judgments and estimates used in the preparation of our consolidated financial statements.
Impairment of Long-Lived Assets. We evaluate our long-lived assets for indicators of possible impairment by comparison of the carrying amounts to future net undiscounted cash flows expected to be generated by such assets when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair value or discounted estimates of future cash flows. We also evaluate the capitalized costs for patents and patent applications filed but not issued for possible impairments. We have not identified any such impairment losses to date. The evaluation of capitalized costs for patents and patent applications is based on a subjective cash flow forecast which is subject to change. We will reassess our cash flow forecast each time there are fundamental changes in the underlying potential use of the patents or patent applications in terms of performance, customer acceptance or other factors that may affect such cash flow forecasts.
Depreciation and Amortization. Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful life of the asset, which ranges from three to six years. Leasehold improvements are amortized using the straight-line method over the estimated useful life of the asset or the term of the lease, whichever is shorter. Whenever assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is expensed as incurred and any significant improvements that extend the useful life of an asset are capitalized.
Stock-Based Compensation. In December 2004, the Financial Accounting Standards Board (“FASB”) issued a revision to SFAS No. 123, Share-Based Payment, (“SFAS No. 123(R)”). This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS No. 123 as originally issued. This statement is effective for new awards and those modified, repurchased or cancelled in interim or annual reporting periods beginning after June 15, 2005. We early adopted this standard upon inception.
Research and Development. The costs of materials and equipment or facilities that are acquired or constructed for
research and development activities and that have alternative future uses are capitalized as tangible assets when acquired or constructed. The cost of such materials consumed in research and development activities and the depreciation of such equipment or facilities used in those activities are research and development costs. However, the costs of materials, equipment, or facilities acquired or constructed for research and development activities that have no alternative future uses are considered research and development costs and are expensed at the time the costs are incurred.
Income Taxes. We report our income taxes in accordance with SFAS 109, Accounting for Income Taxes, (“SFAS 109”) which calls for the utilization of the asset and liability method of accounting for income taxes. Under this method, deferred taxes are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted marginal tax rates and laws that will be in effect when the differences reverse. Temporary differences have been created for all stock option plans and are included in our SFAS 109 computation. At September 30, 2008, we had cumulative net operating loss carryforwards of approximately $33,476,000, which expire in years 2009 through 2027. No effect has been shown in the consolidated financial statements for the net operating loss carryforwards as the likelihood of future tax benefit from such net operating loss carryforwards is not determinable at this time. Accordingly, the potential tax benefits of the net operating loss carryforwards, estimated based upon tax rates at September 30, 2008, have been offset by valuation reserves of the same amount.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years beginning after December 15, 2006 (our fiscal year 2008) and the provisions of FIN 48 will be applied to all tax positions under Statement No. 109 upon initial adoption. We have adopted FIN 48 and there was no effect on our financial statements as a result of its implementation.
In September 2006, the FASB issued Statement of Financial Accounting Standards, “SFAS” No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. We believe that the adoption of SFAS No. 157 will not have a material impact on our financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We will adopt SFAS No. 159 on October 1, 2008 and have not yet determined the impact, if any, on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS 141R), which replaces SFAS 141, Business Combinations. SFAS 141R establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including noncontrolling interests, contingent consideration, and certain acquired contingencies. SFAS 141R also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination. SFAS 141R will be applicable prospectively to business combinations beginning in the Company’s 2010 fiscal year.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary. SFAS 160 also requires that a retained noncontrolling interest upon the deconsolidation of a subsidiary be initially measured at its fair value. SFAS 160 is effective for our 2010 fiscal year. Upon adoption of SFAS 160, we will be required to report our noncontrolling interests, if any, as a separate component of shareholders’ equity. We will also be required to present net income allocable to the noncontrolling interests, if any, and net income attributable to our shareholders of separately in our consolidated statements of income. Currently, noncontrolling interests (minority interests) are reported as a liability in our statement of financial position and the related income attributable to minority interests is
reflected as an expense in arriving at net income. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosure related to derivatives and hedging activities and thereby seeks to improve the transparency of financial reporting. Under SFAS No. 161, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 must be applied prospectively to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS No. 133 for all financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. We do not expect the adoption of SFAS No. 161 to significantly impact our financial position, results of operations or cash flows.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We are currently evaluating the potential impact the new pronouncement will have on our consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and other GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. We are currently evaluating the potential impact the new pronouncement will have on our consolidated financial statements.
Forward-Looking Statements
Statements in this annual report on Form 10-K that are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements subject to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements can be identified by the use of forward-looking terminology including “forecast,” “may,” “believe,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition or state other “forward-looking” information. We and our representatives may from time to time make other oral or written statements that are also forward-looking statements.
These forward-looking statements are made based upon our management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements as a result of certain factors, including but not limited to dependence upon energy industry spending, the volatility of oil and gas prices, weather interruptions, the results of testing of our products, the availability of capital resources, our ability to successfully complete any strategic alternative and the other factors described under “Item 1A. Risk Factors.” We undertake no obligation to update any forward-looking statements except as required by law.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We believe that we do not have any material exposure to financial market risk and we do not enter into foreign currency or interest rate transactions.
Item 8. Financial Statements and Supplementary Data
PARTICLE DRILLING TECHNOLOGIES, INC.
(a development stage enterprise)
Index to Consolidated Financial Statements
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of September 30, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2008, and for the period from June 9, 2003 (date of inception) to September 30, 2008 and our report dated December 15, 2008 expressed an unqualified opinion on those consolidated financial statements. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Particle Drilling Technologies, Inc. as of September 30, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2008, and for the period from June 9, 2003 (date of inception) to September 30, 2008, in conformity with accounting principles generally accepted in the United States of America. | | | | | | | |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | |
| | $ | 2,296,143 | | | $ | 4,461,929 | |
| | | — | | | | — | |
| | | — | | | | 900,000 | |
| | | 260,686 | | | | 233,174 | |
| | | | | | | | | |
| | | 2,556,829 | | | | 5,595,103 | |
| | | | | | | | | |
| | | 1,213,918 | | | | 867,168 | |
| | | | | | | | | |
| | | 1,552,266 | | | | 1,312,246 | |
| | | | | | | | | |
| | | 41,144 | | | | 52,562 | |
| | | | | | | | | |
| | $ | 5,364,157 | | | $ | 7,827,079 | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | |
| | $ | 850,944 | | | $ | 1,028,999 | |
| | | 84,277 | | | | 88,258 | |
| | | 8,651 | | | | 13,511 | |
| | | 353,881 | | | | 134,988 | |
| | | | | | | | | |
| | | 1,297,753 | | | | 1,265,756 | |
| | | | | | | | | |
| | | 15,381 | | | | 24,537 | |
| | | 135,531 | | | | 45,539 | |
| | | | | | | | | |
| | | — | | | | — | |
| | | | | | | | | |
| | | | | | | | |
Common stock, $.001 par value, 100,000,000 shares authorized, 38,767,018 shares issued and 35,763,932 shares outstanding at September 30, 2008, and 34,632,987 shares issued and 31,629,901 shares outstanding at September 30, 2007 | | | 38,768 | | | | 34,634 | |
| | | 46,217,538 | | | | 38,510,488 | |
| | | (1,511,817 | ) | | | (1,511,817 | ) |
| | | (40,828,997 | ) | | | (30,542,058 | ) |
| | | | | | | | | |
| | | 3,915,492 | | | | 6,491,247 | |
| | | | | | | | | |
| | $ | 5,364,157 | | | $ | 7,827,079 | |
| | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | 6,074,173 | | | | 5,894,101 | | | | 5,964,438 | | | | 21,396,245 | |
| | | 5,050,508 | | | | 4,942,621 | | | | 4,581,604 | | | | 20,943,228 | |
| | | — | | | | 295,260 | | | | — | | | | 295,260 | |
| | | (756,469 | ) | | | — | | | | — | | | | (756,469 | ) |
| | | | | | | | | | | | | | | | | |
| | | 10,368,212 | | | | 11,131,982 | | | | 10,546,042 | | | | 41,878,264 | |
| | | | | | | | | | | | | | | | | |
| | | (10,368,212 | ) | | | (11,131,982 | ) | | | (10,546,042 | ) | | | (41,878,264 | ) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | 87,888 | | | | 384,484 | | | | 260,914 | | | | 942,591 | |
| | | — | | | | — | | | | 46,565 | | | | 73,727 | |
| | | — | | | | — | | | | — | | | | 35,283 | |
| | | — | | | | — | | | | 55,614 | | | | 55,614 | |
| | | (6,615 | ) | | | (6,771 | ) | | | (6,638 | ) | | | (57,948 | ) |
| | | | | | | | | | | | | | | | | |
| | | 81,273 | | | | 377,713 | | | | 356,455 | | | | 1,049,267 | |
| | | | | | | | | | | | | | | | | |
| | $ | (10,286,939 | ) | | $ | (10,754,269 | ) | | $ | (10,189,587 | ) | | $ | (40,828,997 | ) |
| | | | | | | | | | | | | | | | | |
| | $ | (0.32 | ) | | $ | (0.36 | ) | | $ | (0.42 | ) | | $ | (1.50 | ) |
| | | | | | | | | | | | | | | | | |
| | | 32,490,392 | | | | 30,185,030 | | | | 24,520,619 | | | | 27,173,234 | |
| | | 200,000 | | | | 200 | | | | — | | | | — | | | | 32,062 | | | | — | | | | 32,262 | |
| | | 5,000,000 | | | | 5,000 | | | | — | | | | — | | | | 595,000 | | | | — | | | | 600,000 | |
| | | 410,000 | | | | 410 | | | | — | | | | — | | | | 553,090 | | | | — | | | | 553,500 | |
| | | 375,000 | | | | 375 | | | | — | | | | — | | | | 717,125 | | | | — | | | | 717,500 | |
| | | — | | | | — | | | | — | | | | — | | | | 2,880 | | | | — | | | | 2,880 | |
| | | — | | | | — | | | | — | | | | — | | | | 42,551 | | | | — | | | | 42,551 | |
| | | — | | | | — | | | | — | | | | — | | | | — | | | | (3,331,000 | ) | | | (3,331,000 | ) |
| | | 18,095,447 | | | | 18,095 | | | | — | | | | — | | | | 3,974,148 | | | | (3,873,784 | ) | | | 118,459 | |
| | | 850,000 | | | | 850 | | | | — | | | | — | | | | 1,581,585 | | | | — | | | | 1,582,435 | |
| | | 10,000 | | | | 10 | | | | — | | | | — | | | | 17,490 | | | | — | | | | 17,500 | |
| | | 9,314 | | | | 10 | | | | — | | | | — | | | | (10 | ) | | | — | | | | — | |
| | | 33,333 | | | | 33 | | | | — | | | | — | | | | 302 | | | | — | | | | 335 | |
| | | (700,000 | ) | | | (700 | ) | | | — | | | | — | | | | (83,300 | ) | | | — | | | | (84,000 | ) |
| | | (50,000 | ) | | | (50 | ) | | | — | | | | — | | | | 50 | | | | — | | | | — | |
| | | 9,000,000 | | | | 9,000 | | | | — | | | | — | | | | 14,605,332 | | | | — | | | | 14,614,332 | |
| | | — | | | | — | | | | (3,000,000 | ) | | | (1,500,000 | ) | | | — | | | | — | | | | (1,500,000 | ) |
| | | 140,000 | | | | 140 | | | | — | | | | — | | | | (140 | ) | | | — | | | | — | |
| | | 5,000 | | | | 5 | | | | — | | | | — | | | | (5 | ) | | | — | | | | — | |
| | | 48,378 | | | | 48 | | | | — | | | | — | | | | (48 | ) | | | — | | | | — | |
| | | — | | | | — | | | | — | | | | — | | | | 2,508,564 | | | | | | | | 2,508,564 | |
| | | — | | | | — | | | | — | | | | — | | | | 614,900 | | | | | | | | 614,900 | |
| | | — | | | | — | | | | — | | | | — | | | | — | | | | (5,724,418 | ) | | | (5,724,418 | ) |
| | | 27,441,472 | | | $ | 27,441 | | | | (3,000,000 | ) | | $ | (1,500,000 | ) | | $ | 23,218,868 | | | $ | (9,598,202 | ) | | $ | 12,148,107 | |
| | | 53,750 | | | | 54 | | | | | | | | | | | | 6,396 | | | | | | | | 6,450 | |
| | | 9,721 | | | | 10 | | | | | | | | | | | | (10 | ) | | | | | | | | |
| | | 150,000 | | | | 150 | | | | | | | | | | (150 | ) | | | | | | |
| | | 176,458 | | | | 176 | | | | | | | | | | (176 | ) | | | | | | |
| | | 20,000 | | | | 20 | | | | | | | | | | (20 | ) | | | | | | |
| | | 66,000 | | | | 66 | | | | | | | | | | (66 | ) | | | | | | |
| | | | | | | | | | | (3,086 | ) | | | (11,817 | ) | | | | | | | | | | (11,817 | ) |
| | | 12,500 | | | | 13 | | | | | | | | | | | | (13 | ) | | | | | | | |
| | | 5,000 | | | | 5 | | | | | | | | | | | | (5 | ) | | | | | | | |
| | | 10,000 | | | | 10 | | | | | | | | | | | | (10 | ) | | | | | | | |
| | | 5,000 | | | | 5 | | | | | | | | | | | | (5 | ) | | | | | | | |
| | | 5,000 | | | | 5 | | | | | | | | | | | | (5 | ) | | | | | | | |
| | | 5,000 | | | | 5 | | | | | | | | | | | | (5 | ) | | | | | | | |
| | | 29,390 | | | | 29 | | | | | | | | | | | | (29 | ) | | | | | | | |
| | | 14,500 | | | | 15 | | | | | | | | | | | | (15 | ) | | | | | | | |
| | | 7,500 | | | | 8 | | | | | | | | | | | | (8 | ) | | | | | | | |
| | | 2,000 | | | | 2 | | | | | | | | | | | | (2 | ) | | | | | | | |
| | | — | | | | — | | | | — | | | | — | | | | 2,014,476 | | | | | | | 2,014,476 | |
| | | — | | | | — | | | | — | | | | — | | | | — | | | | (10,189,587 | ) | | | (10,189,587 | ) |
| | | 28,013,291 | | | $ | 28,014 | | | | (3,003,086 | ) | | $ | (1,511,817 | ) | | $ | 25,239,221 | | | $ | (19,787,789 | ) | | $ | 3,967,629 | |
| | | 5,000,000 | | | | 5,000 | | | | | | | | | | | | 10,710,995 | | | | | | | | 10,715,995 | |
| | | 3,000 | | | | 3 | | | | | | | | | | | | (3 | ) | | | | | | | | |
| | | 68,250 | | | | 68 | | | | | | | | | | | | (68 | ) | | | | | | | | |
| | | 5,745 | | | | 6 | | | | | | | | | | | | (6 | ) | | | | | | | | |
| | | 6,000 | | | | 6 | | | | | | | | | | | | 714 | | | | | | | | 720 | |
| | | 5,816 | | | | 6 | | | | | | | | | | (6 | ) | | | | | | |
| | | 2,000 | | | | 2 | | | | | | | | | | 238 | | | | | | | 240 | |
| | | 486,558 | | | | 487 | | | | | | | | | | (487 | ) | | | | | | | |
| | | 30,000 | | | | 30 | | | | | | | | | | (30 | ) | | | | | | | |
| | | 4,000 | | | | 4 | | | | | | | | | | (4 | ) | | | | | | | |
| | | (3,375 | ) | | | (3 | ) | | | | | | | | | 3 | | | | | | | | |
| | | 24,202 | | | | 24 | | | | | | | | | | (24 | ) | | | | | | | |
| | | 37,500 | | | | 37 | | | | | | | | | | 4,463 | | | | | | | 4,500 | |
| | | 300,000 | | | | 300 | | | | | | | | | | 35,700 | | | | | | | 36,000 | |
| | | 500,000 | | | | 500 | | | | | | | | | | (500 | ) | | | | | | | |
| | | 150,000 | | | | 150 | | | | | | | | | | (150 | ) | | | | | | | |
| | | — | | | | — | | | | — | | | | — | | | | 2,520,432 | | | | | | | 2,520,432 | |
| | | — | | | | — | | | | — | | | | — | | | | — | | | | (10,754,269 | ) | | | (10,754,269 | ) |
| | | 34,632,987 | | | $ | 34,634 | | | | (3,003,086 | ) | | $ | (1,511,817 | ) | | $ | 38,510,488 | | | $ | (30,542,058 | ) | | $ | 6,491,247 | |
| | | (7,500 | ) | | | (8 | ) | | | | | | | | | | | 8 | | | | | | | | | |
| | | 5,000 | | | | 5 | | | | | | | | | | | | (5 | ) | | | | | | | | |
| | | 688 | | | | 1 | | | | | | | | | | | | (1 | ) | | | | | | | | |
| | | 10,000 | | | | 10 | | | | | | | | | | | | 1,190 | | | | | | | | 1,200 | |
| | | (4,000 | ) | | | (4 | ) | | | | | | | | | | | 4 | | | | | | | | | |
| | | 100,000 | | | | 100 | | | | | | | | | | | | 11,900 | | | | | | | | 12,000 | |
| | | 35,000 | | | | 35 | | | | | | | | | | | | (35 | ) | | | | | | | | |
| | | 3,500,043 | | | | 3,500 | | | | | | | | | | | | 5,070,086 | | | | | | | | 5,073,586 | |
| | | 100,000 | | | | 100 | | | | | | | | | | | | 11,900 | | | | | | | | 12,000 | |
| | | 12,300 | | | | 12 | | | | | | | | | | | | 1,465 | | | | | | | | 1,477 | |
| | | 382,500 | | | | 383 | | | | | | | | | | | | (383 | ) | | | | | | | | |
| | | — | | | | — | | | | — | | | | — | | | | 2,610,921 | | | | | | | | 2,610,921 | |
| | | — | | | | — | | | | — | | | | — | | | | — | | | | (10,286,939 | ) | | | (10,286,939 | ) |
| | | 38,767,018 | | | $ | 38,768 | | | | (3,003,086 | ) | | $ | (1,511,817 | ) | | $ | 46,217,538 | | | $ | (40,828,997 | ) | | $ | 3,915,492 | |
| | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | $ | (10,286,939 | ) | | $ | (10,754,269 | ) | | $ | (10,189,587 | ) | | $ | (40,828,997 | ) |
| | | | | | | | | | | | | | | | |
| | | — | | | | — | | | | — | | | | (35,283 | ) |
| | | — | | | | 295,260 | | | | — | | | | 295,260 | |
| | | (756,469 | ) | | | — | | | | — | | | | (756,469 | ) |
| | | — | | | | — | | | | (54,103 | | | | (55,614 | ) |
| | | 548,482 | | | | 811,754 | | | | 688,185 | | | | 2,587,298 | |
| | | — | | | | — | | | | — | | | | 44,000 | |
| | | — | | | | — | | | | — | | | | 931,500 | |
| | | — | | | | — | | | | — | | | | 63,829 | |
| | | 2,610,921 | | | | 2,520,432 | | | | 2,014,476 | | | | 7,811,543 | |
| | | | | | | | | | | | | | | | |
| | | — | | | | — | | | | — | | | | (40,819 | ) |
| | | — | | | | 385,839 | | | | — | | | | 385,839 | |
| | | (27,512 | ) | | | 1,314 | | | | 249,460 | | | | 105,289 | |
| | | (178,055 | ) | | | 198,447 | | | | (226,181 | ) | | | 511,006 | |
| | | 218,893 | | | | (336,475 | ) | | | 325,627 | | | | 450,678 | |
| | | 11,418 | | | | (37,912 | ) | | | — | | | | (26,494 | ) |
| | | 89,992 | | | | 45,539 | | | | — | | | | 135,531 | |
| | | | | | | | | | | | | | | | | |
| | | (7,769,269 | ) | | | (6,870,071 | ) | | | (7,192,123 | ) | | | (28,421,903 | ) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | (39,898 | ) | | | (1,496,985 | ) | | | (636,930 | ) | | | (3,357,502 | ) |
| | | 851,617 | | | | — | | | | — | | | | 872,574 | |
| | | (290,504 | ) | | | (132,644 | ) | | | (178,170 | ) | | | (1,031,762 | ) |
| | | — | | | | — | | | | (28,415 | ) | | | (419,504 | ) |
| | | — | | | | — | | | | — | | | | (300,783 | ) |
| | | — | | | | — | | | | — | | | | (56,784 | ) |
| | | 521,215 | | | | (1,629,629 | ) | | | (843,515 | ) | | | (4,293,761 | ) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | 5,100,265 | | | | 10,757,455 | | | | 6,089 | | | | 36,839,575 | |
| | | — | | | | — | | | | (11,817 | ) | | | (1,511,817 | ) |
| | | — | | | | — | | | | — | | | | 553,500 | |
| | | (17,997 | ) | | | (87,412 | ) | | | (171,694 | ) | | | (869,451 | ) |
| | | — | | | | — | | | | — | | | | 23,195 | |
| | | — | | | | — | | | | — | | | | (23,195 | ) |
| | | | | | | | | | | | | | | | | |
| | | 5,082,268 | | | | 10,670,043 | | | | (177,422 | ) | | | 35,011,807 | |
| | | | | | | | | | | | | | | | | |
| | | (2,165,786 | ) | | | 2,170,343 | | | | (8,213,060 | ) | | | 2,296,143 | |
| | | | | | | | | | | | | | | | | |
| | | 4,461,929 | | | | 2,291,586 | | | | 10,504,646 | | | | — | |
| | $ | 2,296,143 | | | $ | 4,461,929 | | | $ | 2,291,586 | | | $ | 2,296,143 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | $ | 6,615 | | | $ | 6,771 | | | $ | 12,339 | | | $ | 57,948 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | $ | 107,785 | | | $ | 112,869 | | | $ | 253,985 | | | $ | 586,629 | |
| | | — | | | | — | | | | — | | | | 6,000 | |
| | | — | | | | — | | | | — | | | | 50,000 | |
| | | — | | | | — | | | | — | | | | 56,783 | |
| | | — | | | | — | | | | — | | | | 553,500 | |
| | | — | | | | — | | | | — | | | | 479,610 | |
| | | — | | | | — | | | | — | | | | 757,792 | |
| | | — | | | | — | | | | 30,487 | | | | 30,487 | |
| | | — | | | | — | | | | 385,839 | | | | 385,839 | |
| | | — | | | | — | | | | 19,015 | | | | 19,015 | |
Particle Drilling Technologies, Inc. (“PDTI” or the “Company”) is a Nevada corporation, formerly named MedXLink, Corp. (“MXLK”). On January 14, 2005, Particle Drilling Technologies, Inc., a Delaware corporation (“PDTI-DE”), merged with a subsidiary of MXLK in a stock-for-stock transaction as a result of a merger and plan of reorganization agreement between MXLK and PDTI-DE. Pursuant to the above merger, MXLK assumed PDTI-DE’s operations and business plan and changed its name to Particle Drilling Technologies, Inc.
The Company has presented basic and diluted net loss per share pursuant SFAS No. 128, Earnings Per Share. In accordance with SFAS No. 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Dilutive net loss per share would give affect to the dilutive effect of common stock equivalents consisting of options and warrants. Potentially dilutive securities have been excluded from the net loss per common share calculation as the effects would be antidilutive. Potentially dilutive securities for the years ended September 30, 2008, 2007 and 2006 that have been excluded are 2,081,796, 1,063,474and 1,276,624, respectively.
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | $ | (10,286,939 | ) | | $ | (10,754,296 | ) | | $ | (10,189,587 | ) | | $ | (40,828,997 | ) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | 32,490,392 | | | | 30,185,030 | | | | 24,520,619 | | | | 27,173,234 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | $ | (0.32 | ) | | $ | (0.36 | ) | | $ | (0.42 | ) | | $ | (1.50 | ) |
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosure related to derivatives and hedging activities and thereby seeks to improve the transparency of financial reporting. Under SFAS No. 161, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 must be applied prospectively to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS No. 133 for all financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company does not expect the adoption of SFAS No. 161 to significantly impact its financial position, results of operations or cash flows.
| | | | | | | |
| | | | | | | |
| | $ | 278,350 | | | $ | 270,687 | |
| | | 1,813,816 | | | | 2,073,205 | |
| | | 243,164 | | | | 217,423 | |
| | | | | | | | | |
| | | 2,335,330 | | | | 2,561,315 | |
| | | | | | | | | |
| | | — | | | | — | |
| | | | | | | | | |
| | | (1,121,412 | ) | | | (1,694,147 | ) |
| | | | | | | | | |
| | $ | 1,213,918 | | | $ | 867,168 | |
| | | | | | | |
| | | | | | | |
| | $ | 1,789,548 | | | $ | 1,499,043 | |
| | | (237,282 | ) | | | (186,797 | ) |
| | | | | | | | | |
| | $ | 1,552,266 | | | $ | 1,312,246 | |
| | | | | | | |
| | | | | | | |
| | $ | 29,795 | | | $ | 31,001 | |
| | | 17,163 | | | | 30,196 | |
| | | — | | | | 32,342 | |
| | | 77,270 | | | | 10,228 | |
| | | 103,074 | | | | — | |
| | | 126,579 | | | | 31,221 | |
| | | | | | | | | |
| | $ | 353,881 | | | $ | 134,988 | |
| | | | | | | |
| | | | | | | |
| | | 3,981,575 | | | | 4,063,375 | |
| | | 1,779,141 | | | | 1,791,141 | |
| | | 666,500 | | | | 1,215,500 | |
| | | | | | | | | |
| | | 6,427,216 | | | | 7,070,016 | |
Stock-based employee compensation expense recorded for awards issued under the 2004 Plan, the 2005 Plan and for the 2007 Plan for the years ended September 30, 2008 and 2007 was $2,610,921 and $2,520,432, respectively. Stock-based employee compensation expense for awards issued under the 2004 Plan, the 2005 Plan, and the 2007 Plan since inception (June 9, 2003) to September 30, 2008 was $7,811,543. | | | | | | | | | | | | | |
| | | 4,267,000 | | | $ | 1.66 | | | | 1,265,141 | | | $ | 1.91 | |
| | | | | | | | | | | | | | | | | |
| | | 251,250 | | | | 3.28 | | | | 1,500,000 | | | | — | |
| | | (343,500 | ) | | | 0.12 | | | | (974,000 | ) | | | 1.92 | |
| | | (115,375 | ) | | | 4.20 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| | | 4,059,375 | | | $ | 1.82 | | | | 1,791,141 | | | $ | 3.02 | |
| | | | | | | | | | | | | | | | | |
| | | 175,000 | | | | 2.21 | | | | — | | | | — | |
| | | (212,300 | ) | | | 0.12 | | | | (12,000 | ) | | | 0.45 | |
| | | (40,500 | ) | | | 4.38 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| | | 3,981,575 | | | $ | 1.89 | | | | 1,779,141 | | | $ | 1.99 | |
| | | | | | | | | | | | | | | | | |
| | | 3,564,493 | | | $ | 1.71 | | | | 1,779,141 | | | $ | 1.99 | |
| | | | | | | |
| | | | | | | |
| | | | | | |
| | $ | 12,683,936 | | | $ | 9,192,374 | |
| | | 31,296 | | | | 31,296 | |
| | | 834,807 | | | | 834,807 | |
| | | 227,704 | | | | 122,788 | |
| | | 2,513,832 | | | | 1,626,119 | |
| | | | | | | | |
| | | (203,351 | ) | | | (203,351 | ) |
| | | (560,247 | ) | | | (338,743 | ) |
| | | (245,349 | ) | | | — | ) |
| | | | | | | | | |
| | | 15,282,628 | | | | 11,265,290 | |
| | | | | | | | | |
| | | (15,282,628 | ) | | | (11,265,290 | ) |
| | | | | | | | | |
| | $ | — | | | $ | — | |
We filed our income tax return for the tax year ended September 30, 2007. The tax years ended September 30, 2006 and September 30, 2007 are open for examination by the U.S. and State taxing authorities. The Company anticipates recording no tax benefit for the year, based upon management’s assessment that the realization of the anticipated financial loss for the year is not at this point reasonably assured; accordingly, no benefit has been recorded for the three months ended December 31, 2008.
In January 2004, PDTI entered into a Royalty Agreement with PSI whereby PDTI will be required to pay PSI a royalty on a quarterly basis equal to 18% of the earnings before interest, income taxes, depreciation and amortization (“EBITDA”) derived from the use of the PID technology, until an aggregate of $67,500,000 has been paid. PDTI also entered into a Royalty Agreement in January 2004 with PSIL whereby PDTI will be required to pay PSIL a royalty on a quarterly basis equal to 2% of EBITDA derived from the use of the PID technology, until an aggregate of $7,500,000 has been paid. In addition, PDTI will be required to pay CCORE, PSI and PSIL a royalty equal to 1.6%, 1.2% and 1.2%, respectively, of PDTI’s quarterly gross revenue derived from the use of the PID technology. PDTI has no revenues or EBITDA; therefore no royalties have been paid or accrued as of September 30, 2008.
| | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | — | | | | — | | | | — | | | | — | | | | — | |
| | | (3,259,917 | ) | | | (2,339,338 | ) | | | (2,539,614 | ) | | | (2,229,343 | ) | | | (10,368,212 | ) |
| | | (3,226,536 | ) | | | (2,329,074 | ) | | | (2,518,589 | ) | | | (2,212,740 | ) | | | (10,286,939 | ) |
| | $ | (0.10 | ) | | $ | (0.08 | ) | | $ | (0.07 | ) | | $ | (0.06 | ) | | $ | (0.32 | ) |
| | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | — | | | | — | | | | — | | | | — | | | | — | |
| | | (2,963,387 | ) | | | (3,521,923 | ) | | | (2,470,639 | ) | | | (2,176,033 | ) | | | (11,131,982 | ) |
| | | (2,838,461 | ) | | | (3,409,799 | ) | | | (2,390,167 | ) | | | (2,115,842 | ) | | | (10,754,269 | ) |
| | $ | (0.10 | ) | | $ | (0.11 | ) | | $ | (0.08 | ) | | $ | (0.07 | ) | | $ | (0.36 | ) |
Thomas E. Hardisty has served as Senior Vice President, Corporate Development of PDTI since June 2004. Mr. Hardisty had previously served as Director and Senior Vice President, Corporate Development of Particle Drilling, Inc. from June 2003 until it was merged into PDTI in June 2004. He also served as a Director of PDTI from June 2004 until March 2006. Mr. Hardisty has over 21 years of experience in the oil and gas industry, primarily in the area of land management, contracts and corporate development, and is co-founder of the company. From January 2001 until June 2003, Mr. Hardisty was Vice President, Land of Shoreline Partners LLC, an independent exploration company and from January 2000 until January 2001, Vice President, Land of Benz Resources LLC, a consulting firm charged with managing certain exploration properties acquired by Harken Energy Corporation. From May 1999 until January 2000, Mr. Hardisty was a Land Manager for Texstar Energy Inc. responsible for divesting certain of the company’s exploration projects in the Texas Gulf Coast and Mississippi areas. From 1994 until May 1999, Mr. Hardisty was Division Landman for PetroCorp Inc. responsible for company land positions, contract negotiations and partner relations in exploration and development projects in PetroCorp’s Gulf Coast, Rockies and Canada Division. From 1984 until 1994, Mr. Hardisty was a land consultant and later Senior Project Manager for Roger A. Soape Inc. in Houston, Texas. Mr. Hardisty graduated from the University of Texas at Austin in 1984 with a BBA in Petroleum Land Management. He is a member of the American Association of Drilling Engineers (AADE), International Association of Drilling Contractors (IADC), the American Association of Professional Landmen (AAPL) and the Houston Association of Professional Landmen (HAPL). Mr. Hardisty formerly served as a Director of HAPL and is past Chairman of the HAPL Ethics Committee and past Chairman of HAPL Membership Committee. Gordon Tibbitts has served as Vice President of Technology of PDTI since June 2004, and served as Vice President of Technology of Particle Drilling, Inc. from June 2003 until it was merged into PDTI in June 2004. Prior to joining Particle Drilling, Inc., Mr. Tibbitts was Vice President of Technology for ProDril Services Inc. from October 2002 until June 2003. From April 2000 until October 2002, Mr. Tibbitts was an in-house engineering consultant on drilling and coring activities for TerraTek Drilling & Completions Research Laboratory. Mr. Tibbitts was employed from May 1999 until April 2000 by Pro Steel Inc as Chief Operating Officer. Prior to that time and for the majority of his career, Mr. Tibbitts worked for Hughes Christensen, one of the world’s largest makers of oil and gas drilling bits. While at Hughes Christensen, Mr. Tibbitts held the title of Director of Research and Development from 1987 until October 1998 and was responsible for managing and directing world-wide research, development, and technical support through research groups in Houston, Salt Lake City and Tulsa. He directed and managed the building of a world-class drilling research laboratory in Houston and a drilling operation in Oklahoma dedicated to field-testing and development of downhole tools. Mr. Tibbitts has over 30 years of experience in the upstream oil and gas industry, including 17 years in engineering, research, and development management. Mr. Tibbitts holds over 70 patents related to drilling, coring, and diamond cutting tools. His work has been published by the Society of Petroleum Engineers, International Association of Drilling Contractors, Society of Core Analysts, and the Journal of Petroleum Technology. Mr. Tibbitts graduated from the University of Utah with a Bachelors degree in Mechanical Engineering. John D. Schiller, Jr. has served as a Director of PDTI since May 2004. Between December 2004 and November 2005, Mr. Schiller acted as interim chief executive officer of our Company. Since July 2005, Mr. Schiller has been Chairman and CEO of Energy XXI. Between December 2003 and December 2004, Mr. Schiller pursued personal interests and private investment opportunities. From April 2003 to December 2003, Mr. Schiller served as Vice President, Exploration & Production, for Devon Energy with responsibility for domestic & international activities. Before joining Devon Energy, Mr. Schiller was Executive Vice President, Exploration & Production, for Ocean Energy, Inc. from 1999 to April 2003, with responsibility for Ocean’s worldwide exploration, production and drilling activities. Mr. Schiller joined Ocean Energy from Seagull Energy in September 1998, where he served as Senior Vice President of Operations, prior to the merger of the two companies in March of 1999. From 1985 to 1998, Mr. Schiller served in various positions with Burlington Resources, including as Corporate Acquisition Manager. From 1981 to 1985, Mr. Schiller was a staff engineer at Superior Oil. Currently, Mr. Schiller serves as the Chairman and Chief Executive Officer of Energy XXI and serves on the Board of Directors of the Escape Family Resource Center, a charitable organization. Michael Mathews has served as a Director of PDTI since June 2004. Mr. Mathews is managing director of Westgate Capital Co., a firm he founded in 1993 to identify and structure investment opportunities on behalf of private investors. Mr. Mathews served on the Board of Petroleum Geo-Services (PGS) from 1993 until September 2002. From 1998 to 2002, he served as Vice Chairman of PGS and held the position as Chairman of the Compensation Committee and was a member of the Audit Committee. From 1989 to 1992, Mr. Mathews served as managing director of Bradford Ventures Ltd., a private investment firm involved in equity investments, including acquisitions. Prior to 1989, he was president of DNC Capital Corporation and senior vice president and director of its parent, DNC America Banking Corp., the US subsidiary of Den Norske Credit Bank Group, where he directed merchant banking and investment activity in North America and founded and acted as senior advisor to Nordic Investors Limited, N.V., a private venture capital fund. Previously, Mr. Mathews was a Vice President in Corporate Finance at Smith Barney and prior to that he was an associate with the New York law firm of White & Case. Mr. Mathews received an A.B. from Princeton University in 1962 and received a J.D. from the University of Michigan Law School in 1965. Hugh A. Menown has served as a Director of PDTI since June 2004. Mr. Menown has over 28 years of experience in mergers & acquisitions, auditing and managerial finance. In May 2007, Mr. Menown joined Energy XXI (Bermuda) Limited as the Chief Accounting Officer and was appointed Chief Information Officer in July 2008. From January 2006 to May 2007, Mr. Menown worked as an independent consultant. From June 1999 through December 2005, Mr. Menown worked with Quanta Services, Inc. (“Quanta”) (NYSE: PWR) as a financial consultant. Mr. Menown performed due diligence on a number of Quanta’s acquisitions and has served as Chief Financial Officer for two of their operating companies, most recently North Houston Pole Line, L.P. located in Houston, Texas. Prior to serving as a financial consultant to Quanta, Mr. Menown was a Partner in the Houston office of PricewaterhouseCoopers, LLP where he led the Transaction Services Practice providing due diligence, mergers & acquisition advisory and strategic consulting to numerous clients in various industries. Mr. Menown also worked in the Business Assurance Practice providing audit and related services to clients. Byron Dunn has served as a Director since November 2007. Mr. Dunn has served as the President and Chief Executive Officer of IDM Group since December 2007. From September 2005 to December 2007, Mr. Dunn has served as Senior Vice President, Corporate Development of Harvest Natural Resources, Inc., an independent energy company engaged in the acquisition, development, production and disposition of oil and natural gas properties. Mr. Dunn previously served on Harvest’s Board of Directors and was a member of the Audit and Compensation committees. From 2003 through 2005, Mr. Dunn was with National Oilwell, Inc., as Vice President, Corporate Business Development. In that capacity he chaired the National Oilwell/Varco integration team, served as President of Eastern Hemisphere Rig Solutions, and Chairman of the Board of TTS Marine ASA, a Bergen Norway ship’s equipment manufacturer. From 1997 to 2003, Mr. Dunn held increasingly responsible roles in UBS global energy and power investment banking group. Earlier in his career, Mr. Dunn was Manager of Upstream Business Development and Acquisitions for Phibro Energy and production and reservoir engineer for Chevron USA. Mr. Dunn holds a Bachelor of Science degree in Chemical Engineering from the Illinois Institute of Technology, a Master of Business Administration degree with a specialization in finance from the University of Chicago, and is a Chartered Financial Analyst. Mr. Dunn is a member of the Board of Directors of Citizens National Bank.
The Compensation Committee selected twelve companies that operate in the oilfield services industry against which to compare our executive compensation program. These companies consist of Dawson Geophysical Company, Oyo Geospace Corporation, Horizon Offshore, Inc., NATCO Group, Inc., Allis Chalmers Energy, Inc., AZZ, Inc., Core Laboratories NV, Electromagnetic GeoServices ASA, Superior Energy Services, Inc., W-H Energy Services, Inc., Weatherford International, Inc., and Halliburton Company. We refer to these twelve companies collectively as our “Peer Group.” Although many of these companies are larger and more established than our company, we require personnel with comparable levels of experience. As a result, we must offer compensation that is generally competitive with larger and more established companies listed in our Peer Group in order to compete for personnel with the high level of experience and expertise we require. The Compensation Committee reviews this Peer Group composition on an annual basis. The Compensation Committee may elect to modify the Peer Group for future periods to reflect best practices in executive compensation or changes in our business or the business of other companies, in and outside the Peer Group.
Benefits. Our executive officers may also participate in our 401(k) plan on the same terms as other employees for which we automatically contribute 3% of the employee’s base salary. We also offer medical, dental and term life insurance. In addition, Messrs. Terry, Boswell, Hardisty, and Tibbitts each have life insurance policies for which we pay the annual premiums of $9,920, $2,870, $2,975, and $1,903, respectively.
Employment Agreement of Jim B. Terry. Mr. Terry entered into an employment agreement effective as of January 23, 2006. This agreement has a three-year term that is automatically extended for successive one-year periods following the end of the initial three-year term unless otherwise terminated by delivery of written notice by either party no less than 90 days prior to the first day of any one-year extension period. No such notice of termination of Mr. Terry’s employment agreement has been delivered and, therefore, the agreement will be extended for a one year term effective January 23, 2009. The agreement provides that Mr. Terry will serve as our Chief Executive Officer and President. Under the terms of the agreement, Mr. Terry will receive an annual base salary of $240,000, which may be further increased at the sole discretion of the Compensation Committee. We may decrease Mr. Terry’s base salary only with the prior written consent of Mr. Terry. Mr. Terry is also eligible to participate in our annual bonus incentive plan as approved by the Compensation Committee or the Board of Directors in amounts approved by and based on criteria established by the Compensation Committee. Mr. Terry will also be eligible to participate, in the sole discretion of the Compensation Committee, in any long-term incentive arrangements we make available to our executive officers from time to time. Finally, Mr. Terry will receive certain perquisites, including reimbursement in accordance with our standard policies and procedures of business and business-related business expenses and dues and fees to industry and professional organizations, four weeks of paid vacation each The agreement also contains customary confidentiality, nondisclosure and proprietary rights provisions. In addition, during his employment and for a period of two years following the termination of Mr. Terry’s employment for any reason, Mr. Terry is prohibited from participating in the ownership, management, operation or control in any business that conducts a business similar to that conducted by us or provides or sells a service or product that is the same, substantially similar to or otherwise competitive with the products and services provided or sold by our Company in any of the business territories that we conduct business from time to time, subject to certain limited exceptions. During that same period, Mr. Terry may not solicit, among others, customers, suppliers and employees of our Company. The agreement also contains customary confidentiality, nondisclosure and proprietary rights provisions. In addition, during his employment and for a period of two years following the termination of Mr. Boswell’s employment for any reason, Mr. Boswell is prohibited from participating in the ownership, management, operation or control in any business that either (1) conducts a business similar to the particle impact drilling system business conducted by us (or any other line of business involving technological processes that we have either developed or acquired) or (2) provides or sells a service or product that is the same, substantially similar to or otherwise competitive with the products and services related to the particle impact drilling system business conducted by us (or any other line of business involving technological processes that we have either developed or acquired) in any of the business territories that we conduct business from time to time, subject to certain limited exceptions. During that same period, Mr. Boswell may not solicit, among others, customers, suppliers and employees of our Company. extension period. No such notice of termination of Mr. Hardisty’s employment agreement has been delivered and, therefore, the agreement will be extended for a one year term effective February 1, 2009. The agreement provides that Mr. Hardisty will serve as a Senior Vice President. Under the terms of the agreement, Mr. Hardisty will receive an annual base salary of $180,000, which may be further increased at the sole discretion of the Compensation Committee. We may decrease Mr. Hardisty’s base salary only with the prior written consent of Mr. Hardisty. Mr. Hardisty is also eligible to participate in our annual bonus incentive plan as approved by the Compensation Committee or the Board of Directors in amounts approved by and based on criteria established by the Compensation Committee. Mr. Hardisty will also be eligible to participate, in the sole discretion of the Compensation Committee, in any long-term incentive arrangements we make available to our executive officers from time to time. Finally, Mr. Hardisty will receive certain perquisites, including reimbursement in accordance with our standard policies and procedures of business and business-related business expenses and dues and fees to industry and professional organizations, four weeks of paid vacation each calendar year, and participation by Mr. Hardisty and his spouse and dependents in all benefits, plans and programs available to our executive employees. We have also agreed to use reasonable efforts to obtain life insurance for Mr. Hardisty in the amount of $500,000. The agreement also contains customary confidentiality, nondisclosure and proprietary rights provisions. In addition, during his employment and for a period of two years following the termination of Mr. Hardisty’s employment for any reason, Mr. Hardisty is prohibited from participating in the ownership, management, operation or control in any business that conducts a business similar to that conducted by us or provides or sells a service or product that is the same, substantially similar to or otherwise competitive with the products and services provided or sold by our Company in any of the business territories that we conduct business from time to time, subject to certain limited exceptions. During that same period, Mr. Hardisty may not solicit, among others, customers, suppliers and employees of our Company. | With respect to 129,250 shares, the restrictions lapse on the date we file our first quarterly or annual report with the Securities and Exchange Commission in which we report Adjusted EBITDA (as defined in the award agreement) for a fiscal quarter that is greater than $0; with respect to 200,000 shares, the restrictions lapse on the date we consummate a strategic transaction with a third party that the Compensation Committee, in its sole discretion, determines satisfies certain criteria described in the award agreement; and with respect to 170,750 shares, the restrictions lapse on the date we file our first quarterly or annual report with the Securities and Exchange Commission in which we report, for two consecutive fiscal quarters, cumulative revenues in an amount equal to or greater than $1.0 million, in the aggregate. |
| | | | | | |
| | | | | | |
| | $ | 554,400 | | | $ | 591,900 | |
| | | — | | | | — | |
| | | 21,323 | | | | 21,323 | |
| | | 31,414 | | | | 31,414 | |
| | | | | | | | |
| | | 25,000 | | | | 25,000 | |
| | | 143,333 | | | | 143,333 | |
| | $ | 775,470 | | | $ | 812,970 | |
Severance Under Employment Agreement of J. Chris Boswell. Except as provided in the following sentence, in the event Mr. Boswell’s employment is subject to an Involuntary Termination (as defined above), we shall pay to Mr. Boswell a lump sum cash payment within 30 days of termination equal to the greater of (1) two times his annual base salary in effect at the time of termination, or (2) $600,000. If Mr. Boswell’s employment is subject to an Involuntary Termination that occurs at any time during the period beginning 60 days prior to the date a definitive agreement concerning a Change of Control (as defined below) is executed and ending on the one-year anniversary of the consummation of such Change of Control (such period being a “Change of Control Period”), Mr. Boswell will be entitled to receive a lump sum cash payment within 30 days of termination equal to the greater of (1) two times the sum of his annual base salary in effect at the time of termination and the average of the bonuses he received in the two preceding fiscal years (as calculated in accordance with the agreement), or (2) $600,000, which amount will be increased to $950,000 if Mr. Boswell is not provided with an opportunity to sell the shares of our common stock then held by Mr. Boswell at a purchase price of $4.00 or more per share in connection with a Change of Control transaction. If Mr. Boswell’s employment is subject to an Involuntary Termination during a Change of Control Period or as a result of his death or disability, we have also agreed to accelerate the vesting of all options to purchase common stock granted to Mr. Boswell and to remove the restrictions on vesting or forfeiture of all restricted stock and all other accrued benefits under any non-qualified deferred compensation plans granted to Mr. Boswell. Finally, Mr. Boswell and his dependents will be eligible to receive COBRA continuation coverage under our group health plans for a period of up to two years following any Involuntary Termination of his employment, in accordance with and to the extent provided by COBRA. | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | $ | 600,000 | | | $ | 600,000 | | | $ | 950,000 | |
| | | — | | | | — | | | | 358,711 | |
| | | 19,546 | | | | 19,546 | | | | 19,546 | |
| | | | | | | | | | | | |
| | | — | | | | — | | | | — | |
| | | — | | | | — | | | | — | |
| | $ | 619,546 | | | $ | 619,546 | | | $ | 1,328,257 | |
Severance Under Employment Agreement of Thomas E. Hardisty. Except as provided in the following sentence, in the event Mr. Hardisty’s employment is subject to an Involuntary Termination (as defined above), we shall pay to Mr. Hardisty a lump sum cash payment within 30 days of termination equal to the greater of (1) two times his annual base salary in effect at the time of termination, or (2) $450,000. If Mr. Hardisty’s employment is subject to an Involuntary Termination that occurs at any time during the period beginning 60 days prior to the date a definitive agreement concerning a Change of Control (as defined below) is executed and ending on the one-year anniversary of the consummation of such Change of Control (such period being a “Change of Control Period”), Mr. Hardisty will be entitled to receive a lump sum cash payment within 30 days of termination equal to the greater of (1) two times the sum of his annual base salary in effect at the time of termination and the average of the bonuses he received in the two preceding fiscal years (as calculated in accordance with the agreement), or (2) $450,000, which amount will be increased to $650,000 if Mr. Hardisty is not provided with an opportunity to sell the shares of our common stock then held by Mr. Hardisty at a purchase price of $4.00 or more per share in connection with a Change of Control transaction. If Mr. Hardisty’s employment is subject to an Involuntary Termination during a Change of Control Period or as a result of his death or disability, we have also agreed to accelerate the vesting of all options to purchase common stock granted to Mr. Hardisty and to remove the restrictions on vesting or forfeiture of all restricted stock and all other accrued benefits under any non-qualified deferred compensation plans granted to Mr. Hardisty. Finally, Mr. Hardisty and his dependents will be eligible to receive COBRA continuation coverage under our group health plans for a period of up to two years following any Involuntary Termination of his employment, in accordance with and to the extent provided by COBRA. | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | $ | 450,000 | | | $ | 450,000 | | | $ | 650,000 | |
| | | — | | | | — | | | | 227,887 | |
| | | 15,992 | | | | 15,992 | | | | 15,992 | |
| | | | | | | | | | | | |
| | | — | | | | — | | | | — | |
| | | — | | | | — | | | | — | |
| | $ | 465,992 | | | $ | 465,992 | | | $ | 893,879 | |
| | | | | | |
| | | | | | |
| | $ | 13,750 | | | $ | 13,750 | |
| Gross Up | | | — | | | | — | |
| | | 12,692 | | | | 12,692 | |
| | | | | | | | |
| | | 4,667 | | | | 4,667 | |
| | | 4,000 | | | | 4,000 | |
| | $ | 35,109 | | | $ | 35,109 | |
Our Board of Directors adopted our current Board Compensation Package effective as of June 1, 2005. Under the Board Compensation Package, our non-employee directors will receive an annual retainer of $20,000 and $1,500 for each formal Board meeting attended. In addition, each non-employee director who is also a committee member will receive an annual committee retainer fee of $2,500 and $750 for each formal committee meeting attended. Each non-employee director who is also a committee chair will receive an additional annual retainer of $2,500. The Board Compensation Package also provides for annual equity compensation for each non-employee director consisting of 5,000 shares of our restricted common stock and an option for 15,000 shares of our common stock. In addition, any new non-employee directors will be granted an option for 25,000 shares of our common stock as a one time award upon joining the Board of Directors. In addition to receiving the compensation described above as a director, the Chairman of the Board will receive an annual retainer of $2,500, as well as an annual award of 5,000 shares of our restricted common stock and an option for 15,000 shares of our common stock. All option awards will be non-qualified stock options and, together with all awards of restricted stock, will be issued pursuant to our equity compensation plans in effect at the time of the award and will be exercisable for a ten-year period from the date of grant of the award. The restricted stock and option awards will vest in 50% installments on each anniversary of the date of grant of the award. On September 16, 2008, the Board of Directors formed a special committee consisting of Messrs Mathews, Dunn and LeSuer to evaluate strategic alternatives for the Company. The Board agreed to pay each member $1,000 for each meeting held by the special committee until an acceptable alternative has been identified. | | Shares of Common Stock Beneficially Owned | | Percentage of Common Stock Beneficially Owned | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Address: c/o Joe McInnis, 4 Manhattanville Road, Suite 201, Purchase, NY 10577-2119. We have been advised that the shares are owned directly by Greywolf Capital Partners II LP (“Greywolf Capital II”) and by Greywolf Capital Overseas Fund (“Greywolf Overseas”). Greywolf Advisors LLC (the “General Partner”), as general partner to Greywolf Capital II, may be deemed to be the beneficial owner of all such shares owned by Greywolf Capital II. Greywolf Management LP (“Investment Manager”), as investment manager of Greywolf Overseas and Greywolf Capital II, may be deemed to be the beneficial owner of all such shares owned by Greywolf Overseas and Greywolf Capital II. Greywolf GP LLC (the “Investment Manager General Partner”), as general partner of the Investment Manager, may be deemed to be the beneficial owner of all such shares owned by Greywolf Capital II and Greywolf Overseas. Jonathan Savitz (“Savitz”), as the senior managing member of the General Partner and as the sole managing member of the Investment Manager General Partner, may be deemed to be the beneficial owner of all such shares owned by Greywolf Capital II and Greywolf Overseas. Each of the General Partner, the Investment Manager, the Investment Manager General Partner and Savitz hereby disclaims any beneficial ownership of any such shares. The address of the principal business office of (i) Greywolf Capital II, General Partner, Investment Manager and Investment Manager General Partner is 4 Manhattanville Road, Suite 201, Purchase, NY 10577 and (ii) Greywolf Overseas is 6 Front Street, Hamilton, HM11 Bermuda. |
Our Board of Directors has determined that Messrs. LeSuer, Schiller, Mathews, Menown, Flannery and Dunn are “independent,” as that term is defined by the rules of the NASDAQ. Prior to December 12, 2006, our Board of Directors had determined that Mr. Schiller was not independent. This was because Mr. Schiller served as interim President and Chief Executive Officer of our company and PDTI from December 2004 until November 14, 2005. During that time, Mr. Schiller received compensation in the form of additional grants of restricted stock for serving as an interim executive officer. Because of modifications to the NASDAQ rules in 2006 related to the definition of an independent director, our Board of Directors re-evaluated this determination with respect to Mr. Schiller in December 2006. As a result of this evaluation, our Board of Directors determined that Mr. Schiller is now an independent director under the rules and regulations of the NASDAQ. In making the independence determinations with respect to our directors, our Board of Directors considered transactions and relationships between each director or his immediate family and our company. The purpose of this review was to determine whether any such relationships or transactions were material and, therefore, inconsistent with a determination that the director is independent. The Board of Directors concluded that any such relationships and transactions during the past three years were not material and that any such transactions were at arm’s-length. As a result of this review, the Board of Directors affirmatively determined based on its understanding of such transactions and relationships that the directors named above, other than Mr. Terry, are independent of the Company under the standards set forth by NASDAQ.
| | |
| | | |
| | |
| | |
| | Agreement and Plan of Reorganization dated July 14, 2004 by and among MedXLink Corp., a Nevada corporation, PDTI Acquisition Corp., a Delaware corporation, Dean Becker, Particle Drilling Technologies, Inc., a Delaware corporation, ProDril Partners L.L.C., a Texas limited liability company, and Thomas E. Hardisty. (Incorporated herein by reference to Exhibit 2.1 to our current report filed on Form 8-K dated July 14, 2004.) |
| | Amendment No. 1 to the Agreement and Plan of Reorganization dated January 10, 2005 by and among MedXLink Corp., a Nevada corporation, PDTI Acquisition Corp., a Delaware corporation, Dean Becker, Particle Drilling Technologies, Inc., a Delaware corporation, ProDril Partners L.L.C., a Texas limited liability company, and Thomas E. Hardisty. (Incorporated herein by reference to Exhibit 99.1 to our current report filed on Form 8-K dated January 12, 2005.) |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | Rights Agreement, dated as of May 23, 2008, between Particle Drilling Technologies, Inc. and Computershare Trust Company, N.A., as Rights Agent, including the form of Certificate of Designation of Series A Junior Participating Preferred Stock, the forms of Right Certificate, Assignment and Election to Purchase, and the Summary of Rights attached thereto as Exhibits A, B and C, respectively (Incorporated herein by reference to Exhibit 4.1 to our current report on Form 8-K dated May 23, 2008). |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| 10.29 | | Bonus Plan for fiscal 2008 (Incorporated herein by reference by reference to Exhibit 10.29 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2007.) |
| 10.30 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
