10QSB 1 r10q0505.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended May 31, 2005 [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _________ Commission File Number: 0-19945 No Fire Technologies, Inc. ------------------------- (Name of small business issuer in its charter) Delaware 22-3218682 --------- ----------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 21 Industrial Avenue, Upper Saddle River, New Jersey 07458 ----------------------------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number (201) 818-1616 ------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by the Court. YES X NO --- --- State the number of shares of each of the issuer's classes of common equity outstanding at the latest practicable date: 34,779,122 shares of Common Stock as of July 15, 2005. Transitional Small Business Disclosure Format (check one): YES NO X --- --- Page 1 NO FIRE TECHNOLOGIES, INC. FORM 10-QSB INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements: Balance Sheets as of May 31, 2005 (unaudited) and August 31, 2004 3 Statements of Operations for the Nine Months and Three Months ended May 31, 2005 and 2004 (unaudited) 5 Statements of Cash Flows for the Nine Months ended May 31,2005 and 2004 (unaudited) 6 Notes to Unaudited Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Controls and Procedures 16 Part II - OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Sales of Unregistered Securities 16 Item 6. Exhibits 17 Signatures 17 Certification of Financial Information Exhibits 31.1 31.2 Sarbanes-Oxley Act Section 906 Certification Exhibits 32.1 32.2 Page 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NO FIRE TECHNOLOGIES, INC. BALANCE SHEETS May 31, August 31, 2005 2004 ----------- ---------- (UNAUDITED) (AUDITED) ASSETS CURRENT ASSETS: Cash $ 9,217 $ 33,706 Accounts receivable - trade 3,211 15,962 Inventories 88,791 86,113 Prepaid expenses and other current assets 17,884 12,294 --------- ---------- Total Current Assets 119,103 148,705 --------- ---------- EQUIPMENT, less accumulated depreciation 3,106 4,399 --------- ---------- OTHER ASSETS: Patents, less accumulated amortization of $1,531,779 at May 31, 2005 and $1,528,023 at August 31, 2004 1,253 5,008 Security deposits 25,750 24,880 Foreign tax credits 46,500 - ---------- --------- 73,503 29,888 ---------- --------- $ 195,712 $ 182,992 ========== ========== See accompanying notes to financial statements Page 3 NO FIRE TECHNOLOGIES, INC. BALANCE SHEETS May 31, August 31, 2005 2004 ----------- ---------- (UNAUDITED) (AUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: Settled liabilities $1,153,426 $1,153,426 Accounts payable and accrued expenses 642,330 481,234 Loans and advances payable to stockholders 233,621 29,071 Deferred salaries 702,872 504,195 Loans payable 337,611 250,173 Convertible Debentures 8% 469,928 482,208 ---------- --------- Total Current Liabilities 3,539,788 2,900,307 ---------- --------- LONG TERM LIABILITY Convertible Debenture 8% - 1,610,294 STOCKHOLDERS' EQUITY (DEFICIENCY): Common stock $.01 par value: Authorized -150,000,000 shares Issued and outstanding 34,791,622 shares at May 31, 2005 and 21,744,019 shares at August 31, 2004 347,916 4,348,804 Capital in excess of par value 13,172,317 6,774,313 Accumulated Deficit (16,854,334) (15,450,726) Unearned Compensation (9,975) ---------- ---------- Total Stockholders' Equity (Deficiency) (3,344,076) (4,327,609) ---------- ---------- $ 195,712 $ 182,992 ========== ========== See accompanying notes to financial statements Page 4 NO FIRE TECHNOLOGIES, INC. STATEMENTS OF OPERATIONS
For the Nine Months For the Three Months Ended May 31, Ended May 31, 2005 2004 2005 2004 ---------- ---------- ---------- ---------- (UNAUDITED) (UNAUDITED) NET SALES $ 464,691 $ 385,875 $ 274,777 $ 252,332 ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Cost of sales 170,742 128,339 61,963 68,473 Research and development costs 36,773 50,620 14,805 19,006 General and administrative 1,010,250 830,492 478,113 300,312 ---------- ---------- --------- ---------- 1,217,765 1,009,451 554,881 387,791 ---------- --------- ---------- ---------- LOSS FROM OPERATIONS (753,074) (623,576) (280,104) (135,459) ---------- ---------- ---------- ---------- OTHER EXPENSES: Interest expense 693,690 232,191 515,434 22,489 Interest income 70 (225) 225 (75) ---------- ---------- ---------- ---------- 693,760 231,966 515,659 22,414 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- LOSS BEFORE INCOME TAXES $ (1,446,834) $ (855,542) $ (795,763) $ (157,873) INCOME TAX BENEFIT-Net 43,225 43,290 - - ---------- ---------- ---------- ---------- NET LOSS $ (1,403,609) $ (812,252) $ (795,763) (157,873) ========== ========== ========== ========== (LOSS) PER SHARE, BASIC AND DILUTED $ (0.047) $ (0.045) $ (0.025) $ (0.008) ========== ========== ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 31,401,705 20,939,019 31,401,705 20,939,019 ========== ========== ========== ==========
See accompanying notes to financial statements Page 5 NO FIRE TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS
For the Nine Months Ended May 31, 2005 2004 --------- --------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,403,609) $(812,252) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization 5,048 6,698 Amortization of interest expense for discount on convertible debentures 423,059 138,000 Repricing of warrants 50,860 - Warrants issued with debt conversion 105,000 - Warrants and shares issued in exchange for services 8,884 - Changes in operating assets and liabilities Inventory (2678) ( 1,500) Accounts receivable - trade 12,751 41,964 Prepaid expenses and other (5,590) (13,111) Accounts payable and accrued expenses 139,491 15,250 Deferred salaries 198,677 189,570 Foreign tax credit 46,500 - ---------- --------- Net cash flows from operating activities (421,607) (435,381) ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Security deposits (870) (5,501) --------- -------- NET CASH FLOWS FROM INVESTING ACTIVITIES (870) (5,501) --------- --------
See accompanying notes to financial statements Page 6 NO FIRE TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS
For the Nine Months Ended May 31, 2005 2004 --------- --------- (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net of related expenses $ 106,000 $ - Payments on advances from stockholders Loans and advances from stockholders 204,550 57,776 Proceeds from issuance of convertible debentures - 230,000 Proceeds from short-term loans 87,438 (43,290) ---------- ---------- Net cash flows from financing activities 397,988 244,486 ---------- ---------- NET CHANGE IN CASH (24,489) (196,396) CASH AT BEGINNING OF PERIOD 33,706 197,161 -------- ---------- CASH AT END OF PERIOD $ 9,217 $ 765 ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 6,878 $ 1,154 ========== ========== Income taxes paid (received) (43,225) $(43,290) =========== ========= Common stock issued Conversion of convertible debt $ 1,614,434 $ - Settlement of debt 10,000 - ========== ==========
See accompanying notes to financial statements Page 7 NO FIRE TECHNOLOGIES, INC. NOTES TO THE FINANCIAL STATEMENTS (Unaudited) May 31, 2005 NOTE 1 - Basis of Presentation: The balance sheet at the end of the preceding fiscal year has been derived from the audited balance sheet contained in the Company's Form 10-KSB for the year ended August 31, 2004 (the "10-KSB") and is presented for comparative purposes. All other financial statements are unaudited. In the opinion of management, all adjustments which include only normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. The results of operations for interim periods are not necessarily indicative of the operating results for the full year. Footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the published rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the financial statements and notes thereto included in the 10-KSB for the most recent fiscal year. NOTE 2 - Reorganization: The Company owned 89% of the outstanding common stock of both No Fire Ceramic Products, Inc. and No Fire Engineering, Inc. together with an option to acquire the remaining 11% of such stock. Both of those subsidiaries were dissolved during the fiscal year ended August 31, 1997. Under a Chapter 11 proceeding, the Bankruptcy Court confirmed a Plan of Reorganization for the Company which became effective on August 11, 1995. Claims of creditors, to the extent allowed under the Plan, were required to be paid over a four-year period. NOTE 3- Summary of significant accounting policies: Loss per Share - Loss per share is based on the weighted average number of shares outstanding during the periods. The effect of warrants outstanding is not included since it would be anti-dilutive. Equity Based Compensation- The Company follows the intrinsic value method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its employee stock options because, in the opinion of management, Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation (FAS 123), requires use of option valuation models that were not developed for use in valuing employee stock options. FAS 123 permits a company to elect to follow the intrinsic value method of APB 25 rather than the alternative fair value accounting provided under FAS 123, but requires pro forma net income (loss) and earnings (loss) per share disclosures as well as various other disclosures. The Company has adopted the disclosure provisions required under Financial Accounting Standards Board Statement No. 148, Accounting for Stock-Based Compensation Transition and Disclosure (FAS 148). Page 8 NO FIRE TECHNOLOGIES, INC. NOTES TO THE FINANCIAL STATEMENTS (Unaudited) May 31, 2005 If the recognition provisions of SFAS 123 using the Black-Scholes option pricing model were applied, the resulting pro-forma net income (loss) available to common shareholders and pro-forma net income (loss) available to common shareholders per share would be as follows:
For the Nine months For the three months ended ended 5/31/2005 5/31/2004 5/31/2005 5/31/2004 Net loss available to common Shareholders, as reported $(1,403,609) $(812,252) $ (795,763) (157,873) Deduct: Stock-based compensation Net of tax 133,000 459,513 0 0 Net loss available to common Shareholders, pro-forma 1,536,609 1,271,765 795,763 157,873 Basic earnings per share: As reported $ (0.047) $(0.045) $ (.025) $ (.0008) Pro-forma $ (0.048) $ (0.06) $ (.025) $ (.0008)
The above stock-based employee compensation expense has been determined utilizing a fair value method, the Black-Scholes option-pricing model. The Company has recorded no compensation expense for stock options and warrants granted to employees during the nine months ended May 31, 2005 and 2004.In accordance with SFAS 123, the fair value of each option grant has been estimated as of the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions: For the nine months ended May 31,2005 May 31,2004 Risk free interest rate 4.0 4.0 Expected life 5 YEARS 6.5 YEARS Dividend rate 0.00% 0.00% Expected volatility 73% 18% New Accounting Pronouncements - FASB 151 Inventory Costs In November 2004, the FASB issued FASB Statement No. 151, which revised ARB No.43,relating to inventory costs. This revision is to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This Statement requires that these items be recognized as a current period charge regardless of whether they meet the criteria specified in ARB No. 43. In addition, this Statement requires the allocation of fixed production overheads to the costs of conversion be based on normal capacity of the production facilities. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after the date this Statement is issued. Management believes this Page 9 NO FIRE TECHNOLOGIES, INC. NOTES TO THE FINANCIAL STATEMENTS (Unaudited) May 31, 2005 Statement will have no impact on the financial statements of the Company once adopted. FASB 152 Accounting for Real Estate Time-Sharing Transactions In December 2004, the FASB issued FASB Statement No. 152, which amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real- estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. Management believes this Statement will have no impact on the financial statements of the Company once adopted. FASB 153 Exchanges of Nonmonetary Assets In December 2004, the FASB issued FASB Statement No. 153. This Statement addresses the measurement of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges incurred during fiscal years beginning after the date this Statement is issued. Management believes this Statement will have no impact on the financial statements of the Company once adopted. FASB 123 (revised 2004) Share-Based Payments In December 2004, the FASB issued a revision to FASB Statement No. 123, Accounting for Stock Based Compensation. This Statement supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement establishes standards for the accounting for transactions in which an entity exchanges it?s 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 entities 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 Statement 123 as originally issued and Page 10 NO FIRE TECHNOLOGIES, INC. NOTES TO THE FINANCIAL STATEMENTS (Unaudited) May 31, 2005 EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. This Statement does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, Employers Accounting for Employee Stock Ownership Plans. A nonpublic entity will measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of those instruments, except in certain circumstances. A public entity will initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of that award will be re-measured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. A nonpublic entity may elect to measure its liability awards at their intrinsic value through the date of settlement. The grant-date fair value of employee share options and similar instruments will be estimated using the option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). Excess tax benefits, as defined by this Statement, will be recognized as an addition to paid-in-capital. Cash retained as a result of those excess tax benefits will be presented in the statement of cash flows as financing cash inflows. The write-off of deferred tax assets relating to unrealized tax benefits associated with recognized compensation cost will be recognized as income tax expense unless there are excess tax benefits from previous awards remaining in paid-in capital to which it can be offset. The notes to the financial statements of both public and nonpublic entities will disclose information to assist users of financial information to understand the nature of share-based payment transactions and the effects of those transactions on the financial statements. The effective date for public entities that do not file as small business issuers will be as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. For public entities that file as small business issuers and nonpublic entities the effective date will be as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. Management intends to comply with this Statement at the scheduled effective date for the relevant financial statements of the Company. NOTE 4 - Management's Actions to Overcome Operating and Liquidity Problems: The Company's financial statements have been presented on the going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company's viability as a going concern is dependent upon its ability to achieve profitable operations through increased sales and/or obtaining additional financing. Without achieving these, there is substantial doubt about the Companys ability to continue as a going concern. Page 11 NO FIRE TECHNOLOGIES, INC. NOTES TO THE FINANCIAL STATEMENTS (Unaudited) May 31, 2005 The Company has a liability for settled claims payable to creditors in connection with its reorganization under the Plan. Without the achievement of profitable operations or additional financing, funds for repayment would not be available. Management believes that successful passing of stringent tests, obtaining various civil and government approvals, and actions it has undertaken to revise the Company's operating and marketing structure should provide it with the opportunity to generate revenues needed to realize profitable operations and to attract the necessary financing and/or capital for the payment of outstanding obligations. NOTE 5 Convertible debentures: On August 30, 2004 the Company entered into a Conversion of Debt Agreement, whereby officers and directors of the Company agreed to convert certain debt into an 8% convertible debenture. The debenture allowed for a conversion at the rate of $0.14 per share of common stock of unpaid principal and accrued interest. On November 30, 2004 $ 1,283,400 of the above debenture was converted into the Companys common stock. In December 2004 the balance of the Convertible Debenture totaling $326,894 was converted into the Companys common stock. In addition warrants were issued at the rate of 3 times the number of Shares During the nine months, two accredited investors converted $55,000 of their Convertible Debentures into 659,003 shares of the Companys common stock. During the nine months, $400,000 of Convertible Debentures previously Issued were reissued to include interest and penalties in the amount of $69,928. In conjunction with the above the Company issued 1,200,000 $0.22 ten Year warrants to purchase the Companys common stock. The warrants vested immediately. The Company charged $ 423,059 to interest expense on this transaction. Note 6- Equity transactions In May 2005 pursuant to a proxy statement filed, the Company increased its authorized Common Stock to 150,000,000 shares, par value $.01. During the nine months ended May 31, 2005 4,146,980 warrants expired. On November 30, 2004 the Company issued to two accredited investors 285,714 shares of the Companys common stock for $40,000. In addition, the Company issued 857,145 $0.14 ten-year warrants to purchase the Companys common stock. The warrants vested immediately. During January 2005 an accredited investor loaned the Company $65,000 on a one year 15% note. The note is collateralized by future sales of New Jersey State Carryover Losses and 500,000 shares of the Companys common stock which is being held in escrow. In addition 65,000 shares of the Companys common stock was issued as an additional fee. Page 12 NO FIRE TECHNOLOGIES, INC. NOTES TO THE FINANCIAL STATEMENTS (Unaudited) May 31, 2005 In February 2005, a creditor converted a $10,000 note into 50,000 shares of the Companys common stock at $.20. He also received 125,000 5 year warrants convertible at $.20 per share. The warrants vested immediately. In February 2005 the Company issued to a director 700,000 10 year warrants convertible at $.22 per share. The warrants vested immediately. On March 17, 2005 an accredited investor purchased 214,286 shares of the Companys common stock for $30,000 and was also issued 642,858, five year warrants exercisable at $0.14 per share. The warrants vested immediately. On March 15, 2005, a creditor converted approximately $10,000 of debt into 30,000 shares of the Companys common stock at $.20 per share. He also received 40,000 5 year warrants convertible at $.20 per share. The warrants vested immediately. In conjunction with the above 60,000 $.20 per share five-year warrants were issued as a modification to an existing consulting agreement. These warrants vest at a rate of 5,000 per month for one year. In addition 60,000 shares of the Companys common stock are to be issued as consulting compensation over a one year period beginning March 15, 2005 at 5000 shares in each monthly period. As of May 31, 2005 12,500 shares of common stock have been recorded as earned. NOTE 7- Subsequent events In June 2005 an officer of the Company advanced loans to the Company in the amount of $44,100 at 15% interest per annum. In May of 2005 a judgment was entered against the Company in the amount of $106,402.59 representing principal, interest, and legal fees on a past due note payable of $88,811.25. A settlement was reached in the matter by agreeing to make four payments of $22,202.81 beginning June 1, 2005. When all payments are made, the matter will be considered fully settled. The first two payments were made on time by an officer of the Company. Page 13 NO FIRE TECHNOLOGIES, INC. NOTES TO THE FINANCIAL STATEMENTS (Unaudited) May 31, 2005 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company continued its product development and application testing and now has numerous certifications for specific applications. Since August 1995, the Company has applied for eight patents, five of which have been issued. The other three are pending. Additionally, one patent has been purchased by the Company. The Company has been increasing its marketing efforts principally by retaining the services of specialized distribution firms. The Company's management believes that marketing efforts to date have brought the Company closer to achieving greater sales for applications in many diverse industries including: military, maritime, wood products, structural steel and nuclear power plants. Significant tests have been passed and approvals received to qualify the Company's products in naval and other military and governmental applications. Aggressive marketing efforts are underway to obtain orders in these applications. Obstacles encountered in obtaining orders for most applications are the continuing tests and approvals required, competition against well established and better capitalized companies, cost, the slow process of specifying new products in highly regulated industrial applications, and the decisions not to use any fire retardant product. In general, the Company's products perform their intended uses well and are in a form that is safe and easy to use. The Company's most pressing need continues to be cash infusion as discussed below in the section on Liquidity and Capital Resources. The Company is limiting its research and development efforts in order to concentrate on sales of existing products. While new market opportunities frequently arise, the Company has opted to concentrate on targeting sales of present products rather than developing new products. Efforts to establish additional U.S. distributors are being accelerated. Additional efforts are also being directed to increase international sales by establishing distributor relationships in strategic locations throughout the industrialized world. The number of manufacturing and quality control employees will increase with increased production. The salaried administrative and marketing staff will be evaluated and may be increased to support sales and marketing initiatives. Additional support for direct sales is expected to be provided by independent commission agents or employees compensated principally by commission. COMPARISION NINE MONTHS AND THREE MONTHS ENDED MAY 31, 2005 AND 2004 Sales of $464,691 for the nine months ended May 31, 2005 represented an increase of 20.4% from the $385,875 for the comparable nine-month period of the prior year. Cost of goods sold during the same periods increased from $128,339 to $170,742 resulting in a gross profit of $293,949 compared to $257,536 in the prior year. Selling and general administrative expenses for the nine months ended May 31, 2005 were $1,010,250, representing an increase of $179,758 or 21.6% from the $830,492 of the similar period of the prior year. Page 14 NO FIRE TECHNOLOGIES, INC. NOTES TO THE FINANCIAL STATEMENTS (Unaudited) May 31, 2005 Sales of $274,777 for the three months ended May 31, 2005 represented an increase of 8.9% from the $252,332 for the comparable three-month period of the prior year. Cost of good sold during the same periods decreased from $68,473 to $61,963 resulting in a gross profit of $212,814 compared to $184,000 in the prior year. Selling and general administrative expenses for the three months ended May 31, 2005 was $478,113, representing an increase of $177,801 or 59.2% from the $300,312 of the similar period of the prior year. The main components of the changes in the nine-month period are as follows. May 31, May 31, 2005 2004 Difference -------- -------- ---------- Material $165,564 $125,263 $40,301 Testing 36,773 50,620 (13,847) Bad debt expense 62,088 - 62,088 Compensation expense 70,565 - 70,565 Mfg. Overhead 34,754 42,492 (7,738) Rent 101,498 96,665 4,833 Commissions 62,984 57,531 5,453 Salaries and fringes 438,118 422,977 15,141 Insurance 70,674 40,647 30,027 Professional fees 96,355 110,860 (14,505) Interest expense 693,689 232,191 461,498 During the period ended May 31, 2005 and May 31, 2004 the Company realized approximately $50,000 and $43,000 respectively through the sale of a portion of its New Jersey Operating Loss Carry Forward under a program sponsored by the state. LIQUIDITY AND CAPITAL RESOURCES At May 31, 2005 the Company had a cash balance of $9,217. In order to fund continuing operations during the nine months ended on that date, the Company issued to two accredited investors 285,714 shares of the Companys common stock for $40,000. In addition the Company issued 857,145 $0.14 ten-year warrants to purchase the Companys common stock. The warrants vested immediately. During January 2005 an accredited investor loaned the company $65,000 in exchange for a one year 15% note. The note is collateralized by future sales of New Jersey State Carryover Losses and 500,000 shares of the Companys common stock, which is being held in escrow. In addition 65,000 shares of the Companys common stock was issued as an additional fee. During February 2005 the Company established a line of credit of $25,000 from MBNA-Business Elite. On March 17, 2005 an accredited investor purchased 214,286 shares of the Companys common stock for $30,000 and was also issued 642,858 5- year warrants exercisable at $0.14. The warrants vested immediately. In June an officer of the Company advanced loans to the Company in the amount of $44,100 at 15% interest per annum. (see subsequent events) The Company has deferred payment of $1,153,426 of the installments of the Chapter 11 liability to unsecured creditors that were due in September 1996, Page 15 NO FIRE TECHNOLOGIES, INC. NOTES TO THE FINANCIAL STATEMENTS (Unaudited) May 31, 2005 1997, 1998 and 1999. Of that deferred amount, $775,394 is due to officers and directors of the Company. In order to pay those liabilities and meet working capital needs until significant sales levels are achieved, the Company will continue to explore alternative sources of funding including exercise of warrants, bank and other borrowings, issuance of convertible debentures, issuance of common stock to settle debt, and the sale of equity securities in a public or private offering. There is no assurance that the Company will be successful in securing requisite financing. Item 3. Controls and Procedures Our management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "1934 Act"), as of the end of the period covered by this report on Form Q-KSB. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. There have been no changes in internal control over financial reporting that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the period covered by this report. PART II. OTHER INFORMATION Item 1. Legal Proceedings In May of 2005 a judgment was entered against the Company in the amount of $106,402.59 representing principal, interest, and legal fees on a past due note payable of $88,811.25. A settlement was reached in the matter by agreeing to make four payments of $22,202.81 beginning June 1, 2005. When all payments are made, the matter will be considered fully settled. (see subsequent events). Item 2. Sales of Unregistered Securities On August 30, 2004 the Company entered into conversion of debt agreement whereby officers and directors of the Company agreed to convert certain debt into an 8% convertible debenture. The debenture allowed for a conversion at the rate of $0.14 per share of common stock. On November 30, 2004 $1,283,400 of the above debenture was converted Into 9,323,444 of the Companys common stock and 27,970,332 of the Companys warrants convertible at $0.14 per share. In December 2004 the balance of the Convertible Debenture totaling $326,894 was converted into 2,393,370 the Companys common stock and 7,180,110 of the Companys warrants convertible at $0.14 per share. During the period two accredited investors converted $55,000 of their Convertible Debentures into 659,003 shares of the Companys common stock. On November 30, 2004 the Company issued to two accredited investors 285,714 shares of the Companys common stock for $40,000. In addition the Company issued 857,145 $0.14 ten-year warrants to purchase the Companys common stock. The warrants vested immediately. Page 16 NO FIRE TECHNOLOGIES, INC. NOTES TO THE FINANCIAL STATEMENTS (Unaudited) May 31, 2005 During January 2005 an accredited investor loaned the Company $65,000 on a one year 15% note. The note is collateralized by future sales of New Jersey State Carryover losses and 500,000 shares of the Companys common stock, which is being held in escrow. In addition 65,000 shares of the Companys common stock were issued as an additional fee. In February 2005, a creditor converted $10,000 into 50,000 shares of the Companys common stock at $.20. He also received 125,000 5 year warrants convertible at $.20 per share. The warrants vested immediately. On March 17, 2005 an accredited investor purchased 214,286 shares of the Companys common stock for $30,000 and was also issued 642,858, five year warrants exercisable at $0.14. The warrants vested immediately. On March 15, 2005, a creditor converted approximately $10,000 of debt into 30,000 shares of the Companys common stock at $.20 per share. He also received 40,000 5 year warrants convertible at $.20 per share. The warrants vested immediately. In conjunction with the above 60,000 $.20 five-year warrants were issued as a modification to an existing consulting agreement. These warrants vest at a rate of 5,000 per month for one year. In addition 60,000 shares of the Companys common stock are to be issued as consulting compensation over a one year period beginning March 15, 2005 at 5000 shares in each monthly period. As of May 31, 2005 12,500 shares of common stock have been recorded. ITEM 6. EXHIBITS Certification of Financial Information Exhibits 31.1 31.2 Sarbanes-Oxley Act Section 906 Certification Exhibits 32.1 32.2 SIGNATURES In accordance with the requirements of the 1934 Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: July 15, 2005 No Fire Technologies, Inc. By: /s/ Samuel Gottfried Sam Gottfried Chief Executive Officer By: /s/ Sam Oolie Sam Oolie Chairman of the Board, Chief Financial Officer Page 17