**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark One)** |
|----------------|
| ** **     | ** ** | ** ** |
| **ý**     | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           |   |   |
|           |   | **For the quarterly period ended March 31,  2005** |
|           |   |   |
| ** **     | ** ** | **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 DrillingTechnologies, Inc.**

(Exact name of registrant as specified in itscharter)

 
| **Nevada**                                                       | ** ** | **20-1563395**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction  of incorporation or  organization) | ** ** | (I.R.S. Employer  Identification No.) |

 

**808 Travis, Suite 850**

**Houston, Texas 77002**(Address of principal executive offices)(Zip Code)

 

**713-223-3031**(Registrant’s telephone number, including area code)

 

**MedXLink, Corp.**

**378 North Main, #124**

**Layton, UT  84041**

(Former name, former address and formerfiscal year, if changed since last report)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  ý      No   o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes   o      No   ý

 

Thenumber of shares of the registrant’s common stock, $.001 par value, outstandingas of May 10, 2005 was 24,248,094.

 

 

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**PARTICLE DRILLINGTECHNOLOGIES, INC.**

**(adevelopment stage enterprise)**

 

**FORM 10-QFOR THE QUARTER ENDED MARCH 31, 2005**

 

**INDEX**

 
| **Part I  - Financial Information** | ** **                                                                                                                                                                                  | ** ** |
|------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                     |                                                                                                                                                                                        |       |   |
| Item 1.                                  | Financial Statements  (Unaudited)                                                                                                                                                           |       |   |
|                                     |                                                                                                                                                                                        |       |   |
|                                     | Consolidated Balance  Sheets at March 31, 2005 (Unaudited) and September 30, 2004                                                                                                 |       | 2 |
|                                     |                                                                                                                                                                                        |       |   |
|                                     | Consolidated  Statements of Operations (Unaudited) - Three Months and Six Months Ended  March 31, 2005 and 2004 and from June 9, 2003 (date of inception)  to March 31, 2005 |       | 3 |
|                                     |                                                                                                                                                                                        |       |   |
|                                     | Consolidated  Statements of Cash Flows (Unaudited) - Six Months Ended March 31, 2005  and 2004 and from June 9, 2003 (date of inception) to March 31,  2005                  |       | 4 |
|                                     |                                                                                                                                                                                        |       |   |
|                                     | Notes to  Consolidated Financial Statements (Unaudited)                                                                                                                                     |       | 5 |
|                                     |                                                                                                                                                                                        |       |   |
| Item 2.                                  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                                                 |       | 8 |
|                                     |                                                                                                                                                                                        |       |   |
| Item 3.                                  | Quantitative and Qualitative Disclosures about  Market Risk                                                                                                                                 |       | 13 |
|                                     |                                                                                                                                                                                        |       |   |
| Item 4.                                  | Controls and Procedures                                                                                                                                                                     |       | 13 |
|                                     |                                                                                                                                                                                        |       |   |
| **Part II - Other  Information**    | ** **                                                                                                                                                                                  | ** ** |
|                                     |                                                                                                                                                                                        |       |   |
| Item 1.                                  | Legal Proceedings                                                                                                                                                                           |       | 14 |
|                                     |                                                                                                                                                                                        |       |   |
| Item  2.                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                |       | 15 |
|                                     |                                                                                                                                                                                        |       |   |
| Item 6.                                  | Exhibits                                                                                                                                                                                    |       | 15 |
|                                     |                                                                                                                                                                                        |       |   |
|                                     | Signatures                                                                                                                                                                                  |       | 18 |

 

1

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**PARTICLE DRILLING TECHNOLOGIES, INC.**

**(a development stage enterprise)**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                                                                           | ** ** | **March 31,  2005** | ** ** | **September 30,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                                           | ** ** | **(Unaudited)**          | ** ** | ** **                   | ** ** |
|                                                                                                                                                                                                 |       |                     |       |                         |       |
| **ASSETS**                                                                                                                                                                                           |       |                     |       |                         |       |
|                                                                                                                                                                                                 |       |                     |       |                         |       |
| Current  assets:                                                                                                                                                                                     |       |                     |       |                         |       |
| Cash and  cash equivalents                                                                                                                                                                           |       | $                        | 14,103,334 |                         | $          | 20,363 |   |
| Prepaid  expenses                                                                                                                                                                                    |       | 98,617                   |       | 110,535                      |       |
|                                                                                                                                                                                                 |       |                     |       |                         |       |
| Total  current assets                                                                                                                                                                                |       | 14,201,951               |       | 130,898                      |       |
|                                                                                                                                                                                                 |       |                     |       |                         |       |
| Property,  plant & equipment, net                                                                                                                                                           |       | 750,875                  |       | 451,825                      |       |
|                                                                                                                                                                                                 |       |                     |       |                         |       |
| Intangibles,  net                                                                                                                                                                                    |       | 967,473                  |       | 982,612                      |       |
|                                                                                                                                                                                                 |       |                     |       |                         |       |
| Other assets                                                                                                                                                                                         |       | 395,233                  |       | 5,250                        |       |
|                                                                                                                                                                                                 |       |                     |       |                         |       |
| Total assets                                                                                                                                                                                         |       | $                        | 16,315,532 |                         | $          | 1,570,585 |   |
|                                                                                                                                                                                                 |       |                     |       |                         |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                       |       |                     |       |                         |       |
|                                                                                                                                                                                                 |       |                     |       |                         |       |
| Current  liabilities:                                                                                                                                                                                |       |                     |       |                         |       |
| Accounts  payable                                                                                                                                                                                    |       | $                        | 689,807    |                         | $          | 864,177 |   |
| Short-term  notes payable                                                                                                                                                                            |       | 72,422                   |       | 351,195                      |       |
| Accrued  expenses                                                                                                                                                                                    |       | 161,439                  |       | 216,553                      |       |
|                                                                                                                                                                                                 |       |                     |       |                         |       |
| Total  current liabilities                                                                                                                                                                           |       | 923,668                  |       | 1,431,925                    |       |
|                                                                                                                                                                                                 |       |                     |       |                         |       |
| Long-term  debt                                                                                                                                                                                      |       | 14,914                   |       | 20,201                       |       |
|                                                                                                                                                                                                 |       |                     |       |                         |       |
| Commitments  and Contingencies - Note 6                                                                                                                                                              |       |                     |       |                         |       |
|                                                                                                                                                                                                 |       |                     |       |                         |       |
| Stockholders’  equity:                                                                                                                                                                          |       |                     |       |                         |       |
| Common  stock, $.001 par value, 100,000,000 shares authorized, 27,248,094 issued and  24,248,094 oustanding at March 31, 2005, and 18,095,447 issued and  oustanding at September 30, 2004 |       | 27,248                   |       | 18,095                       |       |
| Additional  paid-in capital                                                                                                                                                                          |       | 22,765,961               |       | 3,974,148                    |       |
| Treasury  stock at cost, 3,000,000 and -0- at March 31, 2005 and September 30,  2004, respectively                                                                                         |       | (1,500,000               | )          | —                       |       |
| Deficit  accumulated during the development stage                                                                                                                                                    |       | (5,916,259               | )          | (3,873,784                   | )          |
|                                                                                                                                                                                                 |       |                     |       |                         |       |
| Total  stockholders’ equity                                                                                                                                                                     |       | 15,376,950               |       | 118,459                      |       |
|                                                                                                                                                                                                 |       |                     |       |                         |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                     |       | $                        | 16,315,532 |                         | $          | 1,570,585 |   |

 

The accompanying notes are anintegral part of these statements.

 

2

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**PARTICLE DRILLINGTECHNOLOGIES, INC.**

**(adevelopment stage enterprise)**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                               | ** ** | **Three Months Ended March 31,** | ** ** | **Six Months Ended March 31,** | ** ** | **Period from  June 9, 2003  (date of  inception) to  March 31,  2005** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| **2005**                                                                 | ** ** | **2004**                              | ** ** | **2005**                            | ** ** | **2004**                                                                          | ** ** |
|                                                                     |       |                                  |       |                                |       |                                                                              |       |   |   |   |   |
| Revenues                                                                 |       | $                                     | —     |                                | $          | —                                                                            |       | $ | — |   | $ | — |   | $ | — |   |
|                                                                     |       |                                  |       |                                |       |                                                                              |       |   |   |   |   |
| Operating  expenses:                                                     |       |                                  |       |                                |       |                                                                              |       |   |   |   |   |
| Research and  development                                                |       | 807,247                               |       | 91,800                              |       | 990,403                                                                           |       | 124,421 |   | 1,651,782 |   |
| General and  administrative                                              |       | 420,950                               |       | 747,187                             |       | 1,113,987                                                                         |       | 1,102,282 |   | 4,300,168 |   |
|                                                                     |       |                                  |       |                                |       |                                                                              |       |   |   |   |   |
| Total  operating expenses                                                |       | 1,228,197                             |       | 838,987                             |       | 2,104,390                                                                         |       | 1,226,703 |   | 5,951,950 |   |
|                                                                     |       |                                  |       |                                |       |                                                                              |       |   |   |   |   |
| Loss from  operations                                                    |       | (1,228,197                            | )          | (838,987                            | )          | (2,104,390                                                                        | )          | (1,226,703 | ) | (5,951,950 | ) |
|                                                                     |       |                                  |       |                                |       |                                                                              |       |   |   |   |   |
| Other income  (expenses)                                                 |       |                                  |       |                                |       |                                                                              |       |   |   |   |   |
| Interest  income                                                         |       | 45,377                                |       | —                              |       | 45,377                                                                            |       | — |   | 45,377 |   |
| Gain on debt  extinguishment                                             |       | 26,990                                |       | —                              |       | 26,990                                                                            |       | — |   | 26,990 |   |
| Interest  expense                                                        |       | (3,900                                | )          | (7,462                              | )          | (10,452                                                                           | )          | (7,462 | ) | (36,676 | ) |
|                                                                     |       |                                  |       |                                |       |                                                                              |       |   |   |   |   |
| Total other  income (expenses)                                           |       | 68,467                                |       | (7,462                              | )          | 61,915                                                                            |       | (7,462 | ) | 35,691 |   |
|                                                                     |       |                                  |       |                                |       |                                                                              |       |   |   |   |   |
| Net loss                                                                 |       | $                                     | (1,159,730 | )                                   | $          | (846,449                                                                          | )          | $ | (2,042,475 | ) | $ | (1,234,165 | ) | $ | (5,916,259 | ) |
|                                                                     |       |                                  |       |                                |       |                                                                              |       |   |   |   |   |
| Net loss per  common share, basic and diluted                            |       | $                                     | (0.05      | )                                   | $          | (0.07                                                                             | )          | $ | (0.10 | ) | $ | (0.11 | ) | $ | (0.98 | ) |
|                                                                     |       |                                  |       |                                |       |                                                                              |       |   |   |   |   |
| Weighted  average number of common shares outstanding, basic and diluted |       | 21,581,538                            |       | 11,598,061                          |       | 19,912,443                                                                        |       | 11,429,785 |   | 6,065,634 |   |

 

The accompanying notes are anintegral part of these statements.

 

3

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**PARTICLE DRILLINGTECHNOLOGIES, INC.**

**(a development stage enterprise)**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Period from  June 9, 2003  (date of  inception) to  March 31,  2005** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | ** ** |
| ** **                                                                   | ** ** | ** ** |
| ** **                                                                   | ** ** | ** ** |
| **Six Months Ended March 31,**                                          |
| **2005**                                                                     | ** ** | **2004**   |
| ** **                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                                                                        | ** ** |
| Cash flows from operating  activities:                                       |       |       |       |       |       |                                                                              |       |
| Net loss                                                                     |       | $          | (2,042,475 | )          | $          | (1,234,165                                                                        | )          | $ | (5,916,259 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       |       |       |       |       |                                                                              |       |
| Gain on debt  extinguishment                                                 |       | (26,990    | )          | —     |       | (26,990                                                                           | )          |
| Depreciation and  amortization expense                                       |       | 120,466    |       | 38,980     |       | 267,875                                                                           |       |
| Short-term note issued for  services                                         |       | —     |       | 44,000     |       | 44,000                                                                            |       |
| Common stock issued for  services                                            |       | (66,500    | )          | 368,000    |       | 931,500                                                                           |       |
| Warrants issued for  services                                                |       | 57,999     |       | —     |       | 63,829                                                                            |       |
| Stock-based employee  compensation                                           |       | 161,800    |       | —     |       | 212,614                                                                           |       |
| Changes in operating  assets and liabilities:                                |       |       |       |       |       |                                                                              |       |
| (Increase) decrease in  prepaid expenses                                     |       | 11,918     |       | —     |       | (37,627                                                                           | )          |
| decrease in other current  assets                                            |       | —     |       | 7,500      |       | —                                                                            |       |
| Increase (decrease) in  accounts payable                                     |       | (153,889   | )          | 4,542      |       | 341,577                                                                           |       |
| Increase (decrease) in  accrued liabilities                                  |       | (55,114    | )          | 37,158     |       | 161,439                                                                           |       |
|                                                                         |       |       |       |       |       |                                                                              |       |
| Net cash used in operating  activities                                       |       | (1,992,785 | )          | (733,985   | )          | (3,958,042                                                                        | )          |
|                                                                         |       |       |       |       |       |                                                                              |       |
| Cash flows from investing  activities:                                       |       |       |       |       |       |                                                                              |       |
| Payments to purchase  property and equipment                                 |       | (394,271   | )          | —     |       | (410,826                                                                          | )          |
| Proceeds from sale of  property and equipment                                |       | —     |       | —     |       | 20,957                                                                            |       |
| Payments to purchase  intangibles                                            |       | (10,106    | )          | (116,472   | )          | (270,269                                                                          | )          |
| Payments to purchase other  assets                                           |       | (389,983   | )          | —     |       | (395,233                                                                          | )          |
| Payments issued for note  receivable                                         |       | —     |       | (24,447    | )          | (300,783                                                                          | )          |
| Payments issued for note  receivable - related party                         |       | —     |       | (39,283    | )          | (56,783                                                                           | )          |
|                                                                         |       |       |       |       |       |                                                                              |       |
| Net cash used in investing  activities                                       |       | (794,360   | )          | (180,202   | )          | (1,412,937                                                                        | )          |
|                                                                         |       |       |       |       |       |                                                                              |       |
| Cash flows from financing  activities:                                       |       |       |       |       |       |                                                                              |       |
| Proceeds from issuance of  common stock                                      |       | 18,647,666 |       | 973,527    |       | 20,975,766                                                                        |       |
| Purchases of treasury stock                                                  |       | (1,500,000 | )          | —     |       | (1,500,000                                                                        | )          |
| Proceeds from issuance of  convertible notes                                 |       | —     |       | —     |       | 553,500                                                                           |       |
| Repayments of notes  payable                                                 |       | (277,550   | )          | (39,647    | )          | (554,953                                                                          | )          |
| Proceeds from borrowings  under loan agreements - related parties            |       | —     |       | —     |       | 23,195                                                                            |       |
| Repayment of borrowings  under loan agreements - related parties             |       | —     |       | (23,195    | )          | (23,195                                                                           | )          |
|                                                                         |       |       |       |       |       |                                                                              |       |
| Net cash provided by  financing activities                                   |       | 16,870,116 |       | 910,685    |       | 19,474,313                                                                        |       |
|                                                                         |       |       |       |       |       |                                                                              |       |
| Net increase in cash and  cash equivalents                                   |       | 14,082,971 |       | (3,502     | )          | 14,103,334                                                                        |       |
|                                                                         |       |       |       |       |       |                                                                              |       |
| Cash and cash equivalents  - beginning of period                             |       | 20,363     |       | 3,502      |       | —                                                                            |       |
|                                                                         |       |       |       |       |       |                                                                              |       |
| Cash and cash equivalents  - end of period                                   |       | $          | 14,103,334 |       | $          | —                                                                            |       | $ | 14,103,334 |   |
|                                                                         |       |       |       |       |       |                                                                              |       |
| Supplemental disclosures  of cash flow information:                          |       |       |       |       |       |                                                                              |       |
| Cash paid for interest                                                       |       | $          | 11,756     |       | $          | 7,462                                                                             |       | $ | 36,453 |   |
|                                                                         |       |       |       |       |       |                                                                              |       |
| Non-cash investing and  financing activitites:                               |       |       |       |       |       |                                                                              |       |
| Prepaid insurance acquired  with note payable                                |       | $          | —     |       | $          | —                                                                            |       | $ | 60,990 |   |
| Common stock issued as  consideration for account payable                    |       | —     |       | —     |       | 6,000                                                                             |       |
| Common stock issued as  consideration for note payable                       |       | —     |       | 50,000     |       | 50,000                                                                            |       |
| Related party note  receivable exchanged for property and equipment          |       | —     |       | —     |       | 56,783                                                                            |       |
| Note payable converted  into common stock                                    |       | —     |       | —     |       | 553,500                                                                           |       |
| Property and equipment  acquired with assumed liabilities                    |       | —     |       | 479,610    |       | 479,610                                                                           |       |
| Intangibles acquired with  assumed liabilities                               |       | —     |       | 757,792    |       | 757,792                                                                           |       |

 

The accompanying notes are an integral partof these statements.

 

4

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**PARTICLE DRILLINGTECHNOLOGIES, INC.**

**(a development stage enterprise)**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

**1. BASIS OF PRESENTATION**

 

The accompanyingunaudited consolidated financial statements, which include the accounts of Particle DrillingTechnologies, Inc. (the “Company” or “PDTI”) and its subsidiary, have beenprepared in accordance with generally accepted accounting principles and pursuantto the rules and regulations of the Securities and ExchangeCommission.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted in accordance with such rules andregulations.  The information furnishedin the interim condensed consolidated financial statements includes normalrecurring adjustments and reflects all adjustments, which in the opinion ofmanagement are necessary for a fair presentation of such financialstatements.  Although management believesthe disclosures and information presented are adequate to make the informationnot misleading, it is suggested that these interim condensed consolidated financialstatements be read in conjunction with the Company’s September 30, 2004 auditedconsolidated financial statements and notes thereto.  Operating results for the three months andsix months ended March 31, 2005 are not necessarily indicative of theresults that may be expected for the year ending September 30, 2005.

 

Thepreparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities,disclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting periods.  Actual results coulddiffer from these estimates.

 

**2. REVERSE ACQUISITION WITH MEDXLINK, CORP.**

 

OnJuly 14, 2004, MedXLink, Corp. (“MXLK”, or the “Parent”), a Nevadacorporation and an inactive publicly-traded company, entered into an Agreementand Plan of Reorganization with Particle Drilling Technologies, Inc.,a Delaware corporation, (“PDTI-DE”), whereby MXLK agreed to acquire PDTI-DE bymerging PDTI Acquisition Corp. (“Merger Sub”), a newly formed Delawarecorporation and wholly owned subsidiary of MXLK, with and into PDTI-DE and issuingcommon stock of MXLK in exchange for all the outstanding shares of PDTI-DE.  On January 14, 2005, MXLK closed itsacquisition of PDTI-DE and issued 16,698,094 shares of common stock (including3,381,538 shares of common stock issued upon conversion of the same number ofshares of Series A Convertible Preferred Stock of PDTI-DE) to holders ofcommon stock of PDTI-DE and reserved for issuance (1) 228,000 shares ofcommon stock pursuant to outstanding warrants to purchase common stock of PDTI-DE,and (2) 3,205,000 shares of common stock pursuant to outstanding optionsto purchase common stock of PDTI-DE.  Inaddition, 1,342,404 issued and outstanding shares of common stock of the Parentwere cancelled for no consideration in connection with the Merger.  Following the merger, the Parent had18,248,094 shares of common stock issued and outstanding (which included3,381,538 shares of common stock issued upon conversion of the same number ofshares of Series A Convertible Preferred Stock of PDTI-DE) and an additional3,433,000 shares of common stock reserved for issuance upon exercise ofwarrants and options as described above. Following the merger, PDTI-DE continued as the surviving corporationunder the name of Particle Drilling Technologies, Inc. as asubsidiary of Parent, the Parent changed its name to Particle DrillingTechnologies, Inc., and its stock trading symbol changed from MXLK.OB toPDRT.OB.

 

**3. NET LOSS PER COMMON SHARE**

 

The Company has presentedbasic and diluted net loss per share pursuant to Statement of FinancialAccounting Standards (SFAS) No. 128, *Earnings Per Share*.  In accordance with SFAS No. 128, basicand diluted net loss per share has been computed using the weighted averagenumber of shares of common stock outstanding during the

 

5

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period.  Dilutive net loss per sharewould give effect to the dilutive effect of common stock equivalents consistingof options and warrants.  Potentiallydilutive securities have been excluded from the net loss per common sharecalculation as the effects would be antidilutive.  Potentially dilutive securities totaling 4,978,000and -0- for the periods ended March 31, 2005 and 2004, respectively, werenot included in the computation of weighted average diluted common sharesbecause the impact of these potentially dilutive securities were anti-dilutive.

 

**4. COMMON STOCK**

 

FromOctober 2004 to December 2004, PDTI issued 285,000 shares of itscommon stock for cash in a private placement at $2.00 per share.  PDTI received net proceeds of $533,000 afterdeducting the offering expenses of $37,000.

 

InOctober 2004, PDTI issued 10,000 shares of common stock to a financialadvisor for consulting services rendered. PDTI recorded a charge of $17,500 for the fair value of common stock onthe date of issuance.

 

InDecember 2004, PDTI issued 9,314 shares of its common stock upon a netcashless exercise of 10,000 warrants at $0.12 per share.

 

InDecember 2004, the Company issued upon exercise of warrants, 33,333 sharesof the Company’s common stock for cash at $0.01 per share.

 

In January 2005,PDTI issued 565,000 shares of its common stock for cash in a private placementat $2.00 per share.  PDTI receivedproceeds of $1,130,000.  These sharesrelated to a private placement which began in April 2004 and was completedin January 2005.  The Company issueda total of 1,635,000 shares of its common stock under this private placementfrom April 2004 to January 2005 and received total net proceeds of$2,934,000.

 

In January 2005,Cagan McAfee Capital Partners, LLC (“CMCP”) and various groups associated withCMCP agreed to and cancelled 700,000 shares of the Company’s common stock that hadbeen valued at $0.12 per share when the Company originally issued such sharesof common stock in June 2004.  Thiscancellation was conducted in an effort to facilitate the reverse acquisitionbetween PDTI and MedXLink, Corp.  PDTIrecorded a credit to compensation expense of $84,000 in January 2005 forthe cancellation of these shares, an amount equal to the compensation expenserecorded when these shares were issued in 2004.

 

In January 2005,Prentis B. Tomlinson (PDTI’s former President and CEO) and Thomas E. Hardisty,Senior Vice President of Corporate Development of PDTI, cancelled 45,000 and5,000 shares, respectively, of the Company’s common stock that was valued at$0.001 per share.  Mr. Tomlinson andMr. Hardisty agreed to cancel these shares of the Company’s common stockin an effort to facilitate the reverse acquisition between PDTI and MedXLink,Corp.

 

InFebruary 2005, the Company sold 9,000,000 shares of its common stock at$2.00 per share in a private placement that closed February 9, 2005.  The Company received gross proceeds of$18,000,000.  The Company paid 3.0%commissions on the first $15,000,000 and 5.0% commissions on the remaining$3,000,000 gross proceeds received, respectively, $100,000 for reimbursable expenses,and legal fees of $315,767 related to the offering.  In addition, PDTI used $1,500,000 of theseproceed to repurchase 3,000,000 shares of common stock from Mr. Tomlinson.  These shares were purchased as treasury stockand recorded at cost.

 

AtMarch 31, 2005, the Company had 24,248,094 shares of common stockoutstanding and has issued options and warrants to purchase up to 4,978,000 additionalshares of the Company’s common stock.

 

6

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**5. STOCK OPTIONS AND WARRANTS**

 

**Stock Options**

 

InApril 2004, the Board of Directors adopted the 2004 Stock Incentive Plan(the “2004 Plan”).  The 2004 Planprovides for the issuance of incentive stock options, non-statutory stockoptions and restricted stock grants to directors, employees and consultants ofPDTI.  Provisions under the 2004 Planallow for the issuance of up to 3,500,000 shares of common stock pursuant toawards under the 2004 Plan.  As of March 31,2005, the Company had 50,000 shares of common stock available for issuancepursuant to awards under the 2004 Plan. Under the 2004 Plan, the exercise price of each option equals the marketvalue of the Company’s common stock on the date of grant and the maximum termfor the options is ten years.  For the threemonths and six months ended March 31, 2005 and from June 9, 2003(date of inception) to March 31, 2005, compensation expense recorded for optionsissued and vested was $0, $161,800 and $212,614, respectively.   The fair value of each stock option grantedis estimated as of the grant date using the Black-Scholes option pricing modelwith the following weighted average assumptions:  dividend yield of 0%; expected volatility of0%; risk-free interest rate of 4.09%; and expected life of 10 years.  For the three months and six months ended March 31,2004, the Company did not issue any options to employees.

 

In March 2005, the Board of Directors adopted the 2005 StockIncentive Plan (the “2005 Plan”).  The2005 Plan provides the issuance of incentive stock options, non-statutory stockoptions and restricted stock grants to directors, employees and consultants ofPDTI.  Provisions under the 2005 Planallow for the issuance of options and restricted stock awards to purchase orissue up to 2,000,000 shares of common stock. As of March 31, 2005, the Company had 2,000,000 shares of commonstock available for issuance pursuant to awards under the 2005 Plan.

 

**Warrants**

 

InOctober 2004, PDTI issued warrants to purchase 33,333 shares of theCompany’s common stock at $0.01 per share. The warrants were issued to a financial advisor for servicesprovided.  The Company recordedcompensation expense of $58,000 using the Black-Scholes option pricing modelunder the following assumptions: dividend yield of 0%; expected volatility of0%; risk-free interest rate of 3.34%; and expected life of 0 years.

 

In connection with a privateplacement that commenced in April 2004 and that was completed in January 2005,PDTI issued warrants, in January 2005, to purchase 65,500 shares of theCompany’s common stock to certain persons associated with the Placement Agentof this private placement.  Offeringexpense recorded for these warrants was $80,565.  The related charge was a direct cost of theassociated financing and was therefore charged directly to stockholders’equity.  Each warrant has an exerciseprice of $2.00 per share with a maximum term of five years.  The fair value of each warrant granted isestimated as of the grant date using the Black-Scholes option pricing modelwith the following weighted average assumptions: dividend yield of 0%; expectedvolatility of 71.86%; risk-free interest rate of 3.73%; and expected life of 5years.

 

In connection with a privateplacement that was completed February 9, 2005, PDTI issued warrants, in February 2005,to purchase 1,500,000 shares of the Company’s common stock to certain personsassociated with the Placement Agent of this private placement.  Offering expense recorded for these warrantswas $2,370,000.  The related charge was adirect cost of the associated financing and was therefore charged directly tostockholders’ equity.  Each warrant hasan exercise price of $2.00 per share with a maximum term of ten years.  The fair value of each warrant granted isestimated as of the grant date using the Black-Scholes option pricing modelwith the following weighted average assumptions: dividend yield of 0%; expectedvolatility of 71.86%; risk-free interest rate of 4.00%; and expected life of 10years.

 

**6. COMMITMENTS AND CONTINGINCIES**

 

In March 2005, theCompany entered into a five year lease agreement whereby PDTI will move itscurrent office facility located at 808 Travis Street, Suite 850, Houston,TX  77002 to 1021 Main Street, Suite 2650,Houston, TX  77002.  PDTI delivered to the lessor a securitydeposit of $350,000 in the form of an irrevocable letter of credit.  The terms of this lease agreement willcommence on the leasehold completion date. The estimated leasehold completion date is June 1, 2005.  PDTI will divide equally and sublease theoffice space with an affiliate of John D. Schiller, interim President and CEOof PDTI.  The future annual minimum leasepayments commencing on the leasehold completion date is $173,517.  The future annual minimum rental incomeassociated with the sublease agreement will be $88,025.

 

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**7. INCOME TAXES**

 

The Company reports itsincome taxes in accordance with SFAS 109, “Accounting for Income Taxes”, whichcalls for the utilization of the asset and liability method of accounting forincome taxes. Under this method, deferred taxes are determined based ondifferences between financial reporting and tax bases of assets and liabilitiesand are measured using the enacted marginal tax rates and laws that will be ineffect when the differences reverse.  At March 31,2005, the Company had cumulative net operating loss carryforwards of$5,747,116, which expire in years 2005 through 2023. No effect has been shownin the financial statements for the net operating loss carryforwards as thelikelihood of future tax benefit from such net operating loss carryforwards isnot determinable at this time. Accordingly, the potential tax benefits of thenet operating loss carryforwards, estimated based upon current tax rates at March 31,2005, have been offset by valuation reserves of the same amount.

 

**Item 2:****  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

 

Thefollowing discussion of our financial condition and results of operationsshould be read together with the unaudited consolidated financial statementsand related notes that are included elsewhere in this report. This discussionmay contain forward-looking statements based upon current expectations that involverisks and uncertainties that could cause actual results to differ materiallyfrom the forward-looking statements.  Weundertake no obligation to update any forward-looking statements except asrequired by law.

 

**Overview**

 

On January 14, 2005, we acquiredParticle Drilling Technologies, Inc., a privately-held Delaware corporation(“PDTI”).  As a result of thisacquisition, our company, which previously had no material operations, acquiredthe business of PDTI and we are now engaged in the development of the ParticleImpact Drilling System, a patented system utilizing a specially designed “fitfor purpose” drill bit fitted with jetting nozzles and polycrystalline diamondcompact cutting structures for use in the oil and gas drilling industry.

 

Weare a development-stage company and have a limited operating history. Ourpredecessor company for financial reporting purposes was formed on June 9,2003 to acquire the technology related to the Particle Impact DrillingSystem (the “PID technology”). We are still developing this technology, and todate, we have not generated any revenues from our operations. As we continue toexecute our operations plan, we expect our development and operating expensesto increase.

 

*Research and development. *We have made and expect to continue to make substantialinvestments in research and development activities in order to develop andmarket our PID technology. Research and development costs consist primarily ofgeneral and administrative and operating expenses related to research anddevelopment activities. We expense research and development costs as incurredexcept for property, plant and equipment related to research and developmentactivity that have an alternative future use. Property, plant and equipment forresearch and development that have an alternative future use are capitalizedand the related depreciation is expensed as research and development costs.

 

*General and administrative. *General and administrative expenses consist primarily ofsalaries and benefits, office expense, professional services, and othercorporate overhead costs. We anticipate increases in general and administrativeexpenses as a result of becoming subject to reporting obligations applicable topublicly-held companies in January 2005, and as we continue to develop andprepare for commercialization of the PID technology.

 

**Results of Operations**

 

***Quarter Ended March 31,2005 Compared to Quarter Ended March 31, 2004***

 

*Research and development. *Research and development expenses were $807,247 and $91,800for the quarters ended March 31, 2005 and 2004, respectively, representingan increase of $715,447. We purchased the PID technology in January 2004,and we had a limited ability to develop the technology due to our lack of fundsavailable.  As a result of the successfulcompletion of our private placement in February 2005, we began toaggressively develop the PID technology during the quarter ended March 31,2005.

 

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*General and administrative. *General and administrative expenses were $420,950 and$747,187 for the quarter ended March 31, 2005 and 2004, respectively,representing a decrease of $326,237. The decrease was primarily attributed tohigh level of stock-based compensation issued to non-employees during thequarter ended March 31, 2004.  Theseissuances were necessary because the Company had limited liquidity during theearly stages of its development that resulted in the Company issuing morestock-based compensation during the quarter ended March 31, 2004.

 

*Other Income. *Other income was $72,367 and $0for the quarter ended March 31, 2005 and 2004, respectively.  During the quarter ended March 31, 2005,interest income was $45,377 and gains on debt extinguishment were $26,990.  Interest income was due to the interestearned on the investment of funds secured in the private placement in February 2005.  We received gross proceeds of $18 million inconnection with that private placement.  Gainson debt extinguishment were due to settlements on a note payable and an accountpayable that were related to the liabilities we assumed in connection with our acquisitionof the PID technology.

 

*Interest Expense*.  Interest expense was $3,900 and $7,462 forthe quarters ended March 31, 2005 and 2004, respectively, representing adecrease of $3,562.  The decrease ininterest expense was primarily due to the payment of certain notes payable thatwere assumed in connection with our acquisition of the PID technology.

 

***Six Months Ended March 31,2005 Compared to Six Months Ended March 31, 2004***

 

*Research and development. *Research and development expenses were $990,403 and $124,421for the six months ended March 31, 2005 and 2004, respectively,representing an increase of $865,982.  Wedid not purchase the PID technology until the quarter ended March 31, 2004and had limited liquidity to fund the development of the PID technology duringthe six months ended March 31, 2004. Depreciation expense on research and development property and equipmentwas $86,048 for the six months ended March 31, 2005 compared to $29,303for the six months ended March 31, 2004. The increase of $56,745 was due to the purchase of the PID technology inJanuary 2004.

 

*General and administrative. *General and administrative expenses were $1,113,987 and $1,102,282for the six months ended March 31, 2005 and 2004, respectively,representing an increase of $11,705.  Salaries and related expenses increased $404,373 during the six monthsended March 31, 2005 compared to the six months ended March 31, 2004.  The increase was primarily due to: (1) Ourformer President and CEO, Prentis B. Tomlinson, and our current CFO, J.Christopher Boswell, did not receive a salary until April 2004; and (2) theissuance of stock-based compensation in December 2004 with a fair value of$161,800 related to the hiring of our new interim President and CEO, John D.Schiller.  We have also increased thenumber of our employees since March 31, 2004.  Stock-based compensation expense related tonon-employees decreased $382,331 during the six months ended March 31,2005 compared to the same period during 2004. This decrease was primarily as a result of our limited liquidity duringthe early stages of development that resulted in the Company issuing morestock-based compensation during the six months ended March 31, 2004.  Depreciation expense increased $24,741 duringthe six months ended March 31, 2005 compared to the same period during2004 as result of purchasing the PID technology in January 2004.  Other miscellaneous expenses during the sixmonths ended March 31, 2005 decreased $35,078 compared to the six monthsended March 31, 2004, primarily due to a decrease in travel expensesrelated to the resignation of our former CEO and President, Prentis B.Tomlinson, in December 2004.

 

*Other Income. *Other income was $72,367 and $0for the six months ended March 31, 2005 and 2004, respectively.  During the six months ended March 31,2005, interest income was $45,377 and gains on debt extinguishment were $26,990.  Interest income was due to the interestearned on the investment of funds secured in the private placement in February 2005.  We received gross proceeds of $18 million inconnection with that private placement.  Gainson debt extinguishment were due to settlements on a note payable and an accountpayable that were related to the liabilities we assumed in connection with our acquisitionof the PID technology.

 

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**Liquidity and Capital Resources**

 

Sinceinception on June 9, 2003 through March 31, 2005, we have financedour operations through private sales of our equity and the issuance ofconvertible notes payable, totaling net proceeds of $19,474,313.  As of March 31, 2005, we had $14,103,334in cash and cash equivalents.

 

OnFebruary 9, 2005, we sold 9,000,000 shares of our common stock at $2.00per share in a private placement and received gross proceeds of $18,000,000. Wepaid commissions to the placement agent in the amount of $600,000, $100,000 forreimbursable expenses, and legal fees related to this offering of $315,767.  In connection with this private placement, weissued ten year warrants to persons associated with the placement agent topurchase 1,500,000 shares of our common stock in the aggregate at $2.00 pershare. In addition, we used $1,500,000 of these proceeds to repurchase3,000,000 shares of our common stock from Prentis B. Tomlinson (PDTI’s formerPresident and Chief Executive Officer until December 2, 2004). Theseshares were purchased as treasury stock and recorded at cost.

 

Ourprincipal sources of liquidity are cash and cash equivalents. As of March 31,2005, we had $14,103,334 of cash and cash equivalents.  Cash requirements through the end of thefiscal year 2005 are primarily to fund research and development activities andto continuously improve service capabilities and expand operations. We believewe have sufficient resources to meet our working capital and capitalexpenditure requirements for at least the next 12 months; however, ourcontinued existence depends on the successful development of the PID technologyand our ability to successfully commercialize this technology.

 

Thenet cash used in operating activities from June 9, 2003 (date ofinception) to March 31, 2005 was $3,958,042, which is primarilyattributable to the net loss from June 9, 2003 (date of inception) to March 31,2005 of $5,916,259, of which $2,042,475 and $1,234,165 was incurred during thesix months ended March 31, 2005 and 2004, respectively. The net cash used inoperating activities during six months ended March 31, 2005 and 2004 was $1,992,785and $733,985, respectively. The difference was primarily due to fundraisingefforts in February 2005 which allowed PDTI the necessary liquidity toincrease expenditures for planned research and development projects.  During the six months ended March 31,2005, we spent $865,982 more on research and development compared to the sameperiod during 2004.  The non-cashactivities that decreased net operating cash use for the six months ended March 31,2005 and 2004 totaled $246,776 and $450,980, respectively.   The difference was primarily related to adecrease in stock-based compensation expense of $214,701 from the six monthsended March 31, 2005 compared to the same period during 2004.  The Company had limited liquidity during its earlystages of development and as a result it issued more stock-based compensationto employees and non-employees.  From June 9,2003 (date of inception) to March 31, 2005, PDTI recorded $1,207,943 instock-based compensation expense relating to non-cash activities that decreasednet operating cash use.  During the sixmonths ended March 31, 2005, the change in working capital increased netoperating cash use by $197,085.  Duringthe six months ended March 31, 2004, the change in working capitaldecreased net operating cash use by $49,200. The difference was primarily related to the decrease in accounts payableand accrued liabilities during the six months ended March 31, 2005 of$209,003 compared to an increase in accounts payable and accrued liabilities of$41,700 during the six months ended March 31, 2004.  The change in working capital that decreasedoperating cash use from June 9, 2003 (date of inception) to March 31,2005 was $465,389.  The decrease wasprimarily due to an increase in accounts payable and accrued liabilities of $503,016during the period.

 

Netcash used in investing activities for the period from June 9, 2003 (dateof inception) to March 31, 2005 was $1,412,937. The net cash used forinvestment activities during the six months ended March 31, 2005 and 2004was $794,360 and $180,202, respectively. We used $410,826 during the period from June 9, 2003 (date ofinception) to March 31, 2005 to purchase property and equipment, of which$394,271 was used during the six months ended March 31, 2005.  We did not purchase any property andequipment during the six months ended March 31, 2004.  From June 9, 2003 (date of inception) toMarch 31, 2004, we used $270,269 for legal fees related to patentsacquired and patent filing fees.  Of thatamount, $10,106 was used during the six months ended March 31, 2005primarily for legal fees related to patent filing fees, and $116,472 was usedduring the same time last year primarily for legal fees related to patentsacquired.  We used $395,233 to purchaseother assets during the period from June 9, 2003 (date of inception) to March 31,2005, of which $389,983 was used during the six months ended March 31,2005.  This was primarily related to a$350,000 deposit in the form of a letter of credit we established in connectionwith our new office lease.  We extendedcredit in the amount of $300,783 to ProDril Services, Inc. (“PSI”) duringfiscal year 2003 as part of an agreement to purchase the PID technology andrelated equipment, of which $24,447 was loaned during the six months ended March 31,2004. In January 2004, we acquired the PID technology and relatedequipment in a

 

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non-cash transaction in which we received equipment with a fair valueof $479,610 and assumed total liabilities of $1,237,402. We recorded anintangible asset of $757,792 for the difference in the total liabilitiesassumed and the fair value of the equipment received. The $300,783 notereceivable due from PSI was a portion of the liability assumed, and thereforetreated as consideration for the PID technology and related equipment.

 

Netcash provided by financing activities for the six months ended March 31,2005 and 2004 was $16,870,116 and $910,685, respectively. During the six monthsended March 31, 2005 and 2004, we received net proceeds of $18,647,666 and$973,527, respectively, from the issuance of our common stock. During the sixmonths ended March 31, 2005 we used $1,500,000 to repurchase 3,000,000shares from a shareholder.  We used $277,550and $39,647 to repay notes payable during the six months ended March 31,2005 and 2004, respectively.  During thesix months ended March 31, 2004, we used $23,195 to repay borrowings undera loan agreement with related parties, Prentis B. Tomlinson (PDTI’s former CEOand President until December 2, 2004), and an affiliate of Prentis B.Tomlinson.

 

Ourcontractual obligations at March 31, 2005 are set forth in the tablebelow. Our long-term debt obligation is related to equipment that was financedfor a three year period, beginning July 2004, and is secured by the sameequipment. Our operating lease obligations consist of our office and commercialoperating facility that are both located in Houston, Texas. Our current officelease expired in February 2005 and the commercial operating leaseterminates in June 2005. We are currently leasing our office lease on amonth-to-month basis.

 

InMarch 2005, we entered into a five year lease agreement whereby we willmove our current office facility located at 808 Travis Street, Suite 850,Houston, TX 77002 to 1021 Main Street, Suite 2650, Houston, TX 77002. Wehave delivered to the lessor a security deposit of $350,000 in the form of anirrevocable letter of credit. The terms of this lease agreement will commenceon the leasehold completion date, which we expect to be June 1, 2005. Theleased office facility will be divided and subleased to an affiliated companyof John D. Schiller, Jr., our interim President and Chief ExecutiveOfficer. Our future annual minimum lease payments commencing on the leaseholdcompletion date will be $173,517. The future annual minimum rental incomeassociated with the sublease agreement will be $88,025.

 
| ** **                                                    | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|
| **Contractual Obligations**                                   | ** ** | **Total**                  | ** ** | **Less than1  year** | ** ** | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **More than 5  years** | ** ** |
|                                                          |       |                       |       |   |   |   |   |   |   |   |   |
| Long-Term  Debt Obligation  (including current  portion) |       | $                          | 26,154     |   | $ | 11,240 |   | $ | 14,914 |   | $ | — |   | $ | — |   |
| Operating  Lease Obligations                                  |       | 881,085                    |       | 71,339 |   | 520,551 |   | 289,195 |   | — |   |
|                                                          |       |                       |       |   |   |   |   |   |   |   |   |
| Total                                                         |       | $                          | 907,239    |   | $ | 82,579 |   | $ | 535,465 |   | $ | 289,195 |   | $ | — |   |

 

**Off-Balance Sheet Arrangements**

 

Inconnection 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 basisequal to 18% of our earnings before interest, income taxes, depreciation andamortization (“EBITDA”) until an aggregate of $67,500,000 has been paid. PDTIalso entered into a Royalty Agreement in January 2004 with ProDrilServices, International, Ltd. (“PSIL”) pursuant to which we are obligated topay PSIL a royalty on a quarterly basis equal to 2% of our EBITDA until anaggregate of $7,500,000 has been paid. In addition, we are obligated to payCCORE Technology and Licensing, Ltd. (“CTL”), PSI and PSIL a royalty equal to1.6%, 1.2% and 1.2%, respectively, of our quarterly gross revenue. As of March 31,2005, PDTI had no revenues or EBITDA; therefore no royalties have been paid oraccrued.

 

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**Critical Accounting Policies**

 

Ourdiscussion and analysis of our financial condition and results of operations isbased on our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. The preparation of these consolidated financial statements requiresus to make estimates and judgments that affect the reported amounts of assets,liabilities and expenses. We base our estimates on historical experience and onvarious other assumptions that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions. We believe the following criticalaccounting policies affect our most significant judgments and estimates used inpreparation of our consolidated financial statements.

 

*Reverse Acquisition. *The acquisition of PDTI was accounted for as a reverseacquisition. Pursuant to the guidance in Appendix B of SEC AccountingDisclosure Rules and Practices Official Text, the “merger of a privateoperating company into a non-operating public shell corporation with nominalnet assets typically results in the owners and management of the privatecompany having actual or effective operating control of the combined companyafter the transaction, with the shareholders of the former public shellcontinuing only as passive investors. These transactions are considered by thestaff to be capital transactions in substance, rather than businesscombinations. That is, the transaction is equivalent to the issuance of stockby the private company for the net monetary assets of the shell corporation,accompanied by a recapitalization”. Accordingly, the reverse acquisition hasbeen accounted for as a recapitalization. For accounting purposes, PDTI isconsidered the acquirer in the reverse acquisition. The historical financialstatements are those of PDTI. Earnings per share for periods prior to themerger are restated to reflect the number of equivalent shares received by theacquiring company.

 

*Impairment of Long-Lived Assets. *We review long-lived assets and certain identifiable assetsfor impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. If the sum of the expectedfuture undiscounted cash flows is less than the carrying amount of the asset,further impairment analysis is performed. An impairment loss is measured as theamount by which the carrying amount exceeds the fair value of assets.

 

*Stock-Based Compensation. *In December 2004, the FASB issued a revision to SFAS No. 123,*Share-Based Payment*. Thisstatement establishes standards for the accounting for transactions in which anentity exchanges its equity instruments for goods or services. It alsoaddresses transactions in which an entity incurs liabilities in exchange forgoods or services that are based on the fair value of the entity’s equityinstruments or that may be settled by the issuance of those equity instruments.This statement focuses primarily on accounting for transactions in which anentity obtains employee services in share-based payment transactions. Thisstatement does not change the accounting guidance for share-based paymenttransactions with parties other than employees provided in SFAS No. 123 asoriginally issued. This statement is effective for new awards and thosemodified, repurchased or cancelled in interim or annual reporting periodsbeginning after June 15, 2005. We have adopted this standard and theeffects of the early adoption did not have a material impact on ourconsolidated financial statements.

 

*Research and Development. *The costs of materials and equipment or facilities that areacquired or constructed for research and development activities and that havealternative future uses are capitalized as tangible assets when acquired orconstructed. The cost of such materials consumed in research and developmentactivities and the depreciation of such equipment or facilities used in thoseactivities are research and development costs. However, the costs of materials,equipment, or facilities acquired or constructed for research and developmentactivities that have no alternative future uses are considered research anddevelopment costs and are expensed at the time the costs are incurred.

 

*Income Taxes.*  The Company reports its income taxes inaccordance with SFAS 109, “Accounting for Income Taxes”, which calls for theutilization of the asset and liability method of accounting for income taxes.Under this method, deferred taxes are determined based on differences betweenfinancial reporting and tax bases of assets and liabilities and are measuredusing the enacted marginal tax rates and laws that will be in effect when thedifferences reverse.  At March 31,2005, the Company had cumulative net operating loss carryforwards of $5,747,116,which expire in years 2005 through 2023. No effect has been shown in thefinancial statements for the net operating loss carryforwards as the likelihoodof future tax benefit from such net operating loss carryforwards is not determinable

 

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at this time. Accordingly, the potential tax benefits of the netoperating loss carryforwards, estimated based upon current tax rates at March 31,2005, have been offset by valuation reserves of the same amount.

 

**Forward-Looking Statements**

Statementsin this quarterly report on Form 10-Q that are not historical facts (includingany statements concerning plans and objectives of management for futureoperations or economic performance, or assumptions or forecasts relatedthereto) are forward-looking statements. These statements can be identified bythe use of forward-looking terminology including “forecast,” “may,” “believe,” “expect,”“anticipate,” “estimate,” “continue” or other similar words. These statementsdiscuss future expectations, contain projections of results of operations or offinancial condition or state other “forward-looking” information. We and ourrepresentatives may from time to time make other oral or written statementsthat are also forward-looking statements.

 

Theseforward-looking statements are made based upon our management’s current plans,expectations, estimates, assumptions and beliefs concerning future eventsimpacting us and therefore involve a number of risks and uncertainties. Wecaution that forward-looking statements are not guarantees and that actualresults could differ materially from those expressed or implied in theforward-looking statements as a result of certain factors, including but notlimited to dependence upon energy industry spending, the volatility of oil andgas prices, weather interruptions, the results of testing of our products andthe availability of capital resources.

 

Becausethese forward-looking statements involve risks and uncertainties, actualresults could differ materially from those expressed or implied by theseforward-looking statements for a number of important reasons, including thosediscussed under “Risk Factors” in our current report filed on Form 8-Kon January 20, 2005. We undertake no obligation to update anyforward-looking statements except as required by law.

 

**Item 3.****Quantitative and QualitativeDisclosures about Market Risk**

 

Webelieve that we do not have any material exposure to financial market risk and wedo not enter into foreign currency or interest rate transactions.

 

**Item 4.****Controls and Procedures**

 

Inaccordance with Rules 13a-15 and 15d-15 promulgated under the SecuritiesExchange Act of 1934, we carried out an evaluation, under the supervision andwith the participation of our management, including our principal executive officerand principal financial officer, of the effectiveness of our disclosurecontrols and procedures as of the end of the period covered by this report.Based on that evaluation, our principal executive officer and principal financialofficer concluded that our disclosure controls and procedures were effective asof March 31, 2005.

 

InJanuary 2004, we had a complete change in management as well as our boardof directors as a result of the reverse acquisition described in Item 2 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Overview.”  Following such acquisition, our new managementteam implemented at the Company the internal controls over financial reportingthat were in effect at our operating subsidiary, PDTI.  In addition, the financial records of theCompany were transitioned to the accounting software used by our operatingsubsidiary.  During the quarter ended March 31,2005, we also adopted an audit committee charter, compensation committeecharter and a nominating and corporate governance committee charter and a Codeof Ethics.  Finally, our board ofdirectors formed an audit committee that is composed entirely of independentdirectors.

 

 

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**Part II – Other Information**

 

**Item 1. Legal Proceedings**

 

PDTI filed a lawsuit inDistrict Court in Harris County, Texas in November 2004 styled *Particle DrillingTechnologies, Inc. vs. PSI Distribution Incorporated, Harry B. Curlett,Curlett Family Limited Partnership, Ltd., CCore Technology and Licensing, Ltd.,Deep Heat Energy Corporation, and Energeo, LP* to recover certaintangible and intangible assets that PDTI believes should have been transferredas part of the Acquisition Agreement among ProDril Services, Incorporated, theCurlett Group (as defined below) and the predecessor company of PDTI.  It was pursuant to this acquisition that PDTIacquired its intellectual property rights to the PID technology.  In January 2005, PDTI reached asettlement with one of the defendants, PSI Distribution Incorporated (“PSID”),whereby PDTI agreed to hold PSID harmless with regard to this lawsuit inexchange for PSID’s agreement to re-affirm and ratify the AcquisitionAgreement.  Further, PDTI obtained inthis settlement any rights, claims and causes of action that PSID may have topursue damages or to recover assets from the other parties named in thelawsuit.

 

On December 6, 2004,PDTI received a response to the above-referenced lawsuit from certain of thedefendants, namely Harry B. Curlett, Curlett Family Limited Partnership, Ltd., CCORETechnology and Licensing, Ltd. and Deep Heat Energy Corporation, which we referto as the “Curlett Group,” in which the Curlett Group asserted a counterclaimagainst PDTI claiming, among other things, that PDTI (1) owes Mr. Curlett$40,000 plus default interest at 18% per annum under a promissory note andcertain fees incurred in connection with collection under the note; (2) committeda breach of contract in connection with the Acquisition Agreement referenced inthe preceding paragraph and the closing of that agreement in January 2004;(3) engaged in economic duress and fraud in the inducement in connectionwith the negotiation and closing of the Acquisition Agreement; and (4) committedfraud in connection with that transaction. The counterclaim requests damages of, among other things, judgment onthe $40,000 principal amount of the promissory note plus accrued defaultinterest and costs of collection, actual damages of not less than $10 millionfor breach of contract and fraud, exemplary damages of not less than $20million and a declaratory judgment rescinding the Acquisition Agreement.

 

By filing this lawsuit,we seek to recover the intellectual property related to the PID technology asit applies to non-oil and gas applications. We believe the counterclaim made by the Curlett Group is withoutmerit.  We intend to vigorously pursueour claims in this case and shall vigorously defend the alleged counterclaimsby the Curlett Group.  Discovery in thislitigation is ongoing, however, and our position with regard to the merits ofthe various claims and defenses may change as additional information is adducedthrough the discovery process.  Theoutcome of all litigation is inherently uncertain; as a result, we cannotguarantee any outcome in this matter.  Ifthe monetary damages requested in this counterclaim were granted in a judgmentagainst us, such damages would severely impair our ability to continue as agoing concern.  Furthermore, if therequest for rescission of the Acquisition Agreement that closed in January 2004is granted as requested by the counterclaim, such a judgment could have theeffect of causing us to lose all intellectual property ownership rights to thePID technology.

 

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**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

ISSUERPURCHASES OF EQUITY SECURITIES

 
| **Period**               | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number  of Shares  Purchased as  Part of Publicly  Announced  Plans or  Programs** | ** ** | **Maximum Number  (or Approximate  Dollar Value) of  Shares that May  Yet Be Purchased  Under the Plans or  Programs** | ** ** |
|--------------------------|------------|----------------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|
| 01/01/2005 - 01/31/2005  |       | —                                 |       | —                             |       | —                                                                                          |       | —                                                                                                                 |       |
| 02/01/2005 -  02/28/2005 |       | 3,000,000                              | (1)        | $                                  | 0.50       | (1)                                                                                             | —     |                                                                                                                   | —     |   |
| 03/01/2005 -  03/31/2005 |       | —                                 |       | —                             |       | —                                                                                          |       | —                                                                                                                 |       |
| Total                    |       | 3,000,000                              |       | $                                  | 0.50       |                                                                                            | —     |                                                                                                                   | —     |   |

 

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(1)               Shares were purchased in a privatetransaction pursuant to a Stock Purchase Agreement dated February 8, 2005between the Company and Prentis B. Tomlinson, Jr.

 

**Item 6. Exhibits**

 

Exhibits:

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1              |       | Acquisition  Agreement dated as of January 20, 2004 among Particle Drilling, Inc.,  ProDril Partners L.L.C., ProDril Services Incorporated, Mr. Harry B.  Curlett, CCORE Technology and Licensing, Ltd. and Curlett Family Limited  Partnership, Ltd. (Incorporated herein by reference to Exhibit 10.3 to  our current report filed on Form 8-K dated January 20, 2005.)                                                                                                      |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.2              |       | Acquisition  Agreement dated as of January 20, 2004 among Particle Drilling, Inc.,  ProDril Partners L.L.C., ProDril Services International Limited, Mr. Harry  B. Curlett, CCORE Technology and Licensing, Ltd. and Curlett Family Limited  Partnership, Ltd. (Incorporated herein by reference to Exhibit 10.4 to  our current report on Form 8-K dated January 20, 2005).                                                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.3              |       | 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.)                                     |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.4              |       | 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.) |

 

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| 2.5    |   | Plan  of Merger and Merger Agreement, dated January 19, 2005, between Particle Drilling  Technologies, Inc. and MedXLink Corp. (Incorporated herein by reference  to Exhibit 2.3 to our current report filed on Form 8-K dated January 31,  2005.)                                           |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 3.1    |   | Articles  of Incorporation of MedePort, Inc. (Incorporated herein by reference to Exhibit 3.1  to our current report filed on Form 8-K dated January 20, 2005.)                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 3.2    |   | Articles  of Amendment to the Articles of Incorporation of MedePort, Inc. (Incorporated  herein by reference to Exhibit 3.2 to our current report filed on Form 8-K  dated January 20, 2005.)                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 3.3    |   | Articles  of Merger dated January 25, 2005 changing the name of the Company to Particle Drilling  Technologies, Inc. (Incorporated herein by reference to Exhibit 3.3  to our registration statement on Form S-1 (Registration No. 333-123925).)                                             |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 3.4    |   | Bylaws  of the Company (Incorporated herein by reference to Exhibit 3.3 to our  current report filed on Form 8-K dated January 20, 2005.)                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.1   |   | Particle Drilling, Inc.  2004 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.5  to our current report filed on Form 8-K dated January 20, 2005.)                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.2   |   | Particle Drilling  Technologies, Inc. 2005 Stock Incentive Plan. (Incorporated herein by  reference to Exhibit 99.1 to our current report filed on Form 8-K  dated April 4, 2005.)                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.3   |   | Form of  Incentive Stock Option Agreement. (Incorporated herein by reference to Exhibit 10.6  to our current report filed on Form 8-K dated January 20, 2005.)                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.4   |   | Form of  Non-Statutory Stock Option Agreement. (Incorporated herein by reference to Exhibit 10.7  to our current report filed on Form 8-K dated January 20, 2005.)                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.5   |   | Employment  Agreement dated August 18, 2003 between ProDril Acquisition Company, Inc.  and Jon Christopher Boswell, as amended on April 8, 2004. (Incorporated  herein by reference to Exhibit 10.8 to our current report filed on Form 8-K  dated January 20, 2005.)                        |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.6   |   | Employment  Agreement dated August 1, 2003 between ProDril Acquisition Company, Inc.  and Thomas E. Hardisty, as amended on April 8, 2004. (Incorporated  herein by reference to Exhibit 10.9 to our current report filed on Form 8-K  dated January 20, 2005.)                              |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.7   |   | Employment  Agreement dated August 1, 2003 between ProDril Acquisition Company and  Gordon Tibbitts. (Incorporated herein by reference to Exhibit 10.10 to  our current report filed on Form 8-K dated January 20, 2005.)                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.8   |   | Letter  agreement dated December 2, 2004 between Particle Drilling Technologies, Inc.  and Prentis Tomlinson, Jr. (Incorporated herein by reference to Exhibit 10.11  to our current report filed on Form 8-K dated January 20, 2005.)                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.9   |   | Securities  Purchase Agreement, dated as of February 9, 2005, by and among Particle Drilling  Technologies, Inc. and the Purchasers listed on Schedule I thereto.  (Incorporated herein by reference to Exhibit 10.1 to our current report  filed on Form 8-K dated February 10, 2005.) |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.10  |   | Registration  Rights Agreement, dated as of February 9, 2005, by and among Particle Drilling  Technologies, Inc. and each of the Purchasers. (Incorporated herein by  reference to Exhibit 10.2 to our current report filed on Form 8-K  dated February 10, 2005.)                           |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.11  |   | Common  Stock Purchase Warrant issued by Particle Drilling Technologies, Inc.  to Rita Barr (with attached schedule of substantially identical Common  Stock Purchase Warrants not filed with the Securities and                                                                                            |

 

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|   |   | Exchange  Commission). (Incorporated herein by reference to Exhibit 10.3 to our  current report filed on Form 8-K dated February 10, 2005.)                                                                                                                                           |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                 |
| 10.12  |   | Stock  Purchase Agreement, dated as of February 8, 2005, by and between Particle Drilling  Technologies, Inc. and Prentis B. Tomlinson, Jr. (Incorporated  herein by reference to Exhibit 10.4 to our current report filed on Form 8-K  dated February 10, 2005.) |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 10.13  |   | Form of  Common Stock Purchase Warrant issued by Particle Drilling Technologies, Inc.  to Tejas Securities Group, Inc. (Incorporated herein by reference to Exhibit 10.5  to our current report filed on Form 8-K dated February 10, 2005.)                       |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 31.1   |   | Certification  of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of  the Securities Exchange Act of 1934. *                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 31.2   |   | Certification  of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of  the Securities Exchange Act of 1934. *                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 32.1   |   | Certification  of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 32.2   |   | Certification  of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                 |

 

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*                                         Filed herewith

 

17

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SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                    | PARTICLE DRILLING TECHNOLOGIES, INC.         |   |
|-------------------------|---------------------------------------------------|--------|
|                    | (Registrant)                                      |   |
|                    |                                              |
|                    |                                              |
| Date: May 11, 2005 | /s/ J. Chris Boswell                              |   |
|                    | J. Chris Boswell                                  |
|                    | Senior Vice President and Chief Financial Officer |
|                         |                                                   |        |  |  |

 

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