Prospectus filed pursuant to Rule 424(b)2
SEC File No 333-155054
PROSPECTUS
PURADYN FILTER TECHNOLOGIES INCORPORATED
3,500,000 shares of Common Stock
We are offering on a best efforts basis a total of 3,500,000 shares of
our common stock at a price of $.28 per share. The offering is being conducted
on a self-underwritten basis. There is no underwriter for this offering and we
will not pay any commissions on the sale of the shares. Our officers and
directors will attempt to sell the shares offered hereby.
There is no minimum offering and we may receive little or no funds
from this offering. All proceeds from the sale of the shares will be delivered
directly to us and will not be deposited in any escrow account. If the entire
3,500,000 shares are sold, we will receive gross proceeds of $980,000 before
expenses of approximately $8,600. We plan to end the offering on December 31,
2008. However, at our sole discretion, we may end the offering sooner or extend
the offering until January 31, 2009. No assurance can be given on the number of
shares we will sell or even if we will be able to sell any shares.
For a description of the plan of distribution of these shares, please
see page 8 of this prospectus.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"PFTI." On November 13, 2008 the last reported sale price for our common stock
was $.16 per share.
--------------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 3 OF THIS PROSPECTUS TO READ ABOUT THE RISKS OF
INVESTING IN OUR COMMON STOCK.
--------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- ------------------------------------------------------- ------------ ----------
PER SHARE TOTAL
- ------------------------------------------------------- ------------ ----------
Public offering price $.28 $980,000
- ------------------------------------------------------- ------------ ----------
Discounts and commissions 0 0
- ------------------------------------------------------- ------------ ----------
Possible proceeds to the company, before expenses $.28 $980,000
- ------------------------------------------------------- ------------ ----------
--------------------
THE DATE OF THIS PROSPECTUS IS November 14, 2008
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this document or
to which we have referred you. We have not authorized anyone to provide you with
information that is different. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an offer
to sell these securities in any jurisdiction where the offer or sale is not
permitted.
PROSPECTUS SUMMARY
ABOUT US
We design, manufacture, market and distribute the PURADYN(R) bypass oil
filtration system for use with substantially all internal combustion engines and
hydraulic equipment that use lubricating oil. Working in conjunction with an
engine's full-flow oil filter, the PURADYN bypass oil filtration system cleans
oil by continually removing solid, liquid and gaseous contaminants from the oil
through a sophisticated and unique filtration and evaporation process. For
engine lubricating oil, our filters incorporate an additive package. Because
lubricating oil is kept in a continually clean state, the PURADYN bypass oil
filtration system has been used effectively to extend oil-drain intervals and to
extend the time between engine overhauls. We are also the exclusive manufacturer
of the disposable replacement filter elements for the PURADYN bypass oil
filtration system.
The report of our independent registered public accounting firm on
our financial statements for the year ended December 31, 2007 contains an
explanatory paragraph regarding substantial doubt about our ability to continue
as a going concern based upon our recurring losses from operations, our total
liabilities exceeding our total assets, and our reliance on cash inflows from
institutional investors and a current stockholder.
Our principal executive offices are located at 2017 High Ridge Road,
Boynton Beach, Florida 33426 and our telephone number at that office is (561)
547-9499. Our fiscal year end is December 31. Our website is located at
www.puradyn.com.
When used in this prospectus, "Puradyn," "we," "us," "ours,"
and similar terms refers to Puradyn Filter Technologies Incorporated, a Delaware
corporation, and our wholly-owned subsidiary Puradyn Filter Technologies, Ltd.,
a U.K. limited company which we also refer to as "Puradyn Ltd."
SELECTED CONSOLIDATED FINANCIAL DATA
The following summary of our financial information for the six months
ended June 30, 2008 and 2007 (unaudited) and the years ended December 31, 2007
and 2006 which have been derived from, and should be read in conjunction with,
our consolidated financial statements included elsewhere in this prospectus.
SELECTED INCOME STATEMENT DATA:
- ------------------------------------ -------------------------------- --------------------------------
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
- ------------------------------------ -------------------------------- --------------------------------
2008 2007 2007 2006
- ------------------------------------ -------------------------------- --------------- ----------------
(UNAUDITED)
- ------------------------------------ ---------------- --------------- --------------- ----------------
Net sales $1,555,206 $1,553,187 $3,082,873 $3,072,947
- ------------------------------------ ---------------- --------------- --------------- ----------------
Total operating costs 2,257,474 2,440,581 4,967,907 5,258,558
--------- --------- --------- ---------
- ------------------------------------ ---------------- --------------- --------------- ----------------
Loss from operations (702,268) (887,394) (1,885,034) (2,185,611)
- ------------------------------------ ---------------- --------------- --------------- ----------------
Total other expense, net (166,847) (321,221) (556,067) (467,852)
------- ------- ------- -------
- ------------------------------------ ---------------- --------------- --------------- ----------------
Net loss $(869,115) $(1,208,614) $(2,441,101) $(2,653,463)
- ------------------------------------ ---------------- --------------- --------------- ----------------
2
SELECTED BALANCE SHEET DATA:
- ------------------------------------ ------------------ ------------------ -----------------
JUNE 30, 2008 DECEMBER 31, 2007 DECEMBER 31,
(UNAUDITED) 2006
- ------------------------------------ ------------------ ------------------ -----------------
- ------------------------------------ ------------------ ------------------ -----------------
Working capital $1,065,847 $365,917 $691,856
- ------------------------------------ ------------------ ------------------ -----------------
Cash and cash equivalents $324,223 $112,270 $55,175
- ------------------------------------ ------------------ ------------------ -----------------
Total current assets $2,684,343 $2,151,577 $1,999,534
- ------------------------------------ ------------------ ------------------ -----------------
Total assets $2,878,796 $2,373,867 $2,275,045
- ------------------------------------ ------------------ ------------------ -----------------
Total current liabilities $1,618,496 $1,785,660 $1,307,678
- ------------------------------------ ------------------ ------------------ -----------------
Notes payable - stockholder $6,150,000 $6,250,000 $5,839,000
- ------------------------------------ ------------------ ------------------ -----------------
Total liabilities $7,774,819 $8,042,799 $7,146,678
- ------------------------------------ ------------------ ------------------ -----------------
THE OFFERING
Price per share offered: $.28
Securities offered: 3,500,000 shares of common
stock on a best efforts
basis
Common stock outstanding prior to the offering: 35,005,018 shares
Common stock outstanding after the offering,
assuming the sale of all 3,500,000 shares
offered hereby: 38,505,018 shares
Use of proceeds: working capital
OTC Bulletin Board symbol PFTI
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A SIGNIFICANT DEGREE OF
RISK. YOU SHOULD NOT INVEST IN OUR COMMON STOCK UNLESS YOU CAN AFFORD TO LOSE
YOUR ENTIRE INVESTMENT. YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS
AND OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN OUR COMMON
STOCK.
RISKS RELATED TO OUR COMPANY
WE HAVE A HISTORY OF LOSSESS AND OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM HAS DOUBTS ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
We have incurred substantial operating and net losses, as well as
negative operating cash flows, since our inception through June 30, 2008. For
the years ended December 31, 2007 and 2006, we reported net losses of $2,441,101
and $2,653,463, respectively. For the six months ended June 30, 2008, we
reported a net loss of $869,115 and at June 30, 2008, we had an accumulated
deficit of approximately $46.7 million. These recurring operating losses,
liabilities exceeding assets and the reliance on cash inflows from an
institutional investor and current stockholder have led our independent
registered public accounting firm to include a statement in its audit report
relating to our audited consolidated financial statements for the years ended
December 31, 2007 and December 31, 2006 expressing substantial doubt about our
ability to continue as a going concern. Our ability to continue as a going
concern is dependent upon our ability to obtain the necessary financing to meet
our obligations and repay our liabilities when they become due and to generate
profitable operations in the future. We have no firm commitments from any third
party to provide this financing and we cannot assure you we will be successful
in raising working capital as needed. There are no assurances that we will have
sufficient funds to execute our business plan, pay our obligations as they
become due or generate positive operating results and it is possible that we
will be required to cease some or all of our operations if we are not successful
in raising capital as needed. In that event, you could lose your entire
investment in our company.
OUR NET SALES ARE NOT SUFFICIENT TO FUND OUR OPERATING EXPENSES AND OUR SALES
HAVE REMAINED RELATIVELY FLAT OVER THE PAST SEVERAL YEARS. THERE ARE NO
ASSURANCES WE WILL BE ABLE TO INCREASE OUR SALES, IN THE NEAR FUTURE, TO A LEVEL
WHICH WILL FUND OUR OPERATING EXPENSES.
3
We used cash in operations of approximately $1,809,000 and
approximately $1,940,000 in 2007 and 2006, respectively, and approximately
$1,250,000 for the six months ended June 30, 2008. Our net sales are not
sufficient to fund our operating expenses and despite our efforts our sales have
remained relatively flat from period to period. During 2008 we continue to
implement cost reductions in an effort to improve margins, including securing
alternative suppliers for raw materials and manufacturing and we anticipate
these costs reductions will impact our results of operations during the balance
of 2008 and beyond. In addition, we are also reviewing cost of material
increases, some of which were passed through to our customers as product price
increases beginning January 2008 which have served to improve our margins. As
long as our cash flow from operations remains insufficient to fund our
operations, we will continue depleting our cash and other financial resources.
Our failure to achieve profitable operations in future periods will adversely
affect our ability to continue as a going concern. In this event, you could lose
all of your investment in our company.
EVEN IF WE SELL ALL THE SHARES OFFERED HEREBY, WE WILL NEED ADDITIONAL FINANCING
WHICH WE MAY NOT BE ABLE TO OBTAIN ON ACCEPTABLE TERMS. IF WE CANNOT RAISE
ADDITIONAL CAPITAL AS NEEDED, OUR ABILITY TO EXECUTE OUR GROWTH STRATEGY AND
FUND OUR ONGOING OPERATIONS WILL BE IN JEOPARDY.
Historically, our operations have been financed primarily through the
issuance of equity and short-term loans. Our future capital requirements,
however, depend on a number of factors, including our ability to internally grow
our revenues, manage our business and control our expenses. At June 30, 2008, we
had a working capital of $1,065,847 as compared to working capital of $365,917
at December 31, 2007. This change is primarily attributable to proceeds from the
sale of our securities during the 2008 period. Even if we sell all 3,500,000
shares offered hereby, of which there are no assurances, we will need to raise
additional capital to fund our ongoing operations, pay our existing obligations
and for future growth of our company. We cannot assure you we will sell any of
the shares offered hereby or that any additional capital will be available to us
in the future upon terms acceptable to us. Given our history of losses, debt
levels and general uncertainties of the capital markets, we face a number of
challenges in our ability to raise capital. If we do not raise funds as needed,
our ability to provide for current working capital needs, pay our obligations as
they become due, grow our company, and continue our existing business and
operations is in jeopardy. In this event, you could lose all of your investment
in our company.
WE OWE OUR CHAIRMAN AND CEO APPROXIMATELY $6.2 MILLION WHICH IS DUE IN DECEMBER
31, 2009.
Since March 2002, our CEO has been providing funding to us for working
capital on an unsecured basis. At June 30, 2008 we owed him $6.1 million, and he
had advanced an additional $100,000 to us subsequent thereto. This loan is due
on December 31, 2009 or (i) at such time as we have raised an additional $7
million over the $3.5 million raised in prior offerings, or (ii) at such time as
we are operating within sufficient cash flow parameters to sustain operations,
or (iii) until a disposition of our company, such as an acquisition or merger,
occurs. We do not have sufficient funds to pay this loan when it becomes due and
there are no assurances our CEO will extend the due date. While the loan is
unsecured, this obligation makes it more difficult for us to secure the
additional financing we need to fund our operations.
WE RELY ON SALES TO A LIMITED NUMBER OF CUSTOMERS AND THERE ARE NO ASSURANCES
THAT THESE CUSTOMERS WILL CONTINUE TO PURCHASE PRODUCTS FROM US.
We are dependent upon sales to a limited number of customers. During
the six months ended June 30, 2008 two customers individually accounted for
approximately 24% and approximately 16% (for a total of approximately 40%) of
our net sales. During 2007 and 2006 two customers together accounted for
approximately 44% and 39%, respectively, of our consolidated net sales. We do
not have contracts with our customers and the loss of sales from one or more of
these customers could materially impact our results of operations in future
periods.
WE ARE DEPENDENT ON A LIMITED NUMBER OF SUPPLIERS. WHILE WE HAVE IDENTIFIED
ALTERNATIVE SOURCES FOR VARIOUS MATERIALS WE USE, A TEMPORARY DISRUPTION IN OUR
ABILITY TO PROCURE NECESSARY MATERIALS AND PARTS COULD ADVERSELY IMPACT OUR NET
SALES IN FUTURE PERIODS.
4
A substantial portion of the component parts to our products are
manufactured by various suppliers for assembly by us. We believe the
relationships with our suppliers are satisfactory and that alternative suppliers
are available if relationships falter or existing suppliers should become unable
to keep up with our requirements. However, there can be no assurance that our
current or future suppliers will be able to meet our requirements on
commercially reasonable terms or within scheduled delivery times. An
interruption of our arrangements with suppliers could cause a delay in the
production of our products for timely delivery to distributors and customers
which could result in a loss of sales revenue in future periods.
WE FACE COMPETION FROM A NUMBER OF COMPANIES AND THERE ARE NO ASSURANCES WE CAN
EFFECTIVELY COMPETE IN OUR SECTOR.
There are a number of companies which sell bypass oil filtration
systems. Most of our competitors have more capital, greater brand recognition,
larger customer bases and significantly greater financial, technical and
marketing resources than we do. These competitors may also engage in more
extensive development of their technologies, adopt more aggressive pricing
policies and establish more comprehensive marketing and advertising campaigns
than we can. While we believe that our product is superior in performance to our
competitors' products, there are no assurances our belief is correct. For these
and other reasons, our competitors' products may achieve greater acceptance in
the marketplace than our own, limiting our ability to gain market share and
customer loyalty and to generate sufficient revenues to achieve a profitable
level of operations.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY OUR ABILITY TO CONDUCT OUR
BUSINESS AS IT IS PRESENTLY CONDUCTED IS IN JEOPARDY.
Our success is heavily dependent on our proprietary technology and we
rely on a combination of contractual rights, patents, trade secrets, trademarks
and non-disclosure agreements to establish and protect our proprietary rights.
There can be no assurances that the steps we take to protect our proprietary
rights will be adequate to prevent misappropriation of the technology or
independent development by others of products with features based upon, or
otherwise similar to, our products. In addition, although we believe that any
new technology currently in development or patent pending has been independently
developed and does not infringe on the proprietary rights of others, there can
be no assurance that we are correct or that third parties will not assert
infringement claims against us in the future. If instituted, there can be no
assurances we will have adequate resources to defend a patent infringement or
other proprietary rights infringement action. If we are unable to adequately
protect our proprietary rights or if other products should be developed which
are substantially similar to ours, our ability to continue our operations as
they are presently conducted could be in jeopardy and we could be forced to
cease operations.
RISKS RELATED TO THIS OFFERING
THERE IS NO MINIMUM NUMBER OF SHARES WHICH MUST BE SOLD. WE ARE DEPENDENT UPON
THE PROCEEDS OF THIS OFFERING.
We are dependent upon the proceeds from this offering to provide funds
for working capital. This is a best efforts offering which means there is no
minimum number of shares, which must be sold. As a result, if we sell less than
all of the shares offered hereby, we will have significantly less funds
available to us to implement our business strategy, and our ability to generate
any significant increases in our sales may be adversely affected. Even if we
sell all of the shares offered hereby, we cannot guarantee prospective investors
that we will ever generate any significant increases sales or report profitable
operations, or that our sales will not decline in future periods.
OUR MANAGEMENT HAS FULL DISCRETION AS TO THE USE OF PROCEEDS FROM THIS OFFERING.
We presently anticipate that the net proceeds from this offering will
be used for working capital. We reserve the right to use the funds from this
offering for other purposes not presently contemplated which we deem to be in
our best interests in order to address changed circumstances and opportunities.
As a result of the foregoing,
5
purchasers of the shares offered hereby will be entrusting their funds to our
management, upon whose judgment and discretion the investors must depend, with
only limited information concerning management's specific intentions.
RISKS RELATED TO HOLDING OUR SECURITIES
THE EXERCISE OF OUTSTANDING WARRANTS AND OPTIONS WILL BE DILUTIVE TO OUR
EXISTING STOCKHOLDERS.
At October 29, 2008 we had 35,005,018 shares of our common stock issued
and outstanding and the following securities, which are exercisable into shares
of our common stock, were outstanding:
o 3,005,739 shares of our common stock issuable upon the
exercise of warrants with exercise prices ranging from $0.75
to $2.00 per share; and
o 2,350,400 shares of our common stock issuable upon the
exercise of options with exercise prices ranging from $.21 per
share to $9.25 per share.
The issuance of these shares will be dilutive to our existing
stockholders, including purchasers of shares in this offering.
BECAUSE OUR STOCK CURRENTLY TRADES BELOW $5.00 PER SHARE, AND IS QUOTED ON THE
OTC BULLETIN BOARD, OUR STOCK IS CONSIDERED A "PENNY STOCK" WHICH CAN ADVERSELY
AFFECT ITS LIQUIDITY.
As the trading price of our common stock is less than $5.00 per share,
our common stock is considered a "penny stock," and trading in our common stock
is subject to the requirements of Rule 15g-9 under the Securities Exchange Act
of 1934. Under this rule, broker/dealers who recommend low-priced securities to
persons other than established customers and accredited investors must satisfy
special sales practice requirements. The broker/dealer must make an
individualized written suitability determination for the purchaser and receive
the purchaser's written consent prior to the transaction.
Securities and Exchange Commission regulations also require additional
disclosure in connection with any trades involving a "penny stock," including
the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and its associated risks. These requirements
severely limit the liquidity of our common stock in the secondary market because
few broker or dealers are likely to undertake these compliance activities.
Purchasers of our common stock may find it difficult to resell the shares in the
secondary market.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Various statements in this prospectus contain or may contain
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived
utilizing numerous assumptions and other factors that could cause our actual
results to differ materially from those in the forward-looking statements. These
factors include, but are not limited to, our ability to successfully implement
our strategic initiatives, economic, political and market conditions and
fluctuations, government and industry regulation, interest rate risk, global
competition, and other factors. Most of these factors are difficult to predict
accurately and are generally beyond our control. You should consider the areas
of risk described in connection with any forward-looking statements that may be
made herein. Readers are cautioned not to place undue reliance on these
forward-looking statements and readers should carefully review this prospectus
in its entirety, including the risks described in "Risk Factors." Except for our
ongoing obligations to disclose material information under the Federal
securities laws, we undertake no obligation to release publicly any revisions to
any forward-looking statements, to report events or to report the occurrence of
unanticipated events. These forward-looking statements speak only as of the date
of this prospectus, and you should not rely on these statements without also
considering the risks and uncertainties associated with these statements and our
business.
6
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol
PFTI. The reported high and low sales prices for the common stock as reported on
the OTC Bulletin Board are shown below for the periods indicated. The quotations
reflect inter-dealer prices, without retail mark-up, markdown or commission, and
may not represent actual transactions.
HIGH LOW
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2006
First quarter ended March 31, 2006 $1.90 $0.67
Second quarter ended June 30, 2006 $1.75 $1.00
Third quarter ended September 30, 2006 $1.33 $0.90
Fourth quarter ended December 31, 2006 $1.20 $0.55
2007
First quarter ended March 31, 2007 $0.96 $0.56
Second quarter ended June 30, 2007 $0.80 $0.40
Third quarter ended September 30, 2007 $0.50 $0.30
Fourth quarter ended December 31, 2007 $0.60 $0.32
2008
First quarter ended March 31, 2008 $0.40 $0.30
Second quarter ended June 30, 2008 $0.31 $0.25
Third quarter ended September 30, 2008 $0.40 $0.20
On November 13, 2008, the last sale price of our common stock as
reported on the OTC Bulletin Board was $.16. As of October 29, 2008, there were
approximately 300 record owners of our common stock.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. Under Delaware
law, we may declare and pay dividends on our capital stock either out of our
surplus, as defined in the relevant Delaware statutes, or if there is no such
surplus, out of our net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. If, however, the capital of our
company, computed in accordance with the relevant Delaware statutes, has been
diminished by depreciation in the value of our property, or by losses, or
otherwise, to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets, we are prohibited from declaring and
paying out of such net profits and dividends upon any shares of our capital
stock until the deficiency in the amount of capital represented by the issued
and outstanding stock of all classes having a preference upon the distribution
of assets shall have been repaired.
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2008
and as adjusted to give proforma effect to the sale of all 3,500,000 shares
offered hereby. The table should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this prospectus.
JUNE 30, 2008
--------------------------
(UNAUDITED)
-------------- -----------
ACTUAL PROFORMA
Long term liabilities $ 6,156,323 $ 6,156,323
Preferred stock, $0.001 par value, 500,000 shares authorized,
no shares issued and outstanding - -
Common stock, $0.001 par value, 40,000,000 shares authorized,
34,428,888 shares issued and outstanding, 37,928,888 as
adjusted 34,429 37,929
Additional paid-in capital 42,963,955 43,940,455
Notes receivable from stockholders (1,064,031) (1,064,031)
Accumulated deficit (46,694,325) (46,694,325)
Accumulated other comprehensive loss (136,051) (136,051)
------------- ------------
Total stockholders' deficit $ (4,896,023) $ (3,916,023)
Total capitalization $ 1,260,300 $ 2,240,300
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USE OF PROCEEDS
Assuming all 3,500,000 shares offered hereby, the net proceeds to be
received by us after deducting the expenses of this offering including legal,
accounting, printing, filing fees and miscellaneous costs estimated at $8,600,
will total approximately $[ ]. However, as there is no minimum number of shares
which must be sold in this offering, we could receive substantially less
proceeds than $[ ]. We intend to use the net proceeds from this offering for
working capital. We reserve the right, however, to use the funds obtained from
this offering for other purposes not presently contemplated which management
deems to be in our best interests in order to address changes circumstances and
opportunities.
DILUTION
As of June 30, 2008, the net tangible book value of our shares of
common stock was $(4,896,023) or approximately $(0.14215) per share, based upon
an aggregate of 34,428,888 shares of common stock outstanding. Net tangible book
value per share represents our total tangible assets less our total liabilities
and divided by the aggregate number of shares of our common stock outstanding.
Dilution in net tangible book value per share represents the difference between
the amount per share of our common stock that you pay in this offering and the
net tangible book value per share of our common stock immediately after this
offering.
After giving effect to the sale by us of all 3,500,000 shares of common
stock in this offering at an offering price of $.28 per share, the net tangible
book value of our common stock as of June 30, 2008 would have been $(.10325) per
share. This represents an immediate increase in the net tangible book value of
$980,000 to our existing stockholders and an immediate dilution in net tangible
book value of $.0389 per share to new investors purchasing shares in this
offering. The following table illustrates this dilution per share, assuming all
3,500,000 shares offered hereby are sold:
- --------------------------------------------------------------------------- ------------ -------------
Offering price per share $ .28
- --------------------------------------------------------------------------- ------------ -------------
Net tangible book value per share at June 30, 2008 $(0.14215)
--------------------------------------------------------------------------- ------------ ------------
Increase in net tangible book value per share attributed to new investors .0389
- --------------------------------------------------------------------------- ------------ -------------
Net tangible book value per share after this offering $(.10325)
- --------------------------------------------------------------------------- ------------ -------------
Dilution in net tangible book value per share to new investors $ .38325
- --------------------------------------------------------------------------- ------------ -------------
The following table provides information as of June 30, 2008 of the
differences between the amounts paid or to be paid by the groups set forth below
with respect to the aggregate number of shares of our common stock to be held by
each group:
- ------------------------------------ ---------------------------- ---------------------------- ----------------
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
- ------------------------------------ --------------- ------------ ---------------- ----------- PER SHARE
NUMBER % AMOUNT(1) %
- ------------------------------------ --------------- ------------ ---------------- ----------- ----------------
- ------------------------------------ --------------- ------------ ---------------- ----------- ----------------
Existing stockholders 34,428,888 90.8% 42,998,384 97.8% $1.2489
- ------------------------------------ --------------- ------------ ---------------- ----------- ----------------
New investors 3,500,000 9.2% 980,000 2.2% $ .28
- ------------------------------------ --------------- ------------ ---------------- ----------- ----------------
Total 37,928,888 100% 43,978,384 100.0% $1.1595
- ------------------------------------ --------------- ------------ ---------------- ----------- ----------------
(1) Dollar amount, in thousands.
PLAN OF DISTRIBUTION
Our common stock is quoted on the OTC Bulletin Board under the symbol
PFTI. The market for our common stock is limited and the liquidity of our shares
may be severely limited. The market price of the shares of common stock is
likely to be highly volatile and may be significantly affected by factors such
as actual or anticipated fluctuations in our operating results, announcements of
technological innovations, new products or new contracts by us or our
competitors, adoption of new accounting standards affecting our company, general
economic and market conditions and other factors. In addition, the stock market
has from time to time experienced significant
8
price and volume fluctuations that have particularly affected the market price
for the common stocks of technology companies. These types of broad market
fluctuations may adversely affect the market price of our common stock.
We are offering 3,500,000 shares of common stock, using our executive
officers and directors, on a self-underwritten, best-efforts basis. There is no
minimum amount of securities that we must sell in order to receive any
subscriptions. The common stock will be offered at a price of $[ ] per share.
This offering will commence on the date of this prospectus and will continue
until December 31, 20008, or the date all of the shares offered are sold.
However, at our sole discretion, we may end the offering sooner or extend the
offering until January 31, 2009. No assurance can be given on the number of
shares we will sell or even if we will be able to sell any shares.
Our officers and directors may not purchase any securities in this
offering.
As of the date of this prospectus, we have not entered into any
agreements or arrangements for the sale of the shares with any broker/dealer or
sales agent. However, if we were to enter into such arrangements, we will file a
post effective amendment to disclose those arrangements because any
broker/dealer participating in the offering would be acting as an underwriter
and would have to be so named in the prospectus.
In order to comply with the applicable securities laws of certain
states, the securities may not be offered or sold unless they have been
registered or qualified for sale in such states or an exemption from such
registration or qualification requirement is available and with which we have
complied. The purchasers in this offering and in any subsequent trading market
must be residents of such states where the shares have been registered or
qualified for sale or an exemption from such registration or qualification
requirement is available. As of the date of this prospectus, we have not
identified the specific states, where the offering will be sold. We will file a
pre-effective amendment indicating which state(s) the securities are to be sold
pursuant to this registration statement.
The proceeds from the sale of the shares in this offering will be
payable to us. No escrow account has been established, and all subscription
funds will be paid directly to our company.
Investors can purchase common stock in this offering by completing a
Subscription Agreement (attached hereto as Exhibit 99.1 to the registration
statement of which this prospectus is a part) and sending it together with
payment in full to Puradyn Filter Technologies Incorporated, 2017 High Ridge
Road, Boynton Beach, Florida 33426, Attention: Mr. Joseph V. Vittoria, CEO. All
payments must be made in United States currency either by personal check, bank
draft, or cashier's check. There is no minimum subscription requirement. An
investors' failure to pay the full subscription amount will entitle us to
disregard the investors' subscription. All subscription agreements and checks
are irrevocable. We reserve the right to either accept or reject any
subscription. Any subscription rejected will be returned to the subscriber
within five business days of the rejection date, without interest or deduction.
Furthermore, once a subscription agreement is accepted, it will be executed
without reconfirmation to or from the subscriber. Once we accept a subscription,
the subscriber cannot withdraw it.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Sales of our products, the PURADYN bypass oil filtration system, and
replaceable filter elements will depend principally upon end user demand for
such products and acceptance of our products by original equipment manufacturers
(OEMs). The oil filtration industry has historically been competitive and, as is
typically the case with innovative products, the ultimate level of demand for
our products is subject to a high degree of uncertainty. Developing market
acceptance for our existing and proposed products will require substantial
marketing and sales efforts and the expenditure of a significant amount of funds
to inform customers of the perceived benefits and cost advantages of its
products. As a result of our limited resources, to date we have not had adequate
funds available to undertake these necessary marketing efforts.
Currently no bypass oil filtration system has captured a substantial
share of the estimated recurring $15 billion potential market, based upon
figures supplied by The Rhein Report, a diesel engine industry consulting,
publishing and market research company. We believe we are in a unique position
to capitalize on the growing
9
acceptance of bypass oil filtration given that our product and our company are
positioned as, including, but not limited to:
o A competitively priced, value-added product based on patented
technology;
o An alternative solution to the rising costs and national concerns
over dependence on foreign oil; and
o Providing an operational maintenance solution to end users in
conjunction with existing and reasonably foreseeable federal
environmental legislation such as new regulations affecting
diesel engines and diesel fuels mandating cleaner diesel engines
that went into effect January 1, 2007. Additional and more
stringent legislation is anticipated in 2010.
We focus our sales strategy on individual sales and distribution
efforts as well as on the development of a nationwide distribution network that
will not only sell but also install and support our product. We currently have
approximately 140 active distributors in the U.S. and internationally. The
number of distributors will constantly change as we add new distributors as well
as when OEMs come onboard with their distribution network. Additionally, in late
2005 we began to focus our sales and marketing efforts to target industries
which we believe are more open to innovative methods to reduce operating costs.
This strategy includes a focus on:
o the expansion of existing strategic relationships we have, such
as those with John Deere, Western Star,
o continued development and expansion of our distribution network
with distributors who are trained by us and stock inventory in
order to establish a sales and service oriented nationwide
infrastructure,
o continuing to target existing and new industrial/construction
equipment fleets and major diesel engine and generator set OEMs,
o creating customer `pull-through', a sustained level of request
for our product on the OEM level, and
o converting customer evaluations into sales, both immediate and
long term.
While this is a long-term and ongoing commitment, we believe we have
achieved a limited amount of industry acceptance based on recent
accomplishments:
o in September 2008 we announced that Avis Budget Group will be
installing the PURADYN bypass oil filtration system as standard
equipment on its fleet of over 300 heavy duty buses. Avis is the
first major car rental company to use bypass oil filtration.
o in August 2008, we announced that John Deere Forestry Division is
factory-installing the Puradyn bypass oil filtration system in
Joensuu, Finland on equipment to be utilized in Russia and other
countries where high sulfur fuel is used.
o during 2008 we received the initial and repeat orders from the
Foreign Military Sales program, the government-to-government
method for selling U.S. defense equipment, services, and
training, to supply the PURADYN bypass oil filtration systems for
the line haul fleet;
o in July 2008 we received a contract from the U.S. Army to supply
the PURADYN bypass oil filtration systems to outfit JERRV vehicles
used in combat in Iraq and Afghanistan;
o in April 2008 an international distributor placed purchase orders
totaling over $1.1 million for shipment over 2008 and 2009. This
is our first order to date of this magnitude;
o the November 2007 announcement that a fleet of 100 trucks have
exceeded 100 million miles without an oil-related oil change
during the course of an eight-year period using the PURADYN
bypass oil filtration system.
o in June 2006 the U.S. Department of Energy announced final
results of a three-year test conducted on the benefits, cost, and
engine oil consumption analyses of bypass oil filtration
technology that
10
showed 89% oil savings using PURADYN bypass technology on
heavy-duty engines and sport utility vehicles.
We believe that the renewed interest shown in the technology of bypass
oil filtration as an economic alternative to significantly rising oil prices,
dependence upon foreign oil, with the added benefit of being environmentally
beneficial, will timely and favorably position us as a manufacturer of a cost
efficient "green" product. Sales appear to be comparable from the first six
months of 2008 as compared to the first six months of 2007 as a result of one of
our largest customers postponing purchases while awaiting installation of new
maintenance tracking and reporting procedures. However, excluding this customers
decrease in sales, of approximately $184,000, total consolidated sales have
actually increased by approximately $186,000 or approximately 12%. We also
believe that industry acceptance resulting in sales will continue to grow in
2008; however, there can be no assurance that any of our sales efforts or
strategic relationships will meet management's expectations or result in actual
revenues.
Our sales effort not only involves educating the potential customer on
the benefits of our product, but also allowing the end-user to test and evaluate
the PURADYN bypass oil filtration system on its fleet equipment. While set for a
specific period of time, typically ranging from three to 12 months, evaluations
are often influenced by a number of variables including equipment applications
downtime or servicing, which may extend the evaluation period. Consequently, the
sales cycle can be relatively long.
We believe international sales are especially well suited to our
products given that environmental controls are not as regulated in countries
outside North America. Certain applications representing a higher return on
investment are more prevalent in use outside of North America and end-users
consequently are more receptive to the total maintenance package, including the
use of oil analysis, which the PURADYN bypass oil filtration system requires to
verify oil condition. Our wholly-owned subsidiary in the United Kingdom sells
our products in Europe, the Middle East and Africa. In the first six months of
2008, total international sales accounted for approximately 60% of our
consolidated net sales as compared to 63% for the first six months of 2007. We
believe that the combined effects of the July 2008 relocation and overseeing
process of the U.K. office and the marketing of a competitive product to our
customers by our former U.K. Managing Director have contributed to a decline in
its international sales volume.
Until late 2005, we were focused on retail sales in order to maintain
revenue stream and cash flow. While this was necessary to generate market
awareness and industry penetration, it was also extremely costly with respect to
company resources. The progress made with a few major accounts, distributors and
OEMs allowed us to now start concentrating our efforts to expand our
relationships with these OEMs.
Optimizing our limited resources will be key to accomplishing our
goals. We will need to remain focused on working with OEMs, continue developing
the independent distributors we have onboard and maintain growth within the
major accounts using our system. To accomplish these tasks, we will need to add
appropriate sales and marketing support to be sure our distributors and
customers are served. At this time, we anticipate the need for at least two
salespersons and one sale support person. We will be adding application
engineers and product engineers as we grow our OEM account list. A second
application engineer and product engineer will be needed as we add our third
OEM. The expansion into the OEM area, even though it is very demanding due to
response need to meet their needs, is also rewarding in the aspect that it
provides a steady flow of material requirements for our manufacturing area
giving us more stability in manufacturing personnel, a stronger supply chain
with steady production, economics of scale and the ability to better utilize our
overhead with higher average material turn rates.
As described elsewhere herein, we continue to address our liquidity and
working capital issues as we continue to seek to raise additional capital from
institutional and private investors and current stockholders. Historically, we
have faced difficulties in raising adequate capital and we anticipate that those
efforts will continue given the uncertainties facing the capital markets in the
U.S. We also continue to implement cost reductions in an effort to improve
margins, including securing alternative suppliers for raw materials and
manufacturing and we anticipate these costs reductions will impact our results
of operations during the balance of 2008 and beyond. We are also reviewing cost
of material increases, some of which were passed through to our customers as
product price
11
increases beginning January 2008. These price increases were generally limited
to market conditions, but will continue to be applied each January and were in
the range of 4% to 7%.
GOING CONCERN
Our financial statements have been prepared on the basis that we will
operate as a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. We have incurred
net losses each year since inception and have relied on the sale of our stock
from time to time and loans from third parties and from related parties to fund
our operations. These recurring operating losses, liabilities exceeding assets
and the reliance on cash inflows from an institutional investor and current
stockholder have led our independent registered public accounting firm Webb &
Company P.A. to include a statement in its audit report relating to ours audited
consolidated financial statements for the years ended December 31, 2007 and
December 31, 2006 expressing substantial doubt about our ability to continue as
a going concern. Our ability to continue as a going concern is dependent upon
our ability to obtain the necessary financing to meet our obligations and repay
our liabilities when they become due and to generate profitable operations in
the future. We plan to continue to provide for our capital requirements through
the sale of equity securities, however, we have no firm commitments from any
third party to provide this financing and we cannot assure you we will be
successful in raising working capital as needed. There are no assurances that we
will have sufficient funds to execute our business plan, pay our obligations as
they become due or generate positive operating results.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to product returns, bad debts, inventories, financing operations,
warranty obligations and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect us more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial conditions of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. We provide for potential uncollectible accounts receivable based on
customer specific identification and historical collection experience. If market
conditions decline, actual collection experience may not meet expectations and
may result in decreased cash flows and increased bad debt expense.
The policy for determining past due status is based on the contractual
payment terms of each customer, which is generally net 30 or net 60 days. Once
collection efforts by us and our collection agency are exhausted, the
determination for charging off uncollectible receivables is made.
ESTIMATION OF PRODUCT WARRANTY COST
We provide for the estimated cost of product warranties at the time
revenue is recognized. While we engage in product quality programs and
processes, including actively monitoring and evaluating the quality of our
component suppliers, our warranty obligation is affected by product failure
rates, material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service
delivery costs differ from our estimates, revisions to the estimated warranty
liability would be required.
12
ESTIMATION OF INVENTORY OBSOLESCENCE
We provide for estimated inventory obsolescence or unmarketable
inventory in amounts equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
IMPAIRMENT OF LONG-LIVED ASSETS
We periodically evaluate the recoverability of the carrying amount of
our long-lived assets under the guidelines of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Factors that we consider in making
this evaluation include estimating the undiscounted net cash flows estimated to
result from the assets over their remaining useful life. Should our estimates of
these factors change, our results of operations and financial condition could be
adversely impacted.
REVENUE RECOGNITION
Revenue is recognized when earned. Our revenue recognition policies are
in compliance with the provisions issued in SAB No. 104, Revenue Recognition in
Financial Statements. Revenue from product sales to customers, distributors and
resellers is recorded when products that do not require further services or
installation us are shipped, when there are no uncertainties surrounding
customer acceptance and for which liability is reasonably assured. We provide
for sales returns based on an historical analysis of returns. The estimate is
updated for current return activity and the provision is adjusted accordingly.
Should actual returns exceed management's estimates, the provision may require
further adjustment and accordingly, net sales may decrease.
PRODUCT RETURNS
Consistent with industry practices, we may accept limited product
returns or provide other credits in the event that a distributor holds excess
inventory of our products. During the three-months ended June 30, 2008 and June
30, 2007, product returns totaled $12,141 and $452 respectively. During the
six-months ended June 30, 2008 and June 30, 2007, product returns totaled
$17,915 and $3,594 respectively. Increased product returns during 2008, over
2007, was primarily attributable one customer's excess inventory purchases
acquired during 2007. Our sales are made on credit terms, which vary depending
on the nature of the sale. We believe we have established sufficient reserves to
accurately reflect the amount or likelihood of product returns or credits and
uncollectible receivables. However, there can be no assurance that actual
returns and uncollectible receivables will not exceed our reserves.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the Financial Accounting Standards Board (FASB)
issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial
Statements - an amendment of ARB No. 51". This statement improves the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements by establishing
accounting and reporting standards that require : (i) the ownership interests in
subsidiaries held by parties, other than the parent, and the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest be clearly identified and presented on the face of the consolidated
statement of income, (ii) changes in a parent's ownership interest while the
parent retains its controlling financial interest in its subsidiary be accounted
for consistently, (iii) that when a subsidiary is deconsolidated, any retained
noncontrolling equity investment in the former subsidiary be initially measured
at fair value, and (iv) that entities provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160 affects those entities that
have an outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. Early adoption is prohibited. The adoption of this statement is not
expected to have a material effect on our financial statements.
13
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133" (SFAS 161). This statement is intended to improve transparency in
financial reporting by requiring enhanced disclosures of an entity's derivative
instruments and hedging activities and their effects on the entity's financial
position, financial performance, and cash flows. SFAS 161 applies to all
derivative instruments within the scope of SFAS 133. "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) as well as related hedged items,
bifurcated derivatives, and nonderivative instruments that are designed and
qualify as hedging instruments. Entities with instruments subject to SFAS 161
must provide more robust qualitative disclosures and expanded quantitative
disclosures. SFAS 161 is effective prospectively for financial statements issue
for fiscal years and interim periods beginning after November 15, 2008, with
early application permitted. We are currently evaluating the disclosure
implications of this statement.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles." SFAS No. 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with GAAP. The current GAAP hierarchy has been criticized because it
is directed to the auditor rather than the entity, it is complex, and it ranks
FASB Statements of Financial Accounting Concepts, which are subject to the same
level of due process as FASB Statements of Financial Accounting Standards, below
industry practices that are widely recognized as generally accepted but that are
not subject to due process. The Board believes the GAAP hierarchy should be
directed to entities because it is the entity (not its auditors) that is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. SFAS 162 is effective 60 days following
the SEC's approval of PCAOB Auditing Standard No. 6, Evaluating Consistency of
Financial Statements (AS/6). The adoption of FASB 162 is not expected to have a
material impact on our financial position.
In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial
Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60."
Diversity exists in practice in accounting for financial guarantee insurance
contracts by insurance enterprises under FASB Statement No. 60, Accounting and
Reporting by Insurance Enterprises. This results in inconsistencies in the
recognition and measurement of claim liabilities. This Statement requires that
an insurance enterprise recognize a claim liability prior to an event of default
(insured event) when there is evidence that credit deterioration has occurred in
an insured financial obligation. This Statement requires expanded disclosures
about financial guarantee insurance contracts. The accounting and disclosure
requirements of the Statement will improve the quality of information provided
to users of financial statements. SFAS 163 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. The adoption of FASB 163 is not expected to have a
material impact on our financial position.
IMPACT OF INFLATION AND FOREIGN CURRENCY TRANSLATION GAINS AND LOSSES
Inflation has not had a significant impact on our operations. However,
any significant decrease in the price for oil or labor, environmental compliance
costs, and engine replacement costs could adversely impact the end users
cost/benefit analysis as to the use of our products.
The financial statements of our U.K. subsidiary have been translated
into U.S. dollars in accordance with SFAS No. 52, Foreign Currency Translation
(SFAS 52). All balance sheet accounts have been translated using the exchange
rate in effect at the balance sheet date. Income statement amounts have been
translated using an appropriately weighted average exchange rate for the year.
The translation gains and losses resulting from the changes in exchange rates
during the six months ended June 30, 2008 as well as 2007 and 2006 have been
reported in accumulated other comprehensive income, except for gains and losses
resulting from the translation of intercompany receivables and payables, which
are included in earnings for the period. During the six months ended June 30,
2008 and 2007 , we recorded a foreign currency exchange rate gain of
approximately $2,400 and a loss of approximately $35,000, respectively, and for
the years ended December 31, 2007 and 2006 we recorded a foreign currency
exchange rate gain of approximately $87,000 and a loss of approximately
$198,000, respectively, which is included in selling and administrative expenses
in the consolidated statements of operations for each period which appear
elsewhere herein. The exchange rate of the British pound to the U.S. dollar
fluctuated from 1.9973 on December 31, 2007 to 1.9954 on June 30, 2008 as
compared to 1.9266 on December 31, 2006 to 2.0039 on June 30, 2007.
14
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 2007
The following tables set forth the amount of increase or decrease
represented by certain items reflected in our condensed consolidated statements
of operations in comparing the three-months ended June 30, 2008 to the
three-months ended June 30, 2007:
(IN THOUSANDS) THREE MONTHS ENDED JUNE 30,
----------------------------------------------
2008 2007 CHANGE
------------- ------------- --------------
Net sales $ 792 $ 787 $ 5
------------- ------------- --------------
Costs and expenses:
Cost of products sold 642 702 (60)
Salaries and wages 251 265 (14)
Selling and administrative 221 197 24
------------- ------------- --------------
Total costs and expenses 1,114 1,164 (50)
------------- ------------- --------------
Other (expense) income:
Interest income 1 10 (9)
Interest expense (78) (131) 53
------------- ------------- --------------
Total other expense (77) (121) 44
------------- ------------- --------------
Net loss $ (399) $ (498) $ 99
============= ============= ==============
(IN THOUSANDS) THREE MONTHS ENDED JUNE 30,
----------------------------------------------
2008 2007 CHANGE
-------------- -------------- --------------
Gross sales 809 807 2
Sales returns and allowances (17) (20) 3
-------------- -------------- --------------
Net Sales 792 787 5
--
US domestic sales 305 297 8
US international sales 198 137 61
UK sales 306 373 (67)
Rentar sales (included in above) 0 5 (5)
The following tables set forth the amount of increase or decrease
represented by certain items reflected in the our condensed consolidated
statements of operations in comparing the six-months ended June 30, 2008 to the
six-months ended June 30, 2007:
15
(IN THOUSANDS) SIX MONTHS ENDED JUNE 30,
----------------------------------------------
2008 2007 CHANGE
------------- ------------- --------------
Net sales $ 1,555 $ 1,553 $ 2
------------- ------------- --------------
Costs and expenses:
Cost of products sold 1,267 1,350 (83)
Salaries and wages 507 526 (19)
Selling and administrative 483 565 (82)
------------- ------------- --------------
Total costs and expenses 2,257 2,441 (184)
------------- ------------- --------------
Other income (expense):
Interest income 1 22 (21)
Interest expense (168) (343) 175
----------------------------------------------
Total other expense (167) (321) 154
------------- ------------- --------------
Net loss $ (869) $ (1,209) $ 340
============= ============= ==============
(IN THOUSANDS) SIX MONTHS ENDED JUNE 30,
----------------------------------------------
2008 2007 CHANGE
-------------- -------------- --------------
Gross sales 1,525 1,578 (53)
Sales returns and allowances 30 (25) 55
-------------- -------------- --------------
Net sales 1,555 1,553 2
--
U.S. domestic sales 600 576 24
U.S. international sales 355 325 30
U.K. sales 570 652 (82)
Rentar sales (included in above) 1 28 (27)
NET SALES
Net sales for the three months ended June 30, 2008 increased by
approximately $5,000 or approximately 1% from approximately $787,000 in the
three months ending June 30, 2007 to approximately $792,000 in the three months
ending June 30, 2008. Sales to two customers accounted for approximately 29% and
approximately 19% (for a total of 48%) of the consolidated net sales for the
three-months ended June 30, 2008. For the three-months ended June 30, 2007,
sales to two customers accounted for approximately 29% and approximately 11%
(for a total of 40%) of the consolidated net sales. Our U.K. subsidiary's sales
decreased by approximately $67,000 (approximately 18%), from approximately
$373,000 to approximately $306,000 for the three-month period ended June 30,
2008 compared to the three-month period ended June 30, 2007. This decrease is
primarily attributable to the decrease in sales to two customers by
approximately $30,000 and $28,000, respectively. This is partially attributable
to the customer awaiting installation of new maintenance procedures.
International sales totaled approximately $504,000 (64%) of the net consolidated
sales for the three-month period ended June 30, 2008 as compared to
approximately $510,000 (65%) for the comparable period in 2007. In addition, we
believe that the marketing of a competitive product to our customers by our
former U.K. Managing Director have contributed to a decline in our international
sales volume. Legal action is now being reviewed given the contractual
obligations of our former employee.
Net sales increased by approximately $2,000, from approximately
$1,553,000 for the six months ended June 30, 2007 to approximately $1,555,000
for the six months ended June 30, 2008. Sales to two customers individually
accounted for approximately 24% and approximately 16% (for a total 40%) and
approximately 28% and approximately 16% (for a total of 44%) of net sales for
the six-months ended June 30, 2008 and 2007, respectively. Net domestic product
sales increased approximately $103,000, or approximately 7%. However, sales of a
product of which we are no longer a distributor decreased approximately $21,000
during the fiscal 2008 period from the comparable period in fiscal 2007. The
U.K. subsidiary's net sales decreased by approximately $82,000, or approximately
13%, from approximately $652,000 for the six-month period ended June 30, 2007
compared to approximately $570,000 for the six-month period ended June 30, 2008.
Sales to their top customer has decreased during the six months ended June 30,
2008 and were approximately $369,000, or approximately 65% of their net sales,
as compared to approximately $417,000, or approximately 64% for the six months
ending June 30, 2007. In addition, as set forth earlier, we believe that the
marketing of a competitive product to our customers by our former U.K. Managing
Director has contributed to a decline in our international sales volume.
During the six months ended we implemented a price increase of
approximately 4% on our main product lines, which was effective January 1, 2008.
These price increases had the result of increasing our net sales on those
16
products for the three and six months ended June 30, 2008 by approximately
$21,000 and approximately $51,000, respectively.
The mix of product sold during the six months ending June 30, 2008
changed slightly as approximately 51% of sales were comprised of unit sales.
During the same period ending June 30, 2007, unit sales consisted of
approximately 46% of total sales.
COST OF PRODUCTS SOLD
Cost of products sold decreased by approximately $60,000, or 9%, from
approximately $702,000 for the three months ended June 30, 2007 to approximately
$642,000 for the three months ended June 30, 2008. Cost of products sold, as a
percentage of sales, decreased from approximately 89% in the 2007 period to
approximately 81% in the 2008 period. The decrease is primarily due to a $72,000
decrease in reserve for slow moving and obsolete inventory. Additionally, in
accordance with a U.K. master distributor agreement entered into in February
2008, we were reimbursed approximately $35,000 of our manufacturing expenses.
Eliminating the reserve changes and the reimbursement, cost of products sold, as
a percentage of sales, would have been approximately 81% for the three-months
ending June 30, 2007, as compared to 85% for the three-months ending June 30,
2008.
For the six months ended June 30, 2008 cost of products sold decreased
by approximately $83,000, or approximately 6%, from approximately $1,350,000 for
the six months ended June 30, 2007 to approximately $1,267,000 for the six
months ended June 30, 2008. Cost of products sold, as a percentage of sales,
decreased from approximately 87% for the six-months ended June 30, 2007 to
approximately 81% for the six-months ended June 30, 2008. This decrease is
attributable to reductions in indirect factory wages, factory overheads and
scrap expense of approximately $30,000, $29,000 and $10,000 respectively, and
the reimbursement approximately $35,000 of our manufacturing expenses discussed
above. These decreases were offset by increases in inventory shrinkage and
product price increases of approximately $8,000 and $13,000 respectively.
SALARIES AND WAGES
Salaries and wages decreased approximately $14,000, or approximately
5%, for the three months ended June 30, 2008 from the comparable period in 2007.
This decrease is the result of a decrease in salaries and wages of approximately
$32,000 generated in the U.K. office following the resignation of the U.K.
Director in December 2007. This decrease was partially offset by additional
salaries and wages expenses incurred in the U.S. office, in the areas of
engineering hours, quality personnel, as well as general cost of living salary
increases of approximately $3,000, $10,000 and $5,000 respectively.
For the six months ended June 30, 2008 salaries and wages decreased
approximately $19,000, or approximately 4%, from the comparable period in 2007.
This decrease is the result of a decrease in salaries and wages of approximately
$32,000 generated in the U.K. office as described above, offset by additional
salaries and wages expenses incurred in the U.S. office, in the areas of
engineering hours and quality personnel of approximately $3,000 and $19,000
respectively.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses for the three months ended June 30,
2008 increased by approximately $24,000, or approximately 12%. This increase is
due to exchange rate losses, patent expenses, and rent expense by approximately
$45,000, $32,000 and $18,000 respectively. These increases were partially offset
by decreases in professional fees and bad debt expense and a reimbursement of
selling and administrative expenses which are in addition to the reimbursement
of certain manufacturing expenses mentioned described above by the U.K. master
distributor by approximately $18,000, $17,000 and $13,000 respectively.
Selling and administrative expenses for the six months ended June 30,
2008 decreased by approximately $82,000 or approximately 15% from approximately
$565,000 for the six months ended June 30, 2007 to approximately $483,000 for
the six months ended June 30, 2008. This decrease was due to a decrease in bad
debt and travel, entertainment and meals expenses and a reimbursement of
expenses from the U.K. master distributor of approximately $50,000, $32,000, and
$13,000, respectively. The majority of the decrease in travel related expense
17
was attributable to the U.K. office resignation of their director. Bad debt
expense decrease was primarily attributable to the reserves established for one
delinquent international customer, which we reserved during the quarter ended
December 31, 2007. These decreases were partially offset by an increase in stock
based compensation expense of approximately $30,000.
INTEREST INCOME
Interest income for the three months ended June 30, 208 decreased
approximately $9,000 from the comparable period in 2007. Interest income
decreased approximately $21,000, from income of approximately $22,000 for the
six-month period ending June 30, 2007 to approximately $1,000 for the six-month
period ending June 30, 2008. These decreases are attributable to a reserve
established, effective October 1, 2007, against stockholder loan interest that
was previously accruing at approximately $12,000 per quarter.
INTEREST EXPENSE
Interest expense for the three months ended June 30, 2008 decreased by
approximately $53,000, or approximately 40% from the comparable period in 2007,
as a result of a decrease in the interest rate outstanding balance of the
stockholder notes payable. Interest expense for the six months ended June 30,
2008 increased by approximately $175,000, or approximately 51%, from the
comparable period in 2007. During the six months period approximately $80,000 of
this increase is attributable to a reserve established during the period ending
June 30, 2007, toward the accumulation of interest recorded on a stockholder
note receivable and approximately $95,000 of the decrease is due to a decrease
in the interest rate on the outstanding balance of the stockholder notes
payable. We pay interest monthly on the notes payable to stockholder at prime
rate less .5%, with rates reset as often as the Federal Reserve changes interest
rates, which was 4.5% as of June 30, 2008 as opposed to 8.25% as of June 30,
2007.
YEAR ENDED DECEMBER 31, 2007 AS COMPARED TO YEAR ENDED DECEMBER 31, 2006
The following table sets forth (amounts in thousands) our operating
information for the years ended December 31, 2007 and 2006:
- ----------------------------------------- -----------------------------------------------------------
(in thousands)
- ----------------------------------------- -----------------------------------------------------------
2007 2006 Increase
(decrease)($)
- ----------------------------------------- ----------------- ------------------- ---------------------
- ----------------------------------------- ----------------- ------------------- ---------------------
Net sales $3,083 $3,073 10
- ----------------------------------------- ----------------- ------------------- ---------------------
Operating costs and expenses:
- ----------------------------------------- ----------------- ------------------- ---------------------
Cost of products sold 2,832 2,567 265
- ----------------------------------------- ----------------- ------------------- ---------------------
Salaries and wages 1,075 1,348 (273)
- ----------------------------------------- ----------------- ------------------- ---------------------
Selling and administrative 1,061 1,343 (282)
----- -----
- ----------------------------------------- ----------------- ------------------- ---------------------
4,968 5,258 (290)
- ----------------------------------------- ----------------- ------------------- ---------------------
- ----------------------------------------- ----------------- ------------------- ---------------------
Loss from operations (1,885) (2,185) (300)
- ----------------------------------------- ----------------- ------------------- ---------------------
- ----------------------------------------- ----------------- ------------------- ---------------------
Other income (expense):
- ----------------------------------------- ----------------- ------------------- ---------------------
Interest income 33 50 (17)
- ----------------------------------------- ----------------- ------------------- ---------------------
Interest expense (589) (518) 71
--- ---
- ----------------------------------------- ----------------- ------------------- ---------------------
Total other expense (556) (468) 88
- ----------------------------------------- ----------------- ------------------- ---------------------
- ----------------------------------------- ----------------- ------------------- ---------------------
Net loss $(2,441) $(2,653) (212)
- ----------------------------------------- ----------------- ------------------- ---------------------
18
- ----------------------------------------- ------------------ ------------------ --------------------
2007 2006 Increase
(decrease)($)
- ----------------------------------------- ------------------ ------------------ --------------------
- ----------------------------------------- ------------------ ------------------ --------------------
Gross sales $3,126 $3,046 80
- ----------------------------------------- ------------------ ------------------ --------------------
Sales returns and allowances (43) 27 (70)
- ----------------------------------------- ------------------ ------------------ --------------------
Net sales $ 3,083 $3,073 10
- ----------------------------------------- ------------------ ------------------ --------------------
- ----------------------------------------- ------------------ ------------------ --------------------
U.S. domestic sales $1,563 $1,425 138
- ----------------------------------------- ------------------ ------------------ --------------------
U.S. international sales 353 815 (462)
- ----------------------------------------- ------------------ ------------------ --------------------
U.K. sales 1,210 806 404
- ----------------------------------------- ------------------ ------------------ --------------------
Rentar sales (included above) 38 243 (205)
- ----------------------------------------- ------------------ ------------------ --------------------
NET SALES
Although net sales increased marginally by approximately $10,000 from
approximately $3,073,000 in 2006 to approximately $3,083,000 in 2007, sales of
our products actually increased $343,000. Sales of a product for which we are no
longer a distributor accounted for a decrease of approximately $205,000 in gross
sales for 2007 as compared to 2006. Domestic sales generated from the U.S.
operations increased approximately $138,000 in 2007 as compared to 2006. The mix
of product sold continues to change as unit sales revenues have decreased
slightly while filter sales have increased more significantly. The increase in
sales returns and allowances for 2007 was a result of a decrease during 2006,
which was due to a reduction in the cumulative historical rate of returns.
COST OF SALES
Cost of sales increased by approximately $265,000 from approximately
$2,567,000 in 2006 to approximately $2,832,000 in 2007. The increase is
primarily due to expensing of scrap inventory and increases in raw material
costs. Cost of products sold, as a percentage of sales, increased from 84% in
2006 to 92% in 2007. We are offset a portion of these cost increases with
product price increases beginning January, 2008.
SALARIES AND WAGES
Salaries and wages decreased approximately $273,000 due to a net
reduction of three employees, representing a decrease of approximately $462,000,
which was partially offset by cost of living salary increases.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased by approximately $281,000
from approximately $1,343,000 in 2006 to approximately $1,062,000 in 2007.
During 2007 our expenses related to stock compensation decreased approximately
$329,000. These decreases were primarily the result of extension of employee
stock options, warrants issued to employees/directors and amortization of
warrants issued to investors, of approximately $173,000, $101,000, and $66,000,
respectively, all of which occurred in 2006. During 2007 we incurred cost
increases in selling and marketing, stockholder loans, rent, and patent expenses
of approximately $31,000, $21,000, $14,000 and $13,000 respectively.
INTEREST INCOME
Interest income decreased by approximately $17,000 primarily due to
reserves established beginning October 1, 2007, against stockholder loan
interest that was previously accruing at approximately $12,000 per quarter.
INTEREST EXPENSE
Interest expense increased by approximately $71,000 from $518,000 in
2006 to $589,000 in 2007. We pay interest monthly on the note payable to
stockholder at the prime rate, which was 6.75% as of December 31, 2007.
Approximately $16,000 of this increase was attributable to this credit line
interest with a higher average principal balance offset by a lower interest rate
of 6.75% at December 31, 2007 as compared to a lower average principal balance
and a higher interest rate of 8.25% at December 31, 2006. Approximately $87,000
of this increase is attributable to a reserve established during the period
ending June 30, 2007 against a stockholder loan receivable.
19
This increase was partially offset by a decrease of approximately $38,000
relating to a reduction of amortization of deferred finance costs.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2008, we had cash and cash equivalents of approximately
$324,000 as compared to cash and cash equivalents of approximately $112,000 at
December 31, 2007.
At June 30, 2008, we had working capital of approximately $1,066,000
and our current ratio (current assets to current liabilities) was 1.66 to 1. At
December 31, 2007 we had working capital of approximately $366,000 and our
current ratio was 1.20 to 1. The increase in working capital and current ratio
is primarily attributable to the increases in cash (approximately $212,000),
accounts receivable (approximately $133,000), inventories (approximately
$89,000) and prepaid assets which includes prepaid oil analysis, rent and vendor
deposits (approximately $99,000) and a decrease in accounts payable
(approximately $259,000) offset by increases in accrued liabilities which
represents deferred salaries and benefits, warranty expense, interest expense
and estimated recurring vendor expenses of approximately $87,000.
We have incurred net losses each year since inception and at June 30,
2008 we had an accumulated deficit of $4,896,023. Our net sales are not
sufficient to fund our operating expenses. Historically, we have relied on the
sale of our stock from time to time and loans from third parties and from
related parties to fund our operations. During 2007, we raised a total of $1.475
million in capital from an institutional investor and current stockholders and
during the six months ended June 30, 2008 we raised an additional $1.474
million. In addition, as of June 30, 2008, we owe our CEO $6.1 million for funds
he has advanced to us from time to time for working capital . Interest expense
on this loan was approximately $168,000 and approximately $589,000,
respectively, for the six months ended June 30, 2008 and the year ended June 30,
2008. During the three-month period ended June 30, 2008, we converted $100,000
of stockholder loans into 322,581 common shares. We do not have sufficient funds
to pay this loan when it becomes due.
We do not currently have any commitments for capital expenditures.
Currently, without additional equity investments, we expect our operating cash
flows will suffice through December 31, 2008. While we anticipate cash flows
from 2008 sales activity even if we sell all 3,500,000 shares offered hereby
additional cash will still be needed to support operations, meet our working
capital needs and satisfy our obligations as they become due. In addition, as
set forth elsewhere herein we owe our CEO $6.2 million which is due on December
31, 2009 or (i) at such time as we have raised an additional $7 million over the
$3.5 million raised in prior offerings, or (ii) at such time as we are operating
within sufficient cash flow parameters to sustain operations, or (iii) until a
disposition of our company, such as an acquisition or merger, occurs. We do not
have sufficient funds to pay this loan when it becomes due and there are no
assurances our CEO will extend the due date. We continue to address liquidity
concerns because of inadequate revenue growth. As a result, cash flow from
operations is insufficient to cover our liquidity needs for the immediate
future. We have implemented measures to preserve our ability to operate,
including organizational changes, a reduction and/or deferral of salaries,
reduction in personnel and renegotiating creditor and collection arrangements.
If budgeted sales levels are not achieved and/or significant unanticipated
expenditures occur, or if we are not able to raise additional investment
capital, we may have to modify our business plan, reduce or discontinue some of
our operations or seek a buyer for part of its assets to continue as a going
concern through 2008. There can be no assurance that we will be able to raise
additional capital or that sales will increase to the level required to generate
profitable operations to provide positive cash flow from operations. In that
event, it is possible that stockholders could lose their entire investment in
our company.
OPERATING ACTIVITIES
For the six-month period ended June 30, 2008, net cash used in
operating activities was approximately $1,251,000, which primarily resulted from
the net loss of approximately $869,000 and secondarily from reductions in
accounts payables, increase in accounts receivable, prepaid expenses of
approximately $258,000, $107,000, $99,000 and $91,000 respectively. For the
six-month period ended June 30, 2007, net cash used in operating activities was
approximately $911,000, which primarily resulted from the net loss of
approximately $1,208,000.
20
For 2007, net cash used in operating activities was approximately
$1,809,000, which primarily resulted from the net loss of approximately
$2,441,000, combined with changes in working capital amounts. For 2006, net cash
used in operating activities was approximately $1,942,000, which primarily
resulted from the net loss of approximately $2,653,000, combined with changes in
working capital amounts.
INVESTING ACTIVITIES
Net cash used in investing activities for the six months ended June 30,
2008 was approximately $14,000 for the sales and purchases of property and
equipment, with approximately $12,000 relating to the purchase of tooling. Net
cash used in investing activities for the six months ended June 30, 2007 was
approximately $23,000 for the sales and purchases of property and equipment.
Net cash used in investing activities for 2007 was approximately
$55,000 for purchases of property and equipment. Net cash used in investing
activities for 2006 was approximately $39,000 for purchases of property and
equipment.
FINANCING ACTIVITIES
Net cash provided by financing activities for the six months ended June
30, 2008 was approximately $1,472,000 for the period, due to $1,474,000 of
proceeds received from stock issued for cash. During the six month period ending
June 30, 2007, net cash provided by financing activities was approximately
$1,029,000 for the period, due to net proceeds of $975,000 in a private
placement offering and $28,500 from the exercise of employee stock options,
offset by the net repayment of approximately $780,000 of the stockholder loan.
Net cash provided by financing activities for 2007 was approximately
$1,909,000 for the year, primarily due to proceeds of $1,473,000 of funds from
the sale of common stock to a private placement investor, as well as an increase
in stockholder loans of $411,000. Net cash provided by financing activities for
2006 was approximately $2,033,000 for the year, primarily due to proceeds of
$2,267,000 of funds from the sale of common stock to a private placement
investor, offset by a reduction in stockholder loans of $232,000.
OUR BUSINESS
OVERVIEW
We design, manufacture, market and distribute the PURADYN bypass oil
filtration system for use with substantially all internal combustion engines and
hydraulic equipment that use lubricating oil. Working in conjunction with an
engine's full-flow oil filter, the PURADYN bypass oil filtration system cleans
oil by continually removing solid, liquid and gaseous contaminants from the oil
through a sophisticated and unique filtration and evaporation process. For
engine lubricating oil, our filters incorporate an additive package. Because
lubricating oil is kept in a continually clean state, the PURADYN bypass oil
filtration system has been used effectively to extend oil-drain intervals and to
extend the time between engine overhauls. We are the exclusive manufacturer of
the disposable replacement filter elements for the PURADYN bypass oil filtration
system.
OUR PRODUCTS
Our core product, the patented PURADYN bypass oil filtration system, is
offered in two models, TF and PFT, and can be attached to almost any engine and
hydraulic systems. The concept of bypass filtration is similar to a dialysis
machine that filters blood to rid it of impurities, keeping the oil continually
clean. Whenever the engine or machinery is operating, the PURADYN bypass oil
filtration system is extracting from the oil solid particles down to less than
one micron (1/39 millionth of an inch), as well as gaseous and liquid
contaminants, while protecting the engine or hydraulic equipment from harmful
wear caused by contaminants in the oil. Additive packages in which chemicals are
added to the filtering media replenish spent additives in the oil, helping to
maintain the oil's proper chemical balance and viscosity.
The condition of the oil is monitored through use of a simple oil
analysis sample taken in lieu of a regularly scheduled maintenance oil change.
If the sample results, typically received in five to seven days, show that the
21
condition of the oil is considered good for continued use, only the PURADYN
replacement element is to be changed - there is no need to change the oil if it
is clean.
Consequently, we believe that the PURADYN bypass oil filtration system
significantly reduces maintenance costs by decreasing oil consumption, engine
wear and certain other types of general maintenance as well as reducing
environmental concerns and costs associated with the storage and disposal of
waste oil. Based upon our experience, these potential savings are achieved from
utilizing the PURADYN bypass oil filtration system, which generally has a
relatively short payback period of, on average, six to 14 months.
The PURADYN bypass oil filtration system is currently manufactured in
six different sizes suitable for placement on engines or equipment with oil sump
capacities ranging from eight to 300 quarts. All PURADYN bypass oil filtration
systems are compatible with virtually all standard and synthetic oils on the
market and they work with engines using gasoline, diesel, biodiesel, propane or
natural gas. The PURADYN bypass oil filtration system cannot be used on engines
that do not have a pressurized lubricating system, and none of the products can
be used on any engines that mix oil with fuel.
We also manufacture and distribute replaceable filter elements for the
PURADYN bypass oil filtration system. Depending upon the application, we
generally recommend that the replaceable filter element be replaced at the
engine manufacturer's recommended/approved periodic oil change interval or as
oil analysis dictates. The type of element used also depends upon the specific
type of engine or hydraulic application. A customer can change the element and
take the required oil sample in approximately five to 10 minutes.
By continually removing contaminants and replacing vital additives
through a patented time-release additive package to keep oil constantly clean,
we believe that the PURADYN replaceable filter element substantially extends
intervals between oil changes. Replaceable filter elements are interchangeable
between similar-sized models.
We have implemented patented and/or proprietary technology in the
replaceable filter elements that we believe provides several advantages
including:
o An additive package in which pelletized chemicals are added to the
filtering media to replenish additives in the oil. This additive package helps
to maintain the oil's chemical balance and viscosity. In 2006, we re-engineered
the additive package to be compatible with new oils designed to meet EPA 2007
on-highway exhaust emission standards, and be simultaneously
backwards-compatible with all older API diesel lubrication oil service
categories.
o The CGP(R) Extended Life Filter Element containing a patent-pending
process for chemical grafting. This new technology, developed in 1999 and2000
and released in 2001, improves the attraction and retention of soot and other
solid contaminants to the packed cotton filter material. CGP technology was
developed by an outside laboratory over a three-year period inclusive of
laboratory and field-testing. Consolidated results from across the country,
during 2001, show that test vehicles averaged more than 120,000 miles without
the need for a traditional oil change.
o Ease of maintenance: The filter element can be replaced in a matter
of seconds.
When the replaceable filter element is changed, an insignificant amount
of make-up oil is added to replace any oil retained in the used element or
consumed during the normal engine combustion process. Our performance warranties
require the user to change the Puradyn replaceable filter element and take a
small sample of the oil for submission to an oil-testing laboratory at the same
intervals that the original equipment manufacturer (OEM) recommends for an oil
change, or as oil analysis dictates. The oil analysis allows end users to
monitor oil quality and, to some degree, engine condition and provides a trend
and timeline for both our company and end user should a problem arise.
The PURADYN bypass oil filtration system has no moving parts and
consequently requires no significant ongoing maintenance. As long as replaceable
filter elements are changed at the recommended intervals and other standard
preventive maintenance procedures such as changing factory full flow and air
filters and oil analysis are
22
completed, based upon our historical experience to date we believe the PURADYN
bypass oil filtration system will perform as designed.
We are also distributor for the MotorCheck(TM) On-Site Oil Analysis.
The analyzer combines optical emission and infrared oil analysis with optional
viscometer within a desktop-sized enclosure for fast, accurate fluid analysis.
WARRANTIES
The PURADYN bypass oil filtration system carries a six-month,
`money-back' performance guarantee, and is currently warranted to the original
user to be free of defects in material and workmanship for five years with
unlimited miles/hours, with a one-year limited warranty on the heating element.
For our performance guarantee and warranties to remain in effect, users must,
among other things, maintain a record of the laboratory oil analysis results. To
date, there have been no material warranty claims, although there can be no
assurances that such a trend will continue.
We have received letters from several OEMs including Deere & Company,
Detroit Diesel Corporation, Caterpillar, Inc., Ford Motor Company, Mack Trucks,
Inc., Cummins Engine Company, Inc., Daimler Corporation, which have all stated
that the installation and use of the PURADYN bypass oil filtration system does
not void their manufacturer warranties unless an engine failure is attributed to
the PURADYN bypass oil filtration system. In addition, under the Magnuson-Moss
Act, a manufacturer cannot require the use of any particular brand of filter or
oil to satisfy fulfillment of a warranty, unless the manufacturer provides the
item free of charge under the terms of the vehicle warranty. The act intends
that use of an aftermarket product alone is not ground for denying an OEM
warranty. Oil analysis is a standard industry practice endorsed by OEMs and
various fleet maintenance organizations and most engine manufacturers will
accept oil analyses as alternatives to their recommended oil change intervals.
MARKETING
Our products are marketed to numerous industries including marine,
trucking, agricultural, bus, generator, construction, mining, industrial and a
multitude of hydraulic applications, and other users of engines or equipment
that utilize up to 50 weight oil for lubrication. Currently, our primary focus
is on the industrial/construction, generator set, marine, and OEM segments.
Instead of traditional media advertising campaigns, we are concentrating instead
on direct sales contacts, trade shows, white papers and other methods of
demonstration, such as Internet-based marketing, to promote our products,
generate awareness and stimulate sales.
Our products have achieved recognition from well-known sources,
including certification (in 1994) and re-certifications (in 1998 and 2003) by
the California Environmental Protection Agency's Department of Toxic Substances
as a `Pollution Prevention' technology. We believe that such recognition, as
well as our presence at national industry trade shows, have and will continue to
enable us to increase industry recognition of the Puradyn name and products.
One of our marketing strategies is based on creating customer
`pull-through', a sustained level of request for our product on the OEM level
from end-users. To date, customer pull-through has resulted in a limited number
of our systems being factory-installed at individual John Deere, Volvo Trucks,
N.A., Mack, Kenworth and Freightliner facilities.
Taking a long-term approach, we believe that federal government
entities and the U.S. military are markets that can be successfully cultivated.
In December 2004 we were awarded a new five-year contract from the General
Services Administration (GSA) for its Vehicular Multiple Award Schedule, New
Technologies, which simplifies the procurement process for governmental
agencies. In 2006 final test results from the U.S. Department of Energy, showed
that our systems used in evaluation of the benefits and cost analysis of bypass
oil filtration produced an estimated savings of 89% in oil usage and purchases
when used on heavy-duty diesel engines, and in 2007 a National Stocking Number
(NSN) was assigned to a specific Puradyn system kit to be installed on the U.S.
Army's Mine Protection Vehicle family.
23
As a result of these efforts, during 2008 we received the initial and
repeat orders from the Foreign Military Sales program, the government-to-
government method for selling U.S. defense equipment, services, and training, to
supply the PURADYN bypass oil filtration systems for the line haul fleet and in
July 2008 we received a contract from the U.S. Army to supply the PURADYN bypass
oil filtration systems to outfit JERRVvehicles used in combat in Iraq and
Afghanistan.
DISTRIBUTION
We have formal distribution agreements with domestic and international
distributors wherein they are required to maintain minimum product inventory
levels, maintain a storefront and services bay(s), and retain access to
qualified technicians trained by our technical personnel in product installation
and service. All distributors must pay in a timely fashion, and with respect to
international distributors, the agreements typically establish the minimum
dollar amount of inventory to be purchased as well as shipping terms.
We currently have approximately 105 domestic and 35 international
active distributors. However there are additional potential distributors that
participate in other programs; such as Freightliner, Western Star, Paccar and
John Deere. While not all of these potential distributors actively promote our
products, all of these dealers have access to our product and have the
capability to sell our product.
In February 2008 we entered into a Master Distributorship Agreement
(International) with Filter Solutions Ltd. pursuant to which we appointed that
company as our exclusive master distributor in the U.K., mainland Europe and
Ireland, as well as additional future territories which we may agree upon for
sales made to end users with fleets of vehicles, users of hydraulic applications
for manufacturing processes and distributors who market to end-users with either
fleets of vehicles or users of hydraulic applications for manufacturing
processes. The distributor agreed to minimum purchases of $900,000 during the
first nine months of the term, with successive minimum purchases increasing 15%
annually over the previous 12 month annual rate. The agreement is for an initial
term of five years with an automatic one year renewal on each anniversary,
negotiated for minimum quantities. The agreement may be terminated by either
party upon 30 days written notice, or by us without notice upon the occurrence
of certain events.
We have warehouse distributors located throughout North America and we
utilize inventory storage space in the U.K. provided by Filter Solutions Ltd., a
master distributor. Our U.K. subsidiary generates distribution and sales in
Europe, the Middle East, the former Soviet Union, South Africa and Scandinavia.
The remaining distributors are located primarily in South America, England,
Europe and Asia. These distributors purchase product directly from us and sell
to their existing or new customers. We will accept returns of products that are
defective at the time of sale to the distributor or prove to be defective during
the warranty period. Returns are subject to specific conditions.
SALES
We directly and/or with the assistance of our distributors market our
products directly to OEMs, other distributors and national accounts. Typically
larger customers, and some smaller customers, require an evaluation period to
operate the system on their equipment. While set for a specific period of time,
usually ranging from three to 12 months, evaluations are often influenced by a
number of variables including equipment downtime or servicing which may extend
the evaluation period. Consequently, the sales period can be relatively long. We
are beginning to see evidence that this evaluation period has shortened as our
products continue to gain wider acceptance and support from well-known end users
and OEMs.
As of October 24, 2008, our products are being evaluated (in various
stages of progress) by numerous potential end users and existing customers
including, among others, a major engine OEM, a major transmission OEM, a road
materials handling company, two leading food companies, the U.S. military and
two major long-haul carriers, which have been conducted over the past 12 to 18
months.
In December 2004 we were awarded a new five-year contract on the
Vehicular Multiple Award Schedule, New Technologies, which replaced the then
current GSA schedule. The contract enables us to offer our PURADYN bypass oil
filtration system to all federal government agencies and allows easy access to
our products without the
24
usual lengthy bid process to all federal agencies that purchase vehicles,
including construction equipment, medium and heavy trucks, waste disposal
vehicles, aerial lift vehicles and fire trucks. The contract period is for five
years from the date of the award (to December 2009) with three five-year
options. To date sales under this contact have totaled approximately $22,000.
We are dependent upon sales to a limited number of customers. During
the six months ended June 30, 2008 two customers individually accounted for
approximately 24% and approximately 16% (for a total of approximately 40%) of
our net sales. During 2007 and 2006 two customers together accounted for
approximately 44% and 39%, respectively, of our consolidated net sales. Although
we receive customer purchase orders, we do not have contracts with our customers
and the loss of sales from one or more of these customers could materially
impact our results of operations in future periods.
MANUFACTURING AND PRODUCTION
We purchase component parts for our PURADYN bypass oil filtration
systems and manufacture our entire line of replaceable filter elements. The
component parts are assembled, packed and shipped from our facility in Boynton
Beach, Florida.
We currently purchase each substantially all of our raw materials and
component parts from various vendors in the United States. Substantially all the
tools and dies used by certain of our vendors are owned by us. We have
researched alternative sources of supply and do not anticipate that the loss of
any single supplier would have a material long-term adverse effect on our
business, operations or financial condition.
In January 2004, we received ISO 9001:2000 certification from the
International Organization for Standardization. ISO 9001:2000 is a series of
internationally accepted, multi-part quality management systems for
industry-wide standardization applied to manufacturing and service
organizations. We successfully completed subsequent surveillance audits and in
December 2007, completed our recertification audit to retain 9001:2000
certification.
COMPETITION
Our primary competitors are Premo Lubrication Technologies, Inc.,
OilGuard, Amsoil Inc., and Oil Purification Systems, Inc. Competitive bypass oil
filters produced by other companies in varying degrees address the issues of
solid or liquid contaminant filtration through centrifugal design, media
filtration or evaporation. Most of our competitors have more capital, greater
brand recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we do. However, we believe that we design
and manufacture the only bypass oil filtration system that incorporates all of
the following features which we believe provides us with a competitive
advantage:
o filtering solid contaminants to below one micron, including
enhanced soot retention through the use of a patent-pending
process for chemical grafting;
o effectively removing harmful gaseous and liquid contaminants
through a heated evaporation chamber;
o replenishing the base additives; and
o maintaining oil viscosity.
INTELLECTUAL PROPERTY
Our intellectual property is critical to our business, and we may seek
to protect our intellectual property through copyrights, trademarks, patents,
trade secrets, confidentiality provisions in our customer, supplier, potential
investors, and strategic relationship agreements, nondisclosure agreements with
third parties, and invention assignment agreements with our employees and
contractors, although we do not execute such agreements in every case. Our
protection efforts may prove to be unsuccessful, and unauthorized parties may
copy or infringe upon aspects of our technology, services or other intellectual
property rights. In addition, these parties may develop similar technology
independently. Existing trade secret, copyright and trademark laws offer only
limited protection and may not be available in every country in which we will
offer our services.
25
We own patents for the PURADYN bypass oil filtration system;
replaceable filter elements, oil flow meter, and two patents for technology
which include a manifold type full-flow filter/bypass filtration unit
(side-by-side) in the U.S. and certain other countries. The expiration dates of
these patents range from May 2014 to October 2016. The following table provides
information on our current U.S. patents.
- ------------ -------------------------------------------------------------------- -----------------------
PATENT NO. DESCRIPTION DATE ISSUED
- ------------ -------------------------------------------------------------------- -----------------------
5,630,912 oil reclamation device with evaporator base and head mounted filter May 20, 1997
- ------------ -------------------------------------------------------------------- -----------------------
5,591,330 oil filter containing a soluble thermoplastic additive material July 7, 1997
therein
- ------------ -------------------------------------------------------------------- -----------------------
5,639,965 oil reclamation system flow meter July 17, 1997
- ------------ -------------------------------------------------------------------- -----------------------
5,718,258 releasing additives into engine oil February 17, 1998
- ------------ -------------------------------------------------------------------- -----------------------
6,139,715 oil reclamation device with vaporization chamber October 31, 2000
- ------------ -------------------------------------------------------------------- -----------------------
We believe that the patented technology is especially useful for
engines built since the enactment of the Clean Air Act of 1992 which requires
tighter specifications for diesel engines. We have also applied for and received
patents on these technologies in a number of foreign counties.
In April 2001 we applied for a provisional patent application for
improved filtration efficiency using CGP(R), a process for chemical grafting
that we believe can significantly increase the life of the filter element and
further safely extend oil drain intervals.
We have registered the product trademark "Puradyn" in the United
States, Canada, Mexico and a number of foreign countries, and have registered
the product trademarks "CGP" and "Keep It Clean!" in the United States.
We have also obtained the rights to the domain name www.puradyn.com as
well as the domain names puradyn.asia, puradyn.org, puradyn.us, puradyn.info and
puradyn.biz. As with telephone numbers, we do not have and cannot acquire any
property rights in an Internet address. We do not expect to lose the ability to
use these Internet address; however, there can be no assurance in this regard.
EMPLOYEES
At October 24, 2008, we had 21 full-time employees, including our
executive officers. None of our employees are covered by collective bargaining
agreements, and we believe our relationships with our employees to be good.
LEGAL PROCEEDINGS
We are not a party to any pending or threatened litigation.
PROPERTIES
We lease approximately 25,500 square feet of office and warehouse space
in Boynton Beach, Florida from an unrelated third party which serves as our
principal executive offices. Under the term of the five year lease which expires
on July 31, 2013 we pay rent of approximately $179,000 per year which will
increase 3% annually during the term of the lease.
HISTORY OF OUR COMPANY
The patents issued on the oil filtration system that, after further
development, has evolved into the current PURADYN bypass oil filtration system,
were issued in the early 1980's. The owners of these patents attempted to market
and sell the original system under various other trade names, but were not
successful. In 1987, T/F Systems, Inc., a Delaware corporation, of which Messrs.
Richard C. Ford and Willard H. Taylor (deceased) were equal stockholders,
obtained certain limited distribution rights to the PURADYN bypass oil
filtration system, previously known as the "Purifiner" in several states from
Refineco Manufacturing Company, Inc. Mr. Ford served as an executive officer and
director of our company from inception to October 2006. In 1988, T/F Systems,
Inc. obtained an option to acquire the exclusive manufacturing and marketing
rights to the Purifiner in the event Refineco
26
Manufacturing Company, Inc., and subsequently, Purifiner Distribution
Corporation of Chicago, Illinois, were unable to meet their commitments to
supply Purifiners to T/F Systems, Inc. As a result of a default, and a failure
of the manufacturer to meet this supply commitment, T/F Systems, Inc. obtained
the worldwide manufacturing and marketing rights to the Purifiner in 1990.
In February 1988, we were incorporated in Delaware under the name
"Econology Systems, Inc." On October 16, 1990, the name was changed to "T/F
Purifiner, Inc." We were inactive until 1991, when we obtained the distribution
and marketing rights to the Purifiner by virtue of an assignment from T/F
Systems, Inc. However, T/F System, Inc.'s ownership of the rights to the
Purifiner were contested in court by other third parties who were also
manufacturing and marketing a device similar to the Purifiner and using the
Purifiner trademark. Eventually, the court ruled in favor of T/F Systems, Inc.
with respect to its manufacturing and marketing rights, and in May 1993 all
appeals by the other parties were exhausted. During the period of this
litigation, we continued to market the Purifiner, but success was limited due to
various factors including the pending litigation and the actions by these other
parties in the marketplace.
Prior to December 31, 1995, we were the exclusive distributor and T/F
Systems, Inc. was the exclusive manufacturer of the Purifiner. On December 31,
1995, in exchange for any claims we had in the delay damage award, we purchased
all operating assets and assumed all operating liabilities of T/F Systems, Inc.
except for any benefits and/or liabilities related to a delay damage judgment
awarded in December 1994 against the other parties discussed above, and
liabilities related to certain stockholder advances made to T/F Systems, Inc. by
Messrs. Ford and Taylor.
On February 4, 1998, the company filed a Certificate of Amendment to
its Certificate of Incorporation, which changed its name from T/F Purifiner,
Inc. to Puradyn Filter Technologies Incorporated.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------------------------- --------- --------------------------------------------------------
NAME AGE POSITIONS
- --------------------------------------------------- --------- --------------------------------------------------------
Joseph V. Vittoria 72 Chairman of the Board of Directors and Chief Executive
Officer
- --------------------------------------------------- --------- --------------------------------------------------------
Kevin G. Kroger 56 President, Chief Operating Officer and director
- --------------------------------------------------- --------- --------------------------------------------------------
Alan J. Sandler 70 Vice President, Chief Administrative Officer and
corporate secretary
- --------------------------------------------------- --------- --------------------------------------------------------
Cindy Lea Gimler 42 Chief Financial Officer
- --------------------------------------------------- --------- --------------------------------------------------------
Lieutenant General John S. Caldwell, U.S. Army 63 Director
(retired) (2)
- --------------------------------------------------- --------- --------------------------------------------------------
Forrest D. Hayes (1)(2) 75 Director
- --------------------------------------------------- --------- --------------------------------------------------------
Dominick Telesco 78 Director
- --------------------------------------------------- --------- --------------------------------------------------------
Dr. Charles W. Walton (1) 75 Director
- --------------------------------------------------- --------- --------------------------------------------------------
(1) Audit Committee member
(2) Compensation Committee member
JOSEPH V. VITTORIA. Mr. Vittoria was appointed to the Board of
Directors and appointed as Chairman on February 8, 2000. Mr. Vittoria was
Chairman and Chief Executive Officer of Travel Services International, Inc.
where he served from 1998 to 2000. From 1987 to 1997, Mr. Vittoria served as
Chairman and Chief Executive Officer of Avis, Inc. and was President and Chief
Operating Officer of Avis, Inc. from 1982 to 1987. Mr. Vittoria also serves as
Chairman of the Board of Great Wolf Resorts (since November 2006) and is a
member of the Board of Vectrix Corporation (since May 2008).
KEVIN G. KROGER. Mr. Kroger joined our company July 3, 2000 as
President and Chief Operating Officer, and was appointed to the Board of
Directors in November 2000. He was also appointed to the Board of Puradyn, Ltd.
In December 2000, Mr. Kroger was with Detroit Diesel Corporation from 1989 to
the time he joined our company, serving in various executive positions prior to
his appointment in 1998 to the position of Vice President
27
and General Manager of Series 30/40 Product. From 1987 to 1989 he was Vice
President of R.E.S. Leasing and of VE Corporation. Prior to this, from 1971 to
1987, he held several management positions with Caterpillar Corporation.
ALAN J. SANDLER. Mr. Sandler joined our company in June 1998 and has
served in various positions including President (June 1998 until January 2000),
Vice President (January 2000 to present), Chief Operating Officer (June 1998 to
January 2000), Chief Administrative Officer (February 2000 to present) Secretary
(June 1998 to President), Chief Financial Officer (June 1998 to March 2001 and
August 2001 to March 2002), and Director (June 1998 to December 2004). Prior to
joining our company, from 1995 until 1997 Mr. Sandler served as President and
Chief Executive Officer to Hood Depot, Inc., a national restaurant supply
manufacturer/distributor. From 1979 to 1995 he was President and Chief Executive
Officer of Sandler & Sons Dental Supply Company, a regional dental supply and
equipment distributor. Previous to this position he was a Vice President of
Gardner Advertising Company, a national advertising agency, from 1965 to 1979.
CINDY LEA GIMLER. Ms. Gimler has served as Chief Financial Officer
since February 2005 and from October 2003 until October 2004 she held the
position of Accounting Manager with our company. Prior to her employment with
our company, she served as Controller of Bio-Engineered Supplements & Nutrition,
Inc., a nutrition products company, from October 2004 through February 2005. Ms
Gimler also served as Chief Financial Officer of Universal Jet Aviation, a
private jet charter company, from August 2000 through July 2003 and as
Accounting Manager for Singer Asset Finance Co., LLC from July 1999 through
August 2000. From November 1989 through August 2000 she was employed as an
Accountant and Financial Analyst for Oxbow Corporation, an energy finance
company. Ms. Gimler received a Masters of Business Administration and a Bachelor
of Business Administration from Florida Atlantic University and is a CPA in the
State of Florida.
LIEUTENANT GENERAL (RETIRED) JOHN S. CALDWELL, JR. General Caldwell was
appointed to our Board of Directors on August 25, 2005 and serves as Chairman of
the Compensation Committee. General Caldwell served as the Army's top ranking
officer for Acquisition, Logistics and Technology when he retired in January
2004. In that capacity, he was responsible to the Assistant Secretary for the
direction and oversight of the Army's Research, Development and Acquisition
(RDA) programs valued at approximately $20 billion per year. He was also
Director of the 50,000-person Army Acquisition Workforce, responsible for
personnel development and training policy and key assignment recommendations.
From July 2004 until May 2007, General Caldwell served as Senior Vice-President
of QSS Group, an IT services company supporting Federal agencies, which was
acquired by Perot Systems in January 2007. General Caldwell is currently
employed as a consultant and serves on the Board of Directors of TASER
International, Inc., Marlow Industries, a subsidiary of II-IV Incorporated, and
SemiSouth Laboratories, Inc. General Caldwell holds the degrees of Bachelor of
Science from the US Military Academy, West Point in New York, Master in
Mechanical Engineering from Georgia Institute of Technology in Atlanta, GA, and
the Industrial College of the Armed Forces.
FORREST D. HAYES. Mr. Hayes was appointed to our Board of Directors on
November 10, 2005. Mr. Hayes is Chairman of the Audit Committee and a member of
Compensation Committee. Mr. Hayes served as Vice President and Chief Financial
Officer of Wastequip, Inc., a privately owned manufacturer of waste equipment in
1990 and 1991, and from 1992 to 2000, as a member of the Wastequip Board of
Directors. Mr. Hayes was President and Chief Executive Officer of Brittany
Corporation, a privately owned manufacturer of auto/truck parts from 1992 to
2000, and Vice-Chairman from 2000 through 2003. Prior to this, Mr. Hayes served
as a CPA with Arthur Andersen from 1954 to 1990 in various capacities including
Managing Partner, of the Cleveland and Cincinnati, Ohio offices. Mr. Hayes
currently serves on the boards of Polychem Corporation and Brittany Stamping
LLC.
DOMINICK TELESCO. Mr. Telesco was appointed to our Board of Directors
on December 19, 2006. Mr. Telesco has been President and CEO of Boxwood
Associates, Inc. since October 1999. Mr. Telesco also serves on the Board of
Directors of Lydian Private Bank, the Palm Beach United Way, the Palm Beach
County Cultural Council and the Boxwood Association, Inc.
CHARLES W. WALTON, PH.D.. Dr. Walton was appointed to our Board of
Directors on August 25, 2005 and is a member of the Audit Committee. Dr. Walton
is Chairman Emeritus of Wastequip, Inc., which he founded in 1989 with the goal
of consolidating the equipment segment of the waste management industry. As a
result of over 25 successful acquisitions and internal growth, Wastequip, Inc.
which is owned by Odyssey Investment Partners, a
28
private equity firm, is now the largest supplier of equipment in the industry
with approximately $500 million in sales and 30 manufacturing plants in North
America and Mexico. Prior to founding Wastequip, Inc. Dr. Walton was President
and Chief Executive Officer of Sudbury, Inc., a Fortune 500 diversified
manufacturing company, which he co-founded in 1983. In 1987, he was awarded the
Dively Entrepreneurship Award by Case Western Reserve Weatherhead School of
Management and the Harvard Business School Club of Cleveland. Dr. Walton holds
the degrees of Bachelor of Science in Foreign Service and Ph.D. in economics
from Georgetown University, Washington, D.C.
Each director is elected at our annual meeting of stockholders and
holds office until the next annual meeting of stockholders, or until his
successor is elected and qualified.
DIRECTOR COMPENSATION
Each member of the Board of Directors is automatically granted 5,000
options upon election or appointment as a new member of the Board of Directors.
Each director receives an additional 5,000 options at the close of each annual
meeting of stockholders or on the anniversary of their appointment to the Board.
Additionally, each director automatically received 2,500 options for each
committee of the Board on which the director serves. Options are granted at a
price equal to the fair market value of the stock on the date of grant, are
exercisable commencing two years following grant, and will expire five years
from the date of grant. In the event a person ceases to serve on the Board of
Directors, the outstanding options expire one year from the date of cessation of
service.
The following table provides information concerning the compensation of
our Board members for their services as members of our Board of Directors for
the year ended December 31, 2007. The value of the warrant and options described
below were calculated in accordance with FAS 123 I
- ----------------------------------------------------------------------------------------------------------------------
DIRECTOR COMPENSATION
- ----------------------------------------------------------------------------------------------------------------------
NAME FEES STOCK OPTION NON-EQUITY CHANGE IN ALL OTHER TOTAL
EARNED AWARDS AWARDS INCENTIVE PENSION VALUE COMPENSATION
OR PAID PLAN AND
IN COMPENSATION NONQUALIFIED
CASH DEFERRED
($) COMPENSATION
EARNINGS ($)
($) ($) ($) ($) ($)
(a) (b) I (d) (e) (f) (g) (j)
- -------------------------- --------- ---------- ----------- -------------- --------------- ------------- -------------
Joseph V. Vittoria 0 0 0 0 0 0 0
- -------------------------- --------- ---------- ----------- -------------- --------------- ------------- -------------
Richard C. Ford (1) 0 0 0 0 0 0 0
- -------------------------- --------- ---------- ----------- -------------- --------------- ------------- -------------
Kevin G. Kroger 0 0 0 0 0 0 0
- -------------------------- --------- ---------- ----------- -------------- --------------- ------------- -------------
Lieutenant General John 0 0 3,750 0 0 0 3,750
S. Caldwell U.S. Army
(retired) (2)
- -------------------------- --------- ---------- ----------- -------------- --------------- ------------- -------------
Forrest D. Hayes (3) 0 0 5,000 0 0 0 5,000
- -------------------------- --------- ---------- ----------- -------------- --------------- ------------- -------------
Dominick Telesco (4) 0 0 1,650 0 0 0 1,650
- -------------------------- --------- ---------- ----------- -------------- --------------- ------------- -------------
Dr. Charles W. Walton (5) 0 0 3,750 0 0 0 3,750
- -------------------------- --------- ---------- ----------- -------------- --------------- ------------- -------------
(1) On September 7, 2007 Mr. Ford submitted his resignation as Vice-Chairman
and a member of the Board.
(2) On October 10, 2007, General Caldwell was granted options to purchase
7,500 shares of our common stock at an exercise price of $0.37 per share,
vesting on August 25, 2008 and expiring on August 25, 2011; and options to
purchase 7,500 shares of our common stock at an exercise price of $0.37 per
share, vesting on August 25, 2009 and expiring on August 25, 2012.
(3) On October 10, 2007, Mr. Hayes was granted options to purchase 10,000
shares of our common stock at an exercise price of $0.37 per share, vesting on
November 10, 2008 and expiring on November 10, 2011; and options to
29
purchase 10,000 shares of our common stock at an exercise price of $0.37 per
share, vesting November 10, 2009 and expiring on November 10, 2012.
(4) On December 19, 2007 Mr. Telesco was granted options to purchase 5,000
shares of our common stock at an exercise price of $0.47 per share, vesting on
December 19, 2009 and expiring on December 16, 2012.
(5) On October 10, 2007, Dr. Walton was granted options to purchase 7,500
shares of our common stock at an exercise price of $0.37 per share, vesting on
August 25, 2008 and expiring on August 25, 2011; and options to purchase 7,500
shares of our common stock at an exercise price of $0.37 per share, vesting on
August 25, 2009 and expiring on August 25, 2012.
COMMITTEES OF THE BOARD OF DIRECTORS
We do not have a policy regarding the consideration of any director
candidates which may be recommended by our stockholders, including the minimum
qualifications for director candidates, nor has our Board of Directors
established a process for identifying and evaluating director nominees. We have
not adopted a policy regarding the handling of any potential recommendation of
director candidates by our stockholders, including the procedures to be
followed. Our Board has not considered or adopted any of these policies as we
have never received a recommendation from any stockholder for any candidate to
serve on our Board of Directors. We do not anticipate that any of our
stockholders will make such a recommendation in the near future given the small
size of our company. While there have been no nominations of additional
directors proposed, in the event such a proposal is made, all members of our
Board will participate in the consideration of director nominees.
Our Board of Directors has created both an Audit Committee and a
Compensation Committee.
AUDIT COMMITTEE
The Audit Committee of the Board of Directors, which operates under a
written charter, reviews our financial reporting process on behalf of the Board
of Directors. Management has the primary responsibility for the financial
statements and the reporting process including the system of internal controls.
The Audit Committee of the Board of Directors is composed of two independent
directors, Mr. Hayes (Chairperson) and Dr. Walton. The Board has determined that
Mr. Hayes satisfies the criteria as an audit committee financial expert as
established by the Securities and Exchange Commission pursuant to Item 407(d)(5)
of Regulation S-K. In general, an "audit committee financial expert" is an
individual member of the audit committee or Board of Directors who:
o understands generally accepted accounting principles and financial
statements,
o is able to assess the general application of such principles in
connection with accounting for estimates, accruals and reserves,
o has experience preparing, auditing, analyzing or evaluating financial
statements comparable to the breadth and complexity to our financial
statements,
o understands internal controls over financial reporting, and
o understands audit committee functions.
COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors provides overall
guidance for officer compensation programs, including salaries and other forms
of compensation including all employee stock option grants and warrant grants to
non-employees. The members of the Compensation Committee are General Caldwell
(Chairperson) and Mr. Hayes, both independent directors. The Compensation
Committee does not presently have a written charter however we anticipate that
one will be adopted by the Board of Directors during fiscal 2009.
CODE OF ETHICS
We have adopted a Business Ethics and Conflicts of Interest Statement
outlining business ethics and conflicts of interest for all officers, directors
and employees of our company, including procedures for prompt
30
internal reporting of violations of the code to the appropriate persons. Our
Business Ethics and Conflicts of Interest Statement applies to all directors,
officers and employees.
You will find a copy of our Business Ethics and Conflicts of Interest
Statement posted on our website at http://www.puradyn.com under Investor
Relations, or you may write to us at Puradyn Investor Relations, 2017 High Ridge
Road, Boynton Beach, FL 33426 and we will provide a copy to you upon request at
no charge.
EXECUTIVE COMPENSATION
The following table summarizes all compensation recorded by us in the
last completed year for:
o our principal executive officer or other individual serving
in a similar capacity,
o our two most highly compensated executive officers other than
our principal executive officer who were serving as executive
officers at December 31, 2007 as that term is defined under
Rule 3b-7 of the Securities Exchange Act of 1934, and
o up to two additional individuals for whom disclosure would
have been required but for the fact that the individual was
not serving as an executive officer at December 31, 2007.
For definitional purposes, these individuals are sometimes referred to
as the "named executive officers." The value attributable to any warrant or
option awards in the following table is computed in accordance with FAS 123R.
During each of fiscal 2006 and fiscal 2007, each named executive officer listed
below has deferred 50% of their base wages and/or annual increases. The amounts
included above reflect wages actually earned during the respective periods.
- ---------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------------
NON-EQUITY NONQUALIFIED ALL
NAME AND STOCK OPTION INCENTIVE PLAN DEFERRED OTHER
PRINCIPAL YEAR SALARY BONUS AWARDS AWARDS COMPENSATION COMPENSATION COMPENSATION TOTAL
POSITION ($) ($) ($) ($) ($) EARNINGS ($) ($) ($)
(A) (B) I (D) (E) (F) (G) (H) (I) (J)
- -------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
- -------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
Joseph V. 2007 0 0 0 0 0 0 0 0
Vittoria (1)
- -------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
2006 0 0 0 0 0 0 0 0
- -------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
- -------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
Richard Ford 2006 196,575 0 6,300 85,750 0 0 9,743 298,368
(2)
- -------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
- -------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
Kevin Kroger 2007 186,315 0 0 0 0 0 21,089 207,404
(3)
- -------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
2006 195,270 0 5,565 0 0 0 24,714 225,549
- -------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
- -------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
Alan Sandler 2007 112,238 0 0 0 0 0 0 112,238
(4)
- -------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
2006 108,308 0 2,520 0 0 0 0 110,828
- -------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
(1) On October 24, 2006, Mr. Vittoria, who is also the Chairman of our Board
of Directors, was appointed by the Board of Directors to the position of Chief
Executive Officer. Mr. Vittoria serves in that position on a non-salaried basis.
(2) Mr. Ford served as our CEO through October, 2006. Mr. Ford's compensation
for fiscal 2006 included 6,000 shares of our common stock, with a value of $1.05
per share at the time of issuance, which were granted as additional
compensation. In addition, on October 24, 2006, we extended the expiration of
options previously awarded to Mr. Ford purchase an aggregate of 375,000 shares
of our common stock with exercise prices ranging from $0.21 per share to $0.94
per share from November 30, 2006 to November 30, 2008. Pursuant to FAS 123R
there was an expense of $85,750 to us as a result of this modification. All
Other Compensation in the foregoing table represents the aggregate dollar amount
of a car allowance received by Mr. Ford during fiscal 2006.
31
(3) Mr. Kroger serves as our Chief Operating Officer. Mr. Kroger's
compensation for fiscal 2006 includes 5,300 shares of our common stock with a
value of $1.05 per share at the time of issuance. All Other Compensation in the
foregoing table represents the aggregate dollar amount of a car allowance
received by Mr. Kroger during each fiscal year as well as the amount of
disability and life insurance premiums we pay on his behalf.
(4) Mr. Sandler serves as our Chief Administrative Officer. Mr. Sandler's
fiscal 2006 compensation includes 2,400 shares of our common stock with a value
of $1.05 per share at the time of issuance.
HOW OUR EXECUTIVE OFFICERS COMPENSATION IS DETERMINED
Mr. Vittoria, who has served as our Chief Executive Officer since
October 2006, is not a party to an employment agreement with our company. He
receives no compensation and does not participate in any of our insurance plans.
On July 3, 2000, we entered into an employment agreement, with an
initial term of three years, with Mr. Kroger, who serves as our President and
Chief Operating Officer. The contract provided for an annual salary of $166,000,
subject to annual review by the Board of Directors, and minimum bonuses of
$50,000, $80,000 and $80,000, respectively, for the years 2000 through 2002. Mr.
Kroger is also entitled to paid health insurance, a life insurance and
disability policy, a $1,000 per month car allowance, four weeks paid vacation
and other executive benefits which may be made available from time to time. Upon
entering into the agreement we granted Mr. Kroger 10 year options to purchase
300,000 shares of our common stock at the then fair market value of our common
stock which vested in equal installments on the first, second, third and fourth
anniversary date of the agreement. The agreement also contains customary
indemnification, non-compete, confidentiality and invention assignment clauses.
The term of the agreement continues on a year-to-year basis on the same terms
and conditions as were in effect at the time of renewal. The agreement may be
terminated by us upon Mr. Kroger's death or disability, by us for good cause as
defined in the agreement, or by either party without cause. In the event the
agreement is terminated on Mr. Kroger's death, by us for cause or by him without
cause, we do not owe any severance benefits. If the agreement is terminated as a
result of his disability, we are required to pay him a lump sum equal to the
greater of the base salary then in effect for the remaining term of the
agreement or for one year. If the agreement is terminated by us without cause or
by Mr. Kroger in the event of a change of control of our company, we are
required to pay him a lump sum equal to the greater of the base salary then in
effect for the remaining term of the agreement or for one year, together with
any declared but unpaid bonus. On December 23, 2002, the agreement was amended
to provide that he was issued options to purchase 100,000 shares of common stock
in lieu of the $80,000 bonus due on December 31, 2002.
Mr. Sandler, who has served as our Chief Administrative Officer since
January 2000, is not a party to an employment agreement with our company. His
compensation was determined by the Compensation Committee of our Board of
Directors. The Compensation Committee considered a number of factors in
determining Mr. Sandler's compensation including the scope of his duties and
responsibilities to our company and the time he devotes to our business. The
Compensation Committee did not consult with any experts or other third parties
in determining the amount of Mr. Sandler's compensation. During the fiscal year
2007 Mr. Sandler's compensation package included a base annual salary of
$112,000, with approximately $62,000 deferred annually, and company provided
insurance benefits. The amount of payable to Mr. Sandler can be increased at any
time upon the determination of the Compensation Committee of our Board of
Directors.
INCENTIVE AND NON-QUALIFIED STOCK OPTION PLANS
The Board of Directors adopted the 2000 Non-Employee Directors' Plan
(the "Directors' Plan") on November 8, 2000 under which options to purchase
400,000 shares have been authorized for issuance. The Directors' Plan will
provide a means for us to attract and retain highly qualified persons to serve
as non-employee directors and advisory directors.
Each member of the Board of Directors was automatically granted
5,000 options at the date of commencement of the Directors' Plan and on their
initial election as new members to the Board of Directors. Each director
receives an additional 5,000 options at the close of each annual meeting of
stockholders. Additionally, each director automatically receives 2,500 options
for each committee of the Board on which the director serves. Options are
granted at a price equal to the fair market value of the stock on the date of
grant, are exercisable commencing
32
two years following grant, and will expire five years from the date of grant. In
the event a person ceases to serve on the Board of Directors, the outstanding
options expire one year from the date of cessation of service. The Board of
Directors administers the Directors' Plan.
Our 1999 Stock Option Plan (the "1999 Plan") and the 1996 Stock
Option Plan (the "1996 Plan"), were adopted on September 15, 1999 and amended in
June 2000, and on July 31, 1996, respectively. The plans were adopted to
increase proprietary interest in our company of our employees, consultants, and
non-employee directors and to align more closely their interests with the
interests of our stockholders. The plans may also serve to enhance our ability
to attract and retain the services of experienced and highly qualified employees
and non-employee directors.
Under the 1999 Plan and 1996 Plan, we reserved an aggregate of
3,000,000 and 2,200,000 shares, respectively, of common stock for issuance
pursuant to options granted under the plans. The Compensation Committee of the
Board of Directors administers the plans including, without limitation, the
selection of the persons who will be granted plan options under the plans, the
type of plan options to be granted, the number of shares subject to each plan
option and the plan option price.
Options granted under the 1996 Plan and the 1999 Plan may either be
options qualifying as incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended, or non-qualified options. In addition, the
plans also allow for the inclusion of a reload option provision, which permits
an eligible person to pay the exercise price of the plan option with shares of
common stock owned by the eligible person and receive a new plan option to
purchase shares of common stock equal in number to the tendered shares. Any
incentive option granted under the plans must provide for an exercise price of
not less than 100% of the fair market value of the underlying shares on the date
of such grant, but the exercise price of any incentive option granted to an
eligible employee owning more than 10% of our common stock must be at least 110%
of such fair market value as determined on the date of the grant. The term of
each plan option and the manner in which it may be exercised is determined by
the Board of the Directors or the Committee, provided that no plan option may be
exercisable more than 10 years after the date of its grant and, in the case of
an incentive option granted to an eligible employee owning more than 10% of our
common stock, no more than five years after the date of the grant.
The exercise price of non-qualified options is determined by the
Board of Directors or the Committee and cannot be less than the par value of our
common stock. The per share purchase price of shares subject to plan options
granted under the plans may be adjusted in the event of certain changes in our
capitalization, but any such adjustment will not change the total purchase price
payable upon the exercise in full of plan options granted under the plans. Our
officers, directors, key employees and consultants are eligible to receive
non-qualified options under the plans. Only our officers, directors and
employees who are employed by us are eligible to receive incentive options.
All plan options are generally nonassignable and nontransferable,
except by will or by the laws of descent and distribution, and during the
lifetime of the optionee, may be exercised only by such optionee. If an
optionee's employment is terminated for any reason, other than his death or
disability or termination for cause, or if an optionee is not our employee but
is a member of our Board of Directors and his service as a director is
terminated for any reason, other than death or disability, the plan option
granted to him generally will lapse to the extent unexercised on the earlier of
the expiration date or one year following the date of termination. If the
optionee dies during the term of his employment, the plan option granted to him
generally will lapse to the extent unexercised on the earlier of the expiration
date of the plan option or the date one year following the date of the
optionee's death. If the optionee is permanently and totally disabled within the
meaning of Section 22 (c)(3) of the Internal Revenue Code of 1986, the plan
option granted to him generally lapses to the extent unexercised on the earlier
of the expiration date of the option or one year following the date of such
disability.
The Board of Directors or the Committee may amend, suspend or terminate
the plans at any time, except that no amendment shall be made which:
o increases the total number of shares subject to the plans or
changes the minimum purchase price therefore (except in either
case in the event of adjustments due to changes in ours
capitalization),
o extends the term of any plan option beyond 10 years, or
33
o extends the termination date of the plan.
The 1996 Plan terminated on July 31, 2006. As of September 30, 2008
options to purchase 400,150 which were granted under the 1996 Plan prior to its
termination remain outstanding. Unless the plan has been suspended or terminated
by the Board of Directors, the 1999 Plan will terminate on September 15, 2009.
Any such termination will not affect the validity of any plan options previously
granted thereunder.
As of December 31, 2007, under the Directors' Plan, options to purchase
85,000 shares of common stock were outstanding. As of December 31, 2007, under
the 1996 Plan, incentive stock options to purchase 108,232 shares of common
stock were outstanding and non-qualified options to purchase 394,418 shares of
common stock were outstanding and, under the 1999 Plan, incentive stock options
to purchase 1,099,250 shares of common stock were outstanding and non-qualified
options to purchase 80,000 shares of common stock were outstanding.
The following table provides information concerning unexercised
options; stock that has not vested; and equity incentive plan awards for each
named executive officer outstanding as of December 31, 2007:
- ---------------------------------------------------------------------------------------------------------------------------------
EQUITY
NUMBER INCENTIVE EQUITY
OF PLAN INCENTIVE
EQUITY SHARES AWARDS: PLAN AWARDS:
INCENTIVE OR MARKET NUMBER OF MARKET OR
PLAN AWARDS: UNITS VALUE OF UNEARNED PAYOUT VALUE
NUMBER OF NUMBER OF NUMBER OF OF SHARES SHARES, OF UNEARNED
SECURITIES SECURITIES SECURITIES STOCK OR UNITS UNITS OR SHARES,
UNDERLYING UNDERLYING UNDERLYING THAT OF STOCK OTHER UNITS OR
UNEXERCISED UNEXERCISED UNEXERCISED OPTION OPTION HAVE THAT RIGHTS OTHER RIGHTS
OPTIONS OPTIONS UNEARNED EXERCISE EXPIRATION NOT HAVE NOT THAT HAVE THAT HAVE
NAME (#) (#) OPTIONS PRICE DATE VESTED VESTED NOT VESTED NOT VESTED
EXERCISABLE UNEXERCISABLE (#) ($) (#) ($) (#) (#)
(A) (B) I (D) (E) (F) (G) (H) (I) (J)
- ----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
- ----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
Joseph V. 125,000 2.25 3/28/08
Vittoria
- ----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
150,000 2.00 2/02/09
- ----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
100,000 0.95 4/13/10
- ----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
80,000 1.25 11/15/11
- ----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
- ----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
Richard 100,000 0.21 11/30/08
Ford
- ----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
100,000 0.56 11/30/08
- ----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
175,000 0.94 11/30/08
- ----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
- ----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
Kevin 100,000 1.70 1/10/13
Kroger
- ----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
300,000 9.25 7/03/10
- ----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
- ----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
Alan 0 n/a n/a
Sandler
- ----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
LIMITATION ON LIABILITY
Under our certificate of incorporation, our directors are not liable
for monetary damages for breach of fiduciary duty, except in connection with:
o breach of the director's duty of loyalty to us or our
stockholders;
34
o acts or omissions not in good faith or which involve
intentional misconduct, fraud or a knowing violation of law;
o a transaction from which our director received an improper
benefit; or
o an act or omission for which the liability of a director is
expressly provided under Delaware law.
In addition, our bylaws provides that we must indemnify our officers
and directors to the fullest extent permitted by Delaware law for all expenses
incurred in the settlement of any actions against such persons in connection
with their having served as officers or directors.
Insofar as the limitation of, or indemnification for, liabilities
arising under the Securities Act of 1933 may be permitted to directors,
officers, or persons controlling us pursuant to the foregoing, or otherwise, we
have been advised that, in the opinion of the Securities and Exchange
Commission, such limitation or indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 2001, we received promissory notes from two of our officers,
Messrs. Richard C. Ford and Alan J. Sandler, for the exercise of their vested
stock options in the amount of $875,256 and bearing interest of 5.63%. The
principal and accrued interest are due upon the earlier of the expiration of the
original option periods, which range from July 2008 to December 2009, or upon
the sale of the common stock acquired by the execution of the options. During
2007, we recorded approximately $99,000 of interest reserves relating to these
stockholder notes.
In July 2008, we extended the expiration date by six months of a loan
of $123,750 which bears interest at 5.63% per annum and is collateralized by
300,000 shares of our common stock, made to Mr. Ford, a former executive officer
and director, in July 2001. As extended, the loan matures on January 8, 2009.
In July 2008 we agreed to receive from Mr. Sandler, an executive
officer, a stock certificate for 260,000 shares of our common stock which served
as collateral for a loan in the principal amount of $97,500 made to him in July
2001 as satisfaction for the principal amount of the loan. Accrued but unpaid
interest in the amount of $38,000 at June 30, 2008 remains outstanding.
On March 28, 2002, we executed a letter agreement with Mr. Vittoria,
our CEO and Chairman, whereby he agreed to initially fund up to $2.5 million.
The letter agreement, as currently amended, provides that he will fund up to
$6.1 million to us on a unsecured basis. Amounts drawn bear interest at the
prime rate per annum payable monthly and are due December 31, 2009or (i) at such
time as we have raised an additional $7 million over the $3.5 million raised in
prior offerings, or (ii) at such time as we are operating within sufficient cash
flow parameters to sustain operations, or (iii) until a disposition of our
company, such as an acquisition or merger, occurs. In consideration entering
into this loan agreement, we granted Mr. Vittoria common stock purchase warrants
to purchase a total of 475,000 shares of our common stock at an exercise price
equal to the closing market price on the dates of grant. As of June 30, 2008, we
have drawn the entire $6.1 million of the available funds, together with an
additional $100,000 and paid approximately $157,000 in related interest.
PRINCIPAL STOCKHOLDERS
At October 29, 2008 we had 35,005,018 shares of our common stock issued
and outstanding. The following table sets forth information regarding the
beneficial ownership of our common stock as of October 29, 2008 by:
o each person known by us to be the beneficial owner of more
than 5% of our common stock;
o each of our directors;
o each of our named executive officers; and
o our named executive officers, directors and director nominees
as a group.
Unless otherwise indicated, the business address of each person listed
is in care of 2017 High Ridge Road, Boynton Beach, Florida 33426. The
percentages in the table have been calculated on the basis of treating as
35
outstanding for a particular person, all shares of our common stock outstanding
on that date and all shares of our common stock issuable to that holder in the
event of exercise of outstanding options, warrants, rights or conversion
privileges owned by that person at that date which are exercisable within 60
days of that date. Except as otherwise indicated, the persons listed below have
sole voting and investment power with respect to all shares of our common stock
owned by them, except to the extent that power may be shared with a spouse.
- -------------------------------------------------------------------------- --------------------------- -------------
AMOUNT AND NATURE OF % OF CLASS
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP
- -------------------------------------------------------------------------- --------------------------- -------------
- -------------------------------------------------------------------------- --------------------------- -------------
Joseph V. Vittoria (1) 5,364,226 15.0%
- -------------------------------------------------------------------------- --------------------------- -------------
Kevin G. Kroger (2) 1,092,633 3.1%
- -------------------------------------------------------------------------- --------------------------- -------------
Alan J. Sandler (3) 58,392 *
- -------------------------------------------------------------------------- --------------------------- -------------
Cindy Lea Gimler (4) 60,250 *
- -------------------------------------------------------------------------- --------------------------- -------------
Lieutenant General John S. Caldwell, Jr. US Army (retired)(5) 65,000 *
- -------------------------------------------------------------------------- --------------------------- -------------
Forrest D. Hayes (6) 20,000 *
- -------------------------------------------------------------------------- --------------------------- -------------
Dominick Telesco (7) 4,042,085 11.4%
- -------------------------------------------------------------------------- --------------------------- -------------
Dr. Charles W. Walton (8) 415,357 1.2%
- -------------------------------------------------------------------------- --------------------------- -------------
All officers and directors as a group (eight persons) 11,117,943 30.3%
(1)(2)(3)(4)(5)(6)(7)(8)
- -------------------------------------------------------------------------- --------------------------- -------------
Quantum Industrial Partners, LDC (9) 4,570,000 13.1%
- -------------------------------------------------------------------------- --------------------------- -------------
Glenhill Capital Management, LP (10) 4,364,661 12.4%
- -------------------------------------------------------------------------- --------------------------- -------------
Richard C. Ford (11) 3,606,651 10.2%
- -------------------------------------------------------------------------- --------------------------- -------------
* represents less than 1%
(1) The number of shares beneficially owned by Mr. Vittoria includes:
o warrants to purchase 150,000 shares of common stock at $2.00 per
share through February 2, 2009;
o warrants to purchase 100,000 shares of common stock at $0.95 per
share through April 14, 2010;
o warrants to purchase 80,000 shares of common stock at $1.25 per
share through November 15, 2011;
o warrants to purchase 150,000 shares of common stock at $1.25 per
share through March 24, 2013;
o warrants to purchase 71,429 shares of common stock at $1.25 per
share through March 26, 2013;
o warrants to purchase 80,645 shares of common stock at $1.25 per
share through April 4, 2013; and
o warrants to purchase 86,207 shares of common stock at $1.25 per
share through May 9, 2013.
(2) The number of shares beneficially owned by Mr. Kroger includes:
o options to purchase 300,000 shares of common stock at $9.25 per
share through July 3, 2010; and
o options to purchase 100,000 shares of common stock at $1.70 per
share through January 10, 2013.
The number of shares beneficially owned by Mr. Kroger excludes unvested
options to purchase 100,000 shares of our common stock at an exercise price of
$.26 per share through June 10, 2018.
(3) The number of shares beneficially owned by Mr. Sandler excludes
unvested options to purchase 100,000 shares of our common stock at an exercise
price of $.26 per share through June 10, 2018 and unvested options to purchase
100,000 shares of our common stock at an exercise price of $.30 per share
through August 5, 2018.
(4) The number of shares beneficially owned by Ms. Gimler includes:
o options to purchase 50,000 shares of common stock at $0.93 per
share through February 28, 2015; and
o options to purchase 6,500 shares of common stock at $0.40 per
share through September 26, 2017.
The number of shares beneficially owned by Ms. Gimler excludes unvested
options to purchase 18,750 shares of our common stock at an exercise price of
$.40 per share through September 26, 2017.
36
(5) The number of shares beneficially owned by General Caldwell includes:
o options to purchase 5,000 shares of common stock at $0.42 per
share through August 25, 2010;
o options to purchase 2,500 shares of common stock at $0.68 per
share through November 30, 2010;
o options to purchase 7,500 shares of common stock at $0.37 per
share through August 25, 2011; and
o options to purchase 50,000 shares of common stock at $0.97 per
share through March 9, 2015.
The number of shares beneficially owned by General Caldwell excludes
unvested options to purchase 7,500 shares of common stock at $0.37 per share
through August 25, 2012 and unvested options to purchase 7,500 shares of common
stock at $0.38 per share through September 22, 2013.
(6) The number of shares beneficially owned by Mr. Hayes includes:
o options to purchase 7,500 shares of common stock at $1.00 per
share through November 10, 2010;
o options to purchase 2,500 shares of common stock at $0.68 per
share through November 30, 2010; and
o options to purchase 10,000 shares of common stock at $0.37 per
share through November 10, 2011.
The number of shares beneficially owned by Mr. Hayes excludes unvested
options to purchase 10,000 shares of common stock at $0.37 per share through
November 10, 2012 and unvested options to purchase 10,000 shares of common stock
at $.38 per share through September 22, 2013.
(7) The number of shares beneficially owned by Mr. Telesco includes:
o warrants to purchase 100,000 shares of common stock at $1.25 per
share through October 1, 2011;
o warrants to purchase 150,000 shares of common stock at $1.25 per
share through March 24, 2013.;
o warrants to purchase 81,967 shares of common stock at $1.25 per
share through May 14, 2013;
o warrants to purchase 92,593 shares of common stock at $1.25 per
share through July 1, 2013; and
o options to purchase 5,000 shares of common stock at $.66 per
share through December 18, 2011.
The number of shares beneficially owned by Mr. Telesco excludes
unvested options to purchase 5,000 shares of common stock at $0.47 per share
through December 17, 2012.
(8) The number of shares beneficially owned by Dr. Walton includes:
o options to purchase 5,000 shares of common stock at $0.42 per
share through August 25, 2010;
o options to purchase 2,500 shares of common stock $0.68 per share
through November 30, 2010;
o warrants to purchase 21,429 shares of common stock at $1.25 per
share through October 1, 2011; and
o options to purchase 7,500 shares of common stock at $0.37 per
share through August 25, 2011.
The number of shares beneficially owned by Dr. Walton excludes unvested
options to purchase 7,500 shares of common stock at $0.37 per share through
August 25, 2012 and options to purchase 7,500 shares of common stock at $0.38
per share through September 22, 2013.
(9) The address for Quantum Industrial Partners, LTDC is c/o Curacao
Corporation Company, N.V., Kaya Flamboyan, Willenstad Curacao, Netherlands,
Antilles.
(10) The address for Glenhill Capital Management, LP is 598 Madison Avenue,
12th Floor, New York, NY 10022. The number of shares beneficially owned by
Glenhill Capital Management, LP includes warrants to purchase 89,286 shares of
common stock at $1.25 per share through October 1, 2011.
(11) Mr. Ford's address is 4720 S. Ocean Blvd. Highland Beach, Florida
33487. The number of shares beneficially owned by Mr. Ford includes:
37
o options to purchase 100,000 shares of common stock at $0.56 per
share through November 30, 2008;
o options to purchase 100,000 shares of common stock at $0.21 per
share through November 30, 2008; and
o options to purchase 175,000 shares of common stock at $0.94 per
share through November 30, 2008.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth securities authorized for issuance under
equity compensation plans, including individual compensation arrangements, by us
at December 31, 2007.
- ------------------------------------------------------------- ----------------- ------------------ -------------------
NUMBER OF WEIGHTED AVERAGE NUMBER OF
SECURITIES TO EXERCISE PRICE SECURITIES
BE ISSUED UPON OF OUTSTANDING REMAINING
EXERCISE OF OPTIONS, AVAILABLE FOR
OUTSTANDING WARRANTS AND FUTURE ISSUANCE
OPTIONS, RIGHTS (B) UNDER EQUITY
WARRANTS AND COMPENSATION
RIGHTS (A) PLANS (EXCLUDING
SECURITIES
REFLECTED IN
COLUMN (A)) (C)
- ------------------------------------------------------------- ----------------- ------------------ -------------------
PLAN CATEGORY
- ------------------------------------------------------------- ----------------- ------------------ -------------------
Plans approved by stockholders:
- ------------------------------------------------------------- ----------------- ------------------ -------------------
1996 Stock Option Plan 502,650 $1.61 1,697,350
- ------------------------------------------------------------- ----------------- ------------------ -------------------
1999 Stock Option Plan 1,179,250 $3.26 1,820,750
- ------------------------------------------------------------- ----------------- ------------------ -------------------
2000 Non-Employee Directors Plan 85,000 $0.48 315,000
- ------------------------------------------------------------- ----------------- ------------------ -------------------
Plans not approved by stockholders 0 n/a n/a
- ------------------------------------------------------------- ----------------- ------------------ -------------------
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 40,000,000 shares of common
stock, $0.001 par value per share, and 50,000 shares of preferred stock, par
value $0.001 per share. As of October 29, 2008, there were 35,005,018 shares of
common stock and no shares preferred stock issued and outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote for each share on all
matters submitted to a stockholder vote. Holders of common stock do not have
cumulative voting rights. Holders of common stock are entitled to share in all
dividends that the Board of Directors, in its discretion, declares from legally
available funds. In the event of our liquidation, dissolution or winding up,
subject to the preferences of any shares of preferred stock which may then be
authorized and outstanding, each outstanding share entitles its holder to
participate in all assets that remain after payment of liabilities and after
providing for each class of stock, if any, having preference over the common
stock.
Holders of common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions for the common
stock. The rights of the holders of common stock are subject to any rights that
may be fixed for holders of preferred stock, when and if any preferred stock is
authorized and issued. All outstanding shares of common stock are duly
authorized, validly issued, fully paid and non-assessable.
PREFERRED STOCK
We are authorized to issue 500,000 shares of preferred stock issuable
in such series and bearing such voting, dividend, conversion, liquidation and
other rights and preferences as the Board of Directors may determine. The
preferred stock is so-called "blank check" preferred stock, which means that our
Board of Directors, in its sole
38
discretion, are able to issue the shares of preferred stock in one or more
series of classes having such terms, designations and preferences as determined
by the Board of Directors and without authorization or confirmation by our
stockholders.
COMMON STOCK PURCHASE WARRANTS
We currently have outstanding common stock purchase warrants to
purchase an aggregate of 3,005,739 shares of our common stock at exercise prices
ranging from $0.75 per share to $2.00 per share. These warrants expire between
February 2, 2009 and October 1, 2013. The exercise price of the warrants is
subject to pro-rata adjustment in the event of stock splits, recapitalizations
and similar corporate events.
TRANSFER AGENT
Our transfer agent is Florida Atlantic Stock Transfer, Inc., 7130 Nob
Hill Road, Tamarac, Florida 33321, and its telephone number is (954) 726-4954.
SHARES ELIGIBLE FOR FUTURE SALE
At October 29, 2008 we had 35,005,018 shares of common stock issued and
outstanding, of which approximately 5,864,380 shares are "restricted
securities." In general, under Rule 144, as currently in effect, a person, or
person whose shares are aggregated, who is not our affiliate or has not been an
affiliate during the prior three months and owns shares that were purchased from
us, or any affiliate, at least six months previously, is entitled to make
unlimited public resales of such shares provided there is current public
information available at the time of the resales. After a one-year holding
period a non-affiliate is entitled to make unlimited public resales of our
shares without the requirement that current public information be available at
the time of the resales. A person, or persons whose shares are aggregated, who
are affiliates of our company and own shares that were purchased from us, or any
affiliate, at least six months previously is entitled to sell within any three
month period, a number of shares of our common stock that does not exceed the
greater of 1% of the then outstanding shares of our common stock, subject to
manner of sale provisions, notice requirements and the availability of current
public information about us.
Future sales of restricted common stock under Rule 144 could negatively
impact the market price of our common stock. We are unable to estimate the
number of shares that may be sold in the future by our existing stockholders or
the effect, if any, that sales of shares by such stockholders will have on the
market price of our common stock prevailing from time to time. Sales of
substantial amounts of our common stock by existing stockholders could adversely
affect prevailing market prices.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be
passed upon for us by Schneider Weinberger & Beilly LLP.
EXPERTS
Our financial statements as of and for the years ended December 31,
2007 and 2006 included in this prospectus have been audited by Webb & Company,
P.A., independent registered public accounting firm, as indicated in their
report with respect thereto, and have been so included in reliance upon the
report of such firm given on their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission the
registration statement on Form S-1 under the Securities Act of 1933 for the
common stock offered by this prospectus. This prospectus, which is a part of the
registration statement, does not contain all of the information in the
registration statement and the exhibits filed with it, portions of which have
been omitted as permitted by Securities and Exchange Commission rules and
regulations. For further information concerning us and the securities offered by
this prospectus, we refer to the registration statement and to the exhibits
filed with it. Statements contained in this prospectus as to the content of any
contract or
39
other document referred to are not necessarily complete. In each instance, we
refer you to the copy of the contracts and/or other documents filed as exhibits
to the registration statement.
We file annual and special reports and other information with the
Securities and Exchange Commission. Certain of our filings are available over
the Internet at the Securities and Exchange Commission's web site at
http://www.sec.gov. You may also read and copy any document we file with the
Securities and Exchange Commission at its public reference facilities:
Public Reference Room Office
100 F Street, N.E.
Room 1580
Washington, D.C. 20549
You may also obtain copies of the documents at prescribed rates by
writing to the Public Reference Section of the Securities and Exchange
Commission at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Callers in
the United States can also call 1-202-551-8090 for further information on the
operations of the public reference facilities.
40
Puradyn Filter Technologies Incorporated
Condensed Consolidated Balance Sheets
As of June 30, 2008 and December 31, 2007
Assets JUNE 30, DECEMBER 31,
2008 2007
(UNAUDITED) (AUDITED)
------------ ------------
Current assets:
Cash and cash equivalents $ 324,223 $ 112,270
Accounts receivable, net of allowance for uncollectible accounts of $21,041
and $46,870 respectively 515,230 382,279
Inventories, net 1,563,947 1,475,380
Prepaid and other current assets 280,943 181,648
------------ ------------
Total current assets 2,684,343 2,151,577
Property and equipment, net 140,894 162,838
Deferred financing costs, net 12,629 18,522
Other noncurrent assets 40,930 40,930
------------ ------------
Total Other Assets 194,453 222,290
============ ============
Total assets $ 2,878,796 $ 2,373,867
============ ============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 335,696 $ 594,372
Accrued liabilities 1,141,263 1,054,071
Current portion of capital lease obligation 1,398 1,048
Deferred revenue 140,139 136,169
------------ ------------
Total current liabilities 1,618,496 1,785,660
Notes Payable - stockholder 6,150,000 6,250,000
Capital lease obligation, less current portion 6,323 7,139
------------ ------------
Total Long Term Liabilities 6,156,323 6,257,139
Total Liabilities 7,774,819 8,042,799
------------ ------------
Commitments and contingencies -- --
Stockholders' deficit:
Preferred stock, $.001 par value:
Authorized shares - 500,000; none issued and outstanding -- --
Common stock, $.001 par value:
Authorized shares - 40,000,000 --
Issued and outstanding - 34,428,888 and 29,400,638 respectively 34,429 29,401
Additional paid-in capital 42,963,955 41,329,330
Notes receivable from stockholders (1,064,031) (1,064,031)
Accumulated deficit (46,694,325) (45,825,210)
Accumulated other comprehensive loss (136,051) (138,422)
------------ ------------
Total stockholders' deficit (4,896,023) (5,668,932)
------------ ------------
Total liabilities and stockholders' deficit $ 2,878,796 $ 2,373,867
============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-1
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Operations
For the Three Months and Six Months Ended June 30, 2008 and 2007
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2008 2007 2008 2007
------------- ------------- ------------ -------------
Net sales $ 791,781 $ 786,990 $ 1,555,206 $ 1,553,187
Costs and expenses:
Cost of products sold 641,537 702,301 1,266,866 1,350,273
Salaries and wages 250,877 264,768 506,930 525,573
Selling and administrative 221,279 196,564 483,678 564,735
------------- ------------- ------------ -------------
1,113,693 1,163,633 2,257,474 2,440,581
------------- ------------- ------------ -------------
Loss from operations (321,912) (376,643) (702,268) (887,394)
Other income (expense):
Interest income 595 9,448 1,329 21,918
Interest expense (77,323) (130,505) (168,176) (343,139)
------------- ------------- ------------ -------------
Total other expense, net (76,728) (121,057) (166,847) (321,221)
------------- ------------- ------------ -------------
Loss before income taxes (398,640) (497,701) (869,115) (1,208,614)
Income tax expense -- -- -- --
------------- ------------- ------------ -------------
Net loss $ (398,640) $ (497,701) $ (869,115) $ (1,208,614)
============= ============= ============ =============
Basic and diluted loss per common share $ (.01) $ (.02) $ (.03) $ (.04)
============= ============= ============ =============
Weighted average common shares outstanding (basic
and diluted) 32,447,852 27,514,923 31,250,226 27,440,407
============= ============= ============ =============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-2
Puradyn Filter Technologies Incorporated
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2008 and 2007
(Unaudited)
SIX MONTHS ENDED JUNE 30,
2008 2007
----------- -----------
OPERATING ACTIVITIES
Net loss $ (869,115) $(1,208,614)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 34,498 46,414
Gain on sale of assets -- 577
Provision for bad debts (25,829) 40,197
Provision for obsolete and slow moving inventory 2,786 12,425
Amortization of deferred financing costs included in interest expense 5,893 12,966
Interest receivable from notes receivable from stockholders -- 81,195
Compensation expense on stock-based arrangements with employees,
consultants, investors and vendors 20,653 9,446
Compensation expense on stock-based arrangements with investors and
directors 45,000 --
Changes in operating assets and liabilities:
Accounts receivable (107,121) 77,035
Inventories (91,353) (10,117)
Prepaid expenses and other current assets (99,296) (39,310)
Accounts payable (258,676) (30,834)
Accrued liabilities 87,193 81,866
Deferred revenues 3,969 15,931
----------- -----------
Net cash used in operating activities (1,251,398) (910,823)
INVESTING ACTIVITIES
Proceeds from sale of property and equipment -- 5,458
Purchases of property and equipment (14,487) (28,390)
----------- -----------
Net cash used in investing activities (14,487) (22,932)
FINANCING ACTIVITIES
Proceeds from sale of common stock 1,474,000 975,000
Proceeds from exercise of stock options -- 28,500
Proceeds from issuance of notes payable to stockholders -- 808,500
Payment of notes payable to stockholder -- (780,000)
Payment of capital lease obligations (2,002) (3,379)
----------- -----------
Net cash provided by financing activities 1,471,998 1,028,621
Effect of exchange rate changes on cash and cash equivalents 5,840 (36,566)
----------- -----------
Net (decrease) increase in cash and cash equivalents 211,953 58,300
Cash and cash equivalents at beginning of period 112,270 55,175
----------- -----------
Cash and cash equivalents at end of period $ 324,223 $ 113,475
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 198,455 $ 253,652
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Note Payable of $620,000 converted to stockholder's equity $ 620,000 --
=========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-3
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Changes in Stockholders' Deficit
Six Months ended June 30, 2008
(Unaudited)
NOTES ACCUMULATED
COMMON STOCK ADDITIONAL RECEIVABLE OTHER TOTAL
--------------------- PAID-IN FROM ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT INCOME (LOSS) DEFICIT
---------- -------- ------------ ------------ ------------- ------------- ------------
Balance at December 31, 2007 29,400,638 $ 29,401 $ 41,329,330 $ (1,064,031) $ (45,825,210) $ (138,422) $ (5,668,932)
Foreign currency
translation
adjustment 2,371 2,371
Net loss (869,115) (869,115)
------------
Total comprehensive loss (866,744)
Stock issued for private
placement 5,028,250 5,028 1,568,972 1,574,000
Compensation expense on
stock-based
arrangements with
investors and
directors 45,000 45,000
Compensation expense
associated with
unvested options 20,653 20,653
---------- -------- ------------ ------------ ------------- ------------- ------------
Balance at June 30, 2008 34,428,888 $ 34,429 $ 42,963,955 $ (1,064,031) $ (46,694,325) $ (136,051) $ (4,896,023)
========== ======== ============ ============ ============= ============= ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-4
Puradyn Filter Technologies Incorporated
Notes to Condensed Consolidated Financial Statements
June 30, 2008
(Unaudited)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim information and with the instructions to Form 10-Q and
Regulation S-K. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments consisting of a normal and recurring nature considered necessary for
a fair presentation have been included. Operating results for the three-month
and six-month periods ended June 30, 2008 may not necessarily be indicative of
the results that may be expected for the year ending December 31, 2008.
For further information, refer to Puradyn Filter Technologies Incorporated's
("the Company") consolidated financial statements and footnotes thereto included
in the Form 10-KSB for the year ended December 31, 2007.
Going Concern
The Company's financial statements have been prepared on the basis that it will
operate as a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses each year since inception and has relied on the sale of its
stock from time to time and loans from third parties and from related parties to
fund its operations.
These recurring operating losses, liabilities exceeding assets and the reliance
on cash inflows from an institutional investor and current stockholder have led
the Company's independent registered public accounting firm Webb & Company, P.A.
to include a statement in its audit report relating to the Company's audited
consolidated financial statements for the year ended December 31, 2007
expressing substantial doubt about the Company's ability to continue as a going
concern.
The Company has been addressing the liquidity and working capital issues and
continues to attempt to raise additional capital with institutional and private
investors and current stockholders. Cost reductions continue to be implemented
by the Company, including acquiring alternative suppliers for raw materials. The
Company expects to see results from these reductions, as well as from other cost
reduction plans through 2008. Additionally, the Company is reviewing cost of
material increases, some of which were passed through to its customers as
product price increases, beginning January 2008. There can be no assurance that
the Company will be able to raise the additional capital needed or reduce the
level of expenditures in order to sustain operations.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the condensed consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Basic and Diluted Loss Per Share
SFAS No. 128, EARNINGS PER SHARE, requires a dual presentation of basic and
diluted earnings per share. However, because of the Company's net losses, the
effect of outstanding stock options and warrants would be anti-dilutive and,
accordingly, is excluded from the computation of diluted loss per share. The
number of such shares excluded from the computation of loss per share totaled
4,026,114 and 4,799,606 for the three-month and six-month periods ended June 30,
2008 and 3,231,543 for the three-month and six-month periods ended June 30,
2007.
F-5
STOCK COMPENSATION
The Company adopted SFAS 123R effective January 1, 2006 using the modified
prospective application method of adoption which requires us to record
compensation cost related to unvested stock awards as of December 31, 2005,
recognizing the amortized grant date fair value in accordance with provisions of
SFAS 123R on straight line basis over the service periods of each award. We have
estimated forfeiture rates based on our historical experience. Stock option
compensation expense for the periods ended June 30, 2007 and June 30, 2008 have
been recognized as a component of cost of goods sold and general and
administrative expenses in the accompanying Consolidated Financial Statements.
Stock options and warrants issued to consultants and other non-employees as
compensation for services provided to the Company are accounted for based on the
fair value of the services provided or the estimated fair market value of the
option or warrant, whichever is more reliably measurable in accordance with SFAS
123 and EITF 96-18, ACCOUNTING FOR EQUITY INVESTMENTS THAT ARE ISSUED TO OTHER
THAN EMPLOYEES FOR ACQUIRING OR IN CONJUNCTION WITH SELLING GOODS OR SERVICES,
including related amendments and interpretations. The related expense is
recognized over the period the services are provided.
Inventories
Inventories are stated at the lower of cost or market using the first in, first
out (FIFO) method. Production costs, consisting of labor and overhead, are
applied to ending inventories at a rate based on estimated production capacity
and any excess production costs are charged to cost of products sold. Provisions
have been made to reduce excess or obsolete inventories to their net realizable
values.
Inventories consisted of the following at June 30, 2008 and December 31, 2007:
JUNE 30, DECEMBER 31,
2008 2007
----------- -----------
Raw materials $ 851,707 $ 780,979
Finished goods 799,583 779,005
Valuation allowance (87,343) (84,604)
----------- -----------
$ 1,563,947 $ 1,475,380
=========== ===========
Deferred Financing Costs
The Company capitalizes financing costs and amortizes them using the
straight-line method, which approximates the effective interest method, over the
term of the related debt. Amortization of deferred financing costs is included
in interest expense and totaled $2,105 and $4,631 for the three-months ended
June 30, 2008 and June 30, 2007 and $5,893 and $12,966 for the six-months ended
June 30, 2008 and 2007, respectively. Accumulated amortization of deferred
financing costs as of June 30, 2008 and 2007 was $668,521 and $653,367,
respectively.
Revenue Recognition
The Company recognizes revenue from product sales to customers, distributors and
resellers when products that do not require further services or installation by
the Company are shipped, when there are no uncertainties surrounding customer
acceptance and when collectibility is reasonably assured in accordance with
Staff Accounting Bulletin No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
(SAB 104), as amended and interpreted. Cash received by the Company prior to
shipment is recorded as deferred revenue. Sales are made to customers under
terms allowing certain limited rights of return and other limited product and
performance warranties for which provision has been made in the accompanying
condensed consolidated financial statements.
Amounts billed to customers in sales transactions related to shipping and
handling, represent revenues earned for the goods provided and are included in
net sales. Costs of shipping and handling are included in cost of products sold.
F-6
Product Warranty Costs
As required by FASB Interpretation No. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS (FIN 45), the Company is including the following disclosure applicable to
its product warranties.
The Company accrues for warranty costs based on the expected material and labor
costs to provide warranty replacement products. The methodology used in
determining the liability for warranty cost is based upon historical information
and experience. The Company's warranty reserve is calculated as the gross sales
multiplied by the historical warranty expense return rate.
The following table shows the changes in the aggregate product warranty
liability for the six-months ended June 30, 2008:
Balance as of December 31, 2007 $ 89,809
Less: Payments made (7,138)
Change in prior period estimate 355
Add: Provision for current period warranties 29,093
----------
Balance as of June 30, 2007 $ 112,119
==========
Comprehensive Income
SFAS No. 130, REPORTING COMPREHENSIVE INCOME (SFAS 130) establishes rules for
reporting and displaying of comprehensive income and its components.
Comprehensive income is the sum of net loss as reported in the consolidated
statements of operations and other comprehensive income transactions. Other
comprehensive income transactions that currently apply to the Company result
from changes in exchange rates used in translating the financial statements of
its wholly owned subsidiary, Puradyn Filter Technologies, Ltd. (Ltd).
Comprehensive loss as of June 30, 2007 and 2006 is not shown net of taxes
because the Company's deferred tax asset has been fully offset by a valuation
allowance.
Comprehensive loss consisted of the following for the three and six-months ended
June 30, 2007 and 2006:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2008 2007 2008 2007
----------- ----------- ----------- -----------
Net loss $ (398,640) $ (497,701) $ (869,115) $(1,208,614)
Other comprehensive income (loss):
Foreign currency translation adjustment 658 (30,821) 2,371 (34,928)
----------- ----------- ----------- -----------
Comprehensive loss $ (397,982) $ (528,522) $ (866,744) $(1,243,542)
=========== =========== =========== ===========
New Accounting Standards
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an
amendment of ARB No. 51". This statement improves the relevance, comparability,
and transparency of the financial information that a reporting entity provides
in its consolidated financial statements by establishing accounting and
reporting standards that require; the ownership interests in subsidiaries held
by parties other than the parent and the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of income,
changes in a parent's ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for consistently,
when a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary be initially measured at fair value,
entities provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 affects those entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a
subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. Early
adoption is prohibited. The adoption of this statement is not expected to have a
material effect on the Company's financial statements.
F-7
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161). This statement is intended to improve transparency in financial
reporting by requiring enhanced disclosures of an entity's derivative
instruments and hedging activities and their effects on the entity's financial
position, financial performance, and cash flows. SFAS 161 applies to all
derivative instruments within the scope of SFAS 133. "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) as well as related hedged items,
bifurcated derivatives, and nonderivative instruments that are designed and
qualify as hedging instruments. Entities with instruments subject to SFAS 161
must provide more robust qualitative disclosures and expanded quantitative
disclosures. SFAS 161 is effective prospectively for financial statements issue
for fiscal years and interim periods beginning after November 15, 2008, with
early application permitted. We are currently evaluating the disclosure
implications of this statement.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles." SFAS No. 162 identifies the sources of accounting
principles and provides entities with a framework for selecting the principles
used in preparation of financial statements that are presented in conformity
with GAAP. The current GAAP hierarchy has been criticized because it is directed
to the auditor rather than the entity, it is complex, and it ranks FASB
Statements of Financial Accounting Concepts, which are subject to the same level
of due process as FASB Statements of Financial Accounting Standards, below
industry practices that are widely recognized as generally accepted but that are
not subject to due process. The Board believes the GAAP hierarchy should be
directed to entities because it is the entity (not its auditors) that is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. SFAS 162 is effective 60 days following
the SEC's approval of PCAOB Auditing Standard No. 6, Evaluating Consistency of
Financial Statements (AS/6). The adoption of FASB 162 is not expected to have a
material impact on the Company's financial position.
In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts-an interpretation of FASB Statement No. 60." Diversity
exists in practice in accounting for financial guarantee insurance contracts by
insurance enterprises under FASB Statement No. 60, Accounting and Reporting by
Insurance Enterprises. This results in inconsistencies in the recognition and
measurement of claim liabilities. This Statement requires that an insurance
enterprise recognize a claim liability prior to an event of default (insured
event) when there is evidence that credit deterioration has occurred in an
insured financial obligation. This Statement requires expanded disclosures about
financial guarantee insurance contracts. The accounting and disclosure
requirements of the Statement will improve the quality of information provided
to users of financial statements. SFAS 163 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. The adoption of FASB 163 is not expected to have a
material impact on the Company's financial position.
2. ISSUES AFFECTING LIQUIDITY AND MANAGEMENT'S PLANS
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has sustained losses since
inception in 1987 and used net cash in operations of approximately $1,251,000
and $911,000 during the six-months ended June 30, 2008 and 2007, respectively.
As a result, the Company has had to rely principally on private equity funding,
including the conversion of debt into stock, as well as stockholder loans to
fund its activities to date.
These recurring operating losses, liabilities exceeding assets and the reliance
on cash inflows from an institutional investor and current stockholder led the
Company's independent registered public accounting firm, Webb & Company, P.A. to
include a statement in its audit report relating to the Company's audited
consolidated financial statements for the year ended December 31, 2007
expressing substantial doubt about the Company's ability to continue as a going
concern.
F-8
The Company has been addressing the liquidity and working capital issues and
continues to attempt to raise additional capital with institutional and private
investors and current stockholders. Cost reductions continue to be implemented
by the Company including acquiring alternative suppliers for raw materials and
manufacturing and the Company expects to see results from these reductions, as
well as other cost reduction plans through 2008. Additionally, the Company is
reviewing cost of material increases, some of which were passed through to its
customers as product price increases beginning January 2008.
The Company continues to address liquidity concerns because of inadequate
revenue growth. As a result, cash flow from operations is insufficient to cover
our liquidity needs for the immediate future. The Company is in the process of
aggressively seeking to raise capital and is exploring financing availability
and options with investment bankers, funds, private sources, members of
management and existing shareholders. The Company has implemented measures to
preserve its ability to operate, including organizational changes, a reduction
and/or deferral of salaries, reduction in personnel and renegotiating creditor
and collection arrangements. There can be no assurance that the Company will be
able to raise the additional capital needed or reduce the level of expenditures
in order to sustain operations.
On March 7, 2008, the stockholder amended the original loan agreements to extend
the payback dates to December 31, 2009. The original loan agreements, dated
March 28, 2002 and March 14, 2003, were due and payable on December 31, 2003 and
December 31, 2004. Previously, the stockholder waived the funding requirement
mandating maturity as such time as the Company raised an additional $7.0 million
over the $3.5 million previously raised in the Company's private placement
offering; or until such time as the Company is operating within sufficient cash
flow parameters, as defined, to sustain its operations; or until a disposition
of the Company occurs. As of June 30, 2008, the Company had drawn a total of
$6.150 million of the available funds.
The Company anticipates increased cash flows from 2008 sales activity; however,
additional cash will still be needed to support operations. If additional
capital is not raised, budgeted sales levels are not achieved and/or significant
unanticipated expenditures occur, the Company will have to modify its business
plan, reduce or discontinue some of its operations or seek a buyer for part of
its assets to continue as a going concern through 2008. There can be no
assurance that the Company will be able to raise the additional capital needed
to continue as a going concern.
3. STOCK OPTIONS
During the six-months ended June 30, 2007, the Company received $28,500 when an
employee exercised options to purchase 76,000 shares of common stock at $0.375
per share. No options were exercised during the six-months ending June 30, 2008.
During the three-month and six-month periods ended June 30, 2008, the Company
recognized compensation expense of approximately $45,000. During the three-month
and six-month periods ended June 30, 2007, the Company recognized compensation
expense of approximately $2,000 and $25,000, respectively. On February 5, 2008,
the Company recorded an expense of $45,000 related to 225,000 warrants granted
with an average exercise price of $1.25 and an expiration of February 5, 2018.
During the six-month period ended June 30, 2007, approximately $22,000 of
shareholder notes receivables were written-off and expensed. The notes
receivables originated approximately ten years ago between the company and four
former employees or subcontractors and have been disputed by each of the
parties. At June 30, 2008, approximately 2,521,706 warrants with an average
exercise price of $1.28 remain outstanding and were fully vested.
For the three-month and six-month periods ended June 30, 2008, the Company
recorded stock-based compensation expense of $11,298 and $20,653, related to
unvested employee stock options. For the three-month and six-month periods ended
June 30, 2007, the Company recorded stock-based compensation expense of $4,319
and $8,246. Stock options and warrants issued to consultants and other
non-employees as compensation for services provided to the Company are accounted
for based on the fair value of the services provided or the estimated fair
market value of the option or warrant, whichever is more reliably measurable in
accordance with SFAS 123 and EITF 96-18, ACCOUNTING FOR EQUITY INVESTMENTS THAT
ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING OR IN CONJUNCTION WITH SELLING
GOODS OR SERVICES. The related expense is recognized over the period the
services are provided.
F-9
A summary of the Company's stock option plans as of June 30, 2008, and changed
during the six-month period then ended is presented below:
SIX MONTHS ENDED
JUNE 30, 2008
WEIGHTED AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- -----------------
Options outstanding at beginning of period 1,766,900 $2.65
Options granted 515,000 .27
Options exercised -- --
Options cancelled 4,000 2.46
--------- -----
Options at end of period 2,277,900 $2.12
--------- -----
Options exercisable at end of period 1,507,900 $3.02
========= =====
A summary of the Company's stock option plans as of June 30, 2008, and changed
during the three-month period then ended is presented below:
THREE MONTHS ENDED
JUNE 30, 2008
WEIGHTED AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- -----------------
Options outstanding at beginning of period 1,827,900 $2.58
Options granted 450,000 .26
Options exercised -- --
Options expired -- --
--------- -----
Options at end of period 2,277,900 $2.12
--------- -----
Options exercisable at end of period 1,507,900 $3.02
========= =====
Changes in the Company's unvested options for the six months ended June 30, 2008
are summarized as follows:
SIX MONTHS ENDED
JUNE 30, 2008
WEIGHTED AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- -----------------
Options unvested at beginning of period 261,250 $ .77
Options granted 515,000 .27
Options vested 6,250 1.00
Options cancelled -- --
--------- -----
Options unvested at end of period 770,000 $ .35
========= =====
Changes in the Company's unvested options for the three months ended June 30,
2008 are summarized as follows:
THREE MONTHS ENDED
JUNE 30, 2008
WEIGHTED AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- -----------------
Options unvested at beginning of period 320,000 $.48
Options granted 450,000 .26
Options vested -- --
Options cancelled -- --
--------- -----
Options unvested at end of period 770,000 $.35
========= =====
F-10
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ----------- ------------ ------------- ----------- ------------
$ .21 - $1.70 1,733,400 5.46 $ .67 963,400 $ .93
1.86 - 4.50 194,500 3.27 2.39 194,500 2.39
8.50 - 9.25 350,000 .84 9.14 350,000 9.14
----------- ------------ ------------- ----------- ------------
Totals 2,277,900 4.78 $ 2.12 1,507,900 $ 3.02
=========== ============ ============= =========== ============
A summary of the Company's warrant activity as of June 30, 2008 and changed
during the six month and three month periods then ended is presented below:
SIX MONTHS ENDED
JUNE 30, 2008
-------------------------
WEIGHTED AVERAGE EXERCISE
-------------------------
WARRANTS PRICE
---------- -------------
Warrants outstanding at the beginning of 1,869,643 $ 1.25
period
Granted 1,257,063 1.25
Exercised -- --
Expired 605,000 1.10
---------- -----------
Warrants outstanding at end of period 2,521,706 $ 1.28
========== ===========
THREE MONTHS ENDED
JUNE 30, 2008
-------------------------
WEIGHTED AVERAGE EXERCISE
-------------------------
WARRANTS PRICE
---------- -------------
Warrants outstanding at the beginning of 2,198,214 $ 1.19
period
Granted 803,492 1.25
Exercised -- --
Expired 480,000 .80
---------- -----------
Warrants outstanding at end of period 2,521,706 $ 1.28
========== ===========
WARRANTS OUTSTANDING
--------------------------------------------------------
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING (IN YEARS) EXERCISE PRICE
- ----------------- ----------------- ---------------- -----------------
$ .80 - $1.25 2,371,706 4.37 $ 1.24
2.00 - 2.25 150,000 .59 2.00
---------------- ---------------- ----------------
Totals 2,521,706 4.25 $ 1.28
================ ================ ================
F-11
4. NOTES PAYABLE TO STOCKHOLDERS
As of June 30, 2008, the Company had drawn all of the $6.150 million from the
available line-of-credit, which is provided by a stockholder, who is also a
Board Member, of the Company (see Note 2). Amounts drawn bear interest at the
prime rate (4.50% as of June 30, 2008) payable monthly and become due and
payable on December 31, 2009; or until such time as the Company has raised an
additional $7.0 million over the $3.5 million raised in the Company's prior
private placement offering; or until such time as the Company is operating
within sufficient cash flow parameters, as defined, to sustain its operations;
or until a disposition of the Company occurs. Previously, the stockholder waived
this funding requirement. On March 7, 2008, the maturity date of the stockholder
loan was extended from December 31, 2008 to December 31, 2009.
During the six-months ending June 30, 2008, the Company received advances
totaling $520,000 from two members of the Board. In March and May, 2008, these
loans were converted into common shares.
For the three-months ended June 30, 2008 and 2007, the Company recorded
approximately $71,000 and $125,000, respectively; and for the six-months ended
June 30, 2008 and 2007, the Company recorded approximately $157,000 and
$249,000, respectively, of interest expense related to the notes payable to
stockholder, which is included in interest expense in the accompanying condensed
consolidated statements of operations.
5. COMMITMENTS AND CONTINGENCIES AND CONCENTRATIONS
Sales to two customers individually accounted for approximately 24% and
approximately 16% (for a total 40%) of the net sales for the six-months ended
June 30, 2008.
6. SUBSEQUENT EVENTS
On July 8, 2008 the Board of Directors agreed to extend the expiration date by
six months for a loan of $123,750, interest-bearing at a rate of 5.63%, and
collateralized by 300,000 shares of the Company's common stock, made to Richard
C. Ford, a former member of management, on July 25, 2001. The loan will expire
on January 8, 2009.
On July 21, 2008, the Board of Directors agreed to receive from Alan Sandler, a
stock certificate for 260,000 shares of the Company's common stock dated August
8, 2001. These shares were collateral for a loan from the Company. The principal
amount of the loan was retired and the related interest remains due.
During July 2008, the Company relocated its UK office from Exeter to Newbury, to
the facility of its Master Distributor, Filter Solutions Ltd. Effective August
15, 2008, the Company's lease for the facility in Exeter will terminate.
On July 31, 2008, the Company renewed its lease at its facility in Boynton
Beach, for a term of five years.
On August 6, 2008 the Board of Directors awarded Alan Sandler 100,000 employee
stock options to purchase common stock at a price of $.30 for consideration of
service to the Company as Chief Administrative Officer. The options will vest
over four years and expire on August 5, 2018.
F-12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Puradyn Filter Technologies Incorporated
We have audited the accompanying consolidated balance sheet of Puradyn
Filter Technologies Incorporated (the Company) as of December 31, 2007, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for the two years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company has
determined that it is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Puradyn
Filter Technologies Incorporated at December 31, 2007, and the results of their
operations and their cash flows for the two years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2, the
Company has suffered recurring losses from operations, its total liabilities
exceed its total assets, and it has relied on cash inflows from an institutional
investor and current stockholder. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Webb and Company, P.A.
--------------------------
Boynton Beach, Florida
March 10, 2008
F-13
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2007
Assets
Current assets:
Cash and cash equivalents $ 112,270
Accounts receivable, net of allowance for uncollectible accounts of $46,870 382,279
Inventories, net 1,475,380
Prepaid expenses and other current assets 181,648
------------
Total current assets 2,151,577
Property and equipment, net 162,838
Other noncurrent assets 40,930
Deferred financing costs, net 18,522
============
Total assets $ 2,373,867
============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable 594,372
Accrued liabilities 1,054,071
Current portion of capital lease obligation 1,048
Deferred revenues 136,169
------------
Total current liabilities 1,785,660
Capital lease obligation, less current portion 7,139
Notes Payable - stockholder 6,250,000
------------
Total Long Term Liabilities 6,257,139
------------
Total Liabilities 8,042,799
Commitments and contingencies --
Stockholders' deficit:
Preferred stock, $.001 par value: --
Authorized shares - 500,000;
None issued and outstanding
Common stock, $.001 par value, 29,401
Authorized shares - 40,000,000;
Issued and outstanding - 29,400,638
Additional paid-in capital 41,329,330
Notes receivable from stockholders (1,064,031)
Accumulated deficit (45,825,210)
Accumulated other comprehensive income (138,422)
------------
Total stockholders' deficit (5,668,932)
------------
Total liabilities and stockholders' deficit $ 2,373,867
============
See accompanying notes to consolidated financial statements.
F-14
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
2007 2006
------------ ------------
Net sales $ 3,082,873 $ 3,072,947
Costs and expenses:
Cost of products sold 2,831,560 2,566,572
Salaries and wages 1,074,519 1,348,335
Selling and administrative 1,061,828 1,343,651
------------ ------------
Total operating costs 4,967,907 5,258,558
------------ ------------
Loss from operations (1,885,034) (2,185,611)
Other (expense) income:
Interest income 32,516 50,413
Interest expense (588,583) (518,265)
------------ ------------
Total other expense (556,067) (467,852)
------------ ------------
Income taxes -- --
============ ============
Net loss $ (2,441,101) $ (2,653,463)
============ ============
Basic and diluted loss per common share $ (.09) $ (.10)
============ ============
Basic and diluted weighted average common shares
Outstanding 28,322,903 25,385,294
============ ============
See accompanying notes to consolidated financial statements.
F-15
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
NOTES ACCUMULATED
ADDITIONAL ACCUMULATED OTHER TOTAL
COMMON STOCK PAID-IN RECEIVABLE FROM COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT INCOME (LOSS) DEFICIT
------------ --------- ------------ ------------- -------------- ------------- ------------
Balance at December 31, 2005 22,276,099 $ 22,276 $ 37,078,716 $ (1,088,590) $ (40,730,646) $ 13,398 $ (4,704,846)
Foreign currency
translation adjustment -- -- -- -- -- (166,107) (166,107)
Net loss -- -- -- -- (2,653,463) -- (2,653,463)
------------
Total comprehensive loss -- -- -- -- -- -- (2,819,570)
Exercise of stock options 5,000 5 2,595 -- -- -- 2,600
Issuance of common stock
in private Placement, net
of issuance costs 4,971,903 4,972 2,262,028 -- -- -- 2,267,000
Issuance of warrants to
nonemployee directors -- -- 2,250 -- -- -- 2,250
Issuance of warrants to
employee/director -- -- 100,500 -- -- -- 100,500
Issuance of warrants to investors -- -- 66,492 -- -- -- 66,492
Interest receivable related
to notes receivable from stockholders -- -- -- (48,066) -- -- (48,066)
Compensation expense associated
with option modification -- -- 173,350 -- -- -- 173,350
Stock options issued to employees -- -- 29,250 -- -- -- 29,250
Stock options issued in lieu of
compensation 57,350 57 48,160 -- -- -- 48,217
Compensation expense associated
with unvested option awards -- -- 11,190 -- -- -- 11,190
---------- --------- ------------ ------------ ------------- ------------ -----------
Balance at December 31, 2006 27,310,352 27,310 39,774,531 (1,136,656) (43,384,109) (152,709) (4,871,633)
Foreign currency translation
adjustment -- -- -- -- -- 14,287 14,287
Net loss -- -- -- -- (2,441,101) -- (2,441,101)
-----------
Total comprehensive loss -- -- -- -- -- -- (2,426,814)
Exercise of stock options 76,000 76 28,424 -- -- -- 28,500
Issuance of common stock in private
Placement, net of issuance costs 2,014,286 2,015 1,472,985 -- -- -- 1,475,000
1Issuance of warrants to investors -- -- 34,200 -- -- -- 34,200
Foregiveness of stockholder loans -- -- -- 21,506 -- -- 21,506
Interest receivable related to notes
receivable from stockholders -- -- -- 51,119 -- -- 51,119
Compensation expense associated with
option modification -- -- 1,202 -- -- -- 1,202
Compensation expense associated with
unvested option awards -- -- 17,988 -- -- -- 17,988
---------- --------- ------------ ------------ ------------- ------------ -----------
Balance at December 31, 2007 29,400,638 $ 29,401 $ 41,329,330 $ (1,064,031) $ (45,825,210) $ (138,422) $(5,668,932)
========== ========= ============ ============ ============= ============ ===========
See accompanying notes to consolidated financial statements.
F-16
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------
2007 2006
----------- -----------
OPERATING ACTIVITIES
Net loss $(2,441,101) $(2,653,463)
----------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 96,001 183,728
Gain on sale of assets 578 --
Provision for bad debts (3,079) 8,398
Provision for obsolete and slow moving inventory (62,564) (24,819)
Amortization of deferred financing costs included in
interest expense 22,227 48,899
Interest receivable from stockholders' notes 72,626 (48,066)
Compensation expense on stock-based arrangements
with employees and vendors 19,190 213,790
Compensation expense on stock-based arrangements
with investors and directors 34,200 169,242
Changes in operating assets and liabilities:
Accounts receivable 118,687 (83,245)
Inventories (140,360) (65,856)
Prepaid expenses and other current assets (7,633) 71,156
Other noncurrent assets -- --
Accounts payable 277,656 46,326
Accrued liabilities 168,617 167,644
Deferred revenues 36,254 24,105
----------- -----------
Net cash used in operating activities (1,808,701) (1,942,161)
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 5,458 --
Purchases of property and equipment (60,878) (39,455)
----------- -----------
Net cash used in investing activities (55,420) (39,455)
FINANCING ACTIVITIES
Proceeds from sale of common stock 1,475,000 2,267,000
Proceeds from exercise of stock options 28,500 2,600
Proceeds from notes payable to stockholder 1,191,000 515,000
Payment of notes payable to stockholder (780,000) (747,000)
Payment of capital lease obligations (5,931) (4,987)
----------- -----------
Net cash provided by financing activities 1,908,569 2,032,613
Effect of exchange rate changes on cash and cash
equivalents 12,647 (151,379)
----------- -----------
Net increase (decrease) in cash and cash equivalents 57,095 (100,382)
Cash and cash equivalents at beginning of period 55,175 155,557
----------- -----------
Cash and cash equivalents at end of period $ 112,270 $ 55,175
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 453,916 $ 462,784
NONCASH INVESTING AND FINANCING ACTIVITIES
Common stock issued in settlement of accrued bonus $ -- $ 30,000
=========== ===========
See accompanying notes to consolidated financial statements.
F-17
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
1. SIGNIFICANT ACCOUNTING POLICIES
Organization
Puradyn Filter Technologies Incorporated (the "Company"), a Delaware
corporation, is engaged in the manufacturing, distribution and sale of bypass
oil filtration systems under the trademark Puradyn(R) primarily to companies
with large fleets of vehicles and secondarily to original vehicle equipment
manufacturer aftermarket programs. The Company holds the exclusive worldwide
manufacturing and marketing rights for the Puradyn products pursuant to licenses
for two patents and through direct ownership of various other patents.
Puradyn Filter Technologies, Ltd. (Ltd.), a wholly owned subsidiary in the
United Kingdom, sells and distributes the Company's products in Europe, the
Middle East and certain African countries. The results of the operations of Ltd.
have been included in the Company's statements of operations since Ltd.'s
formation on June 1, 2000.
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes,"
which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. In accordance with FIN 48, the Company
must adjust its financial statements to reflect only those tax positions that
are more-likely-than-not to be sustained as of the adoption date. The effective
date of FIN 48 for the Company is January 1, 2007. The adoption of FIN 48 has
not had a material impact on the Company's condensed consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which clarifies the definition of fair value, establishes
guidelines for measuring fair value, and expands disclosures regarding fair
value measurements. SFAS 157 does not require any new fair value measurements
and eliminates inconsistencies in guidance found in various prior accounting
pronouncements. SFAS 157 will be effective for the Company on January 1, 2008.
The Company is currently evaluating the impact of adopting SFAS 157 on its
financial position, cash flow, and results of operations, and its adoption is
not expected to have a material effect on the Company's financial statements.
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115". This statement permits
entities to choose to measure many financial instruments and certain other items
at fair value. Most of the provisions of SFAS No. 159 apply only to entities
that elect the fair value option. However, the amendment to SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities" applies to
all entities with available-for-sale and trading securities. SFAS No. 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided the entity also elects
to apply the provision of SFAS No. 157, "Fair Value Measurements". The adoption
of this statement is not expected to have a material effect on the Company's
financial statements.
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an
amendment of ARB No. 51". This statement improves the relevance, comparability,
and transparency of the financial information that a reporting entity provides
in its consolidated financial statements by establishing accounting and
reporting standards that require; the ownership interests in subsidiaries held
by parties other than the parent and the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of income,
changes in a parent's ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for consistently,
when a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary be initially measured at fair value,
entities provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 affects those entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a
subsidiary. SFAS
F-18
No. 160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Early adoption is prohibited.
The adoption of this statement is not expected to have a material effect on the
Company's financial statements
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Puradyn Filter Technologies, Ltd. All significant
intercompany transactions and balances have been eliminated.
Revenue Recognition
The Company recognizes revenue from product sales to customers, distributors and
resellers when products that do not require further services or installation at
the customer's site are shipped, there are no uncertainties surrounding customer
acceptance and for which collectibility is reasonably assured in accordance with
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial
Statements as amended and interpreted. Cash received by the Company prior to
revenue recognition is recorded as deferred revenues. Sales are made to
customers under terms allowing certain limited rights of return and other
limited product and performance warranties for which provision has been made in
the accompanying consolidated financial statements.
Amounts billed to customers in sales transactions related to shipping and
handling, represent revenues earned for the goods provided and are included in
net sales. Costs of shipping and handling are included in cost of products sold.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original
maturities of three months or less at the time of purchase. At December 31, 2007
and December 31, 2006, the Company did not have any cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, prepaid
expenses and other assets, accounts payable, accrued liabilities and notes
payable to stockholder approximate their fair values as of December 31, 2007
because of their short-term natures.
Accounts Receivable
Accounts receivable are recorded at fair value on the date revenue is
recognized. The Company provides allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to repay their obligation.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to repay, additional allowances may
be required. The Company provides for potential uncollectible accounts
receivable based on specific customer identification and historical collection
experience adjusted for existing market conditions. If market conditions
decline, actual collection experience may not meet expectations and may result
in decreased cash flows and increased bad debt expense.
The policy for determining past due status is based on the contractual payment
terms of each customer, which are generally net 30 or net 60 days. Once
collection efforts by the Company and its collection agency are exhausted, the
determination for charging off uncollectible receivables is made.
Inventories
Inventories are stated at the lower of cost or market using the first in, first
out (FIFO) method. Production costs, consisting of labor and overhead, are
applied to ending finished goods inventories at a rate based on estimated
production capacity. Excess production costs are charged to cost of products
sold. Provisions have been made to reduce excess or obsolete inventories to
their net realizable value.
F-19
Deferred Financing Costs
The Company capitalizes financing costs and amortizes them using the
effective interest method over the term of the related debt. Amortization of
deferred financing costs is included in interest expense and totaled $22,227 and
$48,899 for the years ended December 31, 2007 and 2006, respectively.
Accumulated amortization of deferred financing costs as of December 31, 2007 was
$662,628.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets, except for assets held under capital leases, for which the
Company records depreciation and amortization based on the shorter of the
asset's useful life or the term of the lease. The estimated useful lives of
property and equipment range from 3 to 5 years. Upon sale or retirement, the
cost and related accumulated depreciation and amortization are eliminated from
their respective accounts, and the resulting gain or loss is included in results
of operations. Repairs and maintenance charges, which do not increase the useful
lives of the assets, are charged to operations as incurred.
Impairment of Long-Lived Assets
Management assesses the recoverability of its long-lived assets when indicators
of impairment are present. If such indicators are present, recoverability of
these assets is determined by comparing the undiscounted net cash flows
estimated to result from those assets over the remaining life to the assets' net
carrying amounts. If the estimated undiscounted net cash flows are less than the
net carrying amount, the assets would be adjusted to their fair value, based on
appraisal or the present value of the undiscounted net cash flows.
Product Warranty Costs
In connection with the adoption of FIN 45, the Company is including the
following disclosure applicable to its product warranties.
The Company accrues for warranty costs based on the expected material and labor
costs to provide warranty replacement products. The methodology used in
determining the liability for warranty cost is based upon historical information
and experience. The Company's warranty reserve is calculated as the gross sales
multiplied by the historical warranty expense return rate.
The following table shows the changes in the aggregate product warranty
liability for the year ended December 31, 2007:
Balance as of December 31, 2006 $ 71,759
Less: Payments made (10,895)
Change in prior period estimate 1,397
Add: Provision for current period warranties 27,548
--------
Balance as of December 31, 2007 $ 89,809
========
Guarantees
In August 2003 the Company made a guarantee to its wholly owned subsidiary,
Puradyn Filter Technologies, Ltd., that it would provide cash for working
capital on an as needed basis for a minimum period of twelve months. The
guarantee
F-20
was provided as assurance that they will continue as a going concern for 2003.
This guarantee is excluded from the recognition and measurement provisions of
FIN 45, as it relates to a wholly owned consolidated subsidiary.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income (SFAS 130) establishes rules for
reporting and displaying of comprehensive income and its components.
Comprehensive income is the sum of net loss as reported in the consolidated
statements of operations and other comprehensive income transactions as reported
in the consolidated statement of changes in stockholders' equity (deficit).
Other comprehensive income transactions that currently apply to the Company
result from changes in exchange rates used in translating the financial
statements of its wholly owned subsidiary, Ltd. Comprehensive income as of
December 31, 2007 and 2006 is not shown net of taxes because the Company's
deferred tax asset has been fully offset by a 100% valuation allowance.
Advertising Costs
Advertising costs are expensed as incurred. During the years ended December 31,
2007 and 2006, advertising costs incurred by the Company totaled approximately
$17,000 and $37,000, respectively, and are included in selling and
administrative expenses in the accompanying consolidated statements of
operations.
Engineering and Development
Engineering and development costs are expensed as incurred. During the years
ended December 31, 2007 and 2006, engineering and development costs incurred by
the Company totaled approximately $31,000 and $52,000, respectively, and are
included in selling and administrative expenses in the accompanying consolidated
statements of operations.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiary have been
translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency
Translation (SFAS 52). All balance sheet accounts have been translated using the
exchange rate in effect at the balance sheet date. Income statement amounts have
been translated using an appropriately weighted average exchange rate for the
year. The translation gains and losses resulting from the changes in exchange
rates during 2007 and 2006 have been reported in accumulated other comprehensive
income, except for gains and losses resulting from the translation of
intercompany receivables and payables, which are included in earnings for the
period. During the years ended December 31, 2007 and 2006, the Company recorded
a foreign currency exchange rate gain of approximately $87,000 and a loss of
approximately $198,000, respectively, which is included in selling and
administrative expenses in the accompanying consolidated statements of
operations.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes (SFAS 109). Deferred income tax assets and liabilities are determined
based upon differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Stock Option Plans
We adopted SFAS 123R effective January 1, 2006 using the modified prospective
application method of adoption which requires us to record compensation cost
related to unvested stock awards as of December 31, 2005 recognizing the
amortized grant date fair value in accordance with provisions of SFAS 123R on
straight line basis over the service periods of each award. We have estimated
forfeiture rates based on our historical experience. Stock option compensation
expense for the year ended December 31, 2007 has been recognized as a component
of cost of goods sold and general and administrative expenses in the
accompanying Consolidated Financial Statements.
In 2007 and 2006, respectively, 200,000 and 85,000 options were granted at fair
market value on the date of grant pursuant to the Stock Option Plan.
The Company leases its employees from a payroll leasing company. The Company's
leased employees meet the definition of employees as specified by FIN 44 for
purposes of applying SFAS 123R.
F-21
Stock options and warrants issued to consultants and other non-employees as
compensation for services provided to the Company are accounted for based on the
fair value of the services provided or the estimated fair market value of the
option or warrant, whichever is more reliably measurable in accordance with SFAS
123 and EITF 96-18, Accounting for Equity Investments That are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling Goods or Services,
including related amendments and interpretations. The related expense is
recognized over the period the services are provided.
Credit Risk
The Company minimizes the concentration of credit risk associated with its cash
and cash equivalents by maintaining its cash and cash equivalents with high
quality federally insured financial institutions. However, cash balances in
excess of the FDIC insured limit of $100,000 are at risk. At December 31, 2007,
the Company did not have cash balance above the FDIC insured limit. The Company
performs ongoing evaluations of its significant trade accounts receivable
customers and generally does not require collateral. An allowance for doubtful
accounts is maintained against trade accounts receivable at levels which
management believes is sufficient to cover probable credit losses. There are
concentrations of credit risk with respect to trade receivables due to the
amounts owed by five customers at December 31, 2007 whose trade receivable
balances each represented approximately 24%, 10%, 8%, 8% and 7% for a total of
57% of total accounts receivable. The loss of business from one or a combination
of the Company's significant customers, or an unexpected deterioration in their
financial condition, could adversely affect the Company's operations.
Basic and Diluted Loss Per Share
The Company follows SFAS No. 128, Earnings Per Share (SFAS 128), which requires
a dual presentation of basic and diluted earnings per share. However, because of
the Company's net losses, the effects of stock options and warrants would be
anti-dilutive and, accordingly, are excluded from the computation of earnings
per share. The number of such shares excluded from the computations of diluted
loss per share totaled 3,636,543 in 2007 and 3,470,043 in 2006.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. ISSUES AFFECTING LIQUIDITY AND MANAGEMENT'S PLANS
The Company's financial statements have been prepared on the basis that it will
operate as a going concern, which comtemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses each year since inception and has relied on the sale of its
stock from time to time and loans from third parties and from related parties to
fund its operations.
These recurring operating losses, liabilities exceeding assets and the reliance
on cash inflows from an institutional investor and current stockholder have led
the Company's independent registered public accounting firm Webb & Company to
include a statement in its audit report relating to the Company's audited
consolidated financial statements for the year ended December 31, 2007
expressing substantial doubt about the Company's ability to continue as a going
concern.
The Company has been addressing the liquidity and working capital issues and
continues to attempt to raise additional capital with institutional and private
investors and current stockholders. Cost reductions were and continue to be
implemented by the Company, including acquiring alternative suppliers for raw
materials, and the company expects to see results from these reductions, as well
as other cost reduction plans through 2008. Additionally, the Company is
reviewing cost of material increases, which are expected to be passed through to
its customers as product price increases beginning January, 2008.
Additionally, we continue to address liquidity concerns because of inadequate
revenue growth. As a result, cash flow from operations is insufficient to cover
our liquidity needs for the immediate future. The Company is in the process of
aggressively seeking to raise capital and is exploring financing availability
and options with investment bankers, funds, private sources, members of
management and existing shareholders. The Company has implemented further
measures to preserve its ability to operate, including organizational changes,
deferral of salaries, reduction in personnel and renegotiating creditor and
collection arrangement. There can be no assurance that the Company will be able
to raise the additional capital needed or reduce the level of expenditures in
order to sustain operations.
The Company has sustained losses since inception in 1987 and used net cash in
operations of approximately $1,809,000 and $1,942,000 during the years ended
December 31, 2007 and 2006, respectively. As a result, the Company has had to
F-22
rely principally on private equity funding, including the conversion of debt
into stock, as well as stockholder loans to fund its activities to date.
On February 2, 2004, the stockholder amended the original loan agreements to
extend the maturity dates to December 31, 2005 and to waive the funding
requirement mandating maturity terms until such time as the Company has raised
an additional $7.0 million over the $3.5 million raised in the Company's recent
private placement offering; or until such time as the Company is operating
within sufficient cash flow parameters, as defined, to sustain its operations;
or until a disposition of the Company occurs.
In April 2005, the maturity date of the loan agreement was extended to December
31, 2006. As consideration of this extension, this stockholder was granted an
additional 100,000 common stock purchase warrants at an exercise price equal to
the closing market price of the Company's stock on the date of grant. In March
2006, 2007 and 2008, the stockholder extended the maturity date of the loan
agreement to December 31, 2007, December 31, 2008 and December 31, 2009,
respectively.
The Company experienced a modest reduction in cash used in operations in 2007
and anticipates additional reductions in cash used in operations in 2008;
however, additional cash will still be needed to support operations. Management
believes that the commitments received from its stockholder, the funds received
from its recent current private placement offering, as well as cash from sales
and current working capital will be sufficient to sustain its operations at its
current level through May 2008. However, if budgeted sales levels are not
achieved and/or significant unanticipated expenditures occur, the Company may
have to modify its business plan, reduce or discontinue some of its operations
or seek a buyer for all or part of its assets to continue as a going concern
through 2008. There can be no assurance that the Company will be able to raise
the additional capital needed to continue as a going concern.
3. INVENTORIES
At December 31, 2007, inventories consisted of the following:
Raw materials $ 780,979
Finished goods 779,005
Valuation allowance (84,604)
------------
$ 1,475,380
============
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
At December 31, 2007, prepaid expenses and other current assets consisted of the
following:
Prepaid expenses $ 101,857
Deferred costs related to deferred revenue 79,791
------------
$ 181,648
============
5. PROPERTY AND EQUIPMENT
At December 31, 2007, property and equipment consisted of the following:
Machinery and equipment $ 1,077,501
Furniture and fixtures 101,555
Leasehold improvements 122,622
Website development 72,960
Computer hardware and software 119,262
------------
1,493,900
Less accumulated depreciation and amortization (1,331,062)
------------
$ 162,838
============
Depreciation and amortization expense of property and equipment for the years
ended December 31, 2007 and 2006 is $96,001 and $183,728, respectively, of which
approximately $18,000 and $126,000 is included in cost of products sold
F-23
and approximately $78,000 and $58,000 is included in selling and administrative
costs, respectively, in the accompanying consolidated statements of operations.
6. LEASES
The Company leases its office and warehouse facilities in Boynton Beach, Florida
under a long-term noncancellable lease agreement, which contains renewal options
and rent escalation clauses. A $235,000 security deposit was paid in 2002, which
will be refunded ratably on an annual basis over the first three years of the
lease term beginning on the last day of the first lease year, provided there has
been no Event of Default, as defined, by the Company. Of this amount, $66,667
was paid to the Company in November 2003, January 2005 and January 2006,
respectively. As of December 31, 2007, $34,970 is included in noncurrent assets
in the accompanying consolidated balance sheet. The total minimum lease payments
over the term of the lease aggregate approximately $774,000. The terms of the
lease include a period of free rent and scheduled annual rate increases. As
such, rent expense is recognized on a straight-line basis over the 68-month term
of the lease.
The Company leases a condominium in Ocean Ridge, Florida to provide
accommodations for Company use. The lease is renewable annually and is paid in
three installments.
The Company's wholly owned subsidiary, Ltd., rented office space in Devon,
England under a lease that extended through March 31, 2002 and was subsequently
extended on a month-to-month basis. In September 2003, Ltd. moved to new office
space by assuming the existing lease, which expired in August 2004 and was
renegotiated in September 2005 and expires in September 2010. Rent expense under
all operating leases for the years ended December 31, 2007 and 2006 totaled
approximately $314,000 and $274,000, respectively, of which approximately
$242,000 and $217,000 is included in cost of products sold and approximately
$72,000 and $57,000 is included in selling and administrative costs,
respectively, in the accompanying consolidated statements of operations.
In May 2007, the Company entered into a capital lease obligation for the
purchase of approximately $8,525 of office equipment, which is included in
property and equipment, net of approximately $995 of accumulated amortization,
in the accompanying consolidated balance sheet.
Future minimum lease commitments due for facilities and equipment leases under
noncancellable capital and operating leases at December 31, 2007 are as follows:
CAPITAL OPERATING
LEASES LEASES
-------- ---------
2008 $ 5,479 $149,524
2009 5,479 53,103
2010 5,479 39,282
2011 2,283
2012 and thereafter --
-------- --------
Total minimum lease payments $ 18,720 $241,909
======== ========
Less amount representing interest (10,533)
--------
Present value of minimum lease payments $ 8,187
========
7. ACCRUED LIABILITIES
At December 31, 2007, accrued liabilities consisted of the following:
Accrued wages and benefits $ 680,342
Accrued expenses relating to vendors and others 73,610
Deferral of straight-line rent expense 16,790
Reclassified accounts receivable credit balances 138,016
Accrued warranty costs 89,809
Accrued interest payable relating to stockholder notes 55,504
----------
$1,054,071
==========
F-24
8. LONG-TERM DEBT
NOTES PAYABLE TO STOCKHOLDER
Beginning on March 28, 2002 the Company executed a binding agreement with one of
its stockholders, who is also a Board Member, to fund up to $6.1 million. Under
the terms of the agreements, the Company can draw amounts as needed to fund
operations. Amounts drawn bear interest at the prime rate per annum (6.75% at
December 31, 2007), payable monthly and were to become due and payable on
December 31, 2005 or upon a change in control of the Company or consummation of
any other financing over $7.0 million. In March 2006, March, 2007 and March
2008, the maturity date for the agreement was extended to December 31, 2007,
December 31, 2008 and December 31, 2009, respectively.
At December 31, 2007, the Company had drawn $6.1 million of the available funds.
During December 2007, the Company received $100,000 in shareholder loans, which
in March 2008 were converted to equity. In April 2005, the maturity date of the
agreement was extended from December 31, 2005 to December 31, 2006. As
consideration of this extension, this stockholder was granted an additional
100,000 common stock purchase warrants at an exercise price equal to the closing
market price of the Company's stock on the date of grant, for a period of five
years.
During the years ended December 31, 2007 and 2006, the Company incurred interest
expense of approximately $481,000 and $465,000, respectively, on its draws,
which is included in interest expense in the accompanying consolidated
statements of operations.
MATURITIES OF LONG-TERM OBLIGATIONS FOR FIVE YEARS AND BEYOND
Long-term obligations consisted of the following at December 31, 2007:
Notes payable to stockholder $ 6,250,000
Capital lease obligation 8,187
-----------
6,258,187
Less: current maturities (1,048)
-----------
$ 6,257,139
===========
The minimum annual principal payments of notes payable and capital lease
obligations at December 31, 2007 were:
2008 $ 1,048
2009 6,251,859
2010 3,270
2011 2,010
----------
$6,258,187
==========
9. INCOME TAXES
The United States and foreign components of loss from continuing operations
before income taxes are as follows for the years ended December 31:
2007 2006
----------- -----------
United States $(2,455,387) $(2,704,731)
Foreign 14,286 51,268
Intercompany elimination -- --
----------- -----------
Loss from continuing operations before income taxes $(2,441,101) $(2,653,463)
The significant components of the Company's net deferred tax assets are as
follows for the years ended December 31:
2007 2006
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 14,163,096 $ 13,214,958
Depreciation and amortization 78,177 73,200
Accrued expenses and reserves 58,801 77,795
Impairment loss 78,304 78,304
Compensatory stock options and warrants 57,354 57,354
Capital Loss Carryover 40,630 40,632
Other 16,917 18,829
------------ ------------
Total deferred tax assets 14,493,279 13,561,072
Valuation allowance (14,493,279) (13,561,072)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
F-25
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a full valuation allowance of $14,493,279 against its net
deferred taxes is necessary as of December 31, 2007. The change in valuation
allowance for the years ended December 31, 2007 and 2006 is $932,207 and
$1,024,603 respectively.
At December 31, 2007, the Company had approximately $38,990,150 of U.S. net
operating loss carryforwards remaining, which expire beginning in 2022. The
Company will record the benefit of approximately $1,355,000 of the net operating
loss carryforwards through additional paid-in capital if and when the net
operating loss carryforwards are utilized, as such amounts relate to the
unrecognized tax benefit from stock option exercises.
As a result of certain ownership changes, the Company may be subject to an
annual limitation on the utilization of its U.S. net operating loss
carryforwards pursuant to Section 382 of the Internal Revenue Code. A study to
determine the effect, if any, of this change, has not been undertaken.
A reconciliation of the Company's income taxes to amounts calculated at the
federal statutory rate is as follows for the years ended December 31:
2007 2006
------ -----
Federal statutory taxes (34.00)% (34.00)%
State income taxes, net of federal tax benefit (3.63) (3.63)
Nondeductible items 0.16 0.16
Change in valuation allowance 38.39 38.21
Other (.92) .74
------ -----
--% --%
====== =====
10. COMMITMENTS AND CONTINGENCIES
INVESTMENT BANKING AGREEMENTS
On April 24, 2006, the Company entered into a one-year non-exclusive agreement
with CapitalLink, L.C., an investment banking firm, to assist in additional
financing. The company agreed to pay a fee of 7% of gross proceeds received by
the Company as a result of services performed under the contract, as well as
reimbursement of pre-approved out of pocket expenses. There were no fees
incurred and the company exercised its option not to renew the agreement.
On July 10, 2006, the Company entered into a maximum 90-day agreement with TN
Capital Equities, Ltd., a subsidiary of TerraNova Capital Partners, Inc., and
investment banking firm, to assist the Company in obtaining additional
financing. The company agreed to pay a fee of 10% of the gross proceeds received
by the Company as a result of services performed under the contract, as well as
reimbursement of pre-approved out of pocket expenses. There were no fees
incurred and the company exercised its option not to renew the agreement.
11. STOCK OPTIONS
The Company has three stock option plans, one adopted in 1996 and amended in
July 1997 (the "1996 Option Plan"), one adopted in September 1999 and amended in
June 2000 (the "1999 Option Plan"), and one adopted on November 8, 2000 (the
"Directors' Plan"). The 1996 Option Plan provides for the granting of up to
2,200,000 options, the 1999 Option Plan provides for the granting of up to
3,000,000 options and the Directors' Plan provides for the granting of up to
400,000 options.
F-26
Both the 1996 and 1999 Plan provide for the granting of both incentive and
non-qualified stock options to key personnel, including officers, directors,
consultants and advisors to the Company, at the discretion of the Board of
Directors. Each plan limits the exercise price of the options at no less than
the quoted market price of the common stock on the date of grant. The option
term is determined by the Board of the Directors or the Compensation Committee,
provided that no option may be exercisable more than 10 years after the date of
its grant and, in the case of an Incentive Option granted to an eligible
employee owning more than 10% of the Company's common stock, no more than five
years after the date of the grant. Generally, under the 1996 and 1999 plans,
options to employees vest over four years at 25% per annum, except for certain
grants to employees that vest 50% upon grant with remaining amounts over two
years at 25% per annum.
The Directors' Plan provides for the granting of non-qualified options to
members of the Board of Directors at exercise prices not less than the quoted
market price of the common stock on the date of grant and options expire five
years from the date of grant. In the event a person ceases to serve on the Board
of Directors, the outstanding options expire one year from the date of cessation
of service. Such options may be exercised commencing two years from the date of
grant.
On May 11, 2006, the Company extended the expiration date of 270,000 fully
vested stock options for an employee who left the Company and previously had
options extended through September 30, 2006. The Company's Stock Option Plan
permits an employee to exercise their stock options for up to one month after
their termination date, at which time they expire. The exercise price of the
options ranges from $1.72 to $1.75. In accordance with FIN 44, the Company
compared the options' intrinsic value on the modification date to the original
intrinsic value on the date of grant. The Company recorded approximately $88,000
of compensation expense related to this modification, which was included in the
consolidated statement of operations for the year ending December 31, 2006.
On October 20, 2006, the Company extended the expiration date of 375,000 fully
vested stock options for an employee who left the Company in October 2006. The
Company's Stock Option Plan permits an employee to exercise their stock options
for up to one month after their termination date, at which time they expire. The
exercise price of the options ranges from $.21 to $.94. In accordance with FIN
44, the Company compared the options' intrinsic value on the modification date
to the original intrinsic value on the date of grant. The Company recorded
approximately $86,000 of compensation expense related to this modification,
which was included in the consolidated statement of operations for the year
ending December 31, 2006.
On May 23, 2007 the Company extended the expiration date of 11,650 vested stock
options for a terminated employee who left the company in May, 2005. The
exercise price of the options ranges from $.38 to $2.15. In accordance with SFAS
123, incremental compensation cost was recognized in an amount equal to the
excess of the fair value of the modified award over the fair value of the
original award immediately before the modification. The Company recorded
approximately $1,202 of compensation expense related to this modification, which
was included in the consolidated statement of operations for the year ended
December 31, 2007.
During each of 2007 and 2006, 55,000 and 5,000 respectively, of options were
issued to non-employee Directors.
Additional information concerning the activity in the three option plans is as
follows:
2007 2006
-------------------------- -------------------------
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
---------- --------- --------- ---------
Outstanding, beginning of year 1,880,400 $ 3.10 2,152,070 $ 3.18
Granted 200,000 .40 135,000 .96
Exercised (76,000) .38 (5,000) .52
Cancelled (130,000) 4.28 (159,000) 2.83
Expired (107,500) 5.86 (242,670) 3.73
---------- --------- --------- ---------
Outstanding, end of year 1,766,900 2.65 1,880,400 3.10
========== =========
Exercisable, end of year 1,505,650 $ 3.03 1,708,650 $ 3.30
========== =========
Options available for future grant, end
of year 2,135,750 2,168,250
========== =========
F-27
Summarized information with respect to options outstanding under the three
option plans at December 31, 2007 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
REMAINING
AVERAGE
CONTRACTUAL WEIGHTED WEIGHTED
RANGE OF NUMBER LIFE (IN AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ----------- -------------- ----------- --------------
$ .21 - $1.70 1,218,400 5.56 $ .84 957,150 $ .92
1.86 - 4.50 198,500 4.03 2.39 198,500 2.39
8.50 - 9.25 350,000 1.59 9.14 350,000 9.14
---------- ----- ----- --------- -----
Totals 1,766,900 4.97 $2.65 1,505,650 $3.03
========= ==== ===== ========= =====
Summarized information with respect to options outstanding under the three
option plans at December 31, 2006 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
REMAINING
AVERAGE
CONTRACTUAL WEIGHTED WEIGHTED
RANGE OF NUMBER LIFE (IN AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ----------- -------------- ----------- --------------
$ .21 - $1.70 1,171,900 6.2 $ .89 1,020,525 $ .88
1.86 - 4.50 246,000 4.0 2.42 225,625 2.42
8.50 - 9.25 462,500 2.1 9.07 462,500 9.07
--------- ---- ----- --------- -----
Totals 1,880,400 4.43 $3.10 1,708,650 $3.30
========= ==== ===== ========= =====
12. COMMON STOCK
On January 30, 2006, the Company issued 40,000 shares of common stock, at $.75
per share, to an employee in lieu of a cash bonus that was previously accrued
and deferred.
On February 26, 2006, the Company received cash proceeds of $910,000 from five
accredited investors for the purchase of 3,033,333 shares of common stock at
$0.30 per share. The purchase price of $0.30, previously agreed upon and
approved by the Board of Directors, was discounted approximately 20% as part of
the June 2005 Equity Placement Offering, wherein these five investors funded 50%
of their total predetermined contribution at that time. The 2005 funds were
contributed with the understanding that the 50% balance of investment would be
priced at the same purchase price as the initial
On September 14, 2006, the Company issued a confidential private placement
offering, with a purchase price of $0.70 per share of common stock. Each four
shares purchased will entitle the purchaser to receive common stock purchase
warrants to purchase one share of common stock at an exercise price of $1.25 on
or prior to October 1, 2011. As of December 31, 2006, the Company had received
gross proceeds of approximately $1.357 million for an aggregate of 1,938,570
shares of common stock.
In June 2007, the Company received cash proceeds of $975,000 from an accredited
investor for the purchase of 1,300,000 shares of common stock at $0.75 per share
as part of a private offering.
In August 2007, the Company converted $500,000 previously received in the form
of advances into purchases of 714,286 shares of common stock at $0.70 per share.
F-28
13. WARRANTS
At December 31, 2007 and 2006, 1,869,643 and 1,594,643 shares, respectively, of
common stock have been reserved for issuance under outstanding warrants. All of
the warrants are fully vested and have expiration dates ranging from March 28,
2007 to December 19, 2016. Information concerning the Company's warrant activity
is as follows:
2007 2006
------------------- ------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE EXERCISE
------------------- ------------------
OPTIONS PRICE OPTIONS PRICE
--------- ----- --------- -----
Outstanding, at the beginning of year 1,589,643 $ .99 955,000 $1.53
Granted 380,000 $1.25 634,643 1.25
Exercised -- -- -- --
Expired 100,000 4.05 -- --
--------- ----- --------- -----
Outstanding, at the end of year 1,869,643 $1.25 1,589,643 $ .99
========= ===== ========= =====
In consideration of the stockholder loan agreement (Item 12), the Company has
granted the stockholder a total of 475,000 common stock purchase warrants at an
exercise price equal to the closing market price of the Company's stock on the
dates of grant. On March 28, 2002, the Company recorded a deferred charge of
$318,000. The deferred charge was initially amortized over the commitment period
and subsequently revised to include the repayment period, as amended. During the
years ended December 31, 2007 and 2006, the Company had amortized approximately
$6,000 and $29,000 of such costs, respectively, which are included in interest
expense in the accompanying consolidated statements of operations.
On March 14, 2003, the Company recorded a deferred charge of $212,500. The
deferred charge is being amortized over the repayment period of 21.5 months.
During the years ended December 31, 2007 and 2006, the Company had amortized
approximately $4,000 and $79,000 respectively, which is included in interest
expense in the accompanying 2005 consolidated statement of operations.
On December 15, 2004, the Company extended the life of a director's warrants by
one year. The expiration date of the warrant was extended from December 2004 to
December 2005. The fair value of the modified warrant was estimated at the date
of grant using a Black-Scholes option pricing model and the difference in the
fair value of the old award and the new award was estimated to be $20,000.
During June and July 2005, the Company received cash proceeds of 1.48 million
from the sale of 4,820,664 shares of common stock from a private placement
offering. The funds were used for corporate purposes and to reduce the
outstanding principle balance of the notes payable to stockholder. Additionally,
warrants in the amount of 400,000 and 80,000 were offered to two separate
participants in the private placement at a price of $0.80 per each share of
common stock with an exercise date of June 17, 2006, and an expiration date of
June 17, 2008. During 2006 and 2005, respectively, the Company recorded an
expense of $66,492 and $79,908.
As part of the September 14, 2006 private placement offering, the Company
granted to investors 643,643 warrants to purchase one share of common stock at
an exercise price of $1.25 on or prior to October 1, 2011.
In June 2007, the Company received cash proceeds of $975,000 from an accredited
investor for the purchase of 1,300,000 shares of common stock at $0.75 per share
as part of a private offering. As part of the offering, the Company awarded
380,000 warrants to purchase one share of common stock at an exercise price of
$1.25 on or prior to August 23, 2017.
14. MAJOR CUSTOMERS
During 2007 and 2006, two customers together accounted for approximately 44% and
39%, respectively, of the Company's net sales. In 2007, there were two customers
that individually accounted for greater than 10% of net sales, or approximately
$791,000 and $570,000, while in 2006 there were two customers that individually
accounted for greater than 10% of net sales, or approximately $769,000 and
$417,000. There were five customers at December 31, 2007, whose trade receivable
balances equaled or exceeded 5% of total receivables, representing approximately
24%, 10%, 8%, 8% and 7% respectively, of total accounts receivable. The loss of
business from one or a combination of the Company's significant customers could
adversely affect its operations.
F-29
15. GEOGRAPHIC INFORMATION
The Company has two lines of product, which it manufactures and distributes from
its locations in the United States and the United Kingdom. Information with
respect to sales activity and long-lived assets (consisting entirely of property
and equipment) in the United States and United Kingdom is as follows:
YEAR ENDED DECEMBER 31
------------------------
2007 2006
---------- ----------
Net sales:
United States $1,873,017 $2,266,816
United Kingdom 1,209,856 806,131
---------- ----------
$3,082,873 $3,072,947
========== ==========
Long-lived assets by area:
United States $ 153,139
United Kingdom 9,699
----------
$ 162,838
==========
16. SUBSEQUENT EVENTS
In February 2008, the Company received cash proceeds of $324,000 from an
accredited investor for the purchase of 900,000 shares of common stock at $0.36
per share. As part of the offering, the Company awarded 225,000 warrants to
purchase one share of common stock at an exercise price of $1.25 on or prior to
February 5, 2018. This same investor had previously purchased 1.3 million shares
of common stock in a June 2007 private offering priced at $0.75 per share,
bringing the total shares of Puradyn common stock purchased by this investor to
2,200,000.
On February 18, 2008, the Company entered into a Master Distributor Agreement
with Filter Solutions Ltd (FSL), whereby FSL assumes distributorship for the
United Kingdom, Mainland Europe and Ireland. The contract contains minimum
purchase requirements and shall have an initial term of five years. The Company
expects that under this agreement FSL will absorb the majority of expenses
attributable to the Puradyn, Ltd United Kingdom office.
On March 7, 2008, the repayment date of the stockholder loan was extended from
December 31, 2008 to December 31, 2009.
During the quarter ending March 31, 2008, the Company received shareholder loans
totaling $420,000.
On March 24, 2008, the Company converted $420,000 previously received in the
form of advances into purchases of 1,200,000 shares of common stock at $0.35 per
share. The purchases resulted in the issuance of 300,000 warrants to purchase
one share of common stock at an exercise price of $1.25 on or prior to March 19,
2013.
On March 26, 2008, the Company converted $100,000 received in the form of
advance into the purchase of 285,714 shares of common stock at $.35 per share
and the issuance of 71,429 warrants to purchase one share of common stock at an
exercise price of $1.25 on or prior to March 20, 2013.
F-30
Until December 29, 2008, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations other than those contained in
this prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized by the company or any of the
underwriters. This prospectus does not constitute an offer of any securities
other than those to which it relates or an offer to sell, or a solicitation of
any offer to buy, to any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
the information set forth herein is correct as of any time subsequent to the
date hereof.
TABLE OF CONTENTS
Page
About this Prospectus...................2
Prospectus Summary......................2
Selected Consolidated Financial Data....2
The Offering............................3
Risk Factors............................3
Cautionary Statements Regarding
Forward-Looking Information.............6 PURADYN FILTER
Market for Common Equity and Related TECHNOLOGIES INCORPORATED
Stockholder Matters.....................7
Capitalization..........................7
Use of Proceeds.........................8 PROSPECTUS
Dilution................................8
Plan of Distribution....................8
Management's Discussion and 3,500,000 Shares of Common Stock
Analysis or Plan of Operation.........9
Our Business............................21 Offering Price $.28 per share
Management..............................27
Certain Relationships and Maximum Offering
Related Transactions................35 $980,000
Principal Stockholders..................35
Description of Securities...............38
Shares Eligible for Future Sale ........39
Legal Matters...........................39
Experts.................................39
Where You Can Find Additional
Information.......................39 November 14, 2008
Financial Statements....................F-1