================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
_______________
FORM 10-QSB
_______________
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended MARCH 31, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (No Fee Required)
For the transition period from ________________ to
Commission file number 0-29192
_______________
PURADYN FILTER TECHNOLOGIES INCORPORATED
----------------------------------------------
(Name of small business issuer in its charter)
_______________
Delaware 14-1708544
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2017 High Ridge Road, Boynton Beach, Florida 33426
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(561) 547-9499
-------------------------
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that Puradyn Filter Technologies Incorporated was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Indicate by check mark whether the issuer is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes { } No {X}
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of May 12, 2006, there were 25,349,432 shares of registrant's common stock
outstanding, par value $.001.
================================================================================
Puradyn Filter Technologies Incorporated
Index to Quarterly Report on Form 10-QSB
Part I. Financial Information
Page
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet - March 31, 2006......... 3
Condensed Consolidated Statements of Operations -
Three months ended March 31, 2006 and 2005................... 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2006 and 2005.................... 5
Condensed Consolidated Statement of Stockholders' Deficit..... 6
Notes to Condensed Consolidated Financial Statements.......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 15
Item 3. Controls and Procedures....................................... 19
Part II. Other Information
Item 1. Legal Proceedings............................................. 20
Item 2. Changes in Securities and Use of Proceeds..................... 20
Item 3. Default Upon Senior Securities................................ 20
Item 4. Submission of Matters to a Vote of Security Holders........... 20
Item 5. Other Information............................................. 20
Item 6. Exhibits and Reports on Form 8-K.............................. 20
Signatures................................................................... 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Puradyn Filter Technologies Incorporated
Condensed Consolidated Balance Sheet
March 31, 2006
(Unaudited)
Assets
Current assets:
Cash and cash equivalents 41,896
Accounts receivable, net of allowance for uncollectible accounts of $24,795 468,530
Inventories 1,148,278
Prepaid expenses and other current assets 184,125
Deferred financing costs 71,311
-----------
Total current assets 1,914,140
Property and equipment, net 283,913
Other noncurrent assets 40,930
-----------
Total assets
2,238,983
===========
Liabilities and stockholders' deficit Current liabilities:
Accounts payable 168,594
Accrued liabilities 766,137
Current portion of capital lease obligation 4,519
Deferred revenue 83,690
-----------
Total current liabilities 1,022,940
Capital lease obligation, less current portion 4,843
Notes Payable to stockholder 5,511,000
-----------
Total Liabilities 6,538,783
Commitments and Contingencies's --
Stockholders' deficit:
Preferred stock, $.001 par value:
Authorized shares - 500,000; none issued and outstanding --
None issued and outstanding
Common stock, $.001 par value:
Authorized shares - 30,000,000
Issued and outstanding - 25,349,432 25,350
Additional paid-in capital 38,052,229
Notes receivable from stockholders (1,100,442)
Accumulated deficit (41,280,392)
Accumulated other comprehensive income 3,457
-----------
Total stockholders' deficit (4,299,800)
-----------
Total liabilities and stockholders' deficit
2,238,983
===========
See accompanying notes to condensed consolidated financial statements.
3
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)
Three Months Ended
March 31,
2006 2005
------------ ------------
Net sales $ 822,743 $ 597,693
Costs and expenses:
Cost of products sold 615,377 624,514
Salaries and wages 335,430 368,517
Selling and administrative 268,179 359,649
Stock-based compensation 36,586 (34,215)
------------ ------------
1,255,572 1,318,465
------------ ------------
Loss from operations (432,829) (720,772)
Other income (expense):
Interest income 12,295 12,667
Interest expense (129,212) (113,642)
------------ ------------
Total other income (expense) (116,917) (100,975)
------------ ------------
Net loss before income tax expense $ (549,746) $ (821,747)
============ ============
Income tax expense -- --
------------ ------------
Net loss (549,746) (821,747)
============ ============
Basic and diluted loss per common share $ (0.02) $ (0.05)
============ ============
Weighted average common shares outstanding 23,776,654 17,455,434
============ ============
See accompanying notes tocondensed consolidated financial statements.
4
Puradyn Filter Technologies Incorporated
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)
THREE MONTHS ENDED
2006 2005
--------- ---------
OPERATING ACTIVITIES
Net loss $(549,746) $(821,747)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 52,745 61,260
Provision for bad debts 6,172 (2,409)
Provision for obsolete and slow moving inventory (17,483) 20,482
Amortization of deferred financing costs included in interest expense 18,337 33,961
Interest receivable from notes receivable from stockholders (11,852) (11,852)
Compensation expense on stock-based arrangements with employees and
vendors 36,586 (34,215)
Changes in operating assets and liabilities:
Accounts receivable (51,660) 90,043
Inventories 48,907 73,236
Prepaid expenses and other current assets 61,046 38,551
Accounts payable (101,795) 6,180
Accrued liabilities 48,327 99,445
Deferred revenues 7,880 12,657
--------- ---------
Net cash used in operating activities (450,458) (434,408)
INVESTING ACTIVITIES
Purchases of property and equipment (1,675) --
--------- ---------
Net cash used in investing activities (1,675) --
FINANCING ACTIVITIES
Proceeds from sale of common stock 910,000 --
Proceeds from exercise of stock options -- 3,423
Proceeds from issuance of notes payable to stockholder 187,000 648,100
Payment of notes payable to stockholder (747,000) --
Payment of capital lease obligations (1,218) (1,095)
--------- ---------
Net cash provided by financing activities 348,782 650,428
Effect of exchange rate changes on cash and cash equivalents (10,310) 11,037
--------- ---------
Net (decrease) increase in cash and cash equivalents (115,739) 227,057
Cash and cash equivalents at beginning of period 155,557 257,210
--------- ---------
--------- ---------
Cash and cash equivalents at end of period $ 41,896 $ 484,267
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 92,116 $ 49,852
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued in settlement of accrued bonus $ 30,000 --
========= =========
Warrants issued in connection with financing costs $ -- 112,500
========= =========
See accompanying notes to condensed consolidated financial statements
5
Puradyn Filter Technologies Incorporated
Consolidated Statements of Changes in Stockholders' Deficit
Accumulated
Notes Other
Additional Receivable Comprehensive Total
Common Stock Paid-in From Accumulated Income Stockholders'
Shares Amount Capital Stockholders Deficit (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 -- -- -- -- -- (9,941) (9,941)
Net loss -- -- -- -- (549,746) -- (549,746)
------------
Total comprehensive loss -- -- -- -- -- -- (559,687)
Issuance of common stock in
private placement , net 3,033,333 3,034 906,967 -- -- -- 910,001
Warrants
issued to investors -- -- 36,099 -- -- -- 36,099
Shares Issued in lieu of employee bonus 40,000 40 29,960 -- -- -- 30,000
Interest receivable related to notes
receivable from stockholders -- -- -- (11,852) -- -- (11,852)
Compensation expense associated with
outstanding option awards -- -- 487 -- -- -- 487
------------ -------- ------------ ------------ ------------- -------- ------------
Balance at March 31, 2006 25,349,432 $ 25,350 $ 38,052,229 $ (1,100,442) $ (41,280,392) $ 3,457 $ (4,299,800)
============ ======== ============ ============ ============= ======== ============
See accompanying notes to condensed consolidated financial statements.
6
Puradyn Filter Technologies Incorporated
Notes to Condensed Consolidated Financial Statements
March 31, 2006
(Unaudited)
1. BASIS OF PRESENTATION, GOING CONCERN 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-QSB
and Regulation S-B. 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
period ended March 31, 2006 may not necessarily be indicative of the results
that may be expected for the year ending December 31, 2006.
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, 2005.
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 led the
Company's independent auditor Daszkal Bolton, LLP to include a statement in its
audit report relating to the Company's audited consolidated financial statements
for the year ended December 31, 2005 expressing substantial doubt about the
Company's ability to continue as a going concern.
Additionally, 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 stockholders. The Company has
implemented further measures to preserve its ability to operate, including
organizational changes, a reduction and/or deferral of salaries, reduction in
personnel and renegotiation of 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.
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.
7
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
3,124,570 and 2,816,070 for the three months ended March 31, 2006 and 2005,
respectively.
Stock Compensation
Prior to January 1, 2006, the Company accounted for employee stock-based
compensation using the intrinsic value method supplemented by pro forma
disclosures in accordance with APB 25 and SFAS 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), as amended by SFAS No. 148 "Accounting for
Stock-Based Compensation--Transition and Disclosures." Under the intrinsic value
method, the recorded stock-based compensation expense was related to the
amortization of the intrinsic value of stock options issued and other
equity-based awards issued by the Company. Options granted with exercise prices
equal to the grant date fair value of the Company's stock have no intrinsic
value and therefore no expense was recorded for these options under APB 25. For
stock options whose exercise price was below the grant date fair value of the
Company's stock, the difference between the exercise price and the grant date
fair value of the Company's stock was expensed over the service period
(generally the vesting period) using an accelerated amortization approach in
accordance with FASB Interpretation No. 28 "Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans."
Effective January 1, 2006 the Company adopted SFAS 123R using the modified
prospective approach and accordingly prior periods have not been restated to
reflect the impact of SFAS 123R. Under SFAS 123R, stock-based awards granted
prior to its adoption will be expensed over the remaining portion of their
vesting period. For stock-based awards granted on or after January 1, 2006, the
Company will amortize stock-based compensation expense on a straight-line
basis over the requisite service period, which is generally a one or four years
vesting period. SFAS 123R requires that the deferred stock-based compensation on
the condensed consolidated balance sheet on the date of adoption be netted
against additional paid-in capital. As of December 31, 2005 there was no
deferred stock-based compensation that was netted against additional paid-in
capital on January 1, 2006
Three Months Ended
March 31, 2005
--------------
Net loss as reported
$ (821,747)
Fair value method stock option expense 126,080
--------------
Pro forma net loss
$ (695,667)
==============
Loss per common share:
Basic and diluted loss as reported $ (0.05)
Basic and diluted loss pro forma $ (0.04)
Weighted average fair value per option granted
during the period(1) $ .59
Assumptions:
Average Risk Free Interest Rate 3.74%
Average Volatility Factor .733
Expected Dividend Yield 0%
Expected Life (in years) 5
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
value.
8
Inventories consisted of the following at March 31, 2006:
Raw materials $ 785,399
Finished goods 362,879
-----------
$ 1,148,278
===========
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 $18,337 and $33,960 for the three-months ended
March 31, 2006 and 2005, respectively. In March 2002, the Company recorded the
initial deferred financing costs of $318,000 for the shareholder loan with a
maturity date of December 31, 2004. On March 14, 2003, as the maturity date was
extended to December 31, 2005, an additional $214,400 in deferred financing
costs was recorded (see Note 2). On April 14, 2005 the maturity date was
extended to December 31, 2006, resulting in the addition of approximately
$55,000 of related deferred financing costs. Accumulated amortization of
deferred financing costs as of March 31, 2006 and 2005 was $609,839 and
$524,266, 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.
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 three-months ended March 31, 2006:
Balance as of December 31, 2005 $ 70,370
Less: Payments made (4,532)
Change in prior period estimate 603
Add: Provision for current period warranties 18,379
Balance as of March 31, 2006 $ 84,820
9
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, Ltd. Comprehensive loss as of March 31, 2006 and
2005 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-months ended March
31, 2006 and 2005:
Three Months Ended
March 31,
2006 2005
------------ ------------
Net loss $ (549,746) $ (821,747)
Other comprehensive loss:
Foreign currency translation adjustment 9,943 (11,037)
------------ ------------
Comprehensive loss $ (539,803) $ (832,784)
============ ============
2. ISSUES AFFECTING LIQUIDITY AND MANAGEMENT'S PLANS
The Company's financial statements have been prepared on the basis that it will
continue as a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
sustained losses since inception and used net cash in operations of
approximately $450,000 and $434,000 during the three-months ended March 31, 2006
and 2005, 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, Daszkal Bolton, LLP to
include a statement in its audit report relating to the Company's audited
consolidated financial statements for the year ended December 31, 2005
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 2006. Additionally, the Company is
reviewing cost of material increases, which are expected to be passed through to
its customers as product price increases.
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 further
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 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.
10
On March 29, 2006, the stockholder amended the original loan agreements to
extend the payback dates to December 31, 2007. 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 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. As of March 31, 2006,
the Company had drawn a total of $5.5 million of the available funds.
The Company anticipates increased cash flows from 2006 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 2006. There can be no
assurance that the Company will be able to raise the additional capital needed
to continue as a going concern.
3. 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 offering.
4. STOCK OPTIONS AND WARRANTS
During the three-months ended March 31, 2005, employees of the Company exercised
3,270 common stock options. No options were exercised during the three-months
ending March 31, 2006. The Company received $2,936 in cash proceeds in exchange
for the shares issued in 2005.
During the three-month periods ended March 31, 2006 and March 31, 2005, the
Company recognized compensation expense and income of approximately $37,000 and
$34,000, respectively. At March 31, 2006, approximately 480,000 warrants with an
average exercise price of $0.80, remain unvested and related expenses are being
amortized over their vesting period.
On December 22, 2005, the board of directors approved the acceleration of
vesting rights with respect to options issued to employees, officers and
directors to purchase 197,000 shares of common stock of the Company. Of the
options vested, options to purchase approximately 143,000 shares were held by
the Company's executive officers and directors. No other changes were made with
respect to the option grants.
11
For the three months ended March 31, 2006, the Company recorded stock-based
compensation expense of $488 which reduced net income by $488. For the three
months ended March 31, 2005, the Company recognized $34,000 of stock-based
compensation expense under the intrinsic value method
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 APB 25.
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.
A summary of the Company's stock option plans as of March 31, 2006, and changed
during the three month period then ended is presented below:
Three Months Ended
March 31,
Weighted
Average
Number of Exercise
Options Price
------------- -----------
Options outstanding at beginning of period 2,152,070 $ 3.18
Options granted 25,000 1.00
Options exercised -- --
Options expired 42,500 6.50
------------- -----------
Options at end of period 2,134,570 $ 3.18
------------- -----------
Options exercisable at end of period 2,070,820 $ 3.26
============= ===========
12
Changes in the Company's unvested options for the three months ended March 31,
2006 are summarized as follows:
Three Months Ended
March 31,
Weighted
Average
Number of Exercise
Options Price
------------- -----------
Options unvested at beginning of period 38,750 .34
Options granted 25,000 .66
Options exercised -- --
Options expired -- --
------------- -----------
Options unvested at end of period 63,750 $ .47
============= ===========
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------
REMAINING
AVERAGE WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF NUMBER LIFE (IN EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING YEARS) PRICE EXERCISABLE PRICE
-------------- ----------- ----------- ---------- ----------- -----------
$ .21 - $ 1.70 1,101,900 5.53 $ .88 1,029,400 $ .89
1.86 - 4.50 549,295 3.31 2.50 548,045 2.50
4.81 - 6.81 5,875 .40 5.49 5,875 5.49
8.50 - 9.25 487,500 1.88 9.07 487,500 9.07
----------- ----------- ---------- ----------- -----------
Totals 2,134,570 3.89 $ 3.18 2,070,820 $ 3.26
=========== =========== ========== =========== ===========
------------
(1) A Black-Scholes option-pricing model was used to develop the fair values of
the options granted.
A summary of the Company's warrant activity as of March 31, 2006, and changed
during the three month period then ended is presented below:
2006
-------------------------
WEIGHTED AVERAGE
EXERCISE
-------------------------
OPTIONS PRICE
------------ ----------
Warrants outstanding at the beginning of
period 955,000 $ 1.53
Granted -- --
Exercised -- --
Expired -- --
------------ ----------
Warrants outstanding at end of period 955,000 $ 1.53
============ ==========
13
2006
-------------------------
WEIGHTED AVERAGE
EXERCISE
-------------------------
OPTIONS PRICE
------------ ----------
Warrants unvested at the beginning of
period 480,000 $ .80
Granted -- --
Exercised -- --
Expired -- --
------------ ----------
Warrants unvested at end of period 480,000 $ .80
============ ==========
WARRANTS OUTSTANDING
--------------------------------------
REMAINING
AVERAGE WEIGHTED
CONTRACTUAL AVERAGE
RANGE OF NUMBER LIFE (IN EXERCISE
EXERCISE PRICE OUTSTANDING YEARS) PRICE
----------------- ------------ ---------- ---------
$ .80 - $ .95 580,000 2.82 $ .83
2.00 - 2.25 275,000 2.42 2.11
4.05 100,000 .99 4.05
------------ ---------- ---------
Totals 955,000 2.38 $ 1.53
============ ========== =========
5. NOTES PAYABLE TO STOCKHOLDER
As of March 31, 2006, the Company had drawn an aggregate of approximately $5.5
million from the available line-of-credit, which is provided by a stockholder,
who is also a Board Member, of the Company (see Notes 2 and 3). Amounts drawn
bear interest at the prime rate (7.5% as of March 31, 2006) payable monthly and
become due and payable on December 31, 2007; or 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 February 2006, the
Company used the funds received from the private placement to pay down $747,000
of the outstanding loan balance. During the period ended March 31, 2006, the
Company had drawn an additional $187,000 of the available balance, leaving an
available balance of $639,000. On March 29, 2006, the maturity date of the
stockholder loan was extended from December 31, 2006 to December 31, 2007.
For the three-months ended March 31, 2006 and 2005, the Company recorded
approximately $105,986 and $79,101, 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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Form 10-KSB for the year ended December 31, 2005.
Other than historical and factual statements, the matters and items discussed in
this Quarterly Report on Form 10-QSB are forward-looking statements that involve
risks and uncertainties. Actual results of the Company may differ materially
from the results discussed in the forward-looking statements. Certain factors
that could contribute to such differences are discussed with the forward-looking
statements throughout this report. Except as required by law or regulation, we
do not undertake any obligation to publicly update forward-looking statements to
reflect events or circumstances after the date on which the statement is made or
to reflect the occurrence of unanticipated events.
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 led the
Company's independent auditor Daszkal Bolton, LLP to include a statement in its
audit report relating to the Company's audited consolidated financial statements
for the year ended December 31, 2005 expressing substantial doubt about the
Company's ability to continue as a going concern.
Additionally, 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 stockholders. The Company has
implemented further 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 arrangement. There can be no
assurances that the Company will be able to raise the additional capital needed
or reduce the level of expenditures in order to sustain operations.
General
Sales of the Company's products will depend principally upon end user demand for
such products and acceptance of the Company's products by OEMs. The oil
filtration industry has historically been competitive and, as is typically the
case with innovative products, the ultimate level of demand for the Company's
products is subject to a high degree of uncertainty. Developing market
acceptance for the Company's 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.
Through industry data research, we have been able to identify the potential
applications where management believes market penetration is most accessible.
Currently no bypass oil filtration system has captured a substantial share of
the estimated recurring $13 billion potential market. We believe we are in a
unique position to capitalize on the growing 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 offering a unique selling
concept based on an advanced, patented technology to safely extend
factory specified engine oil drain intervals
o An alternative solution to the rising costs and increasing dependence
on foreign oil
15
o Providing an operational maintenance solution to end users in
conjunction with existing and reasonable foreseeable federal
environmental applications
We continue to incorporate the focus of our sales strategy on individual sales
and distribution efforts as well as on the development of a strong nationwide
distribution network that will not only sell but also install and support our
product.
Additionally we began to focus our sales and marketing efforts to target areas
and issues specific to the bypass oil filtration industry, including cultivating
an innovative outlook on oil maintenance, specifically, that oil does not need
to be changed on a regular basis if kept in a clean state.
This strategy includes focus on:
o The expansion of existing strategic relationships
o Continued development and expansion of our distribution network with
qualified distributors in order to establish a sales- and
service-oriented nationwide infrastructure
o Continuing to target existing and new medium-to-large sized fleets,
industrial/construction business 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
o Closely monitoring customer evaluations to ensure the salient aspects
of our system are addressed on a timely basis
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 Recognition by several engine manufacturers for specific application
concerning Puradyn's ability to safely extend drain intervals by
providing acceptable clean oil as verified through oil analysis.
o 2006 final test results released by the US Department of Energy (DOE)
estimating an 89% savings in oil using bypass oil filtration. Our
system was used in this test conducted from 2002-2005 evaluating the
benefits and cost savings of the technology.
o 2006 announcement that the U.S. Military has ordered the PURADYN
system installed on new trucks that Freightliner LLC is supplying for
foreign military sales.
o 2006 continued testing with the U.S. Military on use of the PURADYN
system on several other applications.
o 2005 announcement that the PURADYN is now being installed by one of
the largest U.S. suppliers of construction aggregates upon successful
conclusion of a joint test conducted with a major oil company.
o Growth of replacement filters has been substantially increased since
2004, achieving targeted growth for this time period.
We believe that the renewed interest shown in the technology of bypass oil
filtration as an economic alternative to rising oil prices, dependence upon
foreign oil, with the added benefit of being environmentally beneficial, will
timely and favorably position the Company as a manufacturer of this type of
product. We also believe that industry acceptance resulting in sales will
continue to grow in 2006; 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.
16
The Company's sales effort not only involves educating the potential customer on
the benefits of our product, but also allowing the customer to test and evaluate
the PURADYN system on its fleet vehicles. While set for a specific period of
time, typically ranging from three to twelve 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. Management believes that this evaluation period will
continue to be shortened as our products gain wider acceptance, support and
usage from well-known customers and OEMs.
The Company utilized its wholly owned subsidiary, Puradyn Filter Technologies,
Ltd. ("Ltd."), in the United Kingdom to sell the Company's products in Europe,
the Middle East and Africa.
International sales are especially well suited to our product 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 system represents. In first quarter 2006, total international
sales accounted for 38% of the Company's consolidated net sales.
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 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
shipment is recorded as deferred revenue. Sales are made to certain 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. Management believes, based on past
experience and future expectations, that such limited return rights and
warranties will not have a material adverse effect on the Company's financial
statements.
RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED MARCH 31, 2006 COMPARED TO THE
THREE-MONTHS ENDED MARCH 31, 2005
The following table sets forth the amount of increase or decrease represented by
certain items reflected in the Company's condensed consolidated statements of
operations in comparing the three-months ended March 31, 2006 to the
three-months ended March 31, 2005:
(In thousands) Three Months Ended March 31,
------------------------------------------
2006 2005 Change
---------- ---------- ----------
Net sales $ 823 $ 598 225
---------- ---------- ----------
Costs and expenses:
Cost of products sold 615 625 (10)
Salaries and wages 336 369 (33)
Selling and administrative 268 360 (92)
Stock-based compensation 37 (34) 71
---------- ---------- ----------
Total costs and expenses 1,256 1,320 64
---------- ---------- ----------
Other (expense) income:
Interest income 12 13 1
Interest expense (129) (114) 15
---------- ---------- ----------
Total other (expense) income
(117) (101) 16
---------- ---------- ----------
Net loss $ (550) (823) (273)
========== ========== ==========
17
NET SALES
Net sales increased by approximately 38% from approximately $598,000 in 2005 to
approximately $823,000 in 2006. This increase is attributable to a 34% increase
in unit sales in 2006 compared to 2005, as well as product price increases.
Sales Returns and Allowances decreased approximately $67,000 due to a decrease
in the cumulative historical rate of returns. Historical return rates have
continued to decline as improvements have been made to the products.
Sales to one customer accounted for approximately 33% of the consolidated net
sales for the three-months ended March 31, 2006. For the three-months ended
March 31, 2005, sales to three customers accounted for approximately 30%, 17%
and 11% of the consolidated net sales. The UK subsidiary's sales decreased by
approximately 27% for the three-month period ended March 31, 2006 compared to
the three-month period ended March 31, 2005.
COST OF PRODUCTS SOLD
Cost of products sold decreased by approximately 1% from approximately $625,000
in 2005 to approximately $615,000 in 2006. Cost of products sold, as a
percentage of sales, decreased from 104% in 2005 to 75% in 2006. This decrease
is attributable to improvements in raw material sourcing, reductions in product
bills of materials and product price increases.
SALARIES AND WAGES
Salaries and wages decreased approximately $33,000, or 9%. This decrease is the
result of a net reduction of three employees, representing a decrease of
approximately $30,000.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased by approximately $92,000, or 25%.
This decrease was due primarily to a reduction in exchange losses and travel
expenses of approximately $36,000 and $19,000 respectively. Licenses and fees
expense decreased $20,000 since the AMEX listing fee is not required since the
company de-listed. Professional fees decreased approximately $7,000 due to the
change in auditors and the reduction of audit and review fees.
STOCK-BASED COMPENSATION
The Company recorded stock based compensation expense and income of
approximately $37,000 and $34,000 for the three-months ended March 31, 2006 and
2005, respectively, related to certain variable equity awards and other stock
based compensation. The increase is attributed to the increase in the stock
price from $.70 at December 31, 2005 to $1.40 at March 31, 2006.
INTEREST EXPENSE
Interest expense increased by approximately $16,000 as a result of an increase
in the interest rate on outstanding balance of the stockholder notes payable.
The Company pays interest monthly on the notes payable to stockholder at the
prime rate, which was 7.5% as of March 31, 2006 as opposed to 5.75% as of March
31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2006, the Company had cash and cash equivalents of approximately
$42,000. For the three-month period ended March 31, 2006, net cash used in
operating activities was approximately $450,000 which primarily resulted from
the net loss of approximately $550,000. There was $1,675 cash used in investing
activities for the purchase of property and equipment. Net cash provided by
financing activities was approximately $349,000 for the period, due to $910,000
of proceeds received from a private offering, offset by $560,000 of net
repayments of the shareholder loan.
18
The Company has incurred net losses each year since its 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.
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. On March
29, 2006, the maturity date of the loan was extended from December 31, 2006 to
December 31, 2007. As of March 31, 2006, the Company had drawn $5.511 million of
the $6.150 million of the available funds.
At March 31, 2006, the Company had working capital of approximately $891,000
and its current ratio (current assets to current liabilities) was 1.87 to 1. The
Company anticipates increased cash flows from 2006 sales activity; however,
additional cash will still be needed to support operations and meet working
capital needs. 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 part of
its assets to continue as a going concern through 2006. There can be no
assurance that the Company 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.
The Company's wholly owned subsidiary, Puradyn Filter Technologies, Ltd., rents
office space in Devon, England under a lease that expires in September 2010.
Consistent with industry practices, the Company may accept product returns or
provide other credits in the event that a distributor holds excess inventory of
the Company's products. The Company's sales are made on credit terms, which vary
depending on the nature of the sale. The Company believes it has 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 the
Company's reserves.
Sales of the Company's products will depend principally on end user demand for
such products and acceptance of the Company's 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 the Company's products is subject to a high degree of
uncertainty. Developing market acceptance, particularly worldwide, for the
Company's 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.
Impact of Inflation
Inflation has not had a significant impact on the Company's operations. However,
any significant decrease in the price for oil or labor, environmental compliance
costs, and engine replacement costs could adversely impact the Company's end
users cost/benefit analysis as to the use of the Company's products. The impact
of fluctuations in foreign currency has not been significant. The exchange rate,
the Great British pound to the U.S. dollar fluctuated from 1.7208 on
December 31, 2005 to 1.7398 on March 31, 2006 as compared to 1.9266 on
December 31, 2004 to 1.879 on March 31, 2005.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Puradyn Filter Technologies Incorporated's Chief Executive Officer and Chief
Financial Officer have evaluated the Company's disclosure controls and
procedures as of March 31, 2006, and they concluded that these controls and
procedures are effective.
(b) Changes in Internal Controls
There are no significant changes in internal controls or in other factors that
could significantly affect these controls subsequent to March 31, 2006.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
------------
(1) A Report on Form 8-K was filed on March 1, 2006, reporting under Item 3.02
that the Company executed subscription agreements with five accredited
investors of $910,000 for the purchase of 3,033,334 shares of common stock
at $0.30 per share.
20
SIGNATURES
In accordance with the requirements of the Exchange Act, Puradyn Filter
Technologies Incorporated caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PURADYN FILTER TECHNOLOGIES INCORPORATED
(Registrant)
Date: May 15, 2006 By: /s/ Cindy Lea Gimler
-----------------------------------------
Cindy Lea Gimler, Chief Financial Officer
Date: May 15, 2006 By: /s/ Richard C. Ford
-----------------------------------------
Richard C. Ford, Chief Executive Officer
21