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 SEPTEMBER 30, 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
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PURADYN FILTER TECHNOLOGIES INCORPORATED
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(Name of small business issuer in its charter)
Delaware 14-1708544
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2017 High Ridge Road, Boynton Beach, Florida 33426
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (561) 547-9499
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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 November 14, 2006, there were 27,252,288 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 -
As of September 30, 2006 and December 31, 2005 3
Condensed Consolidated Statements of Operations -
Three months and nine months ended
September 30, 2006 and 2005 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2006 and 2005 5
Condensed Consolidated Statement of Stockholders' Deficit -
Nine months ended September 30, 2006 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
or Plan of Operation 16
Item 3. Controls and Procedures 22
Part II. Other Information
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Default Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Puradyn Filter Technologies Incorporated
Condensed Consolidated Balance Sheet
As of September 30, 2006 and December 31, 2005
(Unaudited)
September 30, December 31,
2006 2005
------------- ------------
Assets
Current assets:
Cash and cash equivalents 299,656 155,557
Accounts receivable, net of allowance for
uncollectible accounts of $54,841 and $50,250 274,571 423,041
Inventories 1,269,140 1,181,781
Prepaid expenses and other current assets 187,475 245,171
Deferred financing costs, net -- 89,648
----------- -----------
Total current assets 2,030,842 2,095,198
Property and equipment, net 190,686 334,615
Deferred financing costs, net 50,936 --
Other noncurrent assets 55,930 40,930
----------- -----------
Total assets 2,328,394 2,470,743
=========== ===========
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable 361,725 270,389
Accrued liabilities 927,006 747,810
Current portion of capital lease obligation 4,520 4,520
Deferred revenue 89,305 75,810
----------- -----------
Total current liabilities 1,382,556 1,098,529
Capital lease obligation, less current portion 2,307 6,060
Notes payable to stockholder 6,146,000 6,071,000
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 - 25,783,002 and 22,276,099 25,783 22,276
Additional paid-in capital 38,523,147 37,078,716
Notes receivable from stockholders (1,124,541) (1,088,590)
Accumulated deficit (42,550,633) (40,730,646)
Accumulated other comprehensive (loss)/income (76,225) 13,398
----------- -----------
Total stockholders' deficit (5,202,469) (4,704,846)
----------- -----------
Total liabilities and stockholders' deficit 2,328,394 2,470,743
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Operations
For the Three Months and Nine Months Ended September 30, 2006 and 2005
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net sales $ 641,303 $ 538,443 $ 2,319,362 $ 1,775,225
Costs and expenses:
Cost of products sold 545,105 474,626 1,800,109 1,731,780
Salaries and wages 351,619 445,664 1,044,010 1,043,563
Selling and administrative 260,055 322,409 942,753 1,048,765
------------ ------------ ------------ ------------
1,156,779 1,242,699 3,786,872 3,824,108
------------ ------------ ------------ ------------
Loss from operations (515,476) (704,256) (1,467,510) (2,048,883)
Other income (expense):
Interest income 13,011 12,838 37,698 38,603
Interest expense (136,810) (108,897) (390,175) (334,976)
------------ ------------ ------------ ------------
Total other expense, net (123,799) (96,059) (352,477) (296,373)
------------ ------------ ------------ ------------
Loss before income taxes (639,275) (800,316) (1,819,987) (2,345,255)
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Net loss (639,275) (800,316) (1,819,987) (2,345,255)
============ ============ ============ ============
Basic and diluted loss
per common share $ (0.03) $ (0.04) $ (0.07) $ (0.12)
============ ============ ============ ============
Weighted average common shares
outstanding 25,355,915 22,276,099 24,833,119 19,591,962
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
4
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2006 and 2005
(Unaudited)
Nine Months Ended
September 30,
----------------------------
2006 2005
----------- -----------
OPERATING ACTIVITIES
Net loss $(1,819,987) $(2,345,255)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 157,444 181,225
Provision for bad debts 36,217 21,833
Provision for obsolete and slow moving inventory (16,085) 347
Deposit on other assets (15,000) --
Amortization of deferred financing costs included in interest expense 38,712 78,786
Interest receivable from notes receivable from stockholders (35,951) (35,951)
Compensation expense on stock-based arrangements with employees,
consultants, investors and vendors 205,338 39,565
Changes in operating assets and liabilities:
Accounts receivable 112,253 255,625
Inventories (69,196) 66,105
Prepaid expenses and other current assets 57,696 17,474
Accounts payable 91,336 17,124
Accrued liabilities 209,196 185,341
Deferred revenues 13,496 28,917
----------- -----------
Net cash used in operating activities (1,034,531) (1,488,864)
INVESTING ACTIVITIES
Purchases of property and equipment (9,562) (21,675)
----------- -----------
Net cash used in investing activities (9,562) (21,675)
FINANCING ACTIVITIES
Proceeds from sale of common stock 1,210,000 1,482,200
Proceeds from exercise of stock options 2,600 2,936
Proceeds from notes payable to stockholder 822,000 923,100
Payment of notes payable to stockholder (747,000) (1,044,000)
Payment of capital lease obligations (3,753) (3,374)
----------- -----------
Net cash provided by financing activities 1,283,847 1,360,862
Effect of exchange rate changes on cash and cash equivalents (95,655) 76,182
----------- -----------
Net (decrease) in cash and cash equivalents 144,099 (73,495)
Cash and cash equivalents at beginning of period 155,557 257,210
----------- -----------
Cash and cash equivalents at end of period 299,656 183,715
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 344,855 244,149
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES
Common stock issued in settlement of accrued bonus $ 30,000 --
Warrants issued in connection with financing costs $ -- $ 55,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
5
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Changes in Stockholders' Deficit
Nine Months ended September 30, 2006
Accumulated
Common Stock Additional Notes Other Total
----------------------- Paid-in Receivable Accumulated Comprehensive Stockholders'
Shares Amount Capital From 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 (89,623) (89,623)
Net loss (1,819,987) (1,819,987)
-----------
Total comprehensive loss (6,614,456)
Compensation expense
associated with
unvested options 4,996 4,996
Issuance of
common stock
in private
placement, net 3,461,903 3,462 1,206,538 1,210,000
Warrants issued
to investors 112,742 112,742
Shares issued in
settlement of
employee bonus 40,000 40 29,960 30,000
Exercise of stock options 5,000 5 2,595 2,600
Interest receivable
related to
notes receivable
from stockholders (35,951) (35,951)
Compensation expense
associated with
option modification 87,600 87,600
---------- ------- ----------- ----------- ------------ -------- -----------
Balance at
September 30, 2006 25,783,002 25,783 38,523,147 (1,124,541) (42,550,633) (76,225) (5,202,469)
========== ======= =========== =========== ============ ======== ===========
See accompanying notes to condensed consolidated financial statements.
6
Puradyn Filter Technologies Incorporated
Notes to Condensed Consolidated Financial Statements
September 30, 2006
(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-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
and nine-month periods ended September 30, 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 have led
the Company's independent registered 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.
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 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. The
condensed consolidated financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
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
2,905,918 and 3,072,070 respectively for the three-month and nine-month periods
ended September 30, 2006 and 3,418,070 for the three-month and nine-month
periods ended September 30, 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 year 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.
Using the Black-Scholes option-pricing model for all options granted, the
Company's pro forma net loss and pro forma net loss per share with related
assumptions were as follows:
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2005
------------------ ------------------
Net loss as reported $ (800,316) $ (2,345,255)
Stock-based employee
compensation cost
(intrinsic value method) -- --
Fair value method
stock option expense (38,847) 58,067
------------ --------------
Pro forma net loss $ (839,163) $ (2,287,188)
============ ==============
Loss per common share:
Basic and diluted loss
as reported $ (0.04) $ (0.12)
Basic and diluted loss
pro forma $ (0.04) $ (0.12)
Weighted average
fair value per
option granted
during the period(1) $ .24 $ .53
Assumptions
Average Risk Free Interest Rate 3.99% 4.26%
Average Volatility Factor .607 .712
Expected Dividend Yield 0% 0%
Expected Life (in years) 2.5 4.75
----------
A Black-Scholes option-pricing model was used to develop the fair values of the
options granted.
8
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 September 30, 2006:
Raw materials $ 858,174
Finished goods 410,966
----------
$1,269,140
==========
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 approximately $10,000 and $22,000 for the
three-months ended September 30, 2006 and 2005, and $39,000 and $79,000 for the
nine months ended September 30, 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,
the Company recorded additional deferred financing costs of $214,400 related to
an additional $3.5 million commitment provided by the same stockholder, with a
payback date of December 31, 2004. On February 2, 2004 the maturity date for
both loans were extended to December 31, 2005, resulting in the addition of
approximately $94,000 of related deferred financing costs. 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 September 30, 2006 was
approximately $630,000.
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
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.
9
The following table shows the changes in the aggregate product warranty
liability for the nine-months ended September 30, 2006:
Balance as of December 31, 2005 $ 70,370
Less: Payments made (7,205)
Change in prior period estimate 1,122
Add: Provision for current period warranties 9,634
-----------
Balance as of September 30, 2006 $ 73,921
===========
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 September 30, 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 and nine-months
ended September 30, 2006 and 2005:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Net loss (639,275) (800,316) (1,819,987) (2,345,255)
---------- ---------- ---------- ----------
Other comprehensive income:
Foreign currency translation adjustment 30,974 20,511 89,623 71,162
---------- ---------- ---------- ----------
Total other comprehensive income 30,974 20,511 89,623 71,162
---------- ---------- ---------- ----------
Comprehensive loss (608,301) (779,805) (1,730,364) (2,274,093)
========== ========== ========== ==========
New Accounting Standards
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 is not
expected to have 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 flows, and results of operations.
10
In September 2006, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 provides interpretive guidance on the SEC's
views on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The provisions of SAB 108 will be effective for the Company for the fiscal year
ended December 31, 2006. The Company is currently evaluating the impact of
applying SAB 108 but does not believe that the application of SAB 108 will have
a material effect on its financial position, cash flows, and results of
operations.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current
period presentation.
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 $1,034,531
and $1,488,000 during the nine-months ended September 30, 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.
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 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.
On March 29, 2006, the stockholder amended the original loan agreements to
extend the payback dates to December 31, 2007 (see note 5). 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
September 30, 2006, the Company had drawn a total of $6.146 million of the
available funds.
Subsequent to September 30, 2006, the Company received $1.032 million in cash
proceeds from accredited investors for the purchase of 1,474,286 common shares.
Through November 14, 2006, the company had net repayments of approximately
$685,000 of the shareholder loan.
The Company anticipates increased cash flows from 2006 and 2007 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 2007. There can be
no assurance that the Company will be able to raise the additional capital
needed to continue as a going concern.
11
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% from the current market price 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.
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 September 30, 2006, the Company had received
gross proceeds of approximately $.3 million for an aggregate of 428,570 shares
of common stock.
Subsequent to September 30, 2006, the Company received $1.032 million in cash
proceeds from accredited investors for the purchase of 1,474,286 common shares.
4. STOCK OPTIONS
During the nine-months ended September 30, 2006 and 2005, respectively,
employees of the Company exercised 5,000 and 3,270 common stock options. The
Company received $2,600 and $2,936, respectively, in cash proceeds in exchange
for the shares issued in 2006 and 2005.
During the three-month and nine month periods ended September 30, 2006, the
Company recognized compensation expense of approximately $49,000 and $205,000,
respectively. During the three-month and nine-month periods ended September 30,
2005, the Company recognized compensation expense of approximately $114,000 and
$40,000, respectively.
For the three-month and nine-month periods ended September 30, 2006, the Company
recorded stock-based compensation expense of $2,372 and $4,996. For the
three-month and nine-month periods ended September 30, 2005, the Company
recognized an expense of approximately $6,000 and $40,000, respectively, 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.
12
A summary of the Company's stock option plans as of September 30, 2006, and
changes during the nine month period then ended is presented below:
Nine Months Ended
September 30, 2006
---------------------------
Weighted Average
Number of Options Exercise Price
----------------- ----------------
Options outstanding at beginning of period 2,152,070 $ 3.18
Options granted 35,000 1.11
Options exercised 5,000 .52
Options Cancelled 5,000 .52
Options expired 337,295 2.93
--------- --------
Options at end of period 1,839,775 3.20
--------- --------
Options exercisable at end of period 1,776,025 3.29
========= ========
A summary of the Company's stock option plans as of September 30, 2006, and
changed during the three month period then ended is presented below:
Three Months Ended
September 30, 2006
-------------------------------------
Weighted Average
Number of Options Exercise Price
----------------- ----------------
Options outstanding at beginning of period 2,117,070 $ 3.10
Options granted -- --
Options exercised 5,000 .52
Options cancelled 5,000 .52
Options expired 267,295 2.50
--------- -----
Options at end of period 1,839,775 3.20
--------- -----
Options exercisable at end of period 1,776,025 3.29
========= =====
Changes in the Company's unvested options for the nine months ended September
30, 2006 are summarized as follows:
Nine Months Ended
September 30, 2006
------------------------------------
Weighted Average
Number of Options Exercise Price
----------------- ----------------
Options unvested at beginning of period 38,750 $ .34
Options granted 35,000 1.11
Options exercised 5,000 .52
Options cancelled 5,000 .52
Options expired -- --
------ -----
Options unvested at end of period 63,750 $ .89
====== =====
Changes in the Company's unvested options for the three months ended September
30, 2006 are summarized as follows:
Three Months Ended
September 30, 2006
----------------------------------
Weighted Average
Number of Options Exercise Price
----------------- ---------------
Options unvested at beginning of period 73,750 $.84
Options granted -- --
Options exercised 5,000 .52
Options cancelled 5,000 .52
Options expired -- --
------ ----
Options unvested at end of period 63,750 $.89
====== ====
13
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Remaining
Average Weighted
Range of Number Contractual Life Average Number Weighted Average
Exercise Price Outstanding (In Years) Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- ----------------
$ .21 - $ 1.70 1,091,900 5.64 $ .89 1,029,400 $ .89
1.86 - 4.50 282,000 3.31 2.50 280,750 2.50
4.81 - 6.81 3,375 .40 6.00 3,375 6.00
8.50 - 9.25 462,500 2.37 9.07 462,500 9.07
--------- ---- ----- --------- -----
Totals 1,839,775 4.04 $3.20 1,776,025 $3.29
========= ==== ===== ========= =====
----------
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 September 30, 2006 and changed
during the nine 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 107,143 1.25
Exercised -- --
Expired -- --
--------- -----
Warrants outstanding at end of period 1,062,143 1.48
========= =====
2006
----------------------
Weighted Average
Exercise
----------------------
Options Price
--------- -----
Warrants unvested at the beginning of
period 480,000 $ .80
Granted -- --
Exercised -- --
Vested 480,000 .80
--------- -----
Warrants unvested at end of period -- --
========= =====
Warrants Outstanding
------------------------------------------------
Remaining
Average Weighted
Range of Number Contractual Life Average
Exercise Price Outstanding (In Years) Exercise Price
-------------- ----------- ---------------- --------------
$ .80 - $1.25 687,143 5.66 .89
2.00 - 2.25 275,000 1.92 2.11
4.05 100,000 .49 4.05
--------- ---- ----
Total 1,062,143 3.04 1.48
========= ==== ====
Subsequent to September 30, 2006, as part of the private placement offering (see
note 3), the Company issued 368,571 warrants to purchase one share of common
stock at an exercise price of $1.25 on or prior to October 1, 2011. The company
will record approximately $128,000 of stock related compensation expense related
to this transaction, for the period ending December 31, 2006.
14
5. NOTES PAYABLE TO STOCKHOLDER
As of September 30, 2006, the Company had drawn an aggregate of approximately
$6.146 million of the $6.15 million from its available line-of-credit, provided
by a stockholder, who is also a Board Member, of the Company (see Note 2).
Amounts drawn bear interest at the prime rate (8.25% as of September 30, 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 a private placement to
pay down $747,000 of the outstanding loan balance. During the three month period
ended September 30, 2006, the Company had drawn an additional $245,000 of the
available balance, leaving an available balance of $4,000. 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 September 30, 2006 and 2005, the Company recorded
approximately $128,000 and $86,000, respectively, and for the nine-months ended
September 30, 2006 and 2005, the Company recorded approximately $348,000 and
$255,000, 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.
Subsequent to September 30, 2006, and through November 14, 2006, the company had
net repayments of approximately $685,000 of the shareholder loan.
6. 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.
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.
7. SUBSEQUENT EVENTS
On October 23, 2006, the Board of Directors unanimously appointed Chairman
Joseph V. Vittoria to the office of Chief Executive Officer as well as Chairman
concurrent with Richard C. Ford stepping down. Mr. Ford will remain on the Board
of Directors of the Company as Vice-Chairman but has resigned his position on
the Board of Directors of Ltd.
On October 25, 2006, the Board of Directors agreed to award certain employees of
the Company vested rights to purchase an aggregate of 17,350 shares of common
stock under the Company's 1999 Employee Stock Plan. The options were priced at
$1.05, the closing price of a share of stock on October 23, 2006. The Company
will record approximately $12,000 of stock related compensation expense, related
to this transaction, for the period ending December 31, 2006.
On October 24, 2006, the Company agreed to extend the expiration day by two
years to November 30, 2008 for 375,000 stock options previously awarded to
Richard C. Ford as a longtime Officer and Director of Puradyn. As per the terms
outlined in the Employee 1996 and 1999 Stock Option Plans, Mr. Ford would have
had 30 days from the date of his October 23, 2006 departure from the Company to
15
exercise all options. The Company will record an expense of approximately
$86,000 related to this transaction in the period ending December 31, 2006.
Subsequent to September 30, 2006, the Company received $1.032 million in cash
proceeds from accredited investors for the purchase of 1,474,286 common shares.
The purchases resulted in the issuance of 368,571 warrants to purchase one share
of common stock at an exercise price of $1.25 on or prior to October 1, 2011.
The company will record approximately $128,000 of stock related compensation
expense related to this transaction, for the period ending December 31, 2006.
On November 2, 2006, the Board of Directors unanimously agreed to award Joseph
V. Vittoria 150,000 Class A Warrants of common stock at a price of $1.25 for
consideration of service to the Company in assuming a non-salaried position as
Chief Executive Officer as well as Chairman. The expiration date of the warrants
is November 7, 2011. The company will record approximately $104,000 of stock
related compensation expense, related to this transaction, for the period ending
December 31, 2006.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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
Our 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. We have incurred net losses
each year since inception and have 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 institutional investors and current stockholders have led
our independent registered public accounting firm Daszkal Bolton, LLP to include
a statement in its audit report relating to our audited consolidated financial
statements for the year ended December 31, 2005 expressing substantial doubt
about our ability to continue as a going concern.
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. We are in the process of
aggressively seeking to raise capital and are exploring financing availability
and options with investment bankers, funds, private sources and existing
stockholders. We have 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 we will be able to raise the
additional capital needed or reduce the level of expenditures in order to
sustain operations.
General
Sales of our 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
16
innovative products, the ultimate level of demand for our products 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.
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 $18 billion potential industry. 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
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 continue to focus our sales and marketing efforts to target
areas and issues specific to the bypass oil filtration industry, 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:
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 end user request
for our product on the OEM level
o Closely monitoring customer evaluations to ensure the salient aspects
of our system are perceived and accepted 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:
- 2006 announcement that the puraDYN has been approved for use by one of
the largest international diversified energy resource companies for
retrofit of equipment used at one of its key coal mine facilities in
the Southwestern U.S.
- 2006 final results released by the U.S. Department of Energy of a
three-year evaluation (2002-2005) of the cost analysis and benefits of
bypass filtration technology show 89% oil savings on heavy-duty diesel
engines.
- 2006 announcement that the U.S. Military has ordered the puraDYN system
installed on new trucks supplied by Freightliner LLC for foreign
military sales.
- 2006 continued testing with the U.S. Military on use of the puraDYN
system on several other applications.
17
- 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.
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 favorable 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.
Our 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.
We utilize our wholly owned subsidiary, Puradyn Filter Technologies, Ltd.
("Ltd"), in the United Kingdom to sell our 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 nine months of 2006, total
international sales accounted for 44.3% of the Company's consolidated net sales.
We recognize revenue from product sales to customers, distributors and resellers
when products that do not require further services or installation by us 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 that we received 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 our financial statements.
RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO
THE THREE-MONTHS ENDED SEPTEMBER 30, 2005
The following table sets 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 September 30, 2006 to the three-months ended
September 30, 2005:
(In thousands) Three Months Ended September 30,
---------------------------------
2006 2005 Change
------- ------- -------
Net sales $ 641 $ 538 $ 103
Costs and expenses:
Cost of products sold 545 474 71
Salaries and wages 352 446 (94)
Selling and administrative 260 322 (62)
------- ------- -------
Total costs and expenses 1,157 1,242 (85)
------- ------- -------
Other (expense) income:
Interest income 13 13 --
Interest expense (136) (109) 27
------- ------- -------
Total other expense (123) (96) 27
------- ------- -------
Net loss $ (639) $ (800) $ (161)
======= ======= =======
18
NET SALES
Net sales increased by approximately $103,000 or 19% from approximately $538,000
in 2005 to approximately $641,000 in 2006. Approximately $122,000 of the
increase is attributable to sales of a new product, which we distribute, the
Rentar fuel catalyst.
Sales to three customers accounted for approximately 22%, 16% and 11% (for a
total of 49%) of the consolidated net sales for the three-months ended September
30, 2006. For the three-months ended September 30, 2005, sales to two customers
accounted for approximately 51% and 15% of the consolidated net sales. The UK
subsidiary's sales decreased by approximately $17,000 (10%), from $172,000 to
$155,000 for the three-month period ended September 30, 2005 compared to the
three-month period ended September 30, 2006.
COST OF PRODUCTS SOLD
Cost of products sold increased by approximately 15% from approximately $474,000
in 2005 to approximately $545,000 in 2006. Cost of products sold, as a
percentage of sales, decreased from 88% in 2005 to 85% in 2006. The decrease is
primarily due to improvements in raw material sourcing, reductions in product
bills of materials and product price increases.
SALARIES AND WAGES
Salaries and wages decreased approximately $94,000, or 21%. During the
three-months ended September 30, 2005, we recorded an expense of approximately
$104,000 due to the increase in our stock price from $.65 at June 30, 2005 to
$1.15 at September 30, 2005. As stock-based compensation expense related to
variable awards is subject to changes in the quoted market value of our common
stock, we cannot predict the impact of stock-based compensation expense on
operations in the future. During the three-months ended September 30, 2006, our
stock declined from $1.28 at June 30, 2006 to $1.00 at September 30, 2006.
This decrease was partially offset by an approximately $8,000 increase in salary
increases to three employees and cost of living wage increases, partially
deferred, to all employees. Also during the three-months ended September 30,
2006, we expensed approximately $2,000 related to unvested options.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased by approximately $62,000, or 19%.
There was approximately a $104,000 decrease in expenses due to a gain on
currency translation, reduction in travel, entertainment and lodging expenses
and deferred finance costs by approximately $48,000, $17,000 and $12,000
respectively. This decrease was partially offset by incurred an expense of
approximately $46,000 related to 107,143 warrants issued to investors (see
note 3).
INTEREST EXPENSE
Interest expense increased by approximately $27,000, or 25%, as a result of the
increase in the interest rate. We pay interest monthly on the notes payable to
stockholder at the prime rate, which was 8.25% as of September 30, 2006,
compared to 6.75% at September 30, 2005. This increase was also attributable to
the higher average principal balance of approximately $6,024,000 in the period
ended September 30, 2006 compared to an average principal balance of
approximately $5,399,000 for the period ended September 30, 2005.
19
RESULTS OF OPERATIONS FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO
THE NINE-MONTHS ENDED SEPTEMBER 30, 2005
The following table sets forth the amount of increase or decrease represented by
certain items reflected in the our condensed consolidated statements of
operations in comparing the nine-months ended September 30, 2006 to the
nine-months ended September 30, 2005:
(in thousands) Nine Months ended September 30,
---------------------------------
2006 2005 Change
------- ------- -------
Net sales $ 2,319 $ 1,775 $ 544
Costs and expenses:
Cost of products sold 1,800 1,732 68
Salaries and wages 1,044 1,043 1
Selling and administrative 943 1,049 (106)
------- ------- -------
Total costs and expenses 3,787 3,824 (37)
------- ------- -------
Other income (expense):
Interest income 38 39 1
Interest expense (390) (335) 55
------- ------- -------
Total other expense (352) (296) 56
------- ------- -------
Net loss $(1,820) $(2,345) $ (525)
======= ======= =======
NET SALES
Net sales increased by approximately $544,000, or 31%, from approximately
$1,775,000 in 2005 to approximately $2,319,000 in 2006. Approximately $195,000
and $117,000 of the increase is attributable to an increase in unit and filter
sales respectively, for the nine-months ended September 30, 2006 as compared to
the nine-months ended September 30, 2005. International sales increased
approximately $166,000, or 19% from approximately $860,000 for the nine-month
period ended September 30, 2005 as compared to approximately $1,027,000 for the
nine-month period ended September 30, 2006. Approximately $186,000 of the
increase is attributable to sales of a new product, which we distribute, the
Rentar fuel catalyst.
Sales to two customers individually accounted for approximately 27% and 17% (for
a total 44%) and 27% and 10% (for a total of 37%) of net sales for the
nine-months ended September 30, 2006 and 2005, respectively. The UK subsidiary's
sales decreased by approximately $6,000, or 1%, from approximately $574,000 for
the nine-month period ended September 30, 2005 compared to approximately
$567,000 for the nine-month period ended September 30, 2006.
COST OF PRODUCTS SOLD
Cost of products sold increased by approximately $68,000, or 4%, from
approximately $1,732,000 in 2005 to approximately $1,800,000 in 2006. Cost of
products sold, as a percentage of sales, decreased from 98% for the nine-months
ended September 30, 2005 to 78% for the nine-months ended September 30, 2006.
This decrease in cost of products sold is attributable to improvements in raw
material sourcing, reductions in product bills of materials and product price
increases.
SALARIES AND WAGES
Salaries and wages increased approximately $1,000. There was a decrease of
approximately $9,000 as the result of a net reduction of three employees for a
portion of the period, offset by salary increases to three employees and cost of
living wage increases, partially deferred, to all employees. This decrease was
partially offset by $8,000 of stock based compensation expenses.
20
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased by approximately $106,000 or 10%
from approximately $1,049,000 for the nine months ended September 30, 2005 to
approximately $943,000 for the nine months ended September 30, 2006. There was
approximately a $260,000 decrease in expenses due primarily to the fluctuation
in exchange rates, reduction in deferred finance costs and patent expenses by
approximately $207,000 $38,000, and $16,000 respectively. These decreases were
partially offset by stock based compensation expenses. We recorded stock based
compensation expenses of $205,000 and $40,000 for the nine-months ended
September 30, 2006 and 2005, respectively, related to certain variable equity
awards and other stock based compensation. In September, 2006, we recorded
approximately $46,000 in expense related to warrants issued to investors (see
note 3). Approximately $88,000 is due to the extension in May 2006 of the
expiration date of the exercise period of 270,000 fully vested stock options for
a retired employee who left us in August 2003. Our 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 $1.00 to $8.50. In accordance with FAS123R, we compared the options'
fair value on the modification date to the fair value on the date immediately
prior to the modification and recorded the corresponding charge to compensation
expense.
INTEREST EXPENSE
Interest expense increased by approximately $55,000, or 16%, as a result of an
increase in the interest rate on the outstanding balance of the stockholder
notes payable. We pay interest monthly on the notes payable to stockholder at
the prime rate, which was 8.25% as of September 30, 2006, as compared to 6.75%
as of September 30, 2005. Additionally, the higher average principal balance of
approximately $6,120,000 in the period ended September 30, 2006 compared to an
average principal balance of approximately $5,848,000 for the period ended
September 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2006, we had cash and cash equivalents of approximately
$300,000. For the nine-month period ended September 30, 2006, net cash used in
operating activities was approximately $1,035,000, which primarily resulted from
the net loss of approximately $1,820,000. Net cash used in investing activities
was approximately $10,000 for the purchase of property and equipment. Net cash
provided by financing activities was approximately $1,284,000 for the period,
due to net proceeds of $1,210,000 in private placement offerings and the net
borrowings of approximately $75,000 of the stockholder loan.
Subsequent to September 30, 2006, the Company received $1.032 million in cash
proceeds from accredited investors for the purchase of 1,474,286 common shares.
Through November 14, 2006, the company had net repayments of approximately
$685,000 of the shareholder loan.
We have incurred net losses each year since its 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.
On March 28, 2002, we executed a binding agreement with one of our 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 September 30, 2006, we had drawn $6.146 million of the $6.150
million of the available funds.
At September 30, 2006, we had working capital of approximately $648,000 and our
current ratio (current assets to current liabilities) was 1.47 to 1. We
anticipate 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, we may have to modify our business plan, reduce or
discontinue some of our operations or seek a buyer for part of our assets to
continue as a going concern through 2006. 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.
21
Our 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, we may accept product returns or provide
other credits in the event that a distributor holds excess inventory of our
products. 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.
Sales of our product will depend principally on end user demand for such
products and acceptance of the 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, particularly worldwide, 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.
Impact of Inflation
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 our end users
cost/benefit analysis as to the use of our 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 1.72 on December 31, 2005 to
1.87 on September 30, 2006 as compared to 1.93 on December 31, 2004 to 1.76 on
September 30, 2005.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Puradyn Filter Technologies Incorporated's Chairman and Chief Executive Officer
and Chief Financial Officer have evaluated the Company's disclosure controls and
procedures as of September 30, 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 September 30, 2006.
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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 with 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 November 14, 2006, the Company had received gross
proceeds of approximately $1.332 million for an aggregate of
1,902,856 shares of common stock.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 15, 2006, the Board of Directors of the Company by virtue of
a resolution as well as majority holders of shares of the
Corporation's voting stock by virtue of written consent dated
September 15, 2006, unanimously agreed to increase the number of
authorized shares of the Corporation's Common Stock, par value $0.001
per share, from 30,000,000 shares to 40,000,000 shares.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
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
b) Reports on Form 8-K:
(1) A Report on Form 8-K was filed on October 25, 2006, reporting under
Item 5.02 and Item 7.01 that on October 23, 2006, Richard C. Ford
stepped down as Chief Executive Officer of Puradyn Filter Technologies,
Inc. The Board of Directors appointed Chairman Joseph V. Vittoria to
succeed Mr. Ford as Chief Executive Officer. Mr. Vittoria will hold
both offices of Chairman and Chief Executive Officer.
(2) A Report on Form 8-K was filed on October 10, 2006, reporting under
Item 1.01 and Item 3.02 that between September 27 and October 9, 2006,
Puradyn Filter Technologies Inc. (the Company,) received $650,000 for
the sale of 928,571 shares of its common stock at $0.70 per share. The
Company has also received commitments for an additional $570,000 to
complete the sale of 1,742,857 shares of its common stock at $0.70 per
share for an aggregate of $1.22 million. In addition, in connection
with the issuance of the sale of the common stock, the Company will
issue warrants to purchase a total of 435,714 shares of common stock
with the completion of the offering, exercisable at a price of $1.25
per share over a term of five years, assuming that all shares are
purchased.
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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)
By /s/ Cindy Lea Gimler Date: November 14, 2006
-----------------------------------------
Cindy Lea Gimler, Chief Financial Officer
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