U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB
(Mark one)
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(No Fee Required)
For the transition period form __________ to __________
Commission file number 0-29192
PURADYN FILTER TECHNOLOGIES INCORPORATED
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(Name of small business issuer in its charter)
DELAWARE 14-1708544
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(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
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered under Section 12(g) of the Exchange Act:
Common stock, par value $.001 per share
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(Title of class)
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 the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes {X} No {}
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Indicate by check mark whether the issuer is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
State issuer's revenues for its most recent fiscal year: $3,072,947
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. The aggregate market value of the voting
stock held by non-affiliates computed at the closing price of Puradyn Filter's
common stock on March 30, 2007 is approximately $15,884,084.
State the number of shares outstanding of each of the issuer's class of common
equity, as of the last practicable date. As of March 30, 2007, there were
27,386,352 shares of registrant's common stock outstanding, par value $.001.
This report contains a total of 60 pages.
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS........................................... 3
Forward Looking Statements
The Company
Products
Warranties
Marketing
Distribution
Sales
Manufacturing and Production
Competition
Intellectual Property
Governmental Approval
Engineering and Development
Employees
ITEM 2. DESCRIPTION OF PROPERTY........................................... 9
ITEM 3. LEGAL PROCEEDINGS................................................. 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......... 11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS........ 12
General
Critical Accounting Policies and Estimates
Results of Operations
Liquidity and Capital Resources
Impact of Inflation
Quarterly Fluctuations
Risk Factors Affecting Future Results of Operations
ITEM 7. FINANCIAL STATEMENTS.............................................. 19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES........................................... 20
ITEM 8A. CONTROLS AND PROCEDURES........................................... 20
ITEM 8B. OTHER INFORMATION................................................. 20
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT............... 21
ITEM 10. EXECUTIVE COMPENSATION............................................ 25
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER TRANSACTIONS............... 29
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE......................................... 30
ITEM 13. EXHIBITS.......................................................... 31
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................ 33
2
PART I
The term "the Company", "Puradyn", "we", "us" or "our" refers to Puradyn Filter
Technologies Incorporated, unless the context otherwise implies. The term "Ltd."
and "Puradyn, Ltd" refers to the Company's subsidiary, Puradyn Filter
Technologies, Ltd., unless the context otherwise implies.
ITEM 1. DESCRIPTION OF BUSINESS
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains forward-looking statements
that involve substantial risks and uncertainties. Forward-looking statements can
be identified by the fact that they do not relate strictly to historical or
current facts. They use words such as "may", "will", "expect", "intend",
"anticipate", "believe", "estimate", "continue" and other similar words. You
should read statements that contain these words carefully because they discuss
our future expectations, making projections of our future results of operations
or our financial condition or state other "forward-looking" information.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the actual results, performance or achievements of our Company
to be materially different from those which may be expressed or implied by such
statements. The factors listed in the section entitled "Risk Factors Affecting
Future Results of Operations" in the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations", as well as any other
cautionary language in this report, provide examples of risks, uncertainties and
events which may cause our actual results to differ materially from the
expectations we described in our forward-looking statements. 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.
You can learn more about the Company by visiting our website at
www.puradyn.com. Information on the website is neither incorporated into, nor a
part of, this report. We encourage you to read this and other reports filed by
the Company with the Securities and Exchange Commission. Puradyn will provide
you with a copy of any or all of these reports at no charge. You may also read
and copy any materials the Company files with the SEC at the SEC's Public
Reference Room at 100 F Street, NE, Washington, D.C. 20549, or call the SEC
Public Reference Room to obtain information at 1-800-SEC-0330.
THE COMPANY
Puradyn Filter Technologies Incorporated designs, manufactures, markets
and distributes worldwide the puraDYN(R) bypass oil filtration system (the
"PURADYN") for use with substantially all internal combustion engines and
hydraulic equipment that use lubricating oil. Working in conjunction with an
engine's full-flow oil filter, the puraDYN system cleans oil by continually
removing solid, liquid and gaseous contaminants from the oil through a
sophisticated and unique filtration and evaporation process. For engine
lubricating oil, our filters incorporate an additive package. Because
lubricating oil is kept in a continually clean state, the PURADYN has been used
effectively to extend oil-drain intervals and to extend the time between engine
overhauls. We are the exclusive manufacturer of the disposable replacement
filter elements ("Element") for the PURADYN.
We operate through:
o Puradyn Filter Technologies Incorporated - parent company
o Puradyn Filter Technologies, Ltd. ("Ltd.", "Puradyn, Ltd")
Ltd. is a wholly owned subsidiary established in 2000 which
primarily distributes and markets the PURADYN system in
countries outside North America, including Europe, the Middle
East, the former Soviet Union, Scandinavia and South Africa
through a network of independent distributors.
3
PRODUCTS
The core product, the patented PURADYN bypass oil filtration system, is
offered in two models, TF and PFT, and can be attached to almost any engine and
hydraulic systems. The concept of bypass filtration is similar to a dialysis
machine that filters blood to rid it of impurities, keeping the oil continually
clean. Whenever the engine or machinery is operating, the PURADYN is extracting
from the oil solid particles down to less than one micron (1/39 millionth of an
inch), as well as gaseous and liquid contaminants, while protecting the engine
or hydraulic equipment from harmful wear caused by contaminants in the oil.
Additive packages in which chemicals are added to the filtering media replenish
spent additives in the oil, helping to maintain the oil's proper chemical
balance and viscosity.
The condition of the oil is monitored through use of a simple oil
analysis sample taken in lieu of a regularly scheduled maintenance oil change.
If the sample results, typically received in 5 to 7 days, show that the
condition of the oil is considered good for continued use, only the PURADYN
replacement element is to be changed - there is no need to change the oil if it
is clean.
Consequently, the PURADYN significantly reduces maintenance costs by
decreasing oil consumption, engine wear and certain other types of general
maintenance as well as reducing environmental concerns and costs associated with
the storage and disposal of waste oil. These potential savings are achieved from
utilizing the PURADYN, which generally has a relatively short payback period of,
on average, nine to fourteen months.
The original PURADYN system, the TF model, is currently manufactured in
six different sizes suitable for placement on engines or equipment with oil sump
capacities ranging from 12 to 240 quarts. A new generation of product, the PFT
model, has been engineered to be manufactured in five different sizes with sump
oil capacities varying from 8 to 60 quarts. The PFT model offers the same
benefits and features of the TF model, with the added enhancements of easier
serviceability and the main component of the system being more
corrosion-resistant.
All PURADYN systems are compatible with virtually all standard and
synthetic oils on the market and they work with engines using gasoline, diesel,
propane or natural gas. The PURADYN system cannot be used on engines that do not
have a pressurized lubricating system, and none of the products can be used on
any engines that mix oil with fuel.
We also manufacture and distribute replacement filter elements
("Element" or "Elements") for the PURADYN system. Depending upon the
application, we generally recommend that the Element be replaced at the engine
manufacturer's recommended/approved periodic oil change interval or as oil
analysis dictates. The type of Element used also depends upon the specific type
of engine or hydraulic application. A customer can change the Element and take
the required oil sample in approximately five to ten minutes.
By continually removing contaminants and replacing vital additives
through a patented time-release additive package to keep oil constantly clean,
the PURADYN Element substantially extends intervals between oil changes.
Elements are interchangeable between (similar-sized) models.
The Company has implemented patented and/or proprietary technology in
the filter Elements that provides several advantages including:
o An additive package in which pelletized chemicals are added to the
filtering media to replenish additives in the oil. This additive package
helps to maintain the oil's chemical balance and viscosity. In 2006, the
Company re-engineered the additive package to be compatible with new oils
designed to meet EPA 2007 on-highway exhaust emission standards, and be
simultaneously backwards-compatible with all older API diesel lubrication
oil service categories.
o CGP(R) Extended Life Filter Element containing a patent-pending process for
chemical grafting. This new technology improves the attraction and
retention of soot and other solid contaminants to the packed cotton filter
material. CGP technology was developed over a three-year period inclusive
of laboratory and field-testing. Consolidated results from across the
country show that test vehicles averaged more than 160,000 miles without
the need for a traditional oil change.
o Ease of maintenance: The filter Element can be replaced in a matter of
seconds.
When the Element is changed, an insignificant amount of make-up oil is
added to replace any oil retained in the used Element or consumed during the
normal engine combustion process. The Company's performance warranties require
the user to change the PURADYN filter element and take a small sample of the oil
4
for submission to an oil-testing laboratory at the same intervals that the OEM
recommends for an oil change, or as oil analysis dictates (See "Warranties").
The oil analysis allows end users to monitor oil quality and, to some degree,
engine condition and provides a trend and timeline for both the Company and end
user should a problem arise.
The PURADYN has no moving parts and consequently requires no
significant ongoing maintenance. As long as Elements are changed at the
recommended intervals and other standard preventive maintenance procedures such
as changing factory full flow and air filters and oil analysis are completed,
the Company believes the PURADYN will perform as designed.
We have also become either Distributor or Master Distributor for the
following companies:
o Honeywell Consumer Products Group, manufacturer of FRAM(R) filters. As a
result, we are able to offer the full line of FRAM filters to our
distributors.
o MotorCheck(TM) On-Site Oil Analysis. The analyzer combines optical emission
and infrared oil analysis with optional viscometer within a desktop-sized
enclosure for fast, accurate fluid analysis.
o Rentar Environmental Systems. Puradyn is a Master Distributor for Rentar.
The patented and proprietary Rentar(R)Fuel Catalyst is specifically
designed to increase the efficiency of diesel engines by increasing fuel
efficiency and reducing harmful emissions.
WARRANTIES
The PURADYN carries a six-month `money-back' performance guarantee, and
is currently warranted to the original user to be free of defects in material
and workmanship for one year with unlimited miles/hours. End users have the
option to purchase a four-year extended warranty; however, sales of these
extended warranties have been minimal.
For the Company's performance guarantee and warranties to remain in
effect, users must, among other things, maintain a record of the laboratory oil
analysis results. To date, there have been no material warranty claims, although
there can be no assurances that such a trend will continue.
The Company has received letters from Deere & Company, Detroit Diesel
Corporation, Caterpillar, Inc., Ford Motor Company, Mack Trucks, Inc., Cummins
Engine Company, Inc., Daimler Chrysler Corporation and other engine
manufacturers who have all stated that the installation and use of the PURADYN
does not void their manufacturer warranties unless an engine failure is
attributed to the PURADYN. Most engine manufacturers will accept oil analyses as
alternatives to their recommended oil change intervals. This is standard
industry practice endorsed by OEMs and various fleet maintenance organizations.
MARKETING
The Company's products are marketed to numerous segments of the
transportation industry including marine, agricultural, bus, generator,
construction, mining, industrial and hydraulic applications, and other users of
engines or equipment that utilize up to 50 weight oil for lubrication.
Currently, the Company's primary focus is on the industrial/construction,
generator set, marine, and OEM segments.
Since 2004, the Company has reduced its advertising campaigns in OEM
and truck fleet-related trade magazines, concentrating instead on direct sales
contacts, trade shows, white papers and other methods of demonstration to
promote its products within targeted markets to generate awareness and stimulate
sales.
Our products have achieved recognition from well-known sources,
including certification (in 1994) and re-certifications (in 1998 and 2003) by
the California Environmental Protection Agency's Department of Toxic Substances
as a `Pollution Prevention' technology. We believe that such recognition, as
well as our presence at national industry trade shows, have and will continue to
enable the Company to increase industry recognition of the PURADYN name and
products.
We rely on management's ability to determine the existence and extent
of available markets for our product. Company management and consultants have
considerable sales and marketing backgrounds and devote a significant portion of
their time to sales-related activities.
One of our marketing strategies is based on creating customer
`pull-through', a sustained level of request for our product on the OEM level
from end-users. To this end we established aftermarket programs in 2001 and 2002
with Mack Trucks, Volvo Trucks North America and Paccar (parent company of
5
Kenworth and Peterbilt), all OEMs that sell and service, to offer our product
through their dealer network and distribution centers. To date, customer
pull-through has resulted in a limited number of our systems being
factory-installed at individual Volvo Trucks, N.A., Mack Trucks, Kenworth Truck
and Freightliner facilities. Although we continue to develop this strategic part
of our business, the aftermarket program formally ended in 2006; however,
certain aftermarket dealers have remained as distributors of our product.
In 2005, we entered into limited-time agreements with three outside
consultants to actively pursue federal contacts on three separate levels:
legislative, environmental and energy policy, and military procurement.
Management believes that this is a market that can be successfully cultivated at
this time, based on the following:
o 2007 National Stocking Number (NSN) assigned to a specific Puradyn
system kit to be installed on the U.S. Army's Mine Protection
Vehicle family.
o 2006 final test results from the US Department of Energy, which
shows that the PURADYN systems used in evaluation of the benefits
and cost analysis of bypass oil filtration, have produced an
estimated savings of 89% in oil usage and purchases when used on
heavy-duty diesel engines.
o 2006 initial order placed by the U.S. Military to have the PURADYN
installed on new trucks supplied by Freightliner LLC for foreign
military sales.
o New five-year contract awarded in December 2004 from the General
Services Administration (GSA) for its Vehicular Multiple Award
Schedule, New Technologies, which simplifies the procurement
process for governmental agencies.
o Successful presentation of the PURADYN at the Military Expedited
Modernization Initiative Procedure (EMIP) Program in January 2005.
The Company has established in-house investor relations and marketing
departments.
DISTRIBUTION
We have formal distribution agreements with domestic and international
distributors wherein they are required to maintain minimum product inventory
levels, maintain a storefront and services bay(s), and retain access to
qualified technicians trained by our technical personnel in product installation
and service. All distributors must pay in a timely fashion, and with respect to
international distributors, the agreements typically establish the minimum
dollar amount of inventory to be purchased as well as shipping terms.
The Company has warehouse distributors located throughout North
America. The remaining distributors are located primarily in South America,
England, Europe and Asia. These distributors purchase product directly from the
Company and sell to their existing or new customers. The Company will accept
returns of products that are defective at the time of sale to the distributor or
prove to be defective during the warranty period. Returns are subject to
specific conditions.
As a significant portion of our products are sold to distributors and
end users for use on transportation vehicles, this could unfavorably affect our
overall exposure to credit risk as these customers could be affected by
potential economic or other conditions.
Puradyn, Ltd. operates from the U.K. to generate distribution and sales
in Europe, the Middle East, the former Soviet Union, South Africa and
Scandinavia. There can be no assurance that such distributors will be successful
in introducing the PURADYN in their territories as they will face obstacles
similar to those the Company and its other distributors have encountered in
introducing an innovative technology in their territories. Ltd. has successfully
commenced or completed various evaluation programs, including those of two large
international generator manufacturers, four truck OEMs, one construction
equipment OEM and one diesel engine OEM. One of the world's largest OEMs of
medium-size power generators approved and began purchasing the PURADYN from Ltd.
in 2002.
SALES
DIRECT SALES
The Company directly and/or with the assistance of its manufacturer's
representatives, distributors or other agents, markets its products directly to
OEMs, other distributors and national accounts. Typically these larger
customers, and some smaller customers, require an evaluation period to operate
the system on their equipment. While set for a specific period of time, usually
ranging from three to twelve months, evaluations are often influenced by a
number of variables including equipment downtime or servicing which may extend
the evaluation period. Consequently, the sales period can be relatively long. We
6
believe this evaluation period will continue to be shortened as the Company's
products gain wider acceptance and support from well-known end users and OEMs.
Currently, our products are being evaluated (in various stages of
progress) by numerous potential end users and existing customers including,
among others:
o A major construction equipment OEM
o A major engine OEM
o A major transmission OEM
o A road materials handling Company
o Two leading food companies
o The U.S. Military
o A major oil company
o Two major long-haul carriers
In December 2004 we were awarded a new five-year contract on the
Vehicular Multiple Award Schedule, New Technologies, which replaced the schedule
on which we had currently been, which will enable us to offer our PURADYN system
to all federal government agencies. The new schedule allows easy access to our
products without the usual lengthy bid process to all federal agencies that
purchase vehicles, including construction equipment, medium and heavy trucks,
waste disposal vehicles, aerial lift vehicles and fire trucks. This new contract
period is for five years from the date of the award (to December 2009) with
three five-year options.
During 2006 and 2005, two customers together accounted for
approximately 39% and 45%, respectively, of the Company's consolidated net
sales. In 2006, there were two customers that individually accounted for greater
than 10% each of net sales, or approximately $769,000 and $417,000, while in
2005 two customers individually accounted for greater than 10% each of net
sales, or approximately $705,000 and $424,000.
At December 31, 2006 there were five customers whose trade receivable
balances equaled or exceeded 5% of total receivables, representing approximately
20%, 18%, 7%, 6% and 5% respectively, for a total of 56% of total accounts
receivable. The loss of business from one or a combination of the Company's
significant customers could adversely affect its operations.
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
recorded reserves.
In 2006, sales to a customer with one of the nation's largest privately
held fleet of trucks and equipment, represented 25% of our consolidated net
sales. This represents a 3% decrease from its percentage of consolidated net
sales in 2005.
In 2002, after extensive testing, one of the world's largest
manufacturers of medium-size power generators purchased over $350,000 of
product. This customer accounted for 17% of our 2005 consolidated net sales and
14% of our 2006 consolidated net sales.
INTERNATIONAL SALES
The Company, directly and/or with the assistance of commission-based
manufacturer's representatives, has established primarily non-exclusive
distributors in various countries, including Denmark, South Africa, Nigeria,
United Kingdom, Kuwait, United Arab Emirates, Thailand, Colombia, and others.
The ultimate success of these and other distributors depends upon, among other
things, their abilities to successfully introduce and sell the product in their
territories including obtaining local evaluations, establishing distribution and
other factors similar to those faced by the Company in the United States. Total
international sales amounted to approximately 53% and 44% of consolidated net
sales in 2006 and 2005, respectively.
MANUFACTURING AND PRODUCTION
The Company purchases component parts for its PURADYN systems and
manufactures its entire line of filter Elements. The component parts are
assembled, packed and shipped from our facility in Boynton Beach, Florida.
7
We currently source (i.e., purchase each raw material and component
part from a specific vendor) substantially all of our raw materials and
component parts from various vendors in the United States. Substantially all the
tools and dies used by certain of our vendors are owned by the Company. We have
researched alternative sources of supply and do not anticipate that the loss of
any single supplier would have a material long-term adverse effect on our
business, operations or financial condition.
In January 2004, we received ISO 9001:2000 certification from the
International Organization for Standardization. ISO 9001:2000 is a series of
internationally accepted, multi-part quality management systems for
industry-wide standardization applied to manufacturing and service
organizations. Management believes this certification will reinforce recognition
of its tangible commitment to quality control from OEMs and other potential
large customers. In January and November 2005, we successfully completed
surveillance audits and in November 2006, we successfully completed our
recertification audit to retain ISO 9001:2000 certification.
COMPETITION
Competitive bypass oil filters produced by other companies in varying
degrees address the issues of solid or liquid contaminant filtration through
centrifugal design, media filtration or evaporation. However, Puradyn believes
that it designs and manufactures the only bypass oil filtration system that
incorporates all of the following features:
o Filtering solid contaminants to below one micron, including
enhanced soot retention through the use of a patent-pending
process for chemical grafting;
o Effectively removing harmful gaseous and liquid contaminants
through a heated evaporation chamber;
o Replenishing the base additives;
o Maintaining oil viscosity
In addition, the PURADYN system was the only bypass oil filtration
system designated by the California EPA as a `Pollution Prevention' technology.
The certificate states in part, "The PURADYN(R) system has been shown to be an
effective means of extending engine oil change intervals without adversely
affecting engine wear or performance".
Tests performed by a leading independent testing facility demonstrated
that the PURADYN system surpassed the capacity, efficiency and overall
performance of its leading competitors. Using our standard filter with
additives, the PURADYN system tested 92.05% efficient under the SAE HS806-95
(modified) standards for filter capacity and contaminant removal. Efficiency
reflects the ability to remove particles and other chemicals from the oil. While
efficiency is not necessarily a standard of comparison to other products, it
does demonstrate the filtering capability of the PURADYN unit. These tests,
performed at the request of one of North America's largest engine manufacturers,
compare favorably with similar tests run by Puradyn in 2001 using our CGP
filter, which showed a filter efficiency of 99.75%.
The use of our products reduces the need for maintenance services,
replacement parts, original oil sales and waste oil disposal.
INTELLECTUAL PROPERTY
The Company owns patents for the PURADYN system; filter Elements, oil
flow meter, and two patents for technology which include a manifold type
full-flow filter/bypass filtration unit (side-by-side) in the U.S. and certain
other countries. The expiration dates of these patents range from May 2014 to
October 2016.
In addition, we received patents from the United States Patent Office
and certain other countries for a filter Element containing an additive package
in which pelletized chemicals are added to the filtering media to replenish
additives in used oil. This is especially important on new engines built since
the enactment of the Clean Air Act of 1992, which requires tighter
specifications for diesel engines.
We also recently applied for a provisional patent application for
improved filtration efficiency using CGP(R), a process for chemical grafting
that can significantly increase the life of the filter Element and further
safely extend oil drain intervals. There can be no assurance that such patents
will withstand competitive threats to their patentability or, in the case of the
redesigned PURADYN, be developed into commercially viable products.
We have registered the product trademark "Puradyn" in the United States
and other countries where the "Purifiner" trademark was registered, and have
registered the product trademarks "CGP" and "Keep It Clean!" in the United
States.
8
GOVERNMENTAL INFLUENCE
Our products typically do not require any governmental approvals. As
part of the certification process under the California Environmental Protection
Agency's Department of Toxic Substances in July 1994 and subsequent
re-certifications in July 1998 and August 2003, the Company obtained an
Executive Order issued by the State of California Air Resources Board stating
that the PURADYN does not reduce the effectiveness of applicable vehicle
pollution control systems, and may be installed on all 2002 and older model
vehicles with pressure oil systems.
2007 emissions standards represent landmark regulations. Unlike cars,
which rely heavily on after-treatment devices, to meet emission regulations,
most heavy-duty engine manufacturers have relied on computer and engine
component technology to meet stringent exhaust gas standards. Today, catalytic
converters and particulate traps in addition to using exhaust gas recirculation
(EGR) are required to meet these new 2007 emission standards. Due to the
after-treatment devices and their sensitivity to ash content, the oil industry
had to develop entirely new additive formulation removing any additives that
produced ash as a byproduct. Therefore, in order to be compatible with the new
oil formulation, we developed an entirely new additive package for 2007. In
addition, this new additive package is backwards-compatible in that it is also
compatible with the pre-2007 oils. Both lab and field tests of the new additive
package demonstrated excellent results.
As more engine manufacturers move to these new methods, including EGR,
the oil is being subjected to more extreme conditions increasing the need for
finer filtration of contaminants such as soot; reduction of water and gaseous
contaminants, and constant replenishment of oil additives to combat oxidation
and acid.
We believe that engine and truck manufacturers can capitalize on our
enhanced technology to remove soot from their oil to maintain their extended
drain intervals by operating on constantly clean oil.
ENGINEERING AND DEVELOPMENT
Currently, we have two individuals directly involved in product
engineering and development: a Product Engineer Manager and an Applications
Engineer. In addition, we employ the services of an outside petrochemical
consultant. The engineering department is also testing additional design
improvements that may be candidates for patents for the Company. During the past
two years our engineering department has devoted resources to improve the
product's filtration efficiency and abilities to meet the customers extended
drain interval requirements with the next generation of diesel engines.
In 2006 and 2005, we spent approximately $52,000 and 31,000,
respectively, on engineering research, the cost of which was not passed on to
our customers.
EMPLOYEES
At December 31, the Company had 28 employees, including 3 from Puradyn
Ltd., in the following areas:
o 9 in manufacturing, assembly, quality control, warehousing and
shipping
o 1 in purchasing
o 2 in customer service
o 5 in marketing and sales
o 1 in technical support and installation assistance
o 2 in engineering and development
o 3 in finance
o 2 in administrative positions
o 3 in administration and sales
None of the employees are represented by a labor union.
ITEM 2. DESCRIPTION OF PROPERTY.
In December 2002, the Company moved into new leased corporate
facilities within two miles of its former location, where substantially all of
the Company's operations are conducted, expanding from approximately 14,000 sq.
9
ft. to approximately 25,500 sq. ft. (5,000 sq. ft. for administration, 20,500
sq. ft. (versus former 10,000 sq. ft.) for manufacturing.) The lease term at the
new facility is for 68 months with a total lease obligation of approximately
$774,000.
In order to support its operations in Europe, Ltd. had a lease for
3,150 square feet in Devon, England, which extended through March 31, 2002,
whereupon it converted to a month-to-month basis for approximately $2,000 per
month. Due to anticipated increased sales activity, Ltd. moved to a 4,260 square
foot facility in Devon in September 2003. They assumed the existing lease, which
expired in August 2004. In September 2005, this lease was renewed with a term
that expires in September 2010.
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
In December 2001, the Company was accepted and listed on the American
Stock Exchange under the symbol PFT. On June 24, 2005, the Company submitted an
application to the Securities and Exchange Commission (SEC) for the voluntarily
withdrawal of the listing of its common stock from the American Stock Exchange.
On August 18, 2005 this application was approved effective at the opening of
business that day. The Company continues to be required to file reports with the
SEC under Section 13 of the Securities Exchange Act of 1934, including quarterly
and annual reports and, as of August 31, 2005, its common stock is included for
quotation on the OTC Bulletin Board under the symbol PFTI.OB.
As of December 31, 2006, there were approximately 295 stockholders of
record of the Company's stock. The closing bid price quoted on the Over The
Counter Bulletin Board for the Company's Common Stock at March 30, 2007 was
$.58. The transfer agent for the Company's common stock is Florida Atlantic
Stock Transfer, Inc., 7130 Nob Hill Road, Tamarac, Florida 33321.
The Company has never declared or paid cash dividends on its common
stock. The Company presently intends to retain future earnings, if any, to
finance the expansion of its business and does not anticipate any cash dividends
will be paid in the foreseeable future. The future dividend policy will depend
on our earnings, capital requirements, expansion plans, financial condition and
other relevant factors.
The following table indicates the high and low sales prices for the
quarterly periods in 2006 and 2005:
QUARTER ENDED 2006 SALES PRICE 2005 SALES PRICE
-------------------------- -------------------------
HIGH LOW HIGH LOW
------------- ------------ ------------ ------------
March 31 $1.90 $0.67 $1.24 $0.86
June 30 $1.75 $1.00 $1.04 $0.32
September 30 $1.33 $0.90 $1.80 $0.31
December 31 $1.20 $0.55 $1.21 $0.51
As of March 30, 2007, the high sales price for the first quarter of
2007 was $.96 while the low for the quarter was $.56.
Between October 2, 2006 and November 22, 2006, the Company received
$1.057 million in cash proceeds from nine accredited investors for the purchase
of 1,510,000 common shares.
In the foregoing transaction, the purchaser represented that he/she/it
was acquiring the shares for investment purposes only, and not with a view
towards distribution or resale except in compliance with applicable securities
laws. No general solicitation or advertising was used in connection with any
transaction, and the certificate evidencing the securities that were issued
contained a legend restricting their transferability absent registration under
the Securities Act of 1933 or the availability of an applicable exemption
therefrom. Accordingly, this transaction was exempt from the registration
requirements of the Securities Act of 1933 by reason of Section 4(2) of the Act
and the rules and regulations there under.
11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF 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 $15 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 unique product based on an
advanced, patented technology
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 reasonably 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 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 industrial/construction
equipment fleets, marine applications, 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 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 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.
o 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.
12
o 2006 announcement that the U.S. Military has ordered the PURADYN
system installed on new trucks supplied by Freightliner LLC for
foreign military sales.
o 2006 continued testing by the U.S. Military for use of the PURADYN
system on several other applications.
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.
We believe that industry acceptance resulting in sales will continue to
grow in 2007; 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.
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 downtime or
servicing, which may extend the evaluation period. Consequently, the sales cycle
can be relatively long. Management believes that this evaluation period has
shortened as our products gain wider acceptance, support and usage from
well-known customers and OEMs.
The Company utilizes 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 2005, total international
sales accounted for 44% 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. 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
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.
13
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 current and former independent registered public
accounting firms Webb & Company and DaszkalBolton LLP, respectively, to include
a statement in its audit report relating to the Company's audited consolidated
financial statements for the years ended December 31, 2006 and 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 2007. Additionally,
the Company is reviewing cost of material increases, which are expected to be
passed through to its customers as product price increases.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to product returns, bad
debts, inventories, financing operations, warranty obligations and contingencies
and litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial conditions of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. The Company provides for potential uncollectible
accounts receivable based on customer specific identification and historical
collection experience. If market conditions decline, actual collection
experience may not meet expectations and may result in decreased cash flows and
increased bad debt expense.
The policy for determining past due status is based on the contractual
payment terms of each customer, which is generally net 30 or net 60 days. Once
collection efforts by the Company and its collection agency are exhausted, the
determination for charging off uncollectible receivables is made.
14
Estimation of Product Warranty Cost
The Company provides for the estimated cost of product warranties at
the time revenue is recognized. While the Company engages in product quality
programs and processes, including actively monitoring and evaluating the quality
of its component suppliers, the Company's warranty obligation is affected by
product failure rates, material usage and service delivery costs incurred in
correcting a product failure. Should actual product failure rates, material
usage or service delivery costs differ from the Company's estimates, revisions
to the estimated warranty liability would be required.
Estimation of Inventory Obsolescence
The Company provides for estimated inventory obsolescence or
unmarketable inventory in amounts equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required.
Impairment of Long-Lived Assets
The Company periodically evaluates the recoverability of the carrying
amount of its long-lived assets under the guidelines of SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. Factors that the Company
considers in making this evaluation include estimating the undiscounted net cash
flows estimated to result from the assets over their remaining useful life.
Should the Company's estimates of these factors change, the Company's results of
operations and financial condition could be adversely impacted.
Revenue Recognition
Revenue is recognized when earned. The Company's revenue recognition
policies are in compliance with the provisions issued in SAB No. 104, Revenue
Recognition in Financial Statements. Revenue from product sales to customers,
distributors and resellers is recorded when products that do not require further
services or installation by the Company are shipped, when there are no
uncertainties surrounding customer acceptance and for which collectibility is
reasonably assured. The Company provides for sales returns based on an
historical analysis of returns. The estimate is updated for current return
activity and the provision is adjusted accordingly. Should actual returns exceed
management's estimates, the provision may require further adjustment and
accordingly, net sales may decrease.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB),
issued SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS 123R), which
replaces SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) and
supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values, beginning with the first interim or annual period after June
15, 2005. Small business filers will be required to adopt the provisions of SFAS
No. 123R in the first interim or annual reporting period beginning after
December 15, 2005. The grant-date fair value of employee share options and
similar instruments will be estimated using an option-pricing model adjusted for
any unique characteristics of a particular instrument. If an equity award is
modified after the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the modified award over
the fair value of the original award immediately before the modification. As a
result of this pronouncement, the Company's income statement would have
reflected approximately $227,000 of future compensation expense. 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, thus eliminating future expenses
related to these previously issued options.
15
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs: an Amendment to ARB No. 43" (SFAS 151).
This statement clarifies the types of costs that should be expensed rather than
capitalized as inventory. This statement also clarifies the circumstances under
which fixed overhead costs, such as abnormal amounts of idle facility expense,
freight, handling costs and wasted material, associated with operating
facilities involved in inventory processing should be expensed or capitalized.
The provisions of this statement are effective for fiscal years beginning after
June 15, 2005. Consequently, the Company adopted the standard in 2005 and it did
not have a material effect on the Company's financial position or the results of
its operations.
In May 2005, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 154 "Accounting Changes and Error Corrections", which replaces APB
Opinion No. 20 and SFAS No. 3, and changes the requirements for the accounting
for and reporting of a change in accounting principle. This statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The Company adopted SFAS No. 154 effective
January 1, 2006. The adoption of SFAS No. 154 did not have a material effect on
the Company's financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements". SFAS No. 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which the reporting
entity transacts. SFAS No. 157 applies whenever other standards require assets
or liabilities to be measured at fair value and does not expand the use of fair
value in any new circumstances. SFAS No. 157 establishes a hierarchy that
prioritizes the information used in developing fair value estimates. The
hierarchy gives the highest priority to quoted prices in active markets and the
lowest priority to unobservable data, such as the reporting entity's own data.
SFAS No. 157 requires fair value measurements to be disclosed by level within
the fair value hierarchy. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. The Company does not anticipate that the adoption of
SFAS No. 157 will have a material effect on the Company's financial statements.
Results of Operations
The following table sets forth (amounts in thousands) the Company's
operating information for the years ended December 31,2006 and 2005:
(IN THOUSANDS)
INCREASE
2006 2005 (DECREASE)
------- ------- -------
Net sales $ 3,073 $ 2,475 $ 598
Operating costs and expenses:
Cost of products sold 2,567 2,420 147
Salaries and wages 1,348 1,405 (57)
Selling and administrative 1,343 1,444 (101)
------- ------- -------
5,258 5,269 (11)
Loss from operations (2,185) (2,794) (609)
Other income (expense):
Interest income 50 63 (13)
Interest expense (518) (460) (58)
------- ------- -------
Total other expense (468) (397) (71)
Net loss $(2,653) $(3,191) (538)
======= ======= =======
16
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
NET SALES Net sales increased by approximately $598,000 from
approximately $2,475,000 in 2005 to approximately $3,073,000 in 2006. Sales of
Rentar units accounted for approximately $186,000 of the increase. Total
international sales increased approximately $545,000, from approximately
$1,076,000 in 2005 to approximately $1,621,000 in 2006. The mix of product sold
continues to change as filter sales have increased slightly and unit sales have
decreased slightly over last year's volumes. Although the Company anticipates
increased sales to customers in 2007, there can be no assurance that the sales
volume generated by these customers will increase or remain at the same level in
2007.
COST OF SALES Cost of sales increased by approximately $147,000 from
approximately $2,420,000 in 2005 to approximately $2,567,000 in 2006. This
increase is directly attributable to the increase in sales by approximately
$598,000. Cost of products sold, as a percentage of sales, decreased from 98% in
2005 to 84% in 2006. The decrease is primarily due to improvements in raw
material sourcing, reductions in product bills of materials and product price
increases. Additionally, the Company realized higher margins on sales generated
under distributor agreements.
SALARIES AND WAGES Salaries and wages decreased approximately $57,000
due to personnel changes in the sales and administrative staff.
SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses
decreased by approximately $101,000 from approximately $1,444,000 in 2005 to
approximately $1,343,000 in 2006. During 2005 the Company expensed investment
capital costs of approximately $106,000, such expenses were not incurred in
2006.
INTEREST EXPENSE Interest expense increased by approximately $58,000
from $460,000 in 2005 to $518,000 in 2006. The Company pays interest monthly on
the note payable to stockholder at the prime rate, which was 8.25% as of
December 31, 2006. The increase is offset by a lower principal balance of
$5,839,000 with a higher interest rate of 8.25% at December 31, 2006 as compared
to a balance of $6,071,000 and an interest rate of 7.25% at December 31, 2005.
Liquidity and Capital Resources
The Company's consolidated 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. As such, the consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern. 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 current and former independent auditors Webb & Company,
P.A. and DaszkalBolton LLP, respectively, to include a statement in its audit
report relating to the Company's audited consolidated financial statements for
the years ended December 31, 2006 and December 31, 2005 expressing substantial
doubt about the Company's ability to continue as a going concern.
The Company is currently addressing the liquidity and working capital
issues and is in the process of attempting to raise additional capital with
institutional and private investors and current stockholders. As of March 26,
2007, the Company received commitments totaling $500,000 in capital proceeds
from five accredited investors.
As of December 31, 2006, the Company had cash and cash equivalents of
approximately $55,000. For the year ended December 31, 2006, net cash used in
operating activities was approximately $1,942,000, which primarily resulted from
the net loss of approximately $2,653,000, combined with changes in working
capital amounts. Net cash used in investing activities was approximately $39,000
for purchases of property and equipment. Net cash provided by financing
activities was approximately $2,033,000 for the year, primarily due to proceeds
17
of $2,267,000 of funds from the sale of common stock to a private placement
investor, offset by a reduction in shareholder loans of $232,000.
Beginning on March 28, 2002, the Company had a binding agreement with
one of its stockholders, who is also a Board Member, to fund up to $6.1 million.
Amounts drawn bear interest at the prime rate per annum (8.25% at December 31,
2006) payable monthly and were to become due and payable on December 31, 2005,
or upon a change in control of the Company or consummation of any other
financing over $7 million. In April 2005, the repayment date was extended to
December 31,2006. In March 2006, the repayment date was further extended to
December 31, 2007 and in March 2007, the repayment date was extended to December
31, 2008. In consideration for the stockholder entering into this loan
agreement, the Company has granted the stockholder a total of 475,000 common
stock purchase warrants at an exercise price equal to the closing market price
of the Company's stock on the dates of grant. As of December 31, 2006, the
Company had drawn $5.839 million of the available funds.
At December 31, 2006, the Company had working capital of approximately
$692,000 and its current ratio (current assets to current liabilities) was 1.53
to 1, as compared with working capital of approximately $907,000 and a current
ratio of 1.83 to 1 at December 31, 2005. 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 additional capital is not
raised, budgeted sales levels are not achieved 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 or that it will continue to
operate as a going concern.
While the Company believes it can attain profitable operations in the
future, there is no assurance that sales will increase to the level required to
generate profitable operations to provide positive cash flow from operations.
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.
Quarterly Fluctuations
The Company's operating results may fluctuate significantly from period
to period as a result of a variety of factors, including product returns,
purchasing patterns of consumers, the length of the Company's sales cycle to key
customers and distributors, the timing of the introduction of new products and
product enhancements by the Company and its competitors, technological factors,
variations in sales by product and distribution channel, and competitive pricing
and general economic conditions throughout the industrialized world.
Consequently, the Company's product revenues may vary significantly by quarter
and the Company's operating results may experience significant fluctuations.
Risk Factors Affecting Future Results of Operations
The Company's future results of operations involve a number of risks
and uncertainties - many beyond our control - that could cause actual events or
results to be significantly different from those described in this document. The
following outlines a number of risks that could impact the Company's financial
condition and results of operations.
o Our ability to operate as a going concern.
o Our ability to raise capital to fund operations is limited.
o Potential for continuing losses and accumulated deficit affects our
outlook.
18
o Our products may not satisfy our customers' needs.
o Our product may not obtain market acceptance.
o We are dependent on distributors and a few significant customers and their
loss could have a significant adverse impact on us.
o Competition may adversely affect our operations, specifically alternative
products designed by OEMs or in conjunction with a third party.
o We market a limited number of related products, which makes us vulnerable
if our products do not gain market acceptance.
o There are risks associated with our international operations and
international distribution. Our foreign operations are subject to a number
of risks, including longer payment cycles, unexpected changes in regulatory
requirements, import and export restrictions and tariffs, difficulties in
staffing and managing foreign operations, the burden of complying with a
variety of foreign laws, greater difficulty in accounts receivable
collection, potentially adverse tax consequences, currency fluctuations,
enforcing patent protection and political and economic instability.
o Our intellectual property rights may not provide meaningful protection for
us.
o We will likely experience possible fluctuations in operating results, which
will expose us to greater uncertainties.
o Our product acceptance represents an educational and behavioral change
resulting in a relatively long sales cycle.
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Reports of Independent Registered Public Accounting Firms..................36-37
Consolidated Financial Statements:
Consolidated Balance Sheet - December 31, 2006........................ 38
Consolidated Statements of Operations -
Years ended December 31, 2006 and 2005................................ 39
Consolidated Statements of Changes in Stockholders' Deficit -
Years ended December 31, 2006 and 2005............................ 40
Consolidated Statements of Cash Flows -
Years ended December 31, 2006 and 2005............................ 41
Notes to Consolidated Financial Statements............................ 42
19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 17, 2006, the client-auditor relationship between Daszkal
Bolton LLP was terminated. Daszkal Bolton had been the independent registered
public accounting firm for, and audited the financial statements of, the Company
since November 2004.
On November 17, 2006, Webb & Company became the independent registered
public accounting firm for Puradyn.
The reports of Daszkal Bolton on the financial statements of the
Company for the past two fiscal years contained no adverse opinion or disclaimer
of opinion, and were not qualified or modified as to uncertainty, audit scope or
accounting principles.
The decision to change accountants was approved by the Audit Committee
of the Board of Directors.
In connection with the audits for the two most recent fiscal years and
in connection with Daszkal Bolton's review of the subsequent interim period
preceding separation between November 17, 2006, there were no disagreements
between the Company and Daszkal Bolton on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to the satisfaction of Daszkal Bolton, would have caused
Daszkal Bolton, to make reference thereto in their report on the Company's
financial statements for these fiscal years. During the two most recent fiscal
years and prior to the date of November 17, 2006, the Company had no reportable
events as defined in Item 304(a) (1) of Regulation S-B.
ITEM 8A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. In accordance
with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), as of December 31, 2006, the end of the period of
this annual report on Form 10-KSB, an evaluation was carried out
under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and
Chief Financial Officer, on the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Exchange Act). Based upon
their evaluation of these disclosure controls and procedures, the
Chief Executive Officer and the Chief Financial Officer concluded
that the disclosure controls and procedures were effective as of
the date of such evaluation to provide reasonable assurance that
information required to be disclosed in our reports under the
Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods prescribed by SEC rules and
regulations, and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.
(b) Changes in internal controls. There have been no changes in our
internal control over financial reporting during our fourth fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting..
ITEM 8B. OTHER INFORMATION
NONE
20
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
On October 24, 2006, Richard C. Ford stepped down from the position of
Chief Executive Officer and Chairman Joseph V. Vittoria was appointed by the
Board of Directors to the position of Chief Executive Officer. Mr. Ford remains
on the Board of Directors as Vice-Chairman and will focus on developing specific
and targeted accounts as a Manufacturer's Representative for the Company.
Effective October 24, 2006, Chairman Vittoria assumed the
responsibilities of CEO as a non-salaried position. Mr. Ford, as a
Manufacturer's Representative, will receive a draw on commission against future
sales.
The following table sets forth the names, positions with the Company
and ages of the executive officers, significant employees and directors of the
Company and Ltd. Directors will be elected at the Company's Annual Meeting of
Stockholders and serve for one year or until their successors are elected and
duly qualified. In the absence of an Annual Meeting, the Board elects directors
based upon qualifications. Additionally, the Board elects officers and their
terms of office are, except to the extent governed by employment contract, at
the discretion of the Board.
Board of Directors and Executive Management
NAME AGE POSITION
------------------------- --- --------------------------------------------------------------------
Joseph V. Vittoria 71 Chairman of the Board of Directors and Chief Executive Officer
Richard C. Ford 63 Vice Chairman of the Board of Directors
Kevin G. Kroger 55 President, Chief Operating Officer and Director
John S. Caldwell (2) 62 Director
Forrest D. Hayes (1), (2) 74 Director
Dominick Telesco 77 Director
Charles W. Walton (1) 74 Director
Alan J. Sandler 68 Vice President, Chief Administrative Officer and Corporate Secretary
Cindy Lea Gimler 40 Chief Financial Officer
Kevin Davies 48 Managing Director, Puradyn Ltd.
----------
(1) Audit Committee members
(2) Compensation Committee members
JOSEPH V. VITTORIA was appointed to the Board of Directors and
appointed as Chairman on February 8, 2000. Mr. Vittoria was Chairman and Chief
Executive Officer of Travel Services International, Inc. where he served from
1998 to 2000. From 1987 to 1997, Mr. Vittoria served as Chairman and Chief
Executive Officer of Avis, Inc. and was President and Chief Operating Officer of
Avis, Inc. from 1982 to 1987. Mr. Vittoria also serves as Chairman on the Boards
of Flexcar, Inc. and Great Wolf Resorts and is a member of the Board of City Car
Services, Inc.
RICHARD C. FORD has been a Director of the Company since its inception
in 1988. He served as President of the Company from its inception in 1988 until
April 1997 and as Chief Executive Officer and Treasurer until June 1997. He also
served as Secretary of the Company from its inception until August 1996. Mr.
Ford resigned from the Company in 1997 but returned to the Company as President
in April 1998 and in January 1999, was elected Chairman of the Board of
Directors and appointed Chief Executive Officer. Mr. Ford was also a Director of
TF Purifiner Ltd. through July 17, 1997 at which time he resigned, and was
re-appointed in 1999, currently serving as a Director on the Board of Puradyn,
Ltd. On October 23, 2006, Mr. Ford stepped down from the position of CEO of the
Company, currently serving on the Board as Vice-Chairman.
KEVIN G. KROGER joined the Company July 3, 2000 as President and Chief
Operating Officer, and was appointed to the Board of Directors in November 2000,
and was also appointed to the Board of Puradyn, Ltd. in December 2000. Mr.
Kroger was with Detroit Diesel Corporation from 1989 to the time he joined the
Company, serving in various executive positions prior to his appointment in 1998
to the position of Vice President and General Manager of Series 30/40 Product.
From 1987 to 1989 he was Vice President of R.E.S. Leasing and of VE Corporation.
21
Prior to this, from 1971 to 1987, he held several management positions with
Caterpillar Corporation.
LIEUTENANT GENERAL (RETIRED) JOHN S. CALDWELL, Jr. was appointed to the
Puradyn Board of Directors on August 25, 2005 and serves as Chairman of the
Compensation Committee. General Caldwell served as the Army's top ranking
officer for Acquisition, Logistics and Technology when he retired in January
2004. In that capacity, he was responsible to the Assistant Secretary for the
direction and oversight of the Army's Research, Development and Acquisition
(RDA) programs valued at approximately $20 billion per year. He was also
Director of the 50,000-person Army Acquisition Workforce, responsible for
personnel development and training policy and key assignment recommendations.
General Caldwell currently works as Senior Vice-President of QSS Group, an IT
services company supporting Federal agencies. General Caldwell holds the degrees
of Bachelor of Science from the US Military Academy, West Point in New York,
Master in Mechanical Engineering from Georgia Institute of Technology in
Atlanta, GA, and the Industrial College of the Armed Forces.
FORREST D. HAYES was appointed to the Puradyn Board of Directors on
November 10, 2005. Mr. Hayes is Chairman of the Audit Committee and a member of
Compensation Committee. Mr. Hayes served as Vice President and CFO of Wastequip,
Inc., a privately owned manufacturer of waste equipment in 1990 and 1991, and
from 1992 to 2000, as a member of the Wastequip Board of Directors. Mr. Hayes
was President and CEO of Brittany Corporation, a privately owned manufacturer of
auto/truck parts from 1992 to 2000, and as Vice-Chairman through 2003. Prior to
this, Mr. Hayes served as a CPA with Arthur Andersen from 1954 to 1990 in
various capacities including Managing Partner, of the Cleveland and Cincinnati,
Ohio offices. Currently serves on the boards of Polychem Corporation and
Brittany Stamping LLC.
DOMINICK TELESCO was appointed to the Puradyn Board of Directors on
December 19, 2006. In addition to Puradyn, Mr. Telesco also serves on the Boards
of Lydian Private Bank and the Palm Beach County Cultural Council. Mr. Telesco
is Chairman of the Board of 3 Logistics Corporation and Datelco, Inc. Mr.
Telesco is also a member of the Board of Governors of the Palm Beach Branch of
John Hopkins Hospital; and President of Boxwood, Inc. and Boxwood Association,
Inc.
CHARLES W. WALTON, PhD. was appointed to the Puradyn Board of Directors
on August 25, 2005 and is a member of the Audit Committee. Dr. Walton is
Chairman of Wastequip, Inc., which he founded in 1989 with the goal of
consolidating the equipment segment of the waste management industry. As a
result of twenty successful acquisitions and internal growth, Wastequip is now
the largest supplier of equipment in the industry with approximately $500
million in sales and 34 manufacturing plants in North America. It was recently
purchased by Odyssey Investor Partners, a private equity firm headquartered in
New York. Prior to founding Wastequip, Dr. Walton was President and Chief
Executive Officer of Sudbury, Inc., a Fortune 500 diversified manufacturing
company, which he co-founded in 1983. In 1987, he was awarded the Dively
Entrepreneurship Award by Case Western Reserve Weather head School of Management
and the Harvard Business School Club of Cleveland. Dr. Walton holds the degrees
of Bachelor of Science in Foreign Service and PhD. in economics from Georgetown
University, Washington, D.C.
ALAN J. SANDLER joined the Company in June 1998 as President, Chief
Operating Officer, Secretary, Chief Financial Officer, and Director. In January
2000, he became Vice President and resigned from the positions of President and
Chief Operating Officer. In March 2001, he resigned as Chief Financial Officer.
In August 2001, Mr. Sandler resumed the position of Chief Financial Officer and
then resigned from the position in March 2002. From 1995 until 1997 Mr. Sandler
served as President and Chief Executive Officer to Hood Depot, Inc., a national
restaurant supply manufacturer/distributor. From 1979 to 1995 he was President
and Chief Executive Officer of Sandler & Sons Dental Supply Company, a regional
dental supply and equipment distributor. Previous to this position he was a Vice
President of Gardner Advertising Company, a national advertising agency. Mr.
Sandler was appointed as a Director of TF Purifiner Ltd. in 1999 through 2000.
Effective December 16, 2004 Mr. Sandler did not seek reelection to the Board of
Directors at the 2004 Annual Meeting of Stockholders. He resigned from the
Director position to maintain a balanced Board with regard to independence as
defined in Section 121B(2)(c), of the AMEX listing standards and currently holds
22
the positions of Vice President, Chief Administrative Officer and Secretary to
the Board.
CINDY LEA GIMLER previously held the position of Accounting Manager
with the Company from October 2003 through October 2004. In February, 2005 she
was appointed as Chief Financial Officer. Prior to her employment with the
Company, she served as Controller of Bio-Engineered Supplements & Nutrition,
Inc., a nutrition products company, from October 2004 through February 2005. Ms
Gimler also served as CFO of Universal Jet Aviation, a private jet charter
company, from August 2000 through July 2003 and as Accounting Manager for Singer
Asset Finance Co., LLC from July 1999 through August 2000. From November 1989
through August 2000 she was employed as an Accountant and Financial Analyst for
Oxbow Corporation, an energy finance company. Ms. Gimler received a Masters of
Business Administration and a Bachelor of Business Administration from Florida
Atlantic University and is a CPA in the state of Florida.
KEVIN DAVIES serves as Managing Director of Puradyn, Ltd, located in
the UK. Mr. Davies has been with the Company since 1995 and at different times
has served in the positions of Technical Sales Manager, Marketing Director,
Acting Managing Director, and, as of March 2004, Managing Director. Prior to
joining Puradyn, Mr. Davies worked for Recruitment and Management Consultancy in
London, and from 1985-1990, for a diesel engine and spare parts company (part of
the Lancaster Group) in the positions of National Sales Manager, USA, as well as
Export Sales Manager for North America, Europe and the Middle East. DIRECTOR
COMPENSATION
Each member of the Board of Directors is automatically granted 5,000
options upon election as a new member of the Board of Directors. Each director
receives an additional 5,000 options at the close of each annual meeting of
stockholders. Additionally, each director automatically received 2,500 options
for each committee of the Board on which the director serves. Options are
granted at a price equal to the fair market value of the stock on the date of
grant, are exercisable commencing two years following grant, and will expire
five years from the date of grant. In the event a person ceases to serve on the
Board of Directors, the outstanding options expire one year from the date of
cessation of service. The Board of Directors will administer the Directors'
Plan.
The following table provides information concerning the compensation of
our Board members for their services as members of our Board of Directors for
the fiscal year ended December 31, 2006. The value of the warrant and options
described below were calculated in accordance with FAS 123 (R )
------------------------------------------------------------------------------------------------------------------------------------
DIRECTOR COMPENSATION
------------------------------------------------------------------------------------------------------------------------------------
FEES NON-EQUITY NON-QUALIFIED ALL OTHER
EARNED OR STOCK OPTION INCENTIVE PLAN DEFERRED COMPENSATION($) TOTAL ($)
NAME PAID IN AWARDS AWARDS COMPENSATION COMPENSATION (G) (H)
(A) CASH ($) ($) ($) ($) EARNINGS ($)
(B) (C) (D) (E) (F)
------------------------------------------------------------------------------------------------------------------------------------
Joseph V. Vittoria(1) $-- $-- $-- $-- $-- $100,500 $100,500
------------------------------------------------------------------------------------------------------------------------------------
Richard C. Ford -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Kevin G. Kroger -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
John S. Caldwell -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Forrest D. Hayes -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Dominick Telesco(2) -- -- 2,250 -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Charles W. Walton -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
(1) On November 15, 2006, Mr. Vittoria was awarded Class A warrants to purchase
150,000 shares of common stock at an exercise price of $1.25 for
consideration of service as Chairman of the Board and assuming a
non-salaried position at Chief Executive Officer.
(2) On November 30, 2006 Mr. Telesco was granted options to purchase 2,500
shares of our common stock at an exercise price of $0.68 per share, vesting
on November 30, 2007 and expiring on November 30, 2010.
23
COMMITTEES OF THE BOARD OF DIRECTORS
We do not have a policy regarding the consideration of any director
candidates which may be recommended by our stockholders, including the minimum
qualifications for director candidates, nor has our Board of Directors
established a process for identifying and evaluating director nominees. We have
not adopted a policy regarding the handling of any potential recommendation of
director candidates by our stockholders, including the procedures to be
followed. Our Board has not considered or adopted any of these policies as we
have never received a recommendation from any stockholder for any candidate to
serve on our Board of Directors. We do not anticipate that any of our
stockholders will make such a recommendation in the near future. While there
have been no nominations of additional directors proposed, in the event such a
proposal is made, all members of our Board will participate in the consideration
of director nominees.
Our Board of Directors has created both an Audit Committee and a
Compensation Committee.
Audit Committee
During 2006, the audit committee of the board of directors was composed
of two independent directors. It operates under a written charter adopted by the
board of directors. The committee members are Forrest D. Hayes (Chairperson) and
Charles W. Walton.
The Board has determined that Mr. Hayes satisfies the criteria as an
audit committee financial expert as established by the SEC under 407(d)(5) of
Regulation S-B, The audit committee met four times in 2006.
The audit committee reviews our financial reporting process on behalf
of the board of directors. Management has the primary responsibility for the
financial statements and the reporting process including the system of internal
controls.
In this context, the chairperson has met and held discussions with
management and the independent auditors. Management represented to the committee
that Puradyn's consolidated financial statements were prepared in accordance
with accounting principles generally accepted in the United States, and the
committee has reviewed and discussed the consolidated financial statements with
management and the independent auditors. The committee discussed with the
independent auditors matters required to be discussed by Statement on Auditing
Standards No. 61, Communication with Audit Committees, as amended.
In addition, the committee has discussed with the independent auditors
the auditor's independence from the Company and its management, including the
matters in the written disclosures required by the Independence Standards Board
Standard No. 1, Independence Discussions with Audit Committees.
The committee discussed with our independent auditors the overall scope
and plans for their respective audit. The committee meets with the independent
auditors with and without management present, to discuss the results of their
examinations, the evaluations of Puradyn's internal controls, and the overall
quality of our financial reporting.
In reliance on the reviews and discussions referred to above, the
committee recommended to the board of directors, and the board has approved,
that the audited consolidated financial statements be included in Puradyn's Form
10-KSB for the year ended December 31, 2006, for filing with the Securities and
Exchange Commission.
24
Submitted by the audit committee of the Board of Directors:
Forrest D. Hayes Charles W. Walton
Compensation Committee
The compensation committee provides overall guidance for officer
compensation programs, including salaries and other forms of compensation
including all employee stock option grants and warrant grants to non-employees.
The compensation committee is comprised of board members John S. Caldwell as
chairperson, and Forrest D. Hayes. The compensation committee meets on an
as-needed basis and reports to the Board of Directors.
Beneficial Ownership Reporting Compliance
Section 16 (a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent (10%) of a
registered class of the Company's equity securities, to file with the Commission
initial reports of ownership and reports of changes in ownership of common stock
and other equity securities of the Company. Officers, directors and greater than
ten percent (10%) stockholders are required by Commission regulation to furnish
the Company with copies of all Section 16 (a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the year ended December 31, 2006, the Company is
not aware of any officers, directors and/or greater than ten percent (10%)
beneficial owners who failed to timely file such forms.
Code of Ethics
We have adopted a code of ethics outlining business ethics and
conflicts of interest for all officers, directors and employees of the Company,
including procedures for prompt internal reporting of violations of the code to
the appropriate persons.
You will find a copy of our code of ethics posted on our website at
http://www.puradyn.com under Investor Relations, or you may write to us at
Puradyn Investor Relations, 2017 High Ridge Road, Boynton Beach, FL 33426. Our
Code of Ethics applies to all directors, officers and employees. We will provide
a copy to you upon request at no charge.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes all compensation recorded by us in each
of the last two completed fiscal years for our principal executive officer, each
other executive officer serving as such whose annual compensation exceeded
$100,000 and up to two additional individuals for whom disclosure would have
been made in this table but for the fact that the individual was not serving as
an executive officer of our company at December 31, 2006. The value of the
warrant and options described below were calculated in accordance with FAS
123(R). During each of fiscal 2005 and fiscal 2006, each principal executive
officer and other named employee listed below have deferred from 6% to 50% of
their base wages and/or annual increases. The amounts included above reflect
wages actually earned during the respective periods.
25
--------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------------------------------------------------
NAME AND STOCK OPTION NON-EQUITY NONQUALIFIED ALL OTHER
PRINCIPAL SALARY BONUS AWARDS AWARDS INCENTIVE PLAN DEFERRED COMPENSATION TOTAL ($)
POSITION YEAR ($) ($) ($) ($) COMPENSATION COMPENSATION ($) (J)
(A) (B) (C) (D) (E) (F) ($) EARNINGS (I)
(G) ($)
(H)
--------------------------------------------------------------------------------------------------------------------------
Joseph V.
Vittoria (1) 2006 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
--------------------------------------------------------------------------------------------------------------------------
Richard
Ford (2) 2006 196,575 -- 6,300 85,750 -- -- 9,743 298,368
--------------------------------------------------------------------------------------------------------------------------
2005 212,000 -- -- -- -- -- 12,000 224,000
--------------------------------------------------------------------------------------------------------------------------
Kevin
Kroger(3) 2006 195,270 -- 5,565 -- -- -- 24,714 225,549
--------------------------------------------------------------------------------------------------------------------------
2005 171,905 -- -- -- -- -- 24,745 196,650
--------------------------------------------------------------------------------------------------------------------------
Alan
Sandler (4) 2006 108,308 -- 2,520 -- -- -- -- 110,828
--------------------------------------------------------------------------------------------------------------------------
2005 101,923 -- -- -- -- -- -- 101,923
--------------------------------------------------------------------------------------------------------------------------
----------
(1) On October 24, 2006, Mr. Vittoria, who is also the Chairman of our Board of
Directors, was appointed by the Board of Directors to the position of Chief
Executive Officer. Mr. Vittoria serves in that position on a non-salaried
basis. The amount of compensation paid to Mr. Vittoria for fiscal 2006 in
the foregoing table excludes the compensation paid to him as set forth in
"Director Compensation" appearing earlier in this section.
(2) Mr. Ford served as our CEO through October, 2006. Mr. Ford's compensation
for fiscal 2006 includes 6,000 shares of our common stock , with a value of
$1.05 per share at the time of issuance, which were granted as additional
compensation. In addition, on October 24, 2006, we extended the expiration
of options previously awarded to Mr. Ford purchase an aggregate of 375,000
shares of our common stock with exercise prices ranging from $0.21 per
share to $0.94 per share from November 30, 2006 to November 30, 2008.
Pursuant to FAS 123(R) there was an expense of $85,750 to the Company as a
result of this modification. All Other Compensation in the foregoing table
represents the aggregate dollar amount of a car allowance received by Mr.
Ford during each of fiscal 2006 and fiscal 2005.
(3) Mr. Kroger serves as our Chief Operating Officer. Mr. Kroger's compensation
for fiscal 2006 includes 5,300 shares of our common stock with a value of
$1.05 per share at the time of issuance. All Other Compensation in the
foregoing table represents the aggregate dollar amount of a car allowance
received by Mr. Kroger during fiscal 2006 as well as the amount of
disability and life insurance premiums we pay on his behalf.
(4) Mr. Sandler serves as our Chief Administrative Officer. Mr. Sandler's
fiscal 2006 compensation includes 2,400 shares of our common stock with a
value of $1.05 per share at the time of issuance.
Compensation for officers is determined based upon each officer's respective
employment agreements. The Compensation Committee approves any increases or
other forms of compensation.
Incentive and Non-qualified Stock Option Plans
The Board of Directors adopted the 2000 Non-Employee Directors' Plan
(the "Directors' Plan") on November 8, 2000 under which options to purchase
400,000 shares have been authorized for issuance. The Directors' Plan will
provide a means to attract and retain highly qualified persons to serve as
non-employee directors and advisory directors of the Company.
26
Each member of the Board of Directors was automatically granted 5,000
options at the date of commencement of the Directors' Plan and on their initial
election as new members to the Board of Directors. Each director receives an
additional 5,000 options at the close of each annual meeting of stockholders.
Additionally, each director automatically receives 2,500 options for each
committee of the Board on which the director serves. Options are granted at a
price equal to the fair market value of the stock on the date of grant, are
exercisable commencing two years following grant, and will expire five years
from the date of grant. In the event a person ceases to serve on the Board of
Directors, the outstanding options expire one year from the date of cessation of
service. The Board of Directors will administer the Directors' Plan.
The Company's 1999 Stock Option Plan (the "1999 Plan") and the 1996
Stock Option Plan (the "1996 Plan"), adopted on September 15, 1999 and amended
in June 2000, and July 31, 1996, respectively, will work to increase proprietary
interest in the Company of the employees, Board of Advisors, consultants, and
non-employee Directors and to align more closely their interests with the
interests of the Company's stockholders. The Plans will also maintain the
Company's ability to attract and retain the services of experienced and highly
qualified employees and non-employee directors.
Under the 1999 Plan and 1996 Plan, the Company had reserved an
aggregate of 3,000,000 and 2,200,000 shares, respectively, of common stock for
issuance pursuant to options granted under the Plans ("Plan Options"). The Board
of Directors or a Committee of the Board of Directors (the "Committee") of the
Company will administer the Plans including, without limitation, the selection
of the persons who will be granted Plan Options under the Plans, the type of
Plan Options to be granted, the number of shares subject to each Plan Option and
the Plan Option price.
Options granted under the 1996 and 1999 Plans may either be options
qualifying as incentive stock options ("Incentive options") under Section 422 of
the Internal Revenue Code of 1986, as amended, or options that do not so qualify
("Non-Qualified Options"). In addition, the Plans also allow for the inclusion
of a reload option provision ("Reload Option"), which permits an eligible person
to pay the exercise price of the Plan Option with shares of Common Stock owned
by the eligible person and receive a new Plan Option to purchase shares of
Common Stock equal in number to the tendered shares. Any Incentive Option
granted under the Plans must provide for an exercise price of not less than 100%
of the fair market value of the underlying shares on the date of such grant, but
the exercise price of any Incentive Option granted to an eligible employee
owning more than 10% of the Company's Common Stock must be at least 110% of such
fair market value as determined on the date of the grant. The term of each Plan
Option and the manner in which it may be exercised is determined by the Board of
the Directors or the Committee, provided that no Plan Option may be exercisable
more than 10 years after the date of its grant and, in the case of an Incentive
Option granted to an eligible employee owning more than 10% of the Company's
common stock, no more than five years after the date of the grant.
The exercise price of Non-Qualified Options shall be determined by the
Board of Directors or the Committee and cannot be less than the par value of the
Company's Common Stock.
The per share purchase price of shares subject to Plan Options granted
under the Plans may be adjusted in the event of certain changes in the Company's
capitalization, but any such adjustment shall not change the total purchase
price payable upon the exercise in full of Plan Options granted under the Plan.
Officers, directors, key employees and consultants of the Company and
its subsidiaries (if applicable in the future) will be eligible to receive
Non-Qualified Options under the Plans. Only officers, directors and employees of
the Company who are employed by the Company or by any subsidiary thereof are
eligible to receive Incentive Options.
All Plan Options are generally nonassignable and nontransferable,
except by will or by the laws of descent and distribution, and during the
lifetime of the optionee, may be exercised only by such optionee. If an
optionee's employment is terminated for any reason, other than his death or
27
disability or termination for cause, or if an optionee is not an employee of the
Company but is a member of the Company's Board of Directors and his service as a
Director is terminated for any reason, other than death or disability, the Plan
Option granted to him generally shall lapse to the extent unexercised on the
earlier of the expiration date or one year following the date of termination. If
the optionee dies during the term of his employment, the Plan Option granted to
him generally shall lapse to the extent unexercised on the earlier of the
expiration date of the Plan Option or the date one year following the date of
the optionee's death. If the optionee is permanently and totally disabled within
the meaning of Section 22 (c) (3) of the Internal Revenue Code of 1986, the Plan
Option granted to him generally lapses to the extent unexercised on the earlier
of the expiration date of the option or one year following the date of such
disability.
The Board of Directors or the Committee may amend, suspend or terminate
the Plans at any time, except that no amendment shall be made which (i)
increases the total number of shares subject to the Plans or changes the minimum
purchase price therefore (except in either case in the event of adjustments due
to changes in the Company's capitalization), (ii) extends the term of any Plan
Option beyond ten years, or (iii) extends the termination date of the Plan.
Unless the Plans shall theretofore have been suspended or terminated by the
Board of Directors, the 1996 Plan shall terminate on July 31, 2006 and the 1999
Plan shall terminate on September 15, 2009. Any such termination of the Plans
shall not affect the validity of any Plan Options previously granted thereunder.
As of December 31, 2006, under the Directors' Plan, options to purchase
67,500 shares of common stock were outstanding. As of December 31, 2006, under
the 1996 Plan, incentive stock options to purchase 108,232 shares of common
stock were outstanding and non-qualified options to purchase 540,418 shares of
common stock were outstanding and, under the 1999 Plan, incentive stock options
to purchase 1,084,250 shares of common stock were outstanding and non-qualified
options to purchase 80,000 shares of common stock were outstanding.
---------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
---------------------------------------------------------------------------------------------------------------------------------
OPTION AWARDS STOCK AWARDS
---------------------------------------------------------------------------------------------------------------------------------
EQUITY EQUITY
INCENTIVE INCENTIVE
MARKET PLAN PLAN
NUMBER VALUE AWARDS:
EQUITY OF OF AWARDS: MARKET OR
INCENTIVE SHARES SHARES NUMBER OF PAYOUT
PLAN OR OR UNEARNED VALUE OF
AWARDS: UNITS UNITS SHARES, UNEARNED
NUMBER OF NUMBER OF NUMBER OF OF OF UNITS OR SHARES,
SECURITIES SECURITIES SECURITIES STOCK STOCK OTHER UNITS OR
UNDERLYING UNDERLYING UNDERLYING THAT THAT RIGHTS OTHER
UNEXERCISED UNEXERCISED UNEXERCISED OPTION HAVE HAVE THAT HAVE RIGHTS THAT
OPTIONS OPTIONS UNEARNED EXERCISE OPTION NOT NOT NOT HAVE NOT
NAME (#) (#) OPTIONS PRICE EXPIRATION VESTED VESTED VESTED (#) VESTED
EXERCISABLE UNEXERCISABLE (#) ($) DATE (#) ($) (I) (#)
(A) (B) (C) (D) (E) (F) (G) (H) (J)
---------------------------------------------------------------------------------------------------------------------------------
Joseph V.
Vittoria 100,000 $4.05 3/28/07
---------------------------------------------------------------------------------------------------------------------------------
125.000 2.25 3/28/08
---------------------------------------------------------------------------------------------------------------------------------
150,000 2.00 2/2/09
---------------------------------------------------------------------------------------------------------------------------------
100,000 .95 4/13/10
---------------------------------------------------------------------------------------------------------------------------------
80,000 1.25 11/15/11
---------------------------------------------------------------------------------------------------------------------------------
Richard
Ford 100,000 0.21 11/30/08
---------------------------------------------------------------------------------------------------------------------------------
100,000 0.56 11/30/08
---------------------------------------------------------------------------------------------------------------------------------
175,000 0.94 11/30/08
---------------------------------------------------------------------------------------------------------------------------------
Kevin
Kroger 100,000 1.70 01/10/13
---------------------------------------------------------------------------------------------------------------------------------
300,000 9.25 07/03/10
---------------------------------------------------------------------------------------------------------------------------------
300,000 0.93 02/28/15
---------------------------------------------------------------------------------------------------------------------------------
Alan
Sandler -- -- --
---------------------------------------------------------------------------------------------------------------------------------
28
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding the
Company's common stock beneficially owned on March 30, 2007 for (i) each
stockholder known by the Company to be the beneficial owner of five (5%) percent
or more of the Company's outstanding Common Stock, (ii) each of the Company's
executive officers as reported under Item 10.Executive Compensation, and
directors, and (iii) all officers and directors as a group. In general, a person
is deemed to be a "beneficial owner" of a security if that person has or shares
the power to vote or direct the voting of such security, or the power to dispose
or to direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which the person has the right to acquire
ownership within sixty (60) days. At March 30, 2007, there were 27,386,352
shares of Common Stock outstanding. The address of each of the persons set forth
below is 2017 High Ridge Road, Boynton Beach, Florida 33426, except as otherwise
noted.
PERCENT OF
COMMON STOCK
BENEFICIAL BENEFICIALLY
NAME AND ADDRESS OR IDENTITY OF GROUP OWNERSHIP OWNED
------------------------------------- ---------- ------------
Quantum Industrial Partners LDC ("QIP") (1) 4,570,000 15.4
Glenhill Capital Management, LP (2) 4,275,375 14.7
Richard C. Ford (3) 3,231,651 12.2
Joseph V. Vittoria (4) 2,878,536 11.6
Dominick Telesco (5) 2,100,000 7.4
Kevin G. Kroger (6) 692,633 3.7
Alan J. Sandler (7) 315,992 1.1
John S. Caldwell (8) --*
Forrest D. Hayes (9) --*
Charles W. Walton (10) 327,714 1.2
Cindy Lea Gimler (11) --
Kevin Davies (12) --
All Officers and Directors as a group (10 persons) 9,548,926
----------
* Less than 1%
(1) Address is c/o Curacao Corporation Company, N.V., Kaya Flamboyan,
Willenstad Curacao, Netherlands, Antilles.
(2) Address is 598 Madison Avenue, 12th Floor, New York, NY 10022.
(3) Mr. Ford serves as Vice-Chairman of the Board of Directors. Includes
options to purchase 100,000 shares of common stock at $.56 per share
through November 30, 2008, options to purchase 100,000 shares at $.21 per
share through November 30, 2008, and options to purchase 175,000 shares at
$.94 per share through November 30, 2008 and purchase of 1,666,667 shares
of common stock at $0.30 on June 30, 2005.
(4) Mr. Vittoria serves as Chairman of the Board of Directors and Chief
Executive Officer of the Company. Includes four warrants to purchase
100,000 shares of common stock at $4.05 through March 28, 2007, 125,000
shares of common stock at $2.25 through March 14, 2008, 150,000 shares of
common stock at $2.00 through February 2, 2009, 100,000 shares of common
stock at $.95 through April 14, 2010, and 80,000 shared of common stock at
$1.25 through November 15, 2011, respectively. Also includes purchase of
833,333 shares of common stock at $0.30 on June 30, 2005, and 833,333
shares of common stock at $0.30 on February 28, 2006.
29
(5) Mr. Telesco serves as a Director. Includes purchase of 400,000 shares of
common stock at $.70 on October 17, 2006 and 100,000 warrants to purchase
common stock at $1.25 through October 1, 2011.
(6) Mr. Kroger is President, Chief Operating Officer, and a Director. Includes
options to purchase 300,000 shares of common stock at $9.25 through July 3,
2010; options to purchase 100,000 shares at $1.70 through January 10, 2013;
purchase of 20,000 shares of common stock at $7.50 on September 26, 2000;
purchase of 334,000 shares of common stock at $0.30 on June 30, 2005 and
purchase of 334,000 shares of common stock at $0.30 on February 28, 2006.
(7) Mr. Sandler serves as Vice President, Chief Administrative Officer and
Secretary.
(8) General Caldwell serves as a Director. Includes options to purchase 5,000
shares of common stock each at $0.42 and 2,500 shares of common stock each
at $0.66, through August 25, 2010 and November 30, 2010, respectively.
(9) Mr. Hayes serves as a Director. Includes options to purchase 7,500 shares
of common stock at $1.00 through November 10, 2010 and options to purchase
2,500 shares of common stock at $0.68 through November 30, 2010.
(10) Dr. Walton serves as a Director. Includes options to purchase 5,000 shares
of common stock each at $0.42 and 2,500 shares of common stock each at
$0.68, through August 25, 2010 and November 30, 2010, respectively. Also
includes 21,429 warrants to purchase common stock at $1.25 through October
1, 2011.
(11) Ms. Gimler is Chief Financial Officer. Includes options to purchase 50,000
shares of common stock at $.93 through February 28, 2015.
(12) Mr. Davies is Managing Director of Puradyn, Ltd. Includes options to
purchase 50,000 common shares at $.86 through April 28, 2015 and 20,000
common shares at $2.80 through July 19, 2012.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth securities authorized for issuance under
equity compensation plans, including individual compensation arrangements, by us
under our Puradyn Filter Technologies, Inc. Stock Option Plan and any
compensation plans not previously approved by our stockholders as of December
31, 2006.
----------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES WEIGHTED AVERAGE NUMBER OF SECURITIES
TO BE ISSUED UPON EXERCISE PRICE OF REMAINING AVAILABLE FOR
EXERCISE OF OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER
OUTSTANDING OPTIONS, WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
WARRANTS AND RIGHTS (B) (EXCLUDING SECURITIES
(A) REFLECTED IN COLUMN (A)) (C)
----------------------------------------------------------------------------------------------------------------------
Plan category
----------------------------------------------------------------------------------------------------------------------
1996 Stock Option Plan 648,650 $2.17 1,551,350
----------------------------------------------------------------------------------------------------------------------
1999 Stock Option Plan 1,164,250 3.73 1,835,750
----------------------------------------------------------------------------------------------------------------------
2000 Non-Employee Directors Plan 67,500 1.22 332,500
----------------------------------------------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
In July 2001, the Company received promissory notes from two of its
officers for the exercise of their vested stock options in the amount of
30
$875,256 and bearing interest of 5.63%. The principal and accrued interest are
due upon the earlier of the expiration of the original option periods, which
range from July 2008 to December 2009, or upon the sale of the common stock
acquired by the execution of the options.
Beginning on March 28, 2002, the Company executed a binding agreement
with one of its stockholders, who is also a Board Member, to fund up to $6.1
million. Amounts drawn bear interest at the prime rate per annum (8.25% at
December 31, 2006) payable monthly and were to become due and payable on
December 31, 2005, or upon a change in control of the Company or consummation of
any other financing over $7 million. In April 2005, the maturity date was
extended to December 31, 2006 and then in March 2006, the maturity date was
extended to December 31, 2007. In March, 2007, the maturity date was extended to
December 31, 2008. In consideration for the stockholder entering into this loan
agreement, the Company granted the stockholder a total of 475,000 common stock
purchase warrants at an exercise price equal to the closing market price of the
Company's stock on the dates of grant. As of December 31, 2006, the Company had
drawn $5.839 million of the available funds.
DIRECTOR INDEPENDENCE
John S. Caldwell, Forrest D. Hayes, Dominick Telesco and Charles W.
Walton qualify as "independent" directors as the term is used in Item
7(d)(3)(iv) of Schedule 14A of the Securities Exchange Actt of 1934, as amended.
ITEM 13. EXHIBITS
A)
EXHIBITS DESCRIPTION OF DOCUMENTS
-------- ------------------------
3.1 Amended and Restated Certificate of Incorporation of T/F Purifiner,
Inc. dated December 30, 1996 (2)
3.1(a) Certificate of Amendment to Certificate of Incorporation dated
February 3, 1998 (3)
3.2 Bylaws of T/F Purifiner, Inc. (1)
3.3 Memorandum and Articles of Association of TF Purifiner Ltd. (1)
4.1 Amendment No. 1 to Registration Rights Agreement (3)
4.2 Notice of Delisting from the American Stock Exchange (12)
4.3 Notice of transfer of the Company's Common Stock from the American
Stock Exchange to the Over The Counter Bulletin Board (13)
10.1 1996 Stock Option Plan (1)
10.2 1999 Stock Option Plan (4)
10.3 2000 Non-Employee Directors' Plan (5)
10.4 2002 Audit Committee Charter (8)
10.5 2002 Supply Agreement between Puradyn Filter Technologies, Inc. and
Honeywell Consumer Products Group (8)
31
10.6 2004 Agreement between Puradyn Filter Technologies, Inc. and Imperial
Capital LLP (7)
10.7 2005 Agreement between Puradyn Filter Technologies, Inc. and Biscayne
Capital Markets (10)
10.8 2005 Agreement between Puradyn Filter Technologies, Inc. and
CapitalLink, L.C. (10)
10.9 Change in compensatory plan (11)
14.1 Code of Ethics (8)
16 Letter on change in Certifying Accountant (9)
23.1 Consent of Independent Registered Public Accounting Firm (6)
23.2 Consent of Independent Registered Public Accounting Firm (6)
31.1 Sarbanes-Oxley Act Section 302 Certification
31.2 Sarbanes-Oxley Act Section 302 Certification
32.1 Sarbanes-Oxley Act Section 906 Certification
32.2 Sarbanes-Oxley Act Section 906 Certification
----------
(1) Incorporated by reference from the Exhibits to the company's Form 10-SB 12B
Registration Statement, as amended, as filed with the Securities and
Exchange Commission.
(2) Incorporated by reference from the Exhibit to the company's Form 8-K,
January 9, 1997, as filed with the Securities and Exchange Commission.
(3) Incorporated by reference from the Exhibit to the company's Form 8-KA,
February 11, 1998, as filed with the Securities and Exchange Commission.
(4) Incorporated by reference from Form S-8, September 15, 1999, as filed with
the Securities and Exchange Commission
(5) Incorporated by reference from Form 10-KSB, August 9, 2001, as filed with
the Securities and Exchange Commission.
(6) Filed herewith.
(7) Incorporated by reference from the Exhibit to the company's Form 8-K,
October 29, 2004, as filed with the Securities and Exchange Commission.
(8) Incorporated by reference from Form 10-KSB, March 30, 2004, as filed with
the Securities and Exchange Commission.
(9) Incorporated by reference from the Exhibit to the company's Form 8-K,
November 18, 2004, as filed with the Securities and Exchange Commission.
32
(10) Incorporated by reference from the Exhibit to the company's Form 8-K, April
28, 2005, as filed with the Securities and Exchange Commission.
(11) Incorporated by reference from the Exhibit to the company's Form 8-K, June
21, 2005, as filed with the Securities and Exchange Commission.
(12) Incorporated by reference from the Exhibit to the company's Form 8-K, June
29, 2005, as filed with the Securities and Exchange Commission.
(13) Incorporated by reference from the Exhibit to the company's Form 8-K,
August 22, 2005, as filed with the Securities and Exchange Commission.
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
The following table sets forth the aggregate fees billed to the Company
for the years ended December 31, 2006 by Webb & Company and DaszkalBolton, and
December 31, 2005 by DaszkalBolton, the Company's principal accountants:
2006 2005
------- -------
Audit Fees $28,000 $49,000
Audit-Related Fees 22,500 19,500
Tax Fees -- --
All Other Fees 4,989 2,251
Audit Fees -- This category includes the audit of our annual financial
statements, review of financial statements included in our Form 10-QSB Quarterly
Reports and services that are normally provided by the independent auditors in
connection with engagements for those fiscal years. This category also includes
advice on audit and accounting matters that arose during, or as a result of, the
audit or the review of interim financial statements.
Audit-Related Fees -- This category consists of assurance and related
services by the independent auditors that are reasonably related to the
performance of the audit or review of our financial statements and are not
reported above under "Audit Fees." The services for the fees disclosed under
this category include consultation regarding our correspondence with the SEC and
other accounting consulting.
Tax Fees -- This category consists of professional services rendered by
our independent auditors for tax compliance and tax advice. The services for the
fees disclosed under this category include tax return preparation and technical
tax advice.
All Other Fees -- This category consists of fees for other
miscellaneous items.
The Audit Committee of our Board of Directors has adopted a procedure
for pre-approval of all fees charged by the our independent auditors. Under the
procedure, the Audit Committee approves the engagement letter with respect to
audit, tax and review services. Other fees are subject to pre-approval by the
Audit Committee, or, in the period between meetings, by a designated member of
Audit Committee. Any such approval by the designated member is disclosed to the
entire Audit Committee at the next meeting. The audit and tax fees paid to the
auditors with respect to fiscal year 2006 were pre-approved by the entire Audit
Committee.
33
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Puradyn Filter Technologies Incorporated
(Registrant)
Date: April 2, 2007 By: /s/ Joseph V. Vittoria
----------------------
Joseph V. Vittoria
Chairman and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the date indicated.
Date: April 2, 2007
By: /s/ Joseph V. Vittoria
----------------------------------------------------------
Joseph V. Vittoria
Principal Executive Officer and Chairman of the Board
By: /s/ Alan J. Sandler
----------------------------------------------------------
Alan J. Sandler
Vice President, Chief Administrative Officer and Secretary
By: /s/ Cindy Lea Gimler
----------------------------------------------------------
Cindy Lea Gimler, Chief Financial Officer
Principal Financial and Accounting Officer
By: /s/ Richard C. Ford
----------------------------------------------------------
Richard C. Ford
Vice Chairman of the Board of Directors
By: /s/ Kevin G. Kroger
----------------------------------------------------------
Kevin G. Kroger, President and Chief
Operating Officer and Director
By: /s/ John S. Caldwell
----------------------------------------------------------
John S. Caldwell, Director
By: /s/ Forrest D. Hayes
----------------------------------------------------------
Forrest D. Hayes, Director
By: /s/ Charles W. Walton
----------------------------------------------------------
Charles W. Walton, Director
By: /s/ Dominick Telesco
----------------------------------------------------------
Dominick Telesco, Director
34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Registered Public Accounting Firms..................36-37
Consolidated Financial Statements:
Consolidated Balance Sheet - December 31, 2006........................ 38
Consolidated Statements of Operations -
Years ended December 31, 2006 and 2005............................ 39
Consolidated Statements of Changes in Stockholders' Deficit -
Years ended December 31, 2006 and 2005............................ 40
Consolidated Statements of Cash Flows -
Years ended December 31, 2006 and 2005............................ 41
Notes to Consolidated Financial Statements............................ 42
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Puradyn Filter Technologies Incorporated
We have audited the accompanying consolidated balance sheet of Puradyn
Filter Technologies Incorporated (the Company) as of December 31, 2006, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company has
determined that it is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Puradyn
Filter Technologies Incorporated at December 31, 2006, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2, the
Company has suffered recurring losses from operations, its total liabilities
exceed its total assets, and it has relied on cash inflows from an institutional
investor and current stockholder. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Webb and Company
Boynton Beach, Florida
March 23, 2007
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Puradyn Filter Technologies Incorporated
We have audited the accompanying consolidated statement of operations, changes
in stockholders' equity and cash flows for the year ended December 31, 2005 of
Puradyn Filter Technologies Incorporated. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of their operations and their cash
flows for the year ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
has suffered recurring losses from operations, its total liabilities exceed its
total assets, and it has relied on cash inflows from an institutional investor
and current stockholder. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regards
to these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty
/s/ Daszkal Bolton LLP
Boca Raton, Florida
March 22, 2006, except for Note 16, as to which the date is March 29, 2006
37
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2006
Assets
Current assets:
Cash and cash equivalents $ 55,175
Accounts receivable, net of allowance for
uncollectible accounts of $47,513 497,888
Inventories, net 1,272,456
Prepaid expenses and other current assets 174,015
------------
Total current assets 1,999,534
Property and equipment, net 193,832
Other noncurrent assets 40,930
Deferred financing costs, net 40,749
------------
Total assets $ 2,275,045
============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 316,716
Accrued liabilities 885,454
Current portion of capital lease obligation 5,593
Deferred revenues 99,915
------------
Total current liabilities 1,307,678
Capital lease obligation, less current portion --
Notes Payable - stockholder 5,839,000
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 - 27,310,352 27,310
Additional paid-in capital 39,774,531
Notes receivable from stockholders (1,136,656)
Accumulated deficit (43,384,109)
Accumulated other comprehensive income (152,709)
------------
Total stockholders' deficit (4,871,633)
------------
Total liabilities and stockholders' deficit $ 2,275,045
============
See accompanying notes to consolidated financial statements.
38
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
-----------------------------
2006 2005
------------ ------------
Net sales $ 3,072,947 $ 2,475,285
Costs and expenses:
Cost of products sold 2,566,572 2,420,145
Salaries and wages 1,348,335 1,404,788
Selling and administrative 1,343,651 1,444,038
------------ ------------
5,258,558 5,268,971
------------ ------------
Loss from operations (2,185,611) (2,793,686)
Other (expense) income:
Interest income 50,413 63,365
Interest expense (518,265) (460,473)
------------ ------------
Total other expense (467,852) (397,107)
------------ ------------
Income taxes -- --
============ ============
Net loss $ (2,653,463) $ (3,190,794)
============ ============
Basic and diluted loss per common share $ (.10) $ (.16)
============ ============
Basic and diluted weighted average common shares
Outstanding 25,385,294 20,268,512
============ ============
See accompanying notes to consolidated financial statements.
39
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
NOTES ACCUMULATED
COMMON ADDITIONAL ACCUMULATED OTHER
STOCK PAID-IN RECEIVABLE FROM COMPREHENSIVE STOCKHOLDERS' TOTAL
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT INCOME (LOSS) DEFICIT
---------- ------- ----------- ----------- ------------ ------------ ------------
Balance at December 31, 2004 17,452,164 $17,452 $35,516,248 $(1,1040,524) $(37,539,854) $ (80,680) $ (3,127,358)
Foreign currency
translation adjustment -- -- -- -- -- 94,079 94,079
Net loss -- -- -- -- (3,190,794) -- (3,190,794)
------------
Total comprehensive loss -- -- -- -- -- -- (3,096,715)
Exercise of stock options 3,270 3 2,933 -- -- -- 2,936
Issuance of common stock in private
Placement, net 4,820,665 4,821 1,477,379 -- -- -- 1,482,200
Issuance of warrants to stockholder -- -- 55,000 -- -- -- 55,000
Issuance of warrants to
investors -- -- 79,908 -- -- -- 79,908
Interest receivable
related to notes receivable
from stockholders -- -- -- (48,066) -- -- (48,066)
Stock options issued to consultants -- -- 45,600 -- -- -- 45,600
Compensation expense associated with
outstanding variable option awards -- -- (98,352) -- -- -- (98,352)
---------- ------- ----------- ----------- ------------ ------------ ------------
Balance at December 31, 2005 22,276,099 22,276 37,078,716 (1,088,590) (40,730,646) 13,398 (4,704,846)
Foreign currency
translation adjustment -- -- -- -- -- (166,107) (166,107)
Net loss -- -- -- -- (2,653,463) -- (2,653,463)
------------
Total comprehensive loss -- -- -- -- -- -- (2,819,570)
Exercise of stock options 5,000 5 2,595 -- -- -- 2,600
Issuance of common stock in private
placement, net of issuance costs 4,971,903 4,972 2,262,028 -- -- -- 2,267,000
Issuance of warrants to investors -- -- 66,492 -- -- -- 66,492
Issuance of warrants to
employee/director 100,500 100,500
Issuance of warrants to
nonemployee directors 2,250 2,250
Interest receivable related to notes
receivable from stockholders -- -- -- (48,066) -- -- (48,066)
Stock options issued to employees 29,250 29,250
Shares issued in lieu of compensation 57,350 57 48,160 48,217
Compensation expense associated with
option modification 173,350 173,350
Compensation expense associated
with unvested option awards -- -- 11,190 -- -- -- 11,190
---------- ------- ----------- ----------- ------------ ------------ ------------
Balance at December 31, 2006 27,310,352 $27,310 $39,774,531 $(1,136,656) $(43,384,109) $ (152,708) $ (4,871,633)
========== ======= =========== =========== ============ ============ ============
See accompanying notes to consolidated financial statements.
40
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------
2006 2005
----------- -----------
OPERATING ACTIVITIES
Net loss $(2,653,463) $(3,190,794)
----------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 183,728 231,119
Provision for bad debts 8,398 9,000
Provision for obsolete and slow moving inventory (24,819) 14,492
Amortization of deferred financing costs included in
interest expense 48,899 101,197
Interest receivable from stockholders' notes (48,066) (48,066)
Compensation expense on stock-based arrangements
with employees and vendors 213,790 125,508
Compensation expense on stock-based arrangements
with investors and directors 169,242 --
Compensation expense on option-based arrangements
with consultants -- (98,352)
Changes in operating assets and liabilities:
Accounts receivable (83,245) 58,609
Inventories (65,856) 74,368
Prepaid expenses and other current assets 71,156 166,453
Other noncurrent assets -- --
Accounts payable 46,327 50,153
Accrued liabilities 167,644 245,399
Deferred revenues 24,105 33,419
----------- -----------
Net cash used in operating activities (1,942,161) (2,227,495)
INVESTING ACTIVITIES
Purchases of property and equipment (39,455) (23,012)
----------- -----------
Net cash used in investing activities (39,455) (23,012)
FINANCING ACTIVITIES
Proceeds from sale of common stock 2,267,000 1,482,200
Proceeds from exercise of stock options 2,600 2,936
Proceeds from notes payable to stockholder 515,000 1,613,100
Payment of notes payable to stockholder (747,000) (1,044,000)
Payment of capital lease obligations (4,987) (4,560)
----------- -----------
Net cash provided by financing activities 2,032,613 2,049,676
Effect of exchange rate changes on cash and cash
equivalents (151,379) 99,178
----------- -----------
Net (decrease) in cash and cash equivalents (100,382) (101,653)
Cash and cash equivalents at beginning of period 155,557 257,210
----------- -----------
Cash and cash equivalents at end of period $ 55,175 $ 155,557
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 462,784 $ 240,118
NONCASH INVESTING AND FINANCING ACTIVITIES
Warrants issued for deferred financing and capital
raising costs $ -- $ 55,000
=========== ===========
See accompanying notes to consolidated financial statements.
41
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
1. SIGNIFICANT ACCOUNTING POLICIES
Organization
Puradyn Filter Technologies Incorporated (the "Company"), a Delaware
corporation, is engaged in the manufacturing, distribution and sale of bypass
oil filtration systems under the trademark Puradyn(R) primarily to companies
with large fleets of vehicles and secondarily to original vehicle equipment
manufacturer aftermarket programs. The Company holds the exclusive worldwide
manufacturing and marketing rights for the Puradyn products pursuant to licenses
for two patents and through direct ownership of various other patents.
Puradyn Filter Technologies, Ltd. (Ltd.), a wholly owned subsidiary in the
United Kingdom, sells and distributes the Company's products in Europe, the
Middle East and certain African countries. The results of the operations of Ltd.
have been included in the Company's statements of operations since Ltd.'s
formation on June 1, 2000.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB), issued SFAS
No. 123 (revised 2004), "Share-Based Payment" (SFAS 123R), which replaces SFAS
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) and supercedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values, beginning with the first interim or annual period after June 15, 2005.
Small business filers will be required to adopt the provisions of SFAS No. 123R
in the first interim or annual reporting period beginning after December 15,
2005. The grant-date fair value of employee share options and similar
instruments will be estimated using an option-pricing model adjusted for any
unique characteristics of a particular instrument. If an equity award is
modified after the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the modified award over
the fair value of the original award immediately before the modification. As a
result of this pronouncement, the Company's income statement would have
reflected approximately $227,000 of future compensation. 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, thus eliminating future expenses related
to these previously issued options.
In November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151, "Inventory Costs: an Amendment to ARB No. 43" (SFAS 151). This
statement clarifies the types of costs that should be expensed rather than
capitalized as inventory. This statement also clarifies the circumstances under
which fixed overhead costs, such as abnormal amounts of idle facility expense,
freight, handling costs and wasted material, associated with operating
facilities involved in inventory processing should be expensed or capitalized.
The provisions of this statement are effective for fiscal years beginning after
June 15, 2005. Consequently, the Company adopted the standard in 2005 and it did
not have a material effect on the Company's financial position or the results of
its operations.
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No.
154 "Accounting Changes and Error Corrections", which replaces APB Opinion No.
20 and SFAS No. 3, and changes the requirements for the accounting for and
reporting of a change in accounting principle. This statement is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company adopted SFAS No. 154 effective January 1,
2006. The adoption of SFAS No. 154 did not have a material effect on the
Company's financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". SFAS
No. 157 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. SFAS No. 157
applies whenever other standards require assets or liabilities to be measured at
fair value and does not expand the use of fair value in any new circumstances.
SFAS No. 157 establishes a hierarchy that prioritizes the information used in
developing fair value estimates. The hierarchy gives the highest priority to
quoted prices in active markets and the lowest priority to unobservable data,
42
such as the reporting entity's own data. SFAS No. 157 requires fair value
measurements to be disclosed by level within the fair value hierarchy. SFAS No.
157 is effective for fiscal years beginning after November 15, 2007. The Company
does not anticipate that the adoption of SFAS No. 157 will have a material
effect on the Company's financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Puradyn Filter Technologies, Ltd. All significant
intercompany transactions and balances have been eliminated.
Revenue Recognition
The Company recognizes revenue from product sales to customers, distributors and
resellers when products that do not require further services or installation at
the customer's site are shipped, there are no uncertainties surrounding customer
acceptance and for which collectibility is reasonably assured in accordance with
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial
Statements as amended and interpreted. Cash received by the Company prior to
revenue recognition is recorded as deferred revenues. Sales are made to
customers under terms allowing certain limited rights of return and other
limited product and performance warranties for which provision has been made in
the accompanying consolidated financial statements.
Amounts billed to customers in sales transactions related to shipping and
handling, represent revenues earned for the goods provided and are included in
net sales. Costs of shipping and handling are included in cost of products sold.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original
maturities of three months or less at the time of purchase. At December 31, 2006
and December 31, 2005, the Company did not have any cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, prepaid
expenses and other assets, accounts payable, accrued liabilities and notes
payable to stockholder approximate their fair values as of December 31, 2006
because of their short-term natures.
Accounts Receivable
Accounts receivable are recorded at fair value on the date revenue is
recognized. The Company provides allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to repay their obligation.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to repay, additional allowances may
be required. The Company provides for potential uncollectible accounts
receivable based on specific customer identification and historical collection
experience adjusted for existing market conditions. If market conditions
decline, actual collection experience may not meet expectations and may result
in decreased cash flows and increased bad debt expense.
The policy for determining past due status is based on the contractual payment
terms of each customer, which are generally net 30 or net 60 days. Once
collection efforts by the Company and its collection agency are exhausted, the
determination for charging off uncollectible receivables is made.
Inventories
Inventories are stated at the lower of cost or market using the first in, first
out (FIFO) method. Production costs, consisting of labor and overhead, are
applied to ending finished goods inventories at a rate based on estimated
production capacity. Excess production costs are charged to cost of products
sold. Provisions have been made to reduce excess or obsolete inventories to
their net realizable value.
43
Deferred Financing Costs
The Company capitalizes financing costs and amortizes them using the effective
interest method over the term of the related debt. Amortization of deferred
financing costs is included in interest expense and totaled $48,899 and $101,197
for the years ended December 31, 2006 and 2005, respectively. The deferred
financing costs related to the $2.5 million commitment provided by the Company's
stockholder, who is also a Board Member, totaled $318,000 and were initially
amortized over the nine-month draw down period ending December 31, 2002. Upon
the first draw in August 2002, the amortization period was extended to 18 months
or through December 31, 2003. 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 maturity date of December
31, 2004. The $214,400 of deferred financing costs is being amortized over the
maturity period. In addition, the repayment period for the $2.5 million
commitment was extended to December 31, 2004. Effective March 14, 2003, the
Company began amortizing the then remaining deferred financing costs for the
$2.5 million commitment prospectively over the extended maturity period. On
February 2, 2004 the maturity period for both commitments were extended to
December 31, 2005 (see Note 2). On April 13, 2005 the maturity date for both
commitments were further extended to December 31, 2006, on March 29, 2006, they
were extended to December 31, 2007 and on March 23, 2007 they were further
extended to December 31, 2008. Accumulated amortization of deferred financing
costs as of December 31, 2006 was $640,401.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets, except for assets held under capital leases, for which the
Company records depreciation and amortization based on the shorter of the
asset's useful life or the term of the lease. The estimated useful lives of
property and equipment range from 3 to 5 years. Upon sale or retirement, the
cost and related accumulated depreciation and amortization are eliminated from
their respective accounts, and the resulting gain or loss is included in results
of operations. Repairs and maintenance charges, which do not increase the useful
lives of the assets, are charged to operations as incurred.
Impairment of Long-Lived Assets
Management assesses the recoverability of its long-lived assets when indicators
of impairment are present. If such indicators are present, recoverability of
these assets is determined by comparing the undiscounted net cash flows
estimated to result from those assets over the remaining life to the assets' net
carrying amounts. If the estimated undiscounted net cash flows are less than the
net carrying amount, the assets would be adjusted to their fair value, based on
appraisal or the present value of the undiscounted net cash flows.
Product Warranty Costs
In connection with the adoption of FIN 45, the Company is including the
following disclosure applicable to its product warranties.
The Company accrues for warranty costs based on the expected material and labor
costs to provide warranty replacement products. The methodology used in
determining the liability for warranty cost is based upon historical information
and experience. The Company's warranty reserve is calculated as the gross sales
multiplied by the historical warranty expense return rate.
The following table shows the changes in the aggregate product warranty
liability for the year ended December 31, 2006:
Balance as of December 31, 2005 $ 70,370
Less: Payments made (8,075)
Change in prior period estimate 1,389
Add: Provision for current period warranties 8,075
--------
Balance as of December 31, 2006 $ 71,759
========
Guarantees
In August 2003 the Company made a guarantee to its wholly owned subsidiary,
Puradyn Filter Technologies, Ltd., that it would provide cash for working
44
capital on an as needed basis for a minimum period of twelve months. The
guarantee was provided as assurance that they will continue as a going concern
for 2003. This guarantee is excluded from the recognition and measurement
provisions of FIN 45, as it relates to a wholly owned consolidated subsidiary.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income (SFAS 130) establishes rules for
reporting and displaying of comprehensive income and its components.
Comprehensive income is the sum of net loss as reported in the consolidated
statements of operations and other comprehensive income transactions as reported
in the consolidated statement of changes in stockholders' equity (deficit).
Other comprehensive income transactions that currently apply to the Company
result from changes in exchange rates used in translating the financial
statements of its wholly owned subsidiary, Ltd. Comprehensive income as of
December 31, 2006 and 2005 is not shown net of taxes because the Company's
deferred tax asset has been fully offset by a 100% valuation allowance.
Advertising Costs
Advertising costs are expensed as incurred. During the years ended December 31,
2006 and 2005, advertising costs incurred by the Company totaled approximately
$37,000 and $25,000, respectively, and are included in selling and
administrative expenses in the accompanying consolidated statements of
operations.
Engineering and Development
Engineering and development costs are expensed as incurred. During the years
ended December 31, 2006 and 2005, engineering and development costs incurred by
the Company totaled approximately $52,000 and $31,000, respectively, and are
included in selling and administrative expenses in the accompanying consolidated
statements of operations.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiary have been
translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency
Translation (SFAS 52). All balance sheet accounts have been translated using the
exchange rate in effect at the balance sheet date. Income statement amounts have
been translated using an appropriately weighted average exchange rate for the
year. The translation gains and losses resulting from the changes in exchange
rates during 2006 and 2005 have been reported in accumulated other comprehensive
income, except for gains and losses resulting from the translation of
intercompany receivables and payables, which are included in earnings for the
period. During the years ended December 31, 2006 and 2005, the Company recorded
a foreign currency exchange rate gain of approximately $198,000 and a loss of
approximately $131,000, respectively, which is included in selling and
administrative expenses in the accompanying consolidated statements of
operations.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes (SFAS 109). Deferred income tax assets and liabilities are determined
based upon differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Stock Option Plans
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment"
(SFAS No. 123R) which replaced APB No. 25 and SFAS 123. Through December 2005,
we have accounted for the plans under the intrinsic value recognition and
measurement principles of Account Principles Board ("APB") No. 25, "Accounting
for Stock Issued to Employees". Under APB 25, no compensation expense was
recognized because the exercise price of the employee stock options equaled the
market price of the underlying stock on the date of grant. Through December, 31,
2005, we applied SFAS No. 123, "Accounting for Stock-Based Compensation" for
disclosure purposes only. We adopted SFAS 123R effective January 1, 2006 using
the modified prospective application method of adoption which requires us to
record compensation cost related to unvested stock awards as of December 31,
2005 be recognizing the amortized grant date fair value in accordance with
provisions of SFAS 123R on straight line basis over the service periods of each
award. We have estimated forfeiture rates based on our historical experience.
Stock option compensation expense for the year ended December 31, 2006 has been
recognized as a component of cost of goods sold and general and administrative
expenses in the accompanying Consolidated Financial Statements.
45
As a result of adopting SFAS 123R, net loss for the year ended December 31, 2006
was higher by $11,190 than if the company had continued to account for
stock-based compensation under APB No. 25. The impact on basic and diluted
income per shared for the year ended December 31, 2006 was $0. The following
table illustrates the effect on net loss and loss per share as if we had applied
the fair value recognition provision of SFAS No. 123R in both periods shown.
YEAR ENDED DECEMBER 31
------------------------------------
2006 2005
--------------- ---------------
Net loss as reported $ (2,653,463) $ (3,190,794)
Add: Stock-based employee compensation cost -- --
Deduct: stock-based compensation cost determine
under fair value based method for all awards -- 16,271
--------------- ---------------
Pro forma net loss $ (2,653,463) $ (3,174,523)
=============== ===============
Loss per common share:
Basic and diluted loss as reported $ (0.10) $ (0.16)
Basic and diluted loss pro forma $ (0.10) $ (0.16)
Weighted average fair value per option granted
during the period1 $ .99 $. 54
Assumptions:
Average risk free interest rate 4.71% 3.90%
Average volatility factor .8266 .7314
Expected dividend yield 0% 0%
Expected life (in years) 5.0 5.0
In 2006 and 2005, resptectively, 85,000 and 38,750 options were granted at fair
market value on the date of grant pursuant to the Stock Option Plan.
The Company leases its employees from a payroll leasing company. The Company's
leased employees meet the definition of employees as specified by FIN 44 for
purposes of applying 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,
including related amendments and interpretations. The related expense is
recognized over the period the services are provided
Credit Risk
The Company minimizes the concentration of credit risk associated with its cash
and cash equivalents by maintaining its cash and cash equivalents with high
quality federally insured financial institutions. However, cash balances in
excess of the FDIC insured limit of $100,000 are at risk. At December 31, 2006,
the Company did not have a cash balance above the FDIC insured limit. The
Company performs ongoing evaluations of its significant trade accounts
receivable customers and generally does not require collateral. An allowance for
doubtful accounts is maintained against trade accounts receivable at levels
which management believes is sufficient to cover probable credit losses. There
are concentrations of credit risk with respect to trade receivables due to the
amounts owed by five customers at December 31, 2006 whose trade receivable
balances each represented approximately 20%, 18%, 7%, 6% and 5% for a total of
56% of total accounts receivable. The loss of business from one or a combination
of the Company's significant customers, or an unexpected deterioration in their
financial condition, could adversely affect the Company's operations.
Basic and Diluted Loss Per Share
The Company follows SFAS No. 128, Earnings Per Share (SFAS 128), which requires
a dual presentation of basic and diluted earnings per share. However, because of
the Company's net losses, the effects of stock options and warrants would be
anti-dilutive and, accordingly, are excluded from the computation of earnings
per share. The number of such shares excluded from the computations of diluted
loss per share totaled 3,470,043 in 2006 and 3,107,070 in 2005
46
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. ISSUES AFFECTING LIQUIDITY AND MANAGEMENT'S PLANS
The Company's financial statements have been prepared on the basis that it will
operate as a going concern, which comtemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses each year since inception and has relied on the sale of its
stock from time to time and loans from third parties and from related parties to
fund its operations.
These recurring operating losses, liabilities exceeding assets and the reliance
on cash inflows from an institutional investor and current stockholder have led
the Company's independent registered public accounting firm Webb & Company to
include a statement in its audit report relating to the Company's audited
consolidated financial statements for the year ended December 31, 2006
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 2007. 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 has sustained losses since inception in 1987 and used net cash in
operations of approximately $1,942,000 and $2,227,000 during the years ended
December 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.
On February 2, 2004, the stockholder amended the original loan agreements to
extend the maturity dates to December 31, 2005 and to waive the funding
requirement mandating maturity terms until such time as the Company has raised
an additional $7.0 million over the $3.5 million raised in the Company's recent
private placement offering; or until such time as the Company is operating
within sufficient cash flow parameters, as defined, to sustain its operations;
or until a disposition of the Company occurs.
In April 2005, the maturity date of the loan agreement was extended to December
31, 2006. As consideration of this extension, this stockholder was granted an
additional 100,000 common stock purchase warrants at an exercise price equal to
the closing market price of the Company's stock on the date of grant. In March
2006, the stockholder extended the maturity date of the loan agreement to
December 31, 2007 and in March 2007, the loan was extended to December 31, 2008.
The Company experienced a modest reduction in cash used in operations in 2006
and anticipates additional reductions in cash used in operations in 2007;
however, additional cash will still be needed to support operations. Management
believes that the commitments received from its stockholder, the funds received
from its recent current private placement offering, as well as cash from sales
and current working capital will be sufficient to sustain its operations at its
current level through May 2007. However, if budgeted sales levels are not
achieved and/or significant unanticipated expenditures occur, the Company may
have to modify its business plan, reduce or discontinue some of its operations
or seek a buyer for all or part of its assets to continue as a going concern
through 2007. There can be no assurance that the Company will be able to raise
the additional capital needed to continue as a going concern.
3. INVENTORIES
At December 31, 2006, inventories consisted of the following:
Raw materials 913,034
Finished goods 504,876
Valuation allowance (145,454)
----------
1,272,456
==========
47
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
At December 31, 2006, prepaid expenses and other current assets consisted of
the following:
Prepaid expenses 112,356
Deferred costs related to deferred revenue 61,659
-------
174,015
=======
5. PROPERTY AND EQUIPMENT
At December 31, 2006, property and equipment consisted of the following:
Machinery and equipment 1,064,356
Furniture and fixtures 100,663
Leasehold improvements 122,622
Website development 72,960
Computer hardware and software 117,413
----------
1,478,014
Less accumulated depreciation and amortization (1,284,182)
----------
193,832
==========
Depreciation and amortization expense of property and equipment for the years
ended December 31, 2006 and 2005 is $183,728 and $231,119, respectively, of
which approximately $126,000 and $158,000 is included in cost of products sold
and approximately $58,000 and $73,000 is included in selling and administrative
costs, respectively, in the accompanying consolidated statements of operations.
6. LEASES
The Company leases its office and warehouse facilities in Boynton Beach, Florida
under a long-term noncancellable lease agreement, which contains renewal options
and rent escalation clauses. A $235,000 security deposit was paid in 2002, which
will be refunded ratably on an annual basis over the first three years of the
lease term beginning on the last day of the first lease year, provided there has
been no Event of Default, as defined, by the Company. Of this amount, $66,667
was paid to the Company in November 2003, January 2005 and January 2006,
respectively. As of December 31, 2006, $34,970 is included in noncurrent assets
in the accompanying consolidated balance sheet. The total minimum lease payments
over the term of the lease aggregate approximately $774,000. The terms of the
lease include a period of free rent and scheduled annual rate increases. As
such, rent expense is recognized on a straight-line basis over the 68-month term
of the lease.
The Company leases a condominium in Ocean Ridge, Florida to provide
accommodations for Company use. The lease is renewable annually and is paid in
three installments.
The Company's wholly owned subsidiary, Ltd., rented office space in Devon,
England under a lease that extended through March 31, 2002 and was subsequently
extended on a month-to-month basis. In September 2003, Ltd. moved to new office
space by assuming the existing lease, which expired in August 2004 and was
renegotiated in September 2005 and expires in September 2010. Rent expense under
all operating leases for the years ended December 31, 2006 and 2005 totaled
approximately $274,000 and $308,000, respectively, of which approximately
$217,000 and $223,000 is included in cost of products sold and approximately
$57,000 and $85,000 is included in selling and administrative costs,
respectively, in the accompanying consolidated statements of operations.
In December 2003, the Company entered into a capital lease obligation for the
purchase of approximately $19,000 of office equipment, which is included in
property and equipment, net of approximately $13,000 of accumulated
amortization, in the accompanying consolidated balance sheet.
Future minimum lease commitments due for facilities and equipment leases under
noncancellable capital and operating leases at December 31, 2006 are as follows:
48
CAPITAL OPERATING
LEASES LEASES
-------- --------
2007 $ 5,922 $201,645
2008 -- 149,184
2009 -- 52,763
2010 -- 39,030
2011 and thereafter --
-------- --------
Total minimum lease payments 5,922 $442,622
========
Less amount representing interest (328)
--------
Present value of minimum lease payments $ 5,593
========
7. ACCRUED LIABILITIES
At December 31, 2006, accrued liabilities consisted of the following:
Accrued wages and benefits $577,135
Accrued expenses relating to vendors and others 78,026
Deferral of straight-line rent expense 43,157
Reclassified accounts receivable credit balances 87,265
Accrued warranty costs 71,759
Accrued interest payable relating to stockholder notes 28,112
--------
$885,454
========
8. LONG-TERM DEBT
NOTES PAYABLE TO STOCKHOLDER
Beginning on March 28, 2002 the Company executed a binding agreement with one of
its stockholders, who is also a Board Member, to fund up to $6.1 million. Under
the terms of the agreements, the Company can draw amounts as needed to fund
operations. Amounts drawn bear interest at the prime rate per annum (8.25% at
December 31, 2006), payable monthly and were to become due and payable on
December 31, 2005 or upon a change in control of the Company or consummation of
any other financing over $7.0 million. In March 2006, the maturity date for the
agreement was extended to December 31, 2007. On March 23, 2007, the maturity
date was further extended to December 31, 2008,
At December 31, 2006, the Company had drawn $5.839 million of the available
funds.
In April 2005, the maturity date of the agreement was extended from December 31,
2005 to December 31, 2006. As consideration of this extension, this stockholder
was granted an additional 100,000 common stock purchase warrants at an exercise
price equal to the closing market price of the Company's stock on the date of
grant, for a period of five years.
During the years ended December 31, 2006 and 2005, the Company incurred interest
expense of approximately $465,000 and $256,000, respectively, on its draws,
which is included in interest expense in the accompanying consolidated
statements of operations.
MATURITIES OF LONG-TERM OBLIGATIONS FOR FIVE YEARS AND BEYOND
Long-term obligations consisted of the following at December 31, 2006:
Notes payable to stockholder $5,839,000
----------
5,839,000
Less: current maturities --
----------
$5,839,000
==========
The minimum annual principal payments of notes payable and capital lease
obligations at December 31, 2006 were:
2007 $ --
2008 5,839,000
----------
$5,839,000
==========
49
9. INCOME TAXES
The United States and foreign components of loss from continuing operations
before income taxes are as follows for the years ended December 31:
2006 2005
----------- -----------
United States $(2,704,731) $(2,746,846)
Foreign 51,268 (443,948)
Intercompany elimination -- --
----------- -----------
Loss from continuing operations
before income taxes $(2,653,463) $(3,190,794)
The significant components of the Company's net deferred tax assets are as
follows for the years ended December 31:
2006 2005
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 13,214,958 $ 12,173,178
Depreciation and amortization 73,200 82,007
Accrued expenses and reserves 77,795 87,982
Impairment loss 78,304 78,304
Compensatory stock options
and warrants 57,354 57,354
Capital Loss Carryover 40,632 40,842
Other 18,829 16,802
------------ ------------
Total deferred tax assets 13,561,072 12,536,469
Valuation allowance (13,561,072) (12,536,469)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a full valuation allowance of $13,561,072 against its net
deferred taxes is necessary as of December 31, 2006. The change in valuation
allowance for the years ended December 31, 2006 and 2005 is $1,027,745 and
$1,036,607 respectively.
At December 31, 2006, the Company had approximately $36,472,919 of U.S. net
operating loss carryforwards remaining, which expire beginning in 2020. The
Company will record the benefit of approximately $1,355,000 of the net operating
loss carryforwards through additional paid-in capital if and when the net
operating loss carryforwards are utilized, as such amounts relate to the
unrecognized tax benefit from stock option exercises.
As a result of certain ownership changes, the Company may be subject to an
annual limitation on the utilization of its U.S. net operating loss
carryforwards pursuant to Section 382 of the Internal Revenue Code. A study to
determine the effect, if any, of this change, has not been undertaken.
A reconciliation of the Company's income taxes to amounts calculated at the
federal statutory rate is as follows for the years ended December 31:
2006 2005
------ -----
Federal statutory taxes (34.00)% (34.00)%
State income taxes, net of federal tax benefit (3.63) (3.63)
Nondeductible items 0.16 0.20
Change in valuation allowance 38.21 37.74
Other (.75) (.31)
------ -----
--% --%
====== =====
50
10. COMMITMENTS AND CONTINGENCIES
INVESTMENT BANKING AGREEMENTS
On October 26, 2004, the Company engaged Imperial Capital, LLC ("IC") as an
exclusive financial advisor to the Company. IC was to assist the Company in
raising additional capital, as well as possibly pursuing a strategic partner
from a mutually related field to enhance the Company's ability to develop
business.
In consideration for IC's services, the Company agreed to pay a $100,000
non-refundable retainer, as well as an advance for future out-of-pocket expenses
incurred by IC. Upon the consummation of a transaction, as defined by the
agreement, the Company will pay a success fee of 2.5% of the principal amount of
any debt or equity securities sold or the consideration received from a
strategic relationship. Either party upon 30-day written notice may terminate
the agreement and on December 1, 2005, the Company exercised its option to
terminate the agreement, effective date December 31, 2005. There were no
additional fees incurred and the retainer was expensed during 2005.
On April 21, 2005, the Company entered into an agreement with Biscayne Capital
Markets, Inc. ("BCMI"), an investment-banking firm, to provide assistance in
obtaining 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 agreement.
Fees paid in consideration of services rendered are based upon performance and
there is no obligation to pay any fees unless financing is closed.
On April 28, 2005, 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 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.
AMERICAN STOCK EXCHANGE DELISTING
On April 28, 2005, the Company received a notice from the Staff of the American
Stock Exchange (the Exchange) indicating that the Company was below certain of
the Exchange's continued listing standards. Specifically, as set forth in
Sections 1003(a)(i) and (ii) of the Exchange Company Guide, the Company
sustained losses from continuing operations and/or net losses in two out of its
three most recent fiscal years with stockholders' equity of less than $2
million, and losses from continuing operations and/or net losses in three out of
its four most recent fiscal years with stockholders' equity of less than $4
million.
The Company was given the opportunity to submit a plan to the Exchange outlining
actions it has taken, or would take, over the next 18 months that would bring it
into compliance with continued listing standards. The Company submitted its
compliance plan to Exchange by the scheduled deadline of May 31, 2005.
On June 24, 2005, the Board of Directors approved a resolution to voluntarily
withdraw the Company's common stock from listing on the Exchange. The Board's
decision was based upon a determination that Puradyn would not be able to timely
comply with the Exchange's ongoing financial compliance standards under Section
1003 of the Exchange's Company Guide, as well as the ongoing costs of compliance
with the Exchange's requirement, including the provisions of the Sarbanes-Oxley
Act of 2002 as they apply to Exchange-listed companies, and the requirement to
either limit the amount of financing of its previously announced financing or to
incure additional costs and defer receipt of the financing pending stockholder
approval as required by the Exchange's rules.
Additionally, on June 24, 2005, the Company submitted an application to the
Securities and Exchange Commission (SEC) pursuant to Section 12(d) of the
Securities Exchange Act of 1934 for the voluntarily withdrawal of the listing of
its common stock from the Exchange. On August 18, 2005 this application was
approved effective at the opening of business that day. The Company continues to
be required to file reports with the SEC under Section 13 of the Securities
51
Exchange Act of 1934, including quarterly and annual reports, and as of August
31, 2005, its common stock is included for quotation on the OTC Bulletin Board.
11. STOCK OPTIONS
The Company has three stock option plans, one adopted in 1996 and amended in
July 1997 (the "1996 Option Plan"), one adopted in September 1999 and amended in
June 2000 (the "1999 Option Plan"), and one adopted on November 8, 2000 (the
"Directors' Plan"). The 1996 Option Plan provides for the granting of up to
2,200,000 options, the 1999 Option Plan provides for the granting of up to
3,000,000 options and the Directors' Plan provides for the granting of up to
400,000 options.
Both the 1996 and 1999 Plan provide for the granting of both incentive and
non-qualified stock options to key personnel, including officers, directors,
consultants and advisors to the Company, at the discretion of the Board of
Directors. Each plan limits the exercise price of the options at no less than
the quoted market price of the common stock on the date of grant. The option
term is determined by the Board of the Directors or the Compensation Committee,
provided that no option may be exercisable more than 10 years after the date of
its grant and, in the case of an Incentive Option granted to an eligible
employee owning more than 10% of the Company's common stock, no more than five
years after the date of the grant. Generally, under the 1996 and 1999 plans,
options to employees vest over four years at 25% per annum, except for certain
grants to employees that vest 50% upon grant with remaining amounts over two
years at 25% per annum.
The Directors' Plan provides for the granting of non-qualified options to
members of the Board of Directors at exercise prices not less than the quoted
market price of the common stock on the date of grant and options expire five
years from the date of grant. In the event a person ceases to serve on the Board
of Directors, the outstanding options expire one year from the date of cessation
of service. Such options may be exercised commencing two years from the date of
grant.
On June 29, 2005 the Company extended the expiration date of 11,650 partially
vested stock options for a terminated employee who left the company in May,
2005. The exercise price of the options ranges from $.38 to $2.15. In accordance
with SFAS 123, incremental compensation cost was recognized in an amount equal
to the excess of the fair value of the modified award over the fair value of the
original award immediately before the modification. The Company recorded
approximately $1,648 of compensation expense related to this modification, which
was included in the consolidated statement of operations for the year ended
December 31, 2005.
On October 3, 2005, the Company agreed to extend the exercise date to December
31, 2007 for the aggregate 17,500 shares of common stock issued to two directors
that resigned from the board of directors on August 23, 2005. As per the terms
outlined in the 2000 Non-Employee Directors Stock Option Plan, #6 (b) Option
Expiration, the resigning directors would have had (i) 5 years after the date of
grant or (ii) one year after their August 23, 2005 resignation from the board of
directors to exercise all vested options.
On November 10, 2005 the Company agreed to extend the exercise date to December
31, 2007 for 10,000 shares of common stock issued to a director that resigned
from the board of directors on November 10, 2005. As per the terms outlined in
the 2000 Non-Employee Directors Stock Option Plan, #6 (b) Option Expiration, the
resigning directors would have had (i) 5 years after the date of grant or (ii)
one year after their August 23, 2005 resignation from the board of directors to
exercise all vested options.
On May 11, 2006, the Company extended the expiration date of 270,000 fully
vested stock options for an employee who left the Company and previously had
options extended through September 30, 2006. The Company's Stock Option Plan
permits an employee to exercise their stock options for up to one month after
their termination date, at which time they expire. The exercise price of the
options ranges from $1.72 to $1.75. In accordance with FIN 44, the Company
compared the options' intrinsic value on the modification date to the original
intrinsic value on the date of grant. The Company recorded approximately $88,000
of compensation expense related to this modification, which was included in the
consolidated statement of operations for the year ending December 31, 2006.
On October 20, 2006, the Company extended the expiration date of 375,000 fully
vested stock options for an employee who left the Company in October 2006. The
Company's Stock Option Plan permits an employee to exercise their stock options
for up to one month after their termination date, at which time they expire. The
exercise price of the options ranges from $.21 to $.94. In accordance with FIN
44, the Company compared the options' intrinsic value on the modification date
to the original intrinsic value on the date of grant. The Company recorded
approximately $86,000 of compensation expense related to this modification,
which was included in the consolidated statement of operations for the year
ending December 31, 2006.
52
During each of 2006 and 2005 5,000 and 25,000 of options were issued to
non-employee Directors.
Additional information concerning the activity in the three option plans is as
follows:
2006 2005
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- --------
Outstanding, beginning of year 2,152,070 $ 3.18 2,326,070 $ 3.68
Granted 135,000 .96 228,270 .88
Exercised (5,000) .52 (3,270) 1.05
Cancelled (159,000) 2.83 (154,500) 3.30
Expired (242,670) 3.73 (244,500) 5.73
--------- -------- --------- --------
Outstanding, end of year 1,880,400 3.10 2,152,070 3.18
========= =========
Exercisable, end of year 1,708,650 $ 3.30 2,118,320 $ 3.22
========= =========
Options available for future grant, end
of year 2,168,250 1,129,485
========= =========
Summarized information with respect to options outstanding under the three
option plans at December 31, 2006 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
REMAINING
AVERAGE
CONTRACTUAL WEIGHTED WEIGHTED
RANGE OF NUMBER LIFE (IN AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ----------- -------------- ----------- --------------
$ .21 - $1.70 1,171,900 6.2 $ .89 1,020,525 $ .88
1.86 - 4.50 246,000 4.0 2.42 225,625 2.42
8.50 - 9.25 462,500 2.1 9.07 462,500 9.07
--------- ---- ----- --------- -----
Totals 1,880,400 4.43 $3.10 1,708,650 $3.30
========= ==== ===== ========= =====
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.
The vesting of such options eliminated future compensation expense of
approximately $227,000, that the Company would otherwise have had to recognize
in its income statement with respect to these options upon the adoption of
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 123 (Revised 2004), Share-Based Payment (SFAS 123R). SFAS requires that
compensation expense associated with stock options be recognized in the income
statement, rather than as footnote disclosure in the Company's consolidated
financial statements, effective for the first fiscal year that begins after
December 15, 2005.
12. COMMON STOCK
In April 2005, a majority stockholder and board member was granted 100,000
warrants to purchase common stock, in consideration for extending the repayment
period of the notes payable to stockholder from December 31, 2005 to December
31, 2006, The fair value of the warrants was estimated at $55,000 on the date of
grant using a Black-Scholes option-pricing model, and was recorded as a deferred
financing cost. (see Note 2).
During June and July 2005, the Company received cash proceeds of 1.48 million
from the sale of 4,820,664 shares of common stock from a private placement
offering. The funds were used for corporate purposes and to reduce the
outstanding principle balance of the notes payable to stockholder. Additionally,
warrants in the amount of 400,000 and 80,000 were offered to two separate
participants in the private placement at a price of $0.80 per each share of
common stock with an exercise date of June 17, 2006, and an expiration date of
June 17, 2008. The fair value of the warrants were estimated at $124,000 and
$22,000, respectively, on the date of grant, using a Black-Scholes
option-pricing model. Approximately $67,000 and $13,000, respectively, were
53
recorded as stock based compensation expense in the accompanying consolidated
statement of operations for the year ended December 31, 2005.
On January 30, 2006, the Company issued 40,000 shares of common stock, at $.75
per share, to an employee in lieu of a cash bonus that was previously accrued
and deferred.
On February 26, 2006, the Company received cash proceeds of $910,000 from five
accredited investors for the purchase of 3,033,333 shares of common stock at
$0.30 per share. The purchase price of $0.30, previously agreed upon and
approved by the Board of Directors, was discounted approximately 20% as part of
the June 2005 Equity Placement Offering, wherein these five investors funded 50%
of their total predetermined contribution at that time. The 2005 funds were
contributed with the understanding that the 50% balance of investment would be
priced at the same purchase price as the initial
On September 14, 2006, the Company issued a confidential private placement
offering, with a purchase price of $0.70 per share of common stock. Each four
shares purchased will entitle the purchaser to receive common stock purchase
warrants to purchase one share of common stock at an exercise price of $1.25 on
or prior to October 1, 2011. As of December 31, 2006, the Company had received
gross proceeds of approximately $1.357 million for an aggregate of 1,938,570
shares of common stock.
13. WARRANTS
At December 31, 2006 and 2005, 1,594,643 and 955,000 shares, respectively, of
common stock have been reserved for issuance under outstanding warrants. All of
the warrants are fully vested and have expiration dates ranging from March 28,
2007 to December 19, 2016. Information concerning the Company's warrant activity
is as follows:
2006 2005
------------------- ------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE EXERCISE
------------------- ------------------
OPTIONS PRICE OPTIONS PRICE
--------- ----- -------- -----
Outstanding, at the beginning of year 955,000 $ 1.53 575,000 $2.56
Granted 634,643 1.25 580,000 .83
Exercised -- -- -- --
Expired -- -- (200,000) 2.44
--------- ----- -------- -----
Outstanding, at the end of year 1,589,643 $ .99 955,000 $1.53
========= ====== ======== =====
In consideration of the stockholder loan agreement (Item 12), the Company has
granted the stockholder a total of 475,000 common stock purchase warrants at an
exercise price equal to the closing market price of the Company's stock on the
dates of grant. On March 28, 2002, the Company recorded a deferred charge of
$318,000 . The deferred charge was initially amortized over the commitment
period and subsequently revised to include the repayment period, as amended.
During the years ended December 31, 2006 and 2005, the Company had amortized
approximately $29,000 and $22,000 of such costs, respectively, which are
included in interest expense in the accompanying consolidated statements of
operations.
On March 14, 2003, the Company recorded a deferred charge of $212,500. The
deferred charge is being amortized over the repayment period of 21.5 months.
During the years ended December 31, 2006 and 2005, the Company had amortized
approximately $79,000 and $79,000 respectively, which is included in interest
expense in the accompanying 2005 consolidated statement of operations.
On December 15, 2004, the Company extended the life of a director's warrants by
one year. The expiration date of the warrant was extended from December 2004 to
December 2005. The fair value of the modified warrant was estimated at the date
of grant using a Black-Scholes option pricing model and the difference in the
fair value of the old award and the new award was estimated to be $20,000.
During June and July 2005, the Company received cash proceeds of 1.48 million
from the sale of 4,820,664 shares of common stock from a private placement
offering. The funds were used for corporate purposes and to reduce the
outstanding principle balance of the notes payable to stockholder. Additionally,
warrants in the amount of 400,000 and 80,000 were offered to two separate
participants in the private placement at a price of $0.80 per each share of
common stock with an exercise date of June 17, 2006, and an expiration date of
June 17, 2008. During 2006 and 2005, respectively, the Company recorded an
expense of $66,492 and $79,908.
54
As part of the September 14, 2006 private placement offering, the Company
granted to investors 643,643 warrants to purchase one share of common stock at
an exercise price of $1.25 on or prior to October 1, 2011.
14. MAJOR CUSTOMERS
During 2006 and 2005, two customers together accounted for approximately 39% and
45%, respectively, of the Company's net sales. In 2006 there were two customers
that individually accounted for greater than 10% of net sales, or approximately
$769,000 and $417,000, while in 2005 there were two customers that individually
accounted for greater than 10% of net sales, or approximately $705,000 and
$424,000. There were five customers at December 31, 2006 whose trade receivable
balances equaled or exceeded 5% of total receivables, representing approximately
20%, 18%, 7%, 6% and 5% respectively, of total accounts receivable. The loss of
business from one or a combination of the Company's significant customers could
adversely affect its operations.
15. GEOGRAPHIC INFORMATION
The Company has two lines of product, which it manufactures and distributes from
its locations in the United States and the United Kingdom. Information with
respect to sales activity and long-lived assets (consisting entirely of property
and equipment) in the United States and United Kingdom is as follows:
YEAR ENDED DECEMBER 31
------------------------
2006 2005
---------- ----------
Net sales:
United States $2,266,816 $1,764,343
United Kingdom 806,131 710,942
---------- ----------
$3,072,947 $2,475,285
========== ==========
Long-lived assets by area:
United States $ 170,753
United Kingdom 23,079
----------
$ 193,832
==========
16. SUBSEQUENT EVENTS
During March 2007, the Company received an advance of $300,000 from two members
of the Board, in connection with a prospective private placement, the terms of
which are being determined.
Subsequent to December 31, 2006, the Company received $28,880 when an employee
exercised options to purchase 76,000 shares of common stock at $.38 per share.
On March 23, 2007, the repayment date of the stockholder loan was extended from
December 31, 2007 to December 31, 2008.
55