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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-QSB
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(Mark one)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required)
For the transition period from ________________ to
Commission file number 0-29192
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PURADYN FILTER TECHNOLOGIES INCORPORATED
(Name of small business issuer in its charter)
-----------------
Delaware 14-1708544
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2017 High Ridge Road, Boynton Beach, Florida 33426
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (561) 547-9499
--------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that Puradyn Filter Technologies Incorporated was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Indicate by check mark whether the issuer is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's class of common
equity, as of the last practicable date. As of May 11, 2007, there were
27,386,352 shares of registrant's common stock outstanding, par value $.001.
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PURADYN FILTER TECHNOLOGIES INCORPORATED
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
Page
Part I. Financial Information ----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet - March 31, 2007 ........ 3
Condensed Consolidated Statements of Operations -
Three months ended March 31, 2007 and 2006 ............... 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2007 and 2006 ............... 5
Condensed Consolidated Statement of Stockholders' Deficit ... 6
Notes to Condensed Consolidated Financial Statements ........ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 13
Item 3. Controls and Procedures ..................................... 18
Part II. Other Information
Item 1. Legal Proceedings .............................................. 19
Item 2. Unregistered Sales of Equity Securities and Use ofProceeds .... 19
Item 3. Default Upon Senior Securities ................................. 19
Item 4. Submission of Matters to a Vote of Security Holders ............ 19
Item 5. Other Information ............................................... 19
Item 6. Exhibits ........................................................ 19
Signatures ................................................................. 20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2007
(UNAUDITED)
Assets
Current assets:
Cash and cash equivalents $ 154,745
Accounts receivable, net of allowance for uncollectible accounts of $24,795 457,100
Inventories, net 1,269,105
Prepaid expenses and other current assets 210,592
------------
Total current assets 2,091,542
Property and equipment, net 176,995
Deferred financing costs, net 32,414
Other noncurrent assets 40,930
------------
Total other assets 250,339
============
Total assets $ 2,341,881
============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 386,636
Accrued liabilities 860,771
Current portion of capital lease obligation 107,736
Deferred revenue 3,794
------------
Total current liabilities 1,358,937
Notes Payable - stockholder 6,447,500
------------
Total Liabilities
7,806,437
Commitments and contingencies --
Stockholders' deficit:
Preferred stock, $.001 par value:
Authorized shares - 500,000; none issued and outstanding --
None issued and outstanding
Common stock, $.001 par value:
Authorized shares - 40,000,000
Issued and outstanding - 27,386,352 27,386
Additional paid-in capital 39,806,882
Notes receivable from stockholders (1,046,987)
Accumulated deficit (44,095,022)
Accumulated other comprehensive income (loss) (156,815)
------------
Total stockholders' deficit (5,464,556)
------------
Total liabilities and stockholders' deficit $ 2,341,881
============
See accompanying notes to condensed consolidated financial statements.
3
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2007 2006
------------ ------------
Net sales $ 766,198 $ 822,743
Costs and expenses:
Cost of products sold 647,972 615,377
Salaries and wages 260,805 335,430
Selling and administrative 368,171 304,765
------------ ------------
1,276,948 1,255,572
------------ ------------
Loss from operations (510,750) (432,829)
Other income (expense):
Interest income 12,470 12,295
Interest expense (212,633) (129,212)
------------ ------------
Total other income (expense) (200,163) (116,917)
------------ ------------
Net loss before income tax expense (710,913) (549,746)
Income tax expense -- --
------------ ------------
Net loss $ (710,913) $ (549,746)
============ ============
Basic and diluted loss per common share $ (0.03) $ (0.02)
============ ============
Weighted average common shares outstanding, basic and
diluted 27,386,352 23,776,654
============ ============
See accompanying notes to condensed consolidated financial statements.
4
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
THREE MONTHS ENDED
-----------------------
2007 2006
--------- ---------
OPERATING ACTIVITIES
Net loss $(710,913) $(549,746)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 23,249 52,745
Provision for bad debts 30,126 6,172
Provision for obsolete and slow moving inventory (63,846) (17,483)
Amortization of deferred financing costs included in interest expense 8,335 18,337
Stockholders notes and interest receivable 89,669 (11,852)
Compensation expense on stock-based arrangements with employees and
vendors 3,927 36,586
Changes in operating assets and liabilities:
Accounts receivable 10,661 (51,660)
Inventories 67,197 48,907
Prepaid expenses and other current assets (36,577) 61,046
Accounts payable 69,921 (101,795)
Accrued liabilities (24,683) 48,327
Deferred revenues 7,821 7,880
--------- ---------
Net cash used in operating activities (525,113) (452,536)
INVESTING ACTIVITIES
Purchases of property and equipment (6,384) (1,675)
--------- ---------
Net cash used in investing activities (6,384) (1,675)
FINANCING ACTIVITIES
Proceeds from sale of common stock -- 910,000
Proceeds from exercise of stock options 28,500 --
Proceeds from issuance of notes payable to stockholder 608,500 187,000
Payment of notes payable to stockholder -- (747,000)
Payment of capital lease obligations (1,798) (1,218)
--------- ---------
Net cash provided by financing activities 635,202 348,782
Effect of exchange rate changes on cash and cash equivalents (4,135) (8,232)
--------- ---------
Net (decrease) increase in cash and cash equivalents 99,570 (113,661)
Cash and cash equivalents at beginning of period 55,175 155,557
--------- ---------
Cash and cash equivalents at end of period $ 154,745 $ 41,896
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 124,032 $ 92,116
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued in settlement of accrued bonus $ -- $ 30,000
========= =========
See accompanying notes to condensed consolidated financial statements
5
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' DEFICIT
NOTES ACCUMULATED
ADDITIONAL RECEIVABLE OTHER TOTAL
COMMON STOCK PAID-IN FROM ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT INCOME (LOSS) DEFICIT
----------- -------- ------------ ----------- ------------ ---------- -----------
Balance at December 31, 2006 27,310,352 $ 27,310 $ 39,774,531 $(1,136,656) $(43,384,109) $ (152,708) $(4,871,633)
Foreign currency translation
adjustment -- -- -- -- -- (4,107) (4,107)
Net loss -- -- -- -- (710,913) -- (710,913)
-----------
Total comprehensive loss -- -- -- -- -- -- (715,020)
Exercise of employee stock options 76,000 76 28,424 -- -- 28,500
Interest receivable related to notes
receivable from stockholders -- -- -- 89,669 -- -- 89,669
Compensation expense associated with
unvested option expense -- -- 3,927 -- -- -- 3,927
----------- -------- ------------ ----------- ------------ ---------- -----------
Balance at March 31, 2007 27,386,352 $ 27,386 $ 39,806,882 $(1,046,987) $(44,095,022) $ (156,815) $(5,464,556)
=========== ======== ============ =========== ============ ========== ===========
See accompanying notes to condensed consolidated financial statements.
6
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
1. BASIS OF PRESENTATION, GOING CONCERN AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim information and with the instructions to Form 10-QSB
and Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments consisting of a normal and recurring nature considered necessary for
a fair presentation have been included. Operating results for the three-month
period ended March 31, 2007 may not necessarily be indicative of the results
that may be expected for the year ending December 31, 2007.
For further information, refer to Puradyn Filter Technologies Incorporated's
("the Company") consolidated financial statements and footnotes thereto included
in the Form 10-KSB for the year ended December 31, 2006.
Going Concern
The Company's financial statements have been prepared on the basis that it will
operate as a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses each year since inception and has relied on the sale of its
stock from time to time and loans from third parties and from related parties to
fund its operations.
These recurring operating losses, liabilities exceeding assets and the reliance
on cash inflows from an institutional investor and current stockholder led the
Company's independent auditors Webb & Company, P.A. to include a statement in
its audit report relating to the Company's audited consolidated financial
statements for the year ended December 31, 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. The company expects to see results from these reductions, as well as
from other cost reduction plans through 2007, including organizational changes,
deferral of salaries and renegotiating creditor and collection arrangements.
There can be no assurance that the Company will be able to raise the additional
capital needed or reduce the level of expenditures in order to sustain
operations.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the condensed consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Basic and Diluted Loss Per Share
SFAS No. 128, Earnings Per Share, requires a dual presentation of basic and
diluted earnings per share. However, because of the Company's net losses, the
effect of outstanding stock options and warrants would be anti-dilutive and,
accordingly, is excluded from the computation of diluted loss per share. The
number of such shares excluded from the computation of loss per share totaled
3,231,543 and 3,124,570 for the three months ended March 31, 2007 and 2006,
respectively.
7
Stock Compensation
The Company adopted SFAS 123R effective January 1, 2006 using the modified
prospective application method of adoption which requires us to record
compensation cost related to unvested stock awards as of December 31, 2005,
recognizing the amortized grant date fair value in accordance with provisions of
SFAS 123R on straight line basis over the service periods of each award. We have
estimated forfeiture rates based on our historical experience. Stock option
compensation expense for the periods ended March 31,2006 and March 31, 2007 have
been recognized as a component of cost of goods sold and general and
administrative expenses in the accompanying Consolidated Financial Statements.
Stock options and warrants issued to consultants and other non-employees as
compensation for services provided to the Company are accounted for based on the
fair value of the services provided or the estimated fair market value of the
option or warrant, whichever is more reliably measurable in accordance with SFAS
123 and EITF 96-18, Accounting for Equity Investments That are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling Goods or Services,
including related amendments and interpretations. The related expense is
recognized over the period the services are provided.
Inventories
Inventories are stated at the lower of cost or market using the first in, first
out (FIFO) method. Production costs, consisting of labor and overhead, are
applied to ending inventories at a rate based on estimated production capacity
and any excess production costs are charged to cost of products sold. Provisions
have been made to reduce excess or obsolete inventories to their net realizable
value.
Inventories consisted of the following at March 31, 2007:
Raw materials 782,020
Finished goods 568,693
Valuation allowance (81,608)
----------
1,269,105
==========
Deferred Financing Costs
The Company capitalizes financing costs and amortizes them using the
straight-line method, which approximates the effective interest method, over the
term of the related debt. Amortization of deferred financing costs is included
in interest expense and totaled $8,335 and $18,337 for the three-months ended
March 31, 2007 and 2006, respectively. In March 2002, the Company recorded the
initial deferred financing costs of $318,000 for the shareholder loan with a
maturity date of December 31, 2004. On March 14, 2003, as the maturity date was
extended to December 31, 2005, an additional $214,400 in deferred financing
costs was recorded (see Note 2). On April 14, 2005 the maturity date was
extended to December 31, 2006, resulting in the addition of approximately
$55,000 of related deferred financing costs. Accumulated amortization of
deferred financing costs as of March 31, 2007 and 2006 was $648,736 and
$609,839, respectively.
Revenue Recognition
The Company recognizes revenue from product sales to customers, distributors and
resellers when products that do not require further services or installation by
the Company are shipped, when there are no uncertainties surrounding customer
acceptance and when collectibility is reasonably assured in accordance with
Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements
(SAB 104), as amended and interpreted. Cash received by the Company prior to
shipment is recorded as deferred revenue. Sales are made to customers under
terms allowing certain limited rights of return and other limited product and
performance warranties for which provision has been made in the accompanying
condensed consolidated financial statements.
8
Amounts billed to customers in sales transactions related to shipping and
handling, represent revenues earned for the goods provided and are included in
net sales. Costs of shipping and handling are included in cost of products sold.
Product Warranty Costs
As required by FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), the Company is including the following disclosure applicable to
its product warranties.
The Company accrues for warranty costs based on the expected material and labor
costs to provide warranty replacement products. The methodology used in
determining the liability for warranty cost is based upon historical information
and experience. The Company's warranty reserve is calculated as the gross sales
multiplied by the historical warranty expense return rate.
The following table shows the changes in the aggregate product warranty
liability for the three-months ended March 31, 2007:
Balance as of December 31, 2006 $ 71,759
Less: Payments made (3,552)
Change in prior period estimate 330
Add: Provision for current period warranties 3,643
----------
Balance as of March 31, 2007 $ 72,180
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income (SFAS 130) establishes rules for
reporting and displaying of comprehensive income and its components.
Comprehensive income is the sum of net loss as reported in the consolidated
statements of operations and other comprehensive income transactions. Other
comprehensive income transactions that currently apply to the Company result
from changes in exchange rates used in translating the financial statements of
its wholly owned subsidiary, Puradyn Filter Technologies, Ltd. ("Ltd.").
Comprehensive loss as of March 31, 2007 and 2006 is not shown net of taxes
because the Company's deferred tax asset has been fully offset by a valuation
allowance.
Comprehensive loss consisted of the following for the three-months ended March
31, 2007 and 2006:
THREE MONTHS ENDED
MARCH 31,
----------- -----------
2007 2006
----------- -----------
Net loss $ (710,913) $ (549,746)
Other comprehensive loss:
Foreign currency translation adjustment (4,107) 9,943
----------- -----------
Comprehensive loss $ (715,020) $ (539,803)
=========== ==========
New Accounting Standards
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes,"
which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. In accordance with FIN 48, the Company
must adjust its financial statements to reflect only those tax positions that
are more-likely-than-not to be sustained as of the adoption date. The effective
date of FIN 48 for the Company is January 1, 2007. The adoption of FIN 48 has
not had a material impact on the Company's condensed consolidated financial
statements.
9
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which clarifies the definition of fair value, establishes
guidelines for measuring fair value, and expands disclosures regarding fair
value measurements. SFAS 157 does not require any new fair value measurements
and eliminates inconsistencies in guidance found in various prior accounting
pronouncements. SFAS 157 will be effective for the Company on January 1, 2008.
The Company is currently evaluating the impact of adopting SFAS 157 on its
financial position, cash flows, and results of operations.
In September 2006, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 provides interpretive guidance on the SEC's
views on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The provisions of SAB 108 were effective for the Company for the fiscal year
ended December 31, 2006. The application of SAB 108 did not have a material
effect on its financial position, cash flows, and results of operations.
2. ISSUES AFFECTING LIQUIDITY AND MANAGEMENT'S PLANS
The Company's financial statements have been prepared on the basis that it will
continue as a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
sustained losses since inception and used net cash in operations of
approximately $525,000 and $453,000 during the three-months ended March 31, 2007
and 2006, respectively. As a result, the Company has had to rely principally on
private equity funding, including the conversion of debt into stock, as well as
stockholder loans to fund its activities to date.
These recurring operating losses, liabilities exceeding assets and the reliance
on cash inflows from an institutional investor and current stockholder led the
Company's independent registered public accounting firm, Webb & Company, P.A.,
to include a statement in its audit report relating to the Company's audited
consolidated financial statements for the year ended December 31, 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 manufacturing and the Company expects to see results from these
reductions, as well as other cost reduction plans through 2007.
The Company continues to address liquidity concerns because of inadequate
revenue growth. As a result, cash flow from operations is insufficient to cover
our liquidity needs for the immediate future. The Company is in the process of
aggressively seeking to raise capital and is exploring financing availability
and options with investment bankers, funds, private sources, members of
management and existing shareholders. The Company has implemented measures to
preserve its ability to operate, including organizational changes, a reduction
and/or deferral of salaries, reduction in personnel and renegotiating creditor
and collection arrangements. There can be no assurance that the Company will be
able to raise the additional capital needed or reduce the level of expenditures
in order to sustain operations.
On March 23, 2007, the stockholder amended the original loan agreements to
extend the payback dates to December 31, 2008. The original loan agreements,
dated March 28, 2002 and March 14, 2003, were due and payable on December 31,
2003 and December 31, 2004. Previously, the stockholder waived the funding
requirement mandating maturity as such time as the Company raised an additional
$7.0 million over the $3.5 million previously raised in the Company's private
placement offering; or until such time as the Company is operating within
sufficient cash flow parameters, as defined, to sustain its operations; or until
a disposition of the Company occurs. As of March 31, 2007, the Company had drawn
a total of $6.150 million of the available funds.
The Company anticipates increased cash flows from 2007 sales activity; however,
additional cash will still be needed to support operations. If additional
capital is not raised, budgeted sales levels are not achieved and/or significant
unanticipated expenditures occur, the Company will have to modify its business
plan, reduce or discontinue some of its operations or seek a buyer for part of
its assets to continue as a going concern through 2007. There can be no
assurance that the Company will be able to raise the additional capital needed
to continue as a going concern.
10
3. STOCK OPTIONS AND WARRANTS
During the three-months ended March 31, 2007, the Company received $28,500 when
an employee exercised options to purchase 76,000 shares of common stock at
$0.375 per share. No options were exercised during the three-months ending March
31, 2006.
During the three-month periods ended March 31, 2007 and March 31, 2006, the
Company recognized compensation expense of approximately $22,000 and $37,000,
respectively. Approximately $22,000 of shareholder notes receivables were
written-off and expensed during the period ending March 31, 2007. The notes
receivables originated approximately ten years ago between the company and four
former employees or subcontractors and have been disputed by each of the
parties. At March 31, 2006, approximately 480,000 warrants with an average
exercise price of $0.80, remain unvested and related expenses are being
amortized over their vesting period. At March 31, 2007, approximately 1,494,643
warrants with an average exercise price of $1.24 remain outstanding and were
fully vested.
For the three months ended March 31, 2007 and March 31, 2006, respectively, the
Company recorded stock-based compensation expense of $3,927 and $488, relating
to unvested employee stock options.
Stock options and warrants issued to consultants and other non-employees as
compensation for services provided to the Company are accounted for based on the
fair value of the services provided or the estimated fair market value of the
option or warrant, whichever is more reliably measurable in accordance with SFAS
123 and EITF 96-18, Accounting for Equity Investments That are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling Goods or Services.
The related expense is recognized over the period the services are provided.
A summary of the Company's stock option plans as of March 31, 2007, and changed
during the three month period then ended is presented below:
THREE MONTHS ENDED
MARCH 31, 2007
-----------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
---------- --------
Options outstanding at beginning of period 1,880,400 $ 3.10
Options granted -- --
Options exercised 76,000 .38
Options expired 62,500 8.75
---------- --------
Options at end of period 1,741,900 $ 3.02
---------- --------
Options exercisable at end of period 1,642,525 $ 3.27
========== ========
Changes in the Company's unvested options for the three months ended March 31,
2007 are summarized as follows:
THREE MONTHS ENDED
MARCH 31, 2007
-----------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
---------- --------
Options unvested at beginning of period 115,625 $ .86
Options granted -- --
Options vested 6,250 1.00
Options cancelled 10,000 1.40
---------- --------
Options unvested at end of period 99,375 $ .80
========== ========
11
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -----------------------------
REMAINING
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUNMBER AVERAGE
EXERCISE PRICE OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------ ------------ ------------ ------------ ------------
$ .21 - $ 1.70 1,095,900 5.26 $ .92 997,150 $ .86
1.86 - 4.50 246,000 3.99 2.42 245,375 2.42
8.50 - 9.25 400,000 2.61 9.13 400,000 9.13
------------ ------------ ------------ ------------ ------------
1,741,900 4.61 $ 3.02 1,642,525 $ 3.15
Totals ============ ============ ============ ============ ============
A summary of the Company's warrant activity as of March 31, 2007, and changed
during the three month period then ended is presented below:
2007
-----------------------
WEIGHTED AVERAGE
EXERCISE
---------- --------
OPTIONS PRICE
---------- --------
Warrants outstanding at the
beginning of period 1,589,643 $ .99
Granted --
Exercised --
Expired 100,000 4.05
---------- --------
Warrants outstanding at end of period 1,489,643 $ 1.24
========== ========
WARRANTS OUTSTANDING
-------------------------------------------------------------
RANGE OF NUMBER REMAINING WEIGHTED
AVERAGE
CONTRACTUAL
LIFE (IN AVERAGE
EXERCISE PRICE OUTSTANDING YEARS) EXERCISE PRICE
-------------- ---------- ---------- ----------
$ .80 - $ 1.25 1,214,643 4.12 $ 1.05
2.00 - 2.25 275,000 1.42 2.11
---------- ---------- ----------
Totals 1,489,643 3.86 $ 1.24
========== ========== ==========
4. NOTES PAYABLE TO STOCKHOLDER
As of March 31, 2007, the Company had drawn all of the $6.150 million from the
available line-of-credit, which is provided by a stockholder, who is also a
Board Member, of the Company (see Note 2). Amounts drawn bear interest at the
prime rate (8.25% as of March 31, 2007) payable monthly and become due and
payable on December 31, 2008; or until such time as the Company has raised an
additional $7.0 million over the $3.5 million raised in the Company's prior
private placement offering; or until such time as the Company is operating
within sufficient cash flow parameters, as defined, to sustain its operations;
or until a disposition of the Company occurs. During the period ended March 31,
2007, the Company drew the remaining $308,500 of the available balance. On March
23, 2007, the maturity date of the stockholder loan was extended from December
31, 2007 to December 31, 2008.
During March 2007, the Company received advances totaling $300,000 from two
members of the Board. Until such time as the Company determines the equity terms
of these funds, the Company is recording these advances as shareholder loans.
For the three-months ended March 31, 2007 and 2006, the Company recorded
approximately $124,108 and $105,986, respectively, of interest expense related
to the notes payable to stockholder, which is included in interest expense in
the accompanying condensed consolidated statements of operations.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with condensed consolidated
financial statements (unaudited) for the three months ended March 31, 2007
appearing elsewhere in this report.
CAUTIONARY STATEMENTS REGARDING FORWARD LOOKING INFORMATION
Certain statements in this report contain or may contain forward-looking
statements that are subject to known and unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These forward-looking
statements were based on various factors and were derived utilizing numerous
assumptions and other factors that could cause the Company's actual results to
differ materially from those in the forward-looking statements. These factors
include, but are not limited to, the Company's ability to operate as a going
concern and to raise sufficient capital to fund its operations, acceptance of
the Company's products, the Company's dependence on distributors and a few
significant customers, risks associated with international operations and
international distribution and other factors. Most of these factors are
difficult to predict accurately and are generally beyond our control. You should
consider the areas of risk described in connection with any forward-looking
statements that may be made herein. Readers are cautioned not to place undue
reliance on these forward-looking statements and readers should carefully review
this report in its entirety. Except for the Company's ongoing obligations to
disclose material information under the Federal securities laws, we undertake no
obligation to release publicly any revisions to any forward-looking statements,
to report events or to report the occurrence of unanticipated events. These
forward-looking statements speak only as of the date of this report and you
should not rely on these statements without also considering the risks and
uncertainties associated with these statements and our business.
Going Concern
The Company's financial statements have been prepared on the basis that it will
operate as a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses each year since inception and has relied on the sale of its
stock from time to time and loans from third parties and from related parties to
fund its operations.
These recurring operating losses, liabilities exceeding assets and the reliance
on cash inflows from an institutional investor and current stockholder led the
Company's independent auditors Webb & Company, P.A., to include a statement in
its audit report relating to the Company's audited consolidated financial
statements for the year ended December 31, 2006 expressing substantial doubt
about the Company's ability to continue as a going concern.
Additionally, the Company continues to address liquidity concerns because of
inadequate revenue growth. As a result, cash flow from operations is
insufficient to cover our liquidity needs for the immediate future. The Company
is in the process of aggressively seeking to raise capital and is exploring
financing availability and options with investment bankers, funds, private
sources, members of management and existing stockholders. The Company has
implemented measures to preserve its ability to operate, including
organizational changes, a reduction and/or deferral of salaries, reduction in
personnel and renegotiating creditor and collection arrangement. There can be no
assurances that the Company will be able to raise the additional capital needed
or reduce the level of expenditures in order to sustain operations.
General
Sales of the Company's products will depend principally upon end user demand for
such products and acceptance of the Company's products by OEMs. The oil
filtration industry has historically been competitive and, as is typically the
case with innovative products, the ultimate level of demand for the Company's
products is subject to a high degree of uncertainty. Developing market
acceptance for the Company's existing and proposed products will require
substantial marketing and sales efforts and the expenditure of a significant
amount of funds to inform customers of the perceived benefits and cost
advantages of its products.
13
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 product offering a unique selling
concept 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 reasonable foreseeable federal
environmental applications
We continue to incorporate the focus of our sales strategy on individual sales
and distribution efforts as well as on the development of a strong nationwide
distribution network that will not only sell but also install and support our
product.
Additionally we began to focus our sales and marketing efforts to target areas
and issues specific to the bypass oil filtration industry, including cultivating
an innovative outlook on oil maintenance, specifically, that oil does not need
to be changed on a regular basis if kept in a clean state.
This strategy includes focus on:
o The expansion of existing strategic relationships
o Continued development and expansion of our distribution
network with qualified distributors in order to establish a
sales- and service-oriented nationwide infrastructure
o Continuing to target existing and new medium-to-large sized
fleets, industrial/construction business and major diesel
engine and generator set OEMs
o Creating customer `pull-through', a sustained level of request
for our product on the OEM level
o 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 2007 announcement that Wastequip, Inc., the leading
manufacturer of waste handling, recycling, and material
handling equipment has been named exclusive distributor of the
PURADYN system in the waste industry.
o 2006 announcement that the PURADYN system 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 test results released by the US Department of
Energy (DOE) estimating an 89% savings in oil using bypass oil
filtration. Our system was used in this test conducted from
2002-2005 evaluating the benefits and cost savings of the
technology.
o 2006 announcement that the U.S. Military has ordered the
PURADYN system installed on new trucks that Freightliner LLC
is supplying for foreign military sales.
o 2006 continued testing with the U.S. Military on use of the
PURADYN system on several other applications.
o 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.
14
We believe that the renewed interest shown in the technology of bypass oil
filtration as an economic alternative to rising oil prices, dependence upon
foreign oil, with the added benefit of being environmentally beneficial, will
timely and favorably position the Company as a manufacturer of a cost efficient
"green" product. We also 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 end-user to test and evaluate
the PURADYN system on its fleet equipment. While set for a specific period of
time, typically ranging from three to twelve months, evaluations are often
influenced by a number of variables including equipment applications downtime or
servicing, which may extend the evaluation period. Consequently, the sales cycle
can be relatively long. Management believes that this evaluation period has
shortened as our products gain wider acceptance, support and usage from
well-known end-users and OEMs.
The Company utilized its wholly owned subsidiary, 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 requires to verify oil condition. In the first quarter
of 2007, total international sales accounted for 61% of the Company's
consolidated net sales.
The Company recognizes revenue from product sales to customers, distributors and
resellers when products that do not require further services or installation by
the Company are shipped, when there are no uncertainties surrounding customer
acceptance and for which collectibility is reasonably assured in accordance with
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial
Statements, as amended and interpreted. Cash received by the Company prior to
shipment is recorded as deferred revenue. Sales are made to certain customers
under terms allowing certain limited rights of return and other limited product
and performance warranties for which provision has been made in the accompanying
condensed consolidated financial statements. Management believes based on past
experience and future expectations that such limited return rights and
warranties will not have a material adverse effect on the Company's financial
statements.
Consistent with industry practices, the Company may accept limited product
returns or provide other credits in the event that a distributor holds excess
inventory of the Company's products. The Company's sales are made on credit
terms, which vary depending on the nature of the sale. The Company believes it
has established sufficient reserves to accurately reflect the amount or
likelihood of product returns or credits and uncollectable receivables. However,
there can be no assurance that actual returns and uncollectable receivables will
not exceed the Company's reserves.
Sales of the Company's products will depend principally on end user demand for
such products and acceptance of the Company's products by original equipment
manufacturers ("OEMs"). The oil filtration industry has historically been
competitive and, as is typically the case with innovative products, the ultimate
level of demand for the Company's products is subject to a high degree of
uncertainty. Developing market acceptance, particularly worldwide, for the
Company's existing and proposed products will require substantial marketing and
sales efforts and the expenditure of a significant amount of funds to inform
customers of the perceived benefits and saving advantages of its products.
15
RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED MARCH 31, 2007 COMPARED TO THE
THREE-MONTHS ENDED MARCH 31, 2006
The following table sets forth the amount of increase or decrease represented by
certain items reflected in the Company's condensed consolidated statements of
operations in comparing the three-months ended March 31, 2007 to the
three-months ended March 31, 2006:
(In thousands) THREE MONTHS ENDED MARCH 31,
------------------------------------
2007 2006 CHANGE
--------- -------- ---------
Net sales $ 766 $ 823 $ (57)
--------- -------- ---------
Costs and expenses:
Cost of products sold 648 615 33
Salaries and wages 261 336 (75)
Selling and administrative 368 305 63
--------- -------- ---------
Total costs and expenses 1,277 1,256 21
--------- -------- ---------
Other (expense) income:
Interest income 13 12 (1)
Interest expense (213) (129) 84
--------- -------- ---------
Total other (expense) income (200) (117) 83
--------- -------- ---------
Net loss $ (711) $ (550) $ (161)
========= ======== =========
NET SALES
Net sales decreased by approximately 7% from approximately $823,000 in 2006 to
approximately $766,000 in 2007. Gross sales increased less than 1% from
approximately $768,000 to $771,000. This increase was offset by a 109%, or
$59,000, increase in sales returns and allowances. During the period ending
March 31, 2006, the sales returns and allowances decreased approximately $67,000
due to a decrease in the cumulative historical rate of returns. Historical
return rates have continued to decline as improvements have been made to the
products. During the period ended March 31, 2007, the company recorded
approximately $5,000, or .6% of gross sales, in allowance for sales returns.
Sales to two customers accounted for approximately 28% and 22%, respectively, of
the consolidated net sales for the three-months ended March 31, 2007. For the
three-months ended March 31, 2006, sales to one customer accounted for
approximately 33% of the consolidated net sales. The UK subsidiary's sales
increased by approximately 78%, from approximately $156,000 for the period
ending March 31, 2006, to approximately $279,000 for the period ending March 31,
2007. Sales to one of the UK subsidiary's customers increased by approximately
$142,000, from approximately $67,000 for the period ending March 31, 2006 to
approximately $209,000 for the period ending March 31, 2007.
COST OF PRODUCTS SOLD
Cost of products sold increased by approximately 5% from approximately $615,000
in 2006 to approximately $648,000 in 2007. Cost of products sold, as a
percentage of sales, increased from 75% in 2006 to 85% in 2007. This increase is
mainly attributable to an increase in labor costs, which the company expects
will be mitigated by other cost reductions and process improvements going
forward. During the quarter ending March 31, 2007, the Company initiated
sourcing of key components with a new supplier, which is expected to generate
approximately 20% cost savings for that component beginning in the quarter
ending June 30, 2007.
SALARIES AND WAGES
Salaries and wages decreased approximately $75,000, or 22%. This decrease is the
result of a net reduction of two employees, representing a decrease of
approximately $124,000, which was partially offset by cost of living salary
increases.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased by approximately $63,000, or 21%.
This increase was due to an increase in patents of approximately $35,000, bad
debts of approximately $30,000, rent expense of approximately $27,000 and travel
expenses of approximately $11,000. Patents, rent and travel expense increases
were attributable to general inflation. Bad debt expense increase was primarily
attributable to the reserves for one delinquent international customer, which
the company expects will be collected during the quarter ending June 30, 2007.
16
These increases were offset by a reduction in stock based compensation expense
of approximately $15,000, which was $22,000 and $37,000 for the three-months
ended March 31, 2007 and 2006, respectively, related to certain variable equity
awards and other stock based compensation
INTEREST INCOME
Interest income increased approximately $1,000, from income of approximately
$12,000 for the period ending March 31, 2006 to approximately $13,000 for the
period ending March 31, 2007. This increase is attributable to an increase in
interest rates.
INTEREST EXPENSE
Interest expense increased by approximately $84,000. Approximately $80,000 of
this increase is attributable to a reserve established during the period ending
March 31, 2007, toward the accumulation of interest recorded on a shareholder
notes receivable. The remaining increase is a result of an increase in the
interest rate on outstanding balance of the stockholder notes payable. The
Company pays interest monthly on the notes payable to stockholder at the prime
rate, which was 8.25% as of March 31, 2007 as opposed to 7.5% as of March 31,
2006.
NEW ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes,"
which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. In accordance with FIN 48, the Company
must adjust its financial statements to reflect only those tax positions that
are more-likely-than-not to be sustained as of the adoption date. The effective
date of FIN 48 for the Company is January 1, 2007. The adoption of FIN 48 has
not had a material impact on the Company's condensed consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which clarifies the definition of fair value, establishes
guidelines for measuring fair value, and expands disclosures regarding fair
value measurements. SFAS 157 does not require any new fair value measurements
and eliminates inconsistencies in guidance found in various prior accounting
pronouncements. SFAS 157 will be effective for the Company on January 1, 2008.
The Company is currently evaluating the impact of adopting SFAS 157 on its
financial position, cash flows, and results of operations.
In September 2006, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 provides interpretive guidance on the SEC's
views on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The provisions of SAB 108 were effective for the Company for the fiscal year
ended December 31, 2006. The application of SAB 108 did not have a material
effect on its financial position, cash flows, and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2007, the Company had cash and cash equivalents of approximately
$155,000. For the three-month period ended March 31, 2007, net cash used in
operating activities was approximately $525,000 which primarily resulted from
the net loss of approximately $711,000. There was approximately $6,000 cash used
in investing activities for the purchase of property and equipment. Net cash
provided by financing activities was approximately $635,000 for the period, due
to $608,500 of proceeds received from shareholder borrowings.
The Company has incurred net losses each year since its inception and has relied
on the sale of its stock from time to time and loans from third parties and from
related parties to fund its operations.
On March 28, 2002, the Company executed a binding agreement with one of its
stockholders, who is also a Board Member, to fund up to $6.150 million. On March
23, 2007, the maturity date of the loan was extended from December 31, 2007 to
December 31, 2008. As of March 31, 2007, the Company had drawn all of the $6.150
million of available funds.
17
At March 31, 2007, the Company had working capital of approximately $733,000
and its current ratio (current assets to current liabilities) was 1.54 to 1. The
Company anticipates increased cash flows from 2007 sales activity; however,
additional cash will still be needed to support operations and meet working
capital needs. If budgeted sales levels are not achieved and/or significant
unanticipated expenditures occur, the Company may have to modify its business
plan, reduce or discontinue some of its operations or seek a buyer for part of
its assets to continue as a going concern through 2007. There can be no
assurance that the Company will be able to raise additional capital or that
sales will increase to the level required to generate profitable operations to
provide positive cash flow from operations.
The Company's wholly owned subsidiary, rents office space in Devon, England
under a lease that expires in September 2010.
Impact of Inflation
Inflation has not had a significant impact on the Company's operations. However,
any significant decrease in the price for oil or labor, environmental compliance
costs, and engine replacement costs could adversely impact the Company's end
users cost/benefit analysis as to the use of the Company's products. The impact
of fluctuations in foreign currency has not been significant. The exchange rate,
the Great British pound to the U.S. dollar fluctuated from 1.9266 on December
31, 2006 to 1.9625 on March 31, 2007 as compared to 1.7208 on December 31, 2005
to 1.7398 on March 31, 2006.
ITEM 3. CONTROLS AND PROCEDURES
Our management, which includes our CEO and our Chief Financial Officer,
have conducted an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-14(c) promulgated under the Securities and
Exchange Act of 1934, as amended) as of a date (the "Evaluation Date") as of the
end of the period covered by this report. Our management does not expect that
our disclosure controls and procedures will prevent all error and all fraud. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system's objectives will be
met. Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions.
Based upon that evaluation, our management has concluded that our
disclosure controls and procedures are effective for timely gathering, analyzing
and disclosing the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934, as amended.
There have been no changes in our internal control over financial
reporting identified in connection with the evaluation that occurred during the
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
EXHIBIT NUMBER DESCRIPTION
------------- --------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
19
SIGNATURES
In accordance with the requirements of the Exchange Act, Puradyn Filter
Technologies Incorporated caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PURADYN FILTER TECHNOLOGIES INCORPORATED
By /s/ Joseph V. Vittoria Date: May 14, 2007
----------------------------------------
Joseph V. Vittoria, Chairman and
Chief Executive Officer
By /s/ Cindy Lea Gimler Date: May 14, 2007
----------------------------------------
Cindy Lea Gimler, Chief Financial Officer
20