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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 September 30, 2007
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[ ] 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
(Exact name of small business issuer as specified in its charter)
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Delaware 14-1708544
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
2017 High Ridge Road, Boynton Beach, Florida 33426
(Address of principal executive offices)
(561) 547-9499
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 of 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 [ ]
Indicate by check mark whether the registrant 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 November 14, 2007, there were
29,400,638 shares of registrant's common stock outstanding.
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Puradyn Filter Technologies Incorporated
Index to Quarterly Report on Form 10-QSB
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet - As of September 30, 2007
and December 31, 2006 ........................................ 3
Condensed Consolidated Statements of Operations - Three months
and nine months ended September 30, 2007 and 2006 ............ 4
Condensed Consolidated Statements of Cash Flows - Nine months
ended September 30, 2007 and 2006 ............................ 5
Condensed Consolidated Statement of Stockholders' Deficit -
Nine months ended September 30, 2007 ......................... 6
Notes to Condensed Consolidated Financial Statements ........... 7
Item 2. Management's Discussion and Analysis of Financial Condition or
Plan of Operation .............................................. 15
Item 3. Controls and Procedures ........................................ 22
Part II. Other Information
Item 1. Legal Proceedings .............................................. 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .... 23
Item 3. Default Upon Senior Securities ................................. 23
Item 4. Submission of Matters to a Vote of Security Holders ............ 23
Item 5. Other Information .............................................. 23
Item 6. Exhibits ....................................................... 23
Signatures ................................................................ 24
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Puradyn Filter Technologies Incorporated
Condensed Consolidated Balance Sheets
As of September 30, 2007 and December 31, 2006
(Unaudited)
September 30, December 31,
------------ ------------
Assets 2007 2006
Current assets:
Cash and cash equivalents $ 103,778 $ 55,175
Accounts receivable, net of allowance for uncollectible accounts of
$48,043 and $47,513 419,959 497,888
Inventories 1,310,625 1,272,456
Prepaid expenses and other current assets 240,713 174,015
------------ ------------
Total current assets 2,075,075 1,999,534
Property and equipment, net 163,848 193,832
Deferred financing costs, net 23,153 40,749
Other noncurrent assets 40,930 40,930
------------ ------------
Total assets $ 2,303,006 $ 2,275,045
============ ============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 384,357 $ 316,716
Accrued liabilities 932,312 885,454
Current portion of capital lease obligation 2,305 5,593
Deferred revenue 119,966 99,915
------------ ------------
Total current liabilities 1,438,940 1,307,678
Capital lease obligation, less current portion 7,542 --
Notes payable to stockholder 5,905,500 5,839,000
------------ ------------
Total Liabilities 7,351,982 7,146,678
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 - 29,400,638 and 27,310,352 29,401 27,310
Additional paid-in capital 41,320,599 39,774,531
Notes receivable from stockholders (1,064,030) (1,136,656)
Accumulated deficit (45,119,214) (43,384,109)
Accumulated other comprehensive (loss)/income (215,732) (152,709)
------------ ------------
Total stockholders' deficit (5,048,976) (4,871,633)
------------ ------------
Total liabilities and stockholders' deficit $ 2,303,006 $ 2,275,045
============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Operations
For the Three Months and Nine Months Ended September 30, 2007 and 2006
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Net sales $ 818,682 $ 641,303 $ 2,371,869 $ 2,319,362
Costs and expenses:
Cost of products sold 713,222 545,105 2,073,082 1,800,109
Salaries and wages 251,595 351,619 777,168 1,044,010
Selling and administrative 262,899 260,055 818,048 942,753
------------ ------------ ------------ ------------
1,227,716 1,156,779 3,668,298 3,786,872
------------ ------------ ------------ ------------
Loss from operations (409,034) (515,476) (1,296,429) (1,467,510)
Other income (expense):
Interest income 9,776 13,011 31,694 37,698
Interest expense (127,232) (136,810) (470,370) (390,175)
------------ ------------ ------------ ------------
Total other expense, net (117,456) (123,799) (438,676) (352,477)
------------ ------------ ------------ ------------
Loss before income taxes (526,490) (639,275) (1,735,105) (1,819,987)
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Net loss (526,490) (639,275) (1,735,105) (1,819,987)
============ ============ ============ ============
Basic and diluted loss per common
share $ (.02) $ (0.03) $ (.06) $ (0.07)
============ ============ ============ ============
Weighted average common shares
outstanding 28,981,383 25,355,915 27,959,710 24,833,119
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2007 2006
----------- -----------
OPERATING ACTIVITIES
Net loss $(1,735,105) $(1,819,987)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 71,355 157,444
Gain on sale of assets 577 --
Provision for bad debts 21,021 36,217
Provision for obsolete and slow moving inventory (67,766) (16,085)
Deposit on other assets -- (15,000)
Amortization of deferred financing costs included in interest expense 17,596 38,712
Interest receivable from notes receivable from stockholders 72,626 (35,951)
Compensation expense on stock-based arrangements with employees,
consultants, investors and vendors 44,659 205,338
Changes in operating assets and liabilities:
Accounts receivable 56,907 112,253
Inventories 29,598 (69,196)
Prepaid expenses and other current assets (66,698) 57,696
Accounts payable 67,641 91,336
Accrued liabilities 46,858 209,196
Deferred revenues 20,051 13,496
----------- -----------
Net cash used in operating activities (1,420,680) (1,034,531)
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 5,458 --
Purchases of property and equipment (36,971) (9,562)
----------- -----------
Net cash used in investing activities (31,513) (9,562)
FINANCING ACTIVITIES
Proceeds from sale of common stock 1,475,000 1,210,000
Proceeds from exercise of stock options 28,500 2,600
Proceeds from notes payable to stockholder 846,500 822,000
Payment of notes payable to stockholder (780,000) (747,000)
Payment of capital lease obligations (4,271) (3,753)
----------- -----------
Net cash provided by financing activities 1,565,729 1,283,847
Effect of exchange rate changes on cash and cash equivalents (64,933) (95,655)
----------- -----------
Net increase in cash and cash equivalents 48,603 144,099
Cash and cash equivalents at beginning of period 55,175 155,557
----------- -----------
Cash and cash equivalents at end of period $ 103,778 $ 299,656
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 373,234 $ 344,855
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES
Common stock issued in settlement of accrued bonus $ -- $ 30,000
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Changes in Stockholders' Deficit
Nine Months ended September 30, 2007
(Unaudited)
Accumulated
Common Stock Additional Notes Other Total
---------------------- Paid-in Recivable Accumulated Comprehensive Stockholders'
Shares Amount Capital From Stockholders Deficit Income (Loss) Deficit
----------- --------- ------------ ------------ ------------ ---------- -----------
Balance at December 31, 2006 27,310,352 $ 27,310 $ 39,774,531 $ (1,136,656) $(43,384,109) $ (152,709) $(4,871,633)
Foreign currency translation
adjustment (63,023) (63,023)
Net loss (1,735,105) (1,735,105)
-----------
Total comprehensive loss (1,798,128)
Compensation expense associated
with unvested options 9,258 9,258
Issuance of common stock in
private placement , net 2,014,286 2,015 1,472,985 1,475,000
Warrants issued to investors 34,200 34,200
Exercise of stock options 76,000 76 28,424 28,500
Interest receivable related to
notes receivable from
stockholders 72,626 72,626
Compensation expense associated
with option modification 1,201 1,201
----------- --------- ------------ ------------ ------------ ---------- -----------
Balance at September 30, 2007 29,400,638 $ 29,401 $ 41,320,599 $ (1,064,030) $(45,119,214) $ (215,732) $(5,048,976)
=========== ========= ============ ============ ============ ========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
Puradyn Filter Technologies Incorporated
Notes to Condensed Consolidated Financial Statements
September 30, 2007
(Unaudited)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim information and with the instructions to Form 10-QSB
and Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments consisting of a normal and recurring nature considered necessary for
a fair presentation have been included. Operating results for the three-month
and nine-month periods ended September 30, 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 have led
the Company's independent registered 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. 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 arrangement.
There can be no assurance that the Company will be able to raise the additional
capital needed or reduce the level of expenditures in order to sustain
operations.
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 3,596,543 respectively for the three-month and nine-month periods
ended September 30, 2007 and 2,905,918 and 3,072,070 respectively for the
three-month and nine-month periods ended September 30, 2006.
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 September 30, 2006 and September 30,
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
values.
Inventories consisted of the following at September 30, 2007 and December 31,
2006:
Raw materials $ 635,386 $ 913,034
Finished goods 752,927 504,876
Valuation allowance (77,688) (145,454)
----------- -----------
$ 1,310,625 $ 1,272,456
=========== ===========
Deferred Financing Costs
The Company capitalizes financing costs and amortizes them using the
straight-line method, which approximates the effective interest method, over the
term of the related debt. Amortization of deferred financing costs is included
in interest expense and totaled approximately $5,000 and $10,000 for the
three-months ended September 30, 2007 and 2006, and $18,000 and $39,000 for the
nine months ended September 30, 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 September 30, 2007 and 2006 was
approximately $658,000 and $630,000, 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
8
(SAB 104), as amended and interpreted. Cash received by the Company prior to
shipment is recorded as deferred revenue. Sales are made to customers under
terms allowing certain limited rights of return and other limited product and
performance warranties for which provision has been made in the accompanying
condensed consolidated financial statements.
Amounts billed to customers in sales transactions related to shipping and
handling, represent revenues earned for the goods provided and are included in
net sales. Costs of shipping and handling are included in cost of products sold.
Product Warranty Costs
The Company accrues for warranty costs based on the expected material and labor
costs to provide warranty replacement products. The methodology used in
determining the liability for warranty cost is based upon historical information
and experience. The Company's warranty reserve is calculated as the gross sales
multiplied by the historical warranty expense return rate.
The following table shows the changes in the aggregate product warranty
liability for the nine-months ended September 30, 2007:
Balance as of December 31, 2006 $ 71,759
Less: Payments made (8,793)
Change in prior period estimate 1,164
Add: Provision for current period warranties 19,523
----------
Balance as of September 30, 2007 $ 83,653
==========
Comprehensive Income
SFAS No. 130, REPORTING COMPREHENSIVE INCOME (SFAS 130) establishes rules for
reporting and displaying of comprehensive income and its components.
Comprehensive income is the sum of net loss as reported in the consolidated
statements of operations and other comprehensive income transactions. Other
comprehensive income transactions that currently apply to the Company result
from changes in exchange rates used in translating the financial statements of
its wholly owned subsidiary, Puradyn Filter Technologies, Ltd. (Ltd).
Comprehensive loss as of September 30, 2007 and 2006 is not shown net of taxes
because the Company's deferred tax asset has been fully offset by a valuation
allowance.
Comprehensive loss consisted of the following for the three and nine-months
ended September 30, 2007 and 2006:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Net loss (526,490) (639,275) (1,735,105) (1,819,987)
---------- ---------- ---------- ----------
Other comprehensive income:
Foreign currency translation (28,095) 30,974 (63,023) 89,623
---------- ---------- ---------- ----------
Total other comprehensive income (28,095) 30,974 (63,023) 89,623
---------- ---------- ---------- ----------
Comprehensive loss (554,585) (608,301) (1,798,128) (1,730,364)
========== ========== ========== ==========
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
9
must adjust its financial statements to reflect only those tax positions that
are more-likely-than-not to be sustained as of the adoption date. The effective
date of FIN 48 for the Company is January 1, 2007. The adoption of FIN 48 has
not had a material impact on the Company's condensed consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which clarifies the definition of fair value, establishes
guidelines for measuring fair value, and expands disclosures regarding fair
value measurements. SFAS 157 does not require any new fair value measurements
and eliminates inconsistencies in guidance found in various prior accounting
pronouncements. SFAS 157 will be effective for the Company on January 1, 2008.
The Company is currently evaluating the impact of adopting SFAS 157 on its
financial position, cash flow, and results of operations.
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.
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES -
INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115". This statement permits
entities to choose to measure many financial instruments and certain other items
at fair value. Most of the provisions of SFAS No. 159 apply only to entities
that elect the fair value option. However, the amendment to SFAS No. 115
"ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES" applies to
all entities with available-for-sale and trading securities. SFAS No. 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided the entity also elects
to apply the provision of SFAS No. 157, "FAIR VALUE MEASUREMENTS". The adoption
of this statement is not expected to have a material effect on the Company's
financial statements.
2. ISSUES AFFECTING LIQUIDITY AND MANAGEMENT'S PLANS
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has sustained losses since
inception in 1987 and used net cash in operations of approximately $1,420,680
and $1,034,531 during the nine-months ended September 30, 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.
Additionally, the Company continues to address liquidity concerns because of
inadequate revenue growth. As a result, cash flow from operations is
insufficient to cover our liquidity needs for the immediate future. The Company
is in the process of aggressively seeking to raise capital and is exploring
financing availability and options with investment bankers, funds, private
sources, members of management and existing shareholders. The Company has
implemented further measures to preserve its ability to operate, including
organizational changes, deferral of salaries, reduction in personnel and
10
renegotiating creditor and collection arrangement. There can be no assurance
that the Company will be able to raise the additional capital needed or reduce
the level of expenditures in order to sustain operations.
On March 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 September 30, 2007, the Company had
drawn a total of $5.906 million of the available funds.
The Company anticipates modest cash flows from the remaining 2007 sales activity
and that 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.
3. COMMON STOCK
In June 2007, the Company received cash proceeds of $975,000 from an accredited
investor for the purchase of 1,300,000 shared of common stock at $0.75 per
share.
In August 2007, the Company converted $500,000 previously received in the form
of advances into purchases of 714,286 shares of common stock at $0.70 per share.
4. STOCK OPTIONS
During the nine-months ended September 30, 2007, employees of the Company
exercised 76,000 common stock options. The Company received $28,500, in cash
proceeds in exchange for the shares issued in 2007.
During the three-month and nine month periods ended September 30, 2007, the
Company recognized compensation expense of approximately $35,211 and $66,164
respectively. During the three-month and nine-month periods ended September 30,
2006, the Company recognized compensation expense of approximately $49,000 and
$205,000, respectively.
For the three-month and nine-month periods ended September 30, 2007, the Company
recorded stock-based compensation expense of $1,011 and $9,258. For the
three-month and nine-month periods ended September 30, 2006, the Company
recognized an expense of approximately $2,372 and $4,996, respectively, of
stock-based compensation expense under the intrinsic value method.
The Company leases its employees from a payroll leasing company. The Company's
leased employees meet the definition of employees as specified by FIN 44 for
purposes of applying APB 25.
Stock options and warrants issued to consultants and other non-employees as
compensation for services provided to the Company are accounted for based on the
fair value of the services provided or the estimated fair market value of the
option or warrant, whichever is more reliably measurable in accordance with SFAS
123 and EITF 96-18, ACCOUNTING FOR EQUITY INVESTMENTS THAT ARE ISSUED TO OTHER
THAN EMPLOYEES FOR ACQUIRING OR IN CONJUNCTION WITH SELLING GOODS OR SERVICES.
The related expense is recognized over the period the services are provided.
11
A summary of the Company's stock option plans as of September 30, 2007, and
changes during the nine month period then ended is presented below:
Nine Months Ended
September 30, 2007
----------------------------------
Weighted
Average
Number of Exercise
Options Price
------------ ---------
Options outstanding at beginning of period 1,880,400 $ 3.10
Options granted 115,000 .40
Options exercised 76,000 .38
Options cancelled 130,000 4.28
Options expired 62,500 8.75
------------ ---------
Options at end of period 1,726,900 2.75
------------ ---------
Options exercisable at end of period 1,530,650 $ 3.02
============ =========
A summary of the Company's stock option plans as of September 30, 2007, and
changed during the three month period then ended is presented below:
Three Months Ended
September 30, 2007
----------------------------------
Weighted
Average
Number of Exercise
Options Price
------------ ---------
Options outstanding at beginning of period 1,741,900 $ 3.02
Options granted 115,000 .40
Options exercised -- --
Options cancelled 130,000 4.28
Options expired -- --
------------ ---------
Options at end of period 1,726,900 2.75
------------ ---------
Options exercisable at end of period 1,530,650 $ 3.02
============ =========
Changes in the Company's unvested options for the nine months ended September
30, 2007 are summarized as follows:
Nine Months Ended
September 30, 2007
----------------------------------
Weighted
Average
Number of Exercise
Options Price
------------ ---------
Options unvested at beginning of period 115,625 $ .86
Options granted 115,000 .40
Options vested 16,875 .70
Options cancelled 17,500 .75
------------ ---------
Options unvested at end of period 196,250 $ .60
============ =========
Changes in the Company's unvested options for the three months ended September
30, 2007 are summarized as follows:
Three Months Ended
September 30, 2007
----------------------------------
Weighted
Average
Number of Exercise
Options Price
------------ ---------
Options unvested at beginning of period 98,750 $ .84
Options granted 115,000 .40
Options vested 10,000 .42
Options cancelled 7,500 .75
------------ ---------
Options unvested at end of period 196,250 $ .60
============ =========
12
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ------------------------------
REMAINING
AVERAGE WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ------------ ------------ ----------- -------------- ------------
$ .21 - $ 1.70 1,150,900 5.03 $ .87 954,650 $ .93
1.86 - 4.50 226,000 3.20 2.38 226,000 2.38
8.50 - 9.25 350,000 1.19 9.14 350,000 9.14
------------ ------------ ----------- -------------- ------------
Totals 1,726,900 4.51 $ 2.75 1,530,650 $ 3.02
============ ============ =========== ============== ============
A Black-Scholes option-pricing model was used to develop the fair values of the
options granted.
A summary of the Company's warrant activity as of September 30, 2007 and changed
during the nine and three month periods then ended is presented below:
2007
-------------------------
WEIGHTED AVERAGE
Nine months ended September 30, 2007 EXERCISE
-------------------------
OPTIONS PRICE
-------------------------
Warrants outstanding at the beginning of
period 1,589,643 $ .99
Granted 380,000 1.25
Exercised -- --
Expired 100,000 4.05
------------- ---------
Warrants outstanding at end of period 1,869,643 $ 1.25
============= =========
2007
-------------------------
WEIGHTED AVERAGE
Three months ending September 30, 2007 EXERCISE
-------------------------
OPTIONS PRICE
-------------------------
Warrants unvested at the beginning of
period 1,489,643 $ 1.24
Granted 380,000 1.25
Exercised -- --
Vested -- --
------------- ---------
Warrants unvested at end of period 1,869,643 $ 1.25
============= =========
WARRANTS OUTSTANDING
------------------------------------------------
REMAINING
AVERAGE WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE
EXERCISE PRICE OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE
-------------- ----------- --------------- --------------
$ .80 - $1.25 1,594,643 3.93 $ 1.10
2.00 - 2.25 275,000 .92 2.11
----------- -------------- --------------
Totals 1,869,643 3.66 1.25
=========== ============== ==============
5. NOTES PAYABLE TO STOCKHOLDER
As of September 30, 2007, the Company had drawn $5.906 of the $6.15 million from
the available line-of-credit, provided by a stockholder, who is also a Board
Member, of the Company (see Note 2). Amounts drawn bear interest at the prime
13
rate minus one-quarter percent (7.25% as of September 30, 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 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.
During the nine months ending September 30, 2007, the Company received advances
totaling $500,000 from five stockholders. During August 2007, the Company
determined the equity terms of these shareholder advances and they were
converted to common shares.
For the three-months ended September 30, 2007 and 2006, the Company recorded
approximately $120,000 and $128,000, respectively; and for the nine-months ended
September 30, 2007 and 2006, the Company recorded approximately $373,000 and
$348,000, respectively, of interest expense related to the notes payable to
stockholder, which is included in interest expense in the accompanying condensed
consolidated statements of operations.
6. COMMITMENTS AND CONTINGENCIES
NONE.
7. SUBSEQUENT EVENTS
None.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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
Our financial statements have been prepared on the basis that it will operate as
a going concern, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. We have incurred net losses
each year since inception and have relied on the sale of its stock from time to
time and loans from third parties and from related parties to fund its
operations.
These recurring operating losses, liabilities exceeding assets and the reliance
on cash inflows from institutional investors and current stockholders led our
independent registered public accounting firm Webb & Company, P.A., to include a
statement in its audit report relating to our audited consolidated financial
statements for the year ended December 31, 2006 expressing substantial doubt
about our ability to continue as a going concern.
Additionally, we continue to address liquidity concerns because of inadequate
revenue growth. As a result, cash flow from operations is insufficient to cover
our liquidity needs for the immediate future. We are in the process of
aggressively seeking to raise capital and exploring financing availability and
options with investment bankers, funds, private sources and existing
stockholders. We have implemented further measures to preserve its ability to
operate, including organizational changes, a reduction and/or deferral of
salaries, reduction in personnel and renegotiating creditor and collection
arrangement. There can be no assurances that we will be able to raise the
additional capital needed or reduce the level of expenditures in order to
sustain operations.
General
Sales of our products will depend principally upon end user demand for such
products and acceptance of the Company's products by original equipment
manufacturers OEMs. The oil filtration industry has historically been
competitive and, as is typically the case with innovative products, the ultimate
level of demand for our products subject to a high degree of uncertainty.
Developing market acceptance for our existing and proposed products will require
substantial marketing and sales efforts and the expenditure of a significant
amount of funds to inform customers of the perceived benefits and cost
advantages of its products.
15
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 industry. We believe we are in a
unique position to capitalize on the growing acceptance of bypass oil filtration
given that our product and our Company are positioned as, including, but not
limited to:
o A competitively priced, value-added product offering a unique selling
concept based on an advanced, patented technology
o An alternative solution to the rising costs and increasing dependence on
foreign oil
o Providing an operational maintenance solution to end users in conjunction
with existing and reasonable foreseeable federal environmental applications
We continue to incorporate the focus of our sales strategy on individual sales
and distribution efforts as well as on the development of a strong nationwide
distribution network that will not only sell but also install and support our
product.
Additionally, we continue to focus our sales and marketing efforts to target
areas and issues specific to the bypass oil filtration industry, cultivating an
innovative outlook on oil maintenance, specifically, that oil does not need to
be changed on a regular basis if kept in a clean state.
This strategy includes:
o The expansion of existing strategic relationships
o Continued development and expansion of our distribution network with
qualified distributors in order to establish a sales- and service-oriented
nationwide infrastructure
o Continuing to target existing and new medium-to-large sized fleets,
industrial/construction business and major diesel engine and generator set
OEMs
o Creating customer `pull-through', a sustained level of request for our
product on the OEM level
o Closely monitoring customer evaluations to ensure the salient aspects of
our system are perceived and accepted on a timely basis
o Converting customer evaluations into sales, both immediate and long term
While this is a long-term and ongoing commitment, we believe we have achieved a
limited amount of industry acceptance based on recent accomplishments:
o 2007 announcement that initial orders have been placed for the PURADYN
system by one of the largest global providers of innovative mechanical
solutions, technology, and services for the oil and gas industry.
o 2007 announcement that the PURADYN system has been approved by Cascade
Sierra Solutions as a recommended product for inclusion in its outreach
centers, which will provide information, technology and products geared
toward conservation of oil and energy.
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.
16
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.
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-effective
`green' product. We have seen that industry acceptance has increased in 2007 and
expect this trend to continue into 2008; however, there can be no assurance that
this industry acceptance will result in actual revenues.
Our sales effort not only involves educating the potential customer on the
benefits of our product, but also allowing the customer to test and evaluate the
PURADYN system on its fleet vehicles. While set for a specific period of time,
typically ranging from three to twelve months, evaluations are often influenced
by a number of variables including equipment applications downtime or servicing,
which may extend the evaluation period. Consequently, the sales cycle can be
relatively long. Management believes that this evaluation period will continue
to be shortened as our products gain wider acceptance, support and usage from
well-known customers and OEMs.
We utilize our wholly owned subsidiary, Puradyn Filter Technologies, Ltd.
("Ltd"), in the United Kingdom to sell our products in Europe, the Middle East
and Africa.
International sales are especially well suited to our product given that
environmental controls are not as regulated in countries outside North America.
Certain applications representing a higher return on investment are more
prevalent in use outside of North America and end-users consequently are more
receptive to the total maintenance package, including the use of oil analysis,
which the PURADYN system represents. In first nine months of 2007, total
international sales accounted for approximately 53% of the Company's
consolidated net sales as compared to approximately 44% for the nine months
ending September 30, 2006.
We recognize revenue from product sales to customers, distributors and resellers
when products that do not require further services or installation by us are
shipped, when there are no uncertainties surrounding customer acceptance and for
which collectibility is reasonably assured in accordance with Staff Accounting
Bulletin (SAB) No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, as amended
and interpreted. Cash that we received prior to shipment is recorded as deferred
revenue. Sales are made to certain customers under terms allowing certain
limited rights of return and other limited product and performance warranties
for which provision has been made in the accompanying condensed consolidated
financial statements. Management believes, based on past experience and future
expectations, that such limited return rights and warranties will not have a
material adverse effect our financial statements.
17
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 uncollectible receivables. However,
there can be no assurance that actual returns and uncollectible receivables will
not exceed the Company's reserves.
Sales of the Company's products will depend principally on end user demand for
such products and acceptance of the Company's products by original equipment
manufacturers or "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.
RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO
THE THREE-MONTHS ENDED SEPTEMBER 30, 2006
The following table sets forth the amount of increase or decrease represented by
certain items reflected in our condensed consolidated statements of operations
in comparing the three-months ended September 30, 2007 to the three-months ended
September 30, 2006:
(In thousands) Three Months Ended
September 30,
-----------------------------
2007 2006 Change
------- ------- -------
Net sales $ 819 $ 641 178
------- ------- -------
Costs and expenses:
Cost of products sold 713 545 (168)
Salaries and wages 252 352 100
Selling and administrative 263 260 (3)
------- ------- -------
Total costs and expenses 1,228 1,157 (71)
------- ------- -------
Other (expense) income:
Interest income 10 13 (3)
Interest expense (127) (136) 9
------- ------- -------
Total other expense (117) (123) 6
------- ------- -------
Net loss (526) $ (639) 113
======= ======= =======
NET SALES
Net sales increased by approximately $178,000 or 28% from approximately $641,000
in 2006 to approximately $819,000 in 2007. The UK subsidiary's sales increased
by approximately $186,000 (120%), from approximately $155,000 to approximately
$341,000 for the three-month period ended September 30, 2006 compared to the
three-month period ended September 30, 2007.
Sales to two customers accounted for approximately 27% and 15% (for a total of
42%) of the consolidated net sales for the three-months ended September 30,
2007. For the three-months ended September 30, 2006, sales to three customers
accounted for approximately 22%, 16% and 11% of the consolidated net sales.
18
COST OF PRODUCTS SOLD
Cost of products sold increased by approximately $168,000 or 31% from
approximately $545,000 in 2006 to approximately $713,000 in 2007. Cost of
products sold, as a percentage of sales, increased from approximately 85% in
2006 to approximately 87% in 2007. The increase is primarily due to increases in
raw material sources.
SALARIES AND WAGES
Salaries and wages decreased approximately $100,000, or 28%, as the result of a
net reduction of three employees representing a reduction of $106,000. This
reduction was partially offset by cost of living wage increases.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased by approximately $3,000, or 1%.
INTEREST EXPENSE
Interest expense decreased by approximately $9,000, or 7%, as a result of a
decrease in the interest rate. Effective September 10, 2007, the lender
decreased the rate at which we pay interest from prime rate to prime minus
one-quarter percent. As of September 30, 2007 our rate was 7.25% as compared to
8.25% at September 30, 2006.
RESULTS OF OPERATIONS FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO
THE NINE-MONTHS ENDED SEPTEMBER 30, 2006
The following table sets forth the amount of increase or decrease represented by
certain items reflected in the our condensed consolidated statements of
operations in comparing the nine-months ended September 30, 2007 to the
nine-months ended September 30, 2006:
(in thousands) Nine Months ended
September 30,
-----------------------------
2007 2006 Change
------- ------- -------
Net sales $ 2,372 $ 2,319 $ 53
------- ------- -------
Costs and expenses:
Cost of products sold 2,073 1,800 (273)
Salaries and wages 777 1,044 267
Selling and administrative 818 943 125
------- ------- -------
Total costs and expenses 3,668 3,787 119
------- ------- -------
Other income (expense):
Interest income 31 38 (7)
Interest expense (470) (390) 80
------- ------- -------
Total other expense (439) (352) 87
------- ------- -------
Net loss (1,735) $(1,820) $ 85
======= ======= =======
19
NET SALES
Net sales increased by approximately $53,000, or 2%, from approximately
$2,319,000 in 2006 to approximately $2,372,000 in 2007. International sales
increased approximately $385,000, or 37% from approximately $1,027,000 for the
nine-month period ended September 30, 2006 as compared to approximately
$1,412,000 for the nine-month period ended September 30, 2007. This increase was
partially offset by a decrease in Rentar sales which had decreased by
approximately $178,000 from sales of approximately $210,000 during the nine
month period ending September 30, 2006 to approximately $32,000 for the period
ending September 30, 2007. Additionally, one of our largest customers, which
installs Puradyn product on most new equipment, over purchased their equipment
in 2006, thus causing a decline in their equipment purchases for 2007. As a
result, higher priced unit sales, as a percentage of total sales decreased from
approximately 54% to approximately 48%, whereas filter sales increased from
approximately 34% to approximately 42% of total sales.
Sales to two customers individually accounted for approximately 28% and 16% (for
a total 44%) and 27% and 17% (for a total of 44%) of net sales for the
nine-months ended September 30, 2007 and 2006, respectively. The UK subsidiary's
sales increased by approximately $425,000, or 75%, from approximately $567,000
for the nine-month period ended September 30, 2006 compared to approximately
$993,000 for the nine-month period ended September 30, 2007. Sales to their top
customer has increased during the nine months ending September 30, 2007 and were
approximately 66% of their net sales, as compared to approximately 43% for the
nine months ending September 30, 2006. This increase is attributable to an
important acquisition made by our customer, significantly increasing their
demand for our product.
In the first nine months of 2007, total international sales accounted for
approximately 53% of the Company's consolidated net sales, as compared to
approximately 44% for the nine months ending September 30, 2006.
COST OF PRODUCTS SOLD
Cost of products sold increased by approximately $273,000, or 15%, from
approximately $1,800,000 in 2006 to approximately $2,073,000 in 2007. Cost of
products sold, as a percentage of sales, increased from approximately 78% for
the nine-months ended September 30, 2006 to approximately 87% for the
nine-months ended September 30, 2007. The majority of this increase is
attributable to increases in raw materials. Approximately $12,000 and $38,000,
respectively, of this increase are attributable to an overall increase in
reserves and disposal of slow moving and obsolete inventory and higher cost of
labor, respectively. Effective January 1, 2008, the company will be increasing
product prices, thereby alleviating a portion of this decrease in margins.
SALARIES AND WAGES
Salaries and wages decreased approximately $267,000 or 26%. This decrease is the
result of a net reduction of three employees, representing a decrease of
approximately $279,000. This reduction was partially offset by cost of living
wage increases.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased by approximately $125,000 or 13%
from approximately $943,000 for the nine months ended September 30, 2006 to
approximately $818,000 for the nine months ended September 30, 2007. This
decrease was due primarily to a reduction in stock based compensation expense of
approximately $132,000. During the nine months ended September 30, 2006, we
recorded an expense of approximately $66,000 for the amortization of warrants
issued to investors and an expense of approximately $88,000 for extending the
expiration of stock options of a former employee.
INTEREST EXPENSE
Interest expense increased by approximately $80,000, or 21%. This increase is
attributable to a reserve established during the period ending September 30,
2007, toward the accumulation of interest recorded on a shareholder note
20
receivable. We pay interest monthly on the notes payable to stockholder at the
prime rate minus one-quarter percent, which was 7.75% as of September 30, 2007,
as compared to 8.25% as of September 30, 2006.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2007, we had cash and cash equivalents of approximately
$104,000. For the nine-month period ended September 30, 2007, net cash used in
operating activities was approximately $1,421,000, which primarily resulted from
the net loss of approximately $1,735,000. Net cash used in investing activities
was approximately $32,000 for the purchase of property and equipment. Net cash
provided by financing activities was approximately $1,566,000 for the period,
due to net proceeds of $1,475,000 in a private placement offering and $28,500
from the exercise of employee stock options.
We have incurred net losses each year since its inception and have relied on the
sale of our stock from time to time and loans from third parties and from
related parties to fund our operations.
On March 28, 2002, we executed a binding agreement with one of our stockholders,
who is also a Board Member, to fund up to $6.1 million. On March 29, 2006, the
maturity date of the loan was extended from December 31, 2006 to December 31,
2007 and on March 23, 2007 it was further extended to December 31, 2008. As of
September 30, 2007, we had drawn $5.906 million of the $6.150 million of the
available funds.
At September 30, 2007, we had working capital of approximately $636,000 and our
current ratio (current assets to current liabilities) was 1.44 to 1. We
anticipate increased cash flows from 2007 sales activity; however, additional
cash will still be needed to support operations and meet working capital needs.
In connection with our annual report for our fiscal year ending December 31,
2007 our management will be required to provide an assessment of the
effectiveness of our internal control over financial reporting, including a
statement as to whether or not internal control over financial reporting is
effective. In order to comply with this requirement we will need to engage a
consulting firm to undertake an analysis of our internal controls. We recently
engaged such a consulting firm and at this time we expect the costs associated
with our compliance with Section 404 of Sarbanes-Oxley Act of 2002 will not be
material.
If budgeted sales levels are not achieved and/or significant unanticipated
expenditures occur, and we do not have access to capital as necessary, we may
have to modify our business plan, reduce or discontinue some of our operations
or seek a buyer for part of our assets to continue as a going concern through
2007. There can be no assurance that we will be able to raise additional capital
or that sales will increase to the level required to generate profitable
operations to provide positive cash flow from operations.
CRITICAL ACCOUNTING POLICY
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
21
pronouncements. SFAS 157 will be effective for the Company on January 1, 2008.
The Company is currently evaluating the impact of adopting SFAS 157 on its
financial position, cash flow, and results of operations.
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.
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES -
INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115". This statement permits
entities to choose to measure many financial instruments and certain other items
at fair value. Most of the provisions of SFAS No. 159 apply only to entities
that elect the fair value option. However, the amendment to SFAS No. 115
"ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES" applies to
all entities with available-for-sale and trading securities. SFAS No. 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided the entity also elects
to apply the provision of SFAS No. 157, "FAIR VALUE MEASUREMENTS". The adoption
of this statement is not expected to have a material effect on the Company's
financial statements.
Impact of Inflation
Inflation has not had a significant impact on our operations. However, any
significant decrease in the price for oil or labor, environmental compliance
costs, and engine replacement costs could adversely impact the end users
cost/benefit analysis as to the use of our products. The impact of fluctuations
in foreign currency has not been significant. The exchange rate, the Great
British pound to the U.S. dollar fluctuated from 1.93 on December 31, 2006 to
2.05 on September 30, 2007 as compared to 1.72 on December 31, 2005 to 1.87 on
September 30, 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.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 23, 2007, the Company converted $500,000 in shareholder loans
to the sale of 714,286 shares of common stock at $.70 per share to accredited
investors. The funds were previously received as notes payable to stockholders,
until the equity terms were determined. Inasmuch as the accredited investors was
highly sophisticated, had access to current public information concerning the
Company, could bear the financial risk of the investments, and had agreed to
acquire the shares for investment purposes, the transaction was exempt from
registration under Section 3(a)9 of the Securities Act of 1933.
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
31.1 Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) certificate of Chief Financial Officer
32.1 Section 1350 certification of Chief Executive Officer
32.2 Section 1350 certification of Chief Financial Officer
23
SIGNATURES
In accordance with the requirements of the Exchange Act, Puradyn Filter
Technologies Incorporated caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PURADYN FILTER TECHNOLOGIES INCORPORATED
(Registrant)
By /s/ Cindy Lea Gimler
----------------------------------------
Cindy Lea Gimler, Chief Financial Officer
Date: November 14, 2007
24