AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 2008
REGISTRATION NO. 333-_________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PURADYN FILTER TECHNOLOGIES INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
3714
(Primary Standard Industrial Classification Code Number)
14-1708544
(I.R.S. Employer Identification Number)
2017 HIGH RIDGE ROAD
BOYNTON BEACH, FLORIDA 33426
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
JAMES M. SCHNEIDER, ESQ.
SCHNEIDER WEINBERGER & BEILLY LLP
2200 CORPORATE BOULEVARD, N.W.
SUITE 210
BOCA RATON, FLORIDA 33431
TELEPHONE (561) 362-9595
TELECOPIER (561) 362-9612
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: |X|
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
(Do not check if a smaller reporting company)
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE(1)
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Common stock, par value $0.001 per share 3,500,000 $0.205 $717,500 $29
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(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933 based on the average of the bid and asked price of the common stock as reported on the OTC Bulletin Board on October 30, 2008.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER 5, 2008
PROSPECTUS
PURADYN FILTER TECHNOLOGIES INCORPORATED
3,500,000 shares of Common Stock
We are offering on a best efforts basis a total of 3,500,000 shares of our common stock at a price of $[ ] per share. The offering is being conducted on a self-underwritten basis. There is no underwriter for this offering and we will not pay any commissions on the sale of the shares. Our officers and directors will attempt to sell the shares offered hereby.
There is no minimum offering and we may receive little or no funds from this offering. All proceeds from the sale of the shares will be delivered directly to us and will not be deposited in any escrow account. If the entire 3,500,000 shares are sold, we will receive gross proceeds of $ [ ] before expenses of approximately $8,600. We plan to end the offering on _________, 200_. However, at our sole discretion, we may end the offering sooner or extend the offering until _____________, 200_. No assurance can be given on the number of shares we will sell or even if we will be able to sell any shares.
For a description of the plan of distribution of these shares, please see page 8 of this prospectus.
Our common stock is quoted on the OTC Bulletin Board under the symbol "PFTI." On October 31, 2008 the last reported sale price for our common stock was $0.20 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 3 OF THIS PROSPECTUS TO READ ABOUT THE RISKS OF INVESTING IN OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------------------------- ------------ ----------
PER SHARE TOTAL
------------------------------------------------------- ------------ ----------
Public offering price $[ ] $ [ ]
------------------------------------------------------- ------------ ----------
Discounts and commissions 0 0
------------------------------------------------------- ------------ ----------
Possible proceeds to the company, before expenses $ [ ] $ [ ]
------------------------------------------------------- ------------ ----------
--------------------
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THE DATE OF THIS PROSPECTUS IS ______, 2008
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted.
PROSPECTUS SUMMARY
ABOUT US
We design, manufacture, market and distribute the PURADYN(R) bypass oil filtration system for use with substantially all internal combustion engines and hydraulic equipment that use lubricating oil. Working in conjunction with an engine's full-flow oil filter, the PURADYN bypass oil filtration system cleans oil by continually removing solid, liquid and gaseous contaminants from the oil through a sophisticated and unique filtration and evaporation process. For engine lubricating oil, our filters incorporate an additive package. Because lubricating oil is kept in a continually clean state, the PURADYN bypass oil filtration system has been used effectively to extend oil-drain intervals and to extend the time between engine overhauls. We are also the exclusive manufacturer of the disposable replacement filter elements for the PURADYN bypass oil filtration system.
The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2007 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern based upon our recurring losses from operations, our total liabilities exceeding our total assets, and our reliance on cash inflows from institutional investors and a current stockholder.
Our principal executive offices are located at 2017 High Ridge Road, Boynton Beach, Florida 33426 and our telephone number at that office is (561) 547-9499. Our fiscal year end is December 31. Our website is located at www.puradyn.com.
When used in this prospectus, "Puradyn," "we," "us," "ours," and similar terms refers to Puradyn Filter Technologies Incorporated, a Delaware corporation, and our wholly-owned subsidiary Puradyn Filter Technologies, Ltd., a U.K. limited company which we also refer to as "Puradyn Ltd."
SELECTED CONSOLIDATED FINANCIAL DATA
The following summary of our financial information for the six months ended June 30, 2008 and 2007 (unaudited) and the years ended December 31, 2007 and 2006 which have been derived from, and should be read in conjunction with, our consolidated financial statements included elsewhere in this prospectus.
SELECTED INCOME STATEMENT DATA:
------------------------------------ -------------------------------- --------------------------------
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------------ -------------------------------- --------------------------------
2008 2007 2007 2006
------------------------------------ -------------------------------- --------------- ----------------
(UNAUDITED)
------------------------------------ ---------------- --------------- --------------- ----------------
Net sales $1,555,206 $1,553,187 $3,082,873 $3,072,947
------------------------------------ ---------------- --------------- --------------- ----------------
Total operating costs 2,257,474 2,440,581 4,967,907 5,258,558
--------- --------- --------- ---------
------------------------------------ ---------------- --------------- --------------- ----------------
Loss from operations (702,268) (887,394) (1,885,034) (2,185,611)
------------------------------------ ---------------- --------------- --------------- ----------------
Total other expense, net (166,847) (321,221) (556,067) (467,852)
------- ------- ------- -------
------------------------------------ ---------------- --------------- --------------- ----------------
Net loss $(869,115) $(1,208,614) $(2,441,101) $(2,653,463)
------------------------------------ ---------------- --------------- --------------- ----------------
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SELECTED BALANCE SHEET DATA:
------------------------------------ ------------------ ------------------ -----------------
JUNE 30, 2008 DECEMBER 31, 2007 DECEMBER 31,
(UNAUDITED) 2006
------------------------------------ ------------------ ------------------ -----------------
------------------------------------ ------------------ ------------------ -----------------
Working capital $1,065,847 $365,917 $691,856
------------------------------------ ------------------ ------------------ -----------------
Cash and cash equivalents $324,223 $112,270 $55,175
------------------------------------ ------------------ ------------------ -----------------
Total current assets $2,684,343 $2,151,577 $1,999,534
------------------------------------ ------------------ ------------------ -----------------
Total assets $2,878,796 $2,373,867 $2,275,045
------------------------------------ ------------------ ------------------ -----------------
Total current liabilities $1,618,496 $1,785,660 $1,307,678
------------------------------------ ------------------ ------------------ -----------------
Notes payable - stockholder $6,150,000 $6,250,000 $5,839,000
------------------------------------ ------------------ ------------------ -----------------
Total liabilities $7,774,819 $8,042,799 $7,146,678
------------------------------------ ------------------ ------------------ -----------------
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THE OFFERING
Price per share offered: $[ ]
Securities offered: 3,500,000 shares of common
stock on a best efforts
basis
Common stock outstanding prior to the offering: 35,005,018 shares
Common stock outstanding after the offering,
assuming the sale of all 3,500,000 shares
offered hereby: 38,505,018 shares
Use of proceeds: working capital
OTC Bulletin Board symbol PFTI
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A SIGNIFICANT DEGREE OF RISK. YOU SHOULD NOT INVEST IN OUR COMMON STOCK UNLESS YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT. YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS AND OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN OUR COMMON STOCK.
RISKS RELATED TO OUR COMPANY
WE HAVE A HISTORY OF LOSSESS AND OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM HAS DOUBTS ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
We have incurred substantial operating and net losses, as well as negative operating cash flows, since our inception through June 30, 2008. For the years ended December 31, 2007 and 2006, we reported net losses of $2,441,101 and $2,653,463, respectively. For the six months ended June 30, 2008, we reported a net loss of $869,115 and at June 30, 2008, we had an accumulated deficit of approximately $46.7 million. These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from an institutional investor and current stockholder have led our independent registered public accounting firm to include a statement in its audit report relating to our audited consolidated financial statements for the years ended December 31, 2007 and December 31, 2006 expressing substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain the necessary financing to meet our obligations and repay our liabilities when they become due and to generate profitable operations in the future. We have no firm commitments from any third party to provide this financing and we cannot assure you we will be successful in raising working capital as needed. There are no assurances that we will have sufficient funds to execute our business plan, pay our obligations as they become due or generate positive operating results and it is possible that we will be required to cease some or all of our operations if we are not successful in raising capital as needed. In that event, you could lose your entire investment in our company.
OUR NET SALES ARE NOT SUFFICIENT TO FUND OUR OPERATING EXPENSES AND OUR SALES HAVE REMAINED RELATIVELY FLAT OVER THE PAST SEVERAL YEARS. THERE ARE NO ASSURANCES WE WILL BE ABLE TO INCREASE OUR SALES, IN THE NEAR FUTURE, TO A LEVEL WHICH WILL FUND OUR OPERATING EXPENSES.
We used cash in operations of approximately $1,809,000 and approximately $1,940,000 in 2007 and 2006, respectively, and approximately $1,250,000 for the six months ended June 30, 2008. Our net sales are not sufficient to fund our operating expenses and despite our efforts our sales have remained relatively flat from period to period. During 2008 we continue to implement cost reductions in an effort to improve margins, including securing alternative suppliers for raw materials and manufacturing and we anticipate these costs reductions will impact our results of operations during the balance of 2008 and beyond. In addition, we are also reviewing cost of material increases, some of which were passed through to our customers as product price increases beginning January 2008 which have served to improve our margins. As long as our cash flow from operations remains insufficient to fund our operations, we will continue depleting our cash and other financial resources. Our failure to achieve profitable operations in future periods will adversely affect our ability to continue as a going concern. In this event, you could lose all of your investment in our company.
EVEN IF WE SELL ALL THE SHARES OFFERED HEREBY, WE WILL NEED ADDITIONAL FINANCING WHICH WE MAY NOT BE ABLE TO OBTAIN ON ACCEPTABLE TERMS. IF WE CANNOT RAISE ADDITIONAL CAPITAL AS NEEDED, OUR ABILITY TO EXECUTE OUR GROWTH STRATEGY AND FUND OUR ONGOING OPERATIONS WILL BE IN JEOPARDY.
Historically, our operations have been financed primarily through the issuance of equity and short-term loans. Our future capital requirements, however, depend on a number of factors, including our ability to internally grow our revenues, manage our business and control our expenses. At June 30, 2008, we had a working capital of $1,065,847 as compared to working capital of $365,917 at December 31, 2007. This change is primarily attributable to proceeds from the sale of our securities during the 2008 period. Even if we sell all 3,500,000 shares offered hereby, of which there are no assurances, we will need to raise additional capital to fund our ongoing operations, pay our existing obligations and for future growth of our company. We cannot assure you we will sell any of the shares offered hereby or that any additional capital will be available to us in the future upon terms acceptable to us. Given our history of losses, debt levels and general uncertainties of the capital markets, we face a number of challenges in our ability to raise capital. If we do not raise funds as needed, our ability to provide for current working capital needs, pay our obligations as they become due, grow our company, and continue our existing business and operations is in jeopardy. In this event, you could lose all of your investment in our company.
WE OWE OUR CHAIRMAN AND CEO APPROXIMATELY $6.2 MILLION WHICH IS DUE IN DECEMBER
31, 2009.
Since March 2002, our CEO has been providing funding to us for working capital on an unsecured basis. At June 30, 2008 we owed him $6.1 million, and he had advanced an additional $100,000 to us subsequent thereto. This loan is due on December 31, 2009 or (i) at such time as we have raised an additional $7 million over the $3.5 million raised in prior offerings, or (ii) at such time as we are operating within sufficient cash flow parameters to sustain operations, or (iii) until a disposition of our company, such as an acquisition or merger, occurs. We do not have sufficient funds to pay this loan when it becomes due and there are no assurances our CEO will extend the due date. While the loan is unsecured, this obligation makes it more difficult for us to secure the additional financing we need to fund our operations.
WE RELY ON SALES TO A LIMITED NUMBER OF CUSTOMERS AND THERE ARE NO ASSURANCES THAT THESE CUSTOMERS WILL CONTINUE TO PURCHASE PRODUCTS FROM US.
We are dependent upon sales to a limited number of customers. During the six months ended June 30, 2008 two customers individually accounted for approximately 24% and approximately 16% (for a total of approximately 40%) of our net sales. During 2007 and 2006 two customers together accounted for approximately 44% and 39%, respectively, of our consolidated net sales. We do not have contracts with our customers and the loss of sales from one or more of these customers could materially impact our results of operations in future periods.
WE ARE DEPENDENT ON A LIMITED NUMBER OF SUPPLIERS. WHILE WE HAVE IDENTIFIED ALTERNATIVE SOURCES FOR VARIOUS MATERIALS WE USE, A TEMPORARY DISRUPTION IN OUR ABILITY TO PROCURE NECESSARY MATERIALS AND PARTS COULD ADVERSELY IMPACT OUR NET SALES IN FUTURE PERIODS.
A substantial portion of the component parts to our products are manufactured by various suppliers for assembly by us. We believe the relationships with our suppliers are satisfactory and that alternative suppliers are available if relationships falter or existing suppliers should become unable to keep up with our requirements. However, there can be no assurance that our current or future suppliers will be able to meet our requirements on commercially reasonable terms or within scheduled delivery times. An interruption of our arrangements with suppliers could cause a delay in the production of our products for timely delivery to distributors and customers which could result in a loss of sales revenue in future periods.
WE FACE COMPETION FROM A NUMBER OF COMPANIES AND THERE ARE NO ASSURANCES WE CAN EFFECTIVELY COMPETE IN OUR SECTOR.
There are a number of companies which sell bypass oil filtration systems. Most of our competitors have more capital, greater brand recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. These competitors may also engage in more extensive development of their technologies, adopt more aggressive pricing policies and establish more comprehensive marketing and advertising campaigns than we can. While we believe that our product is superior in performance to our competitors' products, there are no assurances our belief is correct. For these and other reasons, our competitors' products may achieve greater acceptance in the marketplace than our own, limiting our ability to gain market share and customer loyalty and to generate sufficient revenues to achieve a profitable level of operations.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY OUR ABILITY TO CONDUCT OUR BUSINESS AS IT IS PRESENTLY CONDUCTED IS IN JEOPARDY.
Our success is heavily dependent on our proprietary technology and we rely on a combination of contractual rights, patents, trade secrets, trademarks and non-disclosure agreements to establish and protect our proprietary rights. There can be no assurances that the steps we take to protect our proprietary rights will be adequate to prevent misappropriation of the technology or independent development by others of products with features based upon, or otherwise similar to, our products. In addition, although we believe that any new technology currently in development or patent pending has been independently developed and does not infringe on the proprietary rights of others, there can be no assurance that we are correct or that third parties will not assert infringement claims against us in the future. If instituted, there can be no assurances we will have adequate resources to defend a patent infringement or other proprietary rights infringement action. If we are unable to adequately protect our proprietary rights or if other products should be developed which are substantially similar to ours, our ability to continue our operations as they are presently conducted could be in jeopardy and we could be forced to cease operations.
RISKS RELATED TO THIS OFFERING
THERE IS NO MINIMUM NUMBER OF SHARES WHICH MUST BE SOLD. WE ARE DEPENDENT UPON THE PROCEEDS OF THIS OFFERING.
We are dependent upon the proceeds from this offering to provide funds for working capital. This is a best efforts offering which means there is no minimum number of shares, which must be sold. As a result, if we sell less than all of the shares offered hereby, we will have significantly less funds available to us to implement our business strategy, and our ability to generate any significant increases in our sales may be adversely affected. Even if we sell all of the shares offered hereby, we cannot guarantee prospective investors that we will ever generate any significant increases sales or report profitable operations, or that our sales will not decline in future periods.
OUR MANAGEMENT HAS FULL DISCRETION AS TO THE USE OF PROCEEDS FROM THIS OFFERING.
We presently anticipate that the net proceeds from this offering will
be used for working capital. We reserve the right to use the funds from this
offering for other purposes not presently contemplated which we deem to be in
our best interests in order to address changed circumstances and opportunities.
As a result of the foregoing,
purchasers of the shares offered hereby will be entrusting their funds to our management, upon whose judgment and discretion the investors must depend, with only limited information concerning management's specific intentions.
RISKS RELATED TO HOLDING OUR SECURITIES
THE EXERCISE OF OUTSTANDING WARRANTS AND OPTIONS WILL BE DILUTIVE TO OUR EXISTING STOCKHOLDERS.
At October 29, 2008 we had 35,005,018 shares of our common stock issued and outstanding and the following securities, which are exercisable into shares of our common stock, were outstanding:
o 3,005,739 shares of our common stock issuable upon the exercise of warrants with exercise prices ranging from $0.75 to $2.00 per share; and
o 2,350,400 shares of our common stock issuable upon the exercise of options with exercise prices ranging from $.21 per share to $9.25 per share.
The issuance of these shares will be dilutive to our existing stockholders, including purchasers of shares in this offering.
BECAUSE OUR STOCK CURRENTLY TRADES BELOW $5.00 PER SHARE, AND IS QUOTED ON THE OTC BULLETIN BOARD, OUR STOCK IS CONSIDERED A "PENNY STOCK" WHICH CAN ADVERSELY AFFECT ITS LIQUIDITY.
As the trading price of our common stock is less than $5.00 per share, our common stock is considered a "penny stock," and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction.
Securities and Exchange Commission regulations also require additional disclosure in connection with any trades involving a "penny stock," including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of our common stock in the secondary market because few broker or dealers are likely to undertake these compliance activities. Purchasers of our common stock may find it difficult to resell the shares in the secondary market.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Various statements in this prospectus 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 our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, our ability to successfully implement our strategic initiatives, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, global competition, 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 prospectus in its entirety, including the risks described in "Risk Factors." Except for our 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 prospectus, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol PFTI. The reported high and low sales prices for the common stock as reported on the OTC Bulletin Board are shown below for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.
HIGH LOW
----------- -----------
2006
First quarter ended March 31, 2006 $1.90 $0.67
Second quarter ended June 30, 2006 $1.75 $1.00
Third quarter ended September 30, 2006 $1.33 $0.90
Fourth quarter ended December 31, 2006 $1.20 $0.55
2007
First quarter ended March 31, 2007 $0.96 $0.56
Second quarter ended June 30, 2007 $0.80 $0.40
Third quarter ended September 30, 2007 $0.50 $0.30
Fourth quarter ended December 31, 2007 $0.60 $0.32
2008
First quarter ended March 31, 2008 $0.40 $0.30
Second quarter ended June 30, 2008 $0.31 $0.25
Third quarter ended September 30, 2008 $0.40 $0.20
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On October 31, 2008, the last sale price of our common stock as reported on the OTC Bulletin Board was $0.20. As of October 29, 2008, there were approximately 300 record owners of our common stock.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. Under Delaware law, we may declare and pay dividends on our capital stock either out of our surplus, as defined in the relevant Delaware statutes, or if there is no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. If, however, the capital of our company, computed in accordance with the relevant Delaware statutes, has been diminished by depreciation in the value of our property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, we are prohibited from declaring and paying out of such net profits and dividends upon any shares of our capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired.
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2008 and as adjusted to give proforma effect to the sale of all 3,500,000 shares offered hereby. The table should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus.
JUNE 30, 2008
--------------------------
(UNAUDITED)
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ACTUAL PROFORMA
Long term liabilities $ 6,156,323 $ [ ]
Preferred stock, $0.001 par value, 500,000 shares authorized,
no shares issued and outstanding - -
Common stock, $0.001 par value, 40,000,000 shares authorized,
34,428,888 shares issued and outstanding, 37,928,888 as
adjusted 34,429 [ ]
Additional paid-in capital 42,963,955 [ ]
Notes receivable from stockholders (1,064,031) (1,064,031)
Accumulated deficit (46,694,325) (46,694,325)
Accumulated other comprehensive loss (136,051) (136,051)
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Total stockholders' deficit $ (4,896,023) $ [ ]
Total capitalization $ 1,260,300 $ [ ]
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USE OF PROCEEDS
Assuming all 3,500,000 shares offered hereby, the net proceeds to be received by us after deducting the expenses of this offering including legal, accounting, printing, filing fees and miscellaneous costs estimated at $8,600, will total approximately $[ ]. However, as there is no minimum number of shares which must be sold in this offering, we could receive substantially less proceeds than $[ ]. We intend to use the net proceeds from this offering for working capital. We reserve the right, however, to use the funds obtained from this offering for other purposes not presently contemplated which management deems to be in our best interests in order to address changes circumstances and opportunities.
DILUTION
As of June 30, 2008, the net tangible book value of our shares of common stock was $(4,896,023) or approximately $(0.14215) per share, based upon an aggregate of 34,428,888 shares of common stock outstanding. Net tangible book value per share represents our total tangible assets less our total liabilities and divided by the aggregate number of shares of our common stock outstanding. Dilution in net tangible book value per share represents the difference between the amount per share of our common stock that you pay in this offering and the net tangible book value per share of our common stock immediately after this offering.
After giving effect to the sale by us of all 3,500,000 shares of common stock in this offering at an offering price of $[ ] per share, the net tangible book value of our common stock as of June 30, 2008 would have been $[ ] per share. This represents an immediate increase in the net tangible book value of $[ ] to our existing stockholders and an immediate dilution in net tangible book value of $[ ] per share to new investors purchasing shares in this offering. The following table illustrates this dilution per share, assuming all 3,500,000 shares offered hereby are sold:
--------------------------------------------------------------------------- ------------ ------------- Offering price per share $ [ ] --------------------------------------------------------------------------- ------------ ------------- Net tangible book value per share at June 30, 2008 $(0.14215) --------------------------------------------------------------------------- ------------ ------------ Increase in net tangible book value per share attributed to new investors [ ] --------------------------------------------------------------------------- ------------ ------------- Net tangible book value per share after this offering [ ] --------------------------------------------------------------------------- ------------ ------------- Dilution in net tangible book value per share to new investors $ [ ]\ --------------------------------------------------------------------------- ------------ ------------- |
The following table provides information as of June 30, 2008 of the differences between the amounts paid or to be paid by the groups set forth below with respect to the aggregate number of shares of our common stock to be held by each group:
------------------------------------ ---------------------------- ---------------------------- ----------------
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
------------------------------------ --------------- ------------ ---------------- ----------- PER SHARE
NUMBER % AMOUNT(1) %
------------------------------------ --------------- ------------ ---------------- ----------- ----------------
------------------------------------ --------------- ------------ ---------------- ----------- ----------------
Existing stockholders 34,428,888 90.8% 42,998,384 [ ]% $1.2489
------------------------------------ --------------- ------------ ---------------- ----------- ----------------
New investors 3,500,000 9.2% [ ] [ ]% $[ ]
------------------------------------ --------------- ------------ ---------------- ----------- ----------------
Total 37,928,888 100% [ ] [ ]% $[ ]
------------------------------------ --------------- ------------ ---------------- ----------- ----------------
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(1) Dollar amount, in thousands.
PLAN OF DISTRIBUTION
Our common stock is quoted on the OTC Bulletin Board under the symbol PFTI. The market for our common stock is limited and the liquidity of our shares may be severely limited. The market price of the shares of common stock is likely to be highly volatile and may be significantly affected by factors such as actual or anticipated fluctuations in our operating results, announcements of technological innovations, new products or new contracts by us or our competitors, adoption of new accounting standards affecting our company, general economic and market conditions and other factors. In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market price for the common stocks of technology companies. These types of broad market fluctuations may adversely affect the market price of our common stock.
We are offering 3,500,000 shares of common stock, using our executive officers and directors, on a self-underwritten, best-efforts basis. There is no minimum amount of securities that we must sell in order to receive any subscriptions. The common stock will be offered at a price of $[ ] per share. This offering will commence on the date of this prospectus and will continue until the ___________, 2000_, or the date all of the shares offered are sold. However, at our sole discretion, we may end the offering sooner or extend the offering until _____________, 200_. No assurance can be given on the number of shares we will sell or even if we will be able to sell any shares.
Our officers and directors may not purchase any securities in this offering.
As of the date of this prospectus, we have not entered into any agreements or arrangements for the sale of the shares with any broker/dealer or sales agent. However, if we were to enter into such arrangements, we will file a post effective amendment to disclose those arrangements because any broker/dealer participating in the offering would be acting as an underwriter and would have to be so named in the prospectus.
In order to comply with the applicable securities laws of certain states, the securities may not be offered or sold unless they have been registered or qualified for sale in such states or an exemption from such registration or qualification requirement is available and with which we have complied. The purchasers in this offering and in any subsequent trading market must be residents of such states where the shares have been registered or qualified for sale or an exemption from such registration or qualification requirement is available. As of the date of this prospectus, we have not identified the specific states, where the offering will be sold. We will file a pre-effective amendment indicating which state(s) the securities are to be sold pursuant to this registration statement.
The proceeds from the sale of the shares in this offering will be payable to us. No escrow account has been established, and all subscription funds will be paid directly to our company.
Investors can purchase common stock in this offering by completing a Subscription Agreement (attached hereto as Exhibit 99.1 to the registration statement of which this prospectus is a part) and sending it together with payment in full to Puradyn Filter Technologies Incorporated, 2017 High Ridge Road, Boynton Beach, Florida 33426, Attention: Mr. Joseph V. Vittoria, CEO. All payments must be made in United States currency either by personal check, bank draft, or cashier's check. There is no minimum subscription requirement. An investors' failure to pay the full subscription amount will entitle us to disregard the investors' subscription. All subscription agreements and checks are irrevocable. We reserve the right to either accept or reject any subscription. Any subscription rejected will be returned to the subscriber within five business days of the rejection date, without interest or deduction. Furthermore, once a subscription agreement is accepted, it will be executed without reconfirmation to or from the subscriber. Once we accept a subscription, the subscriber cannot withdraw it.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Sales of our products, the PURADYN bypass oil filtration system, and replaceable filter elements will depend principally upon end user demand for such products and acceptance of our products by original equipment manufacturers (OEMs). The oil filtration industry has historically been competitive and, as is typically the case with innovative products, the ultimate level of demand for our products is subject to a high degree of uncertainty. Developing market acceptance 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. As a result of our limited resources, to date we have not had adequate funds available to undertake these necessary marketing efforts.
Currently no bypass oil filtration system has captured a substantial share of the estimated recurring $15 billion potential market, based upon figures supplied by The Rhein Report, a diesel engine industry consulting, publishing and market research company. 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 based on patented
technology;
o An alternative solution to the rising costs and national concerns
over dependence on foreign oil; and
o Providing an operational maintenance solution to end users in
conjunction with existing and reasonably foreseeable federal
environmental legislation such as new regulations affecting
diesel engines and diesel fuels mandating cleaner diesel engines
that went into effect January 1, 2007. Additional and more
stringent legislation is anticipated in 2010.
We focus our sales strategy on individual sales and distribution efforts as well as on the development of a nationwide distribution network that will not only sell but also install and support our product. We currently have approximately 140 active distributors in the U.S. and internationally. The number of distributors will constantly change as we add new distributors as well as when OEMs come onboard with their distribution network. Additionally, in late 2005 we began to focus our sales and marketing efforts to target industries which we believe are more open to innovative methods to reduce operating costs. This strategy includes a focus on:
o the expansion of existing strategic relationships we have, such as those with John Deere, Western Star,
o continued development and expansion of our distribution network with distributors who are trained by us and stock inventory in order to establish a sales and service oriented nationwide infrastructure,
o continuing to target existing and new industrial/construction equipment fleets 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, and
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 in September 2008 we announced that Avis Budget Group will be installing the PURADYN bypass oil filtration system as standard equipment on its fleet of over 300 heavy duty buses. Avis is the first major car rental company to use bypass oil filtration.
o in August 2008, we announced that John Deere Forestry Division is factory-installing the Puradyn bypass oil filtration system in Joensuu, Finland on equipment to be utilized in Russia and other countries where high sulfur fuel is used.
o during 2008 we received the initial and repeat orders from the Foreign Military Sales program, the government-to-government method for selling U.S. defense equipment, services, and training, to supply the PURADYN bypass oil filtration systems for the line haul fleet;
o in July 2008 we received a contract from the U.S. Army to supply the PURADYN bypass oil filtration systems to outfit JERRV vehicles used in combat in Iraq and Afghanistan;
o in April 2008 an international distributor placed purchase orders totaling over $1.1 million for shipment over 2008 and 2009. This is our first order to date of this magnitude;
o the November 2007 announcement that a fleet of 100 trucks have exceeded 100 million miles without an oil-related oil change during the course of an eight-year period using the PURADYN bypass oil filtration system.
o in June 2006 the U.S. Department of Energy announced final results of a three-year test conducted on the benefits, cost, and engine oil consumption analyses of bypass oil filtration technology that
showed 89% oil savings using PURADYN bypass technology on heavy-duty engines and sport utility vehicles.
We believe that the renewed interest shown in the technology of bypass oil filtration as an economic alternative to significantly rising oil prices, dependence upon foreign oil, with the added benefit of being environmentally beneficial, will timely and favorably position us as a manufacturer of a cost efficient "green" product. Sales appear to be comparable from the first six months of 2008 as compared to the first six months of 2007 as a result of one of our largest customers postponing purchases while awaiting installation of new maintenance tracking and reporting procedures. However, excluding this customers decrease in sales, of approximately $184,000, total consolidated sales have actually increased by approximately $186,000 or approximately 12%. We also believe that industry acceptance resulting in sales will continue to grow in 2008; however, there can be no assurance that any of our sales efforts or strategic relationships will meet management's expectations or result in actual revenues.
Our sales effort not only involves educating the potential customer on the benefits of our product, but also allowing the end-user to test and evaluate the PURADYN bypass oil filtration system on its fleet equipment. While set for a specific period of time, typically ranging from three to 12 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.
We believe international sales are especially well suited to our products 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 bypass oil filtration system requires to verify oil condition. Our wholly-owned subsidiary in the United Kingdom sells our products in Europe, the Middle East and Africa. In the first six months of 2008, total international sales accounted for approximately 60% of our consolidated net sales as compared to 63% for the first six months of 2007. We believe that the combined effects of the July 2008 relocation and overseeing process of the U.K. office and the marketing of a competitive product to our customers by our former U.K. Managing Director have contributed to a decline in its international sales volume.
Until late 2005, we were focused on retail sales in order to maintain revenue stream and cash flow. While this was necessary to generate market awareness and industry penetration, it was also extremely costly with respect to company resources. The progress made with a few major accounts, distributors and OEMs allowed us to now start concentrating our efforts to expand our relationships with these OEMs.
Optimizing our limited resources will be key to accomplishing our goals. We will need to remain focused on working with OEMs, continue developing the independent distributors we have onboard and maintain growth within the major accounts using our system. To accomplish these tasks, we will need to add appropriate sales and marketing support to be sure our distributors and customers are served. At this time, we anticipate the need for at least two salespersons and one sale support person. We will be adding application engineers and product engineers as we grow our OEM account list. A second application engineer and product engineer will be needed as we add our third OEM. The expansion into the OEM area, even though it is very demanding due to response need to meet their needs, is also rewarding in the aspect that it provides a steady flow of material requirements for our manufacturing area giving us more stability in manufacturing personnel, a stronger supply chain with steady production, economics of scale and the ability to better utilize our overhead with higher average material turn rates.
As described elsewhere herein, we continue to address our liquidity and working capital issues as we continue to seek to raise additional capital from institutional and private investors and current stockholders. Historically, we have faced difficulties in raising adequate capital and we anticipate that those efforts will continue given the uncertainties facing the capital markets in the U.S. We also continue to implement cost reductions in an effort to improve margins, including securing alternative suppliers for raw materials and manufacturing and we anticipate these costs reductions will impact our results of operations during the balance of 2008 and beyond. We are also reviewing cost of material increases, some of which were passed through to our customers as product price
increases beginning January 2008. These price increases were generally limited to market conditions, but will continue to be applied each January and were in the range of 4% to 7%.
GOING CONCERN
Our financial statements have been prepared on the basis that we 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 our stock from time to time and loans from third parties and from related parties to fund our operations. These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from an institutional investor and current stockholder have led our independent registered public accounting firm Webb & Company P.A. to include a statement in its audit report relating to ours audited consolidated financial statements for the years ended December 31, 2007 and December 31, 2006 expressing substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain the necessary financing to meet our obligations and repay our liabilities when they become due and to generate profitable operations in the future. We plan to continue to provide for our capital requirements through the sale of equity securities, however, we have no firm commitments from any third party to provide this financing and we cannot assure you we will be successful in raising working capital as needed. There are no assurances that we will have sufficient funds to execute our business plan, pay our obligations as they become due or generate positive operating results.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, bad debts, inventories, financing operations, warranty obligations and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect us more significant judgments and estimates used in the preparation of our consolidated financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We provide for potential uncollectible accounts receivable based on customer specific identification and historical collection experience. If market conditions decline, actual collection experience may not meet expectations and may result in decreased cash flows and increased bad debt expense.
The policy for determining past due status is based on the contractual payment terms of each customer, which is generally net 30 or net 60 days. Once collection efforts by us and our collection agency are exhausted, the determination for charging off uncollectible receivables is made.
ESTIMATION OF PRODUCT WARRANTY COST
We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.
ESTIMATION OF INVENTORY OBSOLESCENCE
We provide for estimated inventory obsolescence or unmarketable inventory in amounts equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
IMPAIRMENT OF LONG-LIVED ASSETS
We periodically evaluate the recoverability of the carrying amount of our long-lived assets under the guidelines of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Factors that we consider in making this evaluation include estimating the undiscounted net cash flows estimated to result from the assets over their remaining useful life. Should our estimates of these factors change, our results of operations and financial condition could be adversely impacted.
REVENUE RECOGNITION
Revenue is recognized when earned. Our revenue recognition policies are in compliance with the provisions issued in SAB No. 104, Revenue Recognition in Financial Statements. Revenue from product sales to customers, distributors and resellers is recorded when products that do not require further services or installation us are shipped, when there are no uncertainties surrounding customer acceptance and for which liability is reasonably assured. We provide for sales returns based on an historical analysis of returns. The estimate is updated for current return activity and the provision is adjusted accordingly. Should actual returns exceed management's estimates, the provision may require further adjustment and accordingly, net sales may decrease.
PRODUCT RETURNS
Consistent with industry practices, we may accept limited product returns or provide other credits in the event that a distributor holds excess inventory of our products. During the three-months ended June 30, 2008 and June 30, 2007, product returns totaled $12,141 and $452 respectively. During the six-months ended June 30, 2008 and June 30, 2007, product returns totaled $17,915 and $3,594 respectively. Increased product returns during 2008, over 2007, was primarily attributable one customer's excess inventory purchases acquired during 2007. Our sales are made on credit terms, which vary depending on the nature of the sale. We believe we have established sufficient reserves to accurately reflect the amount or likelihood of product returns or credits and uncollectible receivables. However, there can be no assurance that actual returns and uncollectible receivables will not exceed our reserves.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51". This statement improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require : (i) the ownership interests in subsidiaries held by parties, other than the parent, and the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income, (ii) changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently, (iii) that when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value, and (iv) that entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 affects those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The adoption of this statement is not expected to have a material effect on our financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161). This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity's derivative instruments and hedging activities and their effects on the entity's financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS 133. "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) as well as related hedged items, bifurcated derivatives, and nonderivative instruments that are designed and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS 161 is effective prospectively for financial statements issue for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. We are currently evaluating the disclosure implications of this statement.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles." SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS 162 is effective 60 days following the SEC's approval of PCAOB Auditing Standard No. 6, Evaluating Consistency of Financial Statements (AS/6). The adoption of FASB 162 is not expected to have a material impact on our financial position.
In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60." Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. This results in inconsistencies in the recognition and measurement of claim liabilities. This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of FASB 163 is not expected to have a material impact on our financial position.
IMPACT OF INFLATION AND FOREIGN CURRENCY TRANSLATION GAINS AND LOSSES
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 financial statements of our U.K. subsidiary have been translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency Translation (SFAS 52). All balance sheet accounts have been translated using the exchange rate in effect at the balance sheet date. Income statement amounts have been translated using an appropriately weighted average exchange rate for the year. The translation gains and losses resulting from the changes in exchange rates during the six months ended June 30, 2008 as well as 2007 and 2006 have been reported in accumulated other comprehensive income, except for gains and losses resulting from the translation of intercompany receivables and payables, which are included in earnings for the period. During the six months ended June 30, 2008 and 2007 , we recorded a foreign currency exchange rate gain of approximately $2,400 and a loss of approximately $35,000, respectively, and for the years ended December 31, 2007 and 2006 we recorded a foreign currency exchange rate gain of approximately $87,000 and a loss of approximately $198,000, respectively, which is included in selling and administrative expenses in the consolidated statements of operations for each period which appear elsewhere herein. The exchange rate of the British pound to the U.S. dollar fluctuated from 1.9973 on December 31, 2007 to 1.9954 on June 30, 2008 as compared to 1.9266 on December 31, 2006 to 2.0039 on June 30, 2007.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2007
The following tables set 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 June 30, 2008 to the three-months ended June 30, 2007:
(IN THOUSANDS) THREE MONTHS ENDED JUNE 30,
----------------------------------------------
2008 2007 CHANGE
------------- ------------- --------------
Net sales $ 792 $ 787 $ 5
------------- ------------- --------------
Costs and expenses:
Cost of products sold 642 702 (60)
Salaries and wages 251 265 (14)
Selling and administrative 221 197 24
------------- ------------- --------------
Total costs and expenses 1,114 1,164 (50)
------------- ------------- --------------
Other (expense) income:
Interest income 1 10 (9)
Interest expense (78) (131) 53
------------- ------------- --------------
Total other expense (77) (121) 44
------------- ------------- --------------
Net loss $ (399) $ (498) $ 99
============= ============= ==============
(IN THOUSANDS) THREE MONTHS ENDED JUNE 30,
----------------------------------------------
2008 2007 CHANGE
-------------- -------------- --------------
Gross sales 809 807 2
Sales returns and allowances (17) (20) 3
-------------- -------------- --------------
Net Sales 792 787 5
--
US domestic sales 305 297 8
US international sales 198 137 61
UK sales 306 373 (67)
Rentar sales (included in above) 0 5 (5)
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The following tables set forth the amount of increase or decrease represented by certain items reflected in the our condensed consolidated statements of operations in comparing the six-months ended June 30, 2008 to the six-months ended June 30, 2007:
(IN THOUSANDS) SIX MONTHS ENDED JUNE 30,
----------------------------------------------
2008 2007 CHANGE
------------- ------------- --------------
Net sales $ 1,555 $ 1,553 $ 2
------------- ------------- --------------
Costs and expenses:
Cost of products sold 1,267 1,350 (83)
Salaries and wages 507 526 (19)
Selling and administrative 483 565 (82)
------------- ------------- --------------
Total costs and expenses 2,257 2,441 (184)
------------- ------------- --------------
Other income (expense):
Interest income 1 22 (21)
Interest expense (168) (343) 175
----------------------------------------------
Total other expense (167) (321) 154
------------- ------------- --------------
Net loss $ (869) $ (1,209) $ 340
============= ============= ==============
(IN THOUSANDS) SIX MONTHS ENDED JUNE 30,
----------------------------------------------
2008 2007 CHANGE
-------------- -------------- --------------
Gross sales 1,525 1,578 (53)
Sales returns and allowances 30 (25) 55
-------------- -------------- --------------
Net sales 1,555 1,553 2
--
U.S. domestic sales 600 576 24
U.S. international sales 355 325 30
U.K. sales 570 652 (82)
Rentar sales (included in above) 1 28 (27)
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NET SALES
Net sales for the three months ended June 30, 2008 increased by approximately $5,000 or approximately 1% from approximately $787,000 in the three months ending June 30, 2007 to approximately $792,000 in the three months ending June 30, 2008. Sales to two customers accounted for approximately 29% and approximately 19% (for a total of 48%) of the consolidated net sales for the three-months ended June 30, 2008. For the three-months ended June 30, 2007, sales to two customers accounted for approximately 29% and approximately 11% (for a total of 40%) of the consolidated net sales. Our U.K. subsidiary's sales decreased by approximately $67,000 (approximately 18%), from approximately $373,000 to approximately $306,000 for the three-month period ended June 30, 2008 compared to the three-month period ended June 30, 2007. This decrease is primarily attributable to the decrease in sales to two customers by approximately $30,000 and $28,000, respectively. This is partially attributable to the customer awaiting installation of new maintenance procedures. International sales totaled approximately $504,000 (64%) of the net consolidated sales for the three-month period ended June 30, 2008 as compared to approximately $510,000 (65%) for the comparable period in 2007. In addition, we believe that the marketing of a competitive product to our customers by our former U.K. Managing Director have contributed to a decline in our international sales volume. Legal action is now being reviewed given the contractual obligations of our former employee.
Net sales increased by approximately $2,000, from approximately $1,553,000 for the six months ended June 30, 2007 to approximately $1,555,000 for the six months ended June 30, 2008. Sales to two customers individually accounted for approximately 24% and approximately 16% (for a total 40%) and approximately 28% and approximately 16% (for a total of 44%) of net sales for the six-months ended June 30, 2008 and 2007, respectively. Net domestic product sales increased approximately $103,000, or approximately 7%. However, sales of a product of which we are no longer a distributor decreased approximately $21,000 during the fiscal 2008 period from the comparable period in fiscal 2007. The U.K. subsidiary's net sales decreased by approximately $82,000, or approximately 13%, from approximately $652,000 for the six-month period ended June 30, 2007 compared to approximately $570,000 for the six-month period ended June 30, 2008. Sales to their top customer has decreased during the six months ended June 30, 2008 and were approximately $369,000, or approximately 65% of their net sales, as compared to approximately $417,000, or approximately 64% for the six months ending June 30, 2007. In addition, as set forth earlier, we believe that the marketing of a competitive product to our customers by our former U.K. Managing Director has contributed to a decline in our international sales volume.
During the six months ended we implemented a price increase of approximately 4% on our main product lines, which was effective January 1, 2008. These price increases had the result of increasing our net sales on those
products for the three and six months ended June 30, 2008 by approximately $21,000 and approximately $51,000, respectively.
The mix of product sold during the six months ending June 30, 2008 changed slightly as approximately 51% of sales were comprised of unit sales. During the same period ending June 30, 2007, unit sales consisted of approximately 46% of total sales.
COST OF PRODUCTS SOLD
Cost of products sold decreased by approximately $60,000, or 9%, from approximately $702,000 for the three months ended June 30, 2007 to approximately $642,000 for the three months ended June 30, 2008. Cost of products sold, as a percentage of sales, decreased from approximately 89% in the 2007 period to approximately 81% in the 2008 period. The decrease is primarily due to a $72,000 decrease in reserve for slow moving and obsolete inventory. Additionally, in accordance with a U.K. master distributor agreement entered into in February 2008, we were reimbursed approximately $35,000 of our manufacturing expenses. Eliminating the reserve changes and the reimbursement, cost of products sold, as a percentage of sales, would have been approximately 81% for the three-months ending June 30, 2007, as compared to 85% for the three-months ending June 30, 2008.
For the six months ended June 30, 2008 cost of products sold decreased by approximately $83,000, or approximately 6%, from approximately $1,350,000 for the six months ended June 30, 2007 to approximately $1,267,000 for the six months ended June 30, 2008. Cost of products sold, as a percentage of sales, decreased from approximately 87% for the six-months ended June 30, 2007 to approximately 81% for the six-months ended June 30, 2008. This decrease is attributable to reductions in indirect factory wages, factory overheads and scrap expense of approximately $30,000, $29,000 and $10,000 respectively, and the reimbursement approximately $35,000 of our manufacturing expenses discussed above. These decreases were offset by increases in inventory shrinkage and product price increases of approximately $8,000 and $13,000 respectively.
SALARIES AND WAGES
Salaries and wages decreased approximately $14,000, or approximately 5%, for the three months ended June 30, 2008 from the comparable period in 2007. This decrease is the result of a decrease in salaries and wages of approximately $32,000 generated in the U.K. office following the resignation of the U.K. Director in December 2007. This decrease was partially offset by additional salaries and wages expenses incurred in the U.S. office, in the areas of engineering hours, quality personnel, as well as general cost of living salary increases of approximately $3,000, $10,000 and $5,000 respectively.
For the six months ended June 30, 2008 salaries and wages decreased approximately $19,000, or approximately 4%, from the comparable period in 2007. This decrease is the result of a decrease in salaries and wages of approximately $32,000 generated in the U.K. office as described above, offset by additional salaries and wages expenses incurred in the U.S. office, in the areas of engineering hours and quality personnel of approximately $3,000 and $19,000 respectively.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses for the three months ended June 30, 2008 increased by approximately $24,000, or approximately 12%. This increase is due to exchange rate losses, patent expenses, and rent expense by approximately $45,000, $32,000 and $18,000 respectively. These increases were partially offset by decreases in professional fees and bad debt expense and a reimbursement of selling and administrative expenses which are in addition to the reimbursement of certain manufacturing expenses mentioned described above by the U.K. master distributor by approximately $18,000, $17,000 and $13,000 respectively.
Selling and administrative expenses for the six months ended June 30, 2008 decreased by approximately $82,000 or approximately 15% from approximately $565,000 for the six months ended June 30, 2007 to approximately $483,000 for the six months ended June 30, 2008. This decrease was due to a decrease in bad debt and travel, entertainment and meals expenses and a reimbursement of expenses from the U.K. master distributor of approximately $50,000, $32,000, and $13,000, respectively. The majority of the decrease in travel related expense
was attributable to the U.K. office resignation of their director. Bad debt expense decrease was primarily attributable to the reserves established for one delinquent international customer, which we reserved during the quarter ended December 31, 2007. These decreases were partially offset by an increase in stock based compensation expense of approximately $30,000.
INTEREST INCOME
Interest income for the three months ended June 30, 208 decreased approximately $9,000 from the comparable period in 2007. Interest income decreased approximately $21,000, from income of approximately $22,000 for the six-month period ending June 30, 2007 to approximately $1,000 for the six-month period ending June 30, 2008. These decreases are attributable to a reserve established, effective October 1, 2007, against stockholder loan interest that was previously accruing at approximately $12,000 per quarter.
INTEREST EXPENSE
Interest expense for the three months ended June 30, 2008 decreased by approximately $53,000, or approximately 40% from the comparable period in 2007, as a result of a decrease in the interest rate outstanding balance of the stockholder notes payable. Interest expense for the six months ended June 30, 2008 increased by approximately $175,000, or approximately 51%, from the comparable period in 2007. During the six months period approximately $80,000 of this increase is attributable to a reserve established during the period ending June 30, 2007, toward the accumulation of interest recorded on a stockholder note receivable and approximately $95,000 of the decrease is due to a decrease in the interest rate on the outstanding balance of the stockholder notes payable. We pay interest monthly on the notes payable to stockholder at prime rate less .5%, with rates reset as often as the Federal Reserve changes interest rates, which was 4.5% as of June 30, 2008 as opposed to 8.25% as of June 30, 2007.
YEAR ENDED DECEMBER 31, 2007 AS COMPARED TO YEAR ENDED DECEMBER 31, 2006
The following table sets forth (amounts in thousands) our operating information for the years ended December 31, 2007 and 2006:
----------------------------------------- -----------------------------------------------------------
(in thousands)
----------------------------------------- -----------------------------------------------------------
2007 2006 Increase
(decrease)($)
----------------------------------------- ----------------- ------------------- ---------------------
----------------------------------------- ----------------- ------------------- ---------------------
Net sales $3,083 $3,073 10
----------------------------------------- ----------------- ------------------- ---------------------
Operating costs and expenses:
----------------------------------------- ----------------- ------------------- ---------------------
Cost of products sold 2,832 2,567 265
----------------------------------------- ----------------- ------------------- ---------------------
Salaries and wages 1,075 1,348 (273)
----------------------------------------- ----------------- ------------------- ---------------------
Selling and administrative 1,061 1,343 (282)
----- -----
----------------------------------------- ----------------- ------------------- ---------------------
4,968 5,258 (290)
----------------------------------------- ----------------- ------------------- ---------------------
----------------------------------------- ----------------- ------------------- ---------------------
Loss from operations (1,885) (2,185) (300)
----------------------------------------- ----------------- ------------------- ---------------------
----------------------------------------- ----------------- ------------------- ---------------------
Other income (expense):
----------------------------------------- ----------------- ------------------- ---------------------
Interest income 33 50 (17)
----------------------------------------- ----------------- ------------------- ---------------------
Interest expense (589) (518) 71
--- ---
----------------------------------------- ----------------- ------------------- ---------------------
Total other expense (556) (468) 88
----------------------------------------- ----------------- ------------------- ---------------------
----------------------------------------- ----------------- ------------------- ---------------------
Net loss $(2,441) $(2,653) (212)
----------------------------------------- ----------------- ------------------- ---------------------
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----------------------------------------- ------------------ ------------------ --------------------
2007 2006 Increase
(decrease)($)
----------------------------------------- ------------------ ------------------ --------------------
----------------------------------------- ------------------ ------------------ --------------------
Gross sales $3,126 $3,046 80
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Sales returns and allowances (43) 27 (70)
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Net sales $ 3,083 $3,073 10
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U.S. domestic sales $1,563 $1,425 138
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U.S. international sales 353 815 (462)
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U.K. sales 1,210 806 404
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Rentar sales (included above) 38 243 (205)
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NET SALES
Although net sales increased marginally by approximately $10,000 from approximately $3,073,000 in 2006 to approximately $3,083,000 in 2007, sales of our products actually increased $343,000. Sales of a product for which we are no longer a distributor accounted for a decrease of approximately $205,000 in gross sales for 2007 as compared to 2006. Domestic sales generated from the U.S. operations increased approximately $138,000 in 2007 as compared to 2006. The mix of product sold continues to change as unit sales revenues have decreased slightly while filter sales have increased more significantly. The increase in sales returns and allowances for 2007 was a result of a decrease during 2006, which was due to a reduction in the cumulative historical rate of returns.
COST OF SALES
Cost of sales increased by approximately $265,000 from approximately $2,567,000 in 2006 to approximately $2,832,000 in 2007. The increase is primarily due to expensing of scrap inventory and increases in raw material costs. Cost of products sold, as a percentage of sales, increased from 84% in 2006 to 92% in 2007. We are offset a portion of these cost increases with product price increases beginning January, 2008.
SALARIES AND WAGES
Salaries and wages decreased approximately $273,000 due to a net reduction of three employees, representing a decrease of approximately $462,000, which was partially offset by cost of living salary increases.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased by approximately $281,000 from approximately $1,343,000 in 2006 to approximately $1,062,000 in 2007. During 2007 our expenses related to stock compensation decreased approximately $329,000. These decreases were primarily the result of extension of employee stock options, warrants issued to employees/directors and amortization of warrants issued to investors, of approximately $173,000, $101,000, and $66,000, respectively, all of which occurred in 2006. During 2007 we incurred cost increases in selling and marketing, stockholder loans, rent, and patent expenses of approximately $31,000, $21,000, $14,000 and $13,000 respectively.
INTEREST INCOME
Interest income decreased by approximately $17,000 primarily due to reserves established beginning October 1, 2007, against stockholder loan interest that was previously accruing at approximately $12,000 per quarter.
INTEREST EXPENSE
Interest expense increased by approximately $71,000 from $518,000 in 2006 to $589,000 in 2007. We pay interest monthly on the note payable to stockholder at the prime rate, which was 6.75% as of December 31, 2007. Approximately $16,000 of this increase was attributable to this credit line interest with a higher average principal balance offset by a lower interest rate of 6.75% at December 31, 2007 as compared to a lower average principal balance and a higher interest rate of 8.25% at December 31, 2006. Approximately $87,000 of this increase is attributable to a reserve established during the period ending June 30, 2007 against a stockholder loan receivable.
This increase was partially offset by a decrease of approximately $38,000 relating to a reduction of amortization of deferred finance costs.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2008, we had cash and cash equivalents of approximately $324,000 as compared to cash and cash equivalents of approximately $112,000 at December 31, 2007.
At June 30, 2008, we had working capital of approximately $1,066,000 and our current ratio (current assets to current liabilities) was 1.66 to 1. At December 31, 2007 we had working capital of approximately $366,000 and our current ratio was 1.20 to 1. The increase in working capital and current ratio is primarily attributable to the increases in cash (approximately $212,000), accounts receivable (approximately $133,000), inventories (approximately $89,000) and prepaid assets which includes prepaid oil analysis, rent and vendor deposits (approximately $99,000) and a decrease in accounts payable (approximately $259,000) offset by increases in accrued liabilities which represents deferred salaries and benefits, warranty expense, interest expense and estimated recurring vendor expenses of approximately $87,000.
We have incurred net losses each year since inception and at June 30, 2008 we had an accumulated deficit of $4,896,023. Our net sales are not sufficient to fund our operating expenses. Historically, we 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. During 2007, we raised a total of $1.475 million in capital from an institutional investor and current stockholders and during the six months ended June 30, 2008 we raised an additional $1.474 million. In addition, as of June 30, 2008, we owe our CEO $6.1 million for funds he has advanced to us from time to time for working capital . Interest expense on this loan was approximately $168,000 and approximately $589,000, respectively, for the six months ended June 30, 2008 and the year ended June 30, 2008. During the three-month period ended June 30, 2008, we converted $100,000 of stockholder loans into 322,581 common shares. We do not have sufficient funds to pay this loan when it becomes due.
We do not currently have any commitments for capital expenditures. Currently, without additional equity investments, we expect our operating cash flows will suffice through December 31, 2008. While we anticipate cash flows from 2008 sales activity even if we sell all 3,500,000 shares offered hereby additional cash will still be needed to support operations, meet our working capital needs and satisfy our obligations as they become due. In addition, as set forth elsewhere herein we owe our CEO $6.2 million which is due on December 31, 2009 or (i) at such time as we have raised an additional $7 million over the $3.5 million raised in prior offerings, or (ii) at such time as we are operating within sufficient cash flow parameters to sustain operations, or (iii) until a disposition of our company, such as an acquisition or merger, occurs. We do not have sufficient funds to pay this loan when it becomes due and there are no assurances our CEO will extend the due date. 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 have implemented measures to preserve our ability to operate, including organizational changes, a reduction and/or deferral of salaries, reduction in personnel and renegotiating creditor and collection arrangements. If budgeted sales levels are not achieved and/or significant unanticipated expenditures occur, or if we are not able to raise additional investment capital, we may have to modify our business plan, reduce or discontinue some of our operations or seek a buyer for part of its assets to continue as a going concern through 2008. 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. In that event, it is possible that stockholders could lose their entire investment in our company.
OPERATING ACTIVITIES
For the six-month period ended June 30, 2008, net cash used in operating activities was approximately $1,251,000, which primarily resulted from the net loss of approximately $869,000 and secondarily from reductions in accounts payables, increase in accounts receivable, prepaid expenses of approximately $258,000, $107,000, $99,000 and $91,000 respectively. For the six-month period ended June 30, 2007, net cash used in operating activities was approximately $911,000, which primarily resulted from the net loss of approximately $1,208,000.
For 2007, net cash used in operating activities was approximately $1,809,000, which primarily resulted from the net loss of approximately $2,441,000, combined with changes in working capital amounts. For 2006, net cash used in operating activities was approximately $1,942,000, which primarily resulted from the net loss of approximately $2,653,000, combined with changes in working capital amounts.
INVESTING ACTIVITIES
Net cash used in investing activities for the six months ended June 30, 2008 was approximately $14,000 for the sales and purchases of property and equipment, with approximately $12,000 relating to the purchase of tooling. Net cash used in investing activities for the six months ended June 30, 2007 was approximately $23,000 for the sales and purchases of property and equipment.
Net cash used in investing activities for 2007 was approximately $55,000 for purchases of property and equipment. Net cash used in investing activities for 2006 was approximately $39,000 for purchases of property and equipment.
FINANCING ACTIVITIES
Net cash provided by financing activities for the six months ended June 30, 2008 was approximately $1,472,000 for the period, due to $1,474,000 of proceeds received from stock issued for cash. During the six month period ending June 30, 2007, net cash provided by financing activities was approximately $1,029,000 for the period, due to net proceeds of $975,000 in a private placement offering and $28,500 from the exercise of employee stock options, offset by the net repayment of approximately $780,000 of the stockholder loan.
Net cash provided by financing activities for 2007 was approximately $1,909,000 for the year, primarily due to proceeds of $1,473,000 of funds from the sale of common stock to a private placement investor, as well as an increase in stockholder loans of $411,000. Net cash provided by financing activities for 2006 was approximately $2,033,000 for the year, primarily due to proceeds of $2,267,000 of funds from the sale of common stock to a private placement investor, offset by a reduction in stockholder loans of $232,000.
OUR BUSINESS
OVERVIEW
We design, manufacture, market and distribute the PURADYN bypass oil filtration system for use with substantially all internal combustion engines and hydraulic equipment that use lubricating oil. Working in conjunction with an engine's full-flow oil filter, the PURADYN bypass oil filtration system cleans oil by continually removing solid, liquid and gaseous contaminants from the oil through a sophisticated and unique filtration and evaporation process. For engine lubricating oil, our filters incorporate an additive package. Because lubricating oil is kept in a continually clean state, the PURADYN bypass oil filtration system has been used effectively to extend oil-drain intervals and to extend the time between engine overhauls. We are the exclusive manufacturer of the disposable replacement filter elements for the PURADYN bypass oil filtration system.
OUR PRODUCTS
Our core product, the patented PURADYN bypass oil filtration system, is offered in two models, TF and PFT, and can be attached to almost any engine and hydraulic systems. The concept of bypass filtration is similar to a dialysis machine that filters blood to rid it of impurities, keeping the oil continually clean. Whenever the engine or machinery is operating, the PURADYN bypass oil filtration system is extracting from the oil solid particles down to less than one micron (1/39 millionth of an inch), as well as gaseous and liquid contaminants, while protecting the engine or hydraulic equipment from harmful wear caused by contaminants in the oil. Additive packages in which chemicals are added to the filtering media replenish spent additives in the oil, helping to maintain the oil's proper chemical balance and viscosity.
The condition of the oil is monitored through use of a simple oil analysis sample taken in lieu of a regularly scheduled maintenance oil change. If the sample results, typically received in five to seven days, show that the
condition of the oil is considered good for continued use, only the PURADYN replacement element is to be changed - there is no need to change the oil if it is clean.
Consequently, we believe that the PURADYN bypass oil filtration system significantly reduces maintenance costs by decreasing oil consumption, engine wear and certain other types of general maintenance as well as reducing environmental concerns and costs associated with the storage and disposal of waste oil. Based upon our experience, these potential savings are achieved from utilizing the PURADYN bypass oil filtration system, which generally has a relatively short payback period of, on average, six to 14 months.
The PURADYN bypass oil filtration system is currently manufactured in six different sizes suitable for placement on engines or equipment with oil sump capacities ranging from eight to 300 quarts. All PURADYN bypass oil filtration systems are compatible with virtually all standard and synthetic oils on the market and they work with engines using gasoline, diesel, biodiesel, propane or natural gas. The PURADYN bypass oil filtration system cannot be used on engines that do not have a pressurized lubricating system, and none of the products can be used on any engines that mix oil with fuel.
We also manufacture and distribute replaceable filter elements for the PURADYN bypass oil filtration system. Depending upon the application, we generally recommend that the replaceable filter element be replaced at the engine manufacturer's recommended/approved periodic oil change interval or as oil analysis dictates. The type of element used also depends upon the specific type of engine or hydraulic application. A customer can change the element and take the required oil sample in approximately five to 10 minutes.
By continually removing contaminants and replacing vital additives through a patented time-release additive package to keep oil constantly clean, we believe that the PURADYN replaceable filter element substantially extends intervals between oil changes. Replaceable filter elements are interchangeable between similar-sized models.
We have implemented patented and/or proprietary technology in the replaceable filter elements that we believe provides several advantages including:
o An additive package in which pelletized chemicals are added to the filtering media to replenish additives in the oil. This additive package helps to maintain the oil's chemical balance and viscosity. In 2006, we re-engineered the additive package to be compatible with new oils designed to meet EPA 2007 on-highway exhaust emission standards, and be simultaneously backwards-compatible with all older API diesel lubrication oil service categories.
o The CGP(R) Extended Life Filter Element containing a patent-pending process for chemical grafting. This new technology, developed in 1999 and2000 and released in 2001, improves the attraction and retention of soot and other solid contaminants to the packed cotton filter material. CGP technology was developed by an outside laboratory over a three-year period inclusive of laboratory and field-testing. Consolidated results from across the country, during 2001, show that test vehicles averaged more than 120,000 miles without the need for a traditional oil change.
o Ease of maintenance: The filter element can be replaced in a matter of seconds.
When the replaceable filter element is changed, an insignificant amount of make-up oil is added to replace any oil retained in the used element or consumed during the normal engine combustion process. Our performance warranties require the user to change the Puradyn replaceable filter element and take a small sample of the oil for submission to an oil-testing laboratory at the same intervals that the original equipment manufacturer (OEM) recommends for an oil change, or as oil analysis dictates. The oil analysis allows end users to monitor oil quality and, to some degree, engine condition and provides a trend and timeline for both our company and end user should a problem arise.
The PURADYN bypass oil filtration system has no moving parts and consequently requires no significant ongoing maintenance. As long as replaceable filter elements are changed at the recommended intervals and other standard preventive maintenance procedures such as changing factory full flow and air filters and oil analysis are
completed, based upon our historical experience to date we believe the PURADYN bypass oil filtration system will perform as designed.
We are also distributor for the MotorCheck(TM) On-Site Oil Analysis. The analyzer combines optical emission and infrared oil analysis with optional viscometer within a desktop-sized enclosure for fast, accurate fluid analysis.
WARRANTIES
The PURADYN bypass oil filtration system carries a six-month, `money-back' performance guarantee, and is currently warranted to the original user to be free of defects in material and workmanship for five years with unlimited miles/hours, with a one-year limited warranty on the heating element. For our performance guarantee and warranties to remain in effect, users must, among other things, maintain a record of the laboratory oil analysis results. To date, there have been no material warranty claims, although there can be no assurances that such a trend will continue.
We have received letters from several OEMs including Deere & Company, Detroit Diesel Corporation, Caterpillar, Inc., Ford Motor Company, Mack Trucks, Inc., Cummins Engine Company, Inc., Daimler Corporation, which have all stated that the installation and use of the PURADYN bypass oil filtration system does not void their manufacturer warranties unless an engine failure is attributed to the PURADYN bypass oil filtration system. In addition, under the Magnuson-Moss Act, a manufacturer cannot require the use of any particular brand of filter or oil to satisfy fulfillment of a warranty, unless the manufacturer provides the item free of charge under the terms of the vehicle warranty. The act intends that use of an aftermarket product alone is not ground for denying an OEM warranty. Oil analysis is a standard industry practice endorsed by OEMs and various fleet maintenance organizations and most engine manufacturers will accept oil analyses as alternatives to their recommended oil change intervals.
MARKETING
Our products are marketed to numerous industries including marine, trucking, agricultural, bus, generator, construction, mining, industrial and a multitude of hydraulic applications, and other users of engines or equipment that utilize up to 50 weight oil for lubrication. Currently, our primary focus is on the industrial/construction, generator set, marine, and OEM segments. Instead of traditional media advertising campaigns, we are concentrating instead on direct sales contacts, trade shows, white papers and other methods of demonstration, such as Internet-based marketing, to promote our products, generate awareness and stimulate sales.
Our products have achieved recognition from well-known sources, including certification (in 1994) and re-certifications (in 1998 and 2003) by the California Environmental Protection Agency's Department of Toxic Substances as a `Pollution Prevention' technology. We believe that such recognition, as well as our presence at national industry trade shows, have and will continue to enable us to increase industry recognition of the Puradyn name and products.
One of our marketing strategies is based on creating customer `pull-through', a sustained level of request for our product on the OEM level from end-users. To date, customer pull-through has resulted in a limited number of our systems being factory-installed at individual John Deere, Volvo Trucks, N.A., Mack, Kenworth and Freightliner facilities.
Taking a long-term approach, we believe that federal government entities and the U.S. military are markets that can be successfully cultivated. In December 2004 we were awarded a new five-year contract from the General Services Administration (GSA) for its Vehicular Multiple Award Schedule, New Technologies, which simplifies the procurement process for governmental agencies. In 2006 final test results from the U.S. Department of Energy, showed that our systems used in evaluation of the benefits and cost analysis of bypass oil filtration produced an estimated savings of 89% in oil usage and purchases when used on heavy-duty diesel engines, and in 2007 a National Stocking Number (NSN) was assigned to a specific Puradyn system kit to be installed on the U.S. Army's Mine Protection Vehicle family.
As a result of these efforts, during 2008 we received the initial and repeat orders from the Foreign Military Sales program, the government-to- government method for selling U.S. defense equipment, services, and training, to supply the PURADYN bypass oil filtration systems for the line haul fleet and in July 2008 we received a contract from the U.S. Army to supply the PURADYN bypass oil filtration systems to outfit JERRVvehicles used in combat in Iraq and Afghanistan.
DISTRIBUTION
We have formal distribution agreements with domestic and international distributors wherein they are required to maintain minimum product inventory levels, maintain a storefront and services bay(s), and retain access to qualified technicians trained by our technical personnel in product installation and service. All distributors must pay in a timely fashion, and with respect to international distributors, the agreements typically establish the minimum dollar amount of inventory to be purchased as well as shipping terms.
We currently have approximately 105 domestic and 35 international active distributors. However there are additional potential distributors that participate in other programs; such as Freightliner, Western Star, Paccar and John Deere. While not all of these potential distributors actively promote our products, all of these dealers have access to our product and have the capability to sell our product.
In February 2008 we entered into a Master Distributorship Agreement (International) with Filter Solutions Ltd. pursuant to which we appointed that company as our exclusive master distributor in the U.K., mainland Europe and Ireland, as well as additional future territories which we may agree upon for sales made to end users with fleets of vehicles, users of hydraulic applications for manufacturing processes and distributors who market to end-users with either fleets of vehicles or users of hydraulic applications for manufacturing processes. The distributor agreed to minimum purchases of $900,000 during the first nine months of the term, with successive minimum purchases increasing 15% annually over the previous 12 month annual rate. The agreement is for an initial term of five years with an automatic one year renewal on each anniversary, negotiated for minimum quantities. The agreement may be terminated by either party upon 30 days written notice, or by us without notice upon the occurrence of certain events.
We have warehouse distributors located throughout North America and we utilize inventory storage space in the U.K. provided by Filter Solutions Ltd., a master distributor. Our U.K. subsidiary generates distribution and sales in Europe, the Middle East, the former Soviet Union, South Africa and Scandinavia. The remaining distributors are located primarily in South America, England, Europe and Asia. These distributors purchase product directly from us and sell to their existing or new customers. We will accept returns of products that are defective at the time of sale to the distributor or prove to be defective during the warranty period. Returns are subject to specific conditions.
SALES
We directly and/or with the assistance of our distributors market our products directly to OEMs, other distributors and national accounts. Typically larger customers, and some smaller customers, require an evaluation period to operate the system on their equipment. While set for a specific period of time, usually ranging from three to 12 months, evaluations are often influenced by a number of variables including equipment downtime or servicing which may extend the evaluation period. Consequently, the sales period can be relatively long. We are beginning to see evidence that this evaluation period has shortened as our products continue to gain wider acceptance and support from well-known end users and OEMs.
As of October 24, 2008, our products are being evaluated (in various stages of progress) by numerous potential end users and existing customers including, among others, a major engine OEM, a major transmission OEM, a road materials handling company, two leading food companies, the U.S. military and two major long-haul carriers, which have been conducted over the past 12 to 18 months.
In December 2004 we were awarded a new five-year contract on the Vehicular Multiple Award Schedule, New Technologies, which replaced the then current GSA schedule. The contract enables us to offer our PURADYN bypass oil filtration system to all federal government agencies and allows easy access to our products without the
usual lengthy bid process to all federal agencies that purchase vehicles, including construction equipment, medium and heavy trucks, waste disposal vehicles, aerial lift vehicles and fire trucks. The contract period is for five years from the date of the award (to December 2009) with three five-year options. To date sales under this contact have totaled approximately $22,000.
We are dependent upon sales to a limited number of customers. During the six months ended June 30, 2008 two customers individually accounted for approximately 24% and approximately 16% (for a total of approximately 40%) of our net sales. During 2007 and 2006 two customers together accounted for approximately 44% and 39%, respectively, of our consolidated net sales. Although we receive customer purchase orders, we do not have contracts with our customers and the loss of sales from one or more of these customers could materially impact our results of operations in future periods.
MANUFACTURING AND PRODUCTION
We purchase component parts for our PURADYN bypass oil filtration systems and manufacture our entire line of replaceable filter elements. The component parts are assembled, packed and shipped from our facility in Boynton Beach, Florida.
We currently purchase each substantially all of our raw materials and component parts from various vendors in the United States. Substantially all the tools and dies used by certain of our vendors are owned by us. We have researched alternative sources of supply and do not anticipate that the loss of any single supplier would have a material long-term adverse effect on our business, operations or financial condition.
In January 2004, we received ISO 9001:2000 certification from the International Organization for Standardization. ISO 9001:2000 is a series of internationally accepted, multi-part quality management systems for industry-wide standardization applied to manufacturing and service organizations. We successfully completed subsequent surveillance audits and in December 2007, completed our recertification audit to retain 9001:2000 certification.
COMPETITION
Our primary competitors are Premo Lubrication Technologies, Inc., OilGuard, Amsoil Inc., and Oil Purification Systems, Inc. Competitive bypass oil filters produced by other companies in varying degrees address the issues of solid or liquid contaminant filtration through centrifugal design, media filtration or evaporation. Most of our competitors have more capital, greater brand recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. However, we believe that we design and manufacture the only bypass oil filtration system that incorporates all of the following features which we believe provides us with a competitive advantage:
o filtering solid contaminants to below one micron, including
enhanced soot retention through the use of a patent-pending
process for chemical grafting;
o effectively removing harmful gaseous and liquid contaminants
through a heated evaporation chamber;
o replenishing the base additives; and
o maintaining oil viscosity.
INTELLECTUAL PROPERTY
Our intellectual property is critical to our business, and we may seek to protect our intellectual property through copyrights, trademarks, patents, trade secrets, confidentiality provisions in our customer, supplier, potential investors, and strategic relationship agreements, nondisclosure agreements with third parties, and invention assignment agreements with our employees and contractors, although we do not execute such agreements in every case. Our protection efforts may prove to be unsuccessful, and unauthorized parties may copy or infringe upon aspects of our technology, services or other intellectual property rights. In addition, these parties may develop similar technology independently. Existing trade secret, copyright and trademark laws offer only limited protection and may not be available in every country in which we will offer our services.
We own patents for the PURADYN bypass oil filtration system; replaceable filter elements, oil flow meter, and two patents for technology which include a manifold type full-flow filter/bypass filtration unit (side-by-side) in the U.S. and certain other countries. The expiration dates of these patents range from May 2014 to October 2016. The following table provides information on our current U.S. patents.
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PATENT NO. DESCRIPTION DATE ISSUED
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5,630,912 oil reclamation device with evaporator base and head mounted filter May 20, 1997
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5,591,330 oil filter containing a soluble thermoplastic additive material July 7, 1997
therein
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5,639,965 oil reclamation system flow meter July 17, 1997
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5,718,258 releasing additives into engine oil February 17, 1998
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6,139,715 oil reclamation device with vaporization chamber October 31, 2000
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We believe that the patented technology is especially useful for engines built since the enactment of the Clean Air Act of 1992 which requires tighter specifications for diesel engines. We have also applied for and received patents on these technologies in a number of foreign counties.
In April 2001 we applied for a provisional patent application for improved filtration efficiency using CGP(R), a process for chemical grafting that we believe can significantly increase the life of the filter element and further safely extend oil drain intervals.
We have registered the product trademark "Puradyn" in the United States, Canada, Mexico and a number of foreign countries, and have registered the product trademarks "CGP" and "Keep It Clean!" in the United States.
We have also obtained the rights to the domain name www.puradyn.com as well as the domain names puradyn.asia, puradyn.org, puradyn.us, puradyn.info and puradyn.biz. As with telephone numbers, we do not have and cannot acquire any property rights in an Internet address. We do not expect to lose the ability to use these Internet address; however, there can be no assurance in this regard.
EMPLOYEES
At October 24, 2008, we had 21 full-time employees, including our executive officers. None of our employees are covered by collective bargaining agreements, and we believe our relationships with our employees to be good.
LEGAL PROCEEDINGS
We are not a party to any pending or threatened litigation.
PROPERTIES
We lease approximately 25,500 square feet of office and warehouse space in Boynton Beach, Florida from an unrelated third party which serves as our principal executive offices. Under the term of the five year lease which expires on July 31, 2013 we pay rent of approximately $179,000 per year which will increase 3% annually during the term of the lease.
HISTORY OF OUR COMPANY
The patents issued on the oil filtration system that, after further development, has evolved into the current PURADYN bypass oil filtration system, were issued in the early 1980's. The owners of these patents attempted to market and sell the original system under various other trade names, but were not successful. In 1987, T/F Systems, Inc., a Delaware corporation, of which Messrs. Richard C. Ford and Willard H. Taylor (deceased) were equal stockholders, obtained certain limited distribution rights to the PURADYN bypass oil filtration system, previously known as the "Purifiner" in several states from Refineco Manufacturing Company, Inc. Mr. Ford served as an executive officer and director of our company from inception to October 2006. In 1988, T/F Systems, Inc. obtained an option to acquire the exclusive manufacturing and marketing rights to the Purifiner in the event Refineco
Manufacturing Company, Inc., and subsequently, Purifiner Distribution Corporation of Chicago, Illinois, were unable to meet their commitments to supply Purifiners to T/F Systems, Inc. As a result of a default, and a failure of the manufacturer to meet this supply commitment, T/F Systems, Inc. obtained the worldwide manufacturing and marketing rights to the Purifiner in 1990.
In February 1988, we were incorporated in Delaware under the name "Econology Systems, Inc." On October 16, 1990, the name was changed to "T/F Purifiner, Inc." We were inactive until 1991, when we obtained the distribution and marketing rights to the Purifiner by virtue of an assignment from T/F Systems, Inc. However, T/F System, Inc.'s ownership of the rights to the Purifiner were contested in court by other third parties who were also manufacturing and marketing a device similar to the Purifiner and using the Purifiner trademark. Eventually, the court ruled in favor of T/F Systems, Inc. with respect to its manufacturing and marketing rights, and in May 1993 all appeals by the other parties were exhausted. During the period of this litigation, we continued to market the Purifiner, but success was limited due to various factors including the pending litigation and the actions by these other parties in the marketplace.
Prior to December 31, 1995, we were the exclusive distributor and T/F Systems, Inc. was the exclusive manufacturer of the Purifiner. On December 31, 1995, in exchange for any claims we had in the delay damage award, we purchased all operating assets and assumed all operating liabilities of T/F Systems, Inc. except for any benefits and/or liabilities related to a delay damage judgment awarded in December 1994 against the other parties discussed above, and liabilities related to certain stockholder advances made to T/F Systems, Inc. by Messrs. Ford and Taylor.
On February 4, 1998, the company filed a Certificate of Amendment to its Certificate of Incorporation, which changed its name from T/F Purifiner, Inc. to Puradyn Filter Technologies Incorporated.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
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NAME AGE POSITIONS
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Joseph V. Vittoria 72 Chairman of the Board of Directors and Chief Executive
Officer
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Kevin G. Kroger 56 President, Chief Operating Officer and director
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Alan J. Sandler 70 Vice President, Chief Administrative Officer and
corporate secretary
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Cindy Lea Gimler 42 Chief Financial Officer
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Lieutenant General John S. Caldwell, U.S. Army 63 Director
(retired) (2)
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Forrest D. Hayes (1)(2) 75 Director
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Dominick Telesco 78 Director
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Dr. Charles W. Walton (1) 75 Director
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(1) Audit Committee member
(2) Compensation Committee member
JOSEPH V. VITTORIA. Mr. Vittoria was appointed to the Board of Directors and appointed as Chairman on February 8, 2000. Mr. Vittoria was Chairman and Chief Executive Officer of Travel Services International, Inc. where he served from 1998 to 2000. From 1987 to 1997, Mr. Vittoria served as Chairman and Chief Executive Officer of Avis, Inc. and was President and Chief Operating Officer of Avis, Inc. from 1982 to 1987. Mr. Vittoria also serves as Chairman of the Board of Great Wolf Resorts (since November 2006) and is a member of the Board of Vectrix Corporation (since May 2008).
KEVIN G. KROGER. Mr. Kroger joined our company July 3, 2000 as President and Chief Operating Officer, and was appointed to the Board of Directors in November 2000. He was also appointed to the Board of Puradyn, Ltd. In December 2000, Mr. Kroger was with Detroit Diesel Corporation from 1989 to the time he joined our company, serving in various executive positions prior to his appointment in 1998 to the position of Vice President
and General Manager of Series 30/40 Product. From 1987 to 1989 he was Vice President of R.E.S. Leasing and of VE Corporation. Prior to this, from 1971 to 1987, he held several management positions with Caterpillar Corporation.
ALAN J. SANDLER. Mr. Sandler joined our company in June 1998 and has served in various positions including President (June 1998 until January 2000), Vice President (January 2000 to present), Chief Operating Officer (June 1998 to January 2000), Chief Administrative Officer (February 2000 to present) Secretary (June 1998 to President), Chief Financial Officer (June 1998 to March 2001 and August 2001 to March 2002), and Director (June 1998 to December 2004). Prior to joining our company, from 1995 until 1997 Mr. Sandler served as President and Chief Executive Officer to Hood Depot, Inc., a national restaurant supply manufacturer/distributor. From 1979 to 1995 he was President and Chief Executive Officer of Sandler & Sons Dental Supply Company, a regional dental supply and equipment distributor. Previous to this position he was a Vice President of Gardner Advertising Company, a national advertising agency, from 1965 to 1979.
CINDY LEA GIMLER. Ms. Gimler has served as Chief Financial Officer since February 2005 and from October 2003 until October 2004 she held the position of Accounting Manager with our company. Prior to her employment with our company, she served as Controller of Bio-Engineered Supplements & Nutrition, Inc., a nutrition products company, from October 2004 through February 2005. Ms Gimler also served as Chief Financial Officer of Universal Jet Aviation, a private jet charter company, from August 2000 through July 2003 and as Accounting Manager for Singer Asset Finance Co., LLC from July 1999 through August 2000. From November 1989 through August 2000 she was employed as an Accountant and Financial Analyst for Oxbow Corporation, an energy finance company. Ms. Gimler received a Masters of Business Administration and a Bachelor of Business Administration from Florida Atlantic University and is a CPA in the State of Florida.
LIEUTENANT GENERAL (RETIRED) JOHN S. CALDWELL, JR. General Caldwell was appointed to our Board of Directors on August 25, 2005 and serves as Chairman of the Compensation Committee. General Caldwell served as the Army's top ranking officer for Acquisition, Logistics and Technology when he retired in January 2004. In that capacity, he was responsible to the Assistant Secretary for the direction and oversight of the Army's Research, Development and Acquisition (RDA) programs valued at approximately $20 billion per year. He was also Director of the 50,000-person Army Acquisition Workforce, responsible for personnel development and training policy and key assignment recommendations. From July 2004 until May 2007, General Caldwell served as Senior Vice-President of QSS Group, an IT services company supporting Federal agencies, which was acquired by Perot Systems in January 2007. General Caldwell is currently employed as a consultant and serves on the Board of Directors of TASER International, Inc., Marlow Industries, a subsidiary of II-IV Incorporated, and SemiSouth Laboratories, Inc. General Caldwell holds the degrees of Bachelor of Science from the US Military Academy, West Point in New York, Master in Mechanical Engineering from Georgia Institute of Technology in Atlanta, GA, and the Industrial College of the Armed Forces.
FORREST D. HAYES. Mr. Hayes was appointed to our Board of Directors on November 10, 2005. Mr. Hayes is Chairman of the Audit Committee and a member of Compensation Committee. Mr. Hayes served as Vice President and Chief Financial Officer of Wastequip, Inc., a privately owned manufacturer of waste equipment in 1990 and 1991, and from 1992 to 2000, as a member of the Wastequip Board of Directors. Mr. Hayes was President and Chief Executive Officer of Brittany Corporation, a privately owned manufacturer of auto/truck parts from 1992 to 2000, and Vice-Chairman from 2000 through 2003. Prior to this, Mr. Hayes served as a CPA with Arthur Andersen from 1954 to 1990 in various capacities including Managing Partner, of the Cleveland and Cincinnati, Ohio offices. Mr. Hayes currently serves on the boards of Polychem Corporation and Brittany Stamping LLC.
DOMINICK TELESCO. Mr. Telesco was appointed to our Board of Directors on December 19, 2006. Mr. Telesco has been President and CEO of Boxwood Associates, Inc. since October 1999. Mr. Telesco also serves on the Board of Directors of Lydian Private Bank, the Palm Beach United Way, the Palm Beach County Cultural Council and the Boxwood Association, Inc.
CHARLES W. WALTON, PH.D.. Dr. Walton was appointed to our Board of Directors on August 25, 2005 and is a member of the Audit Committee. Dr. Walton is Chairman Emeritus of Wastequip, Inc., which he founded in 1989 with the goal of consolidating the equipment segment of the waste management industry. As a result of over 25 successful acquisitions and internal growth, Wastequip, Inc. which is owned by Odyssey Investment Partners, a
private equity firm, is now the largest supplier of equipment in the industry with approximately $500 million in sales and 30 manufacturing plants in North America and Mexico. Prior to founding Wastequip, Inc. Dr. Walton was President and Chief Executive Officer of Sudbury, Inc., a Fortune 500 diversified manufacturing company, which he co-founded in 1983. In 1987, he was awarded the Dively Entrepreneurship Award by Case Western Reserve Weatherhead School of Management and the Harvard Business School Club of Cleveland. Dr. Walton holds the degrees of Bachelor of Science in Foreign Service and Ph.D. in economics from Georgetown University, Washington, D.C.
Each director is elected at our annual meeting of stockholders and holds office until the next annual meeting of stockholders, or until his successor is elected and qualified.
DIRECTOR COMPENSATION
Each member of the Board of Directors is automatically granted 5,000 options upon election or appointment as a new member of the Board of Directors. Each director receives an additional 5,000 options at the close of each annual meeting of stockholders or on the anniversary of their appointment to the Board. Additionally, each director automatically received 2,500 options for each committee of the Board on which the director serves. Options are granted at a price equal to the fair market value of the stock on the date of grant, are exercisable commencing two years following grant, and will expire five years from the date of grant. In the event a person ceases to serve on the Board of Directors, the outstanding options expire one year from the date of cessation of service.
The following table provides information concerning the compensation of our Board members for their services as members of our Board of Directors for the year ended December 31, 2007. The value of the warrant and options described below were calculated in accordance with FAS 123 I
----------------------------------------------------------------------------------------------------------------------
DIRECTOR COMPENSATION
----------------------------------------------------------------------------------------------------------------------
NAME FEES STOCK OPTION NON-EQUITY CHANGE IN ALL OTHER TOTAL
EARNED AWARDS AWARDS INCENTIVE PENSION VALUE COMPENSATION
OR PAID PLAN AND
IN COMPENSATION NONQUALIFIED
CASH DEFERRED
($) COMPENSATION
EARNINGS ($)
($) ($) ($) ($) ($)
(a) (b) I (d) (e) (f) (g) (j)
-------------------------- --------- ---------- ----------- -------------- --------------- ------------- -------------
Joseph V. Vittoria 0 0 0 0 0 0 0
-------------------------- --------- ---------- ----------- -------------- --------------- ------------- -------------
Richard C. Ford (1) 0 0 0 0 0 0 0
-------------------------- --------- ---------- ----------- -------------- --------------- ------------- -------------
Kevin G. Kroger 0 0 0 0 0 0 0
-------------------------- --------- ---------- ----------- -------------- --------------- ------------- -------------
Lieutenant General John 0 0 3,750 0 0 0 3,750
S. Caldwell U.S. Army
(retired) (2)
-------------------------- --------- ---------- ----------- -------------- --------------- ------------- -------------
Forrest D. Hayes (3) 0 0 5,000 0 0 0 5,000
-------------------------- --------- ---------- ----------- -------------- --------------- ------------- -------------
Dominick Telesco (4) 0 0 1,650 0 0 0 1,650
-------------------------- --------- ---------- ----------- -------------- --------------- ------------- -------------
Dr. Charles W. Walton (5) 0 0 3,750 0 0 0 3,750
-------------------------- --------- ---------- ----------- -------------- --------------- ------------- -------------
|
(1) On September 7, 2007 Mr. Ford submitted his resignation as Vice-Chairman and a member of the Board.
(2) On October 10, 2007, General Caldwell was granted options to purchase 7,500 shares of our common stock at an exercise price of $0.37 per share, vesting on August 25, 2008 and expiring on August 25, 2011; and options to purchase 7,500 shares of our common stock at an exercise price of $0.37 per share, vesting on August 25, 2009 and expiring on August 25, 2012.
(3) On October 10, 2007, Mr. Hayes was granted options to purchase 10,000 shares of our common stock at an exercise price of $0.37 per share, vesting on November 10, 2008 and expiring on November 10, 2011; and options to
purchase 10,000 shares of our common stock at an exercise price of $0.37 per share, vesting November 10, 2009 and expiring on November 10, 2012.
(4) On December 19, 2007 Mr. Telesco was granted options to purchase 5,000 shares of our common stock at an exercise price of $0.47 per share, vesting on December 19, 2009 and expiring on December 16, 2012.
(5) On October 10, 2007, Dr. Walton was granted options to purchase 7,500 shares of our common stock at an exercise price of $0.37 per share, vesting on August 25, 2008 and expiring on August 25, 2011; and options to purchase 7,500 shares of our common stock at an exercise price of $0.37 per share, vesting on August 25, 2009 and expiring on August 25, 2012.
COMMITTEES OF THE BOARD OF DIRECTORS
We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. We do not anticipate that any of our stockholders will make such a recommendation in the near future given the small size of our company. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees.
Our Board of Directors has created both an Audit Committee and a Compensation Committee.
AUDIT COMMITTEE
The Audit Committee of the Board of Directors, which operates under a written charter, reviews our financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process including the system of internal controls. The Audit Committee of the Board of Directors is composed of two independent directors, Mr. Hayes (Chairperson) and Dr. Walton. The Board has determined that Mr. Hayes satisfies the criteria as an audit committee financial expert as established by the Securities and Exchange Commission pursuant to Item 407(d)(5) of Regulation S-K. In general, an "audit committee financial expert" is an individual member of the audit committee or Board of Directors who:
o understands generally accepted accounting principles and financial
statements,
o is able to assess the general application of such principles in
connection with accounting for estimates, accruals and reserves,
o has experience preparing, auditing, analyzing or evaluating financial
statements comparable to the breadth and complexity to our financial
statements,
o understands internal controls over financial reporting, and
o understands audit committee functions.
COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors provides overall guidance for officer compensation programs, including salaries and other forms of compensation including all employee stock option grants and warrant grants to non-employees. The members of the Compensation Committee are General Caldwell (Chairperson) and Mr. Hayes, both independent directors. The Compensation Committee does not presently have a written charter however we anticipate that one will be adopted by the Board of Directors during fiscal 2009.
CODE OF ETHICS
We have adopted a Business Ethics and Conflicts of Interest Statement outlining business ethics and conflicts of interest for all officers, directors and employees of our company, including procedures for prompt
internal reporting of violations of the code to the appropriate persons. Our Business Ethics and Conflicts of Interest Statement applies to all directors, officers and employees.
You will find a copy of our Business Ethics and Conflicts of Interest Statement posted on our website at http://www.puradyn.com under Investor Relations, or you may write to us at Puradyn Investor Relations, 2017 High Ridge Road, Boynton Beach, FL 33426 and we will provide a copy to you upon request at no charge.
EXECUTIVE COMPENSATION
The following table summarizes all compensation recorded by us in the last completed year for:
o our principal executive officer or other individual serving
in a similar capacity,
o our two most highly compensated executive officers other than
our principal executive officer who were serving as executive
officers at December 31, 2007 as that term is defined under
Rule 3b-7 of the Securities Exchange Act of 1934, and
o up to two additional individuals for whom disclosure would
have been required but for the fact that the individual was
not serving as an executive officer at December 31, 2007.
For definitional purposes, these individuals are sometimes referred to as the "named executive officers." The value attributable to any warrant or option awards in the following table is computed in accordance with FAS 123R. During each of fiscal 2006 and fiscal 2007, each named executive officer listed below has deferred 50% of their base wages and/or annual increases. The amounts included above reflect wages actually earned during the respective periods.
---------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------------------------------------------------------------
NON-EQUITY NONQUALIFIED ALL
NAME AND STOCK OPTION INCENTIVE PLAN DEFERRED OTHER
PRINCIPAL YEAR SALARY BONUS AWARDS AWARDS COMPENSATION COMPENSATION COMPENSATION TOTAL
POSITION ($) ($) ($) ($) ($) EARNINGS ($) ($) ($)
(A) (B) I (D) (E) (F) (G) (H) (I) (J)
-------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
-------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
Joseph V. 2007 0 0 0 0 0 0 0 0
Vittoria (1)
-------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
2006 0 0 0 0 0 0 0 0
-------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
-------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
Richard Ford 2006 196,575 0 6,300 85,750 0 0 9,743 298,368
(2)
-------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
-------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
Kevin Kroger 2007 186,315 0 0 0 0 0 21,089 207,404
(3)
-------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
2006 195,270 0 5,565 0 0 0 24,714 225,549
-------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
-------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
Alan Sandler 2007 112,238 0 0 0 0 0 0 112,238
(4)
-------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
2006 108,308 0 2,520 0 0 0 0 110,828
-------------- ------- --------- -------- ---------- --------- ---------------- ---------------- ----------------- --------
|
(1) On October 24, 2006, Mr. Vittoria, who is also the Chairman of our Board of Directors, was appointed by the Board of Directors to the position of Chief Executive Officer. Mr. Vittoria serves in that position on a non-salaried basis.
(2) Mr. Ford served as our CEO through October, 2006. Mr. Ford's compensation for fiscal 2006 included 6,000 shares of our common stock, with a value of $1.05 per share at the time of issuance, which were granted as additional compensation. In addition, on October 24, 2006, we extended the expiration of options previously awarded to Mr. Ford purchase an aggregate of 375,000 shares of our common stock with exercise prices ranging from $0.21 per share to $0.94 per share from November 30, 2006 to November 30, 2008. Pursuant to FAS 123R there was an expense of $85,750 to us as a result of this modification. All Other Compensation in the foregoing table represents the aggregate dollar amount of a car allowance received by Mr. Ford during fiscal 2006.
(3) Mr. Kroger serves as our Chief Operating Officer. Mr. Kroger's compensation for fiscal 2006 includes 5,300 shares of our common stock with a value of $1.05 per share at the time of issuance. All Other Compensation in the foregoing table represents the aggregate dollar amount of a car allowance received by Mr. Kroger during each fiscal year as well as the amount of disability and life insurance premiums we pay on his behalf.
(4) Mr. Sandler serves as our Chief Administrative Officer. Mr. Sandler's fiscal 2006 compensation includes 2,400 shares of our common stock with a value of $1.05 per share at the time of issuance.
HOW OUR EXECUTIVE OFFICERS COMPENSATION IS DETERMINED
Mr. Vittoria, who has served as our Chief Executive Officer since October 2006, is not a party to an employment agreement with our company. He receives no compensation and does not participate in any of our insurance plans.
On July 3, 2000, we entered into an employment agreement, with an initial term of three years, with Mr. Kroger, who serves as our President and Chief Operating Officer. The contract provided for an annual salary of $166,000, subject to annual review by the Board of Directors, and minimum bonuses of $50,000, $80,000 and $80,000, respectively, for the years 2000 through 2002. Mr. Kroger is also entitled to paid health insurance, a life insurance and disability policy, a $1,000 per month car allowance, four weeks paid vacation and other executive benefits which may be made available from time to time. Upon entering into the agreement we granted Mr. Kroger 10 year options to purchase 300,000 shares of our common stock at the then fair market value of our common stock which vested in equal installments on the first, second, third and fourth anniversary date of the agreement. The agreement also contains customary indemnification, non-compete, confidentiality and invention assignment clauses. The term of the agreement continues on a year-to-year basis on the same terms and conditions as were in effect at the time of renewal. The agreement may be terminated by us upon Mr. Kroger's death or disability, by us for good cause as defined in the agreement, or by either party without cause. In the event the agreement is terminated on Mr. Kroger's death, by us for cause or by him without cause, we do not owe any severance benefits. If the agreement is terminated as a result of his disability, we are required to pay him a lump sum equal to the greater of the base salary then in effect for the remaining term of the agreement or for one year. If the agreement is terminated by us without cause or by Mr. Kroger in the event of a change of control of our company, we are required to pay him a lump sum equal to the greater of the base salary then in effect for the remaining term of the agreement or for one year, together with any declared but unpaid bonus. On December 23, 2002, the agreement was amended to provide that he was issued options to purchase 100,000 shares of common stock in lieu of the $80,000 bonus due on December 31, 2002.
Mr. Sandler, who has served as our Chief Administrative Officer since January 2000, is not a party to an employment agreement with our company. His compensation was determined by the Compensation Committee of our Board of Directors. The Compensation Committee considered a number of factors in determining Mr. Sandler's compensation including the scope of his duties and responsibilities to our company and the time he devotes to our business. The Compensation Committee did not consult with any experts or other third parties in determining the amount of Mr. Sandler's compensation. During the fiscal year 2007 Mr. Sandler's compensation package included a base annual salary of $112,000, with approximately $62,000 deferred annually, and company provided insurance benefits. The amount of payable to Mr. Sandler can be increased at any time upon the determination of the Compensation Committee of our Board of Directors.
INCENTIVE AND NON-QUALIFIED STOCK OPTION PLANS
The Board of Directors adopted the 2000 Non-Employee Directors' Plan (the "Directors' Plan") on November 8, 2000 under which options to purchase 400,000 shares have been authorized for issuance. The Directors' Plan will provide a means for us to attract and retain highly qualified persons to serve as non-employee directors and advisory directors.
Each member of the Board of Directors was automatically granted 5,000 options at the date of commencement of the Directors' Plan and on their initial election as new members to the Board of Directors. Each director receives an additional 5,000 options at the close of each annual meeting of stockholders. Additionally, each director automatically receives 2,500 options for each committee of the Board on which the director serves. Options are granted at a price equal to the fair market value of the stock on the date of grant, are exercisable commencing
two years following grant, and will expire five years from the date of grant. In the event a person ceases to serve on the Board of Directors, the outstanding options expire one year from the date of cessation of service. The Board of Directors administers the Directors' Plan.
Our 1999 Stock Option Plan (the "1999 Plan") and the 1996 Stock Option Plan (the "1996 Plan"), were adopted on September 15, 1999 and amended in June 2000, and on July 31, 1996, respectively. The plans were adopted to increase proprietary interest in our company of our employees, consultants, and non-employee directors and to align more closely their interests with the interests of our stockholders. The plans may also serve to enhance our ability to attract and retain the services of experienced and highly qualified employees and non-employee directors.
Under the 1999 Plan and 1996 Plan, we reserved an aggregate of 3,000,000 and 2,200,000 shares, respectively, of common stock for issuance pursuant to options granted under the plans. The Compensation Committee of the Board of Directors administers the plans including, without limitation, the selection of the persons who will be granted plan options under the plans, the type of plan options to be granted, the number of shares subject to each plan option and the plan option price.
Options granted under the 1996 Plan and the 1999 Plan may either be options qualifying as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified options. In addition, the plans also allow for the inclusion of a reload option provision, which permits an eligible person to pay the exercise price of the plan option with shares of common stock owned by the eligible person and receive a new plan option to purchase shares of common stock equal in number to the tendered shares. Any incentive option granted under the plans must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of such grant, but the exercise price of any incentive option granted to an eligible employee owning more than 10% of our common stock must be at least 110% of such fair market value as determined on the date of the grant. The term of each plan option and the manner in which it may be exercised is determined by the Board of the Directors or the Committee, provided that no plan option may be exercisable more than 10 years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of our common stock, no more than five years after the date of the grant.
The exercise price of non-qualified options is determined by the Board of Directors or the Committee and cannot be less than the par value of our common stock. The per share purchase price of shares subject to plan options granted under the plans may be adjusted in the event of certain changes in our capitalization, but any such adjustment will not change the total purchase price payable upon the exercise in full of plan options granted under the plans. Our officers, directors, key employees and consultants are eligible to receive non-qualified options under the plans. Only our officers, directors and employees who are employed by us are eligible to receive incentive options.
All plan options are generally nonassignable and nontransferable, except by will or by the laws of descent and distribution, and during the lifetime of the optionee, may be exercised only by such optionee. If an optionee's employment is terminated for any reason, other than his death or disability or termination for cause, or if an optionee is not our employee but is a member of our Board of Directors and his service as a director is terminated for any reason, other than death or disability, the plan option granted to him generally will lapse to the extent unexercised on the earlier of the expiration date or one year following the date of termination. If the optionee dies during the term of his employment, the plan option granted to him generally will lapse to the extent unexercised on the earlier of the expiration date of the plan option or the date one year following the date of the optionee's death. If the optionee is permanently and totally disabled within the meaning of Section 22 (c)(3) of the Internal Revenue Code of 1986, the plan option granted to him generally lapses to the extent unexercised on the earlier of the expiration date of the option or one year following the date of such disability.
The Board of Directors or the Committee may amend, suspend or terminate the plans at any time, except that no amendment shall be made which:
o increases the total number of shares subject to the plans or
changes the minimum purchase price therefore (except in either
case in the event of adjustments due to changes in ours
capitalization),
o extends the term of any plan option beyond 10 years, or
o extends the termination date of the plan.
The 1996 Plan terminated on July 31, 2006. As of September 30, 2008 options to purchase 400,150 which were granted under the 1996 Plan prior to its termination remain outstanding. Unless the plan has been suspended or terminated by the Board of Directors, the 1999 Plan will terminate on September 15, 2009. Any such termination will not affect the validity of any plan options previously granted thereunder.
As of December 31, 2007, under the Directors' Plan, options to purchase 85,000 shares of common stock were outstanding. As of December 31, 2007, under the 1996 Plan, incentive stock options to purchase 108,232 shares of common stock were outstanding and non-qualified options to purchase 394,418 shares of common stock were outstanding and, under the 1999 Plan, incentive stock options to purchase 1,099,250 shares of common stock were outstanding and non-qualified options to purchase 80,000 shares of common stock were outstanding.
The following table provides information concerning unexercised options; stock that has not vested; and equity incentive plan awards for each named executive officer outstanding as of December 31, 2007:
---------------------------------------------------------------------------------------------------------------------------------
EQUITY
NUMBER INCENTIVE EQUITY
OF PLAN INCENTIVE
EQUITY SHARES AWARDS: PLAN AWARDS:
INCENTIVE OR MARKET NUMBER OF MARKET OR
PLAN AWARDS: UNITS VALUE OF UNEARNED PAYOUT VALUE
NUMBER OF NUMBER OF NUMBER OF OF SHARES SHARES, OF UNEARNED
SECURITIES SECURITIES SECURITIES STOCK OR UNITS UNITS OR SHARES,
UNDERLYING UNDERLYING UNDERLYING THAT OF STOCK OTHER UNITS OR
UNEXERCISED UNEXERCISED UNEXERCISED OPTION OPTION HAVE THAT RIGHTS OTHER RIGHTS
OPTIONS OPTIONS UNEARNED EXERCISE EXPIRATION NOT HAVE NOT THAT HAVE THAT HAVE
NAME (#) (#) OPTIONS PRICE DATE VESTED VESTED NOT VESTED NOT VESTED
EXERCISABLE UNEXERCISABLE (#) ($) (#) ($) (#) (#)
(A) (B) I (D) (E) (F) (G) (H) (I) (J)
----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
Joseph V. 125,000 2.25 3/28/08
Vittoria
----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
150,000 2.00 2/02/09
----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
100,000 0.95 4/13/10
----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
80,000 1.25 11/15/11
----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
Richard 100,000 0.21 11/30/08
Ford
----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
100,000 0.56 11/30/08
----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
175,000 0.94 11/30/08
----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
Kevin 100,000 1.70 1/10/13
Kroger
----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
300,000 9.25 7/03/10
----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
Alan 0 n/a n/a
Sandler
----------- -------------- --------------- -------------- --------- ------------- -------- ---------- ------------ --------------
|
LIMITATION ON LIABILITY
Under our certificate of incorporation, our directors are not liable for monetary damages for breach of fiduciary duty, except in connection with:
o breach of the director's duty of loyalty to us or our stockholders;
o acts or omissions not in good faith or which involve intentional misconduct, fraud or a knowing violation of law;
o a transaction from which our director received an improper benefit; or
o an act or omission for which the liability of a director is expressly provided under Delaware law.
In addition, our bylaws provides that we must indemnify our officers and directors to the fullest extent permitted by Delaware law for all expenses incurred in the settlement of any actions against such persons in connection with their having served as officers or directors.
Insofar as the limitation of, or indemnification for, liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, or persons controlling us pursuant to the foregoing, or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, such limitation or indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 2001, we received promissory notes from two of our officers, Messrs. Richard C. Ford and Alan J. Sandler, for the exercise of their vested stock options in the amount of $875,256 and bearing interest of 5.63%. The principal and accrued interest are due upon the earlier of the expiration of the original option periods, which range from July 2008 to December 2009, or upon the sale of the common stock acquired by the execution of the options. During 2007, we recorded approximately $99,000 of interest reserves relating to these stockholder notes.
In July 2008, we extended the expiration date by six months of a loan of $123,750 which bears interest at 5.63% per annum and is collateralized by 300,000 shares of our common stock, made to Mr. Ford, a former executive officer and director, in July 2001. As extended, the loan matures on January 8, 2009.
In July 2008 we agreed to receive from Mr. Sandler, an executive officer, a stock certificate for 260,000 shares of our common stock which served as collateral for a loan in the principal amount of $97,500 made to him in July 2001 as satisfaction for the principal amount of the loan. Accrued but unpaid interest in the amount of $38,000 at June 30, 2008 remains outstanding.
On March 28, 2002, we executed a letter agreement with Mr. Vittoria, our CEO and Chairman, whereby he agreed to initially fund up to $2.5 million. The letter agreement, as currently amended, provides that he will fund up to $6.1 million to us on a unsecured basis. Amounts drawn bear interest at the prime rate per annum payable monthly and are due December 31, 2009or (i) at such time as we have raised an additional $7 million over the $3.5 million raised in prior offerings, or (ii) at such time as we are operating within sufficient cash flow parameters to sustain operations, or (iii) until a disposition of our company, such as an acquisition or merger, occurs. In consideration entering into this loan agreement, we granted Mr. Vittoria common stock purchase warrants to purchase a total of 475,000 shares of our common stock at an exercise price equal to the closing market price on the dates of grant. As of June 30, 2008, we have drawn the entire $6.1 million of the available funds, together with an additional $100,000 and paid approximately $157,000 in related interest.
PRINCIPAL STOCKHOLDERS
At October 29, 2008 we had 35,005,018 shares of our common stock issued and outstanding. The following table sets forth information regarding the beneficial ownership of our common stock as of October 29, 2008 by:
o each person known by us to be the beneficial owner of more
than 5% of our common stock;
o each of our directors;
o each of our named executive officers; and
o our named executive officers, directors and director nominees
as a group.
Unless otherwise indicated, the business address of each person listed is in care of 2017 High Ridge Road, Boynton Beach, Florida 33426. The percentages in the table have been calculated on the basis of treating as
outstanding for a particular person, all shares of our common stock outstanding on that date and all shares of our common stock issuable to that holder in the event of exercise of outstanding options, warrants, rights or conversion privileges owned by that person at that date which are exercisable within 60 days of that date. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of our common stock owned by them, except to the extent that power may be shared with a spouse.
-------------------------------------------------------------------------- --------------------------- -------------
AMOUNT AND NATURE OF % OF CLASS
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP
-------------------------------------------------------------------------- --------------------------- -------------
-------------------------------------------------------------------------- --------------------------- -------------
Joseph V. Vittoria (1) 5,364,226 15.0%
-------------------------------------------------------------------------- --------------------------- -------------
Kevin G. Kroger (2) 1,092,633 3.1%
-------------------------------------------------------------------------- --------------------------- -------------
Alan J. Sandler (3) 58,392 *
-------------------------------------------------------------------------- --------------------------- -------------
Cindy Lea Gimler (4) 60,250 *
-------------------------------------------------------------------------- --------------------------- -------------
Lieutenant General John S. Caldwell, Jr. US Army (retired)(5) 65,000 *
-------------------------------------------------------------------------- --------------------------- -------------
Forrest D. Hayes (6) 20,000 *
-------------------------------------------------------------------------- --------------------------- -------------
Dominick Telesco (7) 4,042,085 11.4%
-------------------------------------------------------------------------- --------------------------- -------------
Dr. Charles W. Walton (8) 415,357 1.2%
-------------------------------------------------------------------------- --------------------------- -------------
All officers and directors as a group (eight persons) 11,117,943 30.3%
(1)(2)(3)(4)(5)(6)(7)(8)
-------------------------------------------------------------------------- --------------------------- -------------
Quantum Industrial Partners, LDC (9) 4,570,000 13.1%
-------------------------------------------------------------------------- --------------------------- -------------
Glenhill Capital Management, LP (10) 4,364,661 12.4%
-------------------------------------------------------------------------- --------------------------- -------------
Richard C. Ford (11) 3,606,651 10.2%
-------------------------------------------------------------------------- --------------------------- -------------
|
* represents less than 1%
(1) The number of shares beneficially owned by Mr. Vittoria includes:
o warrants to purchase 150,000 shares of common stock at $2.00 per
share through February 2, 2009;
o warrants to purchase 100,000 shares of common stock at $0.95 per
share through April 14, 2010;
o warrants to purchase 80,000 shares of common stock at $1.25 per
share through November 15, 2011;
o warrants to purchase 150,000 shares of common stock at $1.25 per
share through March 24, 2013;
o warrants to purchase 71,429 shares of common stock at $1.25 per
share through March 26, 2013;
o warrants to purchase 80,645 shares of common stock at $1.25 per
share through April 4, 2013; and
o warrants to purchase 86,207 shares of common stock at $1.25 per
share through May 9, 2013.
(2) The number of shares beneficially owned by Mr. Kroger includes:
o options to purchase 300,000 shares of common stock at $9.25 per
share through July 3, 2010; and
o options to purchase 100,000 shares of common stock at $1.70 per
share through January 10, 2013.
The number of shares beneficially owned by Mr. Kroger excludes unvested options to purchase 100,000 shares of our common stock at an exercise price of $.26 per share through June 10, 2018.
(3) The number of shares beneficially owned by Mr. Sandler excludes unvested options to purchase 100,000 shares of our common stock at an exercise price of $.26 per share through June 10, 2018 and unvested options to purchase 100,000 shares of our common stock at an exercise price of $.30 per share through August 5, 2018.
(4) The number of shares beneficially owned by Ms. Gimler includes:
o options to purchase 50,000 shares of common stock at $0.93 per
share through February 28, 2015; and
o options to purchase 6,500 shares of common stock at $0.40 per
share through September 26, 2017.
The number of shares beneficially owned by Ms. Gimler excludes unvested options to purchase 18,750 shares of our common stock at an exercise price of $.40 per share through September 26, 2017.
(5) The number of shares beneficially owned by General Caldwell includes:
o options to purchase 5,000 shares of common stock at $0.42 per
share through August 25, 2010;
o options to purchase 2,500 shares of common stock at $0.68 per
share through November 30, 2010;
o options to purchase 7,500 shares of common stock at $0.37 per
share through August 25, 2011; and
o options to purchase 50,000 shares of common stock at $0.97 per
share through March 9, 2015.
The number of shares beneficially owned by General Caldwell excludes unvested options to purchase 7,500 shares of common stock at $0.37 per share through August 25, 2012 and unvested options to purchase 7,500 shares of common stock at $0.38 per share through September 22, 2013.
(6) The number of shares beneficially owned by Mr. Hayes includes:
o options to purchase 7,500 shares of common stock at $1.00 per
share through November 10, 2010;
o options to purchase 2,500 shares of common stock at $0.68 per
share through November 30, 2010; and
o options to purchase 10,000 shares of common stock at $0.37 per
share through November 10, 2011.
The number of shares beneficially owned by Mr. Hayes excludes unvested options to purchase 10,000 shares of common stock at $0.37 per share through November 10, 2012 and unvested options to purchase 10,000 shares of common stock at $.38 per share through September 22, 2013.
(7) The number of shares beneficially owned by Mr. Telesco includes:
o warrants to purchase 100,000 shares of common stock at $1.25 per
share through October 1, 2011;
o warrants to purchase 150,000 shares of common stock at $1.25 per
share through March 24, 2013.;
o warrants to purchase 81,967 shares of common stock at $1.25 per
share through May 14, 2013;
o warrants to purchase 92,593 shares of common stock at $1.25 per
share through July 1, 2013; and
o options to purchase 5,000 shares of common stock at $.66 per
share through December 18, 2011.
The number of shares beneficially owned by Mr. Telesco excludes unvested options to purchase 5,000 shares of common stock at $0.47 per share through December 17, 2012.
(8) The number of shares beneficially owned by Dr. Walton includes:
o options to purchase 5,000 shares of common stock at $0.42 per
share through August 25, 2010;
o options to purchase 2,500 shares of common stock $0.68 per share
through November 30, 2010;
o warrants to purchase 21,429 shares of common stock at $1.25 per
share through October 1, 2011; and
o options to purchase 7,500 shares of common stock at $0.37 per
share through August 25, 2011.
The number of shares beneficially owned by Dr. Walton excludes unvested options to purchase 7,500 shares of common stock at $0.37 per share through August 25, 2012 and options to purchase 7,500 shares of common stock at $0.38 per share through September 22, 2013.
(9) The address for Quantum Industrial Partners, LTDC is c/o Curacao Corporation Company, N.V., Kaya Flamboyan, Willenstad Curacao, Netherlands, Antilles.
(10) The address for Glenhill Capital Management, LP is 598 Madison Avenue, 12th Floor, New York, NY 10022. The number of shares beneficially owned by Glenhill Capital Management, LP includes warrants to purchase 89,286 shares of common stock at $1.25 per share through October 1, 2011.
(11) Mr. Ford's address is 4720 S. Ocean Blvd. Highland Beach, Florida 33487. The number of shares beneficially owned by Mr. Ford includes:
o options to purchase 100,000 shares of common stock at $0.56 per
share through November 30, 2008;
o options to purchase 100,000 shares of common stock at $0.21 per
share through November 30, 2008; and
o options to purchase 175,000 shares of common stock at $0.94 per
share through November 30, 2008.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth securities authorized for issuance under equity compensation plans, including individual compensation arrangements, by us at December 31, 2007.
------------------------------------------------------------- ----------------- ------------------ -------------------
NUMBER OF WEIGHTED AVERAGE NUMBER OF
SECURITIES TO EXERCISE PRICE SECURITIES
BE ISSUED UPON OF OUTSTANDING REMAINING
EXERCISE OF OPTIONS, AVAILABLE FOR
OUTSTANDING WARRANTS AND FUTURE ISSUANCE
OPTIONS, RIGHTS (B) UNDER EQUITY
WARRANTS AND COMPENSATION
RIGHTS (A) PLANS (EXCLUDING
SECURITIES
REFLECTED IN
COLUMN (A)) (C)
------------------------------------------------------------- ----------------- ------------------ -------------------
PLAN CATEGORY
------------------------------------------------------------- ----------------- ------------------ -------------------
Plans approved by stockholders:
------------------------------------------------------------- ----------------- ------------------ -------------------
1996 Stock Option Plan 502,650 $1.61 1,697,350
------------------------------------------------------------- ----------------- ------------------ -------------------
1999 Stock Option Plan 1,179,250 $3.26 1,820,750
------------------------------------------------------------- ----------------- ------------------ -------------------
2000 Non-Employee Directors Plan 85,000 $0.48 315,000
------------------------------------------------------------- ----------------- ------------------ -------------------
Plans not approved by stockholders 0 n/a n/a
------------------------------------------------------------- ----------------- ------------------ -------------------
|
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 40,000,000 shares of common stock, $0.001 par value per share, and 50,000 shares of preferred stock, par value $0.001 per share. As of October 29, 2008, there were 35,005,018 shares of common stock and no shares preferred stock issued and outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of common stock do not have cumulative voting rights. Holders of common stock are entitled to share in all dividends that the Board of Directors, in its discretion, declares from legally available funds. In the event of our liquidation, dissolution or winding up, subject to the preferences of any shares of preferred stock which may then be authorized and outstanding, each outstanding share entitles its holder to participate in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the common stock.
Holders of common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions for the common stock. The rights of the holders of common stock are subject to any rights that may be fixed for holders of preferred stock, when and if any preferred stock is authorized and issued. All outstanding shares of common stock are duly authorized, validly issued, fully paid and non-assessable.
PREFERRED STOCK
We are authorized to issue 500,000 shares of preferred stock issuable in such series and bearing such voting, dividend, conversion, liquidation and other rights and preferences as the Board of Directors may determine. The preferred stock is so-called "blank check" preferred stock, which means that our Board of Directors, in its sole
discretion, are able to issue the shares of preferred stock in one or more series of classes having such terms, designations and preferences as determined by the Board of Directors and without authorization or confirmation by our stockholders.
COMMON STOCK PURCHASE WARRANTS
We currently have outstanding common stock purchase warrants to purchase an aggregate of 3,005,739 shares of our common stock at exercise prices ranging from $0.75 per share to $2.00 per share. These warrants expire between February 2, 2009 and October 1, 2013. The exercise price of the warrants is subject to pro-rata adjustment in the event of stock splits, recapitalizations and similar corporate events.
TRANSFER AGENT
Our transfer agent is Florida Atlantic Stock Transfer, Inc., 7130 Nob Hill Road, Tamarac, Florida 33321, and its telephone number is (954) 726-4954.
SHARES ELIGIBLE FOR FUTURE SALE
At October 29, 2008 we had 35,005,018 shares of common stock issued and outstanding, of which approximately 5,864,380 shares are "restricted securities." In general, under Rule 144, as currently in effect, a person, or person whose shares are aggregated, who is not our affiliate or has not been an affiliate during the prior three months and owns shares that were purchased from us, or any affiliate, at least six months previously, is entitled to make unlimited public resales of such shares provided there is current public information available at the time of the resales. After a one-year holding period a non-affiliate is entitled to make unlimited public resales of our shares without the requirement that current public information be available at the time of the resales. A person, or persons whose shares are aggregated, who are affiliates of our company and own shares that were purchased from us, or any affiliate, at least six months previously is entitled to sell within any three month period, a number of shares of our common stock that does not exceed the greater of 1% of the then outstanding shares of our common stock, subject to manner of sale provisions, notice requirements and the availability of current public information about us.
Future sales of restricted common stock under Rule 144 could negatively impact the market price of our common stock. We are unable to estimate the number of shares that may be sold in the future by our existing stockholders or the effect, if any, that sales of shares by such stockholders will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of our common stock by existing stockholders could adversely affect prevailing market prices.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be passed upon for us by Schneider Weinberger & Beilly LLP.
EXPERTS
Our financial statements as of and for the years ended December 31, 2007 and 2006 included in this prospectus have been audited by Webb & Company, P.A., independent registered public accounting firm, as indicated in their report with respect thereto, and have been so included in reliance upon the report of such firm given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission the registration statement on Form S-1 under the Securities Act of 1933 for the common stock offered by this prospectus. This prospectus, which is a part of the registration statement, does not contain all of the information in the registration statement and the exhibits filed with it, portions of which have been omitted as permitted by Securities and Exchange Commission rules and regulations. For further information concerning us and the securities offered by this prospectus, we refer to the registration statement and to the exhibits filed with it. Statements contained in this prospectus as to the content of any contract or
other document referred to are not necessarily complete. In each instance, we refer you to the copy of the contracts and/or other documents filed as exhibits to the registration statement.
We file annual and special reports and other information with the Securities and Exchange Commission. Certain of our filings are available over the Internet at the Securities and Exchange Commission's web site at http://www.sec.gov. You may also read and copy any document we file with the Securities and Exchange Commission at its public reference facilities:
Public Reference Room Office 100 F Street, N.E.
Room 1580
Washington, D.C. 20549
You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the Securities and Exchange Commission at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Callers in the United States can also call 1-202-551-8090 for further information on the operations of the public reference facilities.
Puradyn Filter Technologies Incorporated Condensed Consolidated Balance Sheets As of June 30, 2008 and December 31, 2007
Assets JUNE 30, DECEMBER 31,
2008 2007
(UNAUDITED) (AUDITED)
------------ ------------
Current assets:
Cash and cash equivalents $ 324,223 $ 112,270
Accounts receivable, net of allowance for uncollectible accounts of $21,041
and $46,870 respectively 515,230 382,279
Inventories, net 1,563,947 1,475,380
Prepaid and other current assets 280,943 181,648
------------ ------------
Total current assets 2,684,343 2,151,577
Property and equipment, net 140,894 162,838
Deferred financing costs, net 12,629 18,522
Other noncurrent assets 40,930 40,930
------------ ------------
Total Other Assets 194,453 222,290
============ ============
Total assets $ 2,878,796 $ 2,373,867
============ ============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 335,696 $ 594,372
Accrued liabilities 1,141,263 1,054,071
Current portion of capital lease obligation 1,398 1,048
Deferred revenue 140,139 136,169
------------ ------------
Total current liabilities 1,618,496 1,785,660
Notes Payable - stockholder 6,150,000 6,250,000
Capital lease obligation, less current portion 6,323 7,139
------------ ------------
Total Long Term Liabilities 6,156,323 6,257,139
Total Liabilities 7,774,819 8,042,799
------------ ------------
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 - 34,428,888 and 29,400,638 respectively 34,429 29,401
Additional paid-in capital 42,963,955 41,329,330
Notes receivable from stockholders (1,064,031) (1,064,031)
Accumulated deficit (46,694,325) (45,825,210)
Accumulated other comprehensive loss (136,051) (138,422)
------------ ------------
Total stockholders' deficit (4,896,023) (5,668,932)
------------ ------------
Total liabilities and stockholders' deficit $ 2,878,796 $ 2,373,867
============ ============
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Puradyn Filter Technologies Incorporated Condensed Consolidated Statements of Operations For the Three Months and Six Months Ended June 30, 2008 and 2007
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2008 2007 2008 2007
------------- ------------- ------------ -------------
Net sales $ 791,781 $ 786,990 $ 1,555,206 $ 1,553,187
Costs and expenses:
Cost of products sold 641,537 702,301 1,266,866 1,350,273
Salaries and wages 250,877 264,768 506,930 525,573
Selling and administrative 221,279 196,564 483,678 564,735
------------- ------------- ------------ -------------
1,113,693 1,163,633 2,257,474 2,440,581
------------- ------------- ------------ -------------
Loss from operations (321,912) (376,643) (702,268) (887,394)
Other income (expense):
Interest income 595 9,448 1,329 21,918
Interest expense (77,323) (130,505) (168,176) (343,139)
------------- ------------- ------------ -------------
Total other expense, net (76,728) (121,057) (166,847) (321,221)
------------- ------------- ------------ -------------
Loss before income taxes (398,640) (497,701) (869,115) (1,208,614)
Income tax expense -- -- -- --
------------- ------------- ------------ -------------
Net loss $ (398,640) $ (497,701) $ (869,115) $ (1,208,614)
============= ============= ============ =============
Basic and diluted loss per common share $ (.01) $ (.02) $ (.03) $ (.04)
============= ============= ============ =============
Weighted average common shares outstanding (basic
and diluted) 32,447,852 27,514,923 31,250,226 27,440,407
============= ============= ============ =============
|
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Puradyn Filter Technologies Incorporated Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2008 and 2007
(Unaudited)
SIX MONTHS ENDED JUNE 30,
2008 2007
----------- -----------
OPERATING ACTIVITIES
Net loss $ (869,115) $(1,208,614)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 34,498 46,414
Gain on sale of assets -- 577
Provision for bad debts (25,829) 40,197
Provision for obsolete and slow moving inventory 2,786 12,425
Amortization of deferred financing costs included in interest expense 5,893 12,966
Interest receivable from notes receivable from stockholders -- 81,195
Compensation expense on stock-based arrangements with employees,
consultants, investors and vendors 20,653 9,446
Compensation expense on stock-based arrangements with investors and
directors 45,000 --
Changes in operating assets and liabilities:
Accounts receivable (107,121) 77,035
Inventories (91,353) (10,117)
Prepaid expenses and other current assets (99,296) (39,310)
Accounts payable (258,676) (30,834)
Accrued liabilities 87,193 81,866
Deferred revenues 3,969 15,931
----------- -----------
Net cash used in operating activities (1,251,398) (910,823)
INVESTING ACTIVITIES
Proceeds from sale of property and equipment -- 5,458
Purchases of property and equipment (14,487) (28,390)
----------- -----------
Net cash used in investing activities (14,487) (22,932)
FINANCING ACTIVITIES
Proceeds from sale of common stock 1,474,000 975,000
Proceeds from exercise of stock options -- 28,500
Proceeds from issuance of notes payable to stockholders -- 808,500
Payment of notes payable to stockholder -- (780,000)
Payment of capital lease obligations (2,002) (3,379)
----------- -----------
Net cash provided by financing activities 1,471,998 1,028,621
Effect of exchange rate changes on cash and cash equivalents 5,840 (36,566)
----------- -----------
Net (decrease) increase in cash and cash equivalents 211,953 58,300
Cash and cash equivalents at beginning of period 112,270 55,175
----------- -----------
Cash and cash equivalents at end of period $ 324,223 $ 113,475
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 198,455 $ 253,652
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Note Payable of $620,000 converted to stockholder's equity $ 620,000 --
=========== ===========
|
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Puradyn Filter Technologies Incorporated Condensed Consolidated Statements of Changes in Stockholders' Deficit Six Months ended June 30, 2008
(Unaudited)
NOTES ACCUMULATED
COMMON STOCK ADDITIONAL RECEIVABLE OTHER TOTAL
--------------------- PAID-IN FROM ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT INCOME (LOSS) DEFICIT
---------- -------- ------------ ------------ ------------- ------------- ------------
Balance at December 31, 2007 29,400,638 $ 29,401 $ 41,329,330 $ (1,064,031) $ (45,825,210) $ (138,422) $ (5,668,932)
Foreign currency
translation
adjustment 2,371 2,371
Net loss (869,115) (869,115)
------------
Total comprehensive loss (866,744)
Stock issued for private
placement 5,028,250 5,028 1,568,972 1,574,000
Compensation expense on
stock-based
arrangements with
investors and
directors 45,000 45,000
Compensation expense
associated with
unvested options 20,653 20,653
---------- -------- ------------ ------------ ------------- ------------- ------------
Balance at June 30, 2008 34,428,888 $ 34,429 $ 42,963,955 $ (1,064,031) $ (46,694,325) $ (136,051) $ (4,896,023)
========== ======== ============ ============ ============= ============= ============
|
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Puradyn Filter Technologies Incorporated
Notes to Condensed Consolidated Financial Statements June 30, 2008
(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-Q and Regulation S-K. 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 six-month periods ended June 30, 2008 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2008.
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, 2007.
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 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, 2007 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 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 2008. Additionally, the Company is reviewing cost of material increases, some of which were passed through to its customers as product price increases, beginning January 2008. 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 4,026,114 and 4,799,606 for the three-month and six-month periods ended June 30, 2008 and 3,231,543 for the three-month and six-month periods ended June 30, 2007.
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 June 30, 2007 and June 30, 2008 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 June 30, 2008 and December 31, 2007:
JUNE 30, DECEMBER 31,
2008 2007
----------- -----------
Raw materials $ 851,707 $ 780,979
Finished goods 799,583 779,005
Valuation allowance (87,343) (84,604)
----------- -----------
$ 1,563,947 $ 1,475,380
=========== ===========
|
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 $2,105 and $4,631 for the three-months ended June 30, 2008 and June 30, 2007 and $5,893 and $12,966 for the six-months ended June 30, 2008 and 2007, respectively. Accumulated amortization of deferred financing costs as of June 30, 2008 and 2007 was $668,521 and $653,367, respectively.
Revenue Recognition
The Company recognizes revenue from product sales to customers, distributors and resellers when products that do not require further services or installation by the Company are shipped, when there are no uncertainties surrounding customer acceptance and when collectibility is reasonably assured in accordance with Staff Accounting Bulletin No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (SAB 104), as amended and interpreted. Cash received by the Company prior to shipment is recorded as deferred revenue. Sales are made to customers under terms allowing certain limited rights of return and other limited product and performance warranties for which provision has been made in the accompanying condensed consolidated financial statements.
Amounts billed to customers in sales transactions related to shipping and handling, represent revenues earned for the goods provided and are included in net sales. Costs of shipping and handling are included in cost of products sold.
Product Warranty Costs
As required by FASB Interpretation No. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS (FIN 45), the Company is including the following disclosure applicable to its product warranties.
The Company accrues for warranty costs based on the expected material and labor costs to provide warranty replacement products. The methodology used in determining the liability for warranty cost is based upon historical information and experience. The Company's warranty reserve is calculated as the gross sales multiplied by the historical warranty expense return rate.
The following table shows the changes in the aggregate product warranty liability for the six-months ended June 30, 2008:
Balance as of December 31, 2007 $ 89,809
Less: Payments made (7,138)
Change in prior period estimate 355
Add: Provision for current period warranties 29,093
----------
Balance as of June 30, 2007 $ 112,119
==========
|
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 June 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 six-months ended June 30, 2007 and 2006:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2008 2007 2008 2007
----------- ----------- ----------- -----------
Net loss $ (398,640) $ (497,701) $ (869,115) $(1,208,614)
Other comprehensive income (loss):
Foreign currency translation adjustment 658 (30,821) 2,371 (34,928)
----------- ----------- ----------- -----------
Comprehensive loss $ (397,982) $ (528,522) $ (866,744) $(1,243,542)
=========== =========== =========== ===========
|
New Accounting Standards
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51". This statement improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require; the ownership interests in subsidiaries held by parties other than the parent and the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income, changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value, entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 affects those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The adoption of this statement is not expected to have a material effect on the Company's financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161). This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity's derivative instruments and hedging activities and their effects on the entity's financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS 133. "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) as well as related hedged items, bifurcated derivatives, and nonderivative instruments that are designed and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS 161 is effective prospectively for financial statements issue for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. We are currently evaluating the disclosure implications of this statement.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles." SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS 162 is effective 60 days following the SEC's approval of PCAOB Auditing Standard No. 6, Evaluating Consistency of Financial Statements (AS/6). The adoption of FASB 162 is not expected to have a material impact on the Company's financial position.
In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60." Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. This results in inconsistencies in the recognition and measurement of claim liabilities. This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of FASB 163 is not expected to have a material impact on the Company's financial position.
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 $1,251,000 and $911,000 during the six-months ended June 30, 2008 and 2007, 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, 2007 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 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 2008. Additionally, the Company is reviewing cost of material increases, some of which were passed through to its customers as product price increases beginning January 2008.
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 7, 2008, the stockholder amended the original loan agreements to extend the payback dates to December 31, 2009. 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 June 30, 2008, the Company had drawn a total of $6.150 million of the available funds.
The Company anticipates increased cash flows from 2008 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 2008. There can be no assurance that the Company will be able to raise the additional capital needed to continue as a going concern.
3. STOCK OPTIONS
During the six-months ended June 30, 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 six-months ending June 30, 2008.
During the three-month and six-month periods ended June 30, 2008, the Company recognized compensation expense of approximately $45,000. During the three-month and six-month periods ended June 30, 2007, the Company recognized compensation expense of approximately $2,000 and $25,000, respectively. On February 5, 2008, the Company recorded an expense of $45,000 related to 225,000 warrants granted with an average exercise price of $1.25 and an expiration of February 5, 2018. During the six-month period ended June 30, 2007, approximately $22,000 of shareholder notes receivables were written-off and expensed. 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 June 30, 2008, approximately 2,521,706 warrants with an average exercise price of $1.28 remain outstanding and were fully vested.
For the three-month and six-month periods ended June 30, 2008, the Company recorded stock-based compensation expense of $11,298 and $20,653, related to unvested employee stock options. For the three-month and six-month periods ended June 30, 2007, the Company recorded stock-based compensation expense of $4,319 and $8,246. 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 June 30, 2008, and changed during the six-month period then ended is presented below:
SIX MONTHS ENDED
JUNE 30, 2008
WEIGHTED AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- -----------------
Options outstanding at beginning of period 1,766,900 $2.65
Options granted 515,000 .27
Options exercised -- --
Options cancelled 4,000 2.46
--------- -----
Options at end of period 2,277,900 $2.12
--------- -----
Options exercisable at end of period 1,507,900 $3.02
========= =====
|
A summary of the Company's stock option plans as of June 30, 2008, and changed during the three-month period then ended is presented below:
THREE MONTHS ENDED
JUNE 30, 2008
WEIGHTED AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- -----------------
Options outstanding at beginning of period 1,827,900 $2.58
Options granted 450,000 .26
Options exercised -- --
Options expired -- --
--------- -----
Options at end of period 2,277,900 $2.12
--------- -----
Options exercisable at end of period 1,507,900 $3.02
========= =====
|
Changes in the Company's unvested options for the six months ended June 30, 2008 are summarized as follows:
SIX MONTHS ENDED
JUNE 30, 2008
WEIGHTED AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- -----------------
Options unvested at beginning of period 261,250 $ .77
Options granted 515,000 .27
Options vested 6,250 1.00
Options cancelled -- --
--------- -----
Options unvested at end of period 770,000 $ .35
========= =====
|
Changes in the Company's unvested options for the three months ended June 30, 2008 are summarized as follows:
THREE MONTHS ENDED
JUNE 30, 2008
WEIGHTED AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- -----------------
Options unvested at beginning of period 320,000 $.48
Options granted 450,000 .26
Options vested -- --
Options cancelled -- --
--------- -----
Options unvested at end of period 770,000 $.35
========= =====
|
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------------- ----------- ------------ ------------- ----------- ------------
$ .21 - $1.70 1,733,400 5.46 $ .67 963,400 $ .93
1.86 - 4.50 194,500 3.27 2.39 194,500 2.39
8.50 - 9.25 350,000 .84 9.14 350,000 9.14
----------- ------------ ------------- ----------- ------------
Totals 2,277,900 4.78 $ 2.12 1,507,900 $ 3.02
=========== ============ ============= =========== ============
|
A summary of the Company's warrant activity as of June 30, 2008 and changed during the six month and three month periods then ended is presented below:
SIX MONTHS ENDED
JUNE 30, 2008
-------------------------
WEIGHTED AVERAGE EXERCISE
-------------------------
WARRANTS PRICE
---------- -------------
Warrants outstanding at the beginning of 1,869,643 $ 1.25
period
Granted 1,257,063 1.25
Exercised -- --
Expired 605,000 1.10
---------- -----------
Warrants outstanding at end of period 2,521,706 $ 1.28
========== ===========
THREE MONTHS ENDED
JUNE 30, 2008
-------------------------
WEIGHTED AVERAGE EXERCISE
-------------------------
WARRANTS PRICE
---------- -------------
Warrants outstanding at the beginning of 2,198,214 $ 1.19
period
Granted 803,492 1.25
Exercised -- --
Expired 480,000 .80
---------- -----------
Warrants outstanding at end of period 2,521,706 $ 1.28
========== ===========
WARRANTS OUTSTANDING
--------------------------------------------------------
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING (IN YEARS) EXERCISE PRICE
----------------- ----------------- ---------------- -----------------
$ .80 - $1.25 2,371,706 4.37 $ 1.24
2.00 - 2.25 150,000 .59 2.00
---------------- ---------------- ----------------
Totals 2,521,706 4.25 $ 1.28
================ ================ ================
|
4. NOTES PAYABLE TO STOCKHOLDERS
As of June 30, 2008, 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 (4.50% as of June 30, 2008) payable monthly and become due and payable on December 31, 2009; 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. Previously, the stockholder waived this funding requirement. On March 7, 2008, the maturity date of the stockholder loan was extended from December 31, 2008 to December 31, 2009.
During the six-months ending June 30, 2008, the Company received advances totaling $520,000 from two members of the Board. In March and May, 2008, these loans were converted into common shares.
For the three-months ended June 30, 2008 and 2007, the Company recorded approximately $71,000 and $125,000, respectively; and for the six-months ended June 30, 2008 and 2007, the Company recorded approximately $157,000 and $249,000, 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.
5. COMMITMENTS AND CONTINGENCIES AND CONCENTRATIONS
Sales to two customers individually accounted for approximately 24% and approximately 16% (for a total 40%) of the net sales for the six-months ended June 30, 2008.
6. SUBSEQUENT EVENTS
On July 8, 2008 the Board of Directors agreed to extend the expiration date by six months for a loan of $123,750, interest-bearing at a rate of 5.63%, and collateralized by 300,000 shares of the Company's common stock, made to Richard C. Ford, a former member of management, on July 25, 2001. The loan will expire on January 8, 2009.
On July 21, 2008, the Board of Directors agreed to receive from Alan Sandler, a stock certificate for 260,000 shares of the Company's common stock dated August 8, 2001. These shares were collateral for a loan from the Company. The principal amount of the loan was retired and the related interest remains due.
During July 2008, the Company relocated its UK office from Exeter to Newbury, to the facility of its Master Distributor, Filter Solutions Ltd. Effective August 15, 2008, the Company's lease for the facility in Exeter will terminate.
On July 31, 2008, the Company renewed its lease at its facility in Boynton Beach, for a term of five years.
On August 6, 2008 the Board of Directors awarded Alan Sandler 100,000 employee stock options to purchase common stock at a price of $.30 for consideration of service to the Company as Chief Administrative Officer. The options will vest over four years and expire on August 5, 2018.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Puradyn Filter Technologies Incorporated
We have audited the accompanying consolidated balance sheet of Puradyn Filter Technologies Incorporated (the Company) as of December 31, 2007, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Puradyn Filter Technologies Incorporated at December 31, 2007, and the results of their operations and their cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company has suffered recurring losses from operations, its total liabilities exceed its total assets, and it has relied on cash inflows from an institutional investor and current stockholder. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regards to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Webb and Company, P.A.
--------------------------
Boynton Beach, Florida
March 10, 2008
|
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2007
Assets
Current assets:
Cash and cash equivalents $ 112,270
Accounts receivable, net of allowance for uncollectible accounts of $46,870 382,279
Inventories, net 1,475,380
Prepaid expenses and other current assets 181,648
------------
Total current assets 2,151,577
Property and equipment, net 162,838
Other noncurrent assets 40,930
Deferred financing costs, net 18,522
============
Total assets $ 2,373,867
============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable 594,372
Accrued liabilities 1,054,071
Current portion of capital lease obligation 1,048
Deferred revenues 136,169
------------
Total current liabilities 1,785,660
Capital lease obligation, less current portion 7,139
Notes Payable - stockholder 6,250,000
------------
Total Long Term Liabilities 6,257,139
------------
Total Liabilities 8,042,799
Commitments and contingencies --
Stockholders' deficit:
Preferred stock, $.001 par value: --
Authorized shares - 500,000;
None issued and outstanding
Common stock, $.001 par value, 29,401
Authorized shares - 40,000,000;
Issued and outstanding - 29,400,638
Additional paid-in capital 41,329,330
Notes receivable from stockholders (1,064,031)
Accumulated deficit (45,825,210)
Accumulated other comprehensive income (138,422)
------------
Total stockholders' deficit (5,668,932)
------------
Total liabilities and stockholders' deficit $ 2,373,867
============
|
See accompanying notes to consolidated financial statements.
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
2007 2006
------------ ------------
Net sales $ 3,082,873 $ 3,072,947
Costs and expenses:
Cost of products sold 2,831,560 2,566,572
Salaries and wages 1,074,519 1,348,335
Selling and administrative 1,061,828 1,343,651
------------ ------------
Total operating costs 4,967,907 5,258,558
------------ ------------
Loss from operations (1,885,034) (2,185,611)
Other (expense) income:
Interest income 32,516 50,413
Interest expense (588,583) (518,265)
------------ ------------
Total other expense (556,067) (467,852)
------------ ------------
Income taxes -- --
============ ============
Net loss $ (2,441,101) $ (2,653,463)
============ ============
Basic and diluted loss per common share $ (.09) $ (.10)
============ ============
Basic and diluted weighted average common shares
Outstanding 28,322,903 25,385,294
============ ============
|
See accompanying notes to consolidated financial statements.
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
NOTES ACCUMULATED
ADDITIONAL ACCUMULATED OTHER TOTAL
COMMON STOCK PAID-IN RECEIVABLE FROM COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT INCOME (LOSS) DEFICIT
------------ --------- ------------ ------------- -------------- ------------- ------------
Balance at December 31, 2005 22,276,099 $ 22,276 $ 37,078,716 $ (1,088,590) $ (40,730,646) $ 13,398 $ (4,704,846)
Foreign currency
translation adjustment -- -- -- -- -- (166,107) (166,107)
Net loss -- -- -- -- (2,653,463) -- (2,653,463)
------------
Total comprehensive loss -- -- -- -- -- -- (2,819,570)
Exercise of stock options 5,000 5 2,595 -- -- -- 2,600
Issuance of common stock
in private Placement, net
of issuance costs 4,971,903 4,972 2,262,028 -- -- -- 2,267,000
Issuance of warrants to
nonemployee directors -- -- 2,250 -- -- -- 2,250
Issuance of warrants to
employee/director -- -- 100,500 -- -- -- 100,500
Issuance of warrants to investors -- -- 66,492 -- -- -- 66,492
Interest receivable related
to notes receivable from stockholders -- -- -- (48,066) -- -- (48,066)
Compensation expense associated
with option modification -- -- 173,350 -- -- -- 173,350
Stock options issued to employees -- -- 29,250 -- -- -- 29,250
Stock options issued in lieu of
compensation 57,350 57 48,160 -- -- -- 48,217
Compensation expense associated
with unvested option awards -- -- 11,190 -- -- -- 11,190
---------- --------- ------------ ------------ ------------- ------------ -----------
Balance at December 31, 2006 27,310,352 27,310 39,774,531 (1,136,656) (43,384,109) (152,709) (4,871,633)
Foreign currency translation
adjustment -- -- -- -- -- 14,287 14,287
Net loss -- -- -- -- (2,441,101) -- (2,441,101)
-----------
Total comprehensive loss -- -- -- -- -- -- (2,426,814)
Exercise of stock options 76,000 76 28,424 -- -- -- 28,500
Issuance of common stock in private
Placement, net of issuance costs 2,014,286 2,015 1,472,985 -- -- -- 1,475,000
1Issuance of warrants to investors -- -- 34,200 -- -- -- 34,200
Foregiveness of stockholder loans -- -- -- 21,506 -- -- 21,506
Interest receivable related to notes
receivable from stockholders -- -- -- 51,119 -- -- 51,119
Compensation expense associated with
option modification -- -- 1,202 -- -- -- 1,202
Compensation expense associated with
unvested option awards -- -- 17,988 -- -- -- 17,988
---------- --------- ------------ ------------ ------------- ------------ -----------
Balance at December 31, 2007 29,400,638 $ 29,401 $ 41,329,330 $ (1,064,031) $ (45,825,210) $ (138,422) $(5,668,932)
========== ========= ============ ============ ============= ============ ===========
|
See accompanying notes to consolidated financial statements.
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------
2007 2006
----------- -----------
OPERATING ACTIVITIES
Net loss $(2,441,101) $(2,653,463)
----------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 96,001 183,728
Gain on sale of assets 578 --
Provision for bad debts (3,079) 8,398
Provision for obsolete and slow moving inventory (62,564) (24,819)
Amortization of deferred financing costs included in
interest expense 22,227 48,899
Interest receivable from stockholders' notes 72,626 (48,066)
Compensation expense on stock-based arrangements
with employees and vendors 19,190 213,790
Compensation expense on stock-based arrangements
with investors and directors 34,200 169,242
Changes in operating assets and liabilities:
Accounts receivable 118,687 (83,245)
Inventories (140,360) (65,856)
Prepaid expenses and other current assets (7,633) 71,156
Other noncurrent assets -- --
Accounts payable 277,656 46,326
Accrued liabilities 168,617 167,644
Deferred revenues 36,254 24,105
----------- -----------
Net cash used in operating activities (1,808,701) (1,942,161)
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 5,458 --
Purchases of property and equipment (60,878) (39,455)
----------- -----------
Net cash used in investing activities (55,420) (39,455)
FINANCING ACTIVITIES
Proceeds from sale of common stock 1,475,000 2,267,000
Proceeds from exercise of stock options 28,500 2,600
Proceeds from notes payable to stockholder 1,191,000 515,000
Payment of notes payable to stockholder (780,000) (747,000)
Payment of capital lease obligations (5,931) (4,987)
----------- -----------
Net cash provided by financing activities 1,908,569 2,032,613
Effect of exchange rate changes on cash and cash
equivalents 12,647 (151,379)
----------- -----------
Net increase (decrease) in cash and cash equivalents 57,095 (100,382)
Cash and cash equivalents at beginning of period 55,175 155,557
----------- -----------
Cash and cash equivalents at end of period $ 112,270 $ 55,175
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 453,916 $ 462,784
NONCASH INVESTING AND FINANCING ACTIVITIES
Common stock issued in settlement of accrued bonus $ -- $ 30,000
=========== ===========
|
See accompanying notes to consolidated financial statements.
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
1. SIGNIFICANT ACCOUNTING POLICIES
Organization
Puradyn Filter Technologies Incorporated (the "Company"), a Delaware corporation, is engaged in the manufacturing, distribution and sale of bypass oil filtration systems under the trademark Puradyn(R) primarily to companies with large fleets of vehicles and secondarily to original vehicle equipment manufacturer aftermarket programs. The Company holds the exclusive worldwide manufacturing and marketing rights for the Puradyn products pursuant to licenses for two patents and through direct ownership of various other patents.
Puradyn Filter Technologies, Ltd. (Ltd.), a wholly owned subsidiary in the United Kingdom, sells and distributes the Company's products in Europe, the Middle East and certain African countries. The results of the operations of Ltd. have been included in the Company's statements of operations since Ltd.'s formation on June 1, 2000.
New Accounting Pronouncements
In 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 flow, and results of operations, and its adoption is not expected to have a material effect on the Company's financial statements.
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.
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51". This statement improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require; the ownership interests in subsidiaries held by parties other than the parent and the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income, changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value, entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 affects those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS
No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The adoption of this statement is not expected to have a material effect on the Company's financial statements
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Puradyn Filter Technologies, Ltd. All significant intercompany transactions and balances have been eliminated.
Revenue Recognition
The Company recognizes revenue from product sales to customers, distributors and resellers when products that do not require further services or installation at the customer's site are shipped, there are no uncertainties surrounding customer acceptance and for which collectibility is reasonably assured in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements as amended and interpreted. Cash received by the Company prior to revenue recognition is recorded as deferred revenues. Sales are made to customers under terms allowing certain limited rights of return and other limited product and performance warranties for which provision has been made in the accompanying consolidated financial statements.
Amounts billed to customers in sales transactions related to shipping and handling, represent revenues earned for the goods provided and are included in net sales. Costs of shipping and handling are included in cost of products sold.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original maturities of three months or less at the time of purchase. At December 31, 2007 and December 31, 2006, the Company did not have any cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, prepaid expenses and other assets, accounts payable, accrued liabilities and notes payable to stockholder approximate their fair values as of December 31, 2007 because of their short-term natures.
Accounts Receivable
Accounts receivable are recorded at fair value on the date revenue is recognized. The Company provides allowances for doubtful accounts for estimated losses resulting from the inability of its customers to repay their obligation. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to repay, additional allowances may be required. The Company provides for potential uncollectible accounts receivable based on specific customer identification and historical collection experience adjusted for existing market conditions. If market conditions decline, actual collection experience may not meet expectations and may result in decreased cash flows and increased bad debt expense.
The policy for determining past due status is based on the contractual payment terms of each customer, which are generally net 30 or net 60 days. Once collection efforts by the Company and its collection agency are exhausted, the determination for charging off uncollectible receivables is made.
Inventories
Inventories are stated at the lower of cost or market using the first in, first out (FIFO) method. Production costs, consisting of labor and overhead, are applied to ending finished goods inventories at a rate based on estimated production capacity. Excess production costs are charged to cost of products sold. Provisions have been made to reduce excess or obsolete inventories to their net realizable value.
Deferred Financing Costs
The Company capitalizes financing costs and amortizes them using the effective interest method over the term of the related debt. Amortization of deferred financing costs is included in interest expense and totaled $22,227 and $48,899 for the years ended December 31, 2007 and 2006, respectively. Accumulated amortization of deferred financing costs as of December 31, 2007 was $662,628.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets, except for assets held under capital leases, for which the Company records depreciation and amortization based on the shorter of the asset's useful life or the term of the lease. The estimated useful lives of property and equipment range from 3 to 5 years. Upon sale or retirement, the cost and related accumulated depreciation and amortization are eliminated from their respective accounts, and the resulting gain or loss is included in results of operations. Repairs and maintenance charges, which do not increase the useful lives of the assets, are charged to operations as incurred.
Impairment of Long-Lived Assets
Management assesses the recoverability of its long-lived assets when indicators of impairment are present. If such indicators are present, recoverability of these assets is determined by comparing the undiscounted net cash flows estimated to result from those assets over the remaining life to the assets' net carrying amounts. If the estimated undiscounted net cash flows are less than the net carrying amount, the assets would be adjusted to their fair value, based on appraisal or the present value of the undiscounted net cash flows.
Product Warranty Costs
In connection with the adoption of FIN 45, the Company is including the following disclosure applicable to its product warranties.
The Company accrues for warranty costs based on the expected material and labor costs to provide warranty replacement products. The methodology used in determining the liability for warranty cost is based upon historical information and experience. The Company's warranty reserve is calculated as the gross sales multiplied by the historical warranty expense return rate.
The following table shows the changes in the aggregate product warranty liability for the year ended December 31, 2007:
Balance as of December 31, 2006 $ 71,759
Less: Payments made (10,895)
Change in prior period estimate 1,397
Add: Provision for current period warranties 27,548
--------
Balance as of December 31, 2007 $ 89,809
========
|
Guarantees
In August 2003 the Company made a guarantee to its wholly owned subsidiary, Puradyn Filter Technologies, Ltd., that it would provide cash for working capital on an as needed basis for a minimum period of twelve months. The guarantee
was provided as assurance that they will continue as a going concern for 2003. This guarantee is excluded from the recognition and measurement provisions of FIN 45, as it relates to a wholly owned consolidated subsidiary.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income (SFAS 130) establishes rules for reporting and displaying of comprehensive income and its components. Comprehensive income is the sum of net loss as reported in the consolidated statements of operations and other comprehensive income transactions as reported in the consolidated statement of changes in stockholders' equity (deficit). Other comprehensive income transactions that currently apply to the Company result from changes in exchange rates used in translating the financial statements of its wholly owned subsidiary, Ltd. Comprehensive income as of December 31, 2007 and 2006 is not shown net of taxes because the Company's deferred tax asset has been fully offset by a 100% valuation allowance.
Advertising Costs
Advertising costs are expensed as incurred. During the years ended December 31, 2007 and 2006, advertising costs incurred by the Company totaled approximately $17,000 and $37,000, respectively, and are included in selling and administrative expenses in the accompanying consolidated statements of operations.
Engineering and Development
Engineering and development costs are expensed as incurred. During the years ended December 31, 2007 and 2006, engineering and development costs incurred by the Company totaled approximately $31,000 and $52,000, respectively, and are included in selling and administrative expenses in the accompanying consolidated statements of operations.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiary have been translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency Translation (SFAS 52). All balance sheet accounts have been translated using the exchange rate in effect at the balance sheet date. Income statement amounts have been translated using an appropriately weighted average exchange rate for the year. The translation gains and losses resulting from the changes in exchange rates during 2007 and 2006 have been reported in accumulated other comprehensive income, except for gains and losses resulting from the translation of intercompany receivables and payables, which are included in earnings for the period. During the years ended December 31, 2007 and 2006, the Company recorded a foreign currency exchange rate gain of approximately $87,000 and a loss of approximately $198,000, respectively, which is included in selling and administrative expenses in the accompanying consolidated statements of operations.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes (SFAS 109). Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Stock Option Plans
We adopted SFAS 123R effective January 1, 2006 using the modified prospective application method of adoption which requires us to record compensation cost related to unvested stock awards as of December 31, 2005 recognizing the amortized grant date fair value in accordance with provisions of SFAS 123R on straight line basis over the service periods of each award. We have estimated forfeiture rates based on our historical experience. Stock option compensation expense for the year ended December 31, 2007 has been recognized as a component of cost of goods sold and general and administrative expenses in the accompanying Consolidated Financial Statements.
In 2007 and 2006, respectively, 200,000 and 85,000 options were granted at fair market value on the date of grant pursuant to the Stock Option Plan.
The Company leases its employees from a payroll leasing company. The Company's leased employees meet the definition of employees as specified by FIN 44 for purposes of applying SFAS 123R.
Stock options and warrants issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable in accordance with SFAS 123 and EITF 96-18, Accounting for Equity Investments That are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services, including related amendments and interpretations. The related expense is recognized over the period the services are provided.
Credit Risk
The Company minimizes the concentration of credit risk associated with its cash and cash equivalents by maintaining its cash and cash equivalents with high quality federally insured financial institutions. However, cash balances in excess of the FDIC insured limit of $100,000 are at risk. At December 31, 2007, the Company did not have cash balance above the FDIC insured limit. The Company performs ongoing evaluations of its significant trade accounts receivable customers and generally does not require collateral. An allowance for doubtful accounts is maintained against trade accounts receivable at levels which management believes is sufficient to cover probable credit losses. There are concentrations of credit risk with respect to trade receivables due to the amounts owed by five customers at December 31, 2007 whose trade receivable balances each represented approximately 24%, 10%, 8%, 8% and 7% for a total of 57% of total accounts receivable. The loss of business from one or a combination of the Company's significant customers, or an unexpected deterioration in their financial condition, could adversely affect the Company's operations.
Basic and Diluted Loss Per Share
The Company follows SFAS No. 128, Earnings Per Share (SFAS 128), which requires a dual presentation of basic and diluted earnings per share. However, because of the Company's net losses, the effects of stock options and warrants would be anti-dilutive and, accordingly, are excluded from the computation of earnings per share. The number of such shares excluded from the computations of diluted loss per share totaled 3,636,543 in 2007 and 3,470,043 in 2006.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
2. ISSUES AFFECTING LIQUIDITY AND MANAGEMENT'S PLANS
The Company's financial statements have been prepared on the basis that it will operate as a going concern, which comtemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred net losses each year since inception and has relied on the sale of its stock from time to time and loans from third parties and from related parties to fund its operations.
These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from an institutional investor and current stockholder have led the Company's independent registered public accounting firm Webb & Company to include a statement in its audit report relating to the Company's audited consolidated financial statements for the year ended December 31, 2007 expressing substantial doubt about the Company's ability to continue as a going concern.
The Company has been addressing the liquidity and working capital issues and continues to attempt to raise additional capital with institutional and private investors and current stockholders. Cost reductions were and continue to be implemented by the Company, including acquiring alternative suppliers for raw materials, and the company expects to see results from these reductions, as well as other cost reduction plans through 2008. Additionally, the Company is reviewing cost of material increases, which are expected to be passed through to its customers as product price increases beginning January, 2008.
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. The Company is in the process of aggressively seeking to raise capital and is exploring financing availability and options with investment bankers, funds, private sources, members of management and existing shareholders. The Company has implemented further measures to preserve its ability to operate, including organizational changes, deferral of salaries, reduction in personnel and renegotiating creditor and collection arrangement. There can be no assurance that the Company will be able to raise the additional capital needed or reduce the level of expenditures in order to sustain operations.
The Company has sustained losses since inception in 1987 and used net cash in operations of approximately $1,809,000 and $1,942,000 during the years ended December 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.
On February 2, 2004, the stockholder amended the original loan agreements to extend the maturity dates to December 31, 2005 and to waive the funding requirement mandating maturity terms until such time as the Company has raised an additional $7.0 million over the $3.5 million raised in the Company's recent private placement offering; or until such time as the Company is operating within sufficient cash flow parameters, as defined, to sustain its operations; or until a disposition of the Company occurs.
In April 2005, the maturity date of the loan agreement was extended to December 31, 2006. As consideration of this extension, this stockholder was granted an additional 100,000 common stock purchase warrants at an exercise price equal to the closing market price of the Company's stock on the date of grant. In March 2006, 2007 and 2008, the stockholder extended the maturity date of the loan agreement to December 31, 2007, December 31, 2008 and December 31, 2009, respectively.
The Company experienced a modest reduction in cash used in operations in 2007 and anticipates additional reductions in cash used in operations in 2008; however, additional cash will still be needed to support operations. Management believes that the commitments received from its stockholder, the funds received from its recent current private placement offering, as well as cash from sales and current working capital will be sufficient to sustain its operations at its current level through May 2008. However, if budgeted sales levels are not achieved and/or significant unanticipated expenditures occur, the Company may have to modify its business plan, reduce or discontinue some of its operations or seek a buyer for all or part of its assets to continue as a going concern through 2008. There can be no assurance that the Company will be able to raise the additional capital needed to continue as a going concern.
3. INVENTORIES
At December 31, 2007, inventories consisted of the following:
Raw materials $ 780,979
Finished goods 779,005
Valuation allowance (84,604)
------------
$ 1,475,380
============
|
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
At December 31, 2007, prepaid expenses and other current assets consisted of the following:
Prepaid expenses $ 101,857
Deferred costs related to deferred revenue 79,791
------------
$ 181,648
============
|
5. PROPERTY AND EQUIPMENT
At December 31, 2007, property and equipment consisted of the following:
Machinery and equipment $ 1,077,501
Furniture and fixtures 101,555
Leasehold improvements 122,622
Website development 72,960
Computer hardware and software 119,262
------------
1,493,900
Less accumulated depreciation and amortization (1,331,062)
------------
$ 162,838
============
|
Depreciation and amortization expense of property and equipment for the years ended December 31, 2007 and 2006 is $96,001 and $183,728, respectively, of which approximately $18,000 and $126,000 is included in cost of products sold
and approximately $78,000 and $58,000 is included in selling and administrative costs, respectively, in the accompanying consolidated statements of operations.
6. LEASES
The Company leases its office and warehouse facilities in Boynton Beach, Florida under a long-term noncancellable lease agreement, which contains renewal options and rent escalation clauses. A $235,000 security deposit was paid in 2002, which will be refunded ratably on an annual basis over the first three years of the lease term beginning on the last day of the first lease year, provided there has been no Event of Default, as defined, by the Company. Of this amount, $66,667 was paid to the Company in November 2003, January 2005 and January 2006, respectively. As of December 31, 2007, $34,970 is included in noncurrent assets in the accompanying consolidated balance sheet. The total minimum lease payments over the term of the lease aggregate approximately $774,000. The terms of the lease include a period of free rent and scheduled annual rate increases. As such, rent expense is recognized on a straight-line basis over the 68-month term of the lease.
The Company leases a condominium in Ocean Ridge, Florida to provide accommodations for Company use. The lease is renewable annually and is paid in three installments.
The Company's wholly owned subsidiary, Ltd., rented office space in Devon, England under a lease that extended through March 31, 2002 and was subsequently extended on a month-to-month basis. In September 2003, Ltd. moved to new office space by assuming the existing lease, which expired in August 2004 and was renegotiated in September 2005 and expires in September 2010. Rent expense under all operating leases for the years ended December 31, 2007 and 2006 totaled approximately $314,000 and $274,000, respectively, of which approximately $242,000 and $217,000 is included in cost of products sold and approximately $72,000 and $57,000 is included in selling and administrative costs, respectively, in the accompanying consolidated statements of operations.
In May 2007, the Company entered into a capital lease obligation for the purchase of approximately $8,525 of office equipment, which is included in property and equipment, net of approximately $995 of accumulated amortization, in the accompanying consolidated balance sheet.
Future minimum lease commitments due for facilities and equipment leases under noncancellable capital and operating leases at December 31, 2007 are as follows:
CAPITAL OPERATING
LEASES LEASES
-------- ---------
2008 $ 5,479 $149,524
2009 5,479 53,103
2010 5,479 39,282
2011 2,283
2012 and thereafter --
-------- --------
Total minimum lease payments $ 18,720 $241,909
======== ========
Less amount representing interest (10,533)
--------
Present value of minimum lease payments $ 8,187
========
|
7. ACCRUED LIABILITIES
At December 31, 2007, accrued liabilities consisted of the following:
Accrued wages and benefits $ 680,342
Accrued expenses relating to vendors and others 73,610
Deferral of straight-line rent expense 16,790
Reclassified accounts receivable credit balances 138,016
Accrued warranty costs 89,809
Accrued interest payable relating to stockholder notes 55,504
----------
$1,054,071
==========
|
8. LONG-TERM DEBT
NOTES PAYABLE TO STOCKHOLDER
Beginning on March 28, 2002 the Company executed a binding agreement with one of its stockholders, who is also a Board Member, to fund up to $6.1 million. Under the terms of the agreements, the Company can draw amounts as needed to fund operations. Amounts drawn bear interest at the prime rate per annum (6.75% at December 31, 2007), payable monthly and were to become due and payable on December 31, 2005 or upon a change in control of the Company or consummation of any other financing over $7.0 million. In March 2006, March, 2007 and March 2008, the maturity date for the agreement was extended to December 31, 2007, December 31, 2008 and December 31, 2009, respectively.
At December 31, 2007, the Company had drawn $6.1 million of the available funds.
During December 2007, the Company received $100,000 in shareholder loans, which in March 2008 were converted to equity. In April 2005, the maturity date of the agreement was extended from December 31, 2005 to December 31, 2006. As consideration of this extension, this stockholder was granted an additional 100,000 common stock purchase warrants at an exercise price equal to the closing market price of the Company's stock on the date of grant, for a period of five years.
During the years ended December 31, 2007 and 2006, the Company incurred interest expense of approximately $481,000 and $465,000, respectively, on its draws, which is included in interest expense in the accompanying consolidated statements of operations.
MATURITIES OF LONG-TERM OBLIGATIONS FOR FIVE YEARS AND BEYOND
Long-term obligations consisted of the following at December 31, 2007:
Notes payable to stockholder $ 6,250,000
Capital lease obligation 8,187
-----------
6,258,187
Less: current maturities (1,048)
-----------
$ 6,257,139
===========
|
The minimum annual principal payments of notes payable and capital lease obligations at December 31, 2007 were:
2008 $ 1,048
2009 6,251,859
2010 3,270
2011 2,010
----------
$6,258,187
==========
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9. INCOME TAXES
The United States and foreign components of loss from continuing operations before income taxes are as follows for the years ended December 31:
2007 2006
----------- -----------
United States $(2,455,387) $(2,704,731)
Foreign 14,286 51,268
Intercompany elimination -- --
----------- -----------
Loss from continuing operations before income taxes $(2,441,101) $(2,653,463)
|
The significant components of the Company's net deferred tax assets are as follows for the years ended December 31:
2007 2006
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 14,163,096 $ 13,214,958
Depreciation and amortization 78,177 73,200
Accrued expenses and reserves 58,801 77,795
Impairment loss 78,304 78,304
Compensatory stock options and warrants 57,354 57,354
Capital Loss Carryover 40,630 40,632
Other 16,917 18,829
------------ ------------
Total deferred tax assets 14,493,279 13,561,072
Valuation allowance (14,493,279) (13,561,072)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
|
SFAS 109 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a full valuation allowance of $14,493,279 against its net deferred taxes is necessary as of December 31, 2007. The change in valuation allowance for the years ended December 31, 2007 and 2006 is $932,207 and $1,024,603 respectively.
At December 31, 2007, the Company had approximately $38,990,150 of U.S. net operating loss carryforwards remaining, which expire beginning in 2022. The Company will record the benefit of approximately $1,355,000 of the net operating loss carryforwards through additional paid-in capital if and when the net operating loss carryforwards are utilized, as such amounts relate to the unrecognized tax benefit from stock option exercises.
As a result of certain ownership changes, the Company may be subject to an annual limitation on the utilization of its U.S. net operating loss carryforwards pursuant to Section 382 of the Internal Revenue Code. A study to determine the effect, if any, of this change, has not been undertaken.
A reconciliation of the Company's income taxes to amounts calculated at the federal statutory rate is as follows for the years ended December 31:
2007 2006
------ -----
Federal statutory taxes (34.00)% (34.00)%
State income taxes, net of federal tax benefit (3.63) (3.63)
Nondeductible items 0.16 0.16
Change in valuation allowance 38.39 38.21
Other (.92) .74
------ -----
--% --%
====== =====
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10. COMMITMENTS AND CONTINGENCIES
INVESTMENT BANKING AGREEMENTS
On April 24, 2006, the Company entered into a one-year non-exclusive agreement with CapitalLink, L.C., an investment banking firm, to assist in additional financing. The company agreed to pay a fee of 7% of gross proceeds received by the Company as a result of services performed under the contract, as well as reimbursement of pre-approved out of pocket expenses. There were no fees incurred and the company exercised its option not to renew the agreement.
On July 10, 2006, the Company entered into a maximum 90-day agreement with TN Capital Equities, Ltd., a subsidiary of TerraNova Capital Partners, Inc., and investment banking firm, to assist the Company in obtaining additional financing. The company agreed to pay a fee of 10% of the gross proceeds received by the Company as a result of services performed under the contract, as well as reimbursement of pre-approved out of pocket expenses. There were no fees incurred and the company exercised its option not to renew the agreement.
11. STOCK OPTIONS
The Company has three stock option plans, one adopted in 1996 and amended in July 1997 (the "1996 Option Plan"), one adopted in September 1999 and amended in June 2000 (the "1999 Option Plan"), and one adopted on November 8, 2000 (the "Directors' Plan"). The 1996 Option Plan provides for the granting of up to 2,200,000 options, the 1999 Option Plan provides for the granting of up to 3,000,000 options and the Directors' Plan provides for the granting of up to 400,000 options.
Both the 1996 and 1999 Plan provide for the granting of both incentive and non-qualified stock options to key personnel, including officers, directors, consultants and advisors to the Company, at the discretion of the Board of Directors. Each plan limits the exercise price of the options at no less than the quoted market price of the common stock on the date of grant. The option term is determined by the Board of the Directors or the Compensation Committee, provided that no option may be exercisable more than 10 years after the date of its grant and, in the case of an Incentive Option granted to an eligible employee owning more than 10% of the Company's common stock, no more than five years after the date of the grant. Generally, under the 1996 and 1999 plans, options to employees vest over four years at 25% per annum, except for certain grants to employees that vest 50% upon grant with remaining amounts over two years at 25% per annum.
The Directors' Plan provides for the granting of non-qualified options to members of the Board of Directors at exercise prices not less than the quoted market price of the common stock on the date of grant and options expire five years from the date of grant. In the event a person ceases to serve on the Board of Directors, the outstanding options expire one year from the date of cessation of service. Such options may be exercised commencing two years from the date of grant.
On May 11, 2006, the Company extended the expiration date of 270,000 fully vested stock options for an employee who left the Company and previously had options extended through September 30, 2006. The Company's Stock Option Plan permits an employee to exercise their stock options for up to one month after their termination date, at which time they expire. The exercise price of the options ranges from $1.72 to $1.75. In accordance with FIN 44, the Company compared the options' intrinsic value on the modification date to the original intrinsic value on the date of grant. The Company recorded approximately $88,000 of compensation expense related to this modification, which was included in the consolidated statement of operations for the year ending December 31, 2006.
On October 20, 2006, the Company extended the expiration date of 375,000 fully vested stock options for an employee who left the Company in October 2006. The Company's Stock Option Plan permits an employee to exercise their stock options for up to one month after their termination date, at which time they expire. The exercise price of the options ranges from $.21 to $.94. In accordance with FIN 44, the Company compared the options' intrinsic value on the modification date to the original intrinsic value on the date of grant. The Company recorded approximately $86,000 of compensation expense related to this modification, which was included in the consolidated statement of operations for the year ending December 31, 2006.
On May 23, 2007 the Company extended the expiration date of 11,650 vested stock options for a terminated employee who left the company in May, 2005. The exercise price of the options ranges from $.38 to $2.15. In accordance with SFAS 123, incremental compensation cost was recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. The Company recorded approximately $1,202 of compensation expense related to this modification, which was included in the consolidated statement of operations for the year ended December 31, 2007.
During each of 2007 and 2006, 55,000 and 5,000 respectively, of options were issued to non-employee Directors.
Additional information concerning the activity in the three option plans is as follows:
2007 2006
-------------------------- -------------------------
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
---------- --------- --------- ---------
Outstanding, beginning of year 1,880,400 $ 3.10 2,152,070 $ 3.18
Granted 200,000 .40 135,000 .96
Exercised (76,000) .38 (5,000) .52
Cancelled (130,000) 4.28 (159,000) 2.83
Expired (107,500) 5.86 (242,670) 3.73
---------- --------- --------- ---------
Outstanding, end of year 1,766,900 2.65 1,880,400 3.10
========== =========
Exercisable, end of year 1,505,650 $ 3.03 1,708,650 $ 3.30
========== =========
Options available for future grant, end
of year 2,135,750 2,168,250
========== =========
|
Summarized information with respect to options outstanding under the three option plans at December 31, 2007 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
REMAINING
AVERAGE
CONTRACTUAL WEIGHTED WEIGHTED
RANGE OF NUMBER LIFE (IN AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ----------- -------------- ----------- --------------
$ .21 - $1.70 1,218,400 5.56 $ .84 957,150 $ .92
1.86 - 4.50 198,500 4.03 2.39 198,500 2.39
8.50 - 9.25 350,000 1.59 9.14 350,000 9.14
---------- ----- ----- --------- -----
Totals 1,766,900 4.97 $2.65 1,505,650 $3.03
========= ==== ===== ========= =====
|
Summarized information with respect to options outstanding under the three option plans at December 31, 2006 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
REMAINING
AVERAGE
CONTRACTUAL WEIGHTED WEIGHTED
RANGE OF NUMBER LIFE (IN AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ----------- -------------- ----------- --------------
$ .21 - $1.70 1,171,900 6.2 $ .89 1,020,525 $ .88
1.86 - 4.50 246,000 4.0 2.42 225,625 2.42
8.50 - 9.25 462,500 2.1 9.07 462,500 9.07
--------- ---- ----- --------- -----
Totals 1,880,400 4.43 $3.10 1,708,650 $3.30
========= ==== ===== ========= =====
|
12. COMMON STOCK
On January 30, 2006, the Company issued 40,000 shares of common stock, at $.75 per share, to an employee in lieu of a cash bonus that was previously accrued and deferred.
On February 26, 2006, the Company received cash proceeds of $910,000 from five accredited investors for the purchase of 3,033,333 shares of common stock at $0.30 per share. The purchase price of $0.30, previously agreed upon and approved by the Board of Directors, was discounted approximately 20% as part of the June 2005 Equity Placement Offering, wherein these five investors funded 50% of their total predetermined contribution at that time. The 2005 funds were contributed with the understanding that the 50% balance of investment would be priced at the same purchase price as the initial
On September 14, 2006, the Company issued a confidential private placement offering, with a purchase price of $0.70 per share of common stock. Each four shares purchased will entitle the purchaser to receive common stock purchase warrants to purchase one share of common stock at an exercise price of $1.25 on or prior to October 1, 2011. As of December 31, 2006, the Company had received gross proceeds of approximately $1.357 million for an aggregate of 1,938,570 shares of common stock.
In June 2007, the Company received cash proceeds of $975,000 from an accredited investor for the purchase of 1,300,000 shares of common stock at $0.75 per share as part of a private offering.
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.
13. WARRANTS
At December 31, 2007 and 2006, 1,869,643 and 1,594,643 shares, respectively, of common stock have been reserved for issuance under outstanding warrants. All of the warrants are fully vested and have expiration dates ranging from March 28, 2007 to December 19, 2016. Information concerning the Company's warrant activity is as follows:
2007 2006
------------------- ------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE EXERCISE
------------------- ------------------
OPTIONS PRICE OPTIONS PRICE
--------- ----- --------- -----
Outstanding, at the beginning of year 1,589,643 $ .99 955,000 $1.53
Granted 380,000 $1.25 634,643 1.25
Exercised -- -- -- --
Expired 100,000 4.05 -- --
--------- ----- --------- -----
Outstanding, at the end of year 1,869,643 $1.25 1,589,643 $ .99
========= ===== ========= =====
|
In consideration of the stockholder loan agreement (Item 12), the Company has granted the stockholder a total of 475,000 common stock purchase warrants at an exercise price equal to the closing market price of the Company's stock on the dates of grant. On March 28, 2002, the Company recorded a deferred charge of $318,000. The deferred charge was initially amortized over the commitment period and subsequently revised to include the repayment period, as amended. During the years ended December 31, 2007 and 2006, the Company had amortized approximately $6,000 and $29,000 of such costs, respectively, which are included in interest expense in the accompanying consolidated statements of operations.
On March 14, 2003, the Company recorded a deferred charge of $212,500. The deferred charge is being amortized over the repayment period of 21.5 months. During the years ended December 31, 2007 and 2006, the Company had amortized approximately $4,000 and $79,000 respectively, which is included in interest expense in the accompanying 2005 consolidated statement of operations.
On December 15, 2004, the Company extended the life of a director's warrants by one year. The expiration date of the warrant was extended from December 2004 to December 2005. The fair value of the modified warrant was estimated at the date of grant using a Black-Scholes option pricing model and the difference in the fair value of the old award and the new award was estimated to be $20,000.
During June and July 2005, the Company received cash proceeds of 1.48 million from the sale of 4,820,664 shares of common stock from a private placement offering. The funds were used for corporate purposes and to reduce the outstanding principle balance of the notes payable to stockholder. Additionally, warrants in the amount of 400,000 and 80,000 were offered to two separate participants in the private placement at a price of $0.80 per each share of common stock with an exercise date of June 17, 2006, and an expiration date of June 17, 2008. During 2006 and 2005, respectively, the Company recorded an expense of $66,492 and $79,908.
As part of the September 14, 2006 private placement offering, the Company granted to investors 643,643 warrants to purchase one share of common stock at an exercise price of $1.25 on or prior to October 1, 2011.
In June 2007, the Company received cash proceeds of $975,000 from an accredited investor for the purchase of 1,300,000 shares of common stock at $0.75 per share as part of a private offering. As part of the offering, the Company awarded 380,000 warrants to purchase one share of common stock at an exercise price of $1.25 on or prior to August 23, 2017.
14. MAJOR CUSTOMERS
During 2007 and 2006, two customers together accounted for approximately 44% and 39%, respectively, of the Company's net sales. In 2007, there were two customers that individually accounted for greater than 10% of net sales, or approximately $791,000 and $570,000, while in 2006 there were two customers that individually accounted for greater than 10% of net sales, or approximately $769,000 and $417,000. There were five customers at December 31, 2007, whose trade receivable balances equaled or exceeded 5% of total receivables, representing approximately 24%, 10%, 8%, 8% and 7% respectively, of total accounts receivable. The loss of business from one or a combination of the Company's significant customers could adversely affect its operations.
15. GEOGRAPHIC INFORMATION
The Company has two lines of product, which it manufactures and distributes from its locations in the United States and the United Kingdom. Information with respect to sales activity and long-lived assets (consisting entirely of property and equipment) in the United States and United Kingdom is as follows:
2007 2006
---------- ----------
Net sales:
United States $1,873,017 $2,266,816
United Kingdom 1,209,856 806,131
---------- ----------
$3,082,873 $3,072,947
========== ==========
Long-lived assets by area:
United States $ 153,139
United Kingdom 9,699
----------
$ 162,838
==========
|
16. SUBSEQUENT EVENTS
In February 2008, the Company received cash proceeds of $324,000 from an accredited investor for the purchase of 900,000 shares of common stock at $0.36 per share. As part of the offering, the Company awarded 225,000 warrants to purchase one share of common stock at an exercise price of $1.25 on or prior to February 5, 2018. This same investor had previously purchased 1.3 million shares of common stock in a June 2007 private offering priced at $0.75 per share, bringing the total shares of Puradyn common stock purchased by this investor to 2,200,000.
On February 18, 2008, the Company entered into a Master Distributor Agreement with Filter Solutions Ltd (FSL), whereby FSL assumes distributorship for the United Kingdom, Mainland Europe and Ireland. The contract contains minimum purchase requirements and shall have an initial term of five years. The Company expects that under this agreement FSL will absorb the majority of expenses attributable to the Puradyn, Ltd United Kingdom office.
On March 7, 2008, the repayment date of the stockholder loan was extended from December 31, 2008 to December 31, 2009.
During the quarter ending March 31, 2008, the Company received shareholder loans totaling $420,000.
On March 24, 2008, the Company converted $420,000 previously received in the form of advances into purchases of 1,200,000 shares of common stock at $0.35 per share. The purchases resulted in the issuance of 300,000 warrants to purchase one share of common stock at an exercise price of $1.25 on or prior to March 19, 2013.
On March 26, 2008, the Company converted $100,000 received in the form of advance into the purchase of 285,714 shares of common stock at $.35 per share and the issuance of 71,429 warrants to purchase one share of common stock at an exercise price of $1.25 on or prior to March 20, 2013.
Until ___________, 200_, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
No dealer, sales representative or any other person has been authorized to give any information or to make any representations other than those contained in this prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the company or any of the underwriters. This prospectus does not constitute an offer of any securities other than those to which it relates or an offer to sell, or a solicitation of any offer to buy, to any person in any jurisdiction where such an offer or solicitation would be unlawful. Neither the delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create an implication that the information set forth herein is correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
Page
About this Prospectus...................2
Prospectus Summary......................2
Selected Consolidated Financial Data....2
The Offering............................3
Risk Factors............................3
Cautionary Statements Regarding
Forward-Looking Information.............6 PURADYN FILTER
Market for Common Equity and Related TECHNOLOGIES INCORPORATED
Stockholder Matters.....................7
Capitalization..........................7
Use of Proceeds.........................8 PROSPECTUS
Dilution................................8
Plan of Distribution....................8
Management's Discussion and 3,500,000 Shares of Common Stock
Analysis or Plan of Operation.........9
Our Business............................21 Offering Price $[ ] per share
Management..............................27
Certain Relationships and Maximum Offering
Related Transactions................35 $[ ]
Principal Stockholders..................35
Description of Securities...............38
Shares Eligible for Future Sale ........39
Legal Matters...........................39
Experts.................................39
Where You Can Find Additional
Information.......................39 ________________, 2008
Financial Statements....................F-1
|
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by us in connection with the distribution of the securities being registered are as follows:
SEC Registration and Filing Fee $ 29
Legal Fees and Expenses* 5,000
Accounting Fees and Expenses* 2,500
Financial Printing* 400
Transfer Agent Fees* 75
Blue Sky Fees and Expenses* 500
Miscellaneous* 96
-----------
TOTAL $ 8,600
===========
--------------
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* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Certificate of Incorporation and By-laws provide for the indemnification of our directors and officers to the fullest extent permitted by the Delaware General Corporation Law ("DGCL").
Section 145 of the DGCL permits a corporation, under specified circumstances, to indemnify its directors, officers, employees or agents against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by them in connection with any action, suit or proceeding brought by third parties by reason of the fact that they were or are directors, officers, employees or agents of the corporation, if such directors, officers, employees or agents acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. In a derivative action, i.e., one by or in the right of the corporation, indemnification may be made only for expenses actually and reasonably incurred by directors, officers, employees or agents in connection with the defense or settlement of any action or suit, and only with respect to a matter as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made if such person shall have been adjudged liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine upon application that the defendant directors, officers, employees or agents are fairly and reasonably entitled to indemnity for such expenses despite such adjudication of liability.
Our Certificate of Incorporation contains a provision which eliminates, to the fullest extent permitted by the DGCL, director liability for monetary damages for breaches of the fiduciary duty of care or any other duty as a director.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling our company pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Following are all issuances of securities by the registrant during the past three years which were not registered under the Securities Act of 1933, as amended (the "Securities Act"). In each of these issuances the recipient represented that he was acquiring the shares for investment purposes only, and not with a view towards distribution or resale except in compliance with applicable securities laws. No general solicitation or advertising was used in connection with any transaction, and the certificate evidencing the securities that were issued contained a legend restricting their transferability absent registration under the Securities Act or the availability of an applicable
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exemption therefrom. Unless specifically set forth below, no underwriter participated in the transaction and no commissions were paid in connection with the transactions.
In February 2006, we executed subscription agreements with five accredited investors for the purchase of 3,033,334 shares of common stock at $0.30 per share for an aggregate purchase price of $910,000. Inasmuch each of the investors had a preexisting relationship with us, were stockholders and/or are members of management, and were accredited and sophisticated investors, the issuance of the securities was exempt from registration pursuant to an exemption provided by Section 4(2) of the Securities Act.
Between September 2006 and November 2006, we received $1,357,000 from the sale of 1,938,570 shares of our common stock at $0.70 per share to 10 investors in a private placement. We issued the investors warrants to purchase a total of 475,714 shares of common stock exercisable at a price of $1.25 per share over a term of five years. Inasmuch as each of the investors were accredited, had a preexisting relationship with us, were highly sophisticated and had access to appropriate information concerning our company, the issuance of the securities was exempt from registration pursuant to an exemption provided by Section 4(2) of the Securities Act.
During October 2006 we issued 17,350 shares of common stock valued at $ 18,217.50 to five employees, including two executive officers. The recipients were either accredited or sophisticated investors and the issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(2) thereof.
In June 2007, we received gross proceeds of $975,000 from the sale of 1.3 million shares of common stock at $.75 per share to an accredited investor in a transaction was exempt from registration pursuant to an exemption provided under Section 4 (2) of the Securities Act.
In August 2007, we converted $500,000 in shareholder loans to the sale of 714,286 shares of common stock at $.70 per share to accredited investors in a transaction which was exempt from registration under the Securities Act in reliance on an exemption provided by Section 3(a)9 of act.
In February 2008, we received proceeds of $324,000 from an accredited investor for the purchase of 900,000 shares of common stock at $.36 per share. As part of the offering, we issued warrants to purchase 225,000 shares of common stock at an exercise price of $1.25 on or prior to February 5, 2018. The transaction was exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(2) of that act.
In December 2007, we received loans from two shareholders, who were also members of the Board of Directors, in the amount of $100,000. During the quarter ending March 31, 2008, we received additional loans from the same shareholders, in the amount of $420,000. On March 24, 2008, $420,000 of these loans were converted into 1,200,000 shares of common stock, 600,000 shares issued to the Chief Executive Officer and a member of the Board of Directors, respectively, at $.35 per share, the closing price as of the date of approval. On March 26, 2008 a $100,000 loan from the Chief Executive Officer was converted into 285,714 shares of common stock, at $.35 per share, the closing price as of the date of approval. As part of the transaction we issued warrants to purchase 228,571 shares of common stock at an exercise price of $1.25 on or prior to March 24, 2013. Inasmuch each of the investors had a preexisting relationship with the issuer, are stockholders and/or are members of management, are accredited and sophisticated investors, the issuance of the securities was exempt from registration pursuant to Sections 3(a)(9) and 4(2) of the Securities Act.
During May and June, 2008, we received proceeds of $630,000 from five
accredited investors for the purchase of 2,319,955 shares of common stock at
amounts varying between $.25 and $.305 per share. As part of the offering, we
issued warrants to purchase 579,989 shares of common stock at an exercise price
of $1.25 on or prior to July 1, 2013. The transaction was exempt from
registration under the Securities Act in reliance on an exemption provided by
Section 4(2) of that act.
In May 2008, we converted $100,000 in shareholder loans received from
the Chief Executive Officer to the sale of 322,581 shares of common stock at
$.31 per share. As part of the note conversion we issued warrants to purchase
80,645 shares of common stock at an exercise price of $1.25 on or prior to April
4, 2013. The transactions were exempt from registration under Section 3(a)9 and
Section 4(2) of the Securities Act of 1933.
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In July and August 2008, we received proceeds of $100,000 and $50,000, respectively, from two accredited investors for the purchase of 384,615 and 151,515 shares of common stock, respectively, at $0.26 and $0.33 per share, respectively. As part of the offering, we issued warrants to purchase 96,154 and 47,349 shares of common stock, respectively, at an exercise price of $1.25 on or prior to July 31, 2013 and August 25, 2013, respectively. The transaction was exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(2) of that act.
During October 2008, we issued 300,000 shares of common stock and warrants to purchase an additional 350,000 shares of common stock as compensation valued at $159,000 to an investor relations firm as compensation to their services to us under the terms of a one year agreement. The warrants have an expiration date of October 1, 2013, and warrants to purchase 175,000 shares of common stock are exercisable at $0.75 per share and warrants to purchase 175,000 of common stock are exercisable at $1.25 per share. Inasmuch each of the recipient was an accredited or otherwise sophisticated investor, the issuance of the securities was exempt from registration pursuant to Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as a part of this registration statement or are incorporated by reference to previous filings, if so indicated:
EXHIBIT DESCRIPTION
NO.
3.1 Amended and Restated Certificate of Incorporation dated
December 30, 1996 (2)
3.2 Certificate of Amendment to Certificate of Incorporation dated
February 3, 1998 (3)
3.3 Bylaws (1)
4.1 Form of common stock certificate (8)
4.2 Form of Class A Warrant issued to Mr. Vittoria (9)
4.3 Form of $1.25 common stock purchase warrant (7)
5.1 Opinion of Schneider Weinberger & Beilly LLP *
10.1 1996 Stock Option Plan (1)
10.2 1999 Stock Option Plan (4)
10.3 2000 Non-Employee Directors' Plan (5)
10.4 2002 Audit Committee Charter (6)
10.5 Agreement between T/F Systems, Inc. and T/F Purifiner, Inc. dated
March 1, 1991 (1)
10.6 Asset Purchase Agreement between T/F Systems, Inc. and T/F
Purifiner, Inc. dated December 31, 1995 (1)
10.7 Lease Amendment #2 between Puradyn Filter Technologies, Inc. and
Premier Gateway Center at Quantum LLP (10)
10.8 Master Distributor Agreement dated February 18, 2008 by and between
Puradyn Filter Technologies Incorporated and Filter Solutions Ltd. *
10.9 Employment Agreement dated July 3, 2000 between Puradyn Filter
Technologies Incorporated and Kevin Kroger, as amended *
14.1 Business Ethics and Conflicts of Interest Statement (6)
21.1 Subsidiaries of the registrant *
23.1 Consent of Webb & Company, P.A. *
23.2 Consent of Schneider Weinberger & Beilly LLP (included in
Exhibit 5.1) *
99.1 Form of Subscription Agreement *
--------------
|
* filed herewith
(1) Incorporated by reference from the exhibits to the registration
statement on Form 10-SB, SEC File No. 001-11991, as filed with the
Securities and Exchange Commission, on July 30, 1996, as amended.
(2) Incorporated by reference from the exhibit to the Current Report on
Form 8-K as filed on January 9, 1997.
(3) Incorporated by reference from the exhibit to the Current Report on
Form 8-K/A as filed on February 12, 1998.
(4) Incorporated by reference to the registration statement on Form S-8,
SEC File No. 333-91379, as filed with the Securities and Exchange
Commission on November 22, 1999.
(5) Incorporated by reference from the exhibits to the Annual Report on
Form 10-KSB/A for the fiscal year ended December 31, 2000.
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(6) Incorporated by reference from the exhibits to the Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2003.
(7) Incorporated by reference to the Current Report on Form 8-K as filed on
October 10, 2006.
(8) Incorporated by reference to exhibits to the Form 8-A as filed with the
Securities and Exchange
Commission on December 6, 2001.
(9) Incorporated by reference to exhibits to the Quarterly Report on
Form 10-QSB for the period ended March 31, 2005.
(10) Incorporated by reference to the exhibits to the Quarterly Report on
Form 10-Q for the period ended June 30, 2008.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
1. For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
3. For the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
i. Any preliminary prospectus or prospectus of the undersigned
registrant relating to the offering required to be filed
pursuant to Rule 424;
ii. Any free writing prospectus relating to the offering prepared
by or on behalf of the undersigned registrant or used or
referred to by the undersigned registrant;
iii. The portion of any other free writing prospectus relating to
the offering containing material information about the
undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
iv. Any other communication that is an offer in the offering made
by the undersigned registrant to the purchaser.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Boynton Beach, Florida, on November 3, 2008.
PURADYN FILTER TECHNOLOGIES INCORPORATED
By: /s/ Joseph V. Vittoria
-----------------------------------------------
Joseph V. Vittoria, Chairman of the Board and
Chief Executive Officer
|
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Joseph V. Vittoria his true and lawful attorneys-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to the registration statement, including post-effective amendments, and registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with all exhibits hereto, and other documents in connection therewith, with the Securities and Exchange Commission, and does hereby grant unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
------------------------------------ ------------------------------------------------------ --------------------------
SIGNATURE TITLE DATE
------------------------------------ ------------------------------------------------------ --------------------------
------------------------------------ ------------------------------------------------------ --------------------------
/s/ Joseph V. Vittoria Chairman of the Board and Chief Executive Officer, November 3, 2008
---------------------- principal executive officer
Joseph V. Vittoria
------------------------------------ ------------------------------------------------------ --------------------------
------------------------------------ ------------------------------------------------------ --------------------------
/s/ Kevin G. Kroger President, Chief Operating Officer and director November 3, 2008
-------------------
Kevin G. Kroger
------------------------------------ ------------------------------------------------------ --------------------------
------------------------------------ ------------------------------------------------------ --------------------------
/s/ Alan J. Sandler Vice President, Chief Administrative Officer and November 3, 2008
------------------- corporate secretary
Alan J. Sandler
------------------------------------ ------------------------------------------------------ --------------------------
------------------------------------ ------------------------------------------------------ --------------------------
/s/ Cindy Lea Gimler Chief Financial Officer, principal financial and November 3, 2008
-------------------- accounting officer
Cindy Lea Gimler
------------------------------------ ------------------------------------------------------ --------------------------
------------------------------------ ------------------------------------------------------ --------------------------
/s/ John S. Caldwell Director November 3, 2008
--------------------
John S. Caldwell, Lt. General
U.S. Army (retired)
------------------------------------ ------------------------------------------------------ --------------------------
------------------------------------ ------------------------------------------------------ --------------------------
/s/ Forrest D. Hayes Director November 3, 2008
--------------------
Forest D. Hayes
------------------------------------ ------------------------------------------------------ --------------------------
------------------------------------ ------------------------------------------------------ --------------------------
/s/ Dominic Telesco Director November 3, 2008
-------------------
Dominic Telesco
------------------------------------ ------------------------------------------------------ --------------------------
------------------------------------ ------------------------------------------------------ --------------------------
/s/ Charles W. Walton Director November 3, 2008
---------------------
Charles W. Walton, Ph.D.
------------------------------------ ------------------------------------------------------ --------------------------
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II-5
Exhibits 5.1 and 23.2
SCHNEIDER WEINBERGER & BEILLY LLP
Attorneys-at-Law
2200 Corporate Boulevard, N.W., Suite 210
Boca Raton, Florida 33431-7307
Telephone
James M. Schneider, P.A. (561) 362-9595
Steven I. Weinberger, P.A. Facsimile
Roxanne K. Beilly, P.A. (561) 362-9612
November 3, 2008
Puradyn Filter Technologies Incorporated
2017 High Ridge Road
Boynton Beach, Florida 33426
|
RE: REGISTRATION STATEMENT ON FORM S-1 (THE "REGISTRATION STATEMENT")
PURADYN FILTER TECHNOLOGIES INCORPORATED (THE "COMPANY")
Dear Sir or Madam:
This opinion is submitted pursuant to the applicable rules of the Securities and Exchange Commission with respect to the registration pursuant to the Company's Registration Statement on Form S-1 of 3,500,000 shares of common stock (the "Registerable Shares"), as described in the Registration Statement.
In connection therewith, we have examined and relied upon original, certified,
conformed, photostat or other copies of (a) the Articles of Incorporation, as
amended, and Bylaws of the Company; (b) resolutions of the Board of Directors of
the Company authorizing the issuance of the Registerable Shares; (c) the
Registration Statement and the exhibits thereto; (d) the agreements, instruments
and documents pursuant to which the Registerable Shares are to be issued; and
(e) such other matters of law as we have deemed necessary for the expression of
the opinion herein contained. In all such examinations, we have assumed the
genuineness of all signatures on original documents, and the conformity to
originals or certified documents of all copies submitted to us as conformed,
photostat or other copies. In passing upon certain corporate records and
documents of the Company, we have necessarily assumed the correctness and
completeness of the statements made or included therein by the Company, and we
express no opinion thereon. As to the various questions of fact material to this
opinion, we have relied, to the extent we deemed reasonably appropriate, upon
representations of officers or directors of the Company.
Based upon and subject to the foregoing, we are of the opinion that the Registerable Shares when issued in accordance with their terms and, upon receipt by the Company of the agreed upon consideration therefor, will be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the prospectus forming a part of the Registration Statement. In giving such consent, we do not thereby admit that we are included within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations promulgated thereunder.
Sincerely,
SCHNEIDER WEINBERGER & BEILLY LLP
/s/ Schneider Weinberger & Beilly LLP |
EXHIBIT 10.8
------------------------------------------------------------- [PURADYN(R) LOGO]
Puradyn Filter Technologies Incorporated
MASTER DISTRIBUTORSHIP AGREEMENT
International
This Master Distributor Agreement ("Agreement"), is made and effective this 18th of February, 2008, by and between Puradyn Filter Technologies, Incorporated ("PFTI") or ("The Company"), whose principal address is at 2017 High Ridge Road, Boynton Beach, FL 33426 and Filter Solutions Ltd (FSL) (hereinafter referred to as "Master Distributor") having Principal offices at 33A Kingfisher Court, Hambridge Road, Newbury RG14 5SJ United Kingdom.
WHEREAS:
A. The Manufacturer is in the business of designing, developing, manufacturing and marketing bypass oil refiners and filters under the trademark "puraDYN(R)" hereinafter referred to as the "PRODUCT".
B. The Manufacturer is the exclusive licensee of Patents No. 5,591,330 5,639,965 5,630,912 5,718,258 6,139,725 and pending patent applications.
C. The Manufacturer has the right to grant to the Master Distributor the right to purchase and sell the product in the Service Territory (as defined herein);
D. The Master Distributor warrants that it is now solvent and capable of acting as a Master Distributor within the Service territory; and
E. The Master Distributor is desirous of purchasing and selling the Product in The Service Territory, and the Manufacturer is desirous of granting the Master Distributor, the right to do so upon the following terms and conditions; in consideration of the mutual promises and understandings set forth below, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
PFTI desires to appoint Master Distributor, and Master Distributor desires to accept appointment as, a exclusive Master Distributor of PFTI's product as set forth herein.
The parties agree as follows:
1. Rights Granted and Appointment
A. PFTI hereby grants to Master Distributor an Exclusive RIGHT on the
terms and conditions contained below to purchase inventory, promote
and resell "PFTI Products" (as defined below) in United Kingdom,
Mainland Europe and Ireland plus additional international
territories on a case-by-case basis to (i) end-users with fleets of
vehicles; (ii) users of hydraulic applications for manufacturing
processes; and (iii) Distributors who market to end-users with
fleets of vehicles and/or users of hydraulic applications for
manufacturing processes (those persons identified in paragraph 1,B
(i), (ii) and (iii) shall be collectively referred to as "Customers"
and individually as a "Customer), subject to the terms and
conditions set forth and stated in this Agreement and its attached
exhibits. The Master Distributor hereby accepts such appointment and
agrees to use its best efforts in the performance of such duties
hereunder.
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
B. Manufacturer agrees to forward all inquiries for sales and/or Master
Distributors to the Master Distributor no matter what industry or
market segment inquiry originate. Master Distributor will have ten
(10) working days to respond to Manufacturer in regards to how
inquiry will be handled. In the event that inquiry has not been
adequately satisfied and Manufacturer receives third contact from
said inquirer, Manufacturer will notify in writing the Master
Distributor that the Manufacturer will handle the inquiry.
C. The Manufacturer reserves the right to sell the Product directly to any U.S. Manufacturer of engines, vehicles, and other machinery as original equipment (hereinafter referred to as "OEM"). The OEM has the right to sell the Product through its dealer network.
D. Master Distributors activities shall include, but not be limited to, building sales volume to existing accounts, identifying and developing new accounts, diligently promoting new products and/or services to Customers, identified by Master Distributor, providing any and all services necessary for the support of Customers in their channels of distribution, effectively communicate to Manufacturer all relevant information on the market, competition and Customers that could in any way impact Manufacturer's business, and monitor the creditworthiness of Customers in the Territory.
E. Master Distributor shall not sell or deliver the Products outside the territory or to individuals it knows will transport the Products outside the Territory without first receiving written consent from one of Manufacturer's Officers. In addition, Master Distributor shall not, directly or indirectly engage in any of the following activities outside the Territory without, the prior written consent of Manufacturer in each case: advertise the Products; maintain warehouses for the Products; or seek Orders or engage in any other kind of sales promotion for the Products.
F. The Master Distributor shall not sell, offer for sale, or act as sales agent for the solicitation of Orders for any products which are competitive with any of the Products without first receiving written authorization from Manufacturer.
G. Installation must be performed and completed by a properly trained and authorized representative of the Company or Master Distributor.
2. Products
As used in this Agreement, the term "PFTI's Products" shall mean the products, related service parts and accessories manufactured and/or sold by PFTI as outlined in the PFTI price list, a copy of the most recent of which is attached.
3. Term of Agreement
This Master Distributor contract will have duration of five (5) years from the signing date provided Master Distributor has fulfilled his obligations hereunder. The contact will renew automatically, negotiated with minimum quantities, for an additional twelve (12) months on each anniversary date. This contract may be cancelled by either party with 30 days' written notice.
4. Minimum Annual Purchases
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
The parties agree that the Master Distributor shall purchase from the Manufacturer not less than US $600,000 through December 2008 from date of this contract and to be allocated approximately US$200,000 per quarter, beginning March 1, 2008. (As an example, if Master Distributor were to purchase US$ 250,000 in 2nd Quarter and US$ 250,000 during the 3rd Quarter, 4th Quarter purchases would have to be only US$ 100,000 to comply with Agreement.) (Reference Exhibit 1 for quarterly purchase requirements.)
A. Master Distributor agrees to sell US $600,000 of Product during the first 9 months beginning March 1, 2008.
B. After the first 9 months, Master Distributor agrees to a minimum fifteen percent (15%) increase over the previous 12 months annual rata (of $800,000). This fifteen percent (15%) increase will apply to each successive 12 month calendar period:
2nd year $ 920,000 U.S. Dollars
3rd year $1,058,000 U.S. Dollars
5. Price and Terms of Sale
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A. Price of Products. Master Distributor shall purchase the Product at the prices set forth on the Price Schedule attached as Exhibit 2 (the "Price Schedule"). The Price Schedule does not include Master Distributor taxes, duties, licenses, excises and tariffs, which shall be paid by the Master Distributor.
B. Change in price of Products. Manufacturer may, from time to time, change the Price Schedule in its sole discretion after providing Master Distributor with sixty (60) days written notice of such change.
C. Payments Free of Taxes, Withholding, etc. Master Distributor shall pay any and all taxes and any other surcharges, fees, licenses and other amounts charged or payable in connection with the importation of the Products into, and the sale of Products within, the Territory.
D. Payment Terms. The Master Distributor shall pay for the Product by wire transfer the purchase price prior to Manufacturer making the shipment available to Master Distributor EXW Manufacturer's shipping dock, Boynton Beach, Florida, or by Letter of Credit initially at 30 days after shipment and at some later period, 7 days after shipment.
E. Carrier. The Carrier will be selected and shipment scheduled by PFTI, unless Master Distributor requests a reasonable alternative which does not negatively affect or delay shipment.
6. Order Processing, Returns and Repurchase Option
A. PFTI will employ its best efforts to fill Master Distributor's orders promptly on acceptance, but reserves the right to allot available inventories among Master Distributors at its discretion.
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
B. PFTI will accept returns of products that are defective at the time of sale to Master Distributor or prove defective during the warranty period. PFTI will also allow Master Distributor to return salable goods to The Company, but only within the policy established for returned goods, shown below.
7. Financial Policies
Master Distributor acknowledges the importance to PFTI of Master Distributor's sound financial operation and Master Distributor expressly agrees that it will:
A. Maintain and employ in connection with Master Distributor's business and operations under this Agreement such working capital and net worth as may be required to enable Master Distributor properly and fully to carry out and perform all of Master Distributor's duties, obligations and responsibilities under this Agreement;
B. Pay promptly all amounts due PFTI in accordance with terms of sale extended by PFTI; and
Furnish PFTI with financial information and references in such form as PFTI may reasonably require from time-to-time for determination of credit worthiness.
Shipments and contract may be suspended at PFTI's discretion in the event that Master Distributor fails to promptly and faithfully discharge any obligation in this Section.
8. Use of PFTI's Name
Master Distributor will not use, authorize or permit the use of, the name "Puradyn Filter Technologies Incorporated" or derivatives, or any other trademark or trade name owned by PFTI as part of its firm, corporate or business name in any way. Master Distributor shall not contest the right of PFTI to exclusive use of any trademark or trade name used or claimed by PFTI. Master Distributor may, subject to PFTI's written approval of same, utilize PFTI's name, trademarks or logos in advertising on stationery, business cards and signage.
9. Termination
A. Termination after Notice. This agreement may be terminated by either party in the event of a breach by the other party (or any of its Officers or Principals joining this agreement) of any of its obligations under this Agreement (other than those obligations set forth in paragraphs 9.C and 9.D, below, which may result in earlier termination) which has not been corrected by the breaching party within a period of thirty (30) days from the date on which written notice of termination is given. In such event, termination shall be effected by written notice of termination to the breaching party. Termination on such grounds shall not preclude the terminating party from taking recourse to any legal action or remedy to which it might be entitled.
B. Immediate Termination without Notice. This agreement shall be deemed terminated immediately without notice upon the occurrence of any of the following events:
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
1. An assignment of all or a substantial portion of the assets of the Master Distributor for the benefit of creditors;
2. The insolvency of Master Distributor (as defined in the Uniform Commercial Code);
3. The filing of a voluntary petition in bankruptcy by or against the other party;
4. The filing of any attachment, distraint, levy, execution, or judgment against Master Distributor, the filing of an involuntary petition under the provisions of the U.S. Bankruptcy Act, or similar act under the Master Distributor's local laws as amended, or any applications for the appointment of a receiver for Master Distributor's property, the filing of which remains unsatisfied and undischarged after the end of thirty (30) days after the occurrence of such event;
5. The filing of a petition for bankruptcy, receivership, suspension or payments or dissolution by or against the other party or any equivalent thereof under the national law of that party, which petition is not discharged within thirty (30) days thereafter.
C. Immediate Termination By Either Party With Notice. This Agreement may be terminated with immediate effect by either party by written notice in the event of:
1. The occurrence of a "Force Majeure" as defined in paragraph 17.A hereof; and
2. Any representation made or furnished by the other party or any of its Officers or Principals who have joined in the execution of this Agreement being false or misleading in any material respect at the time it was made.
D. Immediate Termination by Manufacturer. Moreover, this Agreement may be terminated by Manufacturer with immediate effect by written notice to Master Distributor in the event that:
1. Master Distributor is acquired by or becomes affiliated with a company which is or may potentially become a competitor of the Manufacturer or any of the Manufacturer's affiliates;
2. A change occurs of more than fifty percent (50%) or more in the direct or indirect voting control of Master Distributor;
3. Master Distributor's failure to meet any Budget set forth for any period listed in Exhibit 1, hereof;
4. Master Distributor's assignment, transfer, or attempted assignment or transfer, of the rights and privileges granted hereunder without the prior written consent of the Manufacturer;
5. Master Distributor fails to make timely payment to Manufacturer for amounts owed hereunder in accordance with the terms herein.
10. Relationship of the Parties
A. The relationship of the Master Distributor to the Manufacturer shall be that of an independent contractor. This Agreement does not in any way create the relationship of joint venture partnership, franchiser and franchisee or principal and agent between the Manufacturer and the Master Distributor, and it is not contemplated that the Manufacturer will render significant assistance or guidance to the Master Distributor in the management, promotion or operation of the Master Distributor's business.
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
B. At the expiration of the Term, this Agreement automatically terminates and no further relationship between Master Distributor and the Manufacturer will exist, and no further commission whatsoever are due to Master Distributor for any sales made by the Manufacturer to any other entity, whether Master Distributor dealt with the entity or not, after expiration or termination of this Agreement, except such amounts as have accrued and or due and owing to the Master Distributor for sales made in the Master Distributor's Service territory as of the date of termination.
C. Master Distributor agrees that it will:
1. Not act in any way that would give the impression that it has the power or authority to bind the Manufacturer in any respect whatsoever.
2. Not make any representation (oral or written) that varies from the specifications, operating instructions or representations given to Master Distributor or made by the manufacturer with respect to the Products, including warranties.
3. Maintain a place of business in the Service Territory and employ sufficient personnel to carry out Master Distributor's obligations under this Agreement.
4. Comply with all applicable United Kingdom and applicable international territory, federal, province, state and local laws, rules, regulations, ordinances, and orders in the solicitation of orders for the Products, and in its other activities.
5. Master Distributor shall ensure that each installer chosen by Master Distributor (and/or Master Distributor, if applicable) to install the Products carries a commercial general liability insurance policy, with a reputable insurance company, subject to Manufacturer's reasonable approval, that is compliant with and effective under the laws of the Territory (including any laws of any province, state or locality within the Territory), which policy shall insure against any and all liability due to improper installation. Such policy shall have a face amount of not less than $1,000,000.00. Master Distributor shall ensure that Manufacturer is named as an "additional insured" under the policy.
6. Send a progress report to the Manufacturer on each six-month anniversary of the contract indicating the condition and the progress of the Service Territory.
7. Acknowledge that the manufacturer has the right at any time to change the design of, discontinue, or limit the manufacture or provision of any of the Products, or, upon not less than thirty (30) days prior written notice to Master Distributor to change the price thereof or to withdraw from the market entirely.
8. Acknowledge that if the Master Distributor sells controlling interest of Master Distributorship (defined as 50.1% of the voting share capital or more), it must first be approved by the Manufacturer, and may be subject to immediate termination by Manufacturer in accordance with section 9.D.2 (above). Every year the Master Distributor shall inform the Manufacturer of any stockholder changes.
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
9. Not file any (other) trademark applications, or otherwise seek intellectual property rights in or for, any other trademark or trade name of PFTI, and agrees that PFTI has the right to an injunction (as well as any other relief available) if this provision is violated.
10. Use Manufacturer's or its subsidiaries' or affiliates' trademarks "PURADYN"; "KEEP IT CLEAN") only in accordance with established guidelines and not use such trademarks in any manner that would convey the impression that Master Distributor is selling Products or acting on behalf of the Manufacturer.
11. Not use or disclose any Trade Secrets (information concerning Manufacturer's marketing and business plans, sales strategies, advertising programs, pricing, costs, customers, technology or manufacturing methods) and will make every effort to take reasonable precautions to prevent any such disclosure by its employees.
12. Appoint sub-representatives (agents, sub-Master Distributors or dealers) which meet all criteria of this agreement, but will receive Manufacturer's prior written approval for all sub-representatives which do not meet all criteria.
13. Not make any representations about the Product other than those contained in written information and data supplied by the Manufacturer and wilt be responsible for all representations.
14. Provide at its cost any language translations of all commercial communications, such as quotations, proposals, conditions, catalogues and other promotional materials, and will indemnify and hold harmless Manufacturer as a result of incorrect or incomplete translations.
15. Pay all expenses incurred by Master Distributor and its employees in the performance of its obligations under this agreement.
16. Promptly inform Manufacturer if it knows or suspects that customers or prospective customers intend to re-export Products outside the territory, and will not assist same without prior written permission from Manufacturer.
17. Be responsible for Product installation, customer training and customer service, including but not limited to post-warranty service and/or repair.
18. Comply with all governmental requirements, statutes and laws, and will notify Manufacturer of any conflict between its national laws and any provision of this agreement.
19. Not directly or indirectly make any offer or promise to improperly influence an agent, government official, political party or candidate for office in order to obtain or retain business or gain inappropriate advantage.
20. Forward to manufacturer any complaint or grievance with respect to products immediately upon receiving the complaint.
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
21. Distribute and sell Products in the Territory through its own sales organization.
22. Use its best efforts to promote and increase sales of the Products in its Territory and protect Manufacturer's interests in the Territory.
23. Maintain an inventory of all Products adequate to meet the needs of the market in the Territory for a period of ninety (90) days.
24. Maintain a spare parts inventory sufficient to meet demand on a timely basis.
25. Not deface, alter, improve or otherwise make any changes to the product.
26. Properly train installers of the Product and participate in one or more training sessions given by the Manufacturer at its facilities (or off-site with all expenses incurred by Manufacturer repaid by Master Distributor) and will pay for all expenses incurred by the Master Distributor for this training.
27. The Master Distributor shall not manufacture and/or cause to be manufactured and/or purchase and/or distribute and/or sell and/or commercialize during the term of this Agreement, and for a period of ninety (90) days following termination or cancellation of this Agreement products which in the judgment of the Manufacturer are similar in performance to or competitive with the Manufacturer's Products from any source other than the Manufacturer.
28. Manufacturer agrees during the term of the Agreement to permit the Master Distributor to use the Manufacturer's trademarks and trade names in the Master Distributor's sales program for the sole purpose of advertising and promoting the sale of the product. Master Distributor agrees not to use or cause the use of the Manufacturer's trademarks or trade names in any manner which shall directly or indirectly tend to lessen their value.
11. Advertising and Marketing Allowances
A. The Master Distributor will assume full responsibility for developing all promotional material including, but not limited to brochures, flyers, and advertisements. The Master Distributor agrees to dedicate a reasonable amount of gross purchases annually of the product to funding the development of these promotional materials. The Manufacturer agrees to provide any artwork not restricted by licensee to support Master Distributor's promotional material development.
B. Any printed advertising and promotional material created by the Master Distributor referring to the Product shall be sent to the Manufacturer for approval prior to any use, and the Manufacturer may disapprove within ten (10) days by fax, the use of any material which, in the Manufacturer's opinion, misrepresents the Product or which might mislead Customers.
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
C. Master Distributor agrees to conduct its promotion, advertising, sales, pricing and business generally at all times in strict compliance with all applicable Master Distributor federal, state and local laws and regulations.
Master Distributor with a functioning website will be required to link that site with the Puradyn website (www.puradyn.com) within 30 days of signing the Master Distributor Agreement. Puradyn will link to Master Distributor's site within 10 days of signing Master Distributor Agreement. If the Master Distributor Agreement is terminated, the links must be removed within 5 days.
12. Returns
Subject to PFTI headquarters approval, Master Distributor may return twice a year, for credit against future purchase of PFTI product, an amount of PFTI product (filter cases and units only) not to exceed 5% of the Master Distributors net purchases during the preceding six (6) months. Returns are subject to the following conditions:
A. Approval by PFTI headquarters.
B. Shipped pre-paid to PFTI.
C. Product in salable condition, subject to PFTI inspection before acceptance, and subject to a 20% restocking charge.
D. Credits for returns will be issued at the Master Distributor price in effect at the time the Product was purchased.
13. Special Orders
Emergency orders [shipped within 7 (seven) working days] are subject to a ten
(10) percent up charge.
14. Product Liability and Limitation of Warranty
A. Manufacturer's Responsibility. Manufacturer shall be responsible
only for damages caused by manufacturing defects of the Products
arising in the ordinary use of the Products. Manufacturer shall not
be liable for damages caused directly or indirectly by Master
Distributor or third parties as a result of the handling or storage
of the Products (and Master Distributor shall indemnify Manufacturer
and its shareholders, directors, officers, employees and agents, and
their respective successors and assigns, from and against any
damages, liabilities, claims, losses, suits, actions, costs and
expenses to Manufacturer so caused), or of their inadequate or
improper use. Manufacturer shall provide a limited warranty of one
(1) year on the units, including heater (Exhibit 3.) An extended
four-year warranty is available for puraDYN units. Please contact
Puradyn Filter Technologies, Inc. for additional information.
B. Limitation of Liability. THE FOREGOING WARRANTIES ARE EXCLUSIVE AND IN LIEU OF ALL OTHER EXPRESSED AND IMPLIED WARRANTIES WHATSOEVER, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. UNDER NO CIRCUMSTANCES SHALL THE MANUFACTURER BE SUBJECT TO ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT OR CONTINGENT DAMAGES WHATSOEVER WITH RESPECT TO CLAIMS MADE HEREUNDER OR BY ANY PURCHASER OR USER OF PRODUCTS.
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
C. Product Liability and Limitation of Warranty. Master Distributor at its own cost and expense shall maintain a standard form of insurance insuring all goods and merchandise sold by the Manufacturer to the Master Distributor for all risks to their invoice value, while all the goods and merchandise are in the possession, care and custody, or control of the Master Distributor or in which Master Distributor may have an interest.
15. Consequences of Termination.
A. Cessation of Sales Activities. Upon termination of this Agreement for any reason whatsoever, Master Distributor shall cease the sale of the Products and use of the Trademarks in the Territory, including but not limited to any use of the Trademarks for advertising purposes, and make immediate payment to Manufacturer of any and all amounts due Manufacturer. Subject to Manufacturer's right of repurchase in paragraph 15.B below, upon termination of this Agreement. Master Distributor shall be authorized to sell its then-existing stock of the Products at normal prices and otherwise in accordance with the Agreement, during the three (3) months following the effective date of termination, and shall thereupon cease any use of the Trademarks. Any or all Orders not accepted by the Manufacturer on or before the date of termination shall, at the Manufacturer's sole option, be canceled. Master Distributor shall forthwith return, at its own cost and expense, to the Manufacturer all promotional sales information materials and literature, stationery, price lists, catalogues, photographs, letters and papers that shall have been furnished by the Manufacturer to Master Distributor during the term of this Agreement, it being understood that no copies of these foregoing materials may be retained by Master Distributor subsequent to the date of termination or expiration of this Agreement. Master Distributor shall provide to Manufacturer all documentation identifying the names, addresses, telephone numbers and contact individuals of customers of Master Distributor who bought Products or were solicited by Master Distributor. Master Distributor shall also remove and return to Manufacturer, or in the alternative remove and destroy, any and all signs designating Master Distributor as a Master Distributor for the Products, any and all signs which include any trademarks or trade names of Manufacturer and any and all signs which associate Master Distributor with Manufacturer.
B. No Damages and Repurchase Option. Master Distributor acknowledges and expressly agrees that upon termination or expiration of this Agreement for any reason whatsoever, the Manufacturer shall not be liable to Master Distributor and Master Distributor hereby waives any claims for compensation or damages of any kind or character whatsoever, whether on account of the loss by Master Distributor of present or prospective compensation or anticipated compensation, or of expenditures, investments or commitments made either in connection therewith or in connection with the establishment, development or maintenance of establishment, development or maintenance of Master Distributor's business. The Manufacturer shall have no obligation to repurchase or to credit the Master Distributor for its inventory of the Products at the time of termination of this Agreement. The Manufacturer may, at its sole option, repurchase from the Master Distributor, either (i) at Manufacturer's then current list prices or at the net prices paid by the Master Distributor, whichever is lower, and less any and all restocking and freight charges relating thereto, or (ii) by giving Master Distributor a credit on its account(s) with Manufacturer (valued as in (i) above), at Manufacturer's sole discretion, any or all of the inventory of Products originally purchased by the Master Distributor from the Manufacturer and in new and marketable condition. Any restocking charge shall not exceed twenty (20) percent of the repurchase price.
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
16. Indemnification.
A. By Master Distributor. The Master Distributor agrees to indemnify and hold harmless Manufacturer and its shareholders, officers, directors, employees and agents, and their respective successors and assigns, from and against all damages, liabilities, claims, losses, suits, actions, costs and expenses of whatever form or nature, including legal/attorneys' fees and other costs of legal defense, whether direct or indirect, that they, or any of them, may sustain or incur as a result of any acts or omissions of the Master Distributor or any of its directors, officers, employees or agents, including, but not limited to, (1) breach of any of the provisions of this Agreement, (2) negligence or other tortious conduct, (3) representations or statements not specifically authorized by Manufacturer herein or otherwise in writing or (4) violation by the Master Distributor (or any of its owners, Directors, Officers, employees or agents) of any applicable law, regulation, or order in the Territory or of the United States.
B. By Manufacturer. Manufacturer agrees to indemnify and hold harmless the Master Distributor and its owners, officers, directors, employees and agents, and their respective successors and assigns, from and against all damages, liabilities, claims, losses, suits, actions, costs and expenses of whatever form or nature, including attorneys' fees and other costs of legal defense, whether direct or indirect, that they, or any of them, may sustain or incur as a result of any (1) breach of any of the provisions of this Agreement by Manufacturer or (2) negligence or other tortious conduct of Manufacturer.
17. Other Provisions
A. Force Majeure. If the performance of this Agreement or of any obligation hereunder is prevented by reason of any cause beyond the reasonable control of the affected party, which reasons shall include but not be limited to fire, floods, acts of G-d, civil revolution or disturbance, strikes, lockouts, epidemics or governmental measures, the party so affected, upon prompt notice to the other party, shall be excused from such performance to the extent of such prevention, restriction or interference, provided that the party so affected shall use its best efforts to avoid or remove such cause(s) of nonperformance and shall continue performance hereunder with the utmost dispatch whenever such cause(s) is/are removed. In the event that either party is prevented from performing its obligations hereunder by reason of force majeure for a continuous period of more than thirty days, then either party may forthwith terminate this Agreement.
B. Assignment. This Agreement may not be assigned by either party except with the prior written consent of the other party, with the exception that:
1. Master Distributor shall not assign, delegate or otherwise transfer its rights under this Agreement. Notwithstanding such assignment, Master Distributor may retain or utilize agents or sub-Master Distributors in the sale of Products, without the prior written consent of Manufacturer; and
2. Manufacturer may assign this Agreement in connection with the sale of its business, whether such sale takes the form of a sale of assets, a sale of capital stock, a merger, or otherwise.
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
Subject to the foregoing, this Agreement shall inure to the benefit of and be binding upon, the parties and their respective successors and assigns.
C. Independent Contractors. This Agreement is not an employment contract nor joint venture or partnership agreement between Manufacturer and Master Distributor. The relationship between the parties is that of vendor and purchaser and not principal and agent and, accordingly, any purchase of or sale of Products by Master Distributor or any agreement or commitment made by Master Distributor to any person, firm or corporation with respect hereto is made by Master Distributor for its own account as principal. Master Distributor is an independent contractor purchasing Products for its own account and is not obliged to account to Manufacturer for any profits earned by it on sales. Master Distributor shall have no right or authority to execute any agreement or give any warranty or statement in the name of or on behalf of Manufacturer.
D. Notices. Any notices required or authorized to be given hereunder, except for routine and typical shipment of documentation shall be in writing, in English, and shall be delivered by DHL or Federal Express to the following respective addresses or to such other addresses as the parties may hereinafter communicate to each other in writing. Such notice shall be deemed given three (3) days from the day delivered to DHL or Federal Express:
To Manufacturer: Puradyn Filter Technologies Incorporated
2017 High Ridge Road
Boynton Beach, Florida 33426
Attn: Alan J. Sandler
To Master Distributor and/or
any of its Officers or
Principals:
With a copy to: ________________________________________
________________________________________
________________________________________
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Notwithstanding, nothing contained herein shall justify or excuse either party's failure to give oral notice for purposes of informing the other party of circumstances or events that require prompt notification, but such oral notice shall not satisfy the requirements of written notice.
E. Entire Agreement; Amendments. This Agreement including the Exhibits hereto incorporates the entire understanding of the parties in respect of its subject matter, and supersedes any and all agreements, contracts, undertakings or arrangements, written or oral, that might have existed heretofore between the parties regarding the subject matter hereof except any outstanding accounts receivable owed to Manufacturer shall remain due and payable in accordance with their terms. This Agreement may not be amended except by means of a written instrument signed by both parties.
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
F. Waivers. Any waiver by either party of any provision of this Agreement or breach hereof shall not constitute a waiver of that provision or that breach on any future occasion or of any other provision or breach of this Agreement. Neither failure nor delay on the part of a party to exercise any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any singular or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. No understanding or course of dealing between the parties shall be effective to change, modify or discharge any provision of this Agreement or to constitute a waiver of any breach.
G. Severability. In case any provision of this Agreement is held to be prohibited by or invalid or unenforceable under applicable law by a court of competent jurisdiction, the invalidity of such provision shall not affect the validity of the remaining provisions hereof. The parties agree to substitute any such prohibited or invalid provision by another which shall lead to the economic result nearest to the one which would have resulted under the provision held invalid or prohibited.
H. Governing Law. To the extent permitted by the law of the Territory, the validity, interpretation and enforcement of this Agreement and all other instruments and documents executed in connection with this transaction shall be governed by Florida law without regard to conflicts of laws provisions. The parties agree that, to the extent permitted by the law of the Territory, the exclusive venue for any action brought under paragraph 17.K shall be Palm Beach County, Florida, and the parties hereby attorn to the courts of the State of Florida for such purpose. To the extent permitted by the law of the Territory, the parties waive any other jurisdiction which may correspond to them.
I. Interpretation and Rules of Construction. The headings and captions contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. The parties acknowledge and agree that each party has reviewed this Agreement with their respective counsels and that any rule of construction resolving ambiguities against the drafting party shall not be employed in the interpretation of this Agreement or any amendment, Exhibit or schedule hereto. Whenever the context shall require, all words herein in any gender shall be deemed to include the other gender(s), all singular words shall include the plural, and all plural words shall include the singular. This Agreement is executed in English but may be translated to the language of the Territory and both versions shall have the same legal effect. However, if permitted by the laws of the Territory, in case of any discrepancy between the texts, the English version shall govern.
J. Arbitration. In the event that the parties fail to resolve their dispute through the process of mediation then the suit shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by three (3) arbitrators appointed in accordance with the said Rules. The language of arbitration shall be English. The arbitration shall take place in Palm Beach County, Florida, USA. The time limit within which the Arbitral Tribunal must render its final award shall be four (4) months from the date of the initial Request for Arbitration. The parties hereby agree to maintain as confidential the existence of the arbitration and the disclosures made during the proceedings. This confidentiality agreement shall survive this Agreement, but in no manner shall this provision render the enforcement of the arbitral award by any judicial branch or court of law, a breach hereunder.
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
K. Enforcement Of Restrictive Covenants. In the event that Manufacturer seeks to enforce any of the covenants contained in paragraphs 10.C.11 and 10.C.27, the parties agree that Manufacturer may seek a preliminary injunction in the courts of Florida or of the United States for the Southern District of Florida, and by execution and delivery of this Agreement, each party hereto consents, for itself and in respect of its property, to the nonexclusive jurisdiction of those courts. Each party hereto irrevocably waives any objection, including any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any action or proceeding in such jurisdiction in respect of this Agreement or any document related hereto.
L. Judgment Currency
1. If a judgment or order is rendered by any arbitration panel, court or tribunal for the payment of any amounts owing to Manufacturer under this Agreement or for the payment of damages in respect of any breach of this Agreement or under or in respect of a judgment or order of another court or tribunal for the payment of such amounts or damages and such judgment or order is expressed in a currency (the "Judgment Currency") other than United States dollars, Master Distributor shall indemnify and hold harmless Manufacturer against any deficiency in terms of United States dollars in the amounts received by Manufacturer arising or resulting from any variation as between (i) the rate of exchange at which United States dollars are converted into the Judgment Currency for the purposes of such judgment or order, and (ii) the rate of exchange at which Manufacturer is able to purchase the United States dollars with the amount of the Judgment Currency actually received by Manufacturer.
2. The above indemnity constitutes a separate and independent obligation of the Master Distributor from its other obligations hereunder and applies irrespective of any indulgence granted by the Manufacturer. No proof of evidence of any actual loss shall be required by Manufacturer.
3. The term "rate of exchange" shall include any premiums and costs of exchange payable in connection with the purchase of or conversion into the relevant currency.
4. The obligation of Master Distributor in respect of any sum due from it to Manufacturer under this Agreement shall, notwithstanding any judgment in a currency other than United States dollars or otherwise, be discharged only to the extent that on the business day following receipt by Manufacturer of any sum adjudged to be so due in such other currency Manufacturer may in accordance with normal business procedures purchase United States dollars with such other currency. If the United States dollars so purchased are less than the sum originally due to Manufacturer in United States dollars, Master Distributor agrees, to immediately indemnify Manufacturer against such loss with interest at the highest rate allowable by law until such payment is made, and if the United States dollars so purchased exceed the sum originally due to Manufacturer in United States dollars, Manufacturer agrees to immediately remit to Master Distributor such excess.
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
M. Brokerage. The parties each hereby represent and warrant to the other that here is no party entitled to any broker's or finder's fee or commission in connection with this Agreement or the transaction contemplated hereby, and each party indemnifies the other and holds such other party harmless from and against any and all claims for any broker's or finder's fee or commission arising out of or based on any act of the indemnifying party.
N. Specific Performance; Cumulative Remedies. The parties hereby agree that it is impossible to measure in money the damages which will accrue by reason of failure of a party to perform any of its obligations under this Agreement. Therefore, if any party hereto, its heirs, personal representatives, administrators, successors or assigns shall institute any action or proceeding to enforce the terms of this Agreement, the party against whom the action or proceeding is brought hereby waives the claim or defense therein that such party has an adequate remedy at law, and all parties agree that the right of specific performance and/or injunctive relief shall apply to the enforcement of all provisions set forth in this Agreement. The right of specific performance and/or injunctive relief shall be cumulative to and not exclusive of any other rights or remedies of the party instituting suit.
O. Counterparts. This Agreement may be executed by telefacsimile and in any number of counterparts, each of which shall be deemed an original of this Agreement, but all of which together shall constitute one and the same instrument.
P. Third Party Beneficiaries. Nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or give any person, firm or corporation other than the parties and affiliates or subsidiaries referred to herein, their subsidiaries and their heirs, personal representatives, successors, administrators or assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, or result in their being deemed a third party beneficiary of this Agreement.
Q. Attorneys' Fees. In the event a suit or proceeding is brought by a party to this Agreement to enforce its provisions, or to seek remedy for any breach hereof, the prevailing party shall be entitled to receive its reasonable attorneys' fees and disbursements incurred in connection with such suit or proceeding, including fees and expenses incurred in any appellate proceedings.
R. Expenses. Except as specifically provided herein, each party to this Agreement shall pay its own expenses incident to this Agreement and the transactions contemplated hereby.
S. Time. Time is of the essence as to the terms and provisions of this Agreement.
T. General Provision. This Agreement specifically excludes the provisions of the UN Convention on Contracts for the International Sale of Goods.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
For Puradyn Filter Technologies Incorporated
Alan J. Sandler /s/ Alan J. Sandler ------------------------------------- ------------------------------ Name (Print) Name (Sign) -------------------------------------------------------------------------------- INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR |
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
Vice Pres./CAO 561 547 9499 ------------------------------------- ------------------------------ Title Phone 2017 High Ridge Road Boynton Beach, Florida 33426 ------------------------------------- Address For Filter Solutions Ltd Tom Hamilton /s/ Tom Hamilton ------------------------------------- ------------------------------- Name (Print) Name (Sign) Principal DIRECTOR ------------------------------------- Title |
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
EXHIBIT 1
Sales Budget
Master Distributor shall purchase from Manufacturer and sell to Customers in the Territory the following approximate amounts of Products:
During the period from March 1 through December 31, 2008: US$600,000 cumulative, with a quarterly purchase of US$200,000.
During the period from January 1 through December 31, 2009: US$920,000 cumulative, with a quarterly purchase of US$230,000.
During the period from January 1 through December 31, 2010: US$1,058,000 cumulative, with a quarterly purchase of US$264,500.
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
EXHIBIT 3
Puradyn Filter Technologies Incorporated
PRODUCT WARRANTY
puraDYN(R) Bypass Oil Filtration System
The puraDYN bypass oil filtration system is warranted to the original customer to be free from defects in material and workmanship for a period of live (5) years from the date of installation, with the exception of the heating element which is warranted for one (1) year from the date of purchase, providing the puraDYN is properly installed without any modifications or alterations pursuant to the Puradyn Filter Technologies Incorporated, ("PFTI") installation manual. PFTI products are eligible for this warranty only if registered with PFTI. Submission of the PFTI warranty registration is required upon installation.
The puraDYN, including any defective part therein, must be returned to an authorized sales representative, dealer, distributor, or to PFTI, within the material and workmanship warranty period. The sales representative, dealer, distributor or PFTI will then execute the warranty procedures on the owner's behalf. PFTI's responsibility in respect to warranty claims is limited to providing the required repairs or replacements to the product itself, and no claim of breach of warranty shall be cause for cancellation or rescission of the contract of sale of any PFTI products. Proof of purchase will be required to substantiate any warranty claim.
PFTI shall repair the damage to any engine caused directly and solely during said warranty period by the puraDYN provided that 1) the puraDYN is properly installed and maintained in accordance with the prescribed installation guidelines and service intervals contained in the PFTI installation manual; 2) the puraDYN is installed and maintained on an engine which is in normal running and mechanical condition at the time of installation and which continues to be properly maintained in accordance with the engine manufacturer's recommended service intervals (other than recommended oil changes); 3) the puraDYN is installed on an engine in which the replacement engine oil meets or exceeds the engine manufacturer's recommended grade of engine oil; 4) the proper puraDYN filter elements and the engine's standard full-flow filter elements are installed, used and replaced in accordance with the PFTI installation manual; and 5) the oil analyses are performed by a qualified laboratory at the same intervals you change the puraDYN filter element, but at least once a year.
Additionally, within five calendar days following the discovery of such damage, the customer must give written notice to Puradyn Filter Technologies Incorporated, 2017 High Ridge Road, Boynton Beach, Florida 33426, and allow a service representative of PFTI to (a) examine the damaged engine on which the puraDYN is installed; (b) examine the oil inside said damaged engine at the time such damage is discovered; (c) examine the required periodic oil analysis reports; and (d) examine the installation of the puraDYN at the time damage is discovered in order to permit PFTI to determine the extent of damage and whether it was caused solely and directly by the puraDYN In the event that without prior consultation with PFTI, repair work or any other change to the damage is executed, the right to warranty is invalidated and PFTI is not bound to pay any compensation for damage. For other claims, including bodily injury based on the deficiency of the puraDYN filter, the legal stipulations apply.
This warranty does not cover any economic loss, including without limitation, communication expenses, towing mechanic's travel time and/or mileage, meals, lodging, loss of use of the engine or equipment, loss of time, inconvenience, cargo damage, overtime or any other cost or expense resulting from a defect covered by this warranty. Repairs due to an accident, misuse, alteration, misapplication, storage damage, negligence, modification exceeding puraDYN specifications, or improper installation are not covered by this warranty. The above-mentioned warranty and PFTI's liability will never extend beyond (the consequence of) defects in the puraDYN systems themselves. Damage caused by other means or by third parties, such as errors during installation or by incorrect mounting of pieces of hoses, is not covered, either by this warranty or by product liability.
This Warranty expires if and when.
a. The puraDYN systems are handled without due care or in contradiction with the instructions for use, of if used for purposes other than its appropriate purpose.
b. Cartridges other than the original puraDYN filter elements have been applied.
c. The defect and/or damage is a result of a natural disaster, accident, misuse, incorrect use or any other outside cause for which PFTI is not liable.
PFTI reserves the right to change or improve the design of any PFT product without assuming any obligation to modify any PFTI product previously manufactured.
EXCEPT AS STATED ABOVE, PFTI SHALL NOT BE LIABLE IN CONTRACT, TORT, STRICT LIABILITY OR NEGLIGENCE FOR ANY DIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES OR FOR BREACH OF ANY WRITTEN OR IMPLIED WARRANTY. PFTI NEITHER ASSUMES OPR AUTHORIZED ANY OTHER PERSON TO ASSUME FOR PFTI ANY OTHER LIABILITY IN CONNECTION WITH THE SALE OF THE PRODUCT. EXCEPT FOR THE EXPRESS WARRANTY STATED ABOVE AND ANY WARRANTY IMPLIED BY LAW, THERE ARE NOT WARRANTIES EXPRESSED OR IMPLIED.
INITIALS [ILLEGIBLE] PURADYN INITIALS [ILLEGIBLE] MASTER DISTRIBUTOR
2017 High Ridge Road, Boynton Beach, FL 33426 (TF) 1 866 PURADYN (787 2396)
* (T) 561 547 9499 * (F) 561 547 8629 www.puradyn.com
EXHIBIT 10.9
[PURADYN LOGO]
3020 High Ridge Road Suite 100 Boynton Beach, Florida 33426-8710
Telephone 561 547 9499 800 488 0577
Fax 561 547 4025
Internet www.puradyn.com
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") by and between Puradyn Filter Technologies, Inc., a Delaware corporation ("PFTI") and Kevin Kroger ("Employee"), is hereby entered into as of this day of July 3, 2000.
/s/ [ILLEGIBLE] RECITALS |
A. As of the date of this Agreement, PFTI is engaged primarily in the business of providing Bypass Oil Filtration Systems.
B. Employee is employed hereunder by PFTI in a confidential relationship wherein Employee, in the course of Employee's employment with PFTI, has and will continue to become familiar with and aware of information as to PFTI's customers, specific manner of doing business, including the processes, techniques and trade secrets utilized by PFTI, and future plans with respect thereto, all of which has been and will be established and maintained at great expense to PFTI; this information is a trade secret and constitutes the valuable goodwill of PFTI.
AGREEMENTS
1. EMPLOYMENT AND DUTIES.
(a) PFTI hereby employs Employee as President and Chief Operating Officer ("COO") of PFTI. As such, Employee shall have responsibilities, duties and authority reasonably accorded to and expected of a President and COO of PFTI and will report directly to the Chief Executive Officer. Employee hereby accepts this employment upon the terms and conditions herein contained and, subject to paragraph 1(C) hereof, agrees to devote Employee's full business time, attention and efforts to promote and further the business of PFTI.
(b) Employee shall faithfully adhere to, execute and fulfill all policies established by the Board.
(c) Employee shall not, during the term of his employment hereunder, be engaged in any other business activity pursued for gain, profit or other pecuniary advantage if such activity interferes with Employee's duties and responsibilities hereunder. The foregoing limitations shall not be construed as prohibiting Employee from making personal investments in such form or manner as will neither require Employee's services in the operation or affairs of the companies or enterprises in which such investments are made nor violate the terms of paragraph thereof.
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2. COMPENSATION
For all services rendered by Employee, PFTI shall compensate Employee as follows:
(a) Base Salary. The base salary payable to Employee shall be $166,000 per year, payable on a regular basis in accordance with PFTI's standard payroll procedures but not less than bi-monthly. On at least an annual basis, the Board will review Employee's performance and may make increases to such base salary if, in its discretion, any such increase is warranted. Such recommended increase would, in all likelihood, require approval by the Board or a duly constituted committee thereof. In no event shall Employee's base salary be reduced.
(b) Bonus Plan. Minimum amount payable as bonus and schedule of such will be as follows:
Minimum amount Payable on December 31, 2000 $50,000 Minimum amount Payable on December 31, 2001 $80,000 Minimum amount Payable on December 31, 2002 $80,000 |
(c) Executive Perquisites, Benefits, and Other Compensation. Employee shall be entitled to receive additional benefits and compensation from PFTI in such form and to such extent as specified below:
(i) Payment of all premiums for coverage for Employee under health and hospitalization.
(ii) $600,000 Life Insurance Policy, a private Disability as well as Group Policy will be taken out to give approximately $15,000/month worth of coverage within ninety (90) days.
(iii) Car allowance of $1,000 per month. All gas expenses to be charged on corporate credit card.
(iv) Reimbursement for all business travel and other out-of-pocket expenses reasonably incurred by Employee in the performance of Employee's services pursuant to this Agreement. All reimbursable expenses shall be appropriately documented in a reasonable detail by Employee upon submission of any request for reimbursement, and in a format and manner consistent with PFTI's expense reporting policy.
(v) Employee shall be granted paid time off as follows: four
(4) vacation weeks at the completion of one full year of
employment, five (5) vacation weeks upon completion of
the second year.
(vi) PFTI shall provide Employee with other executive perquisites as may be available to or deemed appropriate for Employee by the Board and participation in all other PFTI-wide employee benefits as available from time to time.
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3. OPTIONS.
PFTI will grant to Employee 300,000 qualified stock options as partial payment for his services to PFTI. These options have been granted, effective date of employment in accordance with PFTI's 1999 S-8 Stock Option Plan (see attached) and are priced at the market closing price on the date of employment. Expiration date is ten (10) years from date of employment and such options shall vest in installments of 25% on each of the first, second, third and fourth anniversaries of the Effective Date.
4. NON-COMPETITION
(a) Employee will not, during the period of Employee's employment with PFTI, and for a period of two (2) years immediately following the termination of Employee's employment under this Agreement, for any reason whatsoever, directly or indirectly, for himself or on behalf of or in conjunction with any other person, persons, company, partnership, corporation or business of whatever nature:
(i) Engage, as an officer, director, shareholder, owner, partner, joint venturer or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor or as a sales representative, in any oil filtration business in direct competition with PFTI or any subsidiary of PFTI, within the United States or within 100 miles of any other geographic area in which PFTI or any of PFTI subsidiaries conducts business, including any territory serviced by PFTI or any of its subsidiaries (the "Territory".)
(ii) Call upon any person who is, at that time, within
the Territory, an employee of PFTI (including the
subsidiaries thereof) in a managerial capacity for
the purpose or with the intent of enticing such
employee away from or out of the employ of PFTI
(including the subsidiaries thereof)
(iii) Call upon any person or entity which is, at that time, or which has been, within one (1) year prior to that time, a customer of PFTI (including the respective subsidiaries thereof) within the Territory for the purpose of soliciting or selling products or services in direct competition with PFTI or any subsidiary of PFTI within the Territory; or
(iv) Call upon any prospective acquisition candidate, on Employee's own behalf or on behalf of any competitor, which candidate was, to Employee's actual knowledge after due inquiry, either called upon by PFTI (including the respective subsidiaries thereof) of for which PFTI made an acquisition analysis, for the purpose of acquiring such entity.
Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit Employee from acquiring as an investment not more than two percent (2%) of the capital stock of a competing business, whose stock is traded on a national securities exchange or over-the-counter.
/s/ [ILLEGIBLE] |
(b) Because of the difficulty of measuring economic losses to PFTI as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to PFTI for which it would have no other adequate remedy, Employee agrees that the foregoing covenant may be enforced by PFTI in the event of breach by him, by injunctions and restraining orders.
(c) It is agreed by the parties that the foregoing covenants in this paragraph 4 impose a reasonable restraint on Employee in light of the activities and business of PFTI (including PFTI's subsidiaries) on the date of the execution of this Agreement and the current plans of PFTI (including PFTI's subsidiaries); but it is also the intent of PFT and Employee that such covenants be construed and enforced in accordance with the changing activities, business and locations of PFTI (including PFTI's subsidiaries) throughout the term of this Agreement, whether before or after the date of termination of the employment of Employee. For example, if, during the term of this Agreement, PFTI (including PFTI's subsidiaries) engages in new and different activities, enters a new business or establishes new locations for its current activities or business in addition to or other than the activities or business enumerated under the Recitals above or the locations currently established therefore, then Employee will be precluded from soliciting the customers or employees of such new activities or business or from such new location and from directly competing with such new business within 100 miles of its then-established operating locations(s) through the term of this Agreement.
It is further agreed by the parties hereto that, in the event that Employee shall cease to be employed hereunder, and shall enter into a business or pursue other activities not in competition with PFTI (including PFTI's subsidiaries), or similar activities, or business in locations the operation of which, under such circumstances, does not violate clause (i) of this paragraph 4, and in any event such new business, activities or location are not in violation of this paragraph 4 or of Employee's obligations under this paragraph 4, if any Employee shall not be chargeable with a violation of this paragraph 4 if PFTI (including PFTI's subsidiaries) shall thereafter enter the same, similar or a competitive (i) business, (ii) course of activities or (iii) location, as applicable.
(d) The covenants in the paragraph 4 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall be reformed in accordance therewith.
(e) All of the covenants in this paragraph 4 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of Employee against PFTI, whether predicated on the Agreement or otherwise, shall not constitute a defense to the enforcement by PFTI of such covenants. It is specifically agreed that the period of two (2) years following termination of employment stated at the beginning of this paragraph 4, during which the agreements and covenants of Employee made in this paragraph 4 shall be effective, shall be computed by excluding from such computation any time during which Employee is in violation of any provision of this paragraph 4.
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5. TERM; TERMINATION; RIGHTS ON TERMINATION
The term of this Agreement shall begin on the date hereof and continue for three (3) years, and, unless terminated sooner as herein provided, shall continue thereafter on a year-to-ear basis on the same terms and conditions contained herein in effect as of the time of renewal. As used herein, the work "Term" shall mean (i) during the three-year period referred to in the preceding sentence, such three-year period, and (ii) during any one-year renewal pursuant to the terms hereof, such one-year period. This Agreement and Employee's employment may be terminated in any one of the following ways:
(a) Death. The death of Employee shall immediately terminate this Agreement with no severance compensation due to Employee's estate.
(b) Disability. If, as a result of incapacity due to physical or
mental illness or injury, as reasonably determined by
Employee's physician, Employee shall have been absent from
Employee's full-time duties hereunder for four (4) consecutive
months, then thirty (30) days after receiving written notice
(which notice may occur before or after the end of such four
(4) month period, but which shall not be effective earlier
than the last day of such four (4) month period), PFTI may
terminate Employee's employment hereunder provided Employee is
unable to resume Employee's full- time duties at the
conclusion of such notice period. Also, Employee may terminate
Employee's employment hereunder if is or her health should
become impaired to an extent that makes the continued
performance of Employee's duties hereunder hazardous to
Employee's physical or mental health or life, provided that
Employee shall have furnished PFTI with a written statement
from a qualified doctor to such effect and provided, further
that, at PFTI's request made within thirty (30) days of the
date of such written statement, Employee shall submit to an
examination by a doctor selected by PFTI who is reasonable
acceptable to Employee or Employee's doctor and such doctor
shall have concurred in the conclusion of Employee's doctor.
In the event this Agreement is terminated by either party as a
result of Employee's disability, Employee shall receive from
PFTI, in a lump-sum payment due within ten (10) days of the
effective date of termination, the base salary at the rate
then in effect for whatever time period is remaining under the
Term of this Agreement or for one (1) year, whichever amount
is greater.
(c) Good Cause. PFTI may terminate the Agreement ten (10) days after delivery of written notice to Employee for good cause, which shall be (1) Employee's willful, material and irreparable breach of this Agreement; (2) Employee's gross negligence in the performance or intentional nonperformance continuing for ten (10) days after receipt of written notice of need to cure) of any of Employee's material duties and responsibilities hereunder; (3) Employee's willful dishonesty, fraud or misconduct with respect to the business or affairs of PFTI which materially and adversely affects the operations or reputation of PFTI; (4) Employee's conviction of a felony crime; or (5) chronic alcohol abuse or illegal drug abuse by Employee. In the event of termination for good cause, as enumerated above, Employee shall have no right to any severance compensation.
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(d) Without Cause. At any time after the commencement of employment, Employee may, without cause, terminate this Agreement and Employee's employment, effective thirty (30) days after written notice is provided to PFTI. Employee may only be terminated without cause by PFTI during the Term hereof if such termination is approved by at least two-thirds of the members of the Board. Should Employee's employment be terminated by PFTI without cause during the Term, Employee shall receive from PFTI, in a lump-sum payment due on the effective date of termination, the base salary at the rate then in effect for whatever time period is remaining under the Term of the Agreement or for one (1) year, whichever amount is greater, plus any accrued salary and declared but unpaid bonus and reimbursement of expenses. Should Employee's employment be terminated by PFTI without cause at any time after the Term, Employee shall receive from PFTI, in a lump-sum payment due on the effective date of termination, the base salary rate then in effect equivalent to one (1) year of salary, plus any accrued salary and declared but unpaid bonus and reimbursement expenses. Further, any termination without cause by PFTI shall operate to shorten the period set forth in paragraph 4(a) and during which the terms of paragraph 4 apply to one (1) year from the date of termination of employment. If Employee resigns or otherwise terminates Employee's employment without cause pursuant to this paragraph 5(d), Employee shall receive no severance compensation.
(e) Change in Control of PFTI. In the event of a "Change in Control of PFTI" (as defined below) during the Term, refer to paragraph 12 below.
Upon termination of this Agreement for any reason provided above, Employee shall be entitled to receive all compensation earned and all benefits and reimbursements due through the effective date of termination. Additional compensation subsequent to termination, if any, will be due and payable to Employee only to the extent and in the manner expressly provided above or in paragraph 12 hereof. All other rights and obligations of PFTI and Employee under this Agreement shall cease as of the effective dater of termination, except that PFTI's obligations under paragraph 10 hereof and Employee's obligations under paragraphs 4, 6, 7, 8 and 10 hereof shall survive such termination in accordance with their terms.
If termination of Employee's employment arises out of PFTI's failure to pay Employee on a timely basis the amounts to which he is entitled under this Agreement or as a result of any other material breach of this Agreement by PFTI (including but not limited to a material reduction in Employee's responsibilities hereunder), as determined by a court of competent jurisdiction or pursuant to the provisions of paragraph 16 below, such termination shall be deemed a termination without cause, and PFTI shall pay to Employee severance compensation pursuant to the applicable provisions of paragraph 5(d) and all amounts and damages to which Employee may be entitled as a result of such breach, including interest thereon and all reasonable legal fees and expenses and other costs incurred by Employee to enforce Employee's rights hereunder, Further, none of the provisions of paragraph 4 hereof shall apply in the event this Agreement is terminated as a result of a breach by PFTI.
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In the event of any termination of Employee's employment for any reason provided above, Employee shall be under no obligation to seek other employment and there shall be no offset against any amounts due to Employee under this Agreement on account of any remuneration attributable to any subsequent employment that Employee may obtain. Any amounts due under this paragraph 5 are in the nature of severance payments, or liquidated damages, or both, and are not in the nature of a penalty.
6. RETURN OF COMPANY PROPERTY
All records, designs, patents, business plans, financial statements, manuals, memoranda, lists and other property delivered to or compiled by Employee by or on behalf of PFTI, or its representatives, vendors or customers which pertain to the business of PFTI shall be and remain the property of PFTI, and be subject at all times to its discretions and control. Likewise, all correspondence, reports, records, charts, advertising materials, and other similar data pertaining to the business, activities or future plans of PFTI which is collected by Employee shall be delivered promptly to PFTI without request by it upon termination Employee's employment.
7. INVENTIONS.
Employee shall disclose promptly to PFTI any and all significant conceptions and ideas for inventions, improvements and valuable discoveries, whether patentable or not, which are conceived or made by Employee, solely or jointly with another, during the period of employment, and which are directly related to the business or activities of PFTI and which Employee conceives as a result of Employee's employment by PFTI. Employee hereby assigns and agrees to assign all of Employee's interest therein to PFTI of its nominee. Whenever requested to do so by PFTI, Employee shall execute any and all applications, assignments or other instruments that PFTI shall deem necessary to apply for and obtain Letters Patent of the United States or any foreign country or to otherwise protect PFTI's interest therein.
8. TRADE SECRETS.
Employee agrees that he will not, other than as required by court order, during or after the Term of this Agreement with PFTI, disclose the confidential terms of PFTI's or its subsidiaries' relationships or agreements with its significant vendors or customers or any other significant and material trade secret of PFTI or it subsidiaries, whether in existence or proposed, to any person, firm, partnership, corporation or business for any reason or purpose whatsoever.
9. INDEMNIFICATION.
In connection with any threatened, pending or completed claim, demand, liability, action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by PFTI against Employee), by reason of the fact that Employee is or was performing services (including an act, omission or failure to act) under this Agreement, PFTI shall indemnify and hold harmless, to the maximum extent permitted by law, Employee against all expenses ( including attorneys' fees), judgments, fines and amounts paid in settlement, as actually and reasonably incurred by Employee in connection therewith. In the event that both Employee and PFTI are made a party to the same third-party action, complaint, suit or proceeding, PFTI agrees to engage competent legal representation reasonably acceptable to Employee, and Employee agrees to use the same representation, provided that if counsel selected by PFTI shall have a conflict of interest that prevents such counsel from representing Employee, Employee may engage separate counsel. Further, while Employee is expected at all times to use Employee's best efforts to faithfully
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discharge his or her duties under this Agreement, Employee cannot be held liable to PFTI for errors or omissions made in good faith where Employee has not exhibited gross, willful or wanton negligence or misconduct or performed criminal and fraudulent acts which materially damage the business of PFTI. PFTI shall pay, on behalf of Employee upon presentation of proper invoices, all fees, costs and expenses (including attorneys' fees) incurred in connection with any matter referenced in this paragraph 9.
10. NO PRIOR AGREEMENTS.
Employee hereby represents and warrants to PFTI that the execution of this Agreement by Employee and his employment by PFTI and the performance of Employee's duties hereunder will not violate or be a breach of any agreement with a former employer, client or any other person or entity. Further Employee agrees to indemnify PFTI for any claim, including but not limited to attorneys' fees and expenses of investigation, by any such third party that such third party may now have or may hereafter come to have against PFTI based upon or arising out of any noncompetition agreement, invention or secrecy agreement between Employee and such third party which was in existence as of the date of this Agreement.
11. ASSIGNMENT; BINDING EFFECT
Employee understands that he has been selected for employment by PFTI on the basis of Employee's personal qualifications, experience and skills. Employee, therefore, shall not assign all or any portion of Employee's performance under this Agreement. Subject to the preceding two (2) sentences and the express provisions of paragraph 12 below, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective heirs, legal representatives, successors and assigns.
12. CHANGE IN CONTROL.
(a) Unless employee elects to terminate this Agreement pursuant to
(c) below, Employee understands and acknowledges that PFTI may
be merged or consolidated with or into another entity and that
such entity shall automatically succeed to the rights and
obligations of PFTI hereunder or that PFTI may undergo another
type of Change in Control. In the event such a merger or
consolidation or other Change in Control is initiated prior to
the end of the Term, then the provisions of this paragraph 12
shall be applicable.
(b) In the event of a pending Change in Control wherein PFTI and Employee have not received written notice at least five (5) business days prior to the anticipated closing date of the transaction giving rise to the Change in Control from the successor to all or a substantial portion of PFTI's business and/or assets that such successor is willing as of the closing to assume and agree to perform PFTI's obligations under this Agreement in the same manner and to the same extent that PFTI is hereby required to perform, then such Change in Control shall be deemed to be a termination of the Agreement by PFTI without cause during the Terms and the applicable portions of paragraph 5(d) will apply; however, under such circumstances, the amount of the lump-sum severance payment due to employee shall be the amount calculated under the terms of paragraph 5(d) and the noncompetition provisions of paragraph 4 shall not apply.
/s/ [ILLEGIBLE] |
(c) In any Change in Control situation, Employee may elect to terminate this Agreement by providing written notice to PFTI at least five (5) business days prior to the anticipated closing of the transaction giving rise to the Change in Control In such case, the applicable provisions of paragraph 5(d) will apply as though PFTI had terminated the Agreement without cause during the Term; however, under such circumstance, the amount of the lump-sum severance payment due to Employee shall be the amount calculated under the terms of paragraph 5(d) and the noncompetition provisions of paragraph 4 shall all apply for a period of two (2) years from the effective date of termination.
(d) For purposes of applying paragraph 5 hereof under the circumstances describe in (b) and (c) above, the effective date of termination will be the closing date of the transaction giving rise to the Change in Control and all compensation, reimbursements and lump-sum payments due Employee must be paid in full by PFTI at or prior to such closing. Further, Employee will be given sufficient time and opportunity to elect whether to exercise all or any of Employee's vested options to purchase PFTI Common Stock, including any options with accelerated vesting under the provisions of PFTI's 1999 Stock Option Plan, such that Employee may convert the options to shares of PFTI Common Stock at or prior to the closing of the transaction giving rise to the Change in Control, if Employee so desires.
(e) Employee must be notified in writing by PFTI at any time that PFTI or any member of its Board anticipates that a Change in Control may take place.
13. COMPLETE AGREEMENT.
The Agreement supersedes any other agreements or understandings, written or oral, between PFTI and Employee, and Employee has no oral representations, understandings or agreements with PFTI or any of its officers, directors or representatives covering the same subject matter as this Agreement.
This written Agreement is the final, complete and exclusive statement and expression of the agreement between PFTI and Employee and of all the terms of this Agreement, and it cannot be varied, contradicted or supplemented by evidence of any prior contemporaneous oral or written agreement. This written Agreement may not be later modified except by a written instrument signed by a duly authorized officer of PFTI and Employee, and no term of this Agreement may be waived except by a written instrument signed by the party waiving the benefit of such term.
14. NOTICE.
Whenever any notice is required hereunder, it shall be given in writing addressed as follows:
To PFTI: Puradyn Filter Technologies, Inc.
3020 High Ridge Road, Suite 100
Boynton Beach, FL 33426
To Employee: Kevin Kroger
4305 Cherry Hill Drive, East
Orchard Lake, MI 48323
/s/ [ILLEGIBLE]
|
Notice shall be deemed given and effective three (3) days after the deposit in the U.S. mail of a writing addressed as above and sent first class mail, certified, return receipt requested, or when actually received. Either party may change the address for notice by notifying the other party of such change in accordance with this paragraph 14.
15. SEVERABILITY; HEADINGS.
If any portion of this Agreement is held invalid or inoperative, the other portions of this Agreement shall be deemed valid and operative and, so far as is reasonable and possible, effect shall be given to the intent manifested by the portion held invalid or inoperative. The paragraph headings herein are for reference purposes only and are not intended in any way to describe, interpret, define or limit the extent or intent of the Agreement or of any part hereof.
16. ARBITRATION.
Any unresolved dispute or controversy arising under or in connection within this Agreement shall be settled exclusively by arbitration, conducted before a panel of three (3) arbitrators in the community where the corporate headquarters of PFTI is located on the Effective Date, in accordance with the rules of the American Arbitration Association then in effect. The arbitrators shall not have the authority to add to, detract from or modify any provision hereof nor to award punitive damages to any injured party. The arbitrators shall have the authority to order back-pay, severance compensation, vesting of options (or cash compensation in lieu of vesting of options), reimbursement of costs, including those incurred to enforce this Agreement, and interest thereon in the event the arbitrators determine that Employee was terminated without disability or good cause, as defined in paragraphs 5(b) and 5(c) hereof, respectively, or that PFTI has otherwise materially breached this Agreement. A decision by a majority of the arbitration panel shall be final and binding. Judgment may be entered on the arbitrators' award in any court having jurisdiction. The direct expense of any arbitration proceeding shall be borne by PFTI.
17. GOVERNING LAW.
This Agreement shall in all respects be construed according to the laws of the State of Florida without regard to the conflicts of laws principles of such state.
18. COUNTERPARTS.
This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
Agreed to and Accepted By: /s/ Richard C. Ford /s/ Kevin Kroger --------------------------------- --------------------- Richard C. Ford, CEO Kevin Kroger Puradyn Filter Technologies, Inc. |
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ADDENDUM TO EMPLOYMENT AGREEMENT OF JULY 3, 2000
This Addendum to the July 3, 2000, Employment Agreement ("Agreement") between Kevin G. Kroger ("Kroger") and Puradyn Filter Technologies, Inc. ("PFTI), is made and entered into effective December 23, 2002 ("Effective Date").
RECITALS
A. Kevin Kroger and Puradyn Filter Technologies, Inc. entered into an employment agreement on July 3, 2000. As part of the compensation promised to Kroger in that agreement, Kroger is entitled to the payment of a bonus, as evidenced by Section #2(b). At this time Kroger is entitled to an $80,000.00 bonus, payable on December 31, 2002.
B. As a result of the lackluster performance of the company stock price, Kroger, in his desire to show his confidence and belief in the future performance of PFTI, and to conserve PFTI cash resources at this time, agrees to amend Section #2(b) of his employment contract.
AGREEMENT
1. In lieu of and in exchange for the $80,000.00 bonus which is due and payable on December 31, 2002, PFTI will grant and Kroger will accept 100,000 qualified stock options (ISO) for the purchase of the common stock of PFTI, which stock is traded on the American Stock Exchange. These options are in accordance with PFTI's S-8 1999 Stock Option Plan.
2. The price of these qualified stock options will be priced at the market closing price of PFTI common stock, as seen on the American Stock Exchange, on January 10, 2003, that being $1.70 per share.
3. The grant of these 100,000 options will accrue on the following timetable:
1) 50,000 shares on January 10, 2003
2) 50,000 shares on January 10, 2004
4. These options will expire within ten (10) years from the date of the granting of the same.
5. All other terms and conditions of the July 3, 2000, Employment Agreement remain in full force and effect.
EMPLOYEE EMPLOYER
Kevin G. Kroger Puradyn Filter Technologies, Inc.
a Delaware corporation
By: /s/ Kevin G. Kroger By: /s/ Richard C. Ford
---------------------- ------------------------------------
Kevin G. Kroger Richard C. Ford, CEO
|
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Puradyn Filter Technologies, Ltd., a U.K. limited company
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement on Form S-1 of Puradyn Filter Technologies Incorporated of our report dated March 10, 2008, with respect to the consolidated financial statements for the years ended December 31, 2007 and 2006 of Puradyn Filter Technologies incorporated included in the Annual Report (Form 10-KSB) for the year ended December 31, 2007 and to the reference to our firm under the heading "Experts" in the prospectus.
/s/ WEBB & COMPANY, P.A. Webb & Company, P.A. Boynton Beach, Florida November 4, 2008 |
EXHIBIT 99.1
PURADYN FILTER TECHNOLOGIES INCORPORATED
SUBSCRIPTION AGREEMENT FOR COMMON STOCK
Puradyn Filter Technologies Incorporated
2017 High Ridge Road
Boynton Beach, Florida 33426
Ladies and Gentlemen:
I desire to purchase _____________________shares of Puradyn Filter
Technologies Incorporated (the "Company") at $[ ] per share for a total
investment of $------------------- pursuant to the terms of the prospectus dated
[ ], 200_. Accompanying this subscription is the undersigned's check in the full
amount of the subscription payable to "Puradyn Filter Technologies
Incorporated." The undersigned represents to the Company that it has received
and read the Company's prospectus dated [ ], 200_ and that the undersigned has
the authority to enter into this subscription agreement on behalf of the
person(s) or entity registered above.
The Shares are to be issued in ____________________________________________
(check one box): Print Name of Investor
|_|____ individual name ____________________________________________
Print Name of Joint Investor (if applicable)
|_|____ joint tenants with rights of survivorship
____________________________________________
|_|____ tenants in entirety Signature of Investor
|_|____ corporation (an officer must sign) ____________________________________________
Signature of Joint Investor
|_|____ partnership (all general partners must sign)
____________________________________________
Print Name of Corporation, Partnership or
other Institutional Investor
By:_________________________________________
Title:______________________________________
Investor's complete address:
(Street)
(City) (State) (Zip) (Country)
Please check one of the following |_| U.S. Citizen
|_| U.S. Citizen residing outside the U.S.
|_| Resident Alien
|_| Non-U.S. Citizen
|_| Entity formed in the U.S. (specify domicile:_______)
|_| Non-U.S. Entity
|
Social Security Number (if individual investor) Taxpayer Identification Number (if applicable)
Accepted as of this ______________ day of ______________ 200__
Puradyn Filter Technologies Incorporated
By:________________________________
Joseph V. Vittoria, Chairman and CEO