ITEM 1.

BUSINESS.

The Company

We design, manufacture, market and distribute worldwide the Puradyn® bypass oil filtration system (the "Puradyn" or “system” ) for use with substantially all internal combustion engines and hydraulic equipment that use lubricating oil. Working in conjunction with the equipment’s full-flow oil filter, the Puradyn system cleans oil by providing a kidney loop circuit of oil filtration and treatment to continually remove solid, liquid and gaseous contaminants from the oil through a sophisticated and unique filtration and absorption process. The Puradyn system consists of a base filtration unit or housing that is connected via hoses to the engine or hydraulic system, along with filter elements that reside inside the filtration unit and are replaced periodically to maintain top performance. Our filter is unique in that it incorporates an additive package to replenish depleted base additive levels in engine lubricating oil. Because Puradyn -filtered lubricating oil is kept in a continually clean state, our system has been used effectively to safely and significantly extend oil-drain intervals and to extend the time between engine overhauls. We are the exclusive manufacturer of our unique disposable replacement filter elements ("Element") for the Puradyn system.

Products

The core product, the patented Puradyn bypass oil filtration system, is offered in two models, MTS and a custom-engineered hydraulic system, which can be attached to almost any engine or hydraulic application. The Puradyn bypass filtration system is similar to a kidney dialysis machine that provides an additional filtration circuit outside the body/engine to filter blood/oil and rid it of impurities, keeping the blood/oil continually clean. Whenever the engine or machinery is operating, the Puradyn is extracting from the oil solid particles down to less than one micron (1/39 millionth of an inch), as well as liquid contaminants, protecting the engine or hydraulic equipment from harmful wear and less efficient operation caused by these contaminants. Puradyn replacement filter elements contain an additive package that serves to replenish base additives (in engine lube oil only) in the oil during the filtration process, helping to maintain the oil’s proper chemical balance and viscosity.

Oil condition is monitored through periodic analysis of small oil samples. If the sample results show that the condition of the oil is considered good for continued use, the oil does not need to be changed. The Puradyn filter element is changed at the interval recommended by the OEM for oil changes, or at the customer’s current oil change interval.

Consequently, the Puradyn system significantly reduces maintenance costs by decreasing oil consumption, engine wear and certain other types of general maintenance as well as reducing environmental impact and concerns and costs associated with the storage and disposal of waste oil. Depending on the application, potential savings from utilizing the Puradyn system generally provide a relatively short average payback period of 3 to 12 months, during which time the customer’s oil and labor savings more than recoup the cost of the filtration unit and expended filter elements.

The MTS System is offered in seven different-sized systems that can be used in single or multiple configurations to effectively filter sizes from small (4 qt. / 3.8 L) to large (510 gal. / 1930.50 L) sump capacity engines, allowing the product to be used virtually on most engines in every industry. The MTS model offers water contaminant removal through the Company’s patented Polydry ^® polymer technology embedded in each filter element.

The hydraulic filtration system provides the same filtration efficiency and ability to remove water and solid particles as our engine filtration systems and is capable of handling hydraulic fluids with capacities up to 1,500 gallons (5,678 liters).  Certain hydraulic filtration systems being developed now will easily adapt to other industries where our systems are already operating in engine lube applications.

All Puradyn systems are compatible with virtually all standard and synthetic oils on the market, and they work with engines using gasoline, diesel, propane or natural gas. The Puradyn system, ordinarily, cannot be used on engines that do not have a pressurized lubricating system.

We are also the sole manufacturer and provider of replacement filter elements for the Puradyn system. Depending upon the application, we generally recommend that the element be replaced at the engine manufacturer's recommended/approved periodic oil change interval or current customer service interval. The type of element used also depends upon the specific type of engine or hydraulic application. A customer can change the filter element and take the required oil sample in approximately five to 10 minutes.

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The Puradyn system has no moving parts and consequently requires no significant ongoing maintenance. As long as filter elements are changed at the recommended intervals and other standard preventive maintenance procedures are completed, such as changing factory full-flow oil filters and air filters and completing regular oil analyses, the Company believes the Puradyn system will perform as designed; such belief is established and supported by historical field performance over more than two decades.

Warranties

The Puradyn system carries a six-month ‘money-back’ performance guarantee and is currently warrantied to the original user to be free of defects in material and workmanship for five years from date of purchase, with a one-year limited warranty on the heating element contained in the legacy PFT models. The Company will accept returns of products that are defective at the time of sale or prove to be defective during the limited warranty period. Returns are subject to specific conditions.

For the Company’s performance guarantee and warranty to remain in effect, users must, among other things, maintain a record of the laboratory oil analysis results and use Puradyn filter elements and replacement parts. The Company has received letters from numerous OEMs which have all stated that the installation and use of the Puradyn system does not void their manufacturer warranties if there is no oil related engine failure or malfunction attributed to the Puradyn system. To date, there have been no significant warranty claims, although there can be no assurances that such a trend will continue.

Marketing

The Company has an in-house marketing department comprised of one executive and one employee, with various projects outsourced on an as-needed basis.

The Company’s products are marketed to numerous industries that include hydraulic applications, and other users of engines or equipment that utilize up to 50 weight oil for lubrication. Additionally, we offer marketing assistance in material development to distributors.

Distribution

We currently have a network of approximately 40 domestic and international distributors and dealers; however, the majority of our products are sold through a limited number of distributors. Our distributors and dealers sell products to a number of industries, including oil and gas services, power generation, construction and forestry, commercial marine, mining, and transportation. Currently, international sales are administered by Puradyn from the United States. The international distributors are located in South America, Europe, the Middle East, and Asia. Our international distributors purchase product directly from the Company and sell to their existing or new customers. All distributor agreements can be terminated by either party with a 30 to 60 day written notice.

In February 2018 we entered into a second amendment to our September 2017 amended distribution agreement with DNOW LP (DNOW), a distributor with approximately 300 outlets worldwide that have the potential to sell and service the Puradyn system. Under the terms of the amended distribution agreement with DNOW, we granted it exclusive distribution agreement for the worldwide rights to sell our product in the oil and gas industry effective September 7, 2017. An incentive program was included in the original agreement to incentivize and compensate the distributor for reaching certain sales thresholds through June 30, 2018, but those thresholds were not met and no incentives were earned by DNOW. A sales incentive of approximately $99,000 was accrued in 2017 for potential incentive payments due to DNOW in 2018, but this was reversed in 2018 once it was established that no incentive payments would be earned by DNOW.

MNI Diesel, LLC (MNI) joined the Puradyn distributor network in 2012, and in August 2018, they became the exclusive distributor of Puradyn products to the commercial marine industry for the Ohio and Mississippi River Valleys and the U.S. Gulf Coast of Texas, Louisiana, Mississippi and Alabama.

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Sales

Direct Sales

The Company directly and/or with the assistance of its manufacturer's representatives, distributors, or other agents, markets its products directly to OEMs, other distributors and national accounts. We are dependent upon sales from a limited number of customers. At December 31, 2018 one customer represented approximately 95% of total accounts receivables. During the year ended December 31, 2018 sales from four customers represented 41%, 21%, 11% and 10% for a total of 83% of sales. During the year ended December 31, 2017 sales from three customers represented 36%, 16% and 12% for a total of 64% of sales. The loss of business from one or a combination of the Company’s significant customers could adversely affect its operations.

On November 17, 2017, the Company received two non-binding purchase orders from a major oil and gas customer for delivery of Puradyn product in shipments ranging from December 2017 to September 2018. The revenue generated from this sale was approximately $1,000,000 as of December 31, 2018.

International Sales

The Company, directly and/or with the assistance of commission-based manufacturer's representatives, has established primarily non-exclusive distributors and sales representation in various countries, including the Middle East, Germany, Romania, Turkey, United Kingdom, Thailand, Colombia, and others. The ultimate success of these and other distributors primarily depends upon their ability to successfully introduce and sell the product in their respective territories, including obtaining local evaluations, establishing distribution, and other factors similar to those faced by the Company in the United States. Unlike domestic sales, the Company has a policy that international sales be paid in advance or secured by a letter of credit before shipping. The Company’s credit risk is minimal with international sales as a result of this policy. Total international sales amounted to approximately 9.9% and 25.3% of net sales in 2018 and 2017, respectively.  

Manufacturing and Production

The Company purchases component parts for unit housings and filter elements. The component parts are assembled, packed and shipped from our facility in Boynton Beach, Florida.

We currently source a majority of our raw materials and component parts from various vendors in the United States, and actively search for suppliers that are based in the United States. Substantially all the tools and dies used by certain of our vendors are owned by the Company. We have researched alternative sources of supply and do not anticipate that the loss of any single supplier would have a material long-term adverse effect on our business, operations or financial condition. 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. The Company achieved ISO 9001:2015 registration from the International Organization for Standardization, validating its Quality Management Standards process for ‘design, manufacture, sales and distribution of bypass oil filtration systems and replacement filters for various industries.’

Engineering and development costs are expensed as incurred. During the years ended December 31, 2018 and 2017, we incurred engineering and development costs, excluding payroll and benefit expenses for engineering, in the amount of $5,866 and $6,981, respectively, which are included in selling and administrative expenses in the accompanying statements of operations .

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Competition

Bypass oil filtration systems produced by other companies in varying degrees address the issues of solid or liquid contaminant filtration through centrifugal design, media filtration or evaporation. However, Puradyn believes that its solution is the only bypass oil filtration system that simultaneously incorporates all of the following features, which provide us with a competitive advantage:

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Filtering solid contaminants to as small as below one micron, including enhanced soot retention through the use of a patent-pending process for chemical grafting;

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Effectively removing harmful gaseous and liquid contaminants through a heated evaporation chamber or patented polymer formulation; and

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Replenishing the base additives in engine oil so as to maintain the oil’s chemical balance and viscosity well within engine manufacturers’ specifications for longer periods of time.

The proper use of our products reduces the need for oil-related maintenance services, replacement parts, original oil sales and consumption and waste oil disposal.  

Some of our competitors may have more capital, greater brand recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. 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.

Intellectual Property

Our ability to compete effectively depends in part on our ability to maintain the proprietary nature of our technology, products and manufacturing processes. We principally rely upon patent, trademark, trade secrets and contract law to establish and protect our proprietary rights.  

We rely on a combination of trade secrets, patents and trademarks to establish and protect our intellectual property rights. As of December 31, 2018, we had issued nine U.S. patents and 23 issued international patents that directly relate to our technology that expire between 2017 and 2037, as well as one pending patent application in the U.S. and 13 pending patent applications internationally.  

Subject to the availability of sufficient working capital, we expect to pursue additional patent protection to the extent that we believe it would be beneficial and cost effective.

In 2018 and 2017 we spent $5,866 and $6,981, respectively, on engineering and development.

We have registered the product trademark “ Puradyn ^® ” in the United States and other countries where the " Purifiner ^® " trademark was registered, and have also registered the trademarks “Polydry ^® ” , “ CGP ^® ” , “Keep It Clean! ^® ”, “We Fight Dirty ^® ”, Let’s Talk Dirty ^® ”, and the Puradyn logo in the United States and targeted countries.

We have also obtained the rights to the domain name www.puradyn.com and puradyn.ro, and puradyn.com.tr.  As with telephone numbers, we do not have and cannot acquire any property rights in an Internet address.

Employees

At March 25, 2019, the Company had 20 full-time employees, including our executive officers.

Our employees are not covered by collective bargaining agreements, and we believe our relationship with our employees to be good.

History of our Company

The Company has been incorporated in the State of Delaware since February 1988.  On February 4, 1998, the Company filed a Certificate of Amendment to its Certificate of Incorporation, changing its name to Puradyn Filter Technologies Incorporated.

Corporate Information

The Company’s principal executive offices are located 2017 High Ridge Road, Boynton Beach, Florida  33426, and our telephone number is (561) 547-9499.  Our corporate website is www.puradyn.com .

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ITEM 1A.

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 annual report before deciding to invest in our common stock. If any of the following risks and uncertainties develops into actual events, our business, financial condition or results of operations could be materially adversely affected and you could lose your entire investment in our Company.

Risks Related to our Business

WE HAVE A HISTORY OF LOSSES AND THERE ARE SUBSTANTIAL 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 December 31, 2018. For the years ended December 31, 2018 and 2017, we reported net losses of $216,382 and $1,230,094, respectively, and at December 31, 2018 we had a working capital deficit of $1,603,639. At December 31, 2018, we had an accumulated deficit of approximately $63 million. Our financial statements have been prepared on the basis that we will operate as a going concern; however, as set forth in the report on our audited consolidated financial statements issued by our independent auditor appearing later in this report, there is substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. We anticipate that we will continue to incur losses in future periods until we are successful in significantly increasing our revenues. There are no assurances that we will be able to raise our revenues to a level which supports profitable operations and provides sufficient funds to pay our obligations. If we are unable to meet those obligations, we could be forced to cease operations in which event investors would lose their entire investment in our Company.

WE 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 FUND OUR ONGOING OPERATIONS WILL BE IN JEOPARDY AND WE WILL BE UNABLE TO CONTINUE AS A GOING CONCERN.

As described elsewhere herein, our net sales are not sufficient to pay our operating expenses. Our capital requirements depend on a number of factors, including our ability to internally grow our revenues, manage our business and control our expenses. Historically, our operations have been financed primarily through a credit line from our Executive Chairman, as well as short-term loans from other affiliates. At December 31, 2018, we owed him approximately $8.0 million which is due on December 31, 2021. Earlier in 2017 he advised us that he did not expect to continue to provide working capital advances to the Company at historic levels, if at all. In 2018 we borrowed an additional $325,000 from him under short term demand notes and $26,273 under a previous line. From January 1, 2019 through March 25, 2019, we borrowed an additional $275,000 of unsecured advances which are payable on demand. The reductions in the amount of advances to us from our Executive Chairman have adversely impacted our operations from time to time. While we do not have any external sources of liquidity at this time, the Company is in continuing discussion with third parties for potential investment. These historic discussions, however, have not resulted in identifying any potential capital raising transactions which were upon proposed terms which we believed were fair to our Company and our stockholders. Given our history of losses and secured debt levels, we expect to continue to face a number of challenges in our ability to raise capital. If we do not raise funds as needed, or if our Executive Chairman should continue to reduce amounts advanced to us or discontinue altogether his practice of advancing funds to us to pay our operating expenses, 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, we would no longer be able to continue as a going concern and you could lose all of your investment in our Company.

OUR NET SALES INCREASED IN 2018 FROM 2017 BUT ARE NOT SUFFICIENT TO FUND OUR OPERATING EXPENSES. 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.

Although our net sales for 2018 increased by 87% from 2017, our current operations remain insufficient to fund our operating expenses and pay our obligations as they become due. We used cash in operations of approximately $187,222 and $703,037 in 2017, respectively.

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Our gross profit margins for the year ended of 2018 increased from 22% during the year ended 2017 to 41% during the year ended 2018.The increase in our gross profit margins in the 2018 periods is attributable to increased facility utilization and operating efficiencies due to increased sales and a significant decrease in the expense for slow moving inventory from amounts recorded in 2017. We have been advised by several of our suppliers that prices for various raw materials are being increased as a result of the loss of some of their primary suppliers and higher prices with their secondary suppliers and the unknown impact of recently enacted tariffs by the current administration. However, we are exploring and implementing measures to help mitigate the impact on our costs. We notified our customers of pricing increases effective October 1, 2018 which varied by product, and we will continue to review cost of materials increases and adopt further pricing action in the future as warranted.

WE ARE DEPENDENT UPON SALES TO A LIMITED NUMBER OF CUSTOMERS AND ONE EXCLUSIVE DISTRIBUTOR REPRESENTING THE OIL AND GAS INDUSTRY.

In September 2017 we granted DNOW exclusive worldwide rights to sell our products in the oil and gas industry effective September 7, 2017. Sales under the agreement amounted to approximately $1.7 million in 2018, representing approximately 41% of our total net sales for 2018 vs $828,000 in 2017 representing 36% of our total net sales in 2017. There are no binding obligations from DNOW to purchase a certain amount of product from us, nor to undertake any specific marketing or sales incentives related to our products. Historically, sales to the oil and gas industry have represented approximately 65% and 70%, respectively, of our net sales in 2018 and 2017. While we granted DNOW these exclusive rights because we believed its distribution network was broad enough that it could facilitate our growth in this industry, we are wholly dependent upon DNOW’s sales efforts over which we have limited control. The exclusive nature of this agreement prevents us from engaging other distributors to facilitate sales of our products in the oil and gas industry. In that event, our revenues may be adversely impacted in future periods.

OUR ASSETS SERVE AS COLLATERAL UNDER A SECURED PROMISSORY NOTE IN THE AMOUNT OF $8.39 MILLION TO OUR EXECUTIVE CHAIRMAN WHICH MATURES IN DECEMBER 2021.

Historically we have borrowed working capital from our Executive Chairman and at December 31, 2018, we owed him approximately $8.39 million. During the first quarter of 2019, we received an additional $275,000 of unsecured advances which are payable on demand. As described elsewhere in this report, in March 2019 we entered into a note exchange agreement with him whereby he agreed to extend the due date of these obligations to December 31, 2021 and we granted him a first position security interest in our assets. As of March 25, 2019, we owe him approximately $8.39 million which matures on December 31, 2021, together with an additional $600,000 of unsecured advances which are payable upon demand. If we are unable to pay this obligation when it becomes due, he could seek to foreclose on our assets in an effort to collect the amounts due him. In that event, our ability to continue our business and operations as they are presently conducted would be in jeopardy.

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 year ended December 31, 2018 sales from four customers represented a total of 83% of sales. During the year ended December 31, 2017 sales from three customers represented a total of 64% of sales. Our largest customer is a distributor; in the event of a loss of the distributor the Company would be able to sell the end users directly. 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.

AT DECEMBER 31, 2018 OUR CURRENT LIABILITIES INCLUDE $1,564,253 OF DEFERRED COMPENSATION. WE DO NOT HAVE THE FUNDS TO PAY THESE AMOUNTS.

Since 2005, Mr. Kroger, our President and COO, has deferred a portion of his compensation to assist us in managing our cash flow and working capital needs. In addition, Mr. Edward Vittoria, our CEO who joined our company in May 2018, is also deferring a portion of his compensation to assist us in managing our cash flow and working capital needs. Finally, two other former employees, who no longer receive a salary, are receiving regular payments from their deferred compensation. As there is no written agreement with these employees which memorializes the terms of salary deferral, only an election to do so, it is possible that the employees could demand payment in full at any time, elect to no longer defer their salaries, or reduce the amount they currently defer. We do not have the funds to pay these amounts, and unless we are successful in raising additional capital we are unable to satisfy any demands by these officers and employees for full payment of these obligations of which there are no assurances, we would be unable to pay these amounts to our employees. In that event, it is likely we would lose their services in future periods.

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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. The Company believes it will have future benefits from current patent awards and applications to the extent it has working capital to pursue those patents, of which there is no assurance, and does not regard our business as being dependent upon any single patent or group of patents that may expire in the near-term.

Risk Related to our Common Stock

PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DELAY OR PREVENT A TAKE-OVER WHICH MAY NOT BE IN THE BEST INTERESTS OF OUR STOCKHOLDERS.

Provisions of our certificate of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our shareholders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions of the Delaware General Corporation Law also may be deemed to have certain anti-takeover effects. Further, our certificate of incorporation authorizes the issuance of up to 500,000 shares of preferred stock with such rights and preferences as may be determined from time to time by our board of directors in their sole discretion. Although, to date, we have never issued preferred stock, our board of directors may, without stockholder approval, issue series of preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock.

THE EXERCISE OF OUTSTANDING WARRANTS AND OPTIONS WILL BE DILUTIVE TO OUR EXISTING STOCKHOLDERS.

At December 31, 2018, we had 69,016,468 shares of our common stock issued and outstanding and the following securities, which are exercisable into shares of our common stock, were outstanding:

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773,336 shares of our common stock issuable upon the exercise of warrants with exercise prices ranging from $0.05 to $0.25 per share; and

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11,785,000 shares of our common stock issuable upon the exercise of options with exercise prices ranging from $0.017 per share to $0.280 per share.

The issuance of these shares will be dilutive to our existing stockholders.

BECAUSE OUR STOCK CURRENTLY TRADES BELOW $5.00 PER SHARE, AND IS QUOTED ON THE OTCQB® MARKETPLACE, 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 brokers 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.

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THERE MAY NOT BE SUFFICIENT LIQUIDITY IN THE MARKET FOR OUR SECURITIES IN ORDER FOR INVESTORS TO SELL THEIR SECURITIES. THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.

While our common stock is quoted on the OTCQB Tier of the OTC Markets, our common stock is thinly traded and should be considered an illiquid investment. The market price of our common stock will likely be highly volatile, as is the stock market in general, and the market for over the counter quoted stocks in particular. Some of the factors that may materially affect the market price of our common stock are beyond our control, such as conditions or trends in the industry in which we operate or sales of our common stock. These factors may materially adversely affect the market price of our common stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.

FINRA SALES PRACTICE REQUIREMENTS MAY ALSO LIMIT A STOCKHOLDERS ABILITY TO BUY AND SELL OUR STOCK.

In addition to the penny stock rules promulgated by the SEC, which are discussed earlier in this section, the rules of the Financial Industry Regulatory Authority, Inc. (FINRA) require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative, low-priced securities to their non-institutional customers, broker-dealers must have reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit the ability to buy and sell our stock and have an adverse effect on the market value for our shares.

ITEM 1B.