ITEM 1.
BUSINESS.
The Company
We design, manufacture, market and distribute worldwide the puraDYN® bypass oil filtration system (the "Puradyn") for use with substantially all internal combustion engines and hydraulic equipment that use lubricating oil. Working in conjunction with the equipment’s full-flow oil filter, the Puradyn system cleans oil by continually removing solid, liquid and gaseous contaminants from the oil through a sophisticated and unique filtration and evaporation process. For engine lubricating oil, our filters are unique in that it incorporates an additive package. Because Puradyn filtered lubricating oil is kept in a continually clean state, our system has been used effectively to safely extend oil-drain intervals and to extend the time between engine overhauls. We are the exclusive manufacturer of the disposable replacement filter elements ("Element") for the Puradyn.
Products
The core product, the patented Puradyn bypass oil filtration system, is offered in two families of models, TF and PFT, and can be attached to almost any engine and hydraulic system. The concept of the Puradyn bypass filtration system is similar to a kidney dialysis machine that filters blood to rid it of impurities, keeping the oil continually clean. Whenever the engine or machinery is operating, the Puradyn is extracting from the oil solid particles down to less than one micron (1/39 millionth of an inch), as well as gaseous and liquid contaminants, protecting the engine or hydraulic equipment from harmful wear caused by these contaminants. Replacement elements used for filtration of engine oil contain an additive package in which base additives are replenished 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 at the time the Element is changed in lieu of performing a regularly scheduled 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, there is no need to change the oil.
Consequently, the Puradyn significantly reduces maintenance costs by decreasing oil consumption, engine wear and certain other types of general maintenance as well as reducing environmental concerns and costs associated with the storage and disposal of waste oil. These potential savings are achieved from utilizing the Puradyn, which generally has a relatively short payback period of, on average, six to 14 months, depending upon the application.
The Puradyn system is currently manufactured in six different sizes suitable for placement on engines or equipment with oil sump capacities ranging from a minimum of eight to a maximum of 300 quarts. By utilizing multiple systems, sump capacities up to 450 gallons can be serviced. The later generation PFT model uses the same filter and offers the same benefits and features of the original TF model, with the added enhancements of easier serviceability and the main component of the system being more corrosion-resistant.
All Puradyn systems are compatible with virtually all standard and synthetic oils on the market and they work with engines using gasoline, diesel, propane or natural gas. The Puradyn system, ordinarily, cannot be used on engines that do not have a pressurized lubricating system.
We also manufacture and distribute Elements for the Puradyn system. Depending upon the application, we generally recommend that the Element be replaced at the engine manufacturer's recommended/approved periodic oil change interval or as oil analysis dictates. The type of Element used also depends upon the specific type of engine or hydraulic application. A customer can change the Element and take the required oil sample in approximately five to 10 minutes.
The Company has implemented patented and/or proprietary technology in the filter Elements that we believe provides several advantages including:
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A technology that provides the capability of integrating the engine’s oil filter with the Puradyn system as well as facilitating the development of ‘smart’ features into an advanced oil filtration system. The technology was designed to complement the legacy and heavy duty product lines.
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An additive package in which pellet-encased chemicals are incorporated in the replaceable filter element to replenish additives in the oil. This additive package helps to maintain the oil’s chemical balance and viscosity. In 2006, the Company re-engineered the additive package to be compatible with new oils designed to meet EPA 2007 and 2010 on-highway exhaust emission standards and be simultaneously backwards-compatible with all older API diesel lubrication oil service categories.
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An Extreme Duty (XD) Element, specifically formulated to meet the needs of diesel engine lubricating oils operating in harsh environments, including relatively high levels of sulfur content in fuel, addresses the levels of emissions reduction that began in 2010.
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CGP® Extended Life Filter Element containing a patent-pending process for chemical grafting. This technology improves the attraction and retention of soot and other solid contaminants to the packed cotton filter material. CGP technology was developed over a three-year period inclusive of laboratory and field-testing. Consolidated results from across the country show that test vehicles on a fleet of 150 over the road trucks and 230 tractor trailers vehicles averaged more than 100,000,000 miles without the need for a traditional oil change.
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Ease of maintenance: The filter Element can be replaced in a matter of minutes.
When the Element is changed, a small amount of make-up oil is added to replace any oil retained in the used Element or consumed during the normal engine combustion process. The Company's performance warranties require the user to change the Puradyn filter element and take a small sample of the oil 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 the Company and end user should a problem arise.
The Puradyn has no moving parts and consequently requires no significant ongoing maintenance. As long as Elements are changed at the recommended intervals and other standard preventive maintenance procedures such as changing factory full flow and air filters and oil analyses are completed, the Company believes the Puradyn will perform as designed; such belief is established and supported by independent lab tests and historical field performance.
Warranties
The Puradyn carries a six-month ‘money-back’ performance guarantee, and is currently warranted to the original user to be free of defects in material and workmanship for five years from date of purchase, with a one-year limited warranty on the heating element.
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 replacement parts. Oil analysis is a standard industry practice endorsed by OEMs and various fleet maintenance organizations and most engine manufacturers will accept oil analyses to verify clean oil to extend drain intervals as an alternative to performing their recommended oil change intervals.
The Company has received letters from numerous OEMs which have all stated that the installation and use of the Puradyn does not void their manufacturer warranties if there is no oil related engine failure or malfunction attributed to the Puradyn. 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 established an in-house marketing department.
The Company’s products are marketed to numerous industries including but not limited to, oil and gas services, agricultural, bus, generator, construction, mining, industrial, a multitude of hydraulic applications, and other users of engines or equipment that utilize up to 50 weight oil for lubrication. Currently, the Company's primary focus is on those markets and OEM segments that would most utilize larger sump-capacity engines.
Instead of traditional media advertising campaigns, the Company is concentrating instead on direct sales contacts, trade shows, white papers and other methods of demonstration, such as Internet-based marketing, to promote its products, generate awareness and stimulate sales.
We rely on management's ability to determine the existence and extent of available markets for our product. Company management has considerable sales and marketing backgrounds and devote a significant portion of their time to sales-related activities.
One of our marketing strategies is based on creating customer ‘pull-through’, a sustained level of request for our product on the OEM level from end-users. To date, customer pull-through has resulted in a growing number of our systems being factory-installed at individual Kenworth and Freightliner truck facilities as well as at the John Deere Forestry Division facility in Joensuu, Finland.
Taking a long-term approach, management believes that federal government entities and the U.S. military are markets that can be successfully cultivated, based on the following:
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2011 continuing orders placed by the U.S. Military for installation on new trucks supplied by Freightliner LLC for foreign military sales.
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2009 renewal of the Company’s General Services Administration (GSA) contract, GS-30F-0007R.
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2008 contract received from the U.S. Army to supply 70 Puradyn systems to outfit the JERRV, part of MRAP (Mine Resistant Ambush Protected) vehicle family.
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2007 National Stocking Number (NSN) assigned to a specific Puradyn system kit to be installed on the U.S. Army’s Mine Protection Vehicle family.
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2007 received first order from Freightliner LLC for the Foreign Military Sales Line Haul Trucks
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2006 final test results from the U. S. Department of Energy, which shows that the systems used in evaluation of the benefits and cost analysis of bypass oil filtration, have produced an estimated savings of 89% in oil usage and purchases when used on heavy-duty diesel engines.
Distribution
Distributors maintain minimum product inventory levels, maintain a storefront and service 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 over 100 domestic and international active distributors and warehouse distributors located throughout North America. Additional potential distributors, such as dealers for Freightliner, Paccar, and John Deere, participate in other programs where sales are controlled through these OEMs. While not all of these potential distributors actively promote our products, all distributors have access to our product and have the capability to sell our product.
Currently, the majority of international sales are administered by Puradyn from the United States and the remaining international distributors are located primarily in South America, Europe, and Asia. Our international Distributors purchase product directly from the Company and sell to their existing or new customers. The Company will accept returns of products that are defective at the time of sale to the distributor or prove to be defective during the limited warranty period. Returns are subject to specific conditions.
As a significant portion of our products are sold to distributors , this could unfavorably affect our overall exposure to credit risk as these customers could be affected by potential economic or other conditions.
There can be no assurance that such distributors will be successful in introducing the Puradyn in their territories as they will face obstacles similar to those any Company and its distributors would have encountered when introducing an innovative technology in their territories.
Sales
Direct Sales
The Company directly and/or with the assistance of its manufacturer's representatives, distributors or other agents, markets its products directly to OEMs, other distributors and national accounts. Typically, larger 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; however, we have seen this evaluation period continue to shorten as the Company's products gain wider acceptance and support from well-known end users and OEMs.
Currently, our products are being evaluated (in various stages of progress) by numerous potential end users and existing customers including, among others:
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A major engine OEM
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A major transmission OEM
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An international power generation company
We have a five-year contract on the Vehicular Multiple Award Schedule, New Technologies through the General Services Administration (GSA). This enables us to offer our Puradyn system to all federal, state and local government agencies. The GSA schedule allows easy access to our products without the usual lengthy bid process to all federal agencies that purchase vehicles, including construction equipment, medium and heavy trucks, waste disposal vehicles, aerial lift vehicles and fire trucks. The contract period is for five years from December 2009, the date of the award.
We are dependent upon sales to a limited number of customers. During 2012 four customers together accounted for 49% of the Company’s net sales and during 2011 three customers together accounted for 43% of the Company’s net sales. There were four customers at December 31, 2012, whose trade receivable balances equaled or exceeded 5% of total receivables, representing approximately 33.9%, 17.2%, 16.9%, and 16.9% respectively of total receivables. There were five customers at December 31, 2011, whose trade receivable balances equaled or exceeded 5% of total receivables, representing approximately 79.6% of total receivables. The loss of business from one or a combination of the Company’s significant customers could adversely affect its operations.
The Company’s domestic sales are made on credit terms, which vary depending on the nature of the sale. The Company believes it has established sufficient reserves to accurately reflect the amount or likelihood of product returns or credits and uncollectible receivables. However, there can be no assurance that actual returns and uncollectible receivables will not exceed the Company’s recorded reserves.
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 Denmark, Germany, South Africa, Turkey, United Kingdom, Thailand, Colombia, and others. The ultimate success of these and other distributors depends upon, among other things, their abilities to successfully introduce and sell the product in their territories including obtaining local evaluations, establishing distribution and other factors similar to those faced by the Company in the United States. Unlike domestic sales, the Company has a policy on international sales for them to be paid in advance before shipping or secured by a letter of credit. The Company’s credit risk is minimal with international sales as a result of this policy. Total international sales amounted to approximately 16.7% and 23.8% of consolidated net sales in 2012 and 2011, respectively.
Manufacturing and Production
The Company purchases component parts for unit housing and filter Elements. The component parts are assembled, packed and shipped from our facility in Boynton Beach, Florida.
We currently source (i.e., purchase each raw material and component part from a specific vendor) substantially all of our raw materials and component parts from various vendors in the United States. Substantially all the tools and dies used by certain of our vendors are owned by the Company. We have researched alternative
sources of supply and do not anticipate that the loss of any single supplier would have a material long-term adverse effect on our business, operations or financial condition. 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.
In January 2004, we achieved ISO 9001:2000 registration 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.
In December 2010, the Company completed a transition surveillance audit to achieve 9001:2008 registration, validating its Quality Management Standards process for ‘design, manufacture, sales and distribution of bypass oil filtration systems and replacement filters for various industries.’ Management believes this certification reinforces recognition of its tangible commitment to quality control and continuous improvement processes with OEMs and other potential large customers.
Engineering and development costs are expensed as incurred. During the years ended December 31, 2012 and 2011, we incurred engineering and development costs in the amount of $21,238 and $14,840, respectively, and are included in selling and administrative expenses in the accompanying consolidated statements of operations.
Competition
There are a number of companies which sell bypass oil filtration systems. Our primary competitors are Filter Kleen, 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. However, Puradyn believes that it designs and manufactures the only bypass oil filtration system that incorporates all of the following features which we believe provides us with a competitive advantage:
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Filtering solid contaminants to 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; and
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Replenishing the base additives so as to maintain proper oil total base number (TBN) and viscosity
The proper use of our products reduces the need for oil maintenance services, replacement parts, original oil sales and consumption and waste oil disposal.
Intellectual Property
The Company owns patents for the Puradyn system; filter Elements, oil flow meter, and two patents for technology, which include a manifold type full-flow filter/bypass filtration unit (side-by-side) in the U.S. and certain other countries. The expiration dates of these patents range from May 2014 to August 2028. The following table provides information on our current U.S. patents.
We believe our patented technology is especially important on 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.
During 2008-2012, we applied for the following patents:
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A new patent for a multi-purpose liquid filter.
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International patents for recently granted domestic patents.
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A new patent for a multi-filter lubricant purification system which can be serviced while the engine is running.
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A new patent for an oil-soluble additive injection apparatus, which will increase the efficacy of the replacement filter element.
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A new patent for micro-fine filtration. This patent incorporates technology that includes a means to remove liquid and gaseous contaminants within a closed system where the Company’s legacy evaporation chamber may be counter-indicated due to physical or regulatory limitations.
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A new patent for a technologically advanced engine-mounted full-flow filter/micro-fine bypass filter system with smart sensor capability not available from any other competitive device.
There can be no assurance that such patents will be granted or, if granted, will withstand competitive threats to their patentability or, in the case of the redesigned Puradyn, be developed into commercially viable products.
We have registered the product trademark “Puradyn” in the United States and other countries where the "Purifiner" trademark was registered, and have registered the product trademarks “CGP” and “Keep It Clean!” in the United States.
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 addresses; however, there can be no assurance in this regard.
Governmental Regulation
Our products typically do not require any governmental approvals. As part of the certification process under the California Environmental Protection Agency's Department of Toxic Substances in July 1994 and subsequent re-certifications in July 1998 and August 2003, the Company obtained an Executive Order issued by the State of California Air Resources Board stating that the Puradyn does not reduce the effectiveness of applicable vehicle pollution control systems, and may be installed on all 2002 and older model vehicles with pressure oil systems. While this certification is no longer in use by the California EPA, the Puradyn remains the only technology of its kind to have been designated as a ‘Pollution Prevention’ technology.
2007 emissions standards represented landmark regulations affecting engines using catalytic converters and particulate traps in addition to that using exhaust gas recirculation (EGR). Due to these after-treatment devices and their sensitivity to ash content, the oil industry developed entirely new additive formulations removing any additives that produced ash as a byproduct. In order to be compatible with the new oil formulation, we developed an entirely new additive package for 2007. In addition, this new additive package is backwards-compatible in that it is also compatible with the pre-2007 oils. Both lab and field tests of the newer additive package have demonstrated excellent results and a next-generation additive package has been formulated to meet more stringent regulations that were introduced in 2010.
As more engine manufacturers move to newer methods, including EGR, the oil is being subjected to more extreme conditions increasing the need for finer filtration of contaminants such as soot; reduction of water and gaseous contaminants, and constant replenishment of oil additives to combat oxidation and acid.
We believe that engine manufacturers can capitalize on our enhanced technology to remove soot from their oil to maintain their extended drain intervals by operating on constantly clean oil.
The conservation of energy, oil, and natural resources has become an important part of the national energy and environment agenda. We believe the current U.S. administration’s agenda, which in part, makes the commitment to conserve more oil over the next ten years than the U.S. currently imports from Middle East and Venezuela combined, could result in a mandate of federal fleets to use bypass filtration technology as a means to immediately conserve resources while alternative means of energy and environmental conservation are researched. There are no assurances, however, that any new government regulations will be enacted which will directly or indirectly benefit our company in the future.
Employees
At March 29, 2013, the Company had 21 full-time employees, including our executive officers.
None of the employees are covered by collective bargaining agreements, and we believe our relationships with our employees to be good.
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, was unable to meet its 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.
ITEM 1A.
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 develop 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.
WE HAVE A HISTORY OF LOSSES AND OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM HAS 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, 2012. For the years ended December 31, 2012 and 2011, we reported net losses of $2,227,473 and $1,611,842, respectively. Our revenues declined 4% for 2012 from 2011. At December 31, 2012, we had an accumulated deficit of approximately $55.9 million. These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from our principal stockholder who is also an executive officer and director of our company 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, 2012 and 2011 expressing 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.
OUR NET SALES 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.
We used cash in operations of approximately $1.1 million and approximately $1.3 million in 2012 and 2011, respectively. Our net sales have never been sufficient to fund our operating expenses. 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 cost reductions will continue to benefit us in future periods. However, as long as our cash flow from operations remains insufficient to fund our operations, we will continue depleting our cash and other financial resources which are extremely limited. 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.
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 EXECUTE OUR GROWTH STRATEGY AND FUND OUR ONGOING OPERATIONS WILL BE IN JEOPARDY.
Historically, our operations have been financed primarily through a credit line from one of our principal stockholders, as well as the issuance of equity and short-term loans, primarily from affiliates. 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 December 31, 2012, we had a working capital deficit of $821,615 as compared to a working capital deficit of $636,722 at December 31, 2011. We need to raise additional capital to fund our ongoing operations, pay our existing obligations and for future growth of our company. We do not have any commitments for additional capital and we cannot assure you 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 APPROXIMATELY $8.7 MILLION WHICH IS DUE BY DECEMBER 31, 2014.
Since March 2002, as set forth above, our principal stockholder, has been providing funding to us for working capital on an unsecured basis. At December 31, 2012, we owed him approximately $8.7 million. As extended, this loan is due on December 31, 2014 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 that the due date will be extended. 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 2012 four customers individually accounted for approximately 15%, 13%, 11% and 11% respectively (for a total of 49%) of our net sales. During 2011 three customers individually accounted for approximately 16%, 15% and 12% respectively (for a total of 43%) of our 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.
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.
MOST OF OUR COMPETITORS MAY HAVE MORE CAPITAL; SOME MAY HAVE GREATER BRAND RECOGNITION, LARGER POTENTIAL CUSTOMER BASES AND SIGNIFICANTLY GREATER ACCESS TO FINANCIAL, TECHNICAL AND MARKETING RESOURCES THAN WE DO.
A few of 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; however, independent testing, validation and ongoing field testing has provided a certain degree of assurance in our belief. For these and other possible reasons, some of 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.
THE EXERCISE OF OUTSTANDING WARRANTS AND OPTIONS WILL BE DILUTIVE TO OUR EXISTING STOCKHOLDERS.
At December 31, 2012, we had 47,399,233 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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3,899,758 shares of our common stock issuable upon the exercise of warrants with exercise prices ranging from $0.167 to $1.25 per share; and
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3,863,972 shares of our common stock issuable upon the exercise of options with exercise prices ranging from $0.11 per share to $2.60 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 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 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.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
Not applicable to a smaller reporting company.
ITEM 2.
ITEM 2.
PROPERTIES.
We lease approximately 25,500 square feet of office and warehouse space in Boynton Beach, Florida which serves as our principal executive offices, from an unrelated third party. Under the terms of the prior lease, which will expire on July 31, 2013, we pay an average rent of approximately $188,000 per year On September 27, 2012 we entered into a new lease for the same facility. Effective August 1, 2013, our average annual rent will be approximately $151,564, for the six year term of the lease which expires on July 31, 2019. In addition, we are responsible for all operating expenses and utilities.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS.
On July 7, 2009 the Company filed a lawsuit in the Circuit Court in 15th Judicial District in and for Palm Beach County, Florida, styled Puradyn Filter Technologies, Inc. versus Richard C. Ford case number 502009CA023128XXXXMB. In this action against Mr. Ford, our former Chief Executive Officer, the Company is alleging non-payment of three promissory notes totaling $756,250 with interest at a rate of 5.63% per annum since July 25, 2001, the execution date of the notes. As of November 13, 2009 interest on all three notes amounts to $353,796, for an aggregate amount owing of $1,110,046. At the time of the execution of these promissory notes, Mr. Ford was Chief Executive Officer of the Company and these notes were drafted under Mr. Ford’s direction. The Company is seeking payment of the promissory notes and accrued interest.
On August 22, 2012 we reached a settlement with the plaintiff in this civil suit. Under the terms of the settlement, Mr. Ford agreed to transfer to us a total of 875,000 shares of our common stock, with 6,000 shares due within one week of the execution of a settlement agreement, 133,000 shares by December 31, 2012 and the balance at the rate of 184,000 shares per quarter beginning on March 1, 2013.
In the event Mr. Ford should default in these arrangements, he is obligated to pay us $145,000 less any monies or shares previously tendered to us, we are entitled to obtain a judgment in such amount and he will waive any rights he may have to discharge such judgment through bankruptcy.
On September 11, 2012, a definitive settlement agreement was executed containing these and other customary terms.
On December 31, 2012, Mr. Ford defaulted on the terms of the settlement agreement. The Company has obtained a default final judgment in the amount of $144,160 plus interest and legal fees on February 26, 2013. The Company is pursuing collection of this judgment.
ITEM 4.
ITEM 4.
Mine Safety Disclosures.
Not applicable to our company.
PART II
ITEM 5.
ITEM 5.
STOCKHOLDER MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
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.
On March 28, 2013, the last sale price of our common stock as reported on the OTC Bulletin Board was $0.17. As of March 28, 2013, there were 306 record owners of our common stock. The transfer agent for the Company’s common stock is ClearTrust LLC, 16540 Pointe Village Drive, Suite 201, Lutz, Florida 33558.
Dividend Policy
The Company has never declared or paid cash dividends on its 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.
The Company presently intends to retain future earnings, if any, to finance the expansion of its business and does not anticipate any cash dividends will be paid in the foreseeable future. The future dividend policy will depend on our earnings, capital requirements, expansion plans, financial condition and other relevant factors.
Recent Sales of Unregistered Securities
On June 8, 2012, we renewed a consulting agreement with Monarch Communications, Inc. for services rendered as public relations firm and media relations consultants for the Company. The term of the agreement is for twelve months. As compensation for their services, Monarch will receive a fee of $7,000 per month, for the first six months, payable as $2,000 cash and $5,000 in shares of common stock. For the final six months of the agreement, Monarch will receive a fee of $7,000, payable as $3,000 in cash and $4,000 in shares of common stock. Either party may terminate the agreement with 30 days’ notice. As partial compensation per the agreement for consultant work, the Company issued to Monarch Communications, Inc. the following shares during the fourth quarter of 2012 and subsequent to December 31, 2012:
·
On October 8, 2012, 10,571 shares of common stock valued at $0.14 per share.
·
On October 15, 2012, 26,667 shares of common stock valued at $0.154 per share.
·
On November 26, 2012, 14,286 shares of common stock valued at $0.28 per share.
·
On December 14, 2012, 30,769 shares of common stock valued at $0.13 per share.
·
On January 8, 2013, 28,571 shares of common stock valued at $0.14 per share.
·
On February 8, 2013, 26,667 shares of common stock valued at $0.15 per share.
·
On March 11, 2013, 21,053 shares of common stock valued at $0.19 per share.
The recipient is an accredited or otherwise sophisticated investor who had such knowledge and experience in business matters and was capable of evaluating the merits and risks of the prospective investment in our securities. The issuance of the shares is exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.
On February 13, 2013, the Company issued 882,353 shares of its common stock valued at $0.17 per share as payment for the note payable in the amount of $150,000 from a stockholder who is also a director. The recipient is an accredited or otherwise sophisticated investor who had such knowledge and experience in business matters and was capable of evaluating the merits and risks of the prospective investment in our securities. The issuance of the shares is exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA.
Not applicable to a smaller reporting company.
ITEM 7.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
You should read the following discussion together with our audited consolidated financial statements and the related notes thereto included in Item 8 “Financial Statements and Supplementary Data.” In addition to historical consolidated financial information, this discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Actual results could differ from these expectations as a result of factors including those described under “Cautionary Statement Regarding Forward-Looking Information” and Item 1A, “Risk Factors,” and elsewhere in this Annual Report on Form 10-K.
General
Sales of the Company’s products, the puraDYN® bypass oil filtration system and replaceable filter elements will depend principally upon end user demand for such products and acceptance of the Company’s products by OEMs. The oil filtration industry has historically been competitive and, as is typically the case with innovative products, the ultimate level of demand for the Company’s products is subject to a high degree of uncertainty. Developing market acceptance for the Company’s existing and proposed products will require substantial marketing and sales efforts and the expenditure of a significant amount of funds to inform customers of the perceived benefits and cost advantages of its products. As a result of our limited resources, we have not had adequate funds available to undertake these necessary marketing efforts.
To our knowledge, currently no bypass oil filtration system has captured a substantial share of the market. We believe we are in a unique position to capitalize on the growing acceptance of bypass oil filtration given that our product and our Company are positioned as, including, but not limited to:
·
A competitively priced, value-added product based on an advanced, patented technology;
·
An alternative solution to the rising costs and national concerns over dependence on foreign oil and the growing trend toward ‘greening’ of existing technologies.
·
Providing an operational maintenance solution to end users in recognition of existing and reasonably foreseeable federal environmental legislation such as new regulation affecting diesel engines and diesel fuels, mandating cleaner diesel engines which first went into effect January 1, 2007. Additional and more stringent legislation went into effect in 2010.
·
Providing significant operational savings which will reduce engine life cycle costs.
·
Providing potential fuel efficiency due to a reduction of friction in the engine components from continuously clean lubricating oil.
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 100 active distributors in the U.S. and internationally. The number of distributors will frequently change as we add new distributors as well as when OEMs come onboard with their distribution network.
We continue to focus our sales and marketing efforts to target industries open to innovative methods to reduce oil maintenance operating costs. These industries are searching for new and progressive ways to maintain their equipment, including bypass oil filtration. This strategy includes focus on:
·
The expansion of existing strategic relationships we have with Nabors, John Deere, Avis, and others;
·
Continued development and expansion of our distribution network with distributors who have an established customer base;
·
Continued development of relationships with identified and targeted market segment OEMs;
·
Creating customer ‘pull-through’, a sustained level of request for our product on the OEM level; and
·
Initiating and monitoring customer evaluations for conversion 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 product acceptance based on recent accomplishments:
·
The Company was named and authorized supplier of its Puradyn system for John Deere construction and Forestry division. The product was selected after over four years of evaluation and testing.
·
Increased sales and distribution activity in Europe, the Middle East, and South and Central America.
We believe that the renewed interest shown in our bypass oil filtration technology as an economic alternative to combat significantly rising oil prices and dependence upon foreign oil, coupled with the added benefits of being environmentally beneficial as a means to conserve oil, has timely and favorably positioned the Company as a manufacturer of a cost efficient “green” product.
Our customers have found that bypass oil filtration technology affords the same benefits of the claims made by alternative energy source providers - reduce significant oil consumption and minimize a company’s carbon footprint. We believe that the advantages our Company offers versus alternative energy source providers to existing and potential customers include not having to invest in new equipment; continued use of existing fleet equipment; and offering a relatively low-cost aftermarket product, installation, training, and support.
Recognizing that a level of oil consumption is not 100% avoidable, we promote our technology as environmentally-friendly in that it provides a practical and more intelligent use of oil as opposed to the accepted norm of oil as a disposable and infinite resource. By keeping engine and hydraulic oil continuously clean, equipment runs at optimum efficiency and the oil can be kept in use, possibly extending the life of the oil by numerous oil drain cycles.
We believe that industry acceptance will continue to grow in 2013; however, there can be no assurance that any of our sales efforts or strategic relationships will meet management’s expectations or result in an increase in our revenues.
The Company’s sales effort not only involves educating the potential customer on the benefits of our product, but also allowing the end-user to test and evaluate the Puradyn system on its fleet equipment. While set for a specific period of time, typically ranging from three to twelve months, evaluations are often influenced by a number of variables including equipment applications downtime or servicing, which may extend the evaluation period. Consequently, the sales cycle can be relatively long; however, the addition of several large engine users and the naming of official supplier status at John Deere may help in achieving high end user confidence levels to reduce evaluation times.
We believe international sales are especially well suited to our product for a number of reasons, including the fact that lubricating oil products in foreign countries are usually more expensive than in the United States. In 2012, international sales were 16.7% of the Company’s consolidated net sales. For 2011, international sales were 23.8% of the Company’s consolidated net sales. International sales declined in 2012 compared to 2011 due to one major customer’s reduction in filter purchases by 83%.
Our focus on specific industries several years earlier began to demonstrate a positive impact on sales through the first half of 2012, notwithstanding the general recessed economic environment. Although sales in the second half of 2012 did not reflect the same growth as earlier periods, we anticipate future positive impact from the efforts previously invested in these specific industries. These industries demonstrated early signs of recovery from the economy’s current situation, and we are beginning to benefit from their recovery. We also saw signs from our international business of increasing activity and orders throughout 2013, based on new distributors opened in 2012 and existing customers’ planned purchases. Optimizing our limited resources and obtaining sufficient capital is pivotal 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 specific niche industries using our system. To accomplish these tasks, we need to obtain adequate capital funding and add appropriate sales and marketing support to be sure our distributors and customers are well-served. We anticipate the short-term need for at least one more sales person plus one sales support person. The expansion into the OEM area is rewarding in that it provides a steady flow of material requirements for our manufacturing facility. Additionally, OEM business allows us more stability in retaining trained manufacturing personnel, a stronger supply chain with steady production, economies of scale, and the ability to better utilize our overhead with higher average material turn rates.
We continue to address our liquidity and working capital issues as we seek to raise additional capital. During 2012, we did not raise any capital and during 2011 we raised a total of $100,000 in capital from current stockholders. During 2012 we borrowed $25,000 from a stockholder and member of the Board of Directors and an additional $1,285,020 from our principal stockholder, who is also an executive officer and director of our company. 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 cost reductions will impact our results of operations during the balance of 2013 and beyond. We also continue to review cost of material increases, some of which were passed through to our customers as product price increases in the past few years.
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 our principal stockholder, as set forth above, have led our independent registered public accounting firm Liggett, Vogt & Webb, P.A. to include a statement in its audit report relating to our audited consolidated financial statements for the years ended December 31, 2012 and 2011 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, borrowing from our principal stockholder as previously described, however, we have no firm commitments from any third party or our principal stockholder 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
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, financing operations, warranty obligations and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Estimation of Product Warranty Cost
The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company's warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the Company's estimates, revisions to the estimated warranty liability would be required.
Estimation of Inventory Obsolescence
The Company provides for estimated inventory obsolescence or unmarketable inventory in amounts equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Inventory movement is calculated on a rolling 24 month basis and reserves are established for excess inventory and obsolete inventory based on that analysis and management’s determination.
Recent Accounting Pronouncements
Information concerning recently issued accounting pronouncements is set forth in Note 1 of our Notes to Consolidated Financial Statements under Item 8. “Financial Statements and Supplementary Data” and is incorporated herein by reference.
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. Effective January, 2012, we no longer have operations in any foreign country and are therefore not impacted by foreign currency translations.
Results of Operations
Year Ended December 31, 2012 (2012) as Compared to Year Ended December 31, 2011 (2011)
The following table sets forth (amounts in thousands) the Company’s operating information for 2012 and 2011:
Net Sales. Net sales decreased 4.1% in 2012 compared to 2011. We expect sales to remain constant in 2013. Effective January 1, 2013 we increased prices approximately 3%.
International sales decreased approximately 32.7% in 2012 compared to 2011. As a percentage of sales, international sales represented 16.7% of net sales in 2012 compared to 23.8% in 2011. Domestic sales increased approximately 4.8% in 2012 compared to 2011. We anticipate that international sales will increase in 2013, based upon customer feedback and current installations of trial systems.
Cost of Sales. Cost of products sold, as a percentage of sales, decreased slightly at approximately 76% for 2012 and approximately 77% for 2011. The following table sets forth the components of cost of sales:
Materials and Overhead applied along with Freight Out & Fees decreased in 2012 as compared to 2011 as a result of lower sales and lower overhead costs. The increase in scrap, rework and warranty adjustment expense category was primarily a result of rework expenses incurred in connection with a change in suppliers. During 2011 the warranty reserve was substantially reduced which gave rise to a negative amount in the expense line item in the amount of $(19,169).
Manufacturing wages and benefits decreased 10.7% primarily due to an allocation of costs. During 2012 the cost of an employee who provided administrative support in addition to manufacturing support was allocated to the cost centers as appropriate.
Salaries and Wages Salaries and wages increased approximately 2.4% in 2012 as compared to 2011. This increase resulted from vested benefit accruals. Salaries and wages, as a percentage of sales, were 43% for 2012 and 40% for 2011. The increase in salaries and wages as a percentage of sales was primarily due to a decrease in sales revenues. Management anticipates minimal hiring if the OEM and niche industry targets increase sales. Otherwise, management does not anticipate any changes to our salaries and wages at our current sales volume.
Selling and Administrative Expenses Selling and administrative expenses decreased by approximately 1% in 2012 from 2011. The following table sets forth the components of selling and administrative expenses:
The increase in employee benefits resulted from the impact of the accrual of vested employee stock option expenses. Travel and marketing expenses increased due to the increase in trade show participation. Engineering expense increased in response to additional outside testing requested by a customer in their trial process. Professional fees decreased as a result of reduced accounting costs. The decrease in investor relations was due to the termination of our contract with an investment relations firm, which was replaced with a public relations firm whose expense is a part of marketing expenses. We anticipate that our selling and administration expenses will remain at the same level in 2013 as 2012. Other Expenses represents various expenses including communication costs, office supplies and other components of administrative expenses. The decrease was primarily due to an allowance payment received from the Company’s landlord.
Interest Expense Interest expense remained constant in 2012 as compared to 2011 even though there was an increase in borrowings in 2012. The savings resulted from a reduced interest rate on borrowings. The Company pays interest monthly on the notes payable to our Chairman and CEO at prime rate less .5%, with rates reset as often as the Federal Reserve changes interest rates, which was a weighted average of 2.067% for 2012, as compared to an average of 2.355% for 2011.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate adequate amounts of cash to meet current operating requirements. As of December 31, 2012, we had cash of $114,512 as compared to cash of $51,152 at December 31, 2011. At December 31 2012, we had negative working capital of $821,616 and our current ratio (current assets to current liabilities) was .57 to 1. At December 31, 2011 we had negative working capital of approximately $636,722 and our current ratio was .63 to 1. The decrease in working capital and current ratio is primarily attributable to a decrease in accounts receivable offset by an increase in cash, inventories and prepaid expenses.
We have incurred net losses each year since inception and at December 31, 2012 we had an accumulated deficit of $55,953,726. Our net sales are not sufficient to fund our operating expenses. We do not have any external sources of liquidity. Historically, we have relied on the sales of our stock from time to time and loans from third parties and from related parties to fund our operations. During 2012, we did not raise any capital and during 2011 we raised a total of $100,000 in capital from current stockholders. During 2012 we borrowed $25,000 from a stockholder and member of the Board of Directors and an additional $1,285,020 from our principal stockholder, who is also an executive officer and director of our company, and at December 31, 2012, we owe this executive officer and director of our company approximately $8.7 million for funds he has advanced to us from time to time for working capital. Interest expense on this loan was $165,070 for the year ended December 31, 2012.
We do not currently have any commitments for capital expenditures. Our current cash position is insufficient to cover our current operating needs. While we anticipate cash flows from 2013 sales activity, 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 above, we owe our stockholder approximately $8.7 million which is due on December 31, 2014 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 stockholder 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 2013. 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
Net cash used in operating activities during 2012 was $1,144,327, as compared to $1,288,969 for 2011, which went primarily to fund the operating losses. During 2012, the effect of the net loss on working capital is increased by higher inventories, accounts payable and prepaid expenses and offset by an increase in deferred compensation and accrued liabilities and a decrease in accounts receivable. During 2011, the effect of the net loss on working capital was increased by higher accounts receivable and offset by an increase in the provision for obsolete and slow moving inventory, deferred compensation and compensation expense paid in stock based arrangements.
Investing activities
Net cash used in investing activities during 2012 was $148,540, as compared to $21,341 for 2011. The majority of the 2012 investment activity related to capitalized patent costs and the purchase of computer equipment. The majority of 2011 investments related to computer and software acquisitions.
Financing activities
Net cash provided by financing activities was $1,356,227 for 2012, as compared to $1,311,291 for 2011. During 2012 $4,807 was received from warrant exercise and $35,436 was received from a shareholder receivable for warrant exercise, as compared to $108,335 received from private stock transactions issued for cash, warrant exercise and employee exercise of stock options for cash for 2011. During 2012 $1,285,020 was received from a shareholder credit line, as compared to $1,067,103 which was received in 2011. This loan is a line of credit made available to us by a member of our Board of Directors. Additionally, $25,000 was received from a stockholder and director in 2012 and $125,000 in 2011.
Off Balance Sheet Arrangements
None.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to smaller reporting companies.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements are contained later in this report beginning on page.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, which includes our Chief Executive Officer and our Vice President who serves as our principal financial officer, have conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2012. Based on that evaluation, our Chief Executive Officer and our Vice President who serves as our principal financial officer, concluded that as of December 31, 2012, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
Our management does not expect that our disclosure controls or our internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Management’s Report on Internal Control over Financial Reporting
Our management, including our Chief Executive Officer and our Vice President who serves as our principal financial officer, are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting includes those policies and procedures that:
·
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, our management has concluded that as of December 31, 2012, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal control over financial reporting during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers
The following individuals serve as our executive officers and/or members of our Board of Directors:
-------
(1)
Audit Committee member
(2)
Compensation Committee member
Joseph V. Vittoria was appointed to the Puradyn Board of Directors as Chairman on February 8, 2000 and to the office of Chief Executive Officer on October 24, 2006. Mr. Vittoria was Chairman and Chief Executive Officer of Travel Services International, Inc. from 1997 until it was sold in 2000. From 1987 to 1997, Mr. Vittoria served as Chairman and Chief Executive Officer of Avis, Inc., and was its President and Chief Operating Officer from 1982 to 1987. Mr. Vittoria also serves on the Boards of Smart Procure, Blackjets and City Car Services, Inc.
Mr. Vittoria’s extensive management, banking, organizational growth and experience brings oversight and guidance to the Company’s entire organization. The Board believes that Mr. Vittoria has the experience, qualifications, attributes and skills necessary to serve as a Director.
Kevin G. Kroger joined Puradyn 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 Ltd. In December 2000, Mr. Kroger was with Detroit Diesel Corporation from 1989 to the time he joined our company, serving in various executive and Board 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.
With significant experience in the heavy-duty engine industry, Mr. Kroger provides our company with operations oversight and guidance in sales and marketing. Mr. Kroger also holds a degree in engineering which facilitates our research and development area, along with a deeper understanding in configuring our product to the customer’s needs. The Board believes that Mr. Kroger has the experience, qualifications, attributes and skills necessary to serve as a Director.
Lieutenant General (Retired) John S. Caldwell, Jr. was appointed to the Puradyn Board of Directors on August 25, 2005 and is also the Chairman of the Compensation Committee. Gen. Caldwell served as the Army’s top ranking officer for Acquisition, Logistics and Technology when he retired in January 2004. Also served as Director of the 50,000-person Army Acquisition Workforce, responsible for personnel development and training policy and key assignment recommendations. Prior to these positions, Gen. Caldwell served as the Commanding General of the US Army Tank-Automotive and Armaments Command (TACOM), in which capacity he developed, fielded and supported lethality, survivability and mobility capabilities for approximately 70% of the Army’s ground force. Served 4 years as the Project Manager, Abrams Tank System, leading R&D, production, quality assurance, procurement and logistical support of the Army’s tank program, a $600 million R&D, $15 billion procurement program with major international components. General Caldwell currently consults in various capacities, including Senior Vice President, The Spectrum Group. 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. General Caldwell has been a member of the board of Taser International since 2007.
Gen. Caldwell’s logistic and military background brings to our organization oversight and guidance in the planning and execution of our financial and operational growth plan. The Board believes that Gen. Caldwell has the experience, qualifications, attributes and skills necessary to serve as a Director.
Forrest D. Hayes was appointed to the Board of Directors in 2005; Chairman of the Audit Committee and a member of the Compensation Committee. Mr. Hayes served as Vice President and CFO of Wastequip, Inc., a privately owned manufacturer of waste equipment in 1990 and 1991, and from 1992 to 2000, as a member of the Wastequip Board of Directors. Mr. Hayes was President and CEO of Brittany Corporation, a privately owned manufacturer of auto/truck parts and HVAC parts from 1992 to 2000, and as Vice-Chairman through 2003. Prior to this, Mr. Hayes served as a CPA with Arthur Andersen from 1954 to 1990 in various capacities including Managing Partner of Cleveland and Cincinnati, Ohio offices. Mr. Hayes was a member of the board of The Town and Country Trust from 2005-2006 and currently serves on the board of Polychem Corporation and Brittany Stamping, LLC.
Mr. Hayes’ depth of experience and credentials in the financial arena and his experience with manufacturers of auto and truck parts provides insight and a knowledge base to the company on finance, production and marketing which is extremely valuable to the operation. The Board believes that Mr. Hayes has the experience, qualifications, attributes and skills necessary to serve as a Director.
Dominick Telesco was appointed to the Puradyn Board of Directors on December 19, 2006. In addition to Puradyn, Mr. Telesco also serves on the Boards of the Palm Beach County Cultural Council and the United Way of Palm Beach. Mr. Telesco is Chairman of the Board of 3 Logistics Corporation and Datelco, Inc. Mr. Telesco is also a member of the Board of Governors of the Palm Beach Branch of John Hopkins Hospital; and President of Boxwood Association, Inc.
Mr. Telesco brings to the Company many years of finance and banking experience along with strategic and corporate oversight guidance. The Board believes that Mr. Telesco has the experience, qualifications, attributes and skills necessary to serve as a Director.
Charles W. Walton, Ph.D. was appointed to the Puradyn Board of Directors on August 25, 2005 and is a member of the Audit Committee. Dr. Walton is retired. He was Chairman of Wastequip, Inc., which he founded in 1989. As a result of over 35 successful acquisitions and internal growth, Wastequip became the largest supplier of equipment for the waste management industry in North America. Prior to founding Wastequip, Dr. Walton was President and Chief Executive Officer of Sudbury, Inc., a Fortune 500 diversified manufacturing company, which he co-founded in 1983. Dr. Walton holds the degrees of Bachelor of Science in Foreign Service and PhD. in economics from Georgetown University, Washington, D.C
Dr. Walton’s experience as the Chief Executive Officer of a Fortune 500 company and his successful acquisition record provides the company with leadership, insight and financial/strategic guidance. The Board believes that Dr. Walton has the experience, qualifications, attributes and skills necessary to serve as a Director.
Alan J. Sandler serves as the Company’s principal financial officer, Vice President, Chief Administrative Officer, and Secretary to the Board. Mr. Sandler joined our company in June 1998 and has served in various other positions including President (June 1998 until January 2000), Chief Operating Officer (June 1998 to January 2000), Chief Financial Officer (June 1998 to March 2001 and August 2001 to March 2002), Principal Financial Officer (April 2010 to present) 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.
There are no family relationships between any of the executive officers and directors, except as set forth above. 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.
Compliance With Section 16(a) of the Exchange Act
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(d) of the Securities Exchange Act during the fiscal year ended December 31, 2012 and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended December 31, 2012, as well as any written representation from a reporting person that no Form 5 is required, we are aware of no officer, director or 10% or greater stockholder that failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Securities Exchange Act during the fiscal year ended December 31, 2012 except as follows:
·
Mr. Kroger failed to timely file one Form 4 reporting three transactions,
·
Mr. Sandler failed to timely file one Form 4 reporting three transactions, and
·
Mr. Hayes failed to timely file one Form 4 reporting one transaction.
These reports were subsequently filed.
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 the Company, including procedures for prompt internal reporting of violations of the code to the appropriate persons.
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. Our Code of Ethics applies to all directors, officers and employees. We will provide a copy to you upon request at no charge.
Committees of the Board of Directors
We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. We do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees.
Our Board of Directors has created both an Audit Committee and a Compensation Committee.
Audit Committee
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. Forrest D. Hayes (Chairperson) and Dr. Charles W. Walton.
The Board has determined that Mr. Hayes satisfies the criteria as an audit committee financial expert as established by the SEC under 407(d) (5) of Regulation S-K. In general, an “audit committee financial expert” is an individual member of the audit committee or Board of Directors who:
·
understands generally accepted accounting principles and financial statements,
·
is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves,
·
has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements,
·
understands internal controls over financial reporting, and
·
understands audit committee functions.
The audit committee met four times in 2012.
You will find a copy of our Audit Committee Charter 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. We will provide a copy to you upon request at no charge.
Compensation Committee
On November 20, 2008, the Board of Directors formally adopted a compensation committee charter that was incorporated into the by-laws of the Company. The charter defines the purpose and responsibilities of the Compensation Committee.
The Compensation Committee is a standing committee appointed by the Board of Directors. The Committee is comprised of a minimum of two independent board members; currently, General John S. Caldwell (Chairperson) and Mr. Forrest D. Hayes. The Committee has the authority to determine the compensation of the organization’s executive officers and other employees as the Committee deems appropriate.
In consultation with senior management, the Committee may review, establish, or approve general compensation philosophy, policies and implementation of compensation, with respect to employees or independent contractors. In addition to the salary compensation, the Committee may review and approve other forms of compensation, such as incentive compensation, equity-based, deferred compensation and benefit plans. The Committee shall meet a minimum of once per year and prepare minutes of all meetings and shall distribute said minutes to all Board of Directors for approval.
The Compensation Committee met one time in 2012. . The Compensation Committee did not engage a compensation consultant or similar consultant nor did it consult with any third parties regarding compensation matters during 2012.
You will find a copy of our Compensation Committee Charter 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. We will provide a copy to you upon request at no charge.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION.
The following table summarizes all compensation recorded by us in the last completed fiscal year for:
·
our principal executive officer or other individual serving in a similar capacity,
·
our two most highly compensated executive officers other than our principal executive officer who were serving as executive officers at December 31, 2012 as that term is defined under Rule 3b-7 of the Exchange Act
For definitional purposes in this annual report these individuals are sometimes referred to as the "named executive officers." The value attributable to any option awards is computed in accordance with FASB ASC 718, Compensation-Stock Compensation. The assumptions made in the valuations of the option awards are included in Note 11 of the Notes to our Consolidated Financial Statements for the year ended December 31, 2012 appearing elsewhere in this report. During each of fiscal 2012 and fiscal 2011, two of the executive officers listed below have deferred approximately 50% of their base wages and/or annual increases. The amounts included below reflect wages actually earned during the respective periods.
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1.
Mr. Vittoria, who is also the Chairman of our Board of Directors, serves as our Chief Executive Officer. Mr. Vittoria’s compensation excludes interest paid to him under the working capital loan he provides to our company. See Item 13. Certain Relationships and Related Transactions, and Director Independence appearing later in this report.
2.
Mr. Kroger serves as our President and Chief Operating Officer. All Other Compensation in the foregoing table represents the aggregate dollar amount of a car allowance received by Mr. Kroger during each fiscal year and disability and life insurance premiums we pay on his behalf. Annual salary deferral of $102,920, which is included in his salary for 2012 and 2011 in the foregoing table, is payable at such time as the company achieves a positive cash flow or on an emergency basis, as approved by the CEO and 150,000 employee stock options, exercisable at $.14 per share, with a four-year vesting period from date of grant.
3.
Mr. Sandler serves as our principal financial officer, Vice President, and Chief Administrative Officer. All Other Compensation in the foregoing table represents the amounts for reimbursement of Social Security and Medicare premiums. Annual salary deferral of $62,000, which is included in his salary for 2012 and 2011 in the foregoing table, is payable at such time as the company achieves a positive cash flow or on an emergency basis, as approved by the CEO and 75,000 employee stock options, exercisable at $.14 per share, with a four-year vesting period from date of grant.
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 the Company. He receives no compensation and does not participate in any of the Company’s insurance plans.
On July 3, 2000, the Company entered into an employment agreement, with an initial term of three years, with Mr. Kroger, who serves as our President and Chief Operating Officer. Thereafter, the contract was amended on December 23, 2002 and July 3, 2003. The contract provided for an annual salary of $166,000, minimum bonuses of $50,000, $80,000 and $80,000, respectively, for the years 2000 through 2002; 300,000 qualified stock options; a one-year salary severance clause, and certain insurance and auto allowance compensations. On December 23, 2002, it was agreed that the President receive 100,000 shares of common stock in lieu of the $80,000 bonus due to be paid. 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. The addendum dated July 3, 2003 discontinued the bonus provision of the contract but all other terms and conditions of the contract remain in effect. During the fiscal year 2012, Mr. Kroger’s base annual salary was $185,920 with approximately $102,920 deferred annually and 150,000 employee stock options, exercisable at $.14 per share, with a four-year vesting period from date of grant with all other terms and conditions of his employment agreement intact.
Mr. Sandler, who has served as our principal financial officer since April 2010 and Vice President and Chief Administrative Officer since January 2000, is not a party to an employment agreement with the 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 2012 Mr. Sandler’s compensation package included a base annual salary of $112,000, with approximately $62,000 deferred annually, deferred until such time as the company reaches a positive cash flow, 75,000 employee stock options, exercisable at $.14 per share, with a four-year vesting period from date of grant, and company-provided insurance benefits and reimbursement of his Social Security and Medicare premiums. 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.
Outstanding Equity Awards at Fiscal Year End
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, 2012:
Incentive and Non-qualified Stock Option and Stock Award Plans
On July 29, 2010, the Board of Directors approved the adoption of a stock option plan (the "2010 Option Plan"), which provides for the granting of up to 2,000,000 options, subject to stockholder approval, (for both incentive and non-qualified stock options to key personnel, including officers, directors, consultants and advisors to the Company, based upon the determination of the Board of Directors.
On May 23, 2011 the Board of Directors approved and adopted an increase in the number of shares reserved for issuance under the 2010 from 2,000,000 shares to 4,000,000 shares.
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”) was adopted on September 15, 1999 and amended in June 2000. The plan 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. The 1999 Stock Option Plan expired on September 15, 2009.
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 non-assignable 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:
·
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),
·
extends the term of any plan option beyond 10 years, or
·
extends the termination date of the plan.
The 1996 Plan terminated on July 31, 2006. During 2009, options to purchase 5,150 which were granted under the 1996 Plan prior to its termination expired. The 1999 Plan terminated on September 15, 2009.
As of December 31, 2011, under the Directors’ Plan, options to purchase 150,000 shares of common stock were outstanding. As of December 31, 2011, under the 1996 Plan, there were no non-qualified options outstanding, under the 1999 Plan, incentive stock options to purchase 1,417,583 shares of common stock were outstanding and, under the 2010 Plan, incentive stock options to purchase 2,296,389 shares of common stock were outstanding.
Director Compensation
Each independent 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 independent 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 independent 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. Our management directors do not receive any compensation for their services as directors.
The following table provides information concerning the compensation of our Board members for their services as members of our Board of Directors for 2012. The value attributable to any option awards is computed in accordance with FASB ASC Topic 718. The assumptions made in the valuations of the option awards are included in Note 11 of the Notes to our Consolidated Financial Statements for the year ended December 31, 2012 appearing elsewhere in this report.
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(1)
On August 28, 2012, General Caldwell was granted options to purchase 7,500 shares of common stock at an exercise price of $0.145 per share, vesting on August 27, 2014 and expiring on August 27, 2017.
(2)
On November 9, 2012, Mr. Hayes was granted options to purchase 10,000 shares of common stock at an exercise price of $0.12 per share, vesting on November 9, 2014 and expiring on November 9, 2017.
(3)
On December 20, 2012, Mr. Telesco was granted options to purchase 5,000 shares of common stock at an exercise price of $0.13 per share, vesting on December 19, 2014 and expiring on December 18, 2017. On October 20, 2009, the Company entered into a consulting agreement with Boxwood Associates, Inc., whereby the Company pays $2,000 monthly for management and strategic development services performed. The contract will remain in effect until terminated by either party providing 30 days written notice. Mr. Telesco is President of Boxwood Associates, Inc.
(4)
On August 28, 2012, Dr. Walton was granted options to purchase 7,500 shares of common stock at an exercise price of $0.145 per share, vesting on August 27, 2014 and expiring on August 27, 2017.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
At March 28, 2013 we had 48,357,877 shares of our common stock issued and outstanding. The following table sets forth information regarding the beneficial ownership of our common stock as of March 28, 2013 by:
·
each person known by us to be the beneficial owner of more than 5% of our common stock;
·
each of our directors;
·
each of our named executive officers; and
·
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.
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*
represents less than 1%
(1)
The number of shares beneficially owned by Mr. Vittoria includes:
·
warrants to purchase 80,645 shares of common stock at $1.25 per share through April 4, 2013;
·
warrants to purchase 86,207 shares of common stock at $1.25 per share through May 9, 2013;
·
warrants to purchase 92,593 shares of common stock at $.50 per share through July 17, 2014;
·
warrants to purchase 21,008 shares of common stock at $.50 per share through August 6, 2015; and
·
warrants to purchase 20,492 shares of common stock at $.50 per share through January 10, 2016.
(2)
The number of shares beneficially owned by Mr. Kroger includes:
·
options to purchase 100,000 shares of common stock at $.26 per share through June 10, 2018;
·
options to purchase 75,000 shares of our common stock at an exercise price of $.21 per share through September 8, 2020;
·
options to purchase 112,500 shares of our common stock at an exercise price of $.28 per share through February 4, 2021; and
·
options to purchase 50,000 shares of our common stock at an exercise price of $0.14 per share through March 30, 2022.
The number of shares beneficially owned by Mr. Kroger excludes:
·
unvested options to purchase 25,000shares of our common stock at an exercise price of $.21 per share through September 8, 2020;
·
unvested options to purchase 37,500 shares of our common stock at an exercise price of $.28 per share through February 4, 2021; and
·
unvested options to purchase 100,000 shares of our common stock at an exercise price of $0.14 per share through March 30, 2022.
(3)
The number of shares beneficially owned by Mr. Sandler includes:
·
options to purchase 100,000 shares of common stock at $.30 per share through August 5, 2018;
·
options to purchase 100,000 shares of common stock at $.26 per share through June 10, 2018;
·
options to purchase 52,250 shares of our common stock at an exercise price of $.21 per share through September 8, 2020;
·
options to purchase 56,250 shares of our common stock at an exercise price of $.28 per share through February 4, 2021; and
·
options to purchase 25,000 shares of our common stock at an exercise price of $0.14 per share through March 30, 2022.
The number of shares beneficially owned by Mr. Sandler excludes:
·
unvested options to purchase 18,750 shares of our common stock at an exercise price of $.21 per share through September 8, 2020;
·
unvested options to purchase 18,750 shares of our common stock at an exercise price of $.28 per share through February 4, 2021; and
·
unvested options to purchase 50,000 shares of our common stock at an exercise price of $0.14 per share through March 30, 2022.
(4)
The number of shares beneficially owned by General Caldwell includes:
·
options to purchase 50,000 shares of common stock at $0.97 per share through March 9, 2015;
·
options to purchase 7,500 shares of common stock at $0.38 per share through September 22, 2013;
·
options to purchase 7,500 shares of common stock at $0.34 per share through August 28, 2014; and
·
options to purchase 7,500 shares of common stock at $0.23 per share through August 25,2015.
The number of shares beneficially owned by General Caldwell excludes:
·
unvested options to purchase 7,500 shares of common stock at $0.18 per share through August 25, 2016; and
·
unvested options to purchase 7,500 shares of common stock at $0.145 per share through August 25, 2017.
(5)
The number of shares beneficially owned by Mr. Hayes includes:
·
options to purchase 10,000 shares of common stock at $0.38 per share through September 22, 2013;
·
options to purchase 10,000 shares of common stock at $.25 per share through November 10, 2014; and
·
options to purchase 10,000 shares of common stock at $.27 per share through November 10, 2015.
The number of shares beneficially owned by Mr. Hayes excludes:
·
unvested options to purchase 10,000 shares of common stock at $.18 per share through November 10, 2016; and
·
unvested options to purchase 10,000 shares of common stock at $.12 per share through November 10, 2017.
(6)
The number of shares beneficially owned by Mr. Telesco includes:
·
warrants to purchase 81,967 shares of common stock at $1.25 per share through May 14, 2013;
·
warrants to purchase 92,593 shares of common stock at $1.25 per share through July 1, 2013;
·
warrants to purchase 208,333 shares of common stock at $1.25 per share through November 20, 2013;
·
warrants to purchase 100,000 shares of common stock at $.50 per share through February 3, 2014;
·
warrants to purchase 138,889 shares of common stock at $.50 per share through May 6, 2014;
·
warrants to purchase 18,727 shares of common stock at $.50 per share through January 24, 2016;
·
options to purchase 5,000 shares of common stock at $.47 per share through December 19, 2013;
·
options to purchase 5,000 shares of common stock at $.16 per share through December 18, 2014; and
·
options to purchase 5,000 shares of common stock at $.28 per share through December 18, 2015.
The number of shares beneficially owned by Mr. Telesco excludes:
·
unvested options to purchase 5,000 shares of common stock at $0.11 per share through December 19, 2016; and
·
unvested options to purchase 5,000 shares of common stock at $0.13 per share through December 19, 2017.
(7)
The number of shares beneficially owned by Dr. Walton includes:
·
options to purchase 7,500 shares of common stock at $0.38 per share through September 22, 2013;
·
options to purchase 7,500 shares of common stock at $0.34 per share through August 28, 2014; and
·
options to purchase 7,500 shares of common stock at $0.23 per share through August 28, 2015.
The number of shares beneficially owned by Dr. Walton excludes:
·
unvested options to purchase 7,500 shares of common stock at $0.18 per share through August 25, 2016; and
·
unvested options to purchase 7,500 shares of common stock at $0.145 per share through August 25, 2017.
(8)
The address for Quantum Industrial Partners, LTDC is c/o Curacao Corporation Company, N.V., Kaya Flamboyan, Willenstad Curacao, Netherlands, Antilles.
(9)
The address for Glenhill Capital Management, LP is 598 Madison Avenue, 12th Floor, New York, NY 10022.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance under any equity compensation plans approved by our stockholders as well as any equity compensation plans not approved by our stockholders as of December 31, 2011.
A description of each of these plans is contained earlier in this report under Part III, Item 11. Executive Compensation - Stock Option Plans.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTION, AND DIRECTOR INDEPENDENCE.
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 an unsecured basis. During March of each year, 2006 through 2013, the maturity date for the agreement was extended annually from December 31, 2007 to December 31, 2014.
Amounts drawn bear interest at the prime rate per annum payable monthly and are due December 31, 2014 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. 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. During 2012, the Company borrowed a total of $1,285,020. As of December 31, 2012, we have drawn the entire $6.1 million under the letter agreement plus an additional $2.6 million for a total of $8.7 million, and paid $165,070 in related interest.
On October 20, 2009, the Company entered into a consulting agreement with Boxwood Associates, Inc., whereby the company pays $2,000 monthly for management and strategic development services performed. The contract remains in effect until terminated by either party providing 30 days written notice. During 2012 we paid Boxwood Associates, Inc. $24,000 under this agreement. Mr. Dominick Telesco, a stockholder and note holder, is President of Boxwood Associates, Inc.
On December 12, 2012, the Company received a loan from Mr. Dominick Telesco, a shareholder, who is also a Board member, in the amount of $25,000. On February 13, 2013, Mr. Telesco accepted 882,353 shares of common stock as payment for the loan balance of $150,000, which included an additional loan of $25,000 received by the Company in 2013. The proceeds were used for working capital.
Director Independence
John S. Caldwell, Forrest D. Hayes, Dominick Telesco and Charles W. Walton qualify as "independent” within the meaning of Rule 5605 of the NASDAQ Marketplace Rules.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Liggett, Vogt & Webb, P.A., formerly Webb and Company, P.A. served as our independent registered public accounting firm for fiscal 2012 and fiscal 2011. The following table shows the fees that were billed for the audit and other services provided by such firm for fiscal 2012 and fiscal 2011.
Audit Fees - This category includes the audit of our annual financial statements, review of financial statements included in our Form 10-Q Quarterly Reports and services that are normally provided by the independent auditors in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.
Audit-Related Fees - This category consists of assurance and related services by the independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC and other accounting consulting.
Tax Fees - This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.
All Other Fees - This category consists of fees for other miscellaneous items.
Our Board of Directors has adopted a procedure for pre-approval of all fees charged by our independent auditors. Under the procedure, the Board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the Board, or, in the period between meetings, by a designated member of Board. Any such approval by the designated member is disclosed to the entire Board at the next meeting. The audit and tax fees paid to the auditors with respect to fiscal year 2012 were pre-approved by the entire Board of Directors.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:
-------
*
filed herewith
**
In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this report shall be deemed furnished and not filed.
(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.
(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.
(11)
Incorporated by reference to the registration statement on Form S-1, SEC File No. 333-155,054, as declared effective on November 14, 2008, as amended.
(12)
Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
(13)
Incorporated by reference to the registration statement on Form S-8, SEC File No. 333-169441, as filed with the Securities and Exchange Commission on September 16, 2010.
(14)
Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended June 30, 2011.
(15)
Incorporated by reference to the Current Report on Form 8-K as filed on November 28, 2012
(16)
Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
(17) Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended June 30, 2012.
(18)
Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended September 30, 2012.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date:
April 1, 2013
By:
/s/ Joseph V. Vittoria
Joseph V. Vittoria
Chief Executive Officer and Chairman of the Board, principal executive officer
By:
/s/ Alan J. Sandler
Alan J. Sandler
principal financial officer and principal accounting officer, Vice President, Chief Administrative Officer and Secretary to the Board
By:
/s/ Kevin G. Kroger
Kevin G. Kroger, President and Chief
Operating Officer and Director
By:
/s/ John S. Caldwell
John S. Caldwell, Director
By:
/s/ Forrest D. Hayes
Forrest D. Hayes, Director
By:
/s/ Charles W. Walton
Charles W. Walton, Director
By:
/s/ Dominick Telesco
Dominick Telesco, Director
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Puradyn Filter Technologies Incorporated
We have audited the accompanying consolidated balance sheets of Puradyn Filter Technologies Incorporated (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in stockholders’ 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, 2012 and 2011, 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/ Liggett, Vogt & Webb, P.A.
Boynton Beach, Florida
April 1, 2013
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
See accompanying notes to consolidated financial statements.
PURADYN FILTER TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
See accompanying notes to consolidated financial statements.
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
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® 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.
Since its formation June 1, 2000, Puradyn Filter Technologies, Ltd. (“Ltd.”), the Company’s United Kingdom subsidiary, has been included in the Company’s consolidated financial statements. In March, 2009, Ltd.’s office in the UK was closed and all assets, except for bank cash accounts, were transferred to the United States. Effective January, 2012, Ltd., ceased as a legal entity.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, 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 by the Company are shipped, when there are no uncertainties surrounding customer acceptance and when collectability is reasonably assured in accordance with FASB ASC 605, Revenue Recognition, 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 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. Included in those estimates are assumptions about allowances for inventory obsolescence, warranty reserves and bad-debt reserves, valuation allowance on the deferred tax asset, and the assumptions used in Black-Scholes valuation models related to stock options and warrants.
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, 2012 and December 31, 2011, the Company did not have any cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, prepaid expenses and other assets, accounts payable, accrued liabilities and notes payable to stockholder approximate their fair values as of December 31, 2012 and December 31, 2011, respectively, because of their short-term natures.
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2012 AND 2011
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 $2,442 and $1,518 for the years ended December 31, 2012 and 2011, respectively. Accumulated amortization of deferred financing costs as of December 31, 2012 and December 31, 2011 was $683,096 and $680,654, respectively.
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
As required by FASB ASC 460, Guarantees, 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.
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2012 AND 2011
The following table shows the changes in the aggregate product warranty liability for the year ended December 31, 2012 and December 31, 2011, respectively:
Comprehensive Income
FASB ASC 220, Comprehensive Income, 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, Ltd. Comprehensive income as of December 31, 2012 and 2011 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, 2012 and 2011, advertising costs incurred by the Company totaled approximately $7,031 and $4,533, 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, 2012 and 2011, engineering and development costs incurred by the Company totaled $21,238 and $14,840, 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 FASB ASC 830, Foreign Currency Matters. 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. For the year ended December 31, 2012 balance sheet accounts were not impacted by foreign currency translations. The translation gains and losses resulting from the changes in exchange rates during 2012 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, 2012 and 2011, the Company recorded no foreign currency exchange rate gains and losses.
Income Taxes
The Company accounts for income taxes under FASB ASC 740, Income Taxes. 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.
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2012 AND 2011
Stock Option Plans
We adopted FASB ASC 718, Compensation-Stock Compensation, 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 by recognizing the amortized grant date fair value in accordance with provisions of FASB ASC 718 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, 2012 has been recognized as a component of cost of goods sold and general and administrative expenses in the accompanying Consolidated Financial Statements.
In 2012 and 2011, respectively, 935,000 and 896,389 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 FASB ASC 718.
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 FASB ASC 505, Equity, and FASB ASC 718, Compensation-Stock Compensation, 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 by maintaining its cash with high quality federally insured financial institutions. However, cash balances in excess of the FDIC insured limit of $250,000 are at risk. At December 31, 2012 and December 31, 2011, respectively, the Company did not have cash balances 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 four customers at December 31, 2012 whose trade receivable balances each represented approximately 33.9%, 17.2%, 16.9% and 16.9% for a total of 84.8% of total accounts receivable. There are concentrations of credit risk with respect to trade receivables due to the amounts owed by four customers at December 31, 2011 whose trade receivable balances each represented approximately 31.9%, 17.6%, 11.2% and 11.1% for a total of 71.8% 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
FASB ASC 260, Earnings per Share, 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 7,561,303 in 2012 and 7,585,848 in 2011.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
2. 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.
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2012 AND 2011
These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from a current stockholder have led the Company’s independent registered public accounting firm Liggett, Vogt & Webb, P.A., formerly 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, 2012 and 2011 expressing substantial doubt about the Company’s ability to continue as a going concern.
3. Inventories
At December 31, 2012 and December 31, 2011 inventories consisted of the following:
4. Prepaid Expenses and Other Current Assets
At December 31, 2012 and December 31, 2011, prepaid expenses and other current assets consisted of the following:
5. Property and Equipment
At December 31, 2012 and December 31, 2011, property and equipment consisted of the following:
Depreciation and amortization expense of property and equipment for the years ended December 31, 2012 and 2011 is $44,323 and $47,834, respectively, of which $9,933 and $10,720 is included in cost of products sold and $34,390 and $37,114 is included in selling and administrative costs, respectively, in the accompanying consolidated statements of operations.
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2012 AND 2011
6. Leases
The Company leases its office and warehouse facilities in Boynton Beach, Florida under a long-term non-cancellable lease agreement, which contains renewal options and rent escalation clauses. A $235,000 security deposit was paid in 2002, which was refunded ratably on an annual basis over the first three years of the lease term. As of December 31, 2012, $34,970 is included in noncurrent assets in the accompanying consolidated balance sheet. During 2008, this lease was renewed effective August 1, 2008 and expires July 31, 2013 and contains an annual increase of 3%. During June 2009, an amendment to the lease agreement was reached, temporarily reducing the monthly rent. The total minimum lease payments over the term of the lease were reduced from an aggregate of approximately $956,000 to approximately $925,000, or approximately 3%. On September 27, 2012 the Company entered into a non-cancellable lease agreement for the same facilities commencing August 1, 2013 and expiring July 31, 2019. The total minimum lease payments over the term of the lease signed on September 27, 2012 amount to $909,383.
The Company leases a condominium in Ocean Ridge, Florida, on an annual basis, to provide accommodations for Company use, primarily for Mr. Kevin Kroger, the Company’s Chief Operating Officer. The lease has an annual expense of $6,750. In December, 2012 the lease was renewed until December, 2013.
Rent expense under all operating leases for the years ended December 31, 2012 and 2011 totaled $325,588 and $315,185, respectively, of which $250,694 and $242,666 is included in cost of products sold and $74,894 and $72,519 is included in selling and administrative costs, respectively, in the accompanying consolidated statements of operations.
In January 2012 and August 2011, the Company entered into capital lease obligations for the purchase of $15,383 and $13,681, respectively of office equipment, which is included in property and equipment, net of $5,128 and $3,876, respectively, of accumulated depreciation, in the accompanying consolidated balance sheet.
Future minimum lease commitments due for facilities and equipment leases under non-cancellable capital and operating leases at December 31, 2012 are as follows:
7. Accrued Liabilities
At December 31, 2012 and December 31, 2011, accrued liabilities consisted of the following:
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2012 AND 2011
8. Notes Payable to Stockholders and Capital Leases
Beginning on March 28, 2002 the Company executed a binding agreement with one of its principal stockholders, who is also the Chairman of the Board and an Executive officer, 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 BBA LIBOR Daily Floating Rate plus 1.4 percentage points (1.696% per annum at December 31, 2012), 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. Beginning in March 2006, annually, through February 2012, the maturity date for the agreement was extended annually from December 31, 2007, to December 31, 2013. Refer to Note 14.
At December 31, 2012 the Company had drawn the full funding amount under the agreement of $6.1 million plus an additional $2,614,037. At December 31, 2011, the Company had drawn the full funding amount of $6.1 million under the funding agreement plus an additional $1,329,017.
Additionally, the Company has loans outstanding from one board member, who is also a significant stockholder, totaling $125,000 and $100,000 at December 31, 2012 and 2011. During 2012 and 2011 this board member loaned the Company $25,000 and $125,000 respectively and forgave $25,000 in 2011. The forgiven obligations were reclassified to additional paid in capital, due to the related party nature,. The outstanding debt obligation at December 31, 2012 matures January 1, 2013 and is included in Current Liabilities. Refer to Notes 10 and 14.
During the years ended December 31, 2012 and 2011, the Company incurred interest expense of $165,070 and $165,573, respectively, on its draws, which is included in interest expense in the accompanying consolidated statements of operations.
Notes payable and capital leases consisted of the following at December 31, 2012 and December 31, 2011:
Maturities of Long-Term Obligations for Five Years and Beyond
The minimum annual principal payments of notes payable and capital lease obligations at December 31, 2012 were:
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2012 AND 2011
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:
The significant components of the Company’s net deferred tax assets are as follows for the years ended December 31:
FASB ASC 740, Income Taxes, 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 $18,110,073 and $17,270,995 against its net deferred taxes is necessary as of December 31, 2012 and December 31, 2011, respectively. The change in valuation allowance for the years ended December 31, 2012 and 2011 is $839,078 and $604,773 respectively.
At December 31, 2012 and December 31, 2011, respectively, the Company had $48,317,850 and $46,120,202, respectively, of U.S. net operating loss carryforwards remaining, which expire beginning in 2020.
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:
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2012 AND 2011
10. Commitments and Contingencies
Agreements
On September 27, 2012, the Company entered into a 72 month lease for its corporate offices and warehouse facility in Boynton Beach, Florida. The lease commences August 1, 2013 and requires an initial rent of $12,026 per month beginning in the second month for the first year, increasing in varying amounts to $13,941 per month in the sixth year. In addition, the Company is responsible for all operating expenses and utilities.
On June 8, 2012, we renewed a consulting agreement with Monarch Communications, Inc. for services rendered as public relations firm and media relations consultants for the Company. The term of the agreement is for twelve months. As compensation for their services, Monarch will receive a fee of $7,000 per month, for the first six months, payable as $2,000 cash and $5,000 in shares of common stock. For the final six months of the agreement, Monarch will receive a fee of $7,000, payable as $3,000 in cash and $4,000 in shares of common stock. Either party may terminate the agreement with 30 days’ notice. The recipient is an accredited or otherwise sophisticated investor who had such knowledge and experience in business matters and was capable of evaluating the merits and risks of the prospective investment in our securities. The issuance of the shares is exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.
On October 20, 2009, the Company entered into a consulting agreement with Boxwood Associates, Inc., whereby the Company pays $2,000 monthly for management and strategic development services performed. The contract will remain in effect until terminated by either party providing 30 days written notice. Mr. Telesco, a member of our board of directors, and a significant stockholder, is President of Boxwood Associates, Inc. Refer to Notes 8 and 14.
In December 2012, the Company renewed the lease at an annual expense of $6,750, on a condominium in Ocean Ridge, Florida until December 31, 2013. Refer to Note 6.
Litigation
On July 7, 2009 the Company filed a lawsuit against former Chief Executive Officer, Richard C. Ford, alleging non-payment of three promissory notes totaling $756,250 with interest at a rate of 5.63% per annum since July 25, 2001, the execution date of the notes and we sought payment of the promissory notes and accrued interest which totaled $1,110,046 in the aggregate.
On August 22, 2012 we reached a settlement with the plaintiff in this civil suit. Under the terms of the settlement, Mr. Ford agreed to transfer to us a total of 875,000 shares of our common stock, with 6,000 shares due within one week of the execution of a settlement agreement, 133,000 shares by December 31, 2012 and the balance at the rate of 184,000 shares per quarter beginning on March 1, 2013.
In the event Mr. Ford should default in these arrangements, he is obligated to pay us $145,000 less any monies or shares previously tendered to us, we are entitled to obtain a judgment in such amount and he will waive any rights he may have to discharge such judgment through bankruptcy.
On September 11, 2012, a definitive settlement agreement was executed containing these and other customary terms.
On December 31, 2012, Mr. Ford defaulted on the terms of the settlement agreement. The Company has obtained a default final judgment in the amount of $144,160 plus interest and legal fees on February 26, 2013. The Company is pursuing collection of this judgment.
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2012 AND 2011
11. Stock Options
The Company has three stock option plans, one adopted in September 1999 and amended in June 2000 (the “1999 Option Plan”), one adopted on November 8, 2000 (the “Directors’ Plan”), and one adopted in July 2010 (the “2010 Option Plan”). The 1999 Option Plan provides for the granting of up to 3,000,000 options, the Directors’ Plan provides for the granting of up to 400,000 options, and the 2010 Option Plan provides for the granting of 2,000,000 options.
The 1999 and 2010 Plans 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 both plans, options to employees vest over four years at 25% per annum, except for certain grants to employees that vest 25% upon grant with remaining amounts over two years at 50% and 25% per annum, respectively.
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 February 4, 2011, the Company granted employees options to purchase 800,000 shares of the Company’s common stock, at an exercise price of $0.28 per share. The options vest over a three year period and expire February 4, 2021. The quoted market price of the common stock at the time of issuance of the options was $0.28 per share. The fair value of the options totaled $224,024 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 3.68%, ii) expected life of 10 years, iii) dividend yield of 0%, iv) expected volatility of 138.0%.
On August 26, 2011, the Company granted two directors options to purchase 15,000 shares of the Company’s common stock, at an exercise price of $0.18 per share. The options vest over a three year period and expire August 26, 2016. The quoted market price of the common stock at the time of issuance of the options was $0.18 per share. The fair value of the options totaled $2,602 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 0.94%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 139.8%.
On November 10, 2011, the Company granted one director options to purchase 10,000 shares of the Company’s common stock, at an exercise price of $0.18 per share. The options vest over a three year period and expire November 10, 2016. The quoted market price of the common stock at the time of issuance of the options was $0.18 per share. The fair value of the options totaled $1,621 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 0.9%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 146.3%.
On December 19, 2011, the Company granted one director options to purchase 5,000 shares of the Company’s common stock, at an exercise price of $0.11 per share. The options vest over a three year period and expire December 19, 2016. The quoted market price of the common stock at the time of issuance of the options was $0.11 per share. The fair value of the options totaled $514 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 0.82%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 163.4%.
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2012 AND 2011
On March 30, 2012, the Company granted employees options to purchase 905,000 shares of the Company’s common stock, at an exercise price of $0.14 per share. The options vest over a three year period and expire March 30, 2022. The quoted market price of the common stock at the time of issuance of the options was $0.14 per share. The fair value of the options totaled $126,700 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 2.23%, ii) expected life of 10 years, iii) dividend yield of 0%, iv) expected volatility of 243.1%.
On August 27, 2012, the Company granted two directors options to purchase 15,000 shares of the Company’s common stock, at an exercise price of $0.145 per share. The options vest over a three year period and expire August 27, 2017. The quoted market price of the common stock at the time of issuance of the options was $0.145 per share. The fair value of the options totaled $2,175 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 0.07%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 259.16%.
On November 9, 2012, the Company granted one director options to purchase 10,000 shares of the Company’s common stock, at an exercise price of $0.145 per share. The options vest over a three year period and expire November 9, 2017. The quoted market price of the common stock at the time of issuance of the options was $0.12 per share. The fair value of the options totaled $1,200 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 0.65%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 244.97%.
On December 19, 2012, the Company granted one director options to purchase 5,000 shares of the Company’s common stock, at an exercise price of $0.13 per share. The options vest over a three year period and expire December 19, 2017. The quoted market price of the common stock at the time of issuance of the options was $0.13 per share. The fair value of the options totaled $647 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 0.77%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 255.0%.
At December 31, 2012 there was $193,806 of unrecognized compensation cost related to nonvested share-based payments which is expected to be recognized over a weighted-average period of .93 years.
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for those awards that have an exercise price currently below the closing price. As of December 31, 2012 and 2011, the Company had options outstanding to purchase an aggregate of 3,863,972 and 2,993,972 shares respectively, with an exercise price above the quoted price of the Company’s stock, resulting in no intrinsic value.
Additional information concerning the activity in the three option plans is as follows:
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2012 AND 2011
Additional information concerning the unvested options is as follows:
Summarized information with respect to options outstanding under the three option plans at December 31, 2012 is as follows:
The estimated fair value of each stock option grant on the date of grant was computed using the following weighted-average assumptions:
12. Common Stock
As partial compensation per an agreement dated May 19, 2011 and extended on June 8, 2012 for consultant work, the Company issued to Monarch Communications, Inc. the following:
·
On October 16, 2012, 26,667 shares of its common stock valued at $0.15 per share
·
On November 26, 2012, 14,286 shares of its common stock valued at $0.28 per share.
·
On December 14, 2012, 30,769 shares of its common stock valued at $0.13 per share.
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2012 AND 2011
13. Warrants
At December 31, 2012 and 2011, 3,899,758 and 4,096,476 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 24, 2013 to July 31, 2016. Information concerning the Company’s warrant activity is as follows:
During March, 2003, in consideration of the stockholder loan agreement, the Company granted the stockholder a total of 475,000 common stock purchase warrants at an exercise price equal to the closing market price of the Company’s stock on the dates of grant. On March 28, 2002, the Company recorded a deferred charge of $318,000. On March 14, 2003, the Company recorded a deferred charge of $212,500. The deferred charges were initially amortized over the commitment period and subsequently revised to include the repayment period, as amended. During the years ended December 31, 2012 and 2011, the Company had amortized $503 and $1,007, respectively, of such costs, which are included in interest expense in the accompanying consolidated statements of operations.
The Company granted 39,342 bonus shares in connection with the warrant modification agreement of November 21, 2011 for warrants exercised in January, 2012.
14. Related Party Transactions
In March 2002 the Company executed a binding agreement with its CEO, who is also a principal stockholder, 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 BBA LIBOR Daily Floating Rate plus 1.4 percentage points (1.696% per annum at December 31, 2011), 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. Beginning in March 2006, annually, through February 2012, the maturity date for the agreement was extended from December 31, 2007 to December 31, 2013. Refer to Note 8.
The Company has loans outstanding from one board member, who is also a significant stockholder, totaling $125,000 and $100,000 at December 31, 2012 and 2011. During 2012 and 2011 this board member loaned the Company $25,000 and $125,000, respectively, and forgave $25,000 in 2011. The forgiven amounts were reclassified to additional paid in capital. The outstanding debt obligation at December 31, 2012 matures on January 1, 2013 and is included in Current Liabilities. This board member is also the President of a separate entity that provided consulting services to the Company in 2012 and 2011. Refer to Notes 8 and 10.
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2012 AND 2011
15. Major Customers
During 2012 four customers together accounted for 49% of the Company’s net sales and in 2011, three customers together accounted for 43% of the Company’s net sales. In 2012, there were four customers that individually accounted for greater than 10% of net sales, or approximately $373,180, $337,928, $283,103 and $274,606, while in 2011 there were three customers that individually accounted for greater than 10% of net sales, or approximately $428,106, 395,034 and $332,206. There were four customers at December 31, 2012, whose trade receivable balances equaled or exceeded 5% of total receivables, representing approximately 33.9%, 17.2%, 16.9%, and 16.9% respectively of total receivables. There were five customers at December 31, 2011, whose trade receivable balances equaled or exceeded 5% of total receivables, representing approximately 31.9%, 17.6%, 11.2%, 11.1% and 7.87% respectively of total receivables. The loss of business from one or a combination of the Company’s significant customers could adversely affect its operations.
16. Subsequent Events
As partial compensation per an agreement dated May 19, 2011, and renewed on June 8, 2012, for consultant work, the Company issued to Monarch Communications, Inc. the following:
·
On January 8, 2013, 28,571 shares of its common stock valued at $0.14 per share
·
On February 8, 2013, 26,667 shares of its common stock valued at $0.15 per share.
·
On March 11, 2013, 21,053 shares of its common stock valued at $0.19 per share.
On February 13, 2013 the Company issued 882,353 shares of its common stock valued at $0.17 per share as payment for the note payable in the amount of $150,000 from a stockholder who is also a director.
Between February 7, 2013 and March 5, 2013, the Company received loans in various amounts totaling $350,000, from the Company’s Chairman and CEO, as advances for working capital needs. The loans bear interest at the same rate of interest as the credit facility provided by the stockholder under the note dated March 28, 2002.
On March 14, 2013, the repayment date of the stockholder loan was extended from December 31, 2013 to December 31, 2014.