-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WIF1nxFVhJ3LfZ+fYE1oFElIrZxJe8n8f+p4r1fC/D203pErVD566DbW/euJP4Yg FCetMkm8p4WhNVeTbN2Czg== 0001116502-05-001907.txt : 20050815 0001116502-05-001907.hdr.sgml : 20050815 20050815161104 ACCESSION NUMBER: 0001116502-05-001907 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050815 DATE AS OF CHANGE: 20050815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PURADYN FILTER TECHNOLOGIES INC CENTRAL INDEX KEY: 0001019787 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 141708544 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-11991 FILM NUMBER: 051026763 BUSINESS ADDRESS: STREET 1: 2017 HIGH RIDGE ROAD CITY: BOYTON BEACH STATE: FL ZIP: 33426 BUSINESS PHONE: 5615479499 MAIL ADDRESS: STREET 1: 2017 HIGH RIDGE ROAD CITY: BOYTON BEACH STATE: FL ZIP: 33426 FORMER COMPANY: FORMER CONFORMED NAME: T F PURIFINER INC DATE OF NAME CHANGE: 19960726 10QSB 1 puradyn-10qsb.txt QUARTERLY REPORT U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-QSB (Mark one) {x} QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2005 { } TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from ________________ to ________________ Commission file number 0-29192 PURADYN FILTER TECHNOLOGIES INCORPORATED ------------------------------------------------------------------------------- (Name of small business issuer in its charter) Delaware 14-1708544 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2017 High Ridge Road, Boynton Beach, Florida 33426 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number (561) 547-9499 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that Puradyn Filter Technologies Incorporated was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes { x } No { } Transitional Small Business Disclosure Format: Yes { } No { x } (APPLICABLE ONLY TO CORPORATE REGISTRANTS) As of August 15, 2005, there were 22,275,432 shares of registrant's common stock outstanding, par value $.001. 1 Puradyn Filter Technologies Incorporated Index to Quarterly Report on Form 10-QSB
Page Part I. Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheet - June 30, 2005 .............................. 3 Condensed Consolidated Statements of Operations - Three months and six months ended June 30, 2005 and 2004 ............................................................ 4 Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2005 and 2004 .......................................................................... 5 Condensed Consolidated Statement of Stockholders Equity............................ 6 Notes to Condensed Consolidated Financial Statements .............................. 7 Item 2. Management's Discussion and Analysis or Plan of Operation ......................... 15 Item 3. Controls and Procedures ........................................................... 22 Part II. Other Information Item 1. Legal Proceedings ................................................................. 23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ....................... 23 Item 3. Default Upon Senior Securities .................................................... 23 Item 4. Submission of Matters to a Vote of Security Holders ............................... 23 Item 5. Other Information ................................................................. 23 Item 6. Exhibits .......................................................................... 23 Signatures ................................................................................ 24
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Puradyn Filter Technologies Incorporated Condensed Consolidated Balance Sheet June 30, 2005 (Unaudited) Assets Current assets: Cash and cash equivalents 305,762 Accounts receivable, net of allowance for uncollectible accounts of $41,593 327,114 Inventories 1,141,399 Prepaid expenses and other current assets 361,785 ----------- Total current assets 2,136,060 Property and equipment, net 432,762 Deferred financing costs, net 134,472 Other noncurrent assets 40,930 ----------- Total assets 2,744,224 =========== Liabilities and stockholders' deficit Current liabilities: Accounts payable 263,696 Accrued liabilities 588,753 Current portion of capital lease obligation 4,520 Deferred revenue 62,598 ----------- Total current liabilities 919,567 Capital lease obligation, less current portion 8,401 Notes payable to stockholder 5,316,000 Stockholders' deficit: Preferred stock, $.001 par value: Authorized shares - 500,000; none issued and outstanding Common stock, $.001 par value: Authorized shares - 30,000,000; 22,275,432 issued and outstanding 22,275 Additional paid-in capital 36,987,161 Notes receivable from stockholders (1,394,360) Accumulated deficit (39,084,792) Accumulated other comprehensive loss (30,028) ----------- Total stockholders' deficit (3,499,744) ----------- Total liabilities and stockholders' deficit 2,744,224 =========== See accompanying notes to consolidated financial statements. 3 Puradyn Filter Technologies Incorporated Condensed Consolidated Statements of Operations For the Three Months and Six Months Ended June 30, 2005 and 2004 (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Net sales 639,090 $ 627,320 1,236,783 $ 1,240,724 Costs and expenses: Cost of products sold 632,640 645,586 1,257,155 1,275,252 Salaries and wages 339,382 403,283 707,899 812,269 Selling and administrative 325,184 380,020 684,833 774,195 Stock based compensation (34,263) (33,881) (68,478) 237,222 ------------ ------------ ------------ ------------ 1,262,943 1,395,008 2,581,409 3,098,938 ------------ ------------ ------------ ------------ Loss from operations (623,853) (767,688) (1,344,626) (1,858,214) Other income (expense): Interest income 13,098 12,995 25,765 27,134 Interest expense (112,436) (67,618) (226,078) (155,635) ------------ ------------ ------------ ------------ Total other expense, net (99,338) (54,623) (200,313) (128,501) ------------ ------------ ------------ ------------ Net loss (723,191) $ (822,311) (1,544,939) $ (1,986,715) ============ ============ ============ ============ Basic and diluted loss per common share (.04) $ (0.05) (.08) $ (0.12) ============ ============ ============ ============ Weighted average common shares outstanding 18,991,477 17,452,164 18,227,542 17,102,823 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 4 Puradyn Filter Technologies Incorporated Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2005 and 2004 (Unaudited)
Six Months Ended 2005 2004 ----------- ----------- OPERATING ACTIVITIES Net loss $(1,544,939) $(1,986,715) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 125,731 120,995 Provision for bad debts 6,217 1,876 Amortization of deferred financing costs included in interest expense 56,373 71,749 Interest receivable from stockholders' notes (23,836) (23,967) Compensation expense on stock-based arrangements with employees and vendors (110,000) 237,222 Compensation expense on option-based arrangements with consultants 45,600 1,876 Changes in operating assets and liabilities: Accounts receivable 157,319 (134,497) Inventories 129,242 (50,833) Prepaid expenses and other current assets 49,839 (95,874) Other noncurrent assets -- 18,750 Accounts payable 43,461 214,474 Accrued liabilities 86,342 18,276 Deferred revenues 20,208 9,842 ----------- ----------- Net cash used in operating activities (958,443) (1,598,703) INVESTING ACTIVITIES Purchases of property and equipment (10,674) (60,319) ----------- ----------- Net cash used in investing activities (10,674) (60,319) FINANCING ACTIVITIES Proceeds from sale of common stock, net of issuance costs 1,152,200 1,964,480 Proceeds from exercise of stock options 2,936 10,000 Proceeds from notes payable to stockholder 648,100 500,000 Payment of notes payable to stockholder (834,000) (2,000,000) Subscription receivable from issuance of common stock (330,000) -- Payment of short term loan payable to officer -- -- Payment of capital lease obligations (2,219) (1,977) ----------- ----------- Net cash provided by financing activities 967,017 472,503 Effect of exchange rate changes on cash and cash equivalents 50,652 (4,006) ----------- ----------- Net (decrease) increase in cash and cash equivalents 48,552 (1,190,525) Cash and cash equivalents at beginning of period 257,210 1,394,830 ----------- ----------- Cash and cash equivalents at end of period $ 305,762 $ 204,305 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 160,148 $ 87,087 ----------- ----------- NONCASH INVESTING AND FINANCING ACTIVITIES: Common stock issued to stockholders' for stockholder notes $ 330,000 -- Warrants issued for deferred financing costs $ 55,000 $ 112,500 =========== ===========
See accompanying notes to consolidated financial statements. 5 Puradyn Filter Technologies Incorporated Consolidated Statements of Changes in Stockholders' Equity (Deficit)
Notes Accumulated Common Stock Additional Receivable Other Total ------------------------- Paid-in From Accumulated Comprehensive Stockholders' Shares Amount Capital Stockholders Deficit Income (Loss) Equity (Deficit) ---------- ------------ ------------ ------------- ------------ ------------- ---------------- Balance at December 31, 2004 17,452,164 $ 17,452 $ 35,516,248 $ (1,040,524) $(37,539,853) $ (80,680) $ (3,127,357) Foreign currency translation adjustment -- -- -- -- -- 50,652 50,652 Net loss -- -- -- -- (1,544,939) -- (1,544,939) ------------ Total comprehensive loss -- -- -- -- -- -- (4,621,644) Exercise of stock options 3,270 3 2,933 -- -- -- 2,936 Issuance of common stock in private placement, net 4,819,998 4,820 1,477,380 (330,000) -- -- 1,152,200 Warrants issued to nonemployee directors -- -- 55,000 -- -- -- 55,000 Stock options issued to consultants -- -- 45,600 -- -- -- 45,600 Interest receivable related to notes receivable from stockholders -- -- -- (23,836) -- -- (23,836) Compensation expense associated with outstanding variable option awards -- -- (110,000) -- -- -- (110,000) ---------- ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2004 22,275,432 $ 22,275 $ 36,987,161 $ (1,394,360) $(39,084,792) $ (30,028) $ (3,499,744) ========== ============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 6 Puradyn Filter Technologies Incorporated Notes to Condensed Consolidated Financial Statements June 30, 2005 (Unaudited) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim information and with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments consisting of a normal and recurring nature considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended June 30, 2005 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to Puradyn Filter Technologies Incorporated's (the Company) consolidated financial statements and footnotes thereto included in the Form 10-KSB for the year ended December 31, 2004. GOING CONCERN The Company's financial statements have been prepared on the basis that it will operate as a going concern, which comtemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred net losses each year since inception and has relied on the sale of its stock from time to time and loans from third parties and from related parties to fund its operations. These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from an institutional investor and current stockholder have led the Company's independent registered accounting firm DaszkalBolton to include a statement in its audit report relating to the Company's audited consolidated financial statements for the year ended December 31, 2004 expressing substantial doubt about the Company's ability to continue as a going concern. Additionally, the Company continues to address liquidity concerns because of inadequate revenue growth. As a result, cash flow from operations is insufficient to cover our liquidity needs for the immediate future. The Company was successful in raising $1.48 million in capital in June and July 2005. As the Company performance improves, it will continue to seek additional capital and is exploring financing availability and options with investment bankers, funds, private sources, members of management and existing stockholders. The Company has implemented further measures to preserve its ability to operate, including organizational changes, a reduction and/or deferral of salaries, reduction in personnel and renegotiating creditor and collection arrangements. There can be no assurance that the Company will be able to raise the additional capital needed or reduce the level of expenditures in order to sustain operations. USE OF ESTIMATES The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. 7 BASIC AND DILUTED LOSS PER SHARE SFAS No. 128, Earnings Per Share, requires a dual presentation of basic and diluted earnings per share. However, because of the Company's net losses, the effect of outstanding stock options and warrants would be anti-dilutive and, accordingly, is excluded from the computation of diluted loss per share. The number of such shares excluded from the computation of loss per share totaled 3,402,070 for the three-month and six-month periods ended June 30, 2005 and 2,933,570 for the three-month and six-month periods ended June 30, 2004, respectively. INVENTORIES Inventories are stated at the lower of cost or market using the first in, first out (FIFO) method. Production costs, consisting of labor and overhead, are applied to ending inventories at a rate based on estimated production capacity and any excess production costs are charged to cost of products sold. Provisions have been made to reduce excess or obsolete inventories to their net realizable value. Inventories consisted of the following at June 30, 2005: Raw materials 685,882 Finished goods 455,517 ---------- 1,141,399 ========== DEFERRED FINANCING COSTS The Company capitalizes financing costs and amortizes them using the straight-line method, which approximates the effective interest method, over the term of the related debt. Amortization of deferred financing costs is included in interest expense and totaled approximately $22,000 and $34,000 for the three-months ended June 30, 2005 and 2004, respectively, and approximately $56,000 and $72,000 for the six-months ended June 30, 2005 and 2004, respectively. The deferred financing costs related to the $2.5 million commitment provided by the Company's stockholder, who is also a Board Member, totaled $318,000 and were initially amortized over the nine-month draw down period ending December 31, 2002. Upon the first draw in August 2002, the amortization period was extended to 18 months or through December 31, 2003. On March 14, 2003, the Company recorded additional deferred financing costs of $214,400 related to an additional $3.5 million commitment provided by the same stockholder, with a payback date of December 31, 2004. The deferred financing costs of $214,400 were amortized over the payback period. In addition, the repayment period for the $2.5 million commitment was extended to December 31, 2004. Effective March 14, 2003, the Company began amortizing the remaining balance of deferred financing costs for the $2.5 million commitment prospectively over the extended payback period. On February 2, 2004, the payback period for both the $2.5 and $3.5 million commitments was extended to December 31, 2005 (see Note 2), resulting in the addition of approximately $94,000 of related deferred financing costs. Effective February 2, 2004, the Company began amortizing the remaining balance of deferred financing costs for both the $2.5 and $3.5 million commitments prospectively over the extended payback period. On April 14, 2005, the payback period for both the $2.5 and $3.5 million commitments were extended to December 31, 2006 (see Note 2), resulting in the addition of approximately $55,000 of related deferred financing costs. Effective April 2005, the Company began amortizing the remaining balance of deferred financing costs prospectively over the extended payback period. Accumulated amortization of deferred financing costs as of June 30, 2005 was approximately $547,000. STOCK OPTION PLANS The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation (FIN 44), and provides pro forma disclosures of the compensation expense determined under the fair value provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). The Company does not record compensation expense using the 8 fair value provisions, because the alternative fair value accounting provided for under SFAS 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, in situations where the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company leases its employees from a payroll leasing company. The Company's leased employees meet the definition of employees as specified by FIN 44 for purposes of applying APB 25. Stock options and warrants issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable in accordance with SFAS 123 and EITF 96-18, Accounting for Equity Investments That are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services. The related expense is recognized over the period the services are provided. Pro forma information regarding net loss and loss per common share as if the Company had accounted for its employee stock options under the fair value method of SFAS 123 is presented below. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows:
Three Months Ended June 30, Six Months Ended June 30, 2005 2004 2005 2004 ------------ -------------- ----------- ----------- Net loss as reported (723,191) $ (822,311) (1,544,939) $(1,986,715) Stock-based employee compensation cost (intrinsic value method) -- -- Fair value method stock option expense 12,299 (266,508) 139,630 (624,922) ------------ -------------- ----------- ----------- Pro forma net loss (710,892) $ (1,088,819) (1,405,309) $(2,611,637) ============ ============== =========== =========== Loss per common share: Basic and diluted loss as reported $ (0.04) $ (0.05) $ (0.09) $ (0.12) Basic and diluted loss pro forma $ (0.04) $ (0.06) $ (0.08) $ (0.15) Weighted average fair value per option granted during the period(1) $ .50 $ .57 Assumptions Average Risk Free Interest Rate 4.02% 2.93% 3.82% 3.03% Average Volatility Factor .658 1.025 .712 1.060 Expected Dividend Yield 0% 0% 0% 0% Expected Life (in years) 5 5 5 5
(1) A Black-Scholes option-pricing model was used to develop the fair values of the options granted. REVENUE RECOGNITION The Company recognizes revenue from product sales to customers, distributors and resellers when products that do not require further services or installation by the Company are shipped, when there are no uncertainties surrounding customer acceptance and when collectibility is reasonably assured in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements (SAB 104), as amended and interpreted. Cash received by the Company prior to shipment is recorded as deferred revenue. Sales are made to customers under terms allowing certain limited rights of return and other limited product 9 and performance warranties for which provision has been made in the accompanying condensed consolidated financial statements. Amounts billed to customers in sales transactions related to shipping and handling, represent revenues earned for the goods provided and are included in net sales. Costs of shipping and handling are included in cost of products sold. Product Warranty Costs As required by FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), the Company is including the following disclosure applicable to its product warranties. The Company accrues for warranty costs based on the expected material and labor costs to provide warranty replacement products. The methodology used in determining the liability for warranty cost is based upon historical information and experience. The Company's warranty reserve is calculated as the gross sales multiplied by the historical warranty expense return rate. The following table shows the changes in the aggregate product warranty liability for the six-months ended June 30, 2005: Balance as of December 31, 2004 $ 44,203 Less: Payments made (7,429) Change in prior period estimate 820 Add: Provision for current period warranties 18,304 -------- Balance as of June 30, 2005 $ 55,898 ======== Comprehensive Income SFAS No. 130, Reporting Comprehensive Income (SFAS 130) establishes rules for reporting and displaying of comprehensive income and its components. Comprehensive income is the sum of net loss as reported in the consolidated statements of operations and other comprehensive income transactions. Other comprehensive income transactions that currently apply to the Company result from changes in exchange rates used in translating the financial statements of its wholly owned subsidiary, Puradyn Filter Technologies, Ltd. (Ltd). Comprehensive loss as of June 30, 2005 and 2004 is not shown net of taxes because the Company's deferred tax asset has been fully offset by a valuation allowance. Comprehensive loss consisted of the following for the three and six-months ended June 30, 2005 and 2004:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Net loss (723,191) $ (822,311) (1,544,939) $(1,986,715) ----------- ----------- ----------- ----------- Other comprehensive income (loss): Foreign currency translation adjustment 39,615 3,833 50,652 (4,006) ----------- ----------- ----------- ----------- Total other comprehensive income (loss) 39,615 3,833 50,652 (4,006) ----------- ----------- ----------- ----------- Comprehensive loss (683,576) $ (818,478) (1,494,287) $(1,990,721) =========== =========== =========== ===========
10 RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to the current period presentation. 2. ISSUES AFFECTING LIQUIDITY AND MANAGEMENT'S PLANS The Company's financial statements have been prepared assuming that the Company will continue as a going concern. The Company has sustained losses since inception in 1987 and used net cash in operations of approximately $958,000 and $1,599,000 during the six-months ended June 30, 2005 and 2004, respectively. As a result, the Company has had to rely principally on private equity funding, including the conversion of debt into stock, as well as stockholder loans to fund its activities to date. These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from an institutional investor and current stockholder led the Company's independent registered public accounting firm, DaszkalBolton to include a statement in its audit report relating to the Company's audited consolidated financial statements for the year ended December 31, 2004 expressing substantial doubt about the Company's ability to continue as a going concern. Additionally, the Company continues to address liquidity concerns because of inadequate revenue growth. As a result, cash flow from operations is insufficient to cover our liquidity needs for the immediate future. The Company was successful in raising $1.48 million in capital in June 2005. As the Company performance improves, it will continue to seek additional capital and explore financing availability and options with investment bankers, funds, private sources, members of management and existing shareholders. The Company has implemented further measures to preserve its ability to operate, including organizational changes, deferral of salaries, reduction in personnel and renegotiating creditor and collection arrangement. There can be no assurance that the Company will be able to raise the additional capital needed or reduce the level of expenditures in order to sustain operations. On March 28, 2002 and March 14, 2003, respectively, the Company executed a binding agreement with one of its stockholders, who is also a Board Member, to fund up to $2.5 million through March 31, 2003 and an additional $3.5 million through December 31, 2003. Under the terms of the agreements, the Company can draw amounts as needed in multiples of $500,000 to fund operations subject to Board of Director approval. Amounts drawn bear interest at the prime rate per annum (6.00% at June 30, 2005), payable monthly and were to become due and payable on December 31, 2003 and December 31, 2004, respectively, or upon a change in control of the Company or consummation of any other financing over $3.0 million or over $7.0 million in the aggregate. In March 2003, the payback date for the first agreement was extended to December 31, 2004. On February 2, 2004, the stockholder amended both agreements to extend the payback dates to December 31, 2005 and to waive the funding requirement mandating payback terms until such time as the Company has raised an additional $7.0 million over the $3.5 million raised in the Company's recent private placement offering; or until such time as the Company is operating within sufficient cash flow parameters, as defined, to sustain its operations; or until a disposition of the Company occurs. In March 2004, the Company had repaid $2.0 million of the $5.0 million it had drawn from the available funds. Both of the lines allow for discretionary principal payments, which add to the availability of additional funds that the Company may draw. In May 2004 and in July 2004, the Company made draws of $500,000, respectively. In addition, as part of the February 2, 2004 amendment described above, the second agreement was amended to allow the Company to draw the remaining available balance ($2.5 million as of June 30, 2004) through December 31, 2004. In consideration for the amendments, as well as for efforts in obtaining private placement funding, the Company granted the stockholder 150,000 common stock purchase warrants at an exercise price equal to the closing market price of the Company's stock on the date of grant (see Note 3). 11 In April 2005, the payback dates of the March 28, 2002 and March 14, 2003 agreements were extended from December 31, 2005 to December 31, 2006. As consideration of this extension, this stockholder was granted an additional 100,000 common stock purchase warrants at an exercise price equal to the closing market price of the Company's stock on the date of grant, for a period of five years. In December 2003, the Company issued 750,000 shares of common stock for gross proceeds of $1.5 million from its recent private placement offering (approximately $1.47 million net of related expenses) to a third party investor. In March 2004, an additional 1.0 million shares of common stock were issued to the same investor for gross proceeds of $2.0 million (approximately $1.98 million net of related expenses.) The $2.0 million of gross proceeds was used to reduce the outstanding principal balance of the notes payable to stockholder. There is no assurance that the Company will raise any additional proceeds from future private placements. Subscriptions for the current private placement expired on April 30, 2004. The Company anticipates increased cash flows from 2005 sales activity; however, additional cash will still be needed to support operations. Management believes that the commitments received from its stockholder, the funds received from its recent current private placement offering, as well as cash from sales and current working capital will be sufficient to sustain its operations at its current level through January 1, 2006. However, if budgeted sales levels are not achieved and/or significant unanticipated expenditures occur, the Company may have to modify its business plan, reduce or discontinue some of its operations or seek a buyer for all or part of its assets to continue as a going concern through 2005. 3. COMMON STOCK During June and July 2005, the Company received gross cash proceeds of $1.48 million from the sale of 4,819,998 shares of common stock from a private placement offering. The funds will be used for corporate purposes and to reduce the outstanding principle balance of the notes payable to stockholder. Additionally, warrants in the amount of 400,000 and 80,000 were offered to two separate participants in the private placement at a price of $0.80 per each share of common stock with an exercise date of June 17, 2006, and an expiration date of June 17, 2008. On March 12, 2004, the Company received gross cash proceeds of $2.0 million from the sale of 1.0 million shares of common stock from its private placement offering, which expired on April 30, 2004. The funds were used to reduce the outstanding principal balance of the notes payable to stockholder (see Note 2). The Company incurred related offering costs of approximately $21,000. On February 2, 2004, the two binding funding agreements with a stockholder, who is also a Board member, were amended (see Note 2). In consideration for the amendments, as well as for efforts in obtaining private placement funding, the Company granted the stockholder 150,000 fully vested common stock purchase warrants. The fair value of the warrants was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: risk free interest rate of 2.43%, volatility factor of the expected market price of the Company's common stock of .526, a dividend yield of zero, and a weighted average expected life of 3 years. The warrants have an exercise price of $2.00, which was equal to quoted market value on the date of grant. The fair value of the warrants was estimated at $112,500. The Company accrued $18,750 of the fair value related to the services rendered by the stockholder in association with the private placement funds raised in December 2003, in the 2003 consolidated balance sheet in Form 10-KSB, and recorded a deferred charge of $93,750 in February 2004 for the amendments to the commitment agreements, which is being amortized over the repayment period of 23 months. 4. STOCK OPTIONS During the six-months ended June 30, 2005 and 2004, employees of the Company exercised 3,270 and 10,000, respectively, of common stock options. The Company received $2,936 and $10,000, respectively, in cash proceeds in exchange for the shares issued. 12 During the three-month and six month periods ended June 30, 2005, the Company recognized a credit to operations of approximately $78,000 and $120,000, respectively, (under the intrinsic value method), relating to outstanding variable option awards, which is included in stock based compensation expense for the three-month and six-month periods ended June 30, 2005. During the three-month and six-month periods ended June 30, 2004, the Company recognized approximately $34,000 and $26,000, respectively, of compensation expense relating to variable option awards, which is included stock based compensation expense. At June 30, 2005, approximately 212,000 awards subject to variable accounting remained outstanding with an average exercise price of $0.47. On March 9, 2004, the Company extended the expiration date of the exercise period of 270,000 fully vested stock options for a terminated employee who left the Company in August 2003. The Company's Stock Option Plan permits an employee to exercise their stock options for up to one month after their termination date, at which time they expire. The exercise price of the options ranges from $1.00 to $8.50. In accordance with FIN 44, the Company compared the options' intrinsic value on the modification date to the original intrinsic value on the date of grant. The Company recorded approximately $263,000 of compensation expense related to this modification, which is included in the accompanying condensed consolidated statement of operations for the six-month period ended June 30, 2004. On March 11, 2005, the Company granted a total of 80,000 non-qualified options to two consultants for services rendered. The total value of the options is $45,600, of which $41,522 was expensed and $4,078 was capitalized as of June 30, 2005. 5. NOTES PAYABLE TO STOCKHOLDER As of June 30, 2005, the Company had drawn an aggregate of approximately $5.316 million of the $6.150 million from available line-of-credit, which is provided by a stockholder, who is also a Board Member, of the Company (see Notes 2 and 3). Amounts drawn bear interest at the prime rate (6% as of June 30, 2005) payable monthly and become due and payable on December 31, 2006; or until such time as the Company has raised an additional $7.0 million over the $3.5 million raised in the Company's recent private placement offering; or until such time as the Company is operating within sufficient cash flow parameters, as defined, to sustain its operations; or until a disposition of the Company occurs. In March 2004, the Company repaid $2.0 million of the outstanding balance, using the funds received from the private placement, which expired in April 2004. Both of the lines allow for discretionary principal payments, which add to the availability of additional funds that the Company may draw. During the year ended December 31, 2004, the Company had drawn an additional $2.0 million of the available balance. During the period ended March 31, 2005, the Company had drawn the remaining $648,100 of available balance. On March 22, 2005, the original $2.5 million funding agreement was amended to increase the funds available to $2.65 million and in March 2005, that final draw was made. In June 2005, the Company repaid $834,000 of the outstanding balance, using the funds received from the private placement in June 2005. On April 14, 2005, the repayment dates of the notes payables to stockholder, dated March 28, 2002 and March 14, 2003, were extended from December 31, 2005 to December 31, 2006. As consideration of this extension, this stockholder was granted an additional 100,000 common stock purchase warrants at an exercise price equal to the closing market price of the Company's stock on the date of grant, for a period of five years. The fair value of the warrants was estimated at $55,000. For the three-months ended June 30, 2005 and 2004, the Company recorded approximately $91,000 and $32,000, respectively, and for the six-months ended June 30, 2005 and 2004, the Company recorded approximately $169,000 and $82,000, respectively, of interest expense related to the notes payable to stockholder, which is included in interest expense in the accompanying condensed consolidated statements of operations. 13 6. COMMITMENTS AND CONTINGENCIES INVESTMENT BANKING AGREEMENTS On October 26, 2004, the Company engaged Imperial Capital, LLC ("IC") as an exclusive financial advisor to the Company. IC will assist the Company in raising additional capital, as well as possibly pursuing a strategic partner from a mutually related field to enhance the Company's ability to develop business. In consideration for IC's services, the Company agreed to pay a $100,000 non-refundable retainer, as well as an advance for future out-of-pocket expenses incurred by IC. Upon the consummation of a transaction, as defined by the agreement, the Company will pay a success fee of 2.5% of the principal amount of any debt or equity securities sold or the consideration received from a strategic relationship. Either party upon 30-day written notice may terminate the agreement. No equity capital has been raised pursuant to this agreement through the date of this filing. The Company has also engaged the services of two additional investment banking firms for assistance in obtaining additional financing. Fees for both of these firms are performance-based and do not require any retainers or fees in advance. On April 21, 2005, the company entered into an agreement with Biscayne Capital Markets, Inc ("BCMI") an investment banking firm, to provide assistance in obtaining financing. The company agreed to pay a fee of 7% of gross proceeds received by the Company as a result of services performed under the agreement. Fees paid in consideration of services rendered are based upon performance and there is no obligation to pay any fees unless financing is closed. On April 28, 2005, the Company entered into a one-year non-exclusive agreement with CapitalLink, L.C., an investment banking firm, to assist in additional financing. The company agreed to pay a fee of 7% of gross proceeds received by the Company as a result of services performed under the contract, as well as reimbursement of pre-approved out of pocket expenses. AMERICAN STOCK EXCHANGE DELISTING On April 28, 2005, the Company received a notice from the Staff of the American Stock Exchange (the Exchange) indicating that the Company was below certain of the Exchange's continued listing standards. Specifically, as set forth in Sections 1003(a)(i) and (ii) of the Exchange Company Guide, the Company sustained losses from continuing operations and/or net losses in two out of its three most recent fiscal years with stockholders' equity of less than $2 million, and losses from continuing operations and/or net losses in three out of its four most recent fiscal years with stockholders' equity of less than $4 million. The Company was given the opportunity to submit a plan to the Exchange outlining actions it has taken, or would take, over the next 18 months that would bring it into compliance with continued listing standards. The Company submitted its compliance plan to Exchange by the scheduled deadline of May 31, 2005. On June 24, 2005, the Board of Directors approved a resolution to voluntarily withdraw the Company's common stock from listing on the Exchange. The Board's decision was based upon a determination that Puradyn would not be able to timely comply with the Exchange's ongoing financial compliance standards under Section 1003 of the Exchange's Company Guide, as well as the ongoing costs of compliance with the Exchange's requirement, including the provisions of the Sarbanes-Oxley Act of 2002 as they apply to Exchange-listed companies, and the requirement to either limit the amount of financing of its previously announced financing or to incure additional costs and defer receipt of the financing pending stockholder approval as required by the Exchange's rules. Additionally, on June 24, 2005, the Company submitted an application to the Securities and Exchange Commission (SEC) pursuant to Section 12(d) of the Securities Exchange Act of 1934 for the voluntarily withdrawal of the listing of its common stock from the Exchange. The Company continues to be required to file reports with the SEC under Section 13 of the Securities Exchange Act of 1934, including quarterly and annual reports, and its common stock is expected in the ordinary course to be included for quotation on the OTC Bulletin Board. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Form 10-KSB for the year ended December 31, 2004. Other than historical and factual statements, the matters and items discussed in this Quarterly Report on Form 10-QSB are forward-looking statements that involve risks and uncertainties. Actual results of the Company may differ materially from the results discussed in the forward-looking statements. Certain factors that could contribute to such differences are discussed with the forward-looking statements throughout this report. Except as required by law or regulation, we do not undertake any obligation to publicly update forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. GOING CONCERN The Company's financial statements have been prepared on the basis that it will operate as a going concern, which comtemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred net losses each year since inception and has relied on the sale of its stock from time to time and loans from third parties and from related parties to fund its operations. These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from institutional investors and current stockholders have led the Company's independent registered accounting firm DaszkalBolton to include a statement in its audit report relating to the Company's audited consolidated financial statements for the year ended December 31, 2004 expressing substantial doubt about the Company's ability to continue as a going concern. Additionally, the Company continues to address liquidity concerns because of inadequate revenue growth. As a result, cash flow from operations is insufficient to cover our liquidity needs for the immediate future. The Company was successful in raising $1.48 million in capital in June 2005. As the Company performance improves, it will continue to seek additional capital and is exploring financing availability and options with investment bankers, funds, private sources, members of management and existing stockholders. The Company has implemented further measures to preserve its ability to operate, including organizational changes, a reduction and/or deferral of salaries, reduction in personnel and renegotiating creditor and collection arrangement. There can be no assurances that the Company will be able to raise the additional capital needed or reduce the level of expenditures in order to sustain operations. GENERAL The Company was formed in 1987 and was inactive until it commenced limited operations in 1991 when it obtained worldwide manufacturing and marketing rights to the Purifiner(R) product, now called the PURADYN(R) Bypass Oil Filtration System or the "PURADYN" system. Sales of the Company's products will depend principally upon end user demand for such products and acceptance of the Company's products by OEMs. The oil filtration industry has historically been competitive and, as is typically the case with innovative products, the ultimate level of demand for the Company's products is subject to a high degree of uncertainty. Developing market acceptance for the Company's existing and proposed products will require substantial marketing and sales efforts and the expenditure of a significant amount of funds to inform customers of the perceived benefits and cost advantages of its products. Through industry data research, we have been able to identify the potential applications where management believes market penetration is most accessible. Currently no bypass oil filtration system has captured a substantial share of the estimated recurring $13 billion potential industry. We believe we are in a unique position to capitalize on the growing acceptance of bypass oil filtration given that our product and our Company are positioned as, including, but not limited to: 15 o A competitively priced, value-added product offering a unique selling concept based on an advanced, patented technology o An alternative solution to the rising costs and increasing dependence on foreign oil o Providing an operational maintenance solution to end users in conjunction with existing and reasonable foreseeable federal environmental applications In 2001, the Company redirected the focus of its sales strategy from individual sales and distribution efforts to the development of a strong nationwide distribution network that will not only sell but also install and service our product. The company continues this momentum with its most recent announcement of the addition of Atlantic Detroit Diesel Allison and Florida Detroit Diesel Allison. Their expertise and established presence in the diesel engine industry will be an asset to our organization. Additionally, we began to refocus our sales and marketing efforts to target areas and issues specific to the bypass oil filtration industry. These efforts include identifying customer needs and educating the customer on the total values of our system concerning oil maintenance costs and procedures, specifically, that oil does not need to be changed on a regular basis and the drain interval is safely extended, provided that oil analysis verifies the oil is clean. This strategy includes focus on: o The expansion of existing strategic relationships o Continued development and expansion of our distribution network with qualified distributors in order to establish a sales- and service-oriented nationwide infrastructure o Continuing to target existing and new medium-to-large sized fleets, industrial/construction business and major diesel engine and generator set OEMs o Creating customer 'pull-through', a sustained level of request for our product on the OEM level o Closely monitoring customer evaluations to ensure the salient aspects of our system are perceived and accepted on a timely basis o Converting customer evaluations into sales, both immediate and long term While this is a long-term and ongoing commitment, we believe we have achieved a limited amount of industry acceptance based on recent accomplishments: o 2001 approved by one of the largest private fleets in the U.S. to install PURADYN on their new equipment, a program still currently ongoing. o 2002 approval and purchase of the PURADYN system by a major international OEM of medium-sized power generators. o 2003 selection as a Strategic Supplier for one of the larger equipment rental companies in North America. Although the system is fully supported at the customer's corporate level, the program is expected to take some time to gain momentum as all branches become familiar enough with the benefits of the PURADYN system to begin purchasing. o 2004 ongoing test results released by the US Department of Energy (DOE) estimating an 80% savings in oil using bypass oil filtration. Our system was used in this ongoing test evaluating the benefits and cost savings of the technology. o 2004 announcement that Miami-Dade County, Florida has again specified the PURADYN system on new equipment purchases. o 2004 announcement of combined international expansion with the introduction of two potential distributors in the bus and construction markets in China. 16 o 2005 The U.S. Army notified the company that the PURADYN system received very favorable reviews during the Expedited Modernization Initiative Procedure (EMIP) demonstration. As a direct result of these favorable reviews, the PURADYN system is now being evaluated by several vehicle platforms within the U.S. Army. We believe that the renewed interest shown in the technology of bypass oil filtration as an economic alternative to rising oil prices, dependence upon foreign oil, with the added benefit of being environmentally beneficial, will timely and favorable position the Company as a manufacturer of this type of product. We also believe that industry acceptance resulting in sales will continue to grow in 2005; however, there can be no assurance that any of our sales efforts or strategic relationships will meet management's expectations or result in actual revenues. The Company's sales effort not only involves educating the potential customer on the benefits of our product, but also allowing the customer to test and evaluate the PURADYN system on its fleet vehicles. While set for a specific period of time, typically ranging from three to twelve months, evaluations are often influenced by a number of variables including equipment applications downtime or servicing, which may extend the evaluation period. Consequently, the sales cycle can be relatively long. Management believes that this evaluation period will continue to be shortened as our products gain wider acceptance, support and usage from well-known customers and OEMs. Effective June 1, 2000, the Company formed a wholly owned subsidiary, Puradyn Filter Technologies, Ltd ("Ltd."), in the United Kingdom to sell the Company's products in Europe, the Middle East and Africa. The subsidiary was the result of the dissolution of a joint venture (TF Purifiner, Ltd.) the Company had with Centrax, Ltd. The results of Ltd. have been consolidated with the Company since June 1, 2000. International sales are especially well suited to our product given that environmental controls are not as regulated in countries outside North America. Certain applications representing a higher return on investment are more prevalent in use outside of North America and end-users consequently are more receptive to the total maintenance package, including the use of oil analysis, which the PURADYN system represents. In first six months of 2005, total international sales accounted for 48.2% of the Company's consolidated net sales. The Company recognizes revenue from product sales to customers, distributors and resellers when products that do not require further services or installation by the Company are shipped, when there are no uncertainties surrounding customer acceptance and for which collectibility is reasonably assured in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements, as amended and interpreted. Cash received by the Company prior to shipment is recorded as deferred revenue. Sales are made to certain customers under terms allowing certain limited rights of return and other limited product and performance warranties for which provision has been made in the accompanying condensed consolidated financial statements. Management believes, based on past experience and future expectations, that such limited return rights and warranties will not have a material adverse effect on the Company's financial statements. 17 RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED JUNE 30, 2005 COMPARED TO THE THREE-MONTHS ENDED JUNE 30, 2004 The following table sets forth the amount of increase or decrease represented by certain items reflected in the Company's condensed consolidated statements of operations in comparing the three-months ended June 30, 2005 to the three-months ended June 30, 2004: (In thousands) Three Months Ended June 30, ----------------------------------- 2005 2004 Change ------- ------- ------- Net sales $ 639 $ 627 12 ------- ------- ------- Costs and expenses: Cost of products sold 633 646 (13) Salaries and wages 339 403 (64) Selling and administrative 325 380 (55) Stock-based compensation (34) (34) -- ------- ------- ------- Total costs and expenses 1,263 1,395 (132) ------- ------- ------- Other (expense) income: Interest income 13 13 -- Interest expense (112) (68) 44 ------- ------- ------- Total other expense (99) (55) 44 ------- ------- ------- Net loss (723) $ (822) (99) ======= ======= ======= NET SALES Net sales increased by approximately 2% from approximately $627,000 in 2004 to approximately $639,000 in 2005. Sales to three customers accounted for approximately 24%, 16% and 15% (for a total of 55%) of the consolidated net sales for the three-months ended June 30, 2005. For the three-months ended June 30, 2004, sales to two customers accounted for approximately 17% and 15% of the consolidated net sales. The UK subsidiary's sales decreased by approximately 22% for the three-month period ended June 30, 2005 compared to the three-month period ended June 30, 2004. COST OF PRODUCTS SOLD Cost of products sold decreased by approximately 2% from approximately $646,000 in 2004 to approximately $633,000 in 2005. The decrease is primarily due to improvements in raw material sourcing. SALARIES AND WAGES Salaries and wages decreased approximately $64,000, or 16%. This decrease is the result of a net reduction of three employees, representing $63,000 of the decrease in expenses. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses decreased by approximately $55,000, or 14%. This decrease is due to a reduction in travel, entertainment and lodging expenses and audit fees by approximately $33,000 and $16,000 respectively. 18 STOCK-BASED COMPENSATION The Company recorded a credit to operations of approximately $34,000 for both the three-months ended June 30, 2005 and the three-months ended June 30, 2004. As stock-based compensation expense related to variable awards is subject to changes in the quoted market value of the Company's common stock, the Company cannot predict the impact of stock-based compensation expense on operations in the future. INTEREST EXPENSE Interest expense increased by approximately $44,000, or 65%, as a result of the increase in the outstanding balance of the stockholder notes payable and as an increase in the interest rate. The Company pays interest monthly on the notes payable to stockholder at the prime rate, which was 6% as of June 30, 2005, compared to 4% at June 30, 2004. This increase was partially offset by a change in the amortization period for the deferred financing costs, due to the extension of the payback date to December 31, 2006 of the notes payable to stockholder RESULTS OF OPERATIONS FOR THE SIX-MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX-MONTHS ENDED JUNE 30, 2004 The following table sets forth the amount of increase or decrease represented by certain items reflected in the Company's condensed consolidated statements of operations in comparing the six-months ended June 30, 2005 to the six-months ended June 30, 2004: (in thousands) Six Months Ended June 30, ----------------------------------- 2005 2004 Change ------- ------- ------- Net sales 1,237 $ 1,241 (4) ------- ------- ------- Costs and expenses: Cost of products sold 1,257 1,275 (18) Salaries and wages 708 813 (105) Selling and administrative 685 774 (89) Stock-based compensation (68) 237 (305) ------- ------- ------- Total costs and expenses 2,582 3,099 (517) ------- ------- ------- Other income (expense): Interest income 26 27 1 Interest expense (226) (156) 70 ------- ------- ------- Total other expense (200) (129) 71 ------- ------- ------- Net loss (1,545) $(1,987) (442) ======= ======= ======= NET SALES Net sales decreased by approximately .3% from approximately $1,241,000 in 2004 to approximately $1,237,000 in 2005. Sales to two customers individually accounted for approximately 27% and 16% (for a total 43%) and 21% and 17% (for a total of 38%) of net sales for the six-months ended June 30, 2005 and 2004, respectively. The UK subsidiary's sales decreased by approximately 9%, from approximately $443,000 for the six-month period ended June 30, 2004 compared to approximately $402,000 for the six-month period ended June 30, 2005. 19 COST OF PRODUCTS SOLD Cost of products sold decreased by approximately 1%, or approximately $18,000, from approximately $1,275,000 in 2004 to approximately $1,257,000 in 2005. This decrease is primarily due to the decrease in sales and improvements in raw material sourcing. SALARIES AND WAGES Salaries and wages decreased approximately $105,000, or 13%. This decrease is the result of a net reduction of three employees, representing approximately a $101,000 decrease. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses decreased by approximately 11% from approximately $774,000 for the six months ended June 30, 2004 to approximately $685,000 for the six months ended June 30, 2005, due primarily to a reduction in travel, entertainment and lodging expenses and audit fees by approximately $41,000 and $39,000 respectively. STOCK-BASED COMPENSATION The Company recorded stock based compensation income and expense of $68,000 and $237,000 for the six-months ended June 30, 2005 and 2004, respectively, related to certain variable equity awards and other stock based compensation. Approximately $269,000 is due to the extension in March 2004 of the expiration date of the exercise period of 270,000 fully vested stock options for a retired employee who left the Company in August 2003. The Company's Stock Option Plan permits an employee to exercise their stock options for up to one month after their termination date, at which time they expire. The exercise price of the options ranges from $1.00 to $8.50. In accordance with FIN 44, the Company compared the options' intrinsic value on the modification date to the original intrinsic value on the date of grant and recorded the corresponding charge to compensation expense. As stock-based compensation expense related to variable awards is subject to changes in the quoted market value of the Company's common stock, the Company cannot predict the impact of stock-based compensation expense on operations in the future. Approximately $36,000 of the decrease in stock-based compensation expense was attributed to the decrease in stock price from $1.20 at December 31, 2004 to $.65 at June 30, 2005. INTEREST EXPENSE Interest expense increased by approximately $70,000 as a result of a larger average outstanding balance of the notes payable to stockholder. The Company pays interest monthly on the notes payable to stockholder at the prime rate, which was 6% as of June 30, 2005, compared to 4% as of June 30, 2004. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2005, the Company had cash and cash equivalents of approximately $306,000. For the six-month period ended June 30, 2005, net cash used in operating activities was approximately $958,000, which primarily resulted from the net loss of approximately $1,545,000. Net cash used in investing activities was approximately $11,000 for the purchase of property and equipment. Net cash provided by financing activities was approximately $967,000 for the period, due to net proceeds of $1.15 million in private placement offering, offset by the net repayment of approximately $186,000 of the stockholder loan. The Company has incurred net losses each year since its inception and has relied on the sale of its stock from time to time and loans from third parties and from related parties to fund its operations. On March 28, 2002, the Company executed a binding agreement with one of its stockholders, who is also a Board Member, to fund up to $2.5 million through March 31, 2003. Under the terms of the agreement, the Company could draw amounts as needed in multiples of $500,000 to fund operations subject to Board of 20 Director approval. Amounts drawn bear interest at the prime rate per annum (6.00% at June 30, 2005) payable monthly and were to become due and payable on December 31, 2003, or upon a change in control of the Company or consummation of any other financing over $3.0 million. In March 2003, the payback date was extended to December 31, 2004. In consideration for the stockholder entering into this agreement, the Company granted the stockholder 100,000 common stock purchase warrants at an exercise price equal to the closing market price of the Company's stock on the date of grant. As of June 30, 2004, the Company had drawn the entire $2.5 million of the available funds. On March 14, 2003, the Company executed a second binding agreement with the same stockholder to fund up to an additional $3.5 million through December 31, 2003. Under the terms of the second agreement, the Company can draw amounts as needed in multiples of $500,000 to fund operations subject to Board of Director approval. Amounts drawn bear interest at the prime rate per annum (6.00% at June 30, 2005) payable monthly and become due and payable on December 31, 2004, or upon a change in control of the Company or consummation of any other financing over $7.0 million. In consideration, the Company granted the stockholder 125,000 common stock purchase warrants at an exercise price equal to the closing market price of the Company's stock on the date of grant. As of June 30, 2004, the Company had drawn $3.0 million of the available funds and repaid $2.0 million of the loan on the second line. Both of the lines allow for discretionary principal payments, which add to the availability of additional funds that the Company may draw. In July 2004, the Company drew an additional $500,000. On February 2, 2004, the Company granted this same stockholder an additional 150,000 common stock purchase warrants at an exercise price equal to the closing market price of the Company's stock on the date of grant in consideration for extending the payback dates of the March 28, 2002 and March 14, 2003 agreements from December 31, 2004 to December 31, 2005; for waiving the funding requirement mandating payback terms until such time as the Company has raised an additional $7.0 million over the amount raised during the Company's recent 2004 private placement offering, the Company is operating within sufficient cash flow parameters, as defined, or a disposition of the Company occurs; and for his involvement in equity financing in 2003 and 2004, to date. In April 2005, the payback dates of the March 28, 2002 and March 14, 2003 agreements were extended from December 31, 2005 to December 31, 2006. As consideration of this extension, this shareholder was granted an additional 100,000 common stock purchase warrants at an exercise price equal to the closing market price of the Company's stock on the date of grant, for a period of five years. During June and July 2005, the Company received gross cash proceeds of $1.48 million from the sale of 4,819,998 shares of common stock from a private placement offering. The funds will be used for corporate purposes and to reduce the outstanding principle balance of the notes payable to stockholder. Additionally, warrants in the amount of 400,000 and 80,000 were offered to two separate participants in the private placement at a price of $0.80 per each share of common stock with an exercise date of June 9, 2006, and an expiration date of June 9, 2008. On December 10, 2003, the Company completed the sale of 750,000 shares of its common stock through its recent private placement to a third party investor, initiated in November 2003, with gross proceeds of approximately $1.5 million, all of which was used for capital equipment purchases, marketing, working capital and general corporate purposes. In March 2004, the same investor purchased an additional 1.0 million shares of common stock for $2.0 million. The funds were used to reduce the outstanding balance of the notes payable to stockholder. The Company will then draw amounts, per the terms of the stockholder commitment letters dated March 28, 2002 and March 14, 2003, and amendments thereto, as needed, for operating and capital expenditures. There can be no assurance that the Company will raise any additional proceeds from future private placements. Subscriptions for the current private placement expired on April 30, 2004. Furthermore, on December 18, 2003, the Company entered into an agreement with an investment-banking firm in Boca Raton, Florida to assist in raising approximately $3.0 to $5.0 million in equity capital. The Company has agreed to pay a fee of 7% of any gross proceeds received by the Company as a result of this firm's services, as well as all reasonable out-of-pocket fees, expenses and costs incurred in connection with 21 the performance of its services under the agreement. The agreement excludes the above capital raised in December 2003 and March 2004. No equity capital has been raised pursuant to this agreement through the date of this filing. At June 30, 2005, the Company had working capital of approximately $1.2 million and its current ratio (current assets to current liabilities) was 2.32 to 1. The Company anticipates increased cash flows from 2005 sales activity; however, additional cash will still be needed to support operations. Management believes that the commitments received from its stockholder and the recent private placement offering, as well as cash from sales and current working capital will be sufficient to sustain its operations at its current level through January 1, 2006. However, if budgeted sales levels are not achieved and/or significant unanticipated expenditures occur, the Company may have to modify its business plan, reduce or discontinue some of its operations or seek a buyer for all or part of its assets to continue as a going concern through 2005. The Company's wholly owned subsidiary, Ltd., moved to new office space in September 2003 by assuming the existing lease, which expired in August 2004. The Company is in the process of negotiating a new lease. Consistent with industry practices, the Company may accept product returns or provide other credits in the event that a distributor holds excess inventory of the Company's products. The Company's sales are made on credit terms, which vary depending on the nature of the sale. The Company believes it has established sufficient reserves to accurately reflect the amount or likelihood of product returns or credits and uncollectible receivables. However, there can be no assurance that actual returns and uncollectible receivables will not exceed the Company's reserves. Sales of the Company's products will depend principally on end user demand for such products and acceptance of the Company's products by original equipment manufacturers ("OEMs"). The oil filtration industry has historically been competitive and, as is typically the case with innovative products, the ultimate level of demand for the Company's products is subject to a high degree of uncertainty. Developing market acceptance, particularly worldwide, for the Company's existing and proposed products will require substantial marketing and sales efforts and the expenditure of a significant amount of funds to inform customers of the perceived benefits and cost advantages of its products. IMPACT OF INFLATION Inflation has not had a significant impact on the Company's operations. However, any significant decrease in the price for oil or labor, environmental compliance costs, and engine replacement costs could adversely impact the Company's end users cost/benefit analysis as to the use of the Company's products. ITEM 3. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Puradyn Filter Technologies Incorporated's Chief Executive Officer and Chief Financial Officer have evaluated the Company's disclosure controls and procedures as of June 30, 2005, and they concluded that these controls and procedures are effective. (b) Changes in Internal Controls There are no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to June 30, 2005. 22 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS On June 9, 2005, subject to the terms and conditions set forth in its private placement, the Company offered to two investors 400,000 and 80,000 warrants, respectively, at a price of $0.80 per each share of common stock with an exercise date of June 9, 2006, and an expiration date of June 9, 2008. On April 14, 2005, in consideration for the amendments of the two binding funding agreements with a stockholder, who is also a Board member, the Company granted the stockholder 100,000 fully vested common stock purchase warrants. The warrants have an exercise price of $0.95, which was equal to quoted market value on the date of grant. On March 11, 2005, the Company granted a total of 80,000 non-qualified options to two consultants for services rendered. The total value of the options is $45,600, of which $41,522 was expensed and $4,078 was capitalized as of June 30, 2005. The issuance of these securities was exempt from section 4(2) of the Securities and Exchange Act. ITEM 3. DEFAULT UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS a) Exhibits: 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 Class A Warrants to Purchase Common Stock 23 SIGNATURES In accordance with the requirements of the Exchange Act, Puradyn Filter Technologies Incorporated caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PURADYN FILTER TECHNOLOGIES INCORPORATED (Registrant) By /s/ Cindy Lea Gimler Date: August 15, 2005 - ---------------------------------------- Cindy Lea Gimler, Chief Financial Officer 24 EX-31.1 2 certification311.txt CERTIFICATION Exhibit 31.1 PURADYN FILTER TECHNOLOGIES INCORPORATED CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Richard C. Ford, Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Puradyn Filter Technologies Incorporated (the "Company"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this quarterly report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this quarterly report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal controls over financial reporting. Date: August 15, 2005 /s/ Richard C. Ford ------------------- Richard C. Ford Chief Executive Officer EX-31.2 3 certification312.txt CERTIFICATION Exhibit 31.2 PURADYN FILTER TECHNOLOGIES INCORPORATED CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Cindy Lea Gimler, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Puradyn Filter Technologies Incorporated (the "Company"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this quarterly report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this quarterly report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal controls over financial reporting. Date: August 15, 2005 /s/ Cindy Lea Gimler -------------------- Cindy Lea Gimler Chief Financial Officer EX-32.1 4 certification321.txt CERTIFICATION Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Richard C. Ford, Chief Executive Officer of Puradyn Filter Technologies Incorporated ("the Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1. The quarterly Report on Form 10-QSB of the Company for the quarter ended June 30, 2005 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C.78m); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. August 15, 2005 /s/ Richard C. Ford ------------------- Name: Richard C. Ford Title: Chief Executive Officer EX-32.2 5 certification322.txt CERTIFICATION Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Cindy Lea Gimler, Chief Financial Officer of Puradyn Filter Technologies Incorporated ("the Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1. The quarterly Report on Form 10-QSB of the Company for the quarter ended June 30, 2005 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C.78m); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. August 15, 2005 /s/ Cindy Lea Gimler -------------------- Name: Cindy Lea Gimler Title: Chief Financial Officer EX-99.1 6 exh99-1.txt COMMON STOCK PURCHASE WARRANT EXHIBIT 99.1 NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. COMMON STOCK PURCHASE WARRANT To Purchase 400,000 Shares of Common Stock of PURADYN FILTER TECHNOLOGIES, INC. THIS COMMON STOCK PURCHASE WARRANT CERTIFIES that, for value received, PLAINFIELD SPECIAL SITUATIONS MASTER FUND LIMITED (the "Holder"), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the Initial Exercise Date (as defined in Section 3) and on or prior to the close of business on June 17, 2008 (the "Termination Date") but not thereafter, to subscribe for and purchase from PURADYN FILTER TECHNOLOGIES, INC., a corporation incorporated in the State of Delaware (the "Company"), up to the number of full shares indicated above (the "Warrant Shares") of common stock of the Company (the "Common Stock"). The purchase price of each share of Common Stock (the "Exercise Price") under this Warrant shall be $0.80, subject to adjustment hereunder. The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THAT CERTAIN SUBSCRIPTION AGREEMENT BETWEEN THE COMPANY AND THE HOLDER. 1. Title to Warrant. Prior to the Termination Date and subject to compliance with applicable laws and Section 7 of this Warrant, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company. 2. Authorization of Shares. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. (a) Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the earlier of (i) the date immediately preceding the date the Company effects any extraordinary dividend, any reclassification or reorganization of the Company's capital stock, any merger or acquisition (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company) or any sale of all or substantially all of the Company's assets and (ii) June 17, 2005 (the "Initial Exercise Date") and on or before the Termination Date by the surrender of this Warrant and the Notice of Exercise Form annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased by wire transfer or cashier's check drawn on a United States bank, the Holder shall be entitled to receive a certificate for the number of Warrant Shares so purchased. Certificates for shares purchased hereunder shall be delivered to the Holder within three (3) Trading Days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and the Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 5 prior to the issuance of such shares, have been paid. In the event of an extraordinary dividend, the Holder will be entitled to receive its pro rata share of such extraordinary dividend provided that the Holder exercises the Warrants prior to the date of such extraordinary dividend (regardless of what the record date for such extraordinary dividend is. The Company covenants that it will provide Holder with as much prior notice as is reasonably practicable as to the occurrence of any event that would cause the Initial Exercise Date to occur. (b) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price. 5. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or 2 names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 6. Closing of Books. The Company will not close its stockholder books or records in any manner that prevents the timely exercise of this Warrant, pursuant to the terms hereof. 7. Transfer, Division and Combination. (a) Subject to compliance with any applicable securities laws and the conditions set forth in Sections 1 and 7(e) hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued. (b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. (c) The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7. (d) The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants. (e) If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance reasonably acceptable to the 3 Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act. 8. No Rights as Shareholder until Exercise. This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Adjustments of Exercise Price and Number of Warrant Shares. (a) Stock Splits, etc. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant shall be increased or decreased in the same proportion as the number of shares outstanding immediately prior to the event described in subparagraphs (i), (ii), (iii) or (iv) bears to the number of shares outstanding immediately following such event. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder, the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company resulting from such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 4 12. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property"), are to be received by or distributed to the holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder. For purposes of this Section 12, "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 12 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. 13. Voluntary Adjustment by the Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 15. Notice of Corporate Action. If at any time: (a) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or 5 (b) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or, (c) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (i) at least 10 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 10 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 17(d). 16. Authorized Shares. The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Principal Market upon which the Common Stock may be listed. Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant 6 Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. 17. Registration. The Holder acknowledges that (i) neither this Warrant not the Warrant Shares acquired upon the exercise of this Warrant have been registered under the Securities Act and may not be sold, assigned, pledged, transferred or otherwise disposed of absent registration under the Securities Act or an applicable exemption from the registration requirements of the Securities Act, (ii) except to the extent set forth in the Registration Rights Agreement between the Company and the Holder dated as of the date hereof, the Company has not undertaken to register this Warrant or the Warrant Shares and (iii) a legend will be placed on all certificates evidencing the Warrant Shares referring to the restrictions described in this paragraph. 18. Miscellaneous. (a) Jurisdiction. This Warrant shall be governed by and construed in accordance with the domestic laws of the State of Florida without giving effect to any choice or conflict of law provision or rule (whether of the State of Florida or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Florida. By the Company's delivery and the Holder's acceptance of this of this Warrant, the Holder agrees with the Company that (i) any dispute or disagreement arising under this Warrant shall be resolved by a Federal or State court of competent jurisdiction within the County of Palm Beach, State of Florida, and (ii) each waives any objection that it may have now or hereafter to the venue of any such suit, action or proceeding, and (iii) each irrevocably consents to the in personam jurisdiction of any Federal or State court of competent jurisdiction within the County of Palm Beach, State of Florida in any such suit, action or proceeding. (b) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. 7 (c) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered to the addresses of the Holder and the Company set forth in the Subscription Agreement or at such other address as either the Holder or the Company may provide to the other in writing. (d) Limitation of Liability. No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. (e) Remedies. Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (f) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares. (g) Amendment. This Warrant may be modified or amended or the provisions hereof waived only with the written consent of the Company and the Holder. (h) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant. (i) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. ******************** 8 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized. PURADYN FILTER TECHNOLOGIES, INC. By: -------------------------- Richard C. Ford Chief Executive Officer Date: June 17, 2005 9 NOTICE OF EXERCISE To: puraDYN Filter Technologies, Inc. (1) The undersigned hereby elects to purchase ________ Warrant Shares of puraDYN Filter Technologies, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. (2) Payment of the exercise price in lawful money of the United States accompanies this Notice of Exercise (3) Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below: ______________________________________________ The Warrant Shares shall be delivered to the following: ______________________________________________ ______________________________________________ ______________________________________________ (4) Accredited Investor. The undersigned is an "accredited investor" as defined in Regulation D promulgated under the Securities Act of 1933, as amended. [PURCHASER] By: ------------------------------------- Name: ------------------------------------ Title: ----------------------------------- Dated: ----------------------------------- ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to __________ whose address is __________________ . Dated: ______________, _______ Holder's Signature:__________________________ Holder's Address: __________________________ __________________________ Signature Guaranteed: ___________________________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. -----END PRIVACY-ENHANCED MESSAGE-----