10QSB 1 puradyn10qsb.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, 2007 ------------- [ ] 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 ----------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 14-1708544 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 2017 High Ridge Road, Boynton Beach, Florida 33426 (Address of principal executive offices) (Zip Code) (561) 547-9499 Issuer's telephone number Check whether the issuer (1) filed all reports required to be filed by Section 13 of 15(d) of the Exchange Act during the past 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] (APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares outstanding of each of the issuer's class of common equity, as of the last practicable date. As of August 13, 2007, there were 28,686,352 shares of registrant's common stock outstanding. ================================================================================ 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 - As of June 30, 2007 and December 31, 2006 ....................................... 3 Condensed Consolidated Statements of Operations - Three months and six months ended June 30, 2007 and 2006 ................. 4 Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2007 and 2006 ................................ 5 Condensed Consolidated Statement of Stockholders' Deficit - Six months ended June 30, 2007 .............................. 6 Notes to Condensed Consolidated Financial Statements ........... 7 Item 2. Management's Discussion and Analysis of Financial Condition or Plan of Operation ........................................ 15 Item 3. Controls and Procedures ........................................ 22 Part II. Other Information Item 1. Legal Proceedings ................................................. 23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ....... 23 Item 3. Default Upon Senior Securities .................................... 23 Item 4. Submission of Matters to a Vote of Security Holders ............... 23 Item 5. Other Information ................................................. 23 Item 6. Exhibits .......................................................... 23 Signatures ................................................................. 24 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PURADYN FILTER TECHNOLOGIES INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2007 AND DECEMBER 31, 2006 (UNAUDITED)
JUNE 30, DECEMBER 31, 2007 2006 ------------ ------------ (Unaudited) (Unaudited) Assets Current assets: Cash and cash equivalents $ 113,475 $ 55,175 Accounts receivable, net of allowance for uncollectible accounts of $67,219 and $47,513 380,656 497,888 Inventories, net 1,270,149 1,272,456 Prepaid and other current assets 213,325 174,015 ------------ ------------ Total current assets 1,977,605 1,999,534 Property and equipment, net 179,936 193,832 Deferred financing costs, net 27,783 40,930 Other noncurrent assets 40,930 40,749 ------------ ------------ Total assets $ 2,226,254 $ 2,275,045 ============ ============ Liabilities and stockholders' deficit Current liabilities: Accounts payable $ 285,882 $ 316,716 Accrued liabilities 967,320 885,454 Current portion of capital lease obligation 115,846 5,593 Deferred revenue 3,202 99,915 ------------ ------------ Total current liabilities 1,372,249 1,307,678 Capital lease obligation, less current portion 7,538 -- Notes payable to stockholders 5,867,500 5,839,000 ------------ ------------ Total Liabilities 7,247,287 7,146,678 Stockholders' deficit: Preferred stock, $.001 par value: Authorized shares - 500,000; none issued and outstanding -- -- Common stock, $.001 par value: Authorized shares - 40,000,000 Issued and outstanding - 28,686,352 28,687 27,310 Additional paid-in capital 40,786,102 39,774,531 Notes receivable from stockholders (1,055,462) (1,136,656) Accumulated deficit (44,592,724) (43,384,109) Accumulated other comprehensive loss (187,636) (152,709) ------------ ------------ Total stockholders' deficit (5,021,033) (4,871,633) ------------ ------------ Total liabilities and stockholders' deficit $ 2,226,254 $ 2,275,045 ============ ============
See accompanying notes to condensed consolidated financial statements. 3 PURADYN FILTER TECHNOLOGIES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 2007 2006 2007 2006 ------------ ------------ ------------ ------------ Net sales $ 786,990 $ 855,315 $ 1,553,187 $ 1,678,059 Costs and expenses: Cost of products sold 702,301 648,865 1,350,273 1,264,242 Salaries and wages 264,768 354,636 525,573 690,067 Selling and administrative 194,138 250,890 540,144 519,069 Stock based compensation 2,426 120,131 24,591 156,716 ------------ ------------ ------------ ------------ 1,163,633 1,374,522 2,440,581 2,630,094 ------------ ------------ ------------ ------------ Loss from operations (376,643) (519,207) (887,394) (952,035) Other income (expense): Interest income 9,448 12,392 21,918 24,687 Interest expense (130,505) (124,151) (343,139) (253,364) ------------ ------------ ------------ ------------ Total other expense, net (121,057) (111,759) (321,221) (228,677) ------------ ------------ ------------ ------------ Loss before income taxes (497,701) (630,966) (1,208,614) (1,180,712) Income tax expense -- -- -- -- ------------ ------------ ------------ ------------ Net loss $ (497,701) $ (630,966) $ (1,208,614) $ (1,180,712) ============ ============ ============ ============ Basic and diluted loss per common share $ (.02) $ (.02) $ (.04) $ (.05) ============ ============ ============ ============ Weighted average common shares outstanding (basic and diluted) 27,514,923 25,349,432 27,440,407 24,567,388 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. 4 PURADYN FILTER TECHNOLOGIES INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------------- 2007 2006 ----------- ----------- OPERATING ACTIVITIES Net loss $(1,208,614) $(1,180,712) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 46,414 105,576 Gain on sale of assets 577 -- Provision for bad debts 40,197 9,081 Provision for obsolete and slow moving inventory 12,425 (25,881) Amortization of deferred financing costs included in interest expense 12,966 28,524 Interest receivable from notes receivable from stockholders 81,195 (23,836) Compensation expense on stock-based arrangements with employees, consultants, investors and vendors 9,446 156,716 Changes in operating assets and liabilities: Accounts receivable 77,035 (105,156) Inventories (10,117) 26,319 Prepaid expenses and other current assets (39,310) 46,264 Accounts payable (30,834) (35,316) Accrued liabilities 81,866 212,974 Deferred revenues 15,931 9,332 ----------- ----------- Net cash used in operating activities (910,823) (776,115) INVESTING ACTIVITIES Proceeds from sale of property and equipment 5,458 -- Purchases of property and equipment (28,390) (8,407) ----------- ----------- Net cash used in investing activities (22,932) (8,407) FINANCING ACTIVITIES Proceeds from sale of common stock 975,000 910,000 Proceeds from exercise of stock options 28,500 -- Proceeds from issuance of notes payable to stockholders 808,500 577,000 Payment of notes payable to stockholder (780,000) (747,000) Payment of capital lease obligations (3,379) (2,468) ----------- ----------- Net cash provided by financing activities 1,028,621 737,532 Effect of exchange rate changes on cash and cash equivalents (36,566) (62,361) ----------- ----------- Net (decrease) increase in cash and cash equivalents 58,300 (109,351) Cash and cash equivalents at beginning of period 55,175 155,557 ----------- ----------- Cash and cash equivalents at end of period 113,475 $ 46,206 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 253,652 $ 218,755 =========== =========== NONCASH INVESTING AND FINANCING ACTIVITIES: Common stock issued in settlement of accrued bonus -- $ 30,000 =========== ===========
See accompanying notes to condensed consolidated financial statements 5 PURADYN FILTER TECHNOLOGIES INCORPORATEDCONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT SIX MONTHS ENDED JUNE 30, 2007 (UNAUDITED)
NOTES ACCUMULATED ADDITIONAL RECEIVABLE OTHER TOTAL COMMON STOCK PAID-IN FROM ACCUMULATED COMPREHENSIVE STOCKHOLDERS' SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT INCOME (LOSS) DEFICIT ---------- --------- ------------ ------------ ------------ ---------- ------------ Balance at December 31, 2006 27,310,352 $ 27,310 $ 39,774,531 $ (1,136,656) $(43,384,109) $ (152,708) $ (4,871,633) Foreign currency translation adjustment (34,928) (34,928) Net loss (1,208,614) (1,208,614) ------------ Total comprehensive loss (1,243,542) Compensation expense associated with unvested options 8,246 8,246 Issuance of common stock in private placement , net 1,300,000 1,300 973,700 975,000 Exercise of employee stock options 76,000 76 28,424 28,500 Interest receivable related to notes receivable from stockholders 81,195 81,195 Compensation expense associated with option modification 1,201 1,201 ---------- --------- ------------ ------------ ------------ ---------- ------------ Balance at June 30, 2007 28,686,352 $ 28,686 $ 40,786,102 $ (1,055,462) $(44,592,723) $ (187,636) $ (5,021,033) ========== ========= ============ ============ ============ ========== ============
See accompanying notes to condensed consolidated financial statements. 6 PURADYN FILTER TECHNOLOGIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim information and with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments consisting of a normal and recurring nature considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended June 30, 2007 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2007. For further information, refer to Puradyn Filter Technologies Incorporated's (the Company) consolidated financial statements and footnotes thereto included in the Form 10-KSB for the year ended December 31, 2006. Going Concern The Company's financial statements have been prepared on the basis that it will operate as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred net losses each year since inception and has relied on the sale of its stock from time to time and loans from third parties and from related parties to fund its operations. These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from an institutional investor and current stockholder have led the Company's independent registered accounting firm Webb & Company, P.A. to include a statement in its audit report relating to the Company's audited consolidated financial statements for the year ended December 31, 2006 expressing substantial doubt about the Company's ability to continue as a going concern. The Company has been addressing the liquidity and working capital issues and continues to attempt to raise additional capital with institutional and private investors and current stockholders. Cost reductions were and continue to be implemented by the Company, including acquiring alternative suppliers for raw materials. The company expects to see results from these reductions, as well as from other cost reduction plans through 2007, including organizational changes, deferral of salaries and renegotiating creditor and collection arrangement. There can be no assurance that the Company will be able to raise the additional capital needed or reduce the level of expenditures in order to sustain operations. Use of Estimates The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Basic and Diluted Loss Per Share SFAS No. 128, Earnings Per Share, requires a dual presentation of basic and diluted earnings per share. However, because of the Company's net losses, the effect of outstanding stock options and warrants would be anti-dilutive and, accordingly, is excluded from the computation of diluted loss per share. The 7 number of such shares excluded from the computation of loss per share totaled 3,231,543 for the three-month and six-month periods ended June 30, 2007 and 3,072,070 and 3,089,570 for the three-month and six-month periods ended June 30, 2006, respectively. Stock Compensation The Company adopted SFAS 123R effective January 1, 2006 using the modified prospective application method of adoption which requires us to record compensation cost related to unvested stock awards as of December 31, 2005, recognizing the amortized grant date fair value in accordance with provisions of SFAS 123R on straight line basis over the service periods of each award. We have estimated forfeiture rates based on our historical experience. Stock option compensation expense for the periods ended June 30, 2006 and June 30, 2007 have been recognized as a component of cost of goods sold and general and administrative expenses in the accompanying Consolidated Financial Statements. Stock options and warrants issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable in accordance with SFAS 123 and EITF 96-18, Accounting for Equity Investments That are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services, including related amendments and interpretations. The related expense is recognized over the period the services are provided. Inventories Inventories are stated at the lower of cost or market using the first in, first out (FIFO) method. Production costs, consisting of labor and overhead, are applied to ending inventories at a rate based on estimated production capacity and any excess production costs are charged to cost of products sold. Provisions have been made to reduce excess or obsolete inventories to their net realizable values. Inventories consisted of the following at June 30, 2007 and December 31, 2006: Raw materials $ 872,142 $ 913,034 Finished goods 555,886 504,876 ----------- ----------- Valuation allowance (157,879) (145,454) =========== =========== $ 1,270,149 $ 1,272,456 =========== =========== Deferred Financing Costs The Company capitalizes financing costs and amortizes them using the straight-line method, which approximates the effective interest method, over the term of the related debt. Amortization of deferred financing costs is included in interest expense and totaled approximately $5,000 and $10,000 for the three-months ended June 30, 2007 and 2006, and $13,000 and $29,000 for the six months ended June 30, 2007 and 2006 respectively. In March 2002, the Company recorded the initial deferred financing costs of $318,000 for the shareholder loan with a maturity date of December 31, 2004. On March 14, 2003, as the maturity date was extended to December 31, 2005, an additional $214,400 in deferred financing costs was recorded (see Note 2). On April 14, 2005 the maturity date was extended to December 31, 2006, resulting in the addition of approximately $55,000 of related deferred financing costs. Accumulated amortization of deferred financing costs as of June 30, 2007 and 2006 was approximately $653,000 and $620,000, respectively. 8 Revenue Recognition The Company recognizes revenue from product sales to customers, distributors and resellers when products that do not require further services or installation by the Company are shipped, when there are no uncertainties surrounding customer acceptance and when collectibility is reasonably assured in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements (SAB 104), as amended and interpreted. Cash received by the Company prior to shipment is recorded as deferred revenue. Sales are made to customers under terms allowing certain limited rights of return and other limited product and performance warranties for which provision has been made in the accompanying condensed consolidated financial statements. Amounts billed to customers in sales transactions related to shipping and handling, represent revenues earned for the goods provided and are included in net sales. Costs of shipping and handling are included in cost of products sold. Product Warranty Costs 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, 2007: Balance as of December 31, 2006 $ 71,759 Less: Payments made (5,080) Change in prior period estimate 906 Add: Provision for current period warranties 7,723 --------- Balance as of June 30, 2007 $ 75,308 ========= Comprehensive Income SFAS No. 130, Reporting Comprehensive Income (SFAS 130) establishes rules for reporting and displaying of comprehensive income and its components. Comprehensive income is the sum of net loss as reported in the consolidated statements of operations and other comprehensive income transactions. Other comprehensive income transactions that currently apply to the Company result from changes in exchange rates used in translating the financial statements of its wholly owned subsidiary, Puradyn Filter Technologies, Ltd. (Ltd). Comprehensive loss as of June 30, 2007 and 2006 is not shown net of taxes because the Company's deferred tax asset has been fully offset by a valuation allowance. Comprehensive loss consisted of the following for the three and six-months ended June 30, 2007 and 2006:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ----------------------------- 2007 2006 2007 2006 ----------- ----------- ------------ ------------ Net loss $ (497,701) $ (630,966) $ (1,208,614) $ (1,180,712) ----------- ----------- ------------ ------------ Other comprehensive income: Foreign currency translation adjustment (30,821) 58,650 (34,928) 68,593 ----------- ----------- ------------ ------------ Total other comprehensive income (30,821) 58,650 (34,928) 68,593 ----------- ----------- ------------ ------------ Comprehensive loss $ (528,522) $ (572,316) $ (1,243,542) (1,112,119) =========== =========== ============ ============
9 New Accounting Standards In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes," which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In accordance with FIN 48, the Company must adjust its financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. The effective date of FIN 48 for the Company is January 1, 2007. The adoption of FIN 48 has not had a material impact on the Company's condensed consolidated financial statements. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 will be effective for the Company on January 1, 2008. The Company is currently evaluating the impact of adopting SFAS 157 on its financial position, cash flow, and results of operations. In September 2006, the Securities and Exchange Commission ("SEC") released Staff Accounting bulletin No. 108, "considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (SAB 108"). SAB 108 provides interpretive guidance on the SEC's views on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The provisions of SAB 108 were effective for the Company for the fiscal year ended December 31, 2006. The application of SAB 108 did not have a material effect on its financial position, cash flows and results of operations. 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 $911,000 and $776,000 during the six-months ended June 30, 2007 and 2006, respectively. As a result, the Company has had to rely principally on private equity funding, including the conversion of debt into stock, as well as stockholder loans to fund its activities to date. These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from an institutional investor and current stockholder led the Company's independent registered public accounting firm, Webb & Company, P.A. to include a statement in its audit report relating to the Company's audited consolidated financial statements for the year ended December 31, 2006 expressing substantial doubt about the Company's ability to continue as a going concern. The Company has been addressing the liquidity and working capital issues and continues to attempt to raise additional capital with institutional and private investors and current stockholders. Cost reductions were and continue to be implemented by the Company, including acquiring alternative suppliers for raw materials and manufacturing and the Company expects to see results from these reductions, as well as other cost reduction plans through 2007. Additionally, the Company continues to address liquidity concerns because of inadequate revenue growth. As a result, cash flow from operations is insufficient to cover our liquidity needs for the immediate future. The Company is in the process of aggressively seeking to raise capital and is exploring financing availability and options with investment bankers, funds, private sources, members of management and existing shareholders. The Company has implemented further measures to preserve its ability to operate, including organizational changes, deferral of salaries, reduction in personnel and 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. 10 On March 23, 2007, the stockholder amended the original loan agreements to extend the payback dates to December 31, 2008. The original loan agreements, dated March 28, 2002 and March 14, 2003, were due and payable on December 31, 2003 and December 31, 2004. Previously, the stockholder waived the funding requirement mandating maturity as such time as the Company raised an additional $7.0 million over the $3.5 million previously raised in the Company's private placement offering; or until such time as the Company is operating within sufficient cash flow parameters, as defined, to sustain its operations; or until a disposition of the Company occurs. As of June 30, 2007, the Company had drawn a total of $5.368 million of the available funds. The Company anticipates increased cash flows from 2007 sales activity; however, additional cash will still be needed to support operations. If additional capital is not raised, budgeted sales levels are not achieved and/or significant unanticipated expenditures occur, the Company will have to modify its business plan, reduce or discontinue some of its operations or seek a buyer for part of its assets to continue as a going concern through 2007. There can be no assurance that the Company will be able to raise the additional capital needed to continue as a going concern. 3. COMMON STOCK In June 2007, the Company received cash proceeds of $975,000 from an accredited investor for the purchase of 1,300,000 shared of common stock at $0.75 per share. 4. STOCK OPTIONS During the six-months ended June 30, 2007, employees of the Company exercised 76,000 common stock options. No options were exercised during the six-months ending June 30, 2006. The company received $28,500 in cash proceeds in exchange for the shares issued in 2007. During the three-month and six-month periods ended June 30, 2007, the Company recognized compensation expense of approximately $2,000 and $25,000, respectively. During the three-month and six month periods ended June 30, 2006, the Company recognized compensation expense of approximately $120,000 and $157,000, respectively. For the three-month and six-month periods ended June 30, 2007, the Company recorded stock-based compensation expense of $4,319 and $8,246, related to unvested employee stock options. For the three-month and six-month periods ended June 30, 2006, the Company recorded stock-based compensation expense of $1,836 and $2,624. The Company leases its employees from a payroll leasing company. The Company's leased employees meet the definition of employees as specified by FIN 44 for purposes of applying APB 25. Stock options and warrants issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable in accordance with SFAS 123 and EITF 96-18, Accounting for Equity Investments That are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services. The related expense is recognized over the period the services are provided. 11 A summary of the Company's stock option plans as of June 30, 2007, and changed during the six-month period then ended is presented below: SIX MONTHS ENDED JUNE 30, 2007 -------------------------------- NUMBER OF WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ---------- -------------- Options outstanding at beginning of period 1,880,400 $ 3.10 Options granted -- -- Options exercised 76,000 .38 Options expired 62,500 8.75 ---------- ------- Options at end of period 1,741,900 $ 3.02 ---------- ------- Options exercisable at end of period 1,643,150 $ 3.15 ========== ======= A summary of the Company's stock option plans as of June 30, 2007, and changed during the three-month period then ended is presented below: THREE MONTHS ENDED JUNE 30, 2007 -------------------------------- NUMBER OF WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ---------- -------------- Options outstanding at beginning of period 1,741,900 $ 3.02 Options granted -- -- Options exercised -- -- Options expired -- -- ---------- ------- Options at end of period 1,741,900 $ 3.02 ---------- ------- Options exercisable at end of period 1,643,150 $ 3.15 ========== ======= Changes in the Company's unvested options for the six months ended June 30, 2007 are summarized as follows: SIX MONTHS ENDED JUNE 30, 2007 -------------------------------- NUMBER OF WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ---------- -------------- Options unvested at beginning of period 115,625 $ .86 Options granted Options vested 6,875 1.00 Options cancelled 10,000 -- ---------- ------- Options unvested at end of period 98,750 $ .84 ========== ======= 12 Changes in the Company's unvested options for the three months ended June 30, 2007 are summarized as follows: THREE MONTHS ENDED JUNE 30, 2007 -------------------------------- NUMBER OF WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ---------- -------------- Options unvested at beginning of period 99,375 $ .80 Options granted Options vested 625 2.15 Options cancelled ---------- ------- Options unvested at end of period 98,750 $ .84 ========== =======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------- -------------------------- REMAINING AVERAGE WEIGHTED CONTRACTUAL AVERAGE WEIGHTED AVERAGE RANGE OF NUMBER LIFE (IN EXERCISE NUMBER EXERCISE EXERCISE PRICE OUTSTANDING YEARS) PRICE EXERCISABLE PRICE -------------- ------------ ---------- ---------- ------------ --------- $ .21 - $ 1.70 1,095,900 4.83 .92 997,150 $ .93 1.86 - 4.50 246,000 3.72 2.42 246,000 2.42 8.50 - 9.25 400,000 2.11 9.13 400,000 9.13 ------------ ---------- ---------- ------------ --------- Totals 1,741,900 4.23 $ 3.02 1,643,150 $ 3.15 ============ ========== ========== ============ =========
(1)A Black-Scholes option-pricing model was used to develop the fair values of the options granted. A summary of the Company's warrant activity as of June 30, 2007 and changed during the six month and three month periods then ended is presented below: SIX MONTHS ENDED JUNE 30, 2007 ----------------------- WEIGHTED AVERAGE EXERCISE ----------------------- WARRANTS PRICE ---------- ------- Warrants outstanding at the beginning of period 1,589,643 $ .99 Granted -- -- Exercised -- -- Expired 100,000 4.05 ---------- ------- Warrants outstanding at end of period 1,489,643 $ 1.24 ========== ======= 13 THREE MONTHS ENDED JUNE 30, 2007 ----------------------- WEIGHTED AVERAGE EXERCISE ----------------------- WARRANTS PRICE ---------- ------- Warrants unvested at the beginning of period 1,489,643 $ 1.24 Granted -- -- Exercised -- -- Expired -- -- ---------- ------- Warrants unvested at end of period 1,489,643 $ 1.24 ========== ======= WARRANTS OUTSTANDING ----------------------------------------- REMAINING AVERAGE WEIGHTED CONTRACTUAL AVERAGE RANGE OF NUMBER LIFE (IN EXERCISE EXERCISE PRICE OUTSTANDING YEARS) PRICE -------------- ----------- ----------- -------- $ .80 - $1.25 1,214,643 3.87 $ 1.05 2.00 - 2.25 275,000 1.17 2.11 ----------- ----------- -------- 1,489,643 3.61 $ 1.24 Totals =========== =========== ======== 5. NOTES PAYABLE TO STOCKHOLDERS As of June 30, 2007, the Company had drawn $5.368 of the $6.15 million from the available line-of-credit, provided by a stockholder, who is also a Board Member, of the Company (see Note 2). Amounts drawn bear interest at the prime rate (8.25% as of June 30, 2007) payable monthly and become due and payable on December 31, 2008; or until such time as the Company has raised an additional $7.0 million over the $3.5 million raised in the Company's recent private placement offering; or until such time as the Company is operating within sufficient cash flow parameters, as defined, to sustain its operations; or until a disposition of the Company occurs. In June 2007, the Company used the funds received from a private placement to pay down $780,000 of the outstanding loan balance. During the six months ending June 30, 2007, the Company received advances totaling $500,000 from five stockholders. Until such time as the Company determines the equity terms of these funds, the Company is recording these advances as shareholder loans. For the three-months ended June 30, 2007 and 2006, the Company recorded approximately $125,000 and $113,0000, respectively; and for the six-months ended June 30, 2007 and 2006, the Company recorded approximately $249,000 and $219,000, respectively, of interest expense related to the notes payable to stockholder, which is included in interest expense in the accompanying condensed consolidated statements of operations. 6. COMMITMENTS AND CONTINGENCIES INVESTMENT BANKING AGREEMENTS On April 24, 2006, the Company entered into a one-year non-exclusive agreement with CapitalLink, L.C., an investment banking firm, to assist in additional financing. The company agreed to pay a fee of 7% of gross proceeds received by the Company as a result of services performed under the contract, as well as reimbursement of pre-approved out of pocket expenses. The agreement was not renewed due to non-performance. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION Certain statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause the Company's actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, the Company's ability to operate as a going concern and to raise sufficient capital to fund its operations, acceptance of the Company's products, the Company's dependence on distributors and a few significant customers, risks associated with international operations and international distribution and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety. Except for the Company's ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business. Going Concern Our financial statements have been prepared on the basis that it will operate as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred net losses each year since inception and have relied on the sale of its stock from time to time and loans from third parties and from related parties to fund its operations. These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from institutional investors and current stockholders led our independent registered public accounting firm Webb & Company, P.A.. to include a statement in its audit report relating to our audited consolidated financial statements for the year ended December 31, 2006 expressing substantial doubt about our ability to continue as a going concern. Additionally, we continue to address liquidity concerns because of inadequate revenue growth. As a result, cash flow from operations is insufficient to cover our liquidity needs for the immediate future. We are in the process of aggressively seeking to raise capital and exploring financing availability and options with investment bankers, funds, private sources and existing stockholders. We have implemented further measures to preserve its ability to operate, including organizational changes, a reduction and/or deferral of salaries, reduction in personnel and renegotiating creditor and collection arrangement. There can be no assurances that we will be able to raise the additional capital needed or reduce the level of expenditures in order to sustain operations. General Sales of our products will depend principally upon end user demand for such products and acceptance of the Company's products by original equipment manufacturers OEMs. The oil filtration industry has historically been competitive and, as is typically the case with innovative products, the ultimate level of demand for our products subject to a high degree of uncertainty. Developing market acceptance for our existing and proposed products will require substantial marketing and sales efforts and the expenditure of a significant amount of funds to inform customers of the perceived benefits and cost advantages of its products. 15 Through industry data research, we have been able to identify the potential applications where management believes market penetration is most accessible. Currently no bypass oil filtration system has captured a substantial share of the estimated recurring $15 billion potential industry. We believe we are in a unique position to capitalize on the growing acceptance of bypass oil filtration given that our product and our Company are positioned as, including, but not limited to: o A competitively priced, value-added product offering a unique selling concept based on an advanced, patented technology o An alternative solution to the rising costs and increasing dependence on foreign oil o Providing an operational maintenance solution to end users in conjunction with existing and reasonable foreseeable federal environmental applications We continue to incorporate the focus of our sales strategy on individual sales and distribution efforts as well as on the development of a strong nationwide distribution network that will not only sell but also install and support our product. Additionally, we continue to focus our sales and marketing efforts to target areas and issues specific to the bypass oil filtration industry, cultivating an innovative outlook on oil maintenance, specifically, that oil does not need to be changed on a regular basis if kept in a clean state. This strategy includes: o The expansion of existing strategic relationships o Continued development and expansion of our distribution network with qualified distributors in order to establish a sales- and service-oriented nationwide infrastructure o Continuing to target existing and new medium-to-large sized fleets, industrial/construction business and major diesel engine and generator set OEMs o Creating customer `pull-through', a sustained level of request for our product on the OEM level o Closely monitoring customer evaluations to ensure the salient aspects of our system are perceived and accepted on a timely basis o Converting customer evaluations into sales, both immediate and long term While this is a long-term and ongoing commitment, we believe we have achieved a limited amount of industry acceptance based on recent accomplishments: o 2007 announcement that Wastequip, Inc., the leading manufacturer of waste handling, recycling, and material handling equipment has been named exclusive distributor of the PURADYN system in the waste industry. o 2006 announcement that the PURADYN system has been approved for use by one of the largest international diversified energy resource companies for retrofit of equipment used at one of its key coal mine facilities in the Southwestern U.S. o 2006 final test results released by the US Department of Energy (DOE) estimating an 89% savings in oil using bypass oil filtration. Our system was used in this test conducted from 2002-2005 evaluating the benefits and cost savings of the technology. o 2006 announcement that the U.S. Military has ordered the PURADYN system installed on new trucks that Freightliner LLC is supplying for foreign military sales. 16 o 2006 continued testing with the U.S. Military on use of the PURADYN system on several other applications. o Recognition by several engine manufacturers for specific application concerning Puradyn's ability to safely extend drain intervals by providing acceptable clean oil as verified through oil analysis. We believe that the renewed interest shown in the technology of bypass oil filtration as an economic alternative to rising oil prices, dependence upon foreign oil, with the added benefit of being environmentally beneficial, will timely and favorably position the Company as a manufacturer of a cost-effective `green' product. We also believe that industry acceptance resulting in sales will increase in 2007; however, there can be no assurance that any of our sales efforts or strategic relationships will meet management's expectations or result in actual revenues. Our sales effort not only involves educating the potential customer on the benefits of our product, but also allowing the customer to test and evaluate the PURADYN system on its fleet vehicles. While set for a specific period of time, typically ranging from three to twelve months, evaluations are often influenced by a number of variables including equipment applications downtime or servicing, which may extend the evaluation period. Consequently, the sales cycle can be relatively long. Management believes that this evaluation period will continue to be shortened as our products gain wider acceptance, support and usage from well-known customers and OEMs. We utilize our wholly owned subsidiary, Puradyn Filter Technologies, Ltd. ("Ltd"), in the United Kingdom to sell our products in Europe, the Middle East and Africa. International sales are especially well suited to our product given that environmental controls are not as regulated in countries outside North America. Certain applications representing a higher return on investment are more prevalent in use outside of North America and end-users consequently are more receptive to the total maintenance package, including the use of oil analysis, which the PURADYN system represents. In first six months of 2007, total international sales accounted for approximately 63% of the Company's consolidated net sales as compared to approximately 37% for the six months ending June 30, 2006. We recognize revenue from product sales to customers, distributors and resellers when products that do not require further services or installation by us are shipped, when there are no uncertainties surrounding customer acceptance and for which collectibility is reasonably assured in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements, as amended and interpreted. Cash that we received prior to shipment is recorded as deferred revenue. Sales are made to certain customers under terms allowing certain limited rights of return and other limited product and performance warranties for which provision has been made in the accompanying condensed consolidated financial statements. Management believes, based on past experience and future expectations, that such limited return rights and warranties will not have a material adverse effect our financial statements. Consistent with industry practices, the Company may accept limited product returns or provide other credits in the event that a distributor holds excess inventory of the Company's products. The Company's sales are made on credit terms, which vary depending on the nature of the sale. The Company believes it has established sufficient reserves to accurately reflect the amount or likelihood of product returns or credits and uncollectible receivables. However, there can be no assurance that actual returns and uncollectible receivables will not exceed the Company's reserves. 17 Sales of the Company's products will depend principally on 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, particularly worldwide, for the Company's existing and proposed products will require substantial marketing and sales efforts and the expenditure of a significant amount of funds to inform customers of the perceived benefits and saving advantages of its products. RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED JUNE 30, 2007 COMPARED TO THE THREE-MONTHS ENDED JUNE 30, 2006 The following table sets forth the amount of increase or decrease represented by certain items reflected in our condensed consolidated statements of operations in comparing the three-months ended June 30, 2007 to the three-months ended June 30, 2006: (In thousands) THREE MONTHS ENDED JUNE 30, ------------------------------ 2007 2006 CHANGE -------- -------- -------- Net sales 787 855 (68) -------- -------- -------- Costs and expenses: Cost of products sold 702 649 (53) Salaries and wages 265 355 90 Selling and administrative 196 370 174 -------- -------- -------- Total costs and expenses 1,164 1,374 211 -------- -------- -------- Other (expense) income: Interest income 10 12 (2) Interest expense (131) (124) (7) -------- -------- -------- Total other expense (121) (112) (9) -------- -------- -------- Net loss (498) (631) (133) ======== ======== ======== NET SALES Net sales decreased by approximately $68,000 or approximately 8% from approximately $855,000 in 2006 to approximately $787,000 in 2007. One of our largest customers, which installs Puradyn product on most new equipment, over purchased their equipment in 2006, thus causing a decline in their equipment purchases for the first half of 2007. As a result, during the quarter ending June 30, 2007, higher priced unit sales, as a percentage of total sales decreased from approximately 49% to approximately 44%, whereas filter sales increased from approximately 41% to approximately 44% of total sales. Sales to two customers accounted for approximately 29% and approximately 11% (for a total of 40%) of the consolidated net sales for the three-months ended June 30, 2007. For the three-months ended June 30, 2006, sales to two customers accounted for approximately 36% and approximately 12% of the consolidated net sales. The UK subsidiary's sales increased by approximately $117,000 (approximately 46%), from $256,000 to $373,000 for the three-month period ended June 30, 2007 compared to the three-month period ended June 30, 2006. Sales to their top customer has been increasing and for the quarter ending June 30, 2007 were approximately 62% of their net sales, as compared to approximately 41% for the quarter ending June 30, 2006. 18 COST OF PRODUCTS SOLD Cost of products sold increased by approximately 8% from approximately $649,000 in 2006 to approximately $702,000 in 2007. Cost of products sold, as a percentage of sales, increased from approximately 76% in 2006 to approximately 89% in 2007. The increase is primarily due to increases in reserve for slow moving and obsolete inventory. Eliminating the reserve changes, cost of products sold, as a percentage of sales, would have been approximately 77% for the three-months ending June 30, 2006, as compared to 80% for the three-months ending June 30, 2007. SALARIES AND WAGES Salaries and wages decreased approximately $90,000, or approximately 25%. This decrease is the result of a net reduction of three employees, representing a decrease of $83,000. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses decreased by approximately $174,000, or approximately 47%. This decrease is due to a reduction in stock based compensation expense, travel, entertainment and lodging expenses and patent fees by approximately $118,000, $26,000 and $18,000 respectively. During the three-month period ending June 30, 2006, the Company recorded an expense of $87,600 related to the extension of the expiration date of an employee's stock options as well as approximately $30,000 related to the amortization of warrants. INTEREST INCOME Interest Income decreased approximately $2,000. This decrease is attributable to maintaining lower cash balances. INTEREST EXPENSE Interest expense increased by approximately $7,000, or approximately 6%, as a result of the increase in the interest rate. We pay interest monthly on the notes payable to stockholder at the prime rate, which was 8.25% as of June 30, 2007, compared to 8% at June 30, 2006. This increase was partially offset by the higher average principal balances of $5,706,000 in the period ended June 30, 2006 compared to an average principal balance of $5,758,000 for the period ended June 30, 2007. RESULTS OF OPERATIONS FOR THE SIX-MONTHS ENDED JUNE 30, 2007 COMPARED TO THE SIX-MONTHS ENDED JUNE 30, 2006 The following table sets forth the amount of increase or decrease represented by certain items reflected in the our condensed consolidated statements of operations in comparing the six-months ended June 30, 2007 to the six-months ended June 30, 2006: (in thousands) SIX MONTHS ENDED JUNE 30, ------------------------------ 2007 2006 CHANGE -------- -------- -------- Net sales 1,553 1,678 (125) -------- -------- -------- Costs and expenses: Cost of products sold 1,350 1,264 (86) Salaries and wages 526 690 164 Selling and administrative 565 676 111 -------- -------- -------- Total costs and expenses 2,441 2,630 189 -------- -------- -------- Other income (expense): Interest income 22 25 3 Interest expense (343) (254) 89 -------- -------- -------- Total other expense (321) (229) 92 -------- -------- -------- Net loss (1,209) (1,181) 28 ======== ======== ======== 19 NET SALES Net sales decreased by approximately $125,000, or approximately 7%, from approximately $1,678,000 in 2006 to approximately $1,553,000 in 2007. One of our largest customers, which installs Puradyn product on most new equipment, over purchased their equipment in 2006, thus causing a decline in their equipment purchases for the first half of 2007. As a result, higher priced unit sales, as a percentage of total sales decreased from approximately 59% to approximately 46%, whereas filter sales increased from approximately 29% to approximately 44% of total sales. Sales to two customers individually accounted for approximately 28% and approximately 16% (for a total 44%) and approximately 36% and approximately 12% (for a total of 48%) of net sales for the six-months ended June 30, 2007 and 2006, respectively. The UK subsidiary's sales increased by approximately $240,000, or approximately 58%, from approximately $412,000 for the six-month period ended June 30, 2006 compared to approximately $652,000 for the six-month period ended June 30, 2007. Sales to their top customer has increased during the six months ending June 30, 2007 and were approximately 68% of their net sales, as compared to approximately 42% for the six months ending June 30, 2006. COST OF PRODUCTS SOLD Cost of products sold increased by approximately $86,000, or approximately 7%, from approximately $1,264,000 in 2006 to approximately $1,350,000 in 2007. Cost of products sold, as a percentage of sales, increased from approximately 75% for the six-months ended June 30, 2006 to approximately 87% for the six-months ended June 30, 2007. Approximately $38,000 of this increase is attributable to an overall increase in reserves for slow moving and obsolete inventory. Approximately $26,000 of this increase is attributable to an increase in the cost of labor. While sales for much of our filter line have increased, the cost of certain components have risen significantly, such as the new additive formulation to meet 2007 requirements, contributing to increasing material costs. This is under review with actions being considered to recoup these increases. SALARIES AND WAGES Salaries and wages decreased approximately $164,000, or approximately 24%, as the result of a net reduction of three employees representing a reduction of $173,000. This reduction was partially offset by cost of living wage increases of approximately $24,000. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses decreased by approximately $111,000 or approximately 16% from approximately $676,000 for the six months ended June 30, 2006 to approximately $565,000 for the six months ended June 30, 2007, due primarily to a reduction in stock based compensation expense of approximately $132,000. During the six months ended June 30, 2006, we recorded an expense of approximately $66,000 for the amortization of warrants issued to investors and an expense of approximately $88,000 for extending the expiration of stock options of a former employee. INTEREST INCOME Interest income decreased approximately $3,000, from income of approximately $25,000 for the six-month period ending June 30, 2006 to approximately $22,000 for the six-month period ending June 30, 2007. This decrease is attributable to maintaining lower cash balances. INTEREST EXPENSE Interest expense increased by approximately $89,000, or approximately 35%. Approximately $80,000 of this increase is attributable to a reserve established during the period ending June 30, 2007, toward the accumulation of interest recorded on a shareholder note receivable. Approximately $9,000 of the increase is due to the increase in the interest rate on the outstanding balance of the stockholder notes payable. We pay interest monthly on the notes payable to stockholder at the prime rate, which was 8.25% as of June 30, 2007, as compared to 8.0% as of June 30, 2006. 20 LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2007, we had cash and cash equivalents of approximately $113,000. For the six-month period ended June 30, 2007, net cash used in operating activities was approximately $911,000, which primarily resulted from the net loss of approximately $1,208,000. Net cash used in investing activities was approximately $23,000 for the sales and purchases of property and equipment. Net cash provided by financing activities was approximately $1,029,000 for the period, due to net proceeds of $975,000 in a private placement offering and $28,500 from the exercise of employee stock options, offset by the net repayment of approximately $780,000 of the stockholder loan. We have incurred net losses each year since our inception and have relied on the sale of our stock from time to time and loans from third parties and from related parties to fund our operations. On March 28, 2002, we executed a binding agreement with one of our stockholders, who is also a Board Member, to fund up to $6.1 million. On March 29, 2006, the maturity date of the loan was extended from December 31, 2006 to December 31, 2007 and on March 23, 2007 it was further extended to December 31, 2008. As of June 30, 2007, we had drawn $5.368 million of the $6.150 million of the available funds. At June 30, 2007, we had working capital of approximately $605,000 and our current ratio (current assets to current liabilities) was 1.44 to 1. We anticipate increased cash flows from 2007 sales activity; however, additional cash will still be needed to support operations and meet working capital needs. In addition, in connection with our annual report for our fiscal year ending December 31, 2007 our management will be required to provide an assessment of the effectiveness of our internal control over financial reporting, including a statement as to whether or not internal control over financial reporting is effective. In order to comply with this requirement we will need to engage a consulting firm to undertake an analysis of our internal controls. We recently engaged such a consulting firm and are unable at this time to predict the costs associated with our compliance with Section 404 of Sarbanes-Oxley Act of 2002. If budgeted sales levels are not achieved and/or significant unanticipated expenditures occur, and we do not have access to capital as necessary, we may have to modify our business plan, reduce or discontinue some of our operations or seek a buyer for part of our assets to continue as a going concern through 2007. There can be no assurance that we will be able to raise additional capital or that sales will increase to the level required to generate profitable operations to provide positive cash flow from operations. CRITICAL ACCOUNTING POLICY NEW ACCOUNTING STANDARDS In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes," which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In accordance with FIN 48, the Company must adjust its financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. The effective date of FIN 48 for the Company is January 1, 2007. The adoption of FIN 48 has not had a material impact on the Company's condensed consolidated financial statements. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 will be effective for the Company on January 1, 2008. The Company is currently evaluating the impact of adopting SFAS 157 on its financial position, cash flow, and results of operations. 21 In September 2006, the Securities and Exchange Commission ("SEC") released Staff Accounting bulletin No. 108, "considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (SAB 108"). SAB 108 provides interpretive guidance on the SEC's views on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The provisions of SAB 108 were effective for the Company for the fiscal year ended December 31, 2006. The application of SAB 108 did not have a material effect on its financial position, cash flows and results of operations. Impact of Inflation Inflation has not had a significant impact on our operations. However, any significant decrease in the price for oil or labor, environmental compliance costs, and engine replacement costs could adversely impact the end users cost/benefit analysis as to the use of our products. The impact of fluctuations in foreign currency has not been significant. The exchange rate, the Great British pound to the U.S. dollar fluctuated from 1.93 on December 31, 2006 to 2.00 on June 30, 2007 as compared to 1.72 on December 31, 2005 to 1.82 on June 30, 2006. ITEM 3. CONTROLS AND PROCEDURES Our management, which includes our CEO and our Chief Financial Officer, have conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-14(c) promulgated under the Securities and Exchange Act of 1934, as amended) as of a date (the "Evaluation Date") as of the end of the period covered by this report. Our management does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based upon that evaluation, our management has concluded that our disclosure controls and procedures are effective for timely gathering, analyzing and disclosing the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934, as amended. There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 22 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS On June 24, 2007, the Company received gross cash proceeds of $975,000 from the sale of 1.3 million shares of common stock at $.75 per share to an accredited investor. The funds were used to reduce the outstanding principal 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 all amendments thereto, as needed, for operating and capital expenditures. Inasmuch as the accredited investor was highly sophisticated, had access to current public information concerning the Company, could bear the financial risk of the investment, and had agreed to acquire the shares for investment purposes, the transaction was exempt from registration under Section 4 (2) of the Securities Act of 1933. ITEM 3. DEFAULT UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS 31.1 Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) certificate of Chief Financial Officer 32.1 Section 1350 certification of Chief Executive Officer 32.2 Section 1350 certification of Chief Financial Officer 23 SIGNATURES In accordance with the requirements of the Exchange Act, Puradyn Filter Technologies Incorporated caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 14, 2007 PURADYN FILTER TECHNOLOGIES INCORPORATED (Registrant) By /s/ Cindy Lea Gimler ------------------------------------ Cindy Lea Gimler, Chief Financial Officer 24