psws_10k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2011
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number: 0-30544
PureSafe Water Systems, Inc.
(Name of registrant as specified in its charter)
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Delaware
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86-0515678
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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160 Dupont Street, Plainview, New York
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11803
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (516) 208-8250
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o Yes þ No
Indicate by check mark if the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates as of the last business day of the registrant's most recently completed second fiscal quarter was $ 21,474,577.
As of April 10, 2012, 346,138,827 shares of the common stock of the registrant were issued and outstanding.
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PART I
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Item 1.
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Business.
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4 |
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Item 1A.
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Risk Factors.
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10 |
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Item 1B.
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Unresolved Staff Comments.
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12 |
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Item 2.
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Properties.
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12 |
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Item 3.
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Legal Proceedings.
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12 |
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Item 4.
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Mine Safety Disclosures.
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12 |
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PART II
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Item 5.
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Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
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Item 6.
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Selected Financial Data.
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15 |
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk.
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Item 8.
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Financial Statements and Supplementary Data.
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Item 9.
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Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
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Item 9A.
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Controls and Procedures.
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance.
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Item 11.
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Executive Compensation.
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56 |
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
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62 |
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence.
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64 |
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Item 14.
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Principal Accountant Fees and Services.
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66 |
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PART IV
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Item 15.
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Exhibits and Financial Statement Schedules
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68 |
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Introductory Comment - Use of Terminology
Throughout this Annual Report on Form 10-K, the terms the “Company,” “we,” “us” and “our” refers to PureSafe Water Systems, Inc.
Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). To the extent that any statements made in this Form 10-K contain information that is not historical, these statements are essentially forward-looking. Forward-looking statements can be identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate” “expect,” “hope,” “intend,” “may,” “plan,” “potential,” “product,” “seek,” “should,” “will,” “would” and variations of such words. Forward-looking statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, without limitation:
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our ability to raise capital to finance our research and development and operations, when needed and on terms advantageous to us;
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our ability to manage growth, profitability and marketability of our products;
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general economic and business conditions;
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the effect on our business of recent credit-tightening throughout the United States and the world, especially with respect to federal, state, local and foreign government procurement agencies, as well as quasi-public, charitable and private emergency response organizations;
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the effect on our business of recently reported losses within the financial, banking and other industries and the effect of such losses on the income and financial condition of our potential clients;
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the impact of developments and competition within the industries in which we intend to compete
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adverse results of any legal proceedings;
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the impact of current, pending or future legislation and regulation on water safety, including, but not limited to, changes in zoning and environmental laws and regulations within our target areas of operations;
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our ability to maintain and enter into relationships with suppliers, vendors and contractors of acceptable quality of goods and services on terms advantageous to us;
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the volatility of our operating results and financial condition;
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our ability to attract and retain qualified senior management personnel; and
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the other risks and uncertainties detailed in this Form 10-K and, from time to time, in our other filings with the Securities and Exchange Commission.
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Readers of this Annual Report on Form 10-K should carefully consider such risks, uncertainties and other information, disclosures and discussions which contain cautionary statements identifying important factors that could cause our actual results to differ materially from those provided in forward-looking statements. Readers should not place undue reliance on forward-looking statements contained in this Form 10-K. We do not undertake any obligation to publicly update or revise any forward-looking statements we may make in this Form 10-K or elsewhere, whether as a result of new information, future events or otherwise.
PART I
Organizational Structure
Our company was incorporated in Delaware in 1987. Our business predecessor was incorporated in Arizona in 1985. In 1993, our business predecessor, then known as Auto Swap, U.S.A., Inc., merged with and into our company, although the business predecessor was treated as the surviving corporation for accounting purposes. Following the effectiveness of such merger, the surviving corporation changed its name to “Water Chef, Inc. and began operating the businesses previously conducted by the business predecessor, the manufacture and marketing of water coolers and filters. The manufacture and marketing of water coolers and filters constituted a substantial part of our business from 1993 until the fourth quarter of 2001, at which time such operations were sold and we began concentrating on the further development, manufacturing and marketing of a patented line of water purification systems. In 2007,new management commenced development of our “PureSafe™ First Response Water System” line of mobile water decontamination and purification systems (the “PureSafe FRWS”). In 2008, we changed our name to “PureSafe Water Systems, Inc.”
We have generated our first sale of the FRWS in December of 2011 and our second sale in the first quarter of 2012. Accordingly, we are no longer deemed to be a development state enterprise. We are, however, an early stage commercial enterprise. The accompanying financial statements have been prepared assuming our company will continue as a going concern. The PureSafe FRWS is the product line by which we have generated our first significant sales since 2001.
We have identified the need for providing potable drinking water during emergencies as a market segment that requires solutions we can provide. We believe that dramatic changes in weather patterns, global warming and failing water infrastructures, provide an additional opportunity for our company to exploit in the marketplace by providing rapidly deployable units to areas where populations require potable drinking water quickly. Populations that have little mobility because of infrastructure failures need drinking water immediately to sustain life. It is anticipated that our products would operate in areas where the populations are clustered so that potable drinking water in disinfected portable containers can be provided in an efficient manner.
We have developed a patent pending “PureSafe First Response Water System” (“PureSafe FRWS”) that is self-contained and purifies essentially any type of raw water source or decontaminate any contaminated water without prior knowledge of the contaminants, including seawater that may be found at a first response emergency site. This system is uniquely mobile, by helicopter or transported by SUV or truck. The initial PureSafe FRWS prototype was developed using advanced Israeli water treatment technology. The original prototype was capable of producing 10,000 gallons of water per day, but could not desalinate sea water, and did not have a built in generator or water bagging capability. Adhering to the original treatment train and process, we have since built a 2nd prototype (FRWS unit). The FRWS unit can produce EPA compliant drinking water at the rate of 30,000 gallons per day, to provide drinking water to 45,000 people. The unit has a built in generator and water bagging capability at the rate of 30,000 ½ liters bags of water per day (16.9 ozs). This represents approximately 5,000 gallons of water. The unit also has a built-in Water Filling Station that can provide an additional 25,000 gallons of water that can be delivered in various formats. To prevent secondary contamination, the system has the capability of disinfecting contaminated containers by spraying the insides of the containers with ozonated water. The unit can be easily converted into a stationary unit to provide for daily needs of a population lacking safe drinking water. This system has received Gold Seal Certification from the Water Quality Association, a significant accomplishment. In addition, the Nassau County Department of Health independently tested the PureSafe FRWS unit’s water quality and the results exceeded all testing parameters. A fully operational FRWS demonstration unit is currently located at the Company headquarters in Plainview, New York.
Products
In 1998, searching for a “killer application,” our management focused on the worldwide need for safe drinking water for populations who are not served by municipal water treatment facilities, or are served by municipal systems that have malfunctioned because of improper maintenance or faulty design. The result of that activity was the development of the PureSafe Water Station, a turn-key unit that converts “gray,” or bathing grade, water into EPA grade drinking water. The PureSafe Water Station was designed to eliminate all living pathogens that pollute non-processed water (e.g., bacteria, cysts, viruses, parasites, etc.) at an affordable cost for the emerging economies of the world. In 2007, new management made a strategic decision that the Pure Safe Water Station was not a viable product that could produce significant sales revenues and commenced development of the PureSafe FRWS.
The PureSafe FRWS is designed as a rapid deployment water treatment and bottling system providing immediate drinking water to emergency first responders from almost any source of raw water. The PureSafe FRWS also is intended to provide drinking water to the immediately affected population of a disaster on a short term basis. The first prototype was completed in 2008 and delivered 10,000 gallons of water per day. This prototype has been performance tested and the results have been independently verified. This unit had served as a demonstration unit but, has been replaced by the more advanced system, which is capable of producing 30,000 gallons of water per day to serve a population of up to 45,000 people.
The PureSafe FRWS utilizes our patent pending technology which is comprised of a water extraction boom that extracts water from the ocean, streams, ponds, pools of floodwater or a failed municipal distribution system. The extracted water is then treated by the application of advanced water treatment technologies which employ multiple stage filtration, multiple stage sanitation (including ozone, chlorine and ultraviolet purification techniques), reverse osmosis membranes, mineralization and final polishing to meet the standard drinking water requirements of the U.S. Environmental Protection Agency (the “EPA”). The system provides redundancy at the filtration and sanitation stations and the duel capability of on-site filling of containers, as well as an automatic water bag producing capability. Components utilized in the system are manufactured by others and are NSF certified. The FRWS has obtained Water Quality Association (WQA) Gold Seal Certification. Water Quality Association is a not-for-profit, trade association and a world leader in standards development and product certification. NSF International develops national standards, provides learning opportunities and provides third-party conformity assessment services.
Manufacturing
In September 2009, we formed PureSafe Manufacturing and Research Corporation, as a wholly owned subsidiary of PureSafe Water Systems, Inc. In May of 2010, we signed a lease for a manufacturing facility of 15,000 sq ft in Plainview, New York, in close proximity to our headquarters. Our manufacturing staff built out the space, and we took occupancy in July 2010 We believe we can produce up to fifteen units (15) per month in this facility. We plan to re-engineer and value engineer the system to allow us to outsource the manufacturing process and /or sub-assemblies to qualified sub-contractors, based on demand and cost effectiveness. In the future we may consider licensing agreements for manufacturing in other parts of the world.
On March 26, 2010 we entered into a management agreement with Hidell-Eyster International Inc. (HEI). The HEI group was valuable in helping the Company modify the original prototype to meet the requirements of the existing production unit. Having mutually agreed that the HEI participation was no longer required by the Company a Termination Agreement was entered into on December 29, 2010.
On January 1, 2011, Gerard R. Stoehr was appointed as Chief Operating Officer of the Company. Among Mr. Stoehr’s responsibilities are to oversee the operation of PSMR.
Raw Materials
The PureSafe FRWS system has been designed to utilize readily available off-the-shelf components and sub-systems. Sub-systems and components are available from multiple manufacturers. We do not believe that obtaining raw materials will be difficult, however some components require a twelve (12) week lead time for ordering.
Competition
We have identified the need for providing potable drinking water during emergencies as a market segment that requires solutions we can provide and where populations that have little mobility because of infrastructure failures and need drinking water immediately to sustain life. It is anticipated that individual PureSafe FRWS units will be delivered by the owners to areas where the populations are clustered so that potable drinking water in disinfected portable containers can be provided in an efficient manner.
This is a far different market than that addressed by a large segment of the industry which has concentrated on the multi-billion dollar municipal water treatment sector, or the equally large residential sector. The municipal solution requires significant investment for infrastructure development (e.g., building plants and laying miles of distribution pipes). Products for residential markets do not offer the performance or features to meet the needs of the first response market or the needs of the underdeveloped nations of the world. In summary, although we face competition from numerous competitors, we believe the combined capability of water decontamination and delivery system of our PureSafe FRWS is unique to the market.
We have identified the following companies which manufacture mobile water purification systems, but may or may not have similarities to the PureSafe First Responder Mobile Water Purification System.
There are four categories of existing water purification units:
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The first are those which are essentially very large, not very mobile, almost “fixed” installation units used primarily for long term solutions with a significant amount of lead time. They include: GE, Siemens, and Severn Trent, all of which manufacture large containerized systems.
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The second group includes those products that are smaller, cheaper, lighter in weight, but still unable to respond quickly because of their limited purification capabilities (the unit needs to be prepared in advance for the type of contamination it will face.) These are: Ecospheres Technology, Lenntech, Testa/Viwa and Lifekeeper. None of these systems would fall in to the first responder category.
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The third group is the category made up of specialty units designed to be either much lower cost, use only green power (with the significant limitations caused by that), or meet a specialized and limited need. This list includes Mobile MaxPure, Bi Pure Water and Rodi which, while they have a trailer mounted system, have no on board power source.
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The fourth group includes those companies which have similar claims and design characteristics as PureSafe System but have shortfalls in their application to the first responder market. These companies include: Global Water Group which manufactures different size systems with options which include the trailer, generator, treatment, and salinity options; Nirosoft, which manufactures systems capable of processing different sources; LifeStream, which has a soft side trailer; and Aquapura Tempest, which has different types of units depending on the source. We believe that none of these companies stocks units ready to deploy, none has distribution/packaging capability, none has built in redundant systems, and few have the capability of field service training and support.
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In general, the markets in which we intend to operate are highly competitive with respect to performance, quality and price. We anticipate that we will directly compete with those competitors which we identified above, as well as with other local, regional and water treatment service and equipment providers. In the future, we also may face further competition from new market entrants and possible alliances between existing competitors. Some of our competitors have, or may have, greater financial, marketing and other resources than we have. As a result, competitors may be able to respond more quickly to new or emerging trends and changes in technology, benefit from greater purchasing economies, offer more aggressive pricing to customers or devote greater resources to the promotion of their products than we are capable of accomplishing. There can be no assurance that we will be able to successfully compete in the future with such competitors. The failure to successfully compete could have an adverse effect on our operating results.
Markets Served
We have reviewed a study conducted by Frost & Sullivan examining the Mobile Water Treatment Market to aide us in identifying our target markets and our plan to penetrate those markets.
Definition of Mobile Water Treatment Systems (Frost & Sullivan Study)
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Mobile Water Treatment Systems are trailer/skid mounted systems that offer quick, reliable and cost effective service to meet water crises. They provide various water treatment technologies such as reverse osmosis, filtration, demineralization, ion exchange, softening and deoxgenation.
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Mobile Water Treatment Systems are innovative and immediate solutions to water crises in case of plant downtime, an industrial crisis, facility maintenance and emergency drinking water shortages. These systems can treat both surface and ground water requirements.
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End Users/Target Market Segments
Mobile water treatment systems service end users and the market can be broken down into several treatment segments.
Municipal Treatment
Demand is driven by area water shortages where local governments or municipalities lease equipment for short or long term durations. Demand is increased by natural emergencies such as drought, floods earthquakes, etc.
Target Organizations:
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Federal/State and Local Offices of Emergency Management
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Federal/State Department of Homeland Security
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Department of Public Works
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Department of Public Safety
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Federal, State and Local Correctional Institutions/Facilities
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Quasi-Municipal Treatment
Key market driver is similar to municipal treatment but the affected population is unique to the organization’s specific function or purpose. They can be publically or privately operated and funded.
Target Organizations:
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Public (State) Universities
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Nursing Homes/Assisted Living Facilities
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Analytical Laboratories
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Outpatient Treatment Centers
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Industrial Treatment
Key market driver is cost related to plant downtime in case of unavailability of purified and processed water for process support or as an ingredient in the end product.
Target Industries:
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Oil and Gas Exploration
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Petrochemicals and Refineries
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Food and Beverage Processing
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The International Market
The International Market encompasses the identified target markets as well as the need for drinking water for everyday use.
World Water Facts
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884 million people lack access to safe drinking water.
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3.575 million people die each year from water-related diseases.
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Every 20 seconds a child dies from a water related disease.
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In the developing world 24,000 children under the age of five die every day from preventable causes like diarrhea contracted from unclean water.
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In just one day 200 million hours of women’s time is consumed for the most basic of human needs-collecting water for domestic use.
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Less than 1% of the world’s fresh water is readily accessible for direct human use.
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More than 80% of sewage in developing countries is discharged untreated, polluting rivers, lakes and coastal areas.
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Sources; Water.org, UN reports, WHO
Market Penetration and Marketing Plan
Our management understands that, to be successful, we will need to create an effective sales organization to promote our brand and product attributes through a variety of outlets and formats with clear branding messages. With this in mind, our marketing plan is based on the following key components:
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Strategic Alliances – We intend to enter into strategic alliances with special advisors and organizations already integrated in the water industry both domestically and internationally.
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Direct Marketing and Sales – This effort will be led by a Vice President of Marketing who will be responsible for creating and administering the marketing plan and developing and meeting additional sales forecasts. Our approach to the market will involve use of social media networks as well as traditional industry journal advertising and trade exhibitions. These will be selected based on target audience and editorial focus. Our message will be to communicate the economic benefits, capabilities and specific features of the system. We will also focus on recent deployments and applications. The trade exhibitions will be water treatment specific shows.
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The other exhibitions will be focused on emergency response and industry specific shows such as the oil & gas exploration or general industry conference.
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We will hire four Sales Directors that will be assigned to specific end-user market segments. In that role they will become experts in those segments and will not only be responsible for domestic unit sales in those segments but also for directing future product improvements based on market needs. International sales will be accomplished through independent sales representatives and distributors. This will help with the idiosyncrasies of the local business environment. They will be assisted by the Sales Directors when it comes to specific end users and applications. We have a Director of International Markets.
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We have retained strategic advisors whose compensation is based on performance. They include: Chief Peter Hayden (Ret), formerly Chief of the New York City Fire Department, The Honorable Michael Balboni. Mr. Balboni was a New York State Senator and served as Deputy Secretary of Public Safety for New York State. Theresa Bischoff, formerly Director of the Greater New York Red Cross and President of NYU Medical Center. Dennis Rivera, formerly President of SEIU 1199, the largest union local in the world.
We participated in the United Nations World Water Day on March 22, 2011 and demonstrated our First Response Water System at the event.
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Advertising – We plan to advertise in a number of leading trade magazines.
United States Conference of Mayors – We joined the United States Conference of Mayors and have joined the Mayors Water Council as an affiliate member. Being a member of this organization gives us access to 1,250 mayors and the ability to showcase and present our FRWS to mayors from around the country. We participated in the 79th Annual Meeting in Baltimore, MD June 17-21, 2011
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Onsite Demonstration- We plan to conduct onsite demonstrations with potential clients as required and when feasible. The Company has a fully functional FRWS unit available for demonstrations.
Training- We plan to insure that system operators will be adequately trained. By establishing the “PureSafe Training School”, we seek to assure ourselves and our customers of the quality of the training.
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Web Based Marketing – We will utilize pay-per-click as well as natural Search Engine Optimization (SEO) optimization techniques to generate traffic to our website, www.puresafewatersystems.com. We also plan to publish our website address in our public relations campaigns. This strategy is expected to generate leads from potential clients for follow up by our direct sales organization. The contents of our website do not constitute a part of this Annual Report on Form 10-K.
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Clear Branding Message – We plan to convey clear differentiating brand marketing messages to highlight our brand and product attributes on our website and in our promotional campaigns. The marketing messages will be designed for decision makers in our targeted markets.
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Public and Investor Relations Campaign – We plan to implement an active public and investor relations campaign as part of our over-all marketing plan. We recognize that a well coordinated public relations campaign is as valuable as or more valuable than paid advertising with no organized campaign.
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Intellectual Property
The Company filed for U.S. patent protection for the PureSafe FRWS on April 9, 2008 and this patent application is currently pending.
Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect intellectual proprietary intellectual rights to as great an extent as do the laws of the United States. Monitoring and identifying unauthorized use of broadly disseminated products is difficult.
There can be no assurance that our means of protecting our intellectual property rights will be adequate or that our competitors will not independently develop similar technology or duplicate our products or design around our patents or other intellectual property rights. Further, there also can be no assurance that any issued patent will provide us with any competitive advantages.
We are not aware that the PureSafe FRWS materially infringes upon the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim such infringement by us. Any such claims, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays or might require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us.
Litigation may be necessary to protect our proprietary technology. Our competitors and potential competitors may resort to litigation as a means of competition. Such litigation may be time consuming, costly and expose us to new claims that we may not have anticipated. Although patent and intellectual property disputes have often been settled through licensing, cross-licensing or similar arrangements, costs associated with such arrangements may be substantial, if they may be obtained at all. Any litigation involving us, whether as plaintiff or defendant, regardless of the outcome, may result in substantial costs and expenses to us and cause a significant diversion of effort by our technical and management personnel. In addition, there can be no assurance that litigation, instituted either by or against us, will not be necessary to resolve issues that may arise from time to time in the future with other competitors. Any such litigation could have a material adverse effect upon our business, operating results and financial condition. In the event of an adverse result in any such litigation, we could be required to expend significant resources to develop non-infringing technology, obtain licenses to the technology which is the subject of the litigation on terms not advantageous to us, pay damages, and/or cease the use of any infringing technology. There can be no assurance that we would have available funds sufficient to satisfy any cash awards.
Seasonality
We do not expect that the sales of the PureSafe FRWS will have some level of fluctuation due to seasonality of water trauma events such as hurricanes, tornados, tsunamis, storms, flooding or other natural or man-made disasters. Preparedness requires a readiness to address disasters prior to their occurrence. We do not view seasonality as an issue with respect to international markets.
Research and Development
Ongoing research and development is being conducted under the guidance of Chief Operating Officer, Gerard Stoehr and Director of Research and Development, Alphonse Wolter, supported by specialists in water processing, machine control software and electrical engineering.
Our expenditures for research and development activities in fiscal 2011 were $199,617, and in fiscal 2010 were $234,666.
Insurance
The Company maintains a $4 million general business liability policy. We believe such insurance coverage to be adequate for its current requirements. No assurance can be given that adequate insurance coverage, at reasonable cost or otherwise, will be available in the future.
Employees
As of March 31, 2012, the Company employed a Chief Executive Officer, a Chief Financial Officer, a Chief Operating Officer, a Controller, one part time accounting clerk and one full time administrative employee in our headquarters.
PureSafe Manufacturing and Research Corp. employed one full time Director of Engineering and three full time staff in the production facility.
We have no collective bargaining agreement with any of our employees.
ITEM 1A. RISK FACTORS.
We will need additional capital to finance existing obligations and to fund our operations and growth and we may not be able to obtain additional capital at all, or to obtain capital under terms acceptable to us.
We are seeking to raise up to $5 million additional capital. We anticipate that this amount of capital, if fully raised, will satisfy our financial obligations for approximately 24 months. Our capital requirements in connection with our marketing efforts, continuing product development and purchases of inventory and parts are expected to be significant for the foreseeable future. In addition, unanticipated events could cause our revenues to be lower and our costs to be higher than expected, therefore creating the need for additional capital. Historically, cash generated from operations has not been sufficient to fund our capital requirements, and we have relied upon sales of securities, and loans from our officers to fund our operations. We cannot assure you that we will have sufficient funds available to meet our working capital requirements, or that we will be able to obtain capital to finance operations on favorable terms or at all. If we do not have, or are otherwise unable to secure necessary working capital, we may be unable to fund the continued manufacture of PureSafe units, and we may have to delay or abandon some or all of our development and expansion plans or otherwise forego market opportunities, any of which could harm our business.
We have a history of losses and we may continue to incur losses in the future and/or we may never achieve or maintain profitability.
Our financial statements have been prepared assuming that we will continue as a going concern. We have incurred losses from operations, an accumulated deficit since its inception of approximately $42.27 million and $3,435,148 for the year ended December 31, 2011 and have a working capital deficiency of approximately $3.9 million as of December 31, 2011. These conditions raise substantial doubt about our ability to continue as a going concern.
Our independent registered public accountants have stated in their report that there is substantial doubt about our ability to continue as a going concern.
We have limited cash resources and have a working capital deficit. Our independent registered public accountants have stated in their report that they have a substantial doubt about our ability to continue as a going concern. By being categorized in this manner, we may find it more difficult in the short term to either locate financing for future projects or to identify lenders willing to provide loans at attractive rates, which may require us to use our cash reserves in order to expand. Should this occur, and unforeseen events also require greater cash expenditures than expected, we could be forced to cease all or a part of our operations.
Technological change and competition may render our potential products obsolete.
The water purification industry continues to undergo rapid change, competition is intense and we expect it to continually increase. Competitors may succeed in developing technologies and products that are more effective or affordable than any that we are developing or that would render our technology and products obsolete or noncompetitive. Many of our competitors have substantially greater experience, financial and technical resources and production and development capabilities than we do. Accordingly, some of our competitors may succeed in obtaining regulatory approval for products more rapidly or effectively than we can for technologies and products that are more effective and/or affordable than any that we are developing.
Product liability exposure may expose us to significant liability.
We face an inherent business risk of exposure to product liability and other claims and lawsuits in the event that the development or use of our technology or prospective products is alleged to have resulted in adverse effects. We may not be able to avoid significant liability exposure. We maintain a $4,000,000 general and product liability policy which covers the manufacture and marketing of our products. Although we believe our insurance coverage to be adequate, we may not have sufficient insurance coverage, and we may not be able to obtain sufficient coverage at a reasonable cost. An inability to obtain product liability insurance at acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of our products. A product liability claim could hurt our financial performance. Even if we avoid liability exposure, significant costs could be incurred that could hurt our financial performance and condition.
Our inability to protect our intellectual property rights may force us to incur unanticipated costs.
Our success will depend, in part, on our ability to obtain and maintain protection in the United States and other countries for certain intellectual property incorporated into our water purification systems and our proprietary methodologies. Our patent applications for our products are currently pending, and there is no guarantee that such patents will be granted, and if they are not, we may be unable to obtain patents relating to our technology. Even if issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to prevent competitors from marketing similar solutions that limit the effectiveness of our patent protection and force us to incur unanticipated costs. In addition, existing laws of some countries in which we may provide services or solutions may offer only limited protection of our intellectual property rights.
Our products may infringe the intellectual property rights of third parties, and third parties may infringe our proprietary rights, either of which may result in lawsuits, distraction of management and the impairment of our business.
As the number of patents, copyrights, trademarks and other intellectual property rights in our industry increases, products based on our technology may increasingly become the subject of infringement claims. Third parties could assert infringement claims against us in the future. Infringement claims with or without merit could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, might not be available on terms acceptable to us, or at all. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation to determine the validity of any claims, whether or not the litigation is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel from productive tasks. If there is an adverse ruling against us in any litigation, we may be required to pay substantial damages, discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to infringing technology. Our failure to develop or license a substitute technology could prevent us from selling our products.
We will face substantial competition in marketing our PureSafe FRWS.
We will experience competition from a large number of more established firms in the market for water purification systems. Many of these companies are much larger and have substantially greater financial resources than us. In addition, our potential competitors in many cases already have customers to which they have sold water purification systems and these systems have an operating track record, in contrast to our FRWS which is a relatively new product.in the market.
We do not anticipate paying cash dividends in the foreseeable future, which could adversely affect the price of our Common Stock.
We, by reason of our anticipated financial status and our contemplated financial requirements, do not contemplate or anticipate paying any dividends upon our Common Stock in the foreseeable future. Any payment of cash dividends in the future will be dependent upon the amount of funds legally available, the earnings, financial conditions, capital requirements and other factors that the board of directors may believe are relevant. Further, dividends on our common stock are subordinated to dividends and liquidation rights of the holders of our outstanding Series A and Series D preferred stock and the rights of the holders of our outstanding Series F convertible preferred stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Disclosure under Item 1B is not required of smaller reporting companies.
ITEM 2. PROPERTIES.
The Company currently maintains its principal place of business at 160 Dupont Street, Plainview, NY 11803, which now serves as Company headquarters. The annual rent savings will be in excess of $ 100,000 per annum by combining both spaces compared to maintaining the Company’s former offices at 25 Fairchild Avenue, Plainview, NY.
On May 24, 2010, effective July 1, 2010, the Company entered into a two-year lease for the office and manufacturing facility at 160 Dupont Street in Plainview, New York. The facility now serves as the Company’s offices and production facilities. Under the terms of the lease the Company paid a deposit of approximate $21,400. The minimum monthly lease payments due under this lease are approximately $6,000 for the period July 1, 2010 through June 30, 2011 and approximately $10,700 for the period July 1, 2011 through June 30, 2012. The Company is in the process of negotiating an extension to the lease.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market
Our common stock is traded over-the-counter and has been available for quotation on the OTC Bulletin Board (the “OTC BB”) under the trading symbol “PSWS.OB”. The following table sets forth the range of high and low bid prices for our common stock for the periods indicated as derived from the Yahoo Finance website. The information reflects inter-dealer prices, without retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
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Quarter Ended
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High Bid Price
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Low Bid Price
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|
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March 31, 2010
|
|
$
|
0.053
|
|
|
$
|
0.053
|
|
|
June 30, 2010
|
|
|
0.13
|
|
|
|
0.125
|
|
|
September 30, 2010
|
|
|
0.11
|
|
|
|
0.099
|
|
|
December 31, 2010
|
|
|
0.14
|
|
|
|
0.13
|
|
| |
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
0.118
|
|
|
|
0.110
|
|
|
June 30, 2011
|
|
|
0.067
|
|
|
|
0.046
|
|
|
September 30, 2011
|
|
|
0.104
|
|
|
|
0.096
|
|
|
December 31, 2011
|
|
|
0.062
|
|
|
|
0.058
|
|
Holders
As of April 10, 2012, we had 491 stockholders of record. We estimate that there are approximately 3,000 beneficial holders of our common stock, based on NOBO list we subscribed using January 12, 2012 as record date.
No dividends have been declared or paid on our common stock, and we do not anticipate that any dividends will be declared or paid in the foreseeable future. Dividends on our common stock are subordinated to dividends and liquidation rights of the holders of our outstanding Series A and Series D preferred stock and the rights of the holders of our outstanding Series F convertible preferred stock.
Securities Authorized for Issuance under Equity Compensation Plans
The following table shows information as of December 31, 2011 with respect to each equity compensation plan and individual compensation arrangements under which our equity securities are authorized for issuance to employees or non-employees.
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Plan Category
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Number of securities to be issued upon exercise of outstanding options, warrants and rights
(A)
|
|
|
Weighted-average exercise price of outstanding options, warrants and rights
(B)
|
|
|
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (A))
(C)
|
|
|
Equity compensation plans approved by security holders
|
|
|
6,500,000
|
|
|
$
|
0.0410
|
|
|
|
18,500,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
12,295,000
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|
|
$
|
0.0578
|
|
|
|
0
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18,795,000
|
|
|
$
|
0.0520
|
|
|
|
18,500,000
|
|
As of December 31, 2011, we have granted warrants and other rights to purchase a total of 18,795,000 shares of our common stock with average exercise price of $0.052. These warrants and other rights were granted to multiple individuals with various reasons such as rewards for consulting services, incentive to retain highly desired staff and employee performance rewards. The grant of each of such warrants and other rights were approved by our board of directors. Our board of directors approved all the warrants/options granted in the above schedule but only 6,500,000 warrants/options which were granted under 2008 Equity Compensation Plan that was approved by our security holders in our 2008 annual shareholders’ meeting.
We have set forth below additional information concerning the material features of each grant of warrants and other rights under a plan not approved by our security holders. For purposes of this disclosure, the term “Plan” includes all individual agreements that provide for equity compensation and include all individual option agreements, warrants and other contract rights payable in equity.
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Date of Grant/Issuance
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|
Number of Warrants Granted
|
|
|
Exercise Price
|
|
Expiration Date
|
|
Name of Holder, if a Director or Executive Officer
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| |
|
|
|
|
|
|
|
|
|
|
03/14/08
|
|
|
500,000 |
|
|
|
0.0667 |
|
03/14/12
|
|
Malcolm Hoenlein, director
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|
04/16/08
|
|
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45,000 |
|
|
|
0.0853 |
|
04/15/12
|
|
|
|
04/16/08
|
|
|
45,000 |
|
|
|
0.0853 |
|
04/15/12
|
|
|
|
07/30/08
|
|
|
250,000 |
|
|
|
0.0580 |
|
07/30/11
|
|
|
|
04/17/09
|
|
|
4,000,000 |
|
|
|
0.0410 |
|
04/17/14
|
|
CEO
|
|
09/28/09
|
|
|
250,000 |
|
|
|
0.0480 |
|
09/27/14
|
|
|
|
02/01/10
|
|
|
25,000 |
|
|
|
0.0510 |
|
01/31/15
|
|
|
|
03/08/10
|
|
|
2,000,000 |
|
|
|
0.0520 |
|
03/07/15
|
|
CEO
|
|
03/08/10
|
|
|
2,000,000 |
|
|
|
0.0520 |
|
03/07/15
|
|
V.P. of International Markets
|
|
04/21/10
|
|
|
423,729 |
|
|
|
0.0590 |
|
04/20/15
|
|
|
|
06/21/10
|
|
|
70,622 |
|
|
|
0.0590 |
|
06/21/15
|
|
|
|
06/21/10
|
|
|
70,622 |
|
|
|
0.0590 |
|
06/20/15
|
|
|
|
07/29/10
|
|
|
70,622 |
|
|
|
0.0590 |
|
07/28/15
|
|
|
|
08/05/10
|
|
|
75,000 |
|
|
|
0.0960 |
|
08/04/13
|
|
|
|
08/31/10
|
|
|
70,622 |
|
|
|
0.0590 |
|
08/30/15
|
|
|
|
09/30/10
|
|
|
70,622 |
|
|
|
0.0590 |
|
09/29/15
|
|
|
|
10/29/10
|
|
|
70,622 |
|
|
|
0.0590 |
|
10/28/15
|
|
|
|
12/29/10
|
|
|
50,000 |
|
|
|
0.1000 |
|
12/28/13
|
|
|
|
03/21/11
|
|
|
500,000 |
|
|
|
0.1350 |
|
03/20/14
|
|
|
|
11/1/11
|
|
|
500,000 |
|
|
|
0.0800 |
|
10/31/14
|
|
COO
|
|
11/18/11
|
|
|
250,000 |
|
|
|
0.0850 |
|
11/17/14
|
|
|
|
11/28/11
|
|
|
2,000,000 |
|
|
|
0.0700 |
|
11/28/2016
|
|
CFO
|
In November 2008, our stockholders approved the Company’s 2008 Equity Incentive Plan (the “2008 Plan”). The purposes of the 2008 Plan are (a) to enable us to attract and retain highly qualified personnel who will contribute to our success, and (b) to provide incentives to participants in the 2008 Plan that are linked directly to increases in stockholder value which will therefore inure to the benefit of all of our stockholders.
The 2008 Plan provides for its administrator (i.e., our board of directors, or a committee of the board in which each member will be an independent director) to have full authority, in its discretion, to:
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●
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select the persons, to whom awards will be granted,
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|
●
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determine the number of shares to be covered by each award,
|
|
●
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determine the type, nature, amount, pricing, timing and other terms of each award, and
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|
●
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interpret, construe and implement the provisions of the 2008 Plan, including the authority to adopt rules and regulations.
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Participation in the 2008 Plan is limited to our:
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●
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employees, including officers,
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Under the 2008 Plan, we are authorized to award:
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●
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stock appreciation rights, commonly referred to as “SARs,”
|
The total number of shares of our common stock reserved and available for grant and issuance pursuant to the 2008 Plan is 30 million. As of December 31, 2011 and through March 31, 2012, no options, warrants, and rights were awarded under 2008 Plan.
ITEM 6. SELECTED FINANCIAL DATA.
Disclosure under Item 6 is not required of smaller reporting companies.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview and Recent Developments
We have developed a patent pending “PureSafe First Response Water System” (“PureSafe FRWS”) that is self-contained and purifies essentially any type of raw water source or decontaminate any contaminated water without prior knowledge of the contaminants, including seawater that may be found at a first response emergency site. This system is uniquely mobile, by helicopter or transported by SUV or truck. The initial PureSafe FRWS prototype was developed using advanced Israeli water treatment technology. The original prototype was capable of producing 10,000 gallons of water per day, but could not desalinate sea water, and did not have a built in generator or water bagging capability. Adhering to the original treatment train and process, we have since built a 2nd prototype (FRWS unit). The FRWS unit can produce EPA compliant drinking water at the rate of 30,000 gallons per day, to provide drinking water to 45,000 people. This system has received Gold Seal Certification from the Water Quality Association in September 2010 and was re-certified in April 2011 a significant accomplishment. In addition, the Nassau County Department of Health independently tested the PureSafe unit’s water quality and the results exceeded all testing parameters. A fully operational FRWS demonstration unit is currently located at the Company headquarters in Plainview, New York, for demonstrations.
The FRWS-30K unit was designed to meet the output, ease of operation, mobility and water quality requirements as described in the “Operational Requirements Document” issued by the U.S Department of Homeland Security (2009) for emergency water supplies.
We have initiated discussion with various potential international partners concerning distribution and manufacturing rights and have signed four non-exclusive agreements with Sales Representatives and Distributors in the Middle East, Africa, Latin and Central America and the Caribbean.
We completed production of three FRWS units and sold two, one being sold to an end user in the oil and gas exploration business in Texas ( delivered in Dec 2011) and the second sold to the Department of Military and Veterans Affairs for the State of Alaska (delivered in March 2012). Both of the sold units were manufactured in our production facility.
Features of the FWRS- 30K system
The First Response Water System (FRWS-30K) provides up to 30,000 gallons of clean potable water a day for cities, towns, villages and remote areas.
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●
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The system can process virtually any source water without having to identify the contaminants first. Treatment train design addresses four main groups of water pollutants.
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●
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Post-Treatment using Ozone, Ultra-violet disinfection and micron filtration to complete the process.
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●
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The system is highly mobile and is effective for both short and long-term deployments.
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●
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The system has three water distribution methods that can be used independently or in any combination.
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|
●
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Automatic bagging machine integrated into the system. The FRWS can produce 1,500 ½ liter (15.9 ozs) per hour.
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|
●
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Filling station integrated into the system.
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|
●
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Integrated diesel generator. The diesel generator is an integral part of the system and can operate for up to 90 hours without refueling.
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|
●
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A process control system is integrated into the system and includes a touch screen HMI (human machine interface).
|
|
●
|
The system is Water Quality Association (WQA) Gold Seal certified. It features the highest quality components available and meets or exceeds the standards set by regulatory agencies.
|
Production of our new systems commenced in our manufacturing facility in September 2010. We are seeking financing to expand production to meet what we believe will be significant demand for our product.
We are in discussion with various financial institutions to provide short and longer term capital, lease financing, and purchase order financing. We are also seeking strategic relationships with companies that can provide a synergistic quality either in product, markets or sources of capital. No assurance can be given that we will receive financing from any source or that such financing will be in a sufficient amount or on terms favorable to our company. Any financing could have a dilutive effect to our current stockholders. Even if sufficient and on terms favorable to us, financing cannot guaranty that we will generate revenues or be profitable at any time in the future.
We hired a new Chief Operating Officer in January 2011.
We successfully field tested the FRWS unit in June and July 2011 and performed mock deployment and additional field trials in August 2011.
We participated in World Water Day at the United Nations in March 2011, demonstrated the FRWS system and served as panel experts.
We joined the U.S Counsel of Mayors and the Counsel’s Water Advisory Board.
We achieved our first revenue event with the delivery of the system to an oil and gas exploration customer the last week of 2011.
We won a competitive bid for our first sale in our primary market to the State of Alaska Department of Military and Veterans Affairs ( Homeland Security) in October 2011. The system was delivered in March of 2012.
We added management depth and strength in our operations and added new board members, Dr. Stephen Flynn and John Gibb with direct management experience and operational experience in the emergency and disaster relief universe. Theresa Bischoff and Dennis Rivera joined us as special advisors.
Plan of Operations
Our plans for the next twelve months include;
Raising $5 million in capital in two tranches, $2.0 million within the first six months of 2012 and an additional $3.0 million in the fourth quarter of 2012
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|
●
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The completion of 27 commercial PureSafe FRWS units, with full operational capability. We believe that with acceptable levels of capital, 27 units can be produced of which 23 will be sold and four will remain in inventory.
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|
|
●
|
Expand production capability to meet the expected demand for the FRWS domestically by a combination of expanding the production facility of PureSafe Manufacturing and Research Corporation, re-engineering and value engineering the FRWS to outsource assembly where appropriate.
|
|
|
●
|
Identify strategic partners in specific overseas markets that have the production, distribution, maintenance and training capability to produce, distribute, maintain and train personnel in the operation of our system.
|
|
|
●
|
To enter into field testing programs, targeted at specific end users.
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|
|
●
|
Continue the process of identifying and contracting with new distributors and sales representatives in both domestic and international markets.
|
|
|
●
|
Filing of all required foreign patent applications for the PureSafe FRWS. We will identify all the potential markets in which we need patent protection.
|
|
|
●
|
Continued participation in water industry conferences relating to target markets
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|
|
●
|
Continued utilization of strategic advisors to target potential customers and applications.
|
|
|
●
|
Hiring a Director of Marketing.
|
|
|
●
|
Hiring up to four Sales Directors to target market end users.
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|
|
●
|
Retaining a public relations/investor relations firm to bring awareness of our product and Company to the market and shareholders.
|
No assurance can be given that any of the above items will be completed during the next twelve months or at any time in the future. Further, completion of all of such items does not guaranty that we will generate any revenue or become profitable at any time in the future.
Going Concern
At December 31, 2011, our stockholders’ deficiency was $3,680,358 as compared to $1,710,594 at December 31, 2010. Negative working capital was $3,900,624 at December 31, 2011 as compared to $2,021,433 at December 31, 2010.
We continue to suffer recurring losses from operations and have an accumulated deficit since inception of approximately $42.3 million. These conditions raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements have been prepared assuming that we will continue as a going concern and do not include any adjustments that might be necessary should we be unable to continue as a going concern. The Independent Registered Public Accounting Firm’s report on our financial statements included elsewhere herein contains an explanatory paragraph about conditions that raise substantial doubt about our ability to continue as a going concern. Our continuation as a going concern is dependent upon our ability to bring our products to market and generate revenues, control costs, operate profitably and obtain additional financing, as required and on reasonable terms. Our plans with respect to these matters include restructuring our existing debt and raising additional capital through future issuances of stock and/or debt. We plan to raise an additional $5 million in the next twelve months to fund the following activities: the production of 27 commercialized PureSafe FRWS units; launching a marketing program for the PureSafe FRWS, establishing a sales and marketing network; and concluding agreements with strategic partners for international marketing and manufacturing. We believe that with obtaining the required financing there will be additional revenue recognition in the second quarter of 2012.
We have no assurance that such financing will be available on terms advantageous to us, or at all. However, should we not be successful in obtaining the necessary financing to fund our operations, we would need to curtail certain of our operational activities.
Results of Operations
Revenues. We recognized $287,215 revenues for the year ended December 31, 2011 was and $0 for the year ended 2010, respectively.
Cost of goods sold. Cost of goods sold for the year ended December 31, 2011 was $399,350 and 2010 was $359,213, respectively.
Selling, general and administrative. Selling, general and administrative expenses for the year ended December 31, 2011 was $2,984,959, compared to $3,201,062 for the 2010 fiscal year, a $216,103 or 7% decrease.
The followings are analysis into some other categories that also have significant fluctuations between 2010 and 2011. Rent related expenses increased $125,849 or 88% from $142,120 in 2010 to $267,969 in 2011. The 88% increase is primarily due to the rent increase and real estate taxes associated with our 160 Dupont Street facility. Stock-based compensation, increased $282,252 from $893,073 in 2010 to $1,821,711 in 2011. Total marketing expenses incurred in year ended December 31, 2011 were $135,658, compared to $292,993 (excluding Hidell-Eyster fees) in the same period of 2010, a $157,335 or 54% decrease.
Research and development. Research and development expenses in 2011 were $199,617, compared to $234,666 in 2010, a decrease of $35,049 or 15%. We understand the vital importance of research and development for our overall success. We are committed to continue to conduct research and development activities to ensure PureSafe FRWS has the most advanced technology within the water filtration equipment industry.
Discharge of debt. We realized a gain on discharge of debt of $0 in 2011 and $138,621 in 2010. The 2010 gain on discharge of debt arose from the settlement with Hidell-Eyster International, Inc. when both parties agreed to terminate the Management Agreement entered in March 2010.
Interest expense - non-debt discount related incurred in 2011 and 2010 was $258,389 and $162,038, respectively. The $96,351 or 59% increase was primarily from i) accrued interest from the outstanding promissory notes that we issued over the years to multiple lenders which include our Chief Executive Officer and Chief Financial Officer for a total of $937,091 funds we raised in 2011.
Interest expense - debt discount related Debt discount related interest expense incurred in 2011 and 2010 was $462,843 and $433,763, respectively, a $29,080 or 7% increase. Most debt discount related interest expense incurred in 2011 are related to a aggregate total of $650,000 convertible loans we received in 2011 which includes $30,000 from each of our chief executive officer and chief financial officer.
Change in fair value of warrants and embedded conversion options. Changes in fair value of warrants and embedded conversion options for year ended December 31, 2011 and 2010 were $(362,800) and 2,642,100, respectively.
The accounting treatment, pursuant to ASC 815 “Derivatives and Hedging”, of derivative financial instruments requires that we record the conversion option and related warrants at their fair values as of the inception date of the convertible debenture agreements and at fair value as of each subsequent balance sheet date. As a result of entering into the convertible promissory notes, we were required to reclassify all other non-employee warrants and options as derivative liabilities and record them at their fair values at each balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. We reassess the classification of the instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
On December 31, 2010, upon the request from the former director, we converted $68,491 loan principal and accrued interest we owed him into 974,312 shares of our common stock. After such conversion took place, we were no longer required to report the issuance of certain convertible promissory notes, options and warrants as derivative instrument. Subsequently, we reclassified $2,064,500 which represented the fair value for all respective warrants and embedded conversion options previously classified as components of the derivative liabilities to equity as of December 31, 2010.
On August 3, 2011, the Company borrowed $125,000 from a private investor and issued to the investor a secured convertible promissory note in the principal amount of $125,000 (the “Note”). The Note bears an interest rate of 8% per annum and is convertible at any time after the maturity date (December 1, 2011) into shares of common stock of the Company at a 30% discount from the current market price (as defined in the Note). Because the conversion clause in the note made the total shares that could be converted from the convertible notes not determinable, we are required to reinstate and reclassify all other non-employee warrants and options and embedded conversion options that were reclassified to equity on December 31, 2010 as derivative liabilities and record them at their fair values on the date we issued this convertible promissory note and record any change in fair value as non-operating, non-cash income or expense for each reporting period at each balance sheet date.
The change in fair value of warrants and embedded conversion options for any period is always primarily the result of the following factors. The first factor is the fair value we recorded as the result of new issuances of warrants and the embedded conversion value in the convertible loans incurred in the third quarter of 2009 and the first nine months of 2010. The second factor is the reduction of outstanding options or warrants at the end of each period due to warrant/options exercise or warrants/options expired at the end of each period. The third factor is the fluctuation of the Company’s stock price. The closing price per share for the Company’s common stock on December 31, 2011 was $0.11 which was significantly higher compared with prior period.
Liquidity and Capital Resources
As of December 31, 2011, we maintained a cash balance of $118,228 as compared to $166,758 at December 31, 2010 a decrease in the cash balances of $48,530.
Net cash used in the operating activities was $1,646,860 and $2,399,595 in 2011 and 2010, respectively.
Net cash used in capital expenditures in 2011 and 2010 was $7,400 and $120,712 respectively.
We raised $442,000 and $1,292,939 through sales of our common stock, in 2011 and 2010 respectively. We received $236,420 from investors who exercised their warrants to purchase common stock in 2011 and $494,997 raised through the exercise of warrants in 2010. We raised $425,000 and $595,000 through debt financing in 2011 and 2010 respectively. Proceeds received from officers and directors’ loans were $225,000 and $400,000 in 2011 and 2010 respectively. We repaid $40,000 and $200,000 loan principal in 2011 and 2010 plus accrued interest to our Chief Executive Officer and Chief Financial Officer. From all the above activities, net cash provided by financing activities was $1,605,730 and $2,579,641, in 2011 and 2010, respectively.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of the statements in accordance with these principles requires that we make estimates, using available data and our judgment, for such things as valuing assets, accruing liabilities and estimating expenses. We are considered a development stage enterprise as defined in the Accounting standards Codification 915 “Development Stage Entities.” We are subject to a number of risks similar to those of other companies in an early stage of development.
The following is a list of what we believe are the most critical estimations that we make when preparing our financial statements.
Stock-Based Compensation
We report stock based compensation under ASC 718 “Compensation – Stock Compensation”. ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated financial statements based on their fair values.
We account for equity instruments issued to non-employees in accordance with the provisions of ASC 718, which require that such equity instruments is recorded at its fair value on the measurement date, which is typically the date the services are performed.
The Black-Scholes option valuation model is used to estimate the fair value of the options or their equivalent granted. The model includes subjective input assumptions that can materially affect the fair value estimates. The model was developed for use in estimating the fair value of traded options or warrants. The expected volatility is estimated based on the most recent historical period of time equal to the weighted average life of the options granted.
The principal assumptions used in applying the Black-Scholes model along with the results from the model were as follows:
| |
|
Years Ended December 31,
|
|
| |
|
2011
|
|
|
2010
|
|
|
Risk-free interest rate
|
|
|
0.36 |
% |
|
|
1.00 |
% |
|
Expected life, in years
|
|
3 years
|
|
|
3years
|
|
|
Expected volatility
|
|
|
112 |
% |
|
|
115 |
% |
|
Dividends
|
|
|
0 |
% |
|
|
0 |
% |
We have issued equity instruments in the past to raise capital and as a means of compensation to employees and for the settlement of debt.
Derivative Financial Instruments
In connection with the issuance of certain convertible promissory notes, the terms of the convertible notes included an embedded conversion feature which provided for a conversion of the convertible promissory notes into shares of our common stock at a rate which was determined to be variable. We determined that the conversion feature was an embedded derivative instrument pursuant to ASC 815 “Derivatives and Hedging.”
The accounting treatment of derivative financial instruments requires that we record the conversion option and related warrants at their fair values as of the inception date of the convertible debenture agreements and at fair value as of each subsequent balance sheet date. As a result of entering into the convertible promissory notes, we were required to reclassify all other non-employee warrants and options as derivative liabilities and record them at their fair values at each balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. We reassess the classification of the instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
Effects of Recent Accounting Policies
The FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards updates and regulations as of December 31, 2011 that will become effective in subsequent periods; however, management of the Company does not believe that any of those updates would have significantly affected the Company’s financial accounting measures or disclosures had they been in effect during 2011 or 2010, and it does not believe that any of those pronouncements will have a significant impact on the Company’s consolidated financial statements at the time they become effective.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Disclosure under Item 7A is not required of smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
We set forth below a list of our audited financial statements included in this Annual Report on Form 10-K and their location.
|
Item
|
|
Page *
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
22 |
|
|
Consolidated Balance Sheets as of December 31, 2011 and 2010
|
|
|
23 |
|
|
Consolidated Statements of Operations for the Years Ended December 31, 2011 and 2010
|
|
|
24 |
|
|
Consolidated Statements of Changes in Stockholders’ Deficiency for the Years Ended December 31, 2011 and 2010
|
|
|
25 |
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011 and 2010
|
|
|
26 |
|
|
Notes to Consolidated Financial Statements
|
|
|
27 |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of PureSafe Water Systems, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of PureSafe Water Systems, Inc. and Subsidiary (the “Company”) as of December 31, 2011 and 2010 and the related consolidated statements of operations, stockholders' deficiency and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PureSafe Water Systems, Inc. and Subsidiary as of December 31, 2011 and 2010 and the consolidated results of their operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has had recurring losses, and has a working capital and stockholders' deficiency as of December 31, 2011. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Marcum LLP
New York, New York
April 16, 2012
PureSafe Water Systems Inc. and Subsidiary
Consolidated Balance Sheets
| |
|
December 31,
2011
|
|
|
December 31,
2010
|
|
| ASSETS |
| |
|
Current Assets:
|
|
|
|
|
|
|
|
Cash
|
|
$ |
118,228 |
|
|
$ |
166,758 |
|
|
Inventories
|
|
|
468,093 |
|
|
|
442,815 |
|
|
Prepaid expenses and other current assets
|
|
|
56,674 |
|
|
|
81,697 |
|
|
Total Current Assets
|
|
|
642,995 |
|
|
|
691,270 |
|
| |
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation of $151,760 and $68,450, respectively
|
|
|
136,718 |
|
|
|
231,106 |
|
|
Patents and trademarks, net of accumulated amortization of $35,712 and $29,608, respectively
|
|
|
64,172 |
|
|
|
62,876 |
|
|
Other assets
|
|
|
58,560 |
|
|
|
37,280 |
|
|
TOTAL ASSETS
|
|
$ |
902,445 |
|
|
$ |
1,022,532 |
|
| |
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$ |
582,446 |
|
|
$ |
751,262 |
|
|
Accrued compensation
|
|
|
402,249 |
|
|
|
193,533 |
|
|
Deferred Rent Payable
|
|
|
32,800 |
|
|
|
-- |
|
|
Accrued consulting and director fees
|
|
|
144,000 |
|
|
|
144,000 |
|
|
Customer deposits
|
|
|
130,000 |
|
|
|
-- |
|
|
Convertible notes payable to officers and directors (including accrued interest of $83,932 and $47,445 and net of debt discount of $12,623 and $0, respectively)
|
|
|
743,309 |
|
|
|
534,445 |
|
|
Convertible promissory notes (including accrued interest of $83,929 and $25,132 and net of debt discount of $39,923 and $241,657, respectively)
|
|
|
989,006 |
|
|
|
428,475 |
|
|
Promissory notes payable (including accrued interest of $190,521 and $159,698, respectively)
|
|
|
838,265 |
|
|
|
470,660 |
|
|
Fair value of detachable warrants and conversion option
|
|
|
515,200 |
|
|
|
-- |
|
|
Accrued dividends payable
|
|
|
190,328 |
|
|
|
190,328 |
|
|
Total Current Liabilities
|
|
|
4,567,603 |
|
|
|
2,712,703 |
|
| |
|
|
|
|
|
|
|
|
|
Long Term Liabilities:
|
|
|
|
|
|
|
|
|
|
Notes Payable
|
|
|
15,200 |
|
|
|
20,423 |
|
|
Total Long Term Liabilities
|
|
|
15,200 |
|
|
|
20,423 |
|
|
TOTAL LIABILITIES
|
|
|
4,582,803 |
|
|
|
2,733,126 |
|
| |
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Stockholders' Deficiency:
|
|
|
|
|
|
|
|
|
|
Preferred stock $.001 par value; 10,000,000 shares authorized; 184,144 shares issued and outstanding (liquidation preference $2,808,850 and $2,700,550, as of December 31, 2011 and December 31, 2010, respectively)
|
|
|
184 |
|
|
|
184 |
|
|
Common stock, $.001 par value; 450,000,000 authorized; 340,389,004 shares issued and 340,384,604 shares outstanding at December 31, 2011; 319,026,726 shares issued and 319,022,326 outstanding at December 31, 2010
|
|
|
340,388 |
|
|
|
319,026 |
|
|
Additional paid-in capital
|
|
|
38,667,448 |
|
|
|
37,203,196 |
|
|
Treasury Stock, at cost, 4,400 shares of common stock
|
|
|
(5,768 |
) |
|
|
(5,768 |
) |
|
Subscriptions receivable - related party (including accrued interest of $73,538 and $53,308, respectively)
|
|
|
(410,738 |
) |
|
|
(390,508 |
) |
| |
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(42,271,872 |
) |
|
|
(38,836,724 |
) |
|
Total Stockholders’ Deficiency
|
|
|
(3,680,358 |
) |
|
|
(1,710,594 |
) |
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY
|
|
$ |
902,445 |
|
|
$ |
1,022,532 |
|
The accompanying notes are an integral part of these consolidated financial statements.
PureSafe Water Systems Inc. and Subsidiary
Consolidated Statements of Operations
| |
|
Years Ended December 31,
|
|
| |
|
2011
|
|
|
2010
|
|
|
Sales
|
|
$ |
287,215 |
|
|
$ |
-- |
|
| |
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
399,350 |
|
|
|
359,213 |
|
| |
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
|
(112,135 |
) |
|
|
(359,213 |
) |
| |
|
|
|
|
|
|
|
|
| Operating Expenses: |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Compensation and related benefits, including stock-based compensation of $1,175,225 and $893,073 for the years ended December 31, 2011 and 2010, respectively
|
|
|
1,821,711 |
|
|
|
1,481,671 |
|
| |
|
|
|
|
|
|
|
|
|
Insurance and medical benefits
|
|
|
73,237 |
|
|
|
69,711 |
|
| |
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
199,617 |
|
|
|
234,666 |
|
| |
|
|
|
|
|
|
|
|
|
Professional, legal and consulting fees
|
|
|
201,007 |
|
|
|
335,509 |
|
| |
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
135,658 |
|
|
|
699,852 |
|
| |
|
|
|
|
|
|
|
|
|
Occupancy
|
|
|
267,969 |
|
|
|
142,120 |
|
| |
|
|
|
|
|
|
|
|
|
Other administrative and general
|
|
|
285,760 |
|
|
|
237,533 |
|
| |
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
2,984,959 |
|
|
|
3,201,062 |
|
| |
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(3,097,094 |
) |
|
|
(3,560,275 |
) |
| |
|
|
|
|
|
|
|
|
| Other Income (Expense): |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Other income
|
|
|
20,379 |
|
|
|
20,231 |
|
| |
|
|
|
|
|
|
|
|
|
Gain on settlement of debt
|
|
|
-- |
|
|
|
138,261 |
|
| |
|
|
|
|
|
|
|
|
|
Interest expense, including interest to related parties of $65,731 and $305,835 for the years ended December 31, 2011 and 2010, respectively
|
|
|
(721,233 |
) |
|
|
(595,801 |
) |
| |
|
|
|
|
|
|
|
|
|
Change in fair value of warrants and embedded conversion options
|
|
|
362,800 |
|
|
|
(2,642,100 |
) |
| |
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
(338,054 |
) |
|
|
(3,079,409 |
) |
| |
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(3,435,148 |
) |
|
|
(6,639,684 |
) |
| |
|
|
|
|
|
|
|
|
|
Dividend on preferred stock
|
|
|
(108,300 |
) |
|
|
(108,300 |
) |
| |
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Common Stockholders’
|
|
$ |
(3,543,448 |
) |
|
$ |
(6,747,984 |
) |
| |
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Common Stockholders Per Share basic and diluted
|
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
| |
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
331,986,316 |
|
|
|
295,081,218 |
|
The accompanying notes are an integral part of these consolidated financial statements.
PureSafe Water Systems, Inc. and Subsidiary
Consolidated Statement of Stockholders’ Deficiency
For the year ended December 31, 2011
| |
|
Preferred Stock
|
|
Common Stock
|
|
|
|
|
|
Subscription
|
|
Accumulated
|
|
|
|
| |
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
At Cost
|
|
Receivable
|
|
Deficit
|
|
Deficiency
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE- Dec. 31, 2009
|
|
|
181,144 |
|
$ |
184 |
|
|
272,162,945 |
|
$ |
272,162 |
|
$ |
30,086,795 |
|
$ |
(5,768 |
) |
$ |
(370,276 |
) |
$ |
(32,197,040 |
) |
$ |
(2,213,943 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
-- |
|
|
-- |
|
|
13,377,062 |
|
|
13,378 |
|
|
1,279,561 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
1,292,939 |
|
|
Common stock issued in repayment of debt
|
|
|
-- |
|
|
-- |
|
|
15,669,083 |
|
|
15,669 |
|
|
783,987 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
799,656 |
|
|
Common stock issued for services
|
|
|
-- |
|
|
-- |
|
|
9,167,693 |
|
|
9,168 |
|
|
641,576 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
650,744 |
|
|
Shared issued through exercise of warrants
|
|
|
-- |
|
|
-- |
|
|
8,649,943 |
|
|
8,649 |
|
|
486,348 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
494,997 |
|
|
Reclassification of derivative liability to equity
|
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
3,682,600 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
3,682,600 |
|
|
Accrued interest
|
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(20,232 |
) |
|
-- |
|
|
(20,232 |
) |
|
Amortization of warrants and option over the vesting period for employees and non-employees
|
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
242,329 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
242,329 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(6,639,684 |
) |
|
(6,639,684 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE- DEC. 31, 2010
|
|
|
184,144 |
|
|
184 |
|
|
319,026,726 |
|
|
319,026 |
|
|
37,203,196 |
|
|
(5,768 |
) |
|
(390,508 |
) |
|
(38,836,724 |
) |
|
(1,710,594 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Sale of Common Stock
|
|
|
-- |
|
|
-- |
|
|
5,119,065 |
|
|
5,119 |
|
|
436,881 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
442,000 |
|
|
Proceeds from exercise of warrants
|
|
|
-- |
|
|
-- |
|
|
4,966,244 |
|
|
4,965 |
|
|
231,455 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
236,420 |
|
|
Common stock issued for loan conversion
|
|
|
-- |
|
|
-- |
|
|
2,539,747 |
|
|
2,540 |
|
|
136,557 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
139,097 |
|
|
Common stock issued for repayment of debt
|
|
|
-- |
|
|
-- |
|
|
86,670 |
|
|
87 |
|
|
11,353 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
11,440 |
|
|
Common stock issued for services
|
|
|
|
|
|
|
|
|
8,650,552 |
|
|
8,651 |
|
|
938,874 |
|
|
|
|
|
|
|
|
|
|
|
947,525 |
|
|
Warrant Issued for Stock-Based Compensation
|
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
154,800 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
154,800 |
|
|
Accrued interest
|
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(20,230 |
) |
|
-- |
|
|
(20,230 |
) |
|
Reclassification of equity instruments to derivate liabilities
|
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(693,900 |
) |
|
-- |
|
|
-- |
|
|
-- |
|
|
(693,900 |
) |
|
Warrants granted in connection with debt
|
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
103,132 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
103,132 |
|
|
Financing cost extension of warrants
|
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
85,700 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
85,700 |
|
|
Amortization of warrants and options for employees and non-employees
|
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
59,400 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
59,400 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(3,435,148 |
) |
|
(3,435,148 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE – December 31, 2011
|
|
|
184,144 |
|
$ |
184 |
|
|
340,389,004 |
|
$ |
340,388 |
|
$ |
38,667,448 |
|
$ |
(5,768 |
) |
$ |
(410,738 |
) |
$ |
(42,271,872 |
) |
$ |
(3,680,358 |
) |
Accompanying notes are an integral part of these consolidated financial statements.
PureSafe Water Systems Inc. and Subsidiary
Consolidated Statements of Cash Flows
| |
|
Years EndedDecember 31, |
|
| |
|
2011
|
|
|
2010
|
|
| |
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Net loss
|
|
$ |
(3,435,148 |
) |
|
$ |
(6,639,687 |
) |
|
Adjustments to reconcile net loss to net cash used in operating activities -
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
83,313 |
|
|
|
35,091 |
|
|
Amortization of patents and trademarks
|
|
|
6,104 |
|
|
|
6,104 |
|
|
Financing cost, warrant extension
|
|
|
85,700 |
|
|
|
-- |
|
|
Interest expense – amortization of deferred financing cost
|
|
|
2,375 |
|
|
|
-- |
|
|
Stock based compensation
|
|
|
1,175,225 |
|
|
|
893,073 |
|
|
Deferred rent
|
|
|
32,800 |
|
|
|
-- |
|
|
Interest receivable
|
|
|
(20,230 |
) |
|
|
(20,232 |
) |
|
Accretion of debt discount
|
|
|
462,843 |
|
|
|
465,522 |
|
|
Change in fair value of warrants and embedded conversion option
|
|
|
(362,800 |
) |
|
|
2,642,100 |
|
|
Loss on settlement of debt
|
|
|
-- |
|
|
|
(138,261 |
) |
|
Change in assets and liabilities -
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
25,023 |
|
|
|
38,386 |
|
|
Inventories
|
|
|
(25,278 |
) |
|
|
(345,700 |
) |
|
Other assets
|
|
|
(9,405 |
) |
|
|
(16,780 |
) |
|
Customer deposits
|
|
|
130,000 |
|
|
|
---- |
|
|
Accounts payable, accrued expenses, accrued dividends, accrued compensation, accrued consulting and director fees, and other current liabilities
|
|
|
202,618 |
|
|
|
680,786 |
|
|
Net Cash Used in Operating Activities
|
|
|
(1,646,860 |
) |
|
|
(2,399,595 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
-- |
|
|
|
(120,712 |
) |
|
Patent costs
|
|
|
(7,400 |
) |
|
|
-- |
|
|
Net Cash Used in Investing Activities
|
|
|
(7,400 |
) |
|
|
(120,712 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
442,000 |
|
|
|
1,292,939 |
|
|
Proceeds from exercise of warrants
|
|
|
236,420 |
|
|
|
494,997 |
|
|
Proceeds from convertible promissory note
|
|
|
425,000 |
|
|
|
595,000 |
|
|
Proceeds from officers and directors convertible loans
|
|
|
225,000 |
|
|
|
400,000 |
|
|
Proceeds from notes payable
|
|
|
337,092 |
|
|
|
-- |
|
|
Loan costs
|
|
|
(14,250 |
) |
|
|
-- |
|
|
Repayment of officers and directors loans
|
|
|
(40,000 |
) |
|
|
(200,000 |
) |
|
Repayment of notes payable
|
|
|
(5,532 |
) |
|
|
(3,295 |
) |
|
Net Cash Provided by Financing Activities
|
|
|
1,605,730 |
|
|
|
2,579,641 |
|
| |
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(48,530 |
) |
|
|
59,334 |
|
| |
|
|
|
|
|
|
|
|
|
Cash at beginning of year
|
|
|
166,758 |
|
|
|
107,424 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$ |
118,228 |
|
|
$ |
166,758 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$ |
32,939 |
|
|
$ |
19,041 |
|
| |
|
|
|
|
|
|
|
|
|
Non-Cash Investing Activities:
|
|
|
|
|
|
|
|
|
|
Purchase of Equipment through long term financing
|
|
$ |
-- |
|
|
$ |
29,932 |
|
| |
|
|
|
|
|
|
|
|
|
Non-Cash Financing Activities:
|
|
|
|
|
|
|
|
|
|
Compensation satisfied by issuance of common stock
|
|
$ |
-- |
|
|
$ |
174,000 |
|
| |
|
|
|
|
|
|
|
|
|
Common stock issued in satisfaction of liabilities
|
|
$ |
150,537 |
|
|
$ |
625,657 |
|
| |
|
|
|
|
|
|
|
|
|
Reclassification of derivative liabilities to equity
|
|
$ |
-- |
|
|
$ |
3,126,100 |
|
| |
|
|
|
|
|
|
|
|
|
Reclassification of equity instrument to derivative liabilities
|
|
$ |
693,900 |
|
|
$ |
-- |
|
| |
|
|
|
|
|
|
|
|
|
Warrants granted in connection with debt
|
|
$ |
103,132 |
|
|
|
-- |
|
The accompanying notes are an integral part of these consolidated financial statements.
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1 - DESCRIPTION OF BUSINESS
PureSafe Water Systems, Inc. (the “Company”) is a Delaware corporation currently engaged in the design and development of its technology to be used in the manufacture and sale of water purification systems both in and outside the United States. The Company's corporate headquarters is in Plainview, New York.
As of December 31, 2011, the Company has emerged from the development stage during the fourth quarter of 2011 due to its sales as well as receipts of additional sales orders.
NOTE 2 - BASIS OF PRESENTATION AND CONTINUED OPERATIONS
Principle of Consolidation
The consolidated financial statements of PureSafe Water Systems, Inc. include accounts of the Company and its wholly-owned subsidiary, PureSafe Manufacturing & Research Corporation. Intercompany transactions and balances are eliminated in consolidation.
Going Concern
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”), which contemplate continuation of the Company as a going concern and the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred a net loss of approximately $3.4 million and $6.6 million for each of the years ended December 31, 2011 and 2010, respectively. The Company has a working capital deficit of approximately $3.9 million and $2.0 million, and a stockholders’ deficiency of approximately $3.7 million and $1.7 million at December 31, 2011 and 2010, respectively.
The Company continues to incur recurring losses from operations and has an accumulated deficit since inception of approximately $42 million. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. The Independent Registered Public Accounting Firm’s report on the Company’s consolidated financial statements contains an explanatory paragraph about conditions that raise substantial doubt about its ability to continue as a going concern. The Company’s continuation as a going concern is dependent upon our ability to bring products to market and generate revenues, control costs, operate profitably and obtain additional financing, as required and on reasonable terms. The Company’s plans with respect to these matters include:
|
|
●
|
Raising $5 million in capital in two tranches, $2.0 million within the first six months of 2012 and an additional $3.0 million in the fourth quarter of 2012.
|
|
|
●
|
The completion of 27 commercial PureSafe FRWS units, with full operational capability. We believe that with acceptable levels of capital, 27 units can be produced of which 23 will be sold and four will remain in inventory.
|
|
|
●
|
Expand production capability to meet the expected demand for the FRWS domestically by a combination of expanding the production facility of PureSafe Manufacturing and Research Corporation, re-engineering and value engineering the FRWS to outsource assembly where appropriate.
|
|
|
●
|
Identify strategic partners in specific overseas markets that have the production, distribution, maintenance and training capability to produce, distribute, maintain and train personnel in the operation of our system.
|
|
|
●
|
To enter into field testing programs, targeted at specific users.
|
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
|
|
●
|
Continue the process of identifying and contracting with new distributors and sales representatives in both domestic and international markets.
|
|
|
●
|
Filing of all required foreign patent applications for the PureSafe FRWS. We will identify all the potential markets in which we need patent protection.
|
|
|
●
|
Continued participation in water industry conferences relating to target markets
|
|
|
●
|
Continued utilization of strategic advisors to target potential customers and applications.
|
|
|
●
|
To follow our marketing and sales projections by hiring a Vice President of Marketing to achieve additional sales by the second quarter of 2012.
|
|
|
●
|
Hiring up to four Sales Directors to target market end users.
|
|
|
●
|
Retaining a public relations/investor relations firm to bring awareness of our product and Company to the market and shareholders.
|
No assurance that such financing will be available on terms advantageous to the Company, or at all. However, should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would need to curtail certain or all of its operational activities detailed above.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The most significant estimates, among other things, are used in accounting for allowances for deferred income taxes, expected realizable values for long-lived assets (primarily intangible assets and property and equipment), contingencies, as well as the recording and presentation of its common stock and related warrants issuances. Estimates and assumptions are periodically reviewed and the effects of any material revisions are reflected in the consolidated financial statements in the period that they are determined to be necessary. Actual results could differ from those estimates and assumptions.
Revenue Recognition
The Company generally recognizes revenues under Staff Accounting Bulletin No. 104 when the following criteria are met, persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller's price to the buyer is fixed or determinable, and collectibility is reasonably assured. In addition the Company may involve multiple elements (i.e., products and services/training). Revenue under multiple element arrangements is recognized in accordance with FASB ASC 605-25 Multiple-Element Arrangements (“ASC 605”) . When vendor specific objective evidence or third party evidence of selling price for deliverables in an arrangement cannot be determined, the Company develops a best estimate of the selling price to separate deliverables and allocates arrangement consideration using the relative selling price method. Additionally, this guidance eliminates the residual method of allocation. If an arrangement includes undelivered elements that are not essential to the functionality of the delivered elements, we defer the fair value of the undelivered elements with the residual revenue allocated to the delivered elements. Fair value is determined based upon the price charged when the element is sold separately. If there is not sufficient evidence of the fair value of the undelivered elements, no revenue is allocated to the delivered elements and the total consideration received is deferred until delivery of those elements for which objective and reliable evidence of the fair value is not available. For the year ended December 31, 2011, the Company did not have any multiple deliverable elements.
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less when purchased to be cash equivalents. As of December 31, 2011 and 2010 the Company did not have any cash equivalents.
Inventories
Inventories are stated at the lower of cost, determined by the first-in, first-out (“FIFO”) method, or market.
Based on historical and projected sales volumes and anticipated selling prices, the Company establishes reserves. If the Company does not meet its sales expectations, these reserves are increased. Products that are determined to be obsolete are written down to net realizable value.
Patents and Trademarks
Patents and trademarks are amortized ratably over nine to fourteen years. The Company assesses the carrying value of its patents for impairment each year. Based on its assessments, the Company did not incur any impairment charges for the years ended December 31, 2011 and 2010.
Property and Equipment
Property and equipment consists primarily of equipment and furniture and fixtures and is stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives (generally three to seven years) of the related assets. Leasehold improvements, once placed in service, are amortized ratably over the shorter of the useful life or the remainder of the lease term. Expenditures for maintenance and repairs, which do not extend the economic useful life of the related assets, are charged to operations as incurred. Gains or losses on disposal of property and equipment are reflected in the statement of operations in the period of disposal.
Stock-Based Compensation
The Company reports stock-based compensation under ASC 718 “Compensation – Stock Compensation”. ASC 718 requires all share-based payments to employees, including grants of employee stock options, warrants to be recognized in the consolidated financial statements based on their fair values.
The Company accounts for equity instruments issued to non-employees as compensation in accordance with the provisions of ASC 718, which require that each such equity instrument be recorded at its fair value on the measurement date, which is typically the date the services are performed.
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The Black-Scholes option valuation model is used to estimate the fair value of the warrants or options granted. The model includes subjective input assumptions that can materially affect the fair value estimates. The model was developed for use in estimating the fair value of traded options or warrants. The expected volatility is estimated based on the most recent historical period of time equal to the weighted average life of the warrants or options granted
The principal assumptions used in applying the Black-Scholes model along with the results from the model were as follows:
| |
|
Years Ended December 31,
|
|
| |
|
2011
|
|
|
2010
|
|
|
Assumptions:
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.36
|
%
|
|
|
1.00
|
%
|
|
Expected life
|
|
3 years
|
|
|
3 years
|
|
|
Expected volatility
|
|
|
112
|
%
|
|
|
115
|
%
|
|
Dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Advertising and Marketing
Advertising and marketing costs are expensed as incurred and are included in operating expenses. The Company incurred a charge for advertising of approximately $-0- and $22,000 for the years ended December 31, 2011 and 2010, respectively.
Income Taxes
Income taxes are accounted for under ASC 740, "Income Taxes," which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's consolidated financial statements or tax returns. Valuation allowances are established when necessary to reduce deferred assets to the amounts expected to be realized.
Loss Per Share
Basic loss per share was computed using the weighted average number of outstanding common shares. Diluted loss per share includes the effect of dilutive common stock equivalents from the assumed exercise of warrants and convertible preferred stock. Common stock equivalents were excluded from the computation of diluted loss per share since their inclusion would be anti-dilutive.
In accordance with ASC 260 “Earnings per Share”, the Company has given effect to the issuance of 847,461 warrants exercisable at $0.001 issued by the Company. These warrants have been included in computing the basic net loss per share for the twelve months period ended December 31, 2010. These warrants were exercised during the year ended December 31, 2011.
Total shares issuable upon the exercise of warrants and the conversion of preferred stock and convertible debt for the years ended December 31, 2011 and 2010, were comprised as follows:
| |
|
As of December 31,
|
|
| |
|
2011
|
|
|
2010
|
|
|
Warrants
|
|
|
27,520,997
|
|
|
|
27,141,298
|
|
|
Convertible debt
|
|
|
19,564,618
|
|
|
|
10,129,968
|
|
|
Series F preferred stock
|
|
|
1,545,760
|
|
|
|
1,545,760
|
|
|
Total common stock equivalents
|
|
|
48,631,375
|
|
|
|
38,817,026
|
|
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Fair Value
ASC 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Standard clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date and emphasizes that fair value is a market-based measurement and not an entity-specific measurement.
ASC 820 establishes the following hierarchy used in fair value measurements and expands the required disclosures of assets and liabilities measured at fair value:
|
|
●
|
Level 1 – Inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
|
|
|
●
|
Level 2 – Inputs use other inputs that are observable, either directly or indirectly. These inputs include quoted prices for similar assets and liabilities in active markets as well as other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
|
|
|
●
|
Level 3 – Inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.
|
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair measurements requires judgment and considers factors specific to each asset or liability.
Liabilities measured at fair value on a recurring basis at December 31, 2011 are as follows:
| |
|
Quoted Prices in Active Markets for Identical Liabilities
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Balance at December 31, 2011
|
|
|
Embedded conversion feature
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
68,800
|
|
|
$
|
68,800
|
|
|
Warrant and option liability
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
446,400
|
|
|
$
|
446,400
|
|
|
December 31, 2011
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
515,200
|
|
|
$
|
515,200
|
|
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. The Company’s Level 3 liabilities consist of derivative liabilities associated with the convertible debt that contains an indeterminable conversion share price and the tainted warrants as the Company cannot determine if it will have sufficient authorized common stock to settle such arrangements. As further disclosed in Note 7 (a), the Company issued 947,312 shares for the settlement of this debt. Accordingly, the Company reclassified the derivative liability to equity during the year ended December 31, 2010
On August 3, 2011, the Company issued $125,000 of debt convertible at a 30% discount from the current market price. Accordingly the Company reclassified the conversion option and warrants to derivative liabilities for the year ended December 31, 2011.
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The following table provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured at fair value on a recurring basis using significant unobservable inputs during the years ended December 31, 2011 and 2010.
| |
|
Warrant
Liability
|
|
|
Embedded
Conversion Feature
|
|
|
Total
|
|
|
Balance January 1, 2010
|
|
$
|
286,100
|
|
|
$
|
197,900
|
|
|
$
|
484,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other income expense
|
|
|
1,456,600
|
|
|
|
1,185,500
|
|
|
|
2,642,100
|
|
|
Included in liabilities
|
|
|
157,100
|
|
|
|
399,400
|
|
|
|
556,500
|
|
|
Included in stockholder's equity
|
|
|
(1,899,800
|
)
|
|
|
(1,782,800
|
)
|
|
|
(3,682,600
|
)
|
|
Transfers in and /or out of Level 3
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Balance December 31, 2010
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other income (expense)
|
|
|
(252,800
|
)
|
|
|
(110,000
|
)
|
|
|
(362,800
|
)
|
|
Included in liabilities
|
|
|
129,500
|
|
|
|
41,100
|
|
|
|
170,600
|
|
|
Included in stock based compensation
|
|
|
13,500
|
|
|
|
--
|
|
|
|
13,500
|
|
|
Included in stockholder's equity
|
|
|
556,200
|
|
|
|
137,700
|
|
|
|
693,900
|
|
|
Transfers in and /or out of Level 3
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Balance December 31, 2011
|
|
$
|
446,400
|
|
|
$
|
68,800
|
|
|
$
|
515,200
|
|
Impairment of Long-Lived Assets
The Company assesses the recoverability of its long lived assets, including property and equipment when there are indications that the assets might be impaired. When evaluating assets for potential impairment, the Company first compares the carrying amount of the asset to the asset’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows used in this analysis are less than the carrying amount of the asset, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the asset to the asset’s estimated future cash flows (discounted and with interest charges). If the carrying amount exceeds the asset’s estimated futures cash flows (discounted and with interest charges), the loss is allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets. Based on its assessments, the Company did not incur any impairment charges for the years ended December 31, 2011 and 2010.
Research and Development
Research and development costs consist of expenditures incurred during the course of planned research and investigation aimed at the discovery of new knowledge, which will be useful in developing new products or processes. The Company expenses all research and development costs as incurred.
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Derivative Financial Instruments
In connection with the issuance of certain convertible promissory notes, the terms of the convertible notes included an embedded conversion feature; which provided for a conversion of the convertible promissory notes into shares of common stock at a rate which was determined to be variable. The Company determined that the conversion feature was an embedded derivative instrument pursuant to ASC 815 “Derivatives and Hedging”
The accounting treatment of derivative financial instruments requires that the Company record the conversion option and related warrants at their fair values as of the inception date of the convertible debenture agreements and at fair value as of each subsequent balance sheet date. As a result of entering into the convertible promissory notes, the Company was required to classify all other non-employee warrants and options as derivative liabilities and record them at their fair values at each balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
Reclassification
Certain accounts in the prior year’s financial statements have been reclassified for comparative purposes to conform to the presentation in the current year’s financial statements. These reclassifications have no effect on previously reported earnings.
Subsequent Events
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would require adjustment or disclosure in the consolidated financial statements.
Recent Accounting Pronouncements
The FASB, the Emerging Issues Task Force and the SEC have issued certain accounting standards updates and regulations as of December 31, 2011 that will become effective in subsequent periods; however, management of the Company does not believe that any of those updates would have significantly affected the Company’s financial accounting measures or disclosures had they been in effect during 2011 or 2010, and it does not believe that any of those pronouncements will have a significant impact on the Company’s consolidated financial statements at the time they become effective.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2011 and 2010:
| |
|
2011
|
|
|
2010
|
|
|
Leasehold improvement
|
|
$
|
149,700
|
|
|
$
|
149,700
|
|
|
Furniture and fixtures
|
|
|
49,265
|
|
|
|
49,265
|
|
|
Equipment
|
|
|
89,513
|
|
|
|
100,591
|
|
| |
|
|
288,478
|
|
|
|
299,556
|
|
|
Accumulated depreciation and amortization
|
|
|
(151,760
|
)
|
|
|
(68,450
|
)
|
|
Property and equipment, net
|
|
$
|
136,718
|
|
|
$
|
231,106
|
|
Depreciation and amortization expense was approximately $83,300 and $35,100 for the years ended December 31, 2011 and 2010, respectively.
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 5 - PATENTS AND TRADEMARKS
Patents and trademarks as of December 31, 2011 and 2010 consist of the following:
| |
|
2011
|
|
|
2010
|
|
|
Patents
|
|
$
|
97,164
|
|
|
$
|
89,764
|
|
|
Trademarks
|
|
|
2,720
|
|
|
|
2,720
|
|
|
Total cost
|
|
|
99,884
|
|
|
|
92,484
|
|
|
Accumulated amortization
|
|
|
(35,712
|
)
|
|
|
(29,608
|
)
|
|
Patents and trademarks, net
|
|
$
|
64,172
|
|
|
$
|
62,876
|
|
Amortization expense for the years ended December 31, 2011 and 2010 was approximately $6,100.
The following table presents the Company's estimate for amortization expense for each of the five succeeding years and thereafter.
| Year Ended December 31, |
|
|
|
|
|
2013
|
|
$
|
6,100
|
|
|
2014
|
|
|
6,100
|
|
|
2015
|
|
|
6,100
|
|
|
2016
|
|
|
6,100
|
|
|
2017
|
|
|
6,100
|
|
|
2018 and thereafter
|
|
|
33,672
|
|
| |
|
$
|
64,172
|
|
NOTE 6 – INVENTORIES
Inventories consist of the following at December 31, 2011 and 2010,
| |
|
2011
|
|
|
2010
|
|
|
Raw materials
|
|
$
|
347,183
|
|
|
$
|
188,201
|
|
|
WIP
|
|
|
120,910
|
|
|
|
--
|
|
|
Finished Goods
|
|
|
--
|
|
|
|
254,614
|
|
|
Totals
|
|
$
|
468,093
|
|
|
$
|
442,815
|
|
The allowance for technological obsolescence and slow moving items was $0 at December 31, 2011 and 2010, respectively.
NOTE 7 – CONVERTIBLE NOTES AND NOTES PAYABLE – Officers & Director
Convertible notes and notes payable – Officers & Director and accrued interest at December 31, 2011 and 2010 consists of the following:
| |
|
December 31,
|
|
| |
|
2011
|
|
|
2010
|
|
| |
|
$
|
368,134
|
(b)
|
|
$
|
333,239
|
(b)
|
| |
|
|
201,206
|
(c)
|
|
|
201,206
|
(c)
|
| |
|
|
60,517
|
(e)
|
|
|
--
|
(e)
|
| |
|
|
85,732
|
(f)
|
|
|
--
|
(f)
|
| |
|
|
40,344
|
(g)
|
|
|
--
|
(g)
|
|
Total
|
|
|
755,933
|
|
|
|
534,445
|
|
|
Less: Debt discount
|
|
|
12,623
|
|
|
|
--
|
|
|
Current portion
|
|
$
|
743,310
|
|
|
$
|
534,445
|
|
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
|
(a)
|
In March 2007, the Company’s former director made a loan of $50,000 to the Company. The loan accrued simple interest at the rate of 10% per annum and was due and payable 120 days after funding. The loan carried an option that, if the loans were not repaid by June 29, 2007, such options would entitle the lender to convert their debt into shares of common stock at a conversion price equal to 50% of the average closing price of the common stock over the three previous business days preceding the date of demand for conversion is made.
Under accounting guidance provide by ASC 815, the conversion price of the loans did not have a determinable number of shares the loans could be settled in and as a result, has been presented as a derivative liability. Accordingly, the conversion option was marked to market through earnings at the end of each reporting period.
In December 2010 the former director converted the note principal and accrued interest of $18,491 into 947,312 shares of common stock. Such shares were issued on December 31, 2010. Accordingly, the Company reclassified the derivative liability to equity.
|
|
(b)
|
In September 2009, the Company entered into agreements with the Chief Executive Officer and Chief Financial Officer together to defer a total of $287,000 in compensation owed to them as of September 30, 2009. In return, the Company issued to the Chief Executive Officer and Chief Financial Officer each a promissory note for the deferment. The notes matured in January 2011 and interest will be accrued at 10% per annum compounded monthly. The Chief Executive Officer and Chief Financial Officer have not demanded payment for these notes.
As of December 31, 2011 and 2010, the Company is reflecting a liability of $368,134 and 333,239 which includes $81,134 and
$46,239 of accrued interest, respectively and the Company is not compliant with the repayment terms.
|
|
(c)
|
On April 7, 2010, the Company’s Chief Executive Officer, and the Company’s Chief Financial Officer each made loans of $100,000 to the Company. The loans accrue interest at the rate of 7% per annum. In addition, the Company issued warrants to each officer to purchase 431,034 shares of common stock at an exercise price of $0.059 per share. The loans were due and payable by or on October 7, 2010. The interest accrued on the loans is to be paid on the 7th day of each month until the loans mature and paid off. The loans were evidenced by the promissory notes the Company issued to the two officers which each contain a conversion clause that allow the officers at the officer’s sole option to convert the loan amount plus all accrued and unpaid interest due under the note into common stock. The conversion price was set at $0.059 per share, which was the closing market price of the common stock as of the closing date of the loans.
The Company accounted for the issuance of the convertible promissory note in accordance with ASC 815 “Derivatives and Hedging.” Accordingly, the warrants and the embedded conversion option of the convertible note are recorded as derivative liabilities at their fair market value and were marked to market through earnings at the end of each reporting period. The gross proceeds from the sales of the notes of $200,000 were recorded net of a discount of $101,600. The debt discount consisted of $34,800 related to the fair value of the warrants and approximately $66,800 related to the fair value of the embedded conversion option. The debt discount will be charged to interest expense ratably over the term of the convertible note.
As of December 31, 2011, the Company is reflecting a liability of $201,206 which includes $1,206 accrued interest and the Company is not compliant with the repayment terms of these notes.
|
|
(d)
|
On October 4, 2010, the Company’s Chief Executive Officer, and the Company’s Chief Financial Officer each made loans of $100,000 to the Company. The loans accrue interest at the rate of 10% per annum. In addition, the Company issued warrants to each officer to purchase 200,000 shares of common stock at an exercise price of $0.10 per share. The loans are due and payable by or on November 17, 2010. The interest accrued on the loans were to be paid on the maturity date. The loans were evidenced by the promissory notes the Company issued to the two officers which each contain a conversion clause that allows the officers at the officer’s sole option to convert the loan amount plus all accrued and unpaid interest due under the note into common stock. The conversion price was set at $0.10 per share, which was the closing market price of the common stock as of the closing date of the loans.
The Company accounted for the issuance of the convertible promissory note in accordance with ASC 815” Derivatives and Hedging.” Accordingly, the warrants and the embedded conversion option of the convertible note are recorded as derivative liabilities at their fair market value and were marked to market through earnings at the end of each reporting period. The gross proceeds from the sales of the notes of $200,000 were recorded net of a discount of $120,000. The debt discount consisted of $31,800 related to the fair value of the warrants and approximately $88,200 related to the fair value of the embedded conversion option. The debt discount was charged to interest expense in the fourth quarter of 2010.
On December 17, 2010, the Company repaid its Chief Executive Officer and Chief Financial Officer a total of $200,000 loan principal and $4,170 accrued interest.
|
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
|
(e)
|
On February 7, 2011, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer each made loans of $50,000 to the Company. The loans accrue interest at the rate of 10% per annum. In addition, the Company issued warrants to each officer to purchase 89,928 shares of common stock at an exercise price of $0.139 per share. The loans are due and payable by or on February 7, 2012. The loan and accrued interest are to be paid on the maturity date. The loans were evidenced by the promissory notes the Company issued to the two officers which each contain a conversion clause that allow the officers at the officer’s sole option to convert the loan amount plus all accrued and unpaid interest due under the note into common stock. The conversion price was $0.139 per share, which was the closing market price of the common stock as of the closing date of the loans.
The Company accounted for the issuance of the notes in accordance with ASC 470 “Debt” and accordingly the gross proceeds of $100,000 from the sales of the notes were recorded net of a debt discount of $33,612. The debt discount related to the relative fair value of the warrants and was charged to interest expense ratably over the term of the loan.
On June 3, 2011, the Company repaid $40,000 principal. Total principal payable including accrued interest as of December 31, 2011 was $60,517. The Company is not compliant with the repayment terms of these notes.
|
|
(f)
|
On March 16, 2011, the Company’s Chief Financial Officer made a loan of $85,000 to the Company. The loan accrues interest at the rate of 10% per annum. In addition, the Company issued warrants to purchase 174,180 shares of common stock at an exercise price of $0.122 per share. The loan is due and payable by or on March 16, 2012. The loan and accrued interest are to be paid on the maturity date. The loan is evidenced by the promissory note the Company issued to the officer which contains a conversion clause that allow the officer at the officer’s sole option to convert the loan amount plus all accrued and unpaid interest due under the note into common stock. The conversion price was $0.122 per share, which was the closing market price of the common stock as of the closing date of the loan.
The Company accounted for the issuance of the note in accordance with ASC 470 “Debt” and accordingly the gross proceeds of $85,000 from the sales of the note was recorded net of a debt discount of $28,610. The debt discount related to the relative fair value of the warrants and is being charged to interest expense ratably over the term of the note.
Total principal payable including accrued interest as of December 31, 2011 was $85,732. The Company is not compliant with the repayment terms of this note.
|
|
(g)
|
On March 28, 2011, the Company’s Chief Financial Officer made a loan of $40,000 to the Company. The loan pays interest monthly at the rate of 10% per annum. In addition, the Company issued warrants to purchase 83,333 shares of common stock at an exercise price of $0.12 per share. The loan is due and payable by or on March 28, 2012. The loan and accrued interest are to be paid on the maturity date. The loan is evidenced by the promissory note the Company issued to the officer which contains a conversion clause that allow the officer at the officer’s sole option to convert the loan amount plus all accrued and unpaid interest due under the note into common stock. The conversion price was $0.12 per share, which was the closing market price of the common stock as of the closing date of the loans.
The Company accounted for the issuance of the note in accordance with ASC 470 “Debt” and accordingly the gross proceeds of $40,000 from the sales of the note was recorded net of a debt discount of $13,472. The debt discount related to the relative fair value of the warrants and is being charged to interest expense ratably over the term of the note.
Total principal payable including accrued interests as of December 31, 2011 was $40,344. The Company is not compliant with the repayment terms of this note.
|
NOTE 8 – PROMISSORY NOTES PAYABLE
Notes payable and accrued interest at December 31, 2011 and 2010 consists of the following:
| |
|
December 31,
|
|
| |
|
2011
|
|
|
2010
|
|
| |
|
$
|
228,152
|
(a)
|
|
$
|
219,297
|
(a)
|
| |
|
|
75,000
|
(b)
|
|
|
75,000
|
(b)
|
| |
|
|
188,064
|
(c)
|
|
|
170,247
|
(c)
|
| |
|
|
21,007
|
(d)
|
|
|
26,539
|
(d)
|
| |
|
|
200,264
|
(e)
|
|
|
--
|
|
| |
|
|
140,978
|
(f)
|
|
|
--
|
|
|
Total
|
|
|
853,465
|
|
|
|
491,083
|
|
|
Less long-term portion
|
|
|
(15,200
|
)
|
|
|
(20,423
|
)
|
|
Current Portion
|
|
|
838,265
|
|
|
|
470,660
|
|
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
|
(a)
|
These are unsecured notes bearing interest at rates ranging from 10% to 15% per annum, and have no specific due date for repayment. The outstanding amount of $228,152 and $219,297 include principal of $83,222 and accrued and unpaid interest of $144,930 and $136,076 as of December 31, 2011 and 2010, respectively. No demands for repayment have been made by the note holders. As of December 31, 2011 and 2010, the Company is not compliant with the repayment terms of the notes and is in technical default.
|
|
(b)
|
In April 2001, the Company issued a $400,000 promissory note bearing interest at the rate of 2% per month. In consideration for the issuance of this note, 500,000 shares of common stock were issued to the note holder and a $74,000 debt discount was recorded and fully amortized in the year ended December 31, 2001. The principal balance and accrued interest was payable on September 1, 2001. The Company did not make such payment and was required to issue an additional 100,000 shares to the note holder as a penalty. The Company recorded additional interest expense of $12,300 related to the issuance of these penalty shares.
In October 2007, the Company entered into a settlement agreement with this note holder. Under the settlement agreement, the Company became obligated to make payments of $75,000 each on or before December 31, 2007 and June 30, 2008. The June 20, 2008 payment remains unpaid. In addition, the Company was obligated to issue 2,500,000 shares of common stock to the note holder as settlement for the remaining balance due under the promissory note of $477,934. In January 2008, the Company issued 1,250,000 of the 2,500,000 shares.
Under the advice of then outside counsel, the Company sent inquiries to various parties claiming an interest in the note and shares. The Company has not received a response from any of the parties contacted. In December 2009, the Company issued the remaining 1,250,000 shares to the note holder and recognized a gain on settlement of debt of approximately $203,000. The shares are currently held in an outside attorney’s escrow account for the benefit of the legal owner of the note. At December 31, 2011 and 2010, the Company is reflecting a liability of $75,000, which represents the unpaid settlement payment.
|
|
(c)
|
In September 2009, the Company entered into agreements with three of the Company’s consultants and vendors to defer a total in the aggregate of $236,624 in compensation owed to them. In return, the Company issued to the three vendors each a promissory note for the deferment. The notes matured in January 2011 and interest will be accrued at 10% per annum compounded monthly. As of December 31, 2009 the Company reclassified $236,624 from current liabilities to long term liabilities.
In February 2010, one of the above three vendors, requested to convert the note payable of $90,000 principal plus $5,781 accrued interest into the Company’s common stock. The request was approved by Board of Directors on February 19, 2010 and the conversion price was set at $0.055 which was the closing price published on OTCBB.com on the date of the approval of such request. On March 2, 2010, 1,741,464 shares were issued for such conversion.
As of December 31, 2011 and 2010, the Company is reflecting a liability of $188,064 and $170,247 which includes accrued interest of $41,440 and $23,622, respectively. As of December 31, 2011 the Company is not compliant with the repayment terms of the notes and is in technical default.
|
|
(d)
|
In February, 2010, the Company acquired a vehicle for business use. The cost of the vehicle was approximately $30,000 and the Company financed the entire cost. The financing term was approximately $500 per month for sixty months based on an annual interest rate of 9%. As of December 31, 2011, the Company is reflecting $21,007 as the unpaid principal.
The approximate maturities of this note over the next four years are as follows:
|
|
For the Years Ending December 31,
|
|
|
2012
|
|
$ |
5,800 |
|
|
2013
|
|
|
6,400 |
|
|
2014
|
|
|
7,000 |
|
|
2015
|
|
|
1,800 |
|
|
Total
|
|
$ |
21,000 |
|
|
(e)
|
Between August and December, 2011, the Company raised $197,091 through issuing multiple promissory notes. These notes bear interest rate of 10% per annum and are due and payable between February 26 and May 30, 2012. As of December 31, 2011, the company is reflecting $200,264 which includes $3,174 of accrued interest.
|
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
|
(f)
|
On December 16, 2011, the Company issued a $140,000 promissory note bearing interest at the rate of 15% per annum. This note shall be payable in one monthly installment with the first such installment to be paid on the 15th day of March 2012. The Company may also, at its discretion, permit repayment to be made by assignment of its accounts receivable due from the State of Alaska.
As of December 31, 2011, the Company is reflecting a liability of $140,978 which includes accrued interest of $978.
On March 12, 2012, the Company repaid the Note Holder, principal and interest of total $145,794.
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NOTE 9 - CONVERTIBLE PROMISSORY NOTES PAYABLE
Convertible promissory notes payable and accrued interest at December 31, 2011 and 2010 consists of the following:
| |
|
December 31,
|
|
| |
|
2011
|
|
|
2010
|
|
| |
|
$
|
-
|
(a)
|
|
|
--
|
(a)
|
| |
|
|
899,819
|
(b)
|
|
|
670,132
|
(b)
|
| |
|
|
129,110
|
(c)
|
|
|
--
|
(c)
|
|
Total
|
|
|
1,028,929
|
|
|
|
670,132
|
|
|
Less Debt discount
|
|
|
(39,923
|
)
|
|
|
(241,657
|
)
|
|
Current Portion
|
|
|
989,006
|
|
|
$
|
428,475
|
|
|
(a)
|
On December 17, 2008, the Company sold and issued a convertible promissory note in the principal amount of $50,000 bearing interest at 10% per annum and warrants to purchase 285,714 shares of common stock at an exercise price of $0.042 per share. The convertible note matures on December 17, 2009. The holder of the note is entitled to convert all or a portion of the convertible note plus any unpaid interest, at the lender’s sole option, into shares of common stock at a conversion price of $0.035 per share.
The Company accounted for the issuance of the convertible promissory note in accordance with ASC 815 ”Derivatives and Hedging”. Accordingly, the warrants and the embedded conversion option of the convertible note are recorded as derivative liabilities at their fair market value and were marked to market through earnings at the end of each reporting period. The gross proceeds from the sale of the note $50,000 was recorded net of a discount of $19,500. The debt discount consisted of approximately $2,800 related to the fair value of the warrants and approximately $16,700 related to the fair value of the embedded conversion option. The debt discount was being charged to interest expense ratably over the term of the convertible note.
In April 2010, the lender requested to convert $50,000 plus accrued interest of $7,084 into the Company’s common stock. The Company issued 1,630,967 shares in connection of such conversion for the settlement of this note.
|
|
(b)
|
From January 2009 through December 2010, the Company raised $920,000 through debt financing from multiple lenders. The Company issued each lender a convertible promissory note in the principal amount of money lender loaned to the Company. The promissory note matures in one year and bears interest at 10% per annum and is convertible at the option of the holder in to shares of common stock. The conversion prices range from $0.044 to $0.157. In addition the Company granted 2,555,687 warrants to the note holders. The warrants have a life of 5 years and are fully vested on the date of the grant, the exercise price of the warrants ranges from $0.0528 to $0.1884.
The Company accounted for the issuance of the convertible promissory note in accordance with ASC 815 ”Derivatives and Hedging”. Accordingly, the warrants and the embedded conversion option of the convertible note are recorded as derivative liabilities at their fair market value and were marked to market through earnings at the end of each reporting period. The gross proceeds from the sale of these note $920,000 was recorded net of a discount of $458,400. The debt discount consisted of approximately $324,800 related to the fair value of the embedded conversion option and approximately $133,600 related to the fair value of the warrants. The debt discount was being charged to interest expense ratably over the term of the convertible note.
In 2011, the Company raised $300,000 through debt financing from multiple lenders. The Company issued each lender a convertible promissory note in the principal amount of money lender loaned to the Company. The promissory note matures in one year and bears interest at 10% per annum and is convertible at the option of the holder in to shares of common stock. The conversion prices range from $0.067 to $0.157. In addition the Company granted 634,229 warrants to the note holders. The warrants have a life of 5 years and are fully vested on the date of the grant, the exercise price of the warrants ranges from $0.084 to $0.1884.
|
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
| |
The Company accounted for the issuance of the convertible promissory note in accordance with ASC 815 ”Derivatives and Hedging”. Accordingly, the warrants and the embedded conversion option of the convertible note are recorded as derivative liabilities at their fair market value and were marked to market through earnings at the end of each reporting period. The gross proceeds from the sale of these note $300,000 was recorded net of a discount of $57,638. The debt discount consisted of approximately $13,719 related to the fair value of the embedded conversion option and approximately $43,919 related to the fair value of the warrants. The debt discount was being charged to interest expense ratably over the term of the convertible note.
During the year ended December 31, 2011, multiple lenders requested to convert total aggregated $125,000 principal plus accrued interest of $14,097 into the Company’s common stock. The Company issued total aggregated 2,539,747 shares of common stock in connection with such conversions.
During the year ended December 31, 2010, multiple lenders requested to convert total aggregated $275,000 principal plus accrued interest of $27,300 into the Company’s common stock. The Company issued total aggregated 5,840,939 shares of common stock in connection with such conversions.
As of December 31, 2011, the Company is not in compliance with the repayment terms with certain notes and is currently in technical default.
|
|
(c)
|
On August 3, 2011, the Company borrowed $125,000 from a private investor and issued to the investor a secured convertible promissory note in the principal amount of $125,000. The note matured on December 1, 2011 and bears interest at a stated rate of 8% per annum and the note is convertible into shares of common stock of the Company at a 30% discount from the current market price (as defined in the Note). The Company has the right to redeem the Note at any time by paying the outstanding principal amount of the Note multiplied by a premium according to the following schedule, plus all accrued interest: 120% of the outstanding principal amount if redeemed within 90 days after the issuance date; 125% of the outstanding principal amount if redeemed within 180 days after the issuance date; 130% of the outstanding principal amount if redeemed after 180 days after the issuance date. The Note is further guaranteed by two officers of the Company and secured by stock pledge agreements with each officer, pursuant to which each of the officers has pledged 2,000,000 shares of the Company’s common stock owned by them as collateral to secure payment of the Note. In connection with the issuance of the Note, the Company also issued to the investor a common stock purchase warrant, expiring August 3, 2018, to purchase 1,250,000 shares of common stock at an exercise price of $0.10 per share.
The Company accounted for the issuance of the convertible promissory notes in accordance with ASC 815” Derivatives and Hedging.” Accordingly, the warrants and the embedded conversion option of the convertible note are recorded as derivative liabilities at their fair market value and are marked to market through earnings at the end of each reporting period. The gross proceeds from the sale of the note of $125,000 was recorded net of a discount of $125,000. The debt discount consisted of $83,900 to the fair value of the warrants and $41,100 related to the fair value of the embedded conversion option. In addition to the $125,000 mentioned above, the Company recorded a charge in the amount of $15,900 which represents the fair value of conversion options in excess of the debt discount recorded. The debt discount will be charged to interest expense ratably over the term of the convertible notes.
As of December 31, 2011, the Company is not in compliance with the repayment terms with certain notes and is currently in technical default.
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NOTE 10 - COMMITMENTS AND CONTINGENCIES
Operating Leases
Effective as of July 1, 2008, the Company entered into a seven-year lease for 5,300 square feet of space in Plainview, New York. The facility is to serve as the Company’s executive offices, sales office, showroom and an assembly area.
The minimum lease payments due under this lease are as follows:
|
For the Years Ending December 31,
|
|
Amount
|
|
|
2012
|
|
$
|
67,017
|
|
|
2013
|
|
|
69,029
|
|
|
2014
|
|
|
71,098
|
|
|
Thereafter
|
|
|
36,074
|
|
| |
|
$
|
243,218
|
|
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
On May 24, 2010, effective July 1, 2010, the Company entered into a two-year lease in Plainview, New York. The facility is to serve as the Company’s production facilities. Under the terms of the lease the Company paid a deposit of approximate $12,000. The minimum monthly lease payments due under this lease are approximately $6,000 for the period July 1, 2010 through June 30, 2011 and approximately $10,700 for the period July 1, 2011 through June 30, 2012.
The minimum lease payments due under this lease for 2012 are $64,200.
Rent and rent related expenses, excluding repair and maintenance, during the years ended December 31, 2011 and 2010 was approximately $165,000 and $132,400, respectively. Repair and maintenance expenses during the same periods were approximately $10,000 and $11,100, respectively. In March 2012 management exercised a Good Guy Clause” in its’ lease and abandoned the space at 25 Fairchild Avenue.
Vendor Agreements
On June 9, 2008, the Company entered into a six month consulting agreement with Hidell-Eyster International Inc. (HEI) for strategic planning and the continued development and marketing of the PureSafe FRWS. The agreement provides for a fixed fee of $90,000, plus out of pocket expenses, and is payable at $15,000 per month. During 2008, the Company incurred a charge of approximately $105,000, which has been included in the consolidated statement of operations as part of consulting fees and marketing expenses. The agreement terminated in December 2008 and was continued on a month to month basis until January 1, 2010.
On March 26, 2010 the Company entered into a thirty-six month term management agreement with HEI, effective January 1, 2010. The Company had fees owing to HEI of $ 180,000 through December 31, 2009 of which $90,000 was converted to an interest bearing note in September 2009. HEI has agreed to convert their past due fees into common stock of the Company. The Company’s Board has approved the following:
|
|
●
|
On February 1, 2010 the Board approved the request of HEI to convert $ 90,000 of debt to 1,764,706 shares of common stock .The conversion price is ($0.051) equals the fair value of the common stock on the date of the approval of such request.
|
|
|
●
|
On February 19, 2010 the Board approved the request of HEI to convert a $ 90,000 promissory note dated September 28, 2009 and $ 5,780.52 of accrued interest into 1,741,464 shares of common stock. The conversion price ($0.055) was the fair value of the common stock on the date of the approval of such request.
|
Effective, January 1, 2010 the fees to HEI were increased to $23,000 per month for implementation of Phase I of the agreement and Phase 2 to be implemented on July 1, 2010 at a monthly fee of $36,000 per month.
By mutual agreement the Hidell Eyster General Management Services Agreement was terminated under a Settlement Agreement executed December 29, 2010, effective November 15, 2010. Under the terms of this agreement and in full satisfaction of all claims for payment a cash settlement of $250,000 will be paid on a monthly basis after a $20,000 down payment from January 15, 2011 to November 15, 2011. In addition to the cash settlement, 86,670 shares of common stock were delivered to Hidell Eyster
On August 6, 2008, the Company entered into a six month consulting agreement with Designs and Project Development Corp. (D & P) for planning and continued development of the PureSafe FRWS. The agreement provided for a fixed fee of $6,667 per month plus reimbursement of expenses. Upon termination of the consulting agreement, the agreement continued on a month to month basis. In addition to the fixed fee, in July 2008 the Company issued to D&P’s President, Alphonse Wolter 100,000 shares of common stock, and warrants to purchase an additional 250,000 shares of common stock for the year ended December 31, 2008 the Company incurred a charge of $5,000 for the issuance of these shares.
In April 2009, the Company issued Mr. Wolter 500,000 shares of common stock, and warrants to purchase an additional 500,000 shares of common stock for services. For the year ended December 31, 2009 the Company incurred a charge of $34,700 for the issuance of these shares.
In September 2009, D & P agreed to convert $57,003 of the liability to an interest bearing note.
Effective January 1, 2010 the fee to D & P was increased to $100,000 per annum. On February 1, 2010 the Company issued to Mr. Wolter 500,000 shares of common stock and incurred a stock-base compensation charge of $25,500 for the year ending December 31, 2010. In addition, in February 2010, the Company issued 457,549 shares of common stock to D&P upon the request by Mr. Wolter to convert $23,335 of accrued compensation due to them.
Litigation
The Company is, from time to time, subject to litigation incidental to the conduct of its ongoing business. The Company and its counsel believe that the resolution of these matters will not have a material adverse effect on the financial position of the Company.
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 11 - COMMON STOCK ISSUED
During the year ended December 31, 2011, the Company recorded the following transactions:
Debt
During the year ended December 31, 2011, the Company issued a total of 2,539,747 shares of common stock upon the requests from multiple convertible note holders to convert their notes plus accrued interest totaling $139,097 into the Company’s common stock based on the terms set forth in the loan. The conversion rates were from $0.053 to $0.056.
On January 25, 2011, the Company issued 86,670 shares of common stock to a former consultant in settlement of accrued compensation of $11,440 pursuant to the settlement agreement the Company entered with the consultant on December 29, 2010.
Cash
Through Equity Financing:
During the year ended December 31, 2011, for gross proceeds of $442,000 the Company sold an aggregate of 5,119,065 shares of common stock and warrants to purchase additional 1,244,336 shares of common stock at exercise prices from $0.06 to $0.1740. The warrants have a term of three years and were fully vested on the grant date.