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
For the fiscal year ended December 31, 2012
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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 5, 2013, 809,346,722 shares of the common stock of the registrant were issued and outstanding.
Table of Contents
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PART I
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Item 1.
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Business.
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2 |
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Item 1A.
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Risk Factors.
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7 |
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Item 1B.
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Unresolved Staff Comments.
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8 |
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Item 2.
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Properties.
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8 |
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Item 3.
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Legal Proceedings.
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9 |
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Item 4.
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Mine Safety Disclosures.
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9 |
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PART II
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10 |
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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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10 |
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Item 6.
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Selected Financial Data.
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12 |
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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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12 |
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk.
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16 |
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Item 8.
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Financial Statements and Supplementary Data.
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16 |
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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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44 |
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Item 9A.
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Controls and Procedures.
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44 |
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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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48 |
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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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54 |
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence.
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56 |
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Item 14.
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Principal Accountant Fees and Services.
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59 |
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PART IV
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61 |
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Item 15.
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Exhibits and Financial Statement Schedules
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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
ITEM 1. BUSINESS.
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 and third sales in the last 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 most types of contaminated fresh or service water, including seawater that may be found at a first response emergency site. This system is uniquely mobile, by helicopter or transported by 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 from contaminated fresh or surface 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.
Recent Developments
We have recently entered into two agreements with regard to the engineering and distribution and sale of our PureSafe™ First Response Water System” line of mobile water decontamination and purification systems. On January 24, 2013, we signed an Engineering Package Agreement (“ETG Agreement”) with ETG/Engineering Technologies Group, Inc. (“ETG”), Hopkinton, Massachusetts, for ETG to provide detailed electronic engineering drawings and purchase specifications for our water purification and filtration product, an engineering package to facilitate the outsourcing of the assembly, sub-assembly and manufacturing of our product. On January 25, 2013, we entered into an Exclusive Sales and Marketing Agreement (the “Distribution Agreement”) with Global Equipment Marketing, Inc. (“GEM”), Hopkinton, Massachusetts, a distribution and marketing company. Under the Distribution Agreement GEM is, on an exclusive basis, responsible for promoting and selling our products at their cost and expense. GEM will sell and market the products under a dba entitled PureSafe Water Systems Sales, and all products will be sold under our brand name. GEM will sell and market our products to end users worldwide and will receive a discount from the list prices of our products in connection with sales to its dealers, distributors, representatives and resellers. Under the Distribution Agreement, we remain responsible for the design and manufacturing of our products. The initial term of the Distribution Agreement is five years, renewable for subsequent one year terms if neither party gives notice of termination.
Products
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. 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.
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. We moved our headquarters into the manufacturing facility in March 2012. In January of 2013 we entered into an Engineering Package Agreement with ETG/Engineering Technologies, Group, Inc. The Company plans to have the ability to meet future market demands by having the capability to outsource production of our product
Components
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 well as a permanent solution to 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 small end of the marketplace for inexpensive more personal water filtration needs.. The municipal solution requires significant investment for infrastructure development ( e.g ., building plants and laying miles of distribution pipes). Products for residential or remote developing world 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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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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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 –. In January 2013 we entered into a strategic and exclusive agreement with Global Equipment Marketing, Inc. (GEM). GEM will sell and market our products as a dba PureSafe Water System Sales.
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Direct Marketing and Sales – The marketing and sales plan will initially focus on short term developed business opportunities where money is currently available. The sales effort will be by both direct sales, development of an international dealer distribution network, and through the assistance of sales consultants and respresentatives.
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Intellectual Property
The Company filed for a U.S. continuation patent for the PureSafe FRWS on October15, 2009 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 necessarily protect 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
We expect that continued research and development will be conducted by ETG/Engineering Technologies Group, Inc. going forward after they complete their initial task under the agreement in place.
Our expenditures for research and development activities in fiscal 2012 were $62,032, and in fiscal 2011 were $199,617.
Insurance
The Company maintains a $2 million general business liability policy. We believe such insurance coverage to be adequate for our 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 20, 2013, the Company employed a Chief Executive Officer, a Chief Financial Officer, a Chief Operating Officer, a Controller, one full time administrative employee in our headquarters and two full time staff in the production facility.
We have no collective bargaining agreement with any of our employees.
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 $2.5 million additional capital. Due to our strategic alliance with GEM and ETG our financial requirements have been reduced. We anticipate that this amount of capital, if fully raised, will satisfy our financial obligations for approximately 24 months. 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 - inception in 1987 of approximately $45 million and $2.8 million for the year ended December 31, 2012 and have a working capital deficiency of approximately $4.6 million as of December 31, 2012. 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 $2,000,000 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 productin 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.
Until March 2012, we maintained our principal place of business at 25 Fairchild Avenue - Suite 250, Plainview, NY 11803 under a 7-year lease expiring in April 2015. The lease calls for a monthly base rent of $5,502 through June 2012 with annual increases in the monthly base rent. We are required to pay for all applicable utilities, maintenance costs and real estate taxes, which averaged approximately $3,200 per month during the period in 2011. The facility has 5,300 square feet in space and served as our headquarters, executive offices, and showroom.
In March 2012 management exercised a Good Guy Clause” in its lease and abandoned the space at 25 Fairchild Avenue. Accordingly the Company recorded a charge of $34,707 for the loss on abandonment of property. The landlord Fairchild Warehouse Assoc., LLC is claiming damages on the abandonment of the space.
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, as well as its’ headquarters 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.
On June 28, 2012, the Company signed a lease renewal agreement to extend our lease at 160 Dupont Street for another three years with minimum annual lease payments due under this lease are $134,160 for 2013, $138,185 for 2014 and $70,114 for 2015.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a defendant in a suit in the Supreme Court of the State of New York, County of Nassau, filed by Fairchild Warehouse Associates, LLC, as plaintiff, for recovery of past rental payments for the Company’s former office space at 25 Fairchild Avenue, Plainview, New York 11803, with money damages requested in the amount of $141,721.
The Company on April 4, 2013, was served with a summons and complaint, filed with the Supreme Court of the State of New York, County of New York, by Levin Consulting Group LLC, as plaintiff, where the plaintiff is claiming that additional shares of the Company’s Common Stock are issuable by the Company to plaintiff in connection with the exercise by plaintiff of a common stock purchase warrant issued by the Company.
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.
|
Quarter Ended
|
|
High Bid Price
|
|
|
Low Bid Price
|
|
|
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
|
|
| |
|
|
|
|
|
|
|
|
|
March 31, 2012
|
|
|
0.066
|
|
|
|
0.04
|
|
|
June 30, 2012
|
|
|
0.062
|
|
|
|
0.02
|
|
|
September 30, 2012
|
|
|
0.018
|
|
|
|
0.01
|
|
|
December 31, 2012
|
|
|
0.02
|
|
|
|
0.003
|
|
| |
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
0.019
|
|
|
|
0.008
|
|
Holders
As of April 5, 2013, we had approximately 565 stockholders of record.
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, 2012 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.
|
Plan Category
|
|
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
|
|
|
$
|
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.
|
Date of Grant/Issuance
|
|
Number of Warrants Granted
|
|
Exercise Price
|
|
Expiration Date
|
|
Name of Holder, if a Director or Executive Officer
|
| |
|
|
|
|
|
|
|
|
|
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
|
|
11/28/16
|
|
CFO
|
|
01/01/12
|
|
215,517
|
|
0.0580
|
|
01/01/15
|
|
CEO
|
|
01/01/12
|
|
215,517
|
|
0.0580
|
|
01/01/15
|
|
CFO
|
|
01/01/12
|
|
215,517
|
|
0.0580
|
|
01/01/15
|
|
Director
|
|
01/01/12
|
|
215,517
|
|
0.0580
|
|
01/01/15
|
|
Director
|
|
01/01/12
|
|
215,517
|
|
0.0580
|
|
01/01/15
|
|
Director
|
|
04/02/12
|
|
260,417
|
|
0.0480
|
|
04/02/15
|
|
CEO
|
|
04/02/12
|
|
260,417
|
|
0.0480
|
|
04/02/15
|
|
CFO
|
|
04/02/12
|
|
260,417
|
|
0.0480
|
|
04/02/15
|
|
Director
|
|
04/02/12
|
|
260,417
|
|
0.0480
|
|
04/02/15
|
|
Director
|
|
04/02/12
|
|
260,417
|
|
0.0480
|
|
04/02/15
|
|
Director
|
|
06/04/12
|
|
30,000
|
|
0.0430
|
|
06/07/15
|
|
|
|
06/07/12
|
|
20,000
|
|
0.0430
|
|
06/07/15
|
|
|
|
07/02/12
|
|
367,647
|
|
0.0340
|
|
07/02/15
|
|
CEO
|
|
07/02/12
|
|
367,647
|
|
0.0340
|
|
07/02/15
|
|
CFO
|
|
07/02/12
|
|
367,647
|
|
0.0340
|
|
07/02/15
|
|
Director
|
|
07/02/12
|
|
367,647
|
|
0.0340
|
|
07/02/15
|
|
Director
|
|
10/25/12
|
|
15,000,000
|
|
0.0060
|
|
10/25/17
|
|
CEO
|
|
10/25/12
|
|
15,000,000
|
|
0.0060
|
|
10/25/17
|
|
CFO
|
|
10/25/12
|
|
3,000,000
|
|
0.0060
|
|
10/25/17
|
|
COO
|
|
10/25/12
|
|
1,500,000
|
|
0.0060
|
|
10/25/17
|
|
Director
|
|
10/25/12
|
|
1,500,000
|
|
0.0060
|
|
10/25/17
|
|
Director
|
|
11/05/12
|
|
961,538
|
|
0.0130
|
|
11/05/15
|
|
CEO
|
|
11/05/12
|
|
961,538
|
|
0.0130
|
|
11/05/15
|
|
CFO
|
|
11/05/12
|
|
961,538
|
|
0.0130
|
|
11/05/15
|
|
Director
|
|
11/05/12
|
|
961,538
|
|
0.0130
|
|
11/05/15
|
|
Director
|
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:
|
•
|
select the persons, to whom awards will be granted,
|
|
•
|
determine the number of shares to be covered by each award,
|
|
•
|
determine the type, nature, amount, pricing, timing and other terms of each award, and
|
|
•
|
interpret, construe and implement the provisions of the 2008 Plan, including the authority to adopt rules and regulations.
|
Participation in the 2008 Plan is limited to our:
|
•
|
employees, including officers,
|
Under the 2008 Plan, we are authorized to award:
|
•
|
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, 2012 and through March 31, 2013, 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 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, was re-certified in April 2011 and January 2013, 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. 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.
Under our Exclusive Sales and Marketing Agreement with GEM present and future distributors and representatives will be integrated with GEM’s existing worldwide distributor network. GEM has appointed a Product Manager for our technology.
We entered into an Engineering Package Agreement in January 2013 with ETG/Engineering Technologies Group, Inc. ETG will re-engineer and value engineer the system so that production can be outsourced. This should allow for the Company to meet future demands for the product.
Theresa Bischoff joined the Board of Directors on January 7, 2013 and John Gibb resigned from the Board as he had a conflict with a new appointed position in Mass.
We have sold three FRWS units, one being sold to an end user in the oil and gas exploration business in Texas ( delivered in Dec 2011), the second sold to the Department of Military and Veterans Affairs for the State of Alaska (delivered in the first quarter of 2012) and the third sold to the State of Vera Cruz, Mexico in the fourth quarter of 2012. All of the sold units were manufactured in our production facility.
In March 2012 we participated in the Long Island Capital Alliance/Homeland Security Conference and presented PureSafe to an investment community audience.
In May 2012 we demonstrated our system at the LI/NYC Emergency Responder Conference in Uniondale, NY. This is a statewide conference focusing on Emergency Response issues.
Plan of Operations
Our plans for the next twelve months include;
Raising $2.5 million in capital in two tranches, $1.0 million within the first six months of 2013 and an additional $1.5 million if needed in the fourth quarter of 2013.
| |
●
|
With our new strategic alliance with Global Equipment Marketing, Inc. (GEM) we anticipate additional sales volume to commence in the second quarter of 2013.
|
| |
●
|
The engineering package is expected to be completed by ETG/Engineering Technologies Group, Inc. by the second quarter of 2013.
|
| |
●
|
Identify strategic outsourced facilities to assemble our product in conformity with our detailed engineering drawings.for standardization.
|
| |
●
|
GEM will identify marketing opportunities both domestically and internationally.
|
| |
●
|
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.
|
| |
●
|
Restructuring the liability side of the Balance Sheet to clean up outstanding debt
|
| |
●
|
Examining options in recapitulation of the Company
|
| |
●
|
Creating a strong investor relations program to expand our shareholder base and to disseminate information about our Company
|
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, 2012, our stockholders’ deficiency was $4,483,108 as compared to $3,680,358 at December 31, 2011. Negative working capital was $4,610,445 at December 31, 2012 as compared to $3,924,608 at December 31, 2011.
We continue to suffer recurring losses from operations and have an accumulated deficit since inception (1987) of approximately $45 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 $2.5 million in the next twelve months. This reduced funding requirement takes into consideration a reduction in our burn rate and the alliance with GEM and ETG.
We believe that based on the new dynamics with our strategic relationship, the Company can be cash positive with the sale of 12 FRWS units.
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 $495,000 revenues for the year ended December 31, 2012 and $287,215 for the year ended 2011, respectively.
Cost of goods sold. Cost of goods sold for the year ended December 31, 2012 was $669,535 and 2011 was $399,350.
Selling, general and administrative. Selling, general and administrative expenses for the year ended December 31, 2012 was $2,442,130, compared to $2,984,959 for the 2011 fiscal year, a $542,829 or 18% decrease.
The 18%, or $542,829, decreased was the result of management decision to utilize limited funds on vital activities and scaled back on activities that the management deemed not urgent at this time.
The followings are analysis into some other categories that also have significant fluctuations between 2012 and 2011. Consulting fees decreased $27,250 from $45,500 in 2011 to $18,250 in 2012. Insurance increased $10,320 from $73,237 to $83,557 in 2012. The increase was mainly from the increase of workers’ compensation insurance premium. Total auto expense decreased $26,906 from $44,148 in 2011 to $17,242 in 2012. Directors’ fees decreased $117,000 from $225,000 in 2011 to $108,000 in 2012. The warrants were valued at fair value, using black-scholes model on the date the warrants were awarded. Although general marketing related expenses decreased $59,449, from $72,158 in 2011 to $12,709 in 2012, because of a one-time adjustment we made to accrue $161,111 consulting fee to a consultant in 2012, total marketing expense increased $77,895 from $135,658 in 2011 to $213,553 in 2012. Stock-based compensation decreased $1,353,611 from $1,821,711 in 2011 to $449,700 in 2012. The 1,353,611 or 74% decrease in Stock-based compensation are the combination of two factors: 1.) we have awarded approximately 4 million less of shares of common stock in 2012 than in 2011 for service, compensation, etc.; 2.) the market price of our share in 2012 is much lower than in 2011, thus the fair value of the stock-based compensation were lower. Amortization expense increased $123,054 from $8,479 in 2011 to $131,532 in 2012 was largely due to the high financing cost in connection with our financing activities in 2012.
Research and development. Research and development expenses in 2012 were $62,032, compared to $199,617 in 2011, a decrease of $137,585 or 69%. In 2011, we spent approximately $200,000 in Research & development making modifications and reengineering based on the firs FRWS prototype we built in 2010. In 2012, we focused most of our resources on production activities and scaled back the funds available to research and development. 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.
Interest expense - non-debt discount related incurred in 2012 and 2011 was $365,529 and $258,389, respectively. The $107,140 or 41% 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.
Interest expense - debt discount related Debt discount related interest expense incurred in 2012 and 2011 was $796,040 and $462,843, respectively, a $333,197 or 72% increase. Most debt discount related interest expense incurred in 2012 is related to an aggregate total of $1,084,361 convertible loans we received in 2012.
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, 2012 and 2011 were $998,300 and $362,800 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.
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 2012 and 2011. 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, 2012 was $0.004 which was significantly lower compared with $0.058, the closing price per share for prior period.
Liquidity and Capital Resources
As of December 31, 2012, we maintained a cash balance of $63,571 as compared to $118,228 at December 31, 2011 a decrease in the cash balances of $54,657.
Net cash used in the operating activities was $974,400 and $1,646,860 in 2012 and 2011, respectively.
Net cash used in capital expenditures in 2012 and 2011 was $0 and $7,400 respectively.
We raised $412,270 and $442,000 through sales of our common stock, in 2012 and 2011 respectively. We received $0 from investors who exercised their warrants to purchase common stock in 2012 and $236,420 raised through the exercise of warrants in 2011. We raised $768,500 and $425,000 through debt financing in 2012 and 2011 respectively. Proceeds received from officers and directors’ loans were $105,000 and $225,000 in 2011 and 2010 respectively. Cash Paid for loan costs were $130,024 and $14,250 in 2012 and 2011 respectively. We repaid $104,000 and $40,000 loan principal in 2012 and 2011 plus accrued interest to our Chief Executive Officer and Chief Financial Officer.
From all the above activities, net cash provided by financing activities was $919,740 and $1,605,730, in 2012 and 2011, 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,
|
|
| |
|
2012
|
|
|
2011
|
|
|
Risk-free interest rate
|
|
|
0.36
|
%
|
|
|
0.36
|
%
|
|
Expected life, in years
|
|
3 years
|
|
|
3 years
|
|
|
Expected volatility
|
|
|
117
|
%
|
|
|
112
|
%
|
|
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 2012 or 2011, 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
|
|
|
17 |
|
|
Consolidated Balance Sheets as of December 31, 2012 and 2011
|
|
|
18 |
|
|
Consolidated Statements of Operations for the Years Ended December 31, 2012 and 2011
|
|
|
19 |
|
|
Consolidated Statements of Changes in Stockholders’ Deficiency for the Years Ended December 31, 2012 and 2011
|
|
|
20 |
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011 and 2011
|
|
|
21 |
|
|
Notes to Consolidated Financial Statements
|
|
|
22 |
|
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, 2012 and 2011 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, 2012 and 2011 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, 2012 and 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
Marcum LLP
New York, New York
April 16, 2013
PureSafe Water Systems, Inc. and Subsidiary
Consolidated Balance Sheets
| |
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
ASSETS
|
| |
|
Current Assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
63,571
|
|
|
$
|
118,228
|
|
|
Inventories
|
|
|
322,718
|
|
|
|
498,093
|
|
|
Prepaid expenses and other current assets
|
|
|
54,478
|
|
|
|
56,674
|
|
|
Total Current Assets
|
|
|
440,767
|
|
|
|
642,995
|
|
| |
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation of $164,710 and $151,760, respectively
|
|
|
49,014
|
|
|
|
136,718
|
|
|
Patents and trademarks, net of accumulated amortization of $41,816 and $35,712, respectively
|
|
|
58,068
|
|
|
|
64,1726
|
|
|
Other assets
|
|
|
28,451
|
|
|
|
58,560
|
|
|
TOTAL ASSETS
|
|
$
|
576,300
|
|
|
$
|
902,445
|
|
| |
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
695,589
|
|
|
$
|
582,446
|
|
|
Accrued compensation
|
|
|
972,286
|
|
|
|
402,249
|
|
|
Deferred Rent Payable
|
|
|
7,050
|
|
|
|
32,800
|
|
|
Accrued consulting and director fees
|
|
|
144,000
|
|
|
|
144,000
|
|
|
Customer deposits
|
|
|
149,588
|
|
|
|
130,000
|
|
|
Convertible notes payable to officers and directors (including accrued interest of $138,132 and $83,932 and net of debt discount of $0 and $12,623, respectively)
|
|
|
811,132
|
|
|
|
743,309
|
|
|
Convertible promissory notes (including accrued interest of $141,564 and $83,929 and net of debt discount of $80,606 and $39,923 respectively)
|
|
|
1,111,110
|
|
|
|
989,006
|
|
|
Promissory notes payable (including accrued interest of $220,295 and $190,521, respectively)
|
|
|
706,829
|
|
|
|
838,265
|
|
|
Fair value of detachable warrants and conversion option
|
|
|
263,300
|
|
|
|
515,200
|
|
|
Accrued dividends payable
|
|
|
190,328
|
|
|
|
190,328
|
|
|
Total Current Liabilities
|
|
|
5,051,212
|
|
|
|
4,567,603
|
|
| |
|
|
|
|
|
|
|
|
|
Long Term Liabilities:
|
|
|
|
|
|
|
|
|
|
Notes Payable
|
|
|
8,196
|
|
|
|
15,200
|
|
|
Total Long Term Liabilities
|
|
|
8,196
|
|
|
|
15,200
|
|
|
TOTAL LIABILITIES
|
|
|
5,059,408
|
|
|
|
4,582,803
|
|
| |
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Stockholders' Deficiency:
|
|
|
|
|
|
|
|
|
|
Preferred stock $.001 par value; 10,000,000 shares authorized; 184,195 and 184,144 shares issued and outstanding as of December 31, 2012 and 2011, respectively. (liquidation preference $2,917,150 and $2,808,850, as of December 31, 2012 and December 31, 2011, respectively)
|
|
|
184
|
|
|
|
184
|
|
|
Common stock, $.001 par value; 800,000,000 authorized;561,343,935 shares issued and 561,339,535 shares outstanding at December 31, 2012; 340,389,004 shares issued and 340,384,604 outstanding at December 31, 2011
|
|
|
561,343
|
|
|
|
340,388
|
|
|
Additional paid-in capital
|
|
|
40,423,615
|
|
|
|
38,667,448
|
|
|
Treasury Stock, at cost, 4,400 shares of common stock
|
|
|
(5,768
|
)
|
|
|
(5,768
|
)
|
|
Subscriptions receivable - (including accrued interest of $93,825 and $73,538, respectively)
|
|
|
(431,025
|
)
|
|
|
(410,738
|
)
|
| |
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(45,031,457
|
)
|
|
|
(42,271,872
|
)
|
|
Total Stockholders’ Deficiency
|
|
|
(4,483,108
|
)
|
|
|
(3,680,358
|
)
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY
|
|
$
|
576,300
|
|
|
$
|
902,445
|
|
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,
|
|
| |
|
2012
|
|
|
2011
|
|
|
Sales
|
|
$
|
495,000
|
|
|
$
|
287,215
|
|
| |
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
669,535
|
|
|
|
399,350
|
|
| |
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
|
(174,535
|
)
|
|
|
(112,135
|
)
|
| |
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Compensation and related benefits, including stock-based compensation of $449,700 and $1,175,225 for the years ended December 31, 2012 and 2011, respectively
|
|
|
1,232,140
|
|
|
|
1,821,711
|
|
| |
|
|
|
|
|
|
|
|
|
Insurance and medical benefits
|
|
|
83,557
|
|
|
|
73,237
|
|
| |
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
62,032
|
|
|
|
199,617
|
|
| |
|
|
|
|
|
|
|
|
|
Professional, legal and consulting fees
|
|
|
212,145
|
|
|
|
201,007
|
|
| |
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
213,553
|
|
|
|
135,658
|
|
| |
|
|
|
|
|
|
|
|
|
Occupancy
|
|
|
263,116
|
|
|
|
267,969
|
|
| |
|
|
|
|
|
|
|
|
|
Loss on abandonment of property
|
|
|
34,709
|
|
|
|
--
|
|
| |
|
|
|
|
|
|
|
|
|
Other administrative and general
|
|
|
340,879
|
|
|
|
285,760
|
|
| |
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
2,442,130
|
|
|
|
2,984,959
|
|
| |
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(2,616,665
|
)
|
|
|
(3,097,094
|
)
|
| |
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Other income
|
|
|
20,349
|
|
|
|
20,379
|
|
| |
|
|
|
|
|
|
|
|
|
Interest expense, including interest to related parties of $70,720 and $65,731 for the years ended December 31, 2011 and 2010, respectively
|
|
|
(1,161,569
|
)
|
|
|
(721,233
|
)
|
| |
|
|
|
|
|
|
|
|
|
Change in fair value of warrants and embedded conversion options
|
|
|
998,300
|
|
|
|
362,800
|
|
| |
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
(142,920
|
)
|
|
|
(338,054
|
)
|
| |
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(2,759,585
|
)
|
|
|
(3,435,148
|
)
|
| |
|
|
|
|
|
|
|
|
|
Dividend on preferred stock
|
|
|
(108,300
|
)
|
|
|
(108,300
|
)
|
| |
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Common Stockholders’
|
|
$
|
(2,867,885
|
)
|
|
$
|
(3,543,448
|
)
|
| |
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Common Stockholders Per Share basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
| |
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
380,943,197
|
|
|
|
331,986,316
|
|
The accompanying notes are an integral part of these consolidated financial statements.
PureSafe Water Systems, Inc. and Subsidiary
Condensed Consolidated Statement of Stockholders’ Deficiency
For the Year ended December 31, 2012
| |
|
Preferred Stock
|
|
|
Common Stock
|
|
|
|
|
|
|
|
Subscription
|
|
|
Accumulated
|
|
|
|
|
| |
|
Shares |
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
At Cost
|
|
|
Receivable
|
|
|
Deficit
|
|
|
Deficiency
|
|
|
BALANCE – January 1, 2011
|
|
|
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 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock:
|
|
|
-- |
|
|
|
-- |
|
|
|
51,227,383 |
|
|
|
51,227 |
|
|
|
361,043 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
412,270 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for loan conversion
|
|
|
-- |
|
|
|
-- |
|
|
|
158,491,010 |
|
|
|
158,491 |
|
|
|
693,061 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
851,552 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
|
-- |
|
|
|
-- |
|
|
|
2,674,038 |
|
|
|
2,675 |
|
|
|
165,225 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
167,900 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with debt
|
|
|
-- |
|
|
|
-- |
|
|
|
4,375,000 |
|
|
|
4,375 |
|
|
|
170,625 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
175,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for settlement of customer deposits (includes $37,500 of stock based compensation)
|
|
|
-- |
|
|
|
-- |
|
|
|
4,187,500 |
|
|
|
4,188 |
|
|
|
163,312 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
167,500 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series B Preferred Stock
|
|
|
51 |
|
|
|
|
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative liability
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(80,100 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(80,100 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued for services
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
283,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
283,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(20,287 |
) |
|
|
-- |
|
|
|
(20,287 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,759,585 |
) |
|
|
(2,759,585 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE- December 31, 2012
|
|
|
184,195 |
|
|
$ |
184 |
|
|
|
561,343,935 |
|
|
$ |
561,343 |
|
|
$ |
40,423,615 |
|
|
$ |
(5,768 |
) |
|
$ |
(431,025 |
) |
|
$ |
(45,031,457 |
) |
|
$ |
(4,483,108 |
) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
PureSafe Water Systems, Inc. and Subsidiary
Consolidated Statements of Cash Flows
| |
|
Years Ended December 31,
|
|
| |
|
2012
|
|
|
2011
|
|
| |
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,759,585
|
)
|
|
$
|
(3,435,148
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities -
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
52,997
|
|
|
|
83,313
|
|
|
Amortization of patents and trademarks
|
|
|
6,104
|
|
|
|
6,104
|
|
|
Loss on abandonment of property
|
|
|
34,707
|
|
|
|
--
|
|
|
Financing cost, warrant extension
|
|
|
--
|
|
|
|
85,700
|
|
|
Interest expense – amortization of deferred financing cost
|
|
|
125,428
|
|
|
|
2,375
|
|
|
Interest expense – Penalty interest
|
|
|
9,000
|
|
|
|
--
|
|
|
Stock based compensation
|
|
|
505,600
|
|
|
|
1,175,225
|
|
|
Loss on conversion of convertible notes to notes payable
|
|
|
85,000
|
|
|
|
--
|
|
|
Deferred rent
|
|
|
(25,750
|
)
|
|
|
32,800
|
|
|
Interest receivable
|
|
|
(20,287
|
)
|
|
|
(20,232
|
)
|
|
Accretion of debt discount
|
|
|
796,040
|
|
|
|
462,843
|
|
|
Change in fair value of warrants and embedded conversion option
|
|
|
(998,300
|
)
|
|
|
(362,800
|
)
|
|
Change in assets and liabilities -
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
2,196
|
|
|
|
25,023
|
|
|
Inventories
|
|
|
145,375
|
|
|
|
(25,278
|
)
|
|
Other assets
|
|
|
34,705
|
|
|
|
(9,405
|
)
|
|
Customer deposits
|
|
|
149,588
|
|
|
|
130,000
|
|
|
Accounts payable, accrued expenses, accrued dividends, accrued compensation, accrued consulting and director fees, and other current liabilities
|
|
|
882,779
|
|
|
|
202,618
|
|
|
Net Cash Used in Operating Activities
|
|
|
(974,403
|
)
|
|
|
(1,646,860
|
)
|
| |
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
Patent costs
|
|
|
--
|
|
|
|
(7,400
|
)
|
|
Net Cash Used in Investing Activities
|
|
|
--
|
|
|
|
(7,400
|
)
|
| |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
412,270
|
|
|
|
442,000
|
|
|
Proceeds from exercise of warrants
|
|
|
--
|
|
|
|
236,420
|
|
|
Proceeds from convertible promissory note
|
|
|
768,500
|
|
|
|
425,000
|
|
|
Cash paid for loan costs
|
|
|
(130,024
|
)
|
|
|
(14,250
|
)
|
|
Proceeds from officers and directors convertible loans
|
|
|
105,000
|
|
|
|
225,000
|
|
|
Repayment of officers and directors loans
|
|
|
(104,000
|
)
|
|
|
(40,000
|
)
|
|
Proceeds from notes payable
|
|
|
75,000
|
|
|
|
337,092
|
|
|
Repayment of notes payable
|
|
|
(207,000
|
)
|
|
|
(5,532
|
)
|
| |
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
|
919,746
|
|
|
|
1,605,730
|
|
| |
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(54,657
|
)
|
|
|
(48,530
|
)
|
| |
|
|
|
|
|
|
|
|
|
Cash at beginning of year
|
|
|
118,228
|
|
|
|
166,758
|
|
| |
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
63,571
|
|
|
$
|
118,228
|
|
| |
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
28,837
|
|
|
$
|
32,939
|
|
| |
|
|
|
|
|
|
|
|
|
Non-Cash Investing Activities:
|
|
|
|
|
|
|
|
|
|
Purchase of Equipment through long term financing
|
|
$
|
--
|
|
|
$
|
--
|
|
| |
|
|
|
|
|
|
|
|
|
Non-Cash Financing Activities:
|
|
|
|
|
|
|
|
|
|
Compensation satisfied by issuance of common stock
|
|
$
|
--
|
|
|
$
|
--
|
|
| |
|
|
|
|
|
|
|
|
|
Common stock issued in satisfaction of liabilities
|
|
$
|
851,552
|
|
|
$
|
150,537
|
|
| |
|
|
|
|
|
|
|
|
|
Common stock issued in connection with debt
|
|
$
|
175,000
|
|
|
|
--
|
|
| |
|
|
|
|
|
|
|
|
|
Common stock issued for the settlement of a customer deposit
|
|
$
|
130,000
|
|
|
|
--
|
|
| |
|
|
|
|
|
|
|
|
|
Reclassification of equity instrument to derivative liabilities
|
|
$
|
(80,100
|
)
|
|
$
|
685,600
|
|
| |
|
|
|
|
|
|
|
|
|
Conversion of convertible notes payable to notes payable
|
|
$
|
185,000
|
|
|
$
|
--
|
|
| |
|
|
|
|
|
|
|
|
|
Conversion of notes payable and interest to convertible notes payable
|
|
$
|
207,770
|
|
|
$
|
--
|
|
| |
|
|
|
|
|
|
|
|
|
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 $2.9 million and $3.4 million for each of the years ended December 31, 2012 and 2011, respectively. The Company has a working capital deficit of approximately $4.6 million and $3.9 million, and a stockholders’ deficiency of approximately $4.5 million and $3.7 million at December 31, 2012 and 2011, respectively.
The Company continues to incur recurring losses from operations and has an accumulated deficit since inception (1987) of approximately $45 million. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that 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 Company’s continuation as a going concern is dependent upon the Company’s 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 plans with respect to these matters include restructuring our existing debt and raising additional capital through future issuances of stock and/or debt. The Company’s plans to raise an additional financing in the next twelve months.
The Company can provide no assurance that such financing will provide 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 of its operational activities.
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.
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, 2012 and 2011 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, 2012 and 2011.
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 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.
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,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Assumptions:
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.36
|
%
|
|
|
0.36
|
%
|
|
Expected life
|
|
3 years
|
|
|
3 years
|
|
|
Expected volatility
|
|
|
117
|
%
|
|
|
112
|
%
|
|
Dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Advertising and Marketing
Advertising and marketing costs are expensed as incurred and are included in selling, general and administrative expenses. The Company incurred a charge of approximately $213,553 and $135,658 for the years ended December 31, 2012 and 2011, respectively.
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
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 attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carry overs. Valuation allowances are established when necessary to reduce deferred assets to amounts more likely than not 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.
Total shares issuable upon the exercise of warrants and the conversion of preferred stock and convertible debt for the years ended December 31, 2012 and 2011, were comprised as follows:
|
|
|
As of December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Warrants
|
|
|
85,652,403
|
|
|
|
27,520,997
|
|
|
Convertible debt
|
|
|
187,297,345
|
|
|
|
19,564,618
|
|
|
Series F preferred stock
|
|
|
1,545,760
|
|
|
|
1,545,760
|
|
|
Total common stock equivalents
|
|
|
274,495,508
|
|
|
|
48,631,375
|
|
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:
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●
|
Level 1 – Inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
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|
|
●
|
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.
PureSafe Water Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Liabilities measured at fair value on a recurring basis at December 31, 2012 and 2011, respectively 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,
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion feature
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
68,800
|
|
|
$
|
68,800
|
|
|
Warrant and option liability
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
446,400
|
|
|
$
|
446,400
|
|
|
December 31, 2011
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
515,200
|
|
|
$
|
515,200
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion feature
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
224,000
|
|
|
$
|
224,000
|
|
|
Warrant and option liability
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
39,300
|
|
|
$
|
39,300
|
|
|
December 31, 2012
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
263,300
|
|
|
$
|
263,300
|
|
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.
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, 2012 and 2011.
|
|
|
Warrant
Liability
|
|
|
Embedded
Conversion Feature
|
|
|
Total
|
|
|
Balance January, 1, 2011
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in (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
|
|
|
|
693,930
|
|
|
Balance December 31, 2011
|
|
|
446,400
|
|
|
|
68,800
|
|
|
|
515,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in (income) expense
|
|
|
(537,700
|
)
|
|
|
(460,600
|
)
|
|
|
(998,300
|
)
|
|
Included in liabilities
|
|
|
28,100
|
|
|
|
621,000
|
|
|
|
649,100
|
|
|
Included in stock based compensation
|
|
|
17,200
|
|
|
|
--
|
|
|
|
17,200
|
|
|
Included in stockholder's equity
|
< |