================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from ___________ to ___________
Commission File Number 0-29192
T/F PURIFINER, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 14-1708544
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3020 High Ridge Road, Suite 100,
Boynton Beach, Florida 33426
(Address of principal executive offices) (Zip Code)
(561) 547-9499
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
____________________
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by the court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares
outstanding of each of the issuer's classes of common equity, as of the
latest practicable date: November 1, 1997: 5,205,879.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
T/F Purifiner, Inc.
Condensed Balance Sheet
September 30, 1997
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,140,086
Trade accounts receivable, net 170,555
Inventories 530,559
Prepaid expenses and other current assets, net 78,972
-----------
Total current assets 1,920,172
Property and equipment, net 349,418
Patents and trademarks, net 200,245
Costs in excess of net assets acquired, net 125,774
Other assets 57,345
-----------
$ 2,652,954
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 160,992
Accrued expenses 150,478
Customer deposits and other 112,888
Current portion of note payable and capital lease obligations 39,583
Note payable to shareholder, net of discount of $52,667 1,947,333
Note payable to former shareholder 103,468
-----------
Total current liabilities 2,514,742
Note payable to former shareholder 295,258
Note payable and capital lease obligations 45,670
Deferred rent 6,640
Liability to equity investee 16,000
-----------
Total liabilities 2,878,310
Contingencies
Stockholders' Equity:
Common Stock, $.001 par value 5,205
Preferred Stock, $.001 par value --
Additional paid-in-capital 6,752,332
Unearned compensation (35,333)
Loans receivable (73,931)
Accumulated deficit (6,873,629)
-----------
Total capital deficiency (225,356)
-----------
$ 2,652,954
===========
See accompanying notes to condensed financial statements
2
<PAGE>
T/F Purifiner, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended June 30,
-------------------------------- --------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 378,528 312,022 $ 1,219,825 $ 1,160,211
Cost of sales 201,097 249,580 694,966 758,131
----------- ----------- ----------- -----------
Gross profit 177,431 62,442 524,859 402,080
Operating expenses:
Selling 273,567 804,869 625,777 2,009,065
General and administrative 178,235 222,092 503,629 836,774
Deferred profit (7,117) (1,704) 12,323 (8,167)
----------- ----------- ----------- -----------
444,685 1,025,257 1,141,729 2,837,672
----------- ----------- ----------- -----------
Operating loss (267,254) (962,815) (616,870) (2,435,592)
Other income (expense):
Interest expense (7,018) (80,391) (24,417) (96,366)
Interest income -- 20,169 -- 49,229
----------- ----------- ----------- -----------
Net loss $ (274,272) $(1,023,037) $ (641,287) $(2,482,729)
=========== =========== =========== ===========
Loss per common share $ (.08) $ (.20) $ (.20) $ (.48)
=========== =========== =========== ===========
Weighted average common 3,627,495 5,186,076 3,151,423 5,154,987
shares outstanding ========= ========= ========= =========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
T/F Purifiner, Inc.
Condensed Statements of Changes
in Stockholders' Equity (Capital Deficiency)
(Unaudited)
<TABLE>
<CAPTION>
Total
Common Stock Additional Stockholders'
----------------------- Paid-In- Unearned Loans Accumulated Equity (Capital
Shares Amount Capital Compensation Receivable Deficit Deficiency)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 5,097,080 $ 5,097 $ 6,323,505 $(123,114) $ -- $(4,390,900) $ 1,814,588
Cancellation of common stock (8,676) (9) (22,491) -- -- -- (22,500)
Exercise of stock options, net 116,975 117 238,469 -- (73,931) -- 164,655
Issuance of compensatory
stock options and warrants -- -- 92,849 (92,849) -- -- --
Amortization of unearned
compensation -- -- -- 180,630 -- -- 180,630
Issuance of Stock Purchase
Warrant -- -- 120,000 -- -- -- 120,000
Net loss -- -- -- -- -- (2,482,729) (2,482,729)
---------------------------------------------------------------------------------------------
Balance at September 30, 1997 5,205,379 $ 5,205 $ 6,752,332 $ (35,333) $(73,931) $(6,873,629) $ (225,356)
=============================================================================================
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
T/F Purifiner, Inc.
Condensed Statements of Cash Flows
Nine months ended September 30, 1996 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Operating activities $ (641,287) $(2,482,729)
Net loss
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization 12,021 102,403
Issuances of Common Stock compensatory options
and warrants 27,679 180,630
Cancellation of common stock -- (10,000)
Depreciation and amortization of property and equipment 24,712 56,701
Changes in operating assets and liabilities:
Trade accounts receivable, net (72,636) (43,749)
Inventories (102,763) (90,320)
Prepaid expenses and other current assets (33,060) (36,491)
Other assets (5,839) (10,504)
Accounts payable - trade (17,527) (153,242)
Accrued expenses 176,733 73,401
Customer deposits and other 37,475 (142,737)
Accrued interest and other payables - related parties (58,417) --
Deferred rent (1,484) (6,750)
----------- -----------
Net cash used in operating activities (654,393) (2,563,387)
Investing activities
Patents and trademarks (183,302) (56,475)
Purchases of property and equipment (69,644) (184,802)
Acquisition of DB Filters (1,275) --
(Increase) decrease in other assets, net (33,362) 6,100
Increase in note receivable from shareholder/officer -- (200,000)
Decrease in note receivable from shareholder/officer -- 200,000
----------- -----------
Net cash used in investing activities (287,583) (235,177)
Financing activities
Increase in deferred issuance and financing costs (92,300) (70,325)
Proceeds from issuances of Common Stock and
exercise of stock options, net 976,155 1,193,749
Collection of subscription receivables 7,000 --
Proceeds from notes payable 225,000 20,200
Payment on notes payable and capital lease obligations (34,996) (23,283)
Proceeds from shareholder loans 16,000 2,000,000
Payment on shareholder loans (51,213) --
Payment on former shareholder loans -- (103,300)
Borrowing from investee 25,000 20,875
Repayment to investee (41,612) (28,226)
----------- -----------
Net cash provided by financing activities 1,029,034 3,009,690
----------- -----------
Increase in cash and cash equivalents 87,058 211,126
Cash and cash equivalents at beginning of period 31,732 928,960
----------- -----------
Cash and cash equivalents at end of period $ 118,790 $ 1,140,086
=========== ===========
During 1997 and 1996, the Company entered into capital lease obligations in the amount
of approximately $49,000 and $7,500, respectively.
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION AND COMPANY
The unaudited condensed financial statements as of September 30, 1997 and for
the three and nine month periods ended September 30, 1996 and 1997 are unaudited
and, in the opinion of management, include all adjustments (consisting only of
normal and recurring adjustments) necessary for a fair presentation of financial
position and results of operations for these interim periods. Such interim
financial statements have been prepared on the basis of presentation as more
fully described in the Company's annual financial statements and should be read
in conjunction with the Company's audited financial statements which are
included in the Company's Form 10-KSB. The results of operations for the nine
month period ended September 30, 1997 are not necessarily indicative of the
results to be expected for the entire year.
The Company has incurred recurring losses from operations since inception, which
has resulted in continuing cash flow difficulties and the continuing need for
additional financing. These factors raise substantial doubt about the Company's
ability to continue as a going concern. In order to continue as a going concern,
the Company must obtain additional financing, which it is endeavoring to do
through the issuance of additional securities.
However, there is no assurance that the Company can complete its proposed
issuances or that it can obtain adequate additional financing from other sources
or that profitable operations can be sustained. The inability to obtain
additional financing when needed, would have a material adverse effect on the
Company, including requiring the Company to curtail or cease its operations. The
financial statements do not include any adjustments relating to the
recoverability of recorded asset amounts that might be necessary as a result of
the above uncertainty.
At September 30, 1997, deferred issuance costs of approximately $32,000,
included in other assets, represent costs incurred by the Company in connection
with the Company's planned issuances of securities. Such costs will be charged
directly against the net proceeds of the related offering if it is successfully
completed or will be expensed if the offering is abandoned. At September 30,
1997 other current assets includes approximately $19,000 of deferred financing
costs, net, which represent costs associated with obtaining QIP debt financing
(Note 5)and are being amortized to interest expense over the remaining term of
the agreement.
2. INVENTORIES
At September 30, 1997, inventories consist of the following:
Raw materials $ 384,712
Finished goods 131,137
Supplies 14,710
---------
$ 530,559
=========
6
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
(Unaudited)
3. CONTINGENCIES
During 1995, the Company commenced a patent infringement case against a
competitor which is currently anticipated to go to trial in late 1997 or early
1998. The competitor subsequently asserted certain counterclaims against the
Company and certain of its employees. The ultimate outcome of these
counterclaims cannot currently be determined at this time but the Company
believes it has meritorious defenses and will eventually prevail in these
actions.
In April 1996, the Company became a party to an action filed by a former
independent contractor claiming certain commissions and other damages due him
pursuant to an agreement. Pursuant to the agreement, as adjudicated by the
Court, the Company will resolve this case through arbitration and, although the
ultimate outcome of this matter cannot be determined at this time, the Company,
upon advice of counsel, believes it has meritorious defenses and will eventually
prevail in this matter.
In January 1997, a patent holder filed an action against the Company for non
payment of approximately $21,000 of unpaid royalties claimed by him and seeking
a permanent injunction against the Company's manufacturing and selling of the
covered Purifiner products. The case is scheduled to go to trial in the summer
of 1998. Although the Company believes it has meritorious defenses against
certain of the monetary amounts alleged by the licensor patent owner, it has
offered to pay the patent holder such alleged unpaid royalties, which amount
relates primarily to the timing of the royalty payment and legal fees regarding
defending certain patents pending of the licensor. The Company, upon advice of
counsel, does not believe the license holder will be in a position to obtain an
injunction against the Company's manufacturing and selling of the Purifiner
products. However, the ultimate outcome of this matter cannot be determined at
this time.
In late 1996 and subsequently, TF Systems, Inc.'s former law firm claimed that
it was due approximately $313,000 in legal fees related primarily to obtaining
the manufacturing and marketing rights to the Purifiner for TF Systems, Inc.
("TFS") and the Company. TFS was awaiting the judgment of an appellate court
which, if adjudicated in TFS's favor, would have provided TFS with sufficient
funds to pay such legal fees and other possible legal fee claims from other
attorneys aggregating approximately $72,000 at September 30, 1997. On February
26, 1997, the appellate court ruled against TFS and, accordingly, the funds
discussed above are not currently available to TFS to satisfy such claims. T/F
Purifiner, Inc. did not assume these obligations as part of its purchase of TFS
and management believes such amounts are not the responsibility of T/F
Purifiner, Inc. On June 24, 1997, TFS's former law firm filed a complaint
7
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
(Unaudited)
3. CONTINGENCIES (CONTINUED)
against the Company, TFS, Richard C. Ford, individually and an inactive company
controlled by Richard C. Ford demanding payment of approximately $313,000 of
legal fees and costs, plus interest and attorney fees. The ultimate outcome of
this litigation and other unasserted claims against the Company cannot be
determined at this time. No liability has been recorded for any of these claims
in the accompanying balance sheet.
4. JOINT VENTURE
Effective January 1, 1996, the Company entered into a joint venture agreement
whereby such venture, TF Purifiner Ltd. ("Ltd"), will sell and distribute the
Company's product in Europe, the Middle East and certain African countries. The
Company has an approximate 45% interest in Ltd's operations (50% common stock
voting interest) and is accounting for Ltd using the equity method. The Company
is not required to fund Ltd and will sell product to Ltd until such time as Ltd
decides to exercise its rights under the agreement to manufacture the Company's
products. Ltd was initially capitalized with approximately $88,000 provided by
one of its shareholders. Through September 30, 1997, Ltd advanced the Company
approximately $137,000, to be used to fund certain patent and trademark filings
for the venture's exclusive territory. At September 30, 1997, approximately
$16,000 remained unexpended. For the three and nine months ended September 30,
1997 and 1996, the Company had sales of approximately $11,000 and $53,000 in
1997, respectively, and $6,000, and $248,000 in 1996, respectively, to Ltd at
negotiated prices. At September 30, 1997 and 1996, approximately $9,000 and
$12,000 has been deferred as unrealized intercompany profit related to the
inventory sold to Ltd which is included in Ltd's inventory at September 30, 1997
and 1996, respectively. The Company is currently in the process of renegotiating
this joint venture agreement relating to the ownership / licensing of various
pending patents filed by Ltd's funding shareholder, as well as other matters.
The ultimate outcome of these negotiations cannot be determined at this time.
At September 30, 1997 and 1996 summarized financial information of Ltd is as
follows:
1996 1997
---- ----
Total assets $363,000 $590,000
Total liabilities (1) 630,000 1,411,000
Capital deficiency (267,000) (821,000)
Total revenues 218,000 319,000
Gross profit 81,000 130,000
Net loss (267,000) (345,000)
(1) Includes approximately $1,355,000 and $559,000 at September 30, 1997 and
1996, respectively, of loans due to one of Ltd's foreign shareholders,
collateralized by substantially all the tangible assets of Ltd.
8
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
(Unaudited)
5. NOTE PAYABLE
On June 19, 1997, the Company and members of the Ford Family and Taylor Family
entered into a Securities Purchase Agreement with Quantum Industrial Partners
LDC ("QIP") ("the Agreement"). Pursuant to the Agreement, the Company issued QIP
a $2,000,000 non-interest bearing promissory note due December 19, 1997 and
received gross proceeds of $2,000,000. This note is subject to mandatory
prepayment prior to its due date upon the Company's consummation of a public
offering of either debt or equity securities. As long as this note is
outstanding, the Company cannot, without the consent of QIP, declare or pay any
dividends, purchase, redeem or acquire any of its Common Stock or retire its
existing indebtedness other than required periodic payments.
Additionally, the Company issued a Common Stock Purchase Warrant to QIP for the
purchase of 500,000 shares of the Company's Common Stock, exercisable at $2.75
per share and expiring on December 31, 2000. These warrants have been assigned a
value of $120,000 and, accordingly, such amount has been credited to additional
paid in capital and the $2,000,000 note payable has been recorded net of a
$120,000 discount which is being amortized to interest expense over the term of
the note.
The Company has also agreed to register securities of QIP under certain
circumstances.
6. COMMON STOCK
During the nine months ended September 30, 1997, 116,975 shares of Common Stock
were issued pursuant to the exercise of options at exercise prices ranging from
$2.00 to $6.00 per share. As of September 30, 1997, the Company had received
$164,655 in net cash proceeds and was owed $73,931, substantially all from
current or former employees, related to the cashless exercise of these options.
7. STOCK OPTIONS AND WARRANTS
During the nine months ended September 30, 1997, the Company granted 486,000
options (58,750 of which were subsequently cancelled upon termination of
employment) to purchase Common Stock to various employees at exercise prices
ranging from $4.50 to $10.00 and 60,000 options (40,000 of which were
subsequently cancelled upon termination of a consulting agreement) to
consultants at exercise prices of $9.00 and $9.50 per share. Additionally,
during this period, the Company granted 10,000 warrants to various consultants
which are exercisable at $9.50 per share and expire on January 27, 1999.
9
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
(Unaudited)
7. Stock Options and Warrants (Continued)
During the nine months ended September 30, 1997 and 1996, the Company expensed
approximately $181,000 and $13,200, respectively related to compensatory stock
options and warrants to various consultants and the Board of Advisors using the
Black-Scholes Option Pricing Model.
On July 17, 1997, the Board of Directors authorized an increase in the number of
shares of the Company's Common Stock which may be granted pursuant to the
Company's 1996 Stock Option Plan from 1,625,000 shares to 2.2 million shares.
8. Related Party Transaction
In January 1997, as amended, the Company loaned Richard C. Ford, its then
President and principal shareholder, $200,000 bearing interest at 10% per annum
and due in June 1997, secured by 40,000 shares of the Company's Common Stock
owned by Mr. Ford. On June 19, 1997, Mr. Ford repaid the entire principal and
accrued interest on this loan in the amount of $209,078.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Form 10-KSB.
Other than historical and factual statements, the matters and items discussed in
this Quarterly Report on Form 10-QSB are forward-looking statements that involve
risks and uncertainties. Actual results of the Company may differ materially
from the results discussed in the forward-looking statements. Certain factors
that could contribute to such differences are discussed with the forward-looking
statements throughout this report.
GENERAL
The Company was formed in 1987, and commenced limited operations in 1991 when it
obtained worldwide manufacturing and marketing rights to the Purifiner(R)
products. The acceptance of the Purifiner products is the result of various
factors, including the growing desire of users to extend oil change intervals,
reduce maintenance costs, extend engine life and preserve the environment. In
1997, the Company has been unable to significantly increase its revenues through
its current distribution network. Accordingly, the Company has recently
refocused certain of its resources on the development of commercial
relationships with original equipment manufacturers ("OEM's"), which the Company
believes will result in the increasing acceptance of the Purifiner products in
the marketplace and, accordingly, increase revenues. There can be no assurance
that such efforts to develop commercial OEM relationships will be successful.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain items reflected in the Company's statements of
operations.
Percentage of Revenues
----------------------
Nine months
Ended September 30,
-------------------
1996 1997
---- ----
Net sales 100% 100%
Operating costs and expenses:
Cost of sales (57) (65)
Selling expenses (51) (173)
General and administrative expenses (41) (72)
Other (1) -
----- -----
Total operating costs and expenses (150) (310)
----- -----
Operating loss ( 50)% (210)%
======= ======
11
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1996
Net Sales. Net sales decreased by 4.9% from $1,219,825 in 1996 to
$1,160,211 in 1997. This decrease was primarily attributable to the effect of
the Company's price reductions implemented in the last quarter of 1996. During
1996, the Company had approximately $248,000 of sales to Ltd, the Company's
joint venture formed in 1996 compared to approximately $53,000 in 1997.
Approximately, $9,000 of intercompany profit on these sales to Ltd have been
deferred at September 30, 1997.
Effective October 15, 1996, the Company implemented a new product pricing
strategy to reduce the Company's selling prices to enable end users to obtain a
significantly improved return on investment. The Company believed this new
strategy would promote the sale of the Company's products and result in
increased long-term revenues from unit and replacement filter sales and also
provide the Company with the ability to reduce its product costs, primarily
through 1) volume purchase discounts, 2) utilization of excess fixed
manufacturing capacity and 3) improved production processes. To date, the
Company has not realized the significant increase in revenues it had anticipated
as a result of lowering its selling prices and, accordingly, also did not
realize the anticipated cost savings related thereto. Therefore, the Company's
gross margin was adversely affected. Accordingly, effective November 1, 1997,
the Company revised its pricing strategy and increased the prices of
substantially all the Purifiner units in order to recapture various cost
increases from product improvements, material cost increases and to position the
Purifiner pricing to be in alignment with the Company's strategy to sell
Purifiners to Original Equipment Manufacturers ("OEM's"). The Company is
currently refocusing certain of its resources in an effort to sell the Purifiner
directly to OEM's. There can be no assurance that the OEM's will eventually
purchase the Purifiner from the Company.
Cost of Sales. Cost of sales increased by 9% from $694,966 in 1996 to
$758,131 in 1997. The Company's gross margin decreased from 43% to 34.7%,
substantially all due to the significant price reductions implemented in 1996,
cost increases to the product incurred primarily for improvements and excess
fixed cost manufacturing capacity offset by the reduction of sales made to Ltd.
at substantially lower sales prices than the Company's exclusive international
distributor pricing. Unless the Company can increase its revenues, its gross
margins will continue to be adversely affected by its excess fixed cost
manufacturing capacity.
Selling Expenses. Selling expenses increased by 221% from $625,777 in 1996
to $2,009,065 in 1997. The primary reasons for this increase were the increases
in various selling expenses such as salaries for new personnel and consultants,
compensatory stock options and warrants, commissions, office and related
expenses, brochures and catalogs, advertising, product evaluation and
engineering expenses, and travel and trade show expenses in 1997 versus 1996. As
a percentage of revenues, selling expenses increased from 51% in 1996 to 173% in
1997.
12
<PAGE>
Commencing in late 1996, but primarily in the first two quarters of 1997,
the Company began implementing a product evaluation program, whereby it would
supply Purifiner units, replacement filters and installation services at no cost
to certain potential customers or to assist its distributors potential
customers, to evaluate the effectiveness of the Purifiner. The costs related to
this evaluation program have been charged to selling expenses and no revenues
have been recognized. To the extent these evaluations are not successful or the
Company is unable to consummate these potential sales, the Company's future
revenues will be adversely effected.
General and Administrative Expenses. General and administrative expenses
increased by 66% from $503,629 in 1996 to $836,774 in 1997 and, as a percent of
revenues, increased from 41% to 72%. This dollar increase was generally due to
the increased level of business activity, specifically including increases in
personnel, consultants, compensatory stock options and warrants, travel, and
professional fees.
Operating Loss. As a result of the foregoing, the Company's operating loss
increased from $616,870 in 1996 to $2,435,592 in 1997.
Interest Expense and Income. Interest expense increased by 295% from
$24,147 in 1996 to $96,366 in 1997. This increase resulted from an increase in
average short and long term borrowings outstanding in 1997 versus the comparable
period in 1996, specifically the $2,000,000 short term loan from QIP. Interest
income increased to 49,229 in 1997 as a result of investing idle cash balances
and interest earned on notes receivable from its former president, which note
was repaid in June 1997.
Net Loss. As a result of the foregoing, the Company's net loss increased
from $641,287 for 1996 to $2,482,729 for 1997.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company's capital requirements in connection with its
business activities have been and will continue to be significant. To fund its
activities, the Company has been dependent upon available cash generated from
operations, the proceeds of sales of its securities to investors and
stockholders, and other loans, including its June 1997 short term borrowing from
QIP. The Company's 1996 auditors report included an explanatory paragraph which
stated that because the Company has sustained recurring operating losses and
negative cash flows from operating activities, these factors raise substantial
doubt about the Company's ability to continue as a going concern.
At September 30, 1997, the Company had a working capital deficiency of
$594,570 and its current ratio (current assets to current liabilities) was .76
to 1, as compared with working capital of $1,727,933 and a current ratio of 3.1
to 1 at December 31, 1996. At September 30, 1997, the Company had $1,140,086 of
cash and cash equivalents. Outstanding short-term debt from lenders and
shareholders was $2,090,384 at September 30, 1997 and included a former
shareholder loan of $103,468 due to the Estate of Willard Taylor on January 31,
1998 and $1,947,333 net of a discount of $52,667, due QIP on December 19, 1997.
13
<PAGE>
The proceeds from the QIP loan shall be used solely for general operating
expenses and to hire additional marketing employees for the Company. The balance
of long term debt was $340,928 at September 30, 1997, and included a former
shareholder loan of $295,258 due to the Estate of Willard Taylor.
At September 30, 1997, the Company owed approximately $323,000 in current
liabilities to various trade and other unrelated creditors. These creditors
continue to provide services to the Company; however, there can be no assurance
that they will continue to do so in the future while all or a portion of such
amounts remains outstanding. The Company has made certain payments and intends
to use a portion of existing funds and future financings to repay the amounts
due to creditors.
Consistent with industry practices, the Company may accept product returns
or provide other credits in the event that a distributor holds excess inventory
of the Company's products. The Company's sales are made on credit terms which
vary significantly depending on the nature of the sale. In addition, the Company
does not hold collateral to secure payment from its United States and Canadian
distributors. Therefore, a default in payment by one or more of the Company's
United States and Canadian distributors or customers could adversely affect the
Company's business, results of operations and financial condition. The Company
believes it has established sufficient reserves to accurately reflect the amount
or likelihood of product returns or credits and uncollectible receivables.
However, there can be no assurance that actual returns and uncollectible
receivables will not exceed the Company's reserves. Any significant increase in
product returns or uncollected accounts receivable beyond reserves could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company has not experienced material product returns or
uncollectible receivables in the past, however, there can be no assurance that
such trends will continue in the future.
Sales of the Company's products will depend principally on end user demand
for such products and acceptance of the Company's products by original equipment
manufacturers. The oil filtration industry has historically been competitive
and, as is typically the case with innovative products, the ultimate level of
demand for the Company's products is subject to a high degree of uncertainty.
Developing market acceptance, particularly worldwide, for the Company's existing
and proposed products will require substantial marketing efforts and the
expenditure of a significant amount of funds to inform customers of the
perceived benefits and cost advantages of its products.
The Company currently is not generating sufficient revenues to fund its
existing and planned expansion of its operations. Accordingly, the Company has
embarked and is implementing plans to raise additional capital. The Company
intends to use such additional financing to increase its marketing and sales
efforts, including the hiring of additional sales and technical personnel and
related costs, implementation of advertising, promotional and marketing
programs, and expanded engineering capabilities to deal more effectively with
original equipment manufacturers. Additionally, the Company may hire additional
manufacturing, operating, and administrative personnel and acquire additional
capital equipment and leasehold improvements, as required, as increased sales
levels are achieved. Prior to the due date of the Company's $2,000,000
14
<PAGE>
obligation to QIP, the Company plans on completing another financing which will
enable it to repay such loan to QIP and provide sufficient capital to continue
its expansion plans. However, there can be no assurance that such financing will
be successful.
The above is not an all inclusive listing of the Company's planned
expenditures. In the event that the proceeds from future offerings or financings
are not received, the Company will not be able to fully implement its current
plans. The inability to obtain additional financing when needed, would have a
material adverse effect on the Company, including requiring the Company to
curtail or cease its operations.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's operations.
However, any significant decrease in the price for oil or labor, environmental
compliance costs, and engine replacement costs could adversely impact the
Company's end users cost/benefit analysis as to the use of the Company's
products.
QUARTERLY FLUCTUATIONS
The Company's operating results may fluctuate significantly from period to
period as a result of a variety of factors, including product returns,
purchasing patterns of consumers, the length of the Company's sales cycle to key
customers and distributors, the timing of the introduction of new products and
product enhancements by the Company and its competitors, technological factors,
variations in sales by product and distribution channel, and competitive
pricing. Consequently, the Company's product revenues may vary significantly by
quarter and the Company's operating results may experience significant
fluctuations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
Exhibit 27 - Financial Data Schedule (Electronic filing only)
b) Reports on Form 8-K.
On July 21, 1997, the Company filed a report on Form 8-K reporting (1)
its entering into a Securities Purchase Agreement dated as of June 19,
1997 among Quantum Industrial Partners LDC, T/F Purifiner, Inc. and
members of the Ford and Taylor families and (2) the commencement of
certain legal proceedings against the Company.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
T/F PURIFINER, INC.
(Registrant)
Date: November 10, 1997 By /s/ Keith T.J. Hart
-----------------------
Keith T.J. Hart
Chief Executive Officer and
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF T/F PURIFINER, INC. FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,140,086
<SECURITIES> 0
<RECEIVABLES> 213,722
<ALLOWANCES> 43,167
<INVENTORY> 530,559
<CURRENT-ASSETS> 1,920,172
<PP&E> 534,320
<DEPRECIATION> 184,902
<TOTAL-ASSETS> 2,652,954
<CURRENT-LIABILITIES> 2,514,742
<BONDS> 0
0
0
<COMMON> 5,205
<OTHER-SE> (230,561)
<TOTAL-LIABILITY-AND-EQUITY> 2,652,954
<SALES> 1,160,211
<TOTAL-REVENUES> 1,160,211
<CGS> 758,131
<TOTAL-COSTS> 758,131
<OTHER-EXPENSES> 2,788,443
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96,366
<INCOME-PRETAX> (2,482,729)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,482,729)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,482,729)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.48)
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