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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, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission File Number 0-29192
PURADYN FILTER TECHNOLOGIES INCORPORATED
(Exact name of small business issuer as specified in its charter)
DELAWARE 14-1708544
(State or other jurisdiction (I.R.S. Employer 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)
(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 6, 1998: 5,223,493 .
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1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Puradyn Filter Technologies Incorporated
Condensed Balance Sheet
<TABLE>
<CAPTION>
September 30, 1998 December 31,
(Unaudited) 1997
----------- ----
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 27,562 $ 252,874
Trade accounts receivable, net 56,107 87,142
Inventories 359,736 529,440
Prepaid expenses and other current assets 3,248 112,477
-------- -------
Total current assets 446,653 981,933
Property and equipment, net 320,985 362,898
Other assets 17,903 17,139
-------- ----------
Total assets $785,541 $1,361,970
======== ==========
Liabilities and Capital Deficiency
Current Liabilities:
Accounts payable $223,774 $206,995
Accrued expenses 398,019 175,859
Customer deposits and other 46,464 96,540
Notes payable to shareholder 150,000 -
Note payable to bank 250,000 -
Current portion of notes payable and capital lease obligations 128,217 144,894
--------- -------
Total current liabilities 1,196,074 624,288
Notes payable to QIP, a shareholder, including interest 2,736,059 2,008,000
Note payable to former shareholder 191,121 295,024
Note payable and capital lease obligations 17,464 38,206
--------- ---------
Total liabilities 4,140,718 2,965,518
--------- ---------
Contingencies
Capital Deficiency:
Preferred stock, $.001 par value,
500,000 shares authorized - -
Common stock, $.001 par value,
20,000,000 shares authorized, 5,223,493
and 5,205,879 shares issued and outstanding 5,223 5,206
Additional paid-in-capital 7,309,201 7,297,522
Unearned compensatory options (6,250) (17,320)
Loans and subscriptions receivable (60,931) (73,931)
Accumulated deficit (10,602,420) (8,815,025)
----------- -----------
Total capital deficiency (3,355,177) (1,603,548)
----------- ------------
Total liabilities and capital deficiency $ 785,541 $ 1,361,970
=========== ============
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
Puradyn Filter Technologies Incorporated
Condensed Statements of Operations
For the Three Months and Nine Months Ended September 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $312,022 $152,516 $1,160,211 $501,261
Cost of sales 249,580 142,530 758,131 483,492
------- ------- ------- -------
Gross profit 62,442 9,986 402,080 17,769
------- ------- ------- -------
Operating expenses:
Selling 804,869 131,757 2,009,065 946,967
General and administrative 185,733 68,820 745,221 482,545
Engineering and development 36,359 18,513 91,553 128,329
Deferred profit (1,704) - (8,167) -
--------- --------- ----------- -----------
Total operating expenses 1,025,257 219,090 2,837,672 1,557,841
--------- --------- ----------- -----------
Operating loss (962,815) (209,104) (2,435,592) (1,540,072)
--------- --------- ----------- -----------
Other income (expense):
Interest expense (80,391) (93,415) (96,366) (253,346)
Interest income 20,169 248 49,229 6,023
--------- --------- ----------- -----------
Total other income (expense) (60,222) (93,167) (47,137) (247,323)
--------- --------- ----------- -----------
Net loss $(1,023,037) $(302,271) $(2,482,729) $(1,787,395)
=========== ========= =========== ===========
Basic and diluted loss per share $(.20) $(.06) $(.48) $(.34)
===== ===== ===== =====
Weighted average common
shares outstanding 5,186,076 5,218,636 5,154,987 5,210,572
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
Puradyn Filter Technologies Incorporated
Condensed Statements of Changes
in Capital Deficiency
For The Nine Months Ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Additional Unearned Total
Common Stock Paid-In- Compensatory Loans Accumulated Capital
Shares Amount Capital Options Receivable Deficit Deficiency
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 5,205,879 $5,206 $7,297,522 $(17,320) $(73,931) $(8,815,025) $(1,603,548)
Exercise of stock options, net 500 1,000 1,000
Collections of loans receivable 13,000 13,000
Issuance of common stock 17,114 17 10,679 10,696
Amortization of unearned
compensation 11,070 11,070
Net loss (1,787,395) (1,787,395)
--------- -------- ----------- ---------- ---------- -------------- -------------
Balance at September 30, 1998 5,223,493 $5,223 $7,309,201 $(6,250) $(60,931) $(10,602,420) $(3,355,177)
========= ======== =========== ========== ========== ============== =============
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
Puradyn Filter Technologies Incorporated
Condensed Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
---- ----
Operating activities
<S> <C> <C>
Net loss $(2,482,729) $(1,787,395)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 159,104 87,971
Deferred interest on notes payable to QIP - 228,059
Issuances of compensatory options and warrants 180,630 -
Cancellation of Common Stock (10,000) -
Changes in operating assets and liabilities:
Trade accounts receivable, net (43,749) 31,035
Inventories (90,320) 169,704
Prepaid expenses and other current assets (36,491) 109,229
Other assets (10,504) 17,127
Accounts payable (153,242) 16,779
Accrued expenses 73,401 222,160
Customer deposits and other (142,737) (50,476)
Deferred rent (6,750) (2,636)
----------- -----------
Net cash used in operating activities (2,563,387) (958,443)
----------- -----------
Investing activities
Purchases of property and equipment (184,802) (34,987)
Patents and trademarks (56,475) -
Decrease in other assets 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 (235,177) (34,987)
----------- -----------
Financing activities
Proceeds from issuances of Common Stock and
exercise of stock options, net 1,193,749 11,696
Proceeds from notes payable issued to QIP 2,000,000 500,000
Proceeds from note payable issued to bank - 250,000
Proceeds from issuance of notes payable to shareholder
and other notes payable 20,200 150,000
Increase in deferred issuance and financing costs (70,325) (17,891)
Collection of loans receivable - 13,000
Payment of notes payable and capital lease obligations (30,634) (34,918)
Payment of note payable to former shareholder (103,300) (103,769)
----------- -----------
Net cash provided by financing activities 3,009,690 768,118
----------- -----------
Increase (decrease) in cash and cash equivalents 211,126 (225,312)
Cash and cash equivalents at beginning of period 928,960 252,874
----------- -----------
Cash and cash equivalents at end of period $1,140,086 $ 27,562
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
Puradyn Filter Technologies Incorporated
Notes to Condensed Financial Statements
(Unaudited)
1. Basis of Presentation and Company
The accompanying condensed financial statements as of September 30, 1998 and for
the three month periods and nine month periods ended September 30, 1997 and 1998
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 Puradyn Filter Technologies
Incorporated (formerly known as T/F Purifiner, Inc.) ("the Company") 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 three month period and nine month period ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the entire year.
net cash outflows to fund operations. Cash to fund these requirements have come
from several private placements of its Common Stock in 1996, and debt financing
in June 1997 for $2,000,000 and in January 1998 for $500,000. In addition,
during May and June 1998, the Company borrowed $150,000 from the Company's
director, Richard C. Ford, secured by inventory, and an additional $250,000 in
August 1998 from Barnett Bank which was secured by substantially all of the
Company's assets and guaranteed by Richard C. Ford. The Company needs to
complete additional financings in 1998 to continue its operations, however there
is no assurance that the Company can complete these financings or that the major
shareholder will loan additional funds to the Company.
In late March 1998 and again in August 1998, the Company curtailed its
operations and reduced its remaining workforce to key personnel. These actions
were taken for a number of reasons. Of primary importance was reducing the
amount of cash required to maintain the Company while it continues to seek to
arrange additional financing. During the nine months ended September 30, 1998,
the Company continued its intensified efforts to increase sales of its products
directed at potential customers with large fleets of vehicles and original
equipment manufacturers. However, there is no assurance that these efforts will
result in profitable operations or reduce the amount of cash required to sustain
operations.
These factors raise substantial doubts 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 and/or generate commitments for substantial sales.
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 or the amounts or
classification of liabilities that might be necessary as a result of the above
uncertainty.
Certain general and administrative expenses in the 1997 Statement of Operations
were reclassified to Engineering and Development expenses in order to conform to
the 1998 presentation.
6
<PAGE>
2. Inventories
At September 30, 1998, inventories consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Raw materials $302,719
Finished goods 50,217
Supplies 6,800
---------
Total inventories $359,736
=========
</TABLE>
3. Contingencies
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
meritorious defenses against the monetary amounts alleged by the licensor patent
owner, it had unsuccessfully offered to settle this litigation with the patent
holder, including the payment of 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.
On June 24, 1997, TF Systems, Inc.'s ("Systems") former law firm filed a
complaint against the Company, Systems, Richard C. Ford, individually and an
inactive company controlled by Richard C. Ford, demanding payment of
approximately $313,000 of legal fees and cost, plus interest and attorney fees,
related primarily to obtaining the manufacturing and marketing rights to the
Purifiner for Systems and the Company. Systems, a related party, formerly owned
the manufacturing and marketing rights to the Purifiner and transferred or sold
such rights to the Company prior to January 1, 1996. Systems was awaiting the
judgment of an appellate court which, if adjudicated in Systems' favor, would
have provided it with sufficient funds to pay such legal fees and other possible
legal fee claims aggregating approximately $75,000 at December 31, 1997. On
February 26, 1997, the appellate court ruled against Systems and, accordingly,
the funds discussed above are not currently available to Systems to satisfy such
claims. Puradyn did not assume these obligations as part of its purchase of
Systems in 1995 and management believes such amounts are not the responsibility
of Puradyn. However, Systems is an inactive company whose only asset is the
claim that was reversed on appeal which may be retried by Systems. Accordingly,
the ability to collect such funds, as required, from Systems is uncertain. The
ultimate outcome of this litigation and other unasserted claims against the
Company cannot be determined at this time; however, based upon the opinion of
counsel, a favorable outcome is likely. No liability has been recorded for these
claims in the accompanying balance sheet.
On September 8, 1998 the Company received notice from a stockholder regarding a
potential stockholders' derivative action and/or a direct negligence action
against the prior Directors and Officers. The Company advised the stockholder
that it is not pursuing any potential claim at this time. The impact of this
contingent matter is not reasonably determinable.
7
<PAGE>
4. Joint Venture
Effective January 1, 1996, the Company entered into a joint venture agreement
whereby such venture, TF Purifiner Ltd. Ltd's operations (50% voting interest)
and is accounting for Ltd using the equity method. The Company is not required
to fund Ltd and continues to sell product to Ltd until such time as Ltd decided
to exercise its rights under the agreement to manufacture the Company's products
in 1997. Ltd was initially capitalized with approximately $88,000 provided by
one of its shareholders. For the nine months ended September 30, 1997 and 1998,
sales of the Company's products to Ltd were insignificant. The Company is
commencing to negotiate with Ltd's other 45% shareholder (Centrax Ltd) relating
to the ownership/licensing of various pending patents filed by Centrax, as well
as other matters.
5. Notes Payable to QIP, a Shareholder
On June 19, 1997, the Company and members of the Ford Family and Taylor Family
entered into a Securities Purchase Agreement ("the Agreement") with Quantum
Industrial Partners LDC ("QIP"), a shareholder in the Company. 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
was 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 was 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.
Effective December 19, 1997, the QIP Note began accruing interest at 12% per
annum.
On January 26, 1998, the Company and QIP entered into a Note Exchange Agreement
whereby the above $2,000,000 promissory note, due December 19, 1997, was
exchanged for a $2,000,000 12% Senior Subordinated Convertible Note due 2003.
Additionally, on January 26, 1998, the Company and QIP entered into a Note
Purchase Agreement whereby the Company issued QIP a 12% Senior Subordinated
Convertible Note in the aggregate principal amount of $500,000. The loan
proceeds were used for general operating expenses of the Company and to repay
$103,501 due to a former shareholder. The terms and conditions of the $500,000
Note and the $2,000,000 Note (collectively, the "Notes") are identical.
The Notes provide that interest shall be payable quarterly commencing April 1,
1998, provided however that at the option of the Company, unpaid interest may be
added to the principal balance of the Notes in lieu of a cash payment. The
Company elected to have the aggregate accrued interest on the Notes of $236,059
through September 30, 1998, added to the principal balance of the Notes and,
accordingly, has classified the aggregate amount due to QIP at September 30,
1998, of $2,736,059 as a long term liability. The Notes are senior to all
indebtedness of the Company, except bank or financial institution debt. The
Notes will be redeemable at the option of QIP on or after the earlier of January
1, 2001 or the date on which the Company raises cash proceeds aggregate $10
million involving the sale of debt, equity or assets. As long as these Notes are
outstanding, the Company cannot, without the consent of QIP, declare or pay any
dividends, purchase, redeem or acquire any of its Common Stock, retire its
existing indebtedness other than existing required periodic payments or enter
into transactions with any affiliate.
8
<PAGE>
The Notes further provide that prior to January 1, 2003, at the option of QIP,
the principal amount can be converted into Common Stock of the Company at a
conversion price of $2.75 per share. The Notes are subject to anti-dilution
provisions under certain circumstances. The Company has also agreed to register
the securities underlying the Note under certain circumstances. As of September
30, 1998, the Company has reserved 994,930 shares of its Common Stock for
issuance under the conversion provisions of the Notes.
6. Net Loss Per Share of Common Stock
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share." Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. Dilutive earnings per
share is very similar to the previously reported fully diluted earnings per
share. The Company adopted Statement No. 128 and has retroactively applied the
effects thereof for all periods presented. The impact on the per share amounts
previously reported was not significant. The effects of potential common shares
such as warrants, options and convertible preferred stock has not been included
as the effect would be antidilutive.
7. Notes Payable to Shareholder
The Company's director, Richard Ford, loaned the Company an aggregate of
$150,000 in May and June 1998 under one year notes payable with interest at 12%.
The notes are secured by the Company's inventories.
8. Revolving Note Agreement With Bank
On August 21, 1998, the Company entered into a Revolving Note Agreement with its
bank for $250,000 with interest at 8.75%. The Note is secured by
substantially all of the Company's assets and is guaranteed by Richard C. Ford.
The Note is due August 21, 1999.
9
<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 realize cost savings
associated with extended oil change intervals, reduced maintenance, extended
engine life and the preservation of the environment. In 1998, the Company had
been unable to 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 fleet owners and 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.
Results of Operations for the Three Months and Nine Months Ended September 30,
1998, Compared to the Three Months and Nine Months Ended September 30, 1997
The following table sets forth for the amount of increase or decrease
represented by certain items reflected in the Company's statements of operations
in comparing the three months and nine months ended September 30, 1998 to the
three months and nine months ended September 30, 1997, in thousands.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
Incr. Incr.
1997 1998 (Decr) 1997 1998 (Decr)
---- ---- ------ ---- ---- ------
(in thousands) (in thousands)
-------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $312 $153 $(159) $1,160 $501 $(659)
----- --- ----- ------- ------- -------
Operating costs and expenses:
Cost of sales 250 143 (107) 758 483 (275)
Selling expenses 805 132 (673) 2,009 914 (1,062)
General and administrative expenses 186 69 (117) 745 483 (262)
Engineering and development 36 18 (18) 92 128 36
Other (2) - 2 (8) - 8
----- --- ----- ------- ------- -------
Total operating costs and expenses 1,275 362 (913) 3,596 2,041 (1,555)
----- --- ----- ------- ------- -------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
Incr. Incr.
1997 1998 (Decr) 1997 1998 (Decr)
---- ---- ------ ---- ---- ------
(in thousands) (in thousands)
-------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operating loss (963) (209) (754) (2,436) (1,540) (896)
Interest (expense) income (60) (93) 33 (47) (247) 200
------- ----- ------ ------- ------- ------
Net loss $(1,023) $(302) $(721) $(2,483) $(1,787) $(696)
======== ====== ====== ======= ======= ======
</TABLE>
Net Sales. Net sales decreased by approximately $159,000 and $659,000,
respectively, in the third fiscal quarter and the nine months ended September
30, 1998 compared to the corresponding periods in the prior year. These
decreases were primarily attributable to reduced international sales, inability
to turn material evaluations into sales and the overall market resistance seen
in 1997 to purchase the Purifiner in large volume amounts without long term
evaluation periods and the acceptance of the Purifiner by major engine and truck
manufacturers. The Company believes this market resistance will turn around
later in 1998 and in 1999 as major engine and truck manufacturers are currently
evaluating extended drain intervals and bypass filtration methods, including the
Purifiner, as a means to help meet various federal emissions regulations, as
well as for competitive advantage in the marketplace. The approach by which the
Company is dealing with its decreased revenue is discussed below.
During 1997, 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 substantially increased the U.S. 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). There can be no assurance that the
OEM's will eventually purchase the Purifiner from the Company. Company's
November 1997 price increase will not effect certain ongoing evaluations which
have been quoted at previous lower prices for units purchased in 1998. In June
and July 1998, the Company increased its prices slightly for specific model
units and filter elements to make gross profit margins consistent for its entire
product lines. These adjustments are not expected to have a material effect on
revenues.
Cost of Sales. Cost of sales decreased by approximately $107,000 and $275,000,
respectively, in the third fiscal quarter and the nine months ended September
30, 1998 compared to the corresponding periods in the prior year. The Company's
gross margin was 20.0% and 34.7% in the third fiscal quarter and the nine months
ended September 30, 1997 and decreased to 3.5% and
11
<PAGE>
3.5% in the correspondin periods in 1998. The gross margin decrease was due to
the cost increases to the product incurred primarily for the cost to make
reengineered improvements to finished products and other materials, material
price increases, and the inability to absorb the cost of assets associated with
excess manufacturing capacity. Unless the Company can increase its revenues, it
gross margins will continue to be adversely affected by the costs of its excess
manufacturing capacity.
Selling Expenses. Selling expenses decreased by approximately $673,000 and
$1,062,000 respectively, in the third fiscal quarter and the nine months ended
September 30, 1998 compared to the corresponding periods in the prior year. The
primary reasons for this decrease occurred in the second and third fiscal
quarters in 1998 due to actions taken by management to significantly reduce
spending combined with the effect of lower sales volume in 1998.
Commencing 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 significant 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.
To date, only a limited number of these evaluations have been converted to
actual sales.
General and Administrative Expenses. General and administrative expenses
decreased by approximately $117,000and $262,000, respectively, in the third
fiscal quarter and the nine months ended September 30, 1998 compared to the
corresponding periods in the prior year.. This dollar decrease was generally due
to the decreased level of business activity, specifically including decreases in
salaries, office and related expenses, travel, and professional fees.
Engineering and Development Expenses. Engineering and development expenses
decreased by approximately $18,000 in the third fiscal quarter and increased by
approximately $36,000 in the nine months ended September 30, 1998 compared to
the corresponding periods in the prior year. The increase in the nine month
period was primarily the result of increased personnel costs and a refocusing on
the reengineering of the Purifiner, however, due to the loss of an engineer in
the third fiscal quarter ended September 30, 1998, the expenses decreased
compared to the prior year period.
Interest Expense and Income. Interest expense increased by approximately $13,000
and $157,000, respectively, in the third fiscal quarter and the nine months
ended September 30, 1998 compared to the corresponding periods in the prior
year.
This increase resulted from the $2,000,000 Note Payable to a shareholder issued
in June 1997 which was increased to $2,500,000 in January, 1998. Interest income
decreased by approximately $20,000 and $43,000, respectively, in the third
fiscal quarter and the nine months ended September 30, 1998 compared to the
corresponding periods in the prior year as a result of decreased cash balances
in 1998 and due to the absence in 1998 of the interest earned on a note
receivable from its former president, which note was repaid in June 1997.
12
<PAGE>
Liquidity and Capital Resources.
The Company has incurred recurring losses from operations since inception, which
has resulted in net cash outflows to fund operations. Cash to fund these
requirements has come from several private placements of its Common Stock in
1996, and debt financing in June 1997 for $2,000,000 and in January 1998 for
$500,000. In addition, during May and June 1998, the Company borrowed $150,000,
secured by inventory, from the Company's director, Richard C. Ford, and an
additional $250,000 in August 1998 from Barnett Bank which was secured by
substantially all of the Company's assets and guaranteed by Richard C. Ford. The
Company needs to complete additional financings in 1998/1999 or generate
substantial sales to continue its operations, however there is no assurance that
the Company can complete these financings or that the major shareholder will
loan additional funds to the Company.
In late March 1998 and again in August 1998, the Company curtailed its
operations and reduced its remaining workforce to key personnel. These actions
were taken for a number of reasons, of primary importance was reducing the
amount of cash required to maintain the Company while it continues to seek to
arrange additional financing. During the nine months ended September 30, 1998,
the Company continued its intensified efforts to increase sales of its products
directed at potential customers with large fleets of vehicles and original
equipment manufacturers. However, there is no assurance that these efforts will
result in profitable operations or reduce the amount of cash required to sustain
operations. At September 30, 1998, the Company had a cash overdraft.
At September 30, 1998, the Company had negative working capital of approximately
$749,000 and its current ratio (current assets to current liabilities) was .37
to 1, as compared to working capital of $358,000 and a current ratio of 1.57 to
1 at December 31, 1997. The amount of negative working capital increased by
$197,000 during the three months ended September 30, 1998. At September 30,
1998, the Company had a cash balance of approximately $26,000 and owed
approximately $497,000 in liabilities to various trade and other unrelated
creditors. Most of these creditors continue to provide services to the Company
or have indicated a willingness to restructure these obligations, accept Common
Stock of the Company in exchange for a certain portion of these obligations, or
defer for the current time payment of these obligations. However, one creditor,
who claims to be owed approximately $75,000, has initiated suit against the
Company, and the Company is seeking to defend this lawsuit based, in part, on
what is believed to be excessive charges alleged by this creditor. There can be
no assurances that creditors will continue to provide service to the Company or
that other creditors will continue to refrain from initiating lawsuits against
the Company in the future.
The Company continues to seek both short term and long term investment
commitments from various institutions and investor groups. The Company's
director, Richard C. Ford, has loaned the Company $150,000 in May and June 1998
under one year notes payable, secured by the Company's inventories, with
interest at 12%. On August 21, 1998, the Company entered into a Revolving Note
Agreement with its bank for $250,000 with interest at 8.75%. The Note is secured
by substantially all of the Company's assets and is guaranteed by Richard C.
Ford. The Note is due August 21, 1999. Management believes that such funding,
along with revenues the Company expects to generate from existing customers and
as a result of commitments from present and prospective customers will provide
the Company with sufficient cash resources through December 31, 1998. There can
be no assurances, however, that such cash resources will be sufficient during
that time or that the Company will be able to obtain additional financing
13
<PAGE>
from either members of management or other investors. In the absence of
sufficient revenues or financing, the Company may be unable to sustain its
operations.
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 ("OEM's"). The oil filtration industry has historically been
competitive and, as is typically the case with innovative products, the ultimate
level of demand for the Company's products is subject to a high degree of
uncertainty. Developing market acceptance, particularly worldwide, for the
Company's existing and proposed products will require substantial marketing and
sales efforts and the expenditure of a significant amount of funds to inform
customers of the perceived benefits and cost advantages of its products.
Impact of Inflation.
Inflation has not had a significant impact on the Company's operations. However,
any significant decrease in the price for oil or labor, environmental compliance
costs, and engine replacement costs could adversely impact the Company's end
users cost/benefit analysis as to the use of the Company's products.
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
and general economic conditions throughout the industrialized world.
Consequently, the Company's product revenues may vary significantly by quarter
and the Company's operating results may experience significant fluctuations.
Impact of Year 2000 Issue.
The Company is assessing the possible effects on its operations of the impact
through its own systems and the systems of its key suppliers and subcontractors
of the Year 2000 issue. The Company has no interactive or linked computer
systems to any of its suppliers or subcontractors,
14
<PAGE>
and does not have extensive
reliance on internal computer systems for its manufacturing, marketing or sales
operations. While the impact of the Year 2000 issue could have a material effect
on the Company's operations and financial results, the Company at this time
believes the potential impact and related costs are not significant.
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.
November 9, 1998
PURADYN FILTER TECHNOLOGIES INCORPORATED
(Registrant)
By /s/ Alan J. Sandler
--------------------
Alan J. Sandler
President
By /s/ Richard C. Ford
--------------------
Richard C. Ford
Director
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<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jul-1-1998
<PERIOD-END> Sep-30-1998
<CASH> 0
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<RECEIVABLES> 91,107
<ALLOWANCES> (35,000)
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<PP&E> 605,620
<DEPRECIATION> (284,635)
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<COMMON> 5,223
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<TOTAL-LIABILITY-AND-EQUITY> 785,541
<SALES> 152,516
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<INCOME-PRETAX> (302,271)
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