================================================================================
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 June 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: July 15, 1998: 5,206,379.
================================================================================
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Puradyn Filter Technologies Incorporated
Condensed Balance Sheet
<TABLE>
<CAPTION>
June 30, 1998 December 31,
(Unaudited) 1997
----------- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ - $ 252,874
Trade accounts receivable, net 39,825 87,142
Inventories 428,585 529,440
Prepaid expenses and other current assets 11,474 112,477
---------- ----------
Total current assets 479,884 981,933
Property and equipment, net 334,258 362,898
Other assets 24,783 17,139
---------- ----------
Total assets $ 838,925 $1,361,970
========== ==========
Liabilities and Capital Deficiency
Current Liabilities:
Cash overdraft $ 23,048 $ -
Accounts payable 248,294 206,995
Accrued expenses 371,935 175,859
Customer deposits and other 101,796 96,540
Notes payable to shareholder 150,000 -
Current portion of note payable and capital lease obligations 33,435 41,393
Current portion of note payable to former shareholder 103,635 103,501
---------- ----------
Total current liabilities 1,032,143 624,288
Notes payable to QIP, a shareholder, including interest 2,656,370 2,008,000
Note payable to former shareholder 191,121 295,024
Note payable and capital lease obligations 22,018 34,143
Deferred rent and liability to equity investee 4,565 4,063
---------- ----------
Total liabilities 3,906,217 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, 5,206,379
and 5,205,879 shares issued and outstanding 5,206 5,206
Additional paid-in-capital 7,298,522 7,297,522
Unearned compensatory options (9,940) (17,320)
Loans and subscriptions receivable (60,931) (73,931)
Accumulated deficit (10,300,149) (8,815,025)
------------ ------------
Total capital deficiency (3,067,292) (1,603,548)
------------ ------------
Total liabilities and capital deficiency $ 838,925 $ 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 Six Months Ended June 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- --------------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 432,288 $ 154,022 $ 848,189 $ 348,745
Cost of sales 236,222 148,597 508,551 340,962
----------- ----------- ----------- -----------
Gross profit 196,066 5,425 339,638 7,783
----------- ----------- ----------- -----------
Operating expenses:
Selling 629,579 214,573 1,204,196 815,210
General and administrative 326,593 142,673 559,488 413,725
Engineering and development 29,708 33,584 55,194 109,816
Deferred profit (2,975) -- (6,463) --
----------- ----------- ----------- -----------
Total operating expenses 982,905 390,830 1,812,415 1,338,751
----------- ----------- ----------- -----------
Operating loss (786,839) (385,405) (1,472,777) (1,330,968)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (13,337) (83,932) (15,975) (159,931)
Interest income 12,814 866 29,060 5,775
----------- ----------- ----------- -----------
Total other income (expense) (523) (83,066) 13,085 (154,156)
----------- ----------- ----------- -----------
Net loss $ (787,362) $ (468,471) $(1,459,692) $(1,485,124)
=========== =========== =========== ===========
Basic and diluted loss per share $ (.15) $ (.09) $ (.28) $ (.29)
=========== =========== =========== ===========
Weighted average common
shares outstanding 5,145,879 5,206,379 5,139,442 5,206,307
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
Puradyn Filter Technologies Incorporated
Condensed Statements of Changes
in Capital Deficiency
For The Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Unearned Total
------------------ Paid-In- Compensatory Loans Accumulated Capital
Shares Amount Capital Options Receivable Deficit Deficiency
-----------------------------------------------------------------------------------------------
<S> <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
Amortization of unearned
compensation 7,380 7,380
Net loss (1,485,124) (1,485,124)
--------- ---------- ----------- ---------- ---------- ------------ ------------
Balance at June 30, 1998 5,206,379 $ 5,206 $ 7,298,522 $ (9,940) $ (60,931) $(10,300,149) $ (3,067,292)
========= ========== =========== ========== ========== ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
Puradyn Filter Technologies Incorporated
Condensed Statements of Cash Flows
Six Months Ended June 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Operating activities
Net loss $(1,459,692) $(1,485,124)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 55,320 67,380
Deferred interest on notes payable to QIP - 148,370
Issuances of compensatory options and warrants 131,118 -
Cancellation of Common Stock (10,000) -
Changes in operating assets and liabilities:
Trade accounts receivable, net (49,383) 47,317
Inventories (161,971) 100,855
Prepaid expenses and other current assets (40,141) 101,003
Other assets (1,588) 10,247
Accounts payable (135,298) 41,299
Accrued expenses 185,980 196,076
Customer deposits and other (104,988) 5,256
Deferred rent (4,500) (2,636)
----------- ---------
Net cash used in operating activities (1,595,143) (769,957)
----------- ---------
Investing activities
Purchases of property and equipment (148,656) (31,360)
Patents and trademarks (42,368) -
Decrease in other assets 11,100 -
Increase in note receivable from shareholder/officer 200,000 -
Decrease in note receivable from shareholder/officer (200,000) -
----------- ---------
Net cash used in investing activities (179,924) (31,360)
----------- ---------
Financing activities
Proceeds from issuances of Common Stock and
exercise of stock options, net 1,073,550 1,000
Proceeds from notes payable issued to QIP 2,000,000 500,000
Proceeds from issuance of notes payable to shareholder
and other notes payable 20,200 150,000
Increase in deferred issuance and financing costs (65,857) (17,891)
Collection of loans receivable - 13,000
Payment of notes payable and capital lease obligations (13,437) (20,083)
Payment of note payable to former shareholder (99,585) (103,769)
Borrowing from investee - 7,500
Repayment to investee (20,351) (4,362)
Due to bank - 23,048
----------- ---------
Net cash provided by financing activities 2,894,520 548,443
----------- ---------
Increase (decrease) in cash and cash equivalents 1,119,453 (252,874)
Cash and cash equivalents at beginning of period 928,960 252,874
----------- ----------
Cash and cash equivalents at end of period $2,048,413 $ -0-
=========== ==========
</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 June 30, 1998 and for the
three month periods and six month periods ended June 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 six month period ended June 30, 1998 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 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. At June 30, 1998, the Company had a cash overdraft of approximately
$23,000.
In late March 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 six months ended June 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. 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 June 30, 1998, inventories consist of the following:
Raw materials $351,106
Finished goods 67,159
Supplies 10,320
--------
Total inventories $428,585
========
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
covered Purifiner products. The case is scheduled to go to trial in December
1998. Although the Company believes 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 maybe 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 resonably determinable.
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
7
<PAGE>
1997. Ltd was initially capitalized with approximately $88,000 provided by
one of its shareholders. Through June 30, 1998, Ltd advanced the Company
approximately $144,000, to be used to fund certain patent and trademark filings
for the venture's exclusive territory, most of which was used. For the six
months ended June 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, including the possible
discontinuation of the joint venture with Centrax. The ultimate outcome of these
negotiations cannot be determined at this time.
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 $148,370
through June 30, 1998, added to the principal balance of the Notes and,
accordingly, has classified the aggregate amount due to QIP at June 30, 1998, of
$2,656,370 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.
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
8
<PAGE>
circumstances. As of June 30, 1998, the Company has reserved 965,953 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 extend oil change intervals,
reduce maintenance costs, extend engine life and preserve 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 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 Six Months Ended June 30, 1998,
Compared to the Three Months and Six Months Ended March 31, 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 six months ended June 30, 1998 to the three
months and six months ended June 30, 1997, in thousands.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- ------------------------------------
Incr. Incr.
1997 1998 (Decr) 1997 1998 (Decr)
---- ---- ------ ---- ---- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 432 $ 154 $ (278) $ 848 $ 349 $ (499)
------- ------- ------- ------- ------- -------
Operating costs and expenses:
Cost of sales 236 148 (88) 508 341 (167)
Selling expenses 629 215 (414) 1,204 815 (389)
General and administrative expenses 326 142 (184) 560 414 (146)
Engineering and development 30 34 4 55 110 55
Other (3) -- 3 (6) -- 6
------- ------- ------- ------- ------- -------
Total operating costs and expenses 1,218 539 (679) 2,321 1,680 (641)
------- ------- ------- ------- ------- -------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------------
Incr. Incr.
1997 1998 (Decr) 1997 1998 (Decr)
---- ---- ------ ---- ---- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Operating loss (786) (385) (401) (1,473) (1,331) (142)
Interest (expense) income (1) (83) 82 13 (154) 167
------ ------ ------ -------- -------- -----
Net loss $(787) $(468) $(319) $(1,460) $(1,485) $25
====== ====== ====== ======== ======== =====
</TABLE>
Net Sales. Net sales decreased by approximately $278,000 and $499,000,
respectively, in the second fiscal quarter and the six months ended June 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 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.
Cost of Sales. Cost of sales decreased by approximately $88,000 and $167,000,
respectively, in the second fiscal quarter and the six months ended June 30,
1998 compared to the corresponding periods in the prior year. The Company's
gross margin was 45.4% and 40.0% in the second fiscal quarter and the six months
ended June 30, 1997 and decreased to 3.5% and 2.2% in the corresponding 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 assets
associated with excess
11
<PAGE>
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.
Selling Expenses. Selling expenses decreased by approximately $414,000 and
$389,000, respectively, in the second fiscal quarter and the six months ended
June 30, 1998 compared to the corresponding periods in the prior year. The
primary reasons for this decrease occurred in the second fiscal quarter 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 $184,000 and $146,000, respectively, in the second
fiscal quarter and the six months ended June 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
increased by approximately $4,000 and $55,000, respectively, in the second
fiscal quarter and the six months ended June 30, 1998 compared to the
corresponding periods in the prior year. This increase was primarily the result
of increased personnel costs and a refocusing on the reengineering of the
Purifiner.
Interest Expense and Income. Interest expense increased by approximately $71,000
and $144,000, respectively, in the second fiscal quarter and the six months
ended June 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 $12,000 and $23,000, respectively, in the second
fiscal quarter and the six months ended June 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.
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
12
<PAGE>
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, 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 six months ended June 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 June 30, 1998, the Company
had a cash overdraft.
At June 30, 1998, the Company had negative working capital of $552,000 and its
current ratio (current assets to current liabilities) was .46 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 $360,000 during the
three months ended June 30, 1998. At June 30, 1998, the Company had a cash
overdraft of approximately $23,000 and owed approximately $487,000 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 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
13
<PAGE>
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, 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.
14
<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.
PURADYN FILTER TECHNOLOGIES INCORPORATED
(Registrant)
September 10, 1998 By /s/ Alan J. Sandler
------------------------
President
By /s/ Richard C. Ford
------------------------
Director
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 89,825
<ALLOWANCES> (50,000)
<INVENTORY> 428,585
<CURRENT-ASSETS> 479,884
<PP&E> 601,993
<DEPRECIATION> (267,735)
<TOTAL-ASSETS> 838,925
<CURRENT-LIABILITIES> 1,032,143
<BONDS> 0
0
0
<COMMON> 5,206
<OTHER-SE> (3,072,498)
<TOTAL-LIABILITY-AND-EQUITY> 838,925
<SALES> 154,022
<TOTAL-REVENUES> 154,022
<CGS> 148,597
<TOTAL-COSTS> 390,830
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,066
<INCOME-PRETAX> (468,471)
<INCOME-TAX> 0
<INCOME-CONTINUING> (468,471)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (468,471)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
