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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, 1999
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 12, 1999: 5,389,903
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Puradyn Filter Technologies Incorporated
Condensed Balance Sheet
<TABLE>
<CAPTION>
September 30, 1999 December 31,
(UNAUDITED) 1998
----------- ----
<S> <C> <C>
Assets
Current assets:
Trade accounts receivable, net $ 67,950 $ 30,623
Inventories 230,995 342,439
Prepaid expenses and other current assets - 207
-
--------- ---------
Total current assets 298,945 373,269
Property and equipment, net 218,001 289,317
Other assets 11,770 16,370
-------- --------
Total assets $528,716 $678,956
======== ========
Liabilities and Capital Deficiency
Current Liabilities:
Cash overdraft $ 102,423 $ 77,693
Accounts payable 446,801 422,252
Accrued expenses 264,052 167,661
Customer deposits 56,828 48,568
Note payable to bank 525,000 250,000
Notes payable to shareholder 150,000 150,000
Current portion of capital lease obligations 18,773 20,960
Note payable to former shareholder 294,756 294,756
--------- -----------
Total current liabilities 1,858,593 1,431,890
Notes payable and accrued interest to QIP, a shareholder 3,082,942 2,821,396
Capital lease obligations 870 12,851
--------- -----------
Total liabilities 4,942,405 4,266,137
--------- -----------
Capital Deficiency:
Preferred stock, $.001 par value,
500,000 shares authorized - -
Common stock, $.001 par value,
20,000,000 shares authorized, 5,389,903
and 5,223,493 shares issued and outstanding 5,411 5,223
Additional paid-in-capital 7,386,338 7,309,201
Unearned compensatory options - (2,560)
Loans receivable, net (12,931) (22,931)
Accumulated deficit (11,792,507) (10,876,114)
----------- ------------
Total capital deficiency (4,413,689) (3,587,181)
------------- -------------
Total liabilities and capital deficiency $ 528,716 $ 678,956
============== ===============
</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, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 147,621 $ 152,516 $ 412,904 $ 501,261
Cost of sales 135,820 142,530 398,159 483,492
----------- ----------- ----------- -----------
Gross profit 11,801 9,986 14,745 17,769
----------- ----------- ----------- -----------
Operating expenses:
Selling 75,574 131,757 223,363 946,967
General and administrative 95,954 68,820 337,250 482,545
Engineering and development 9,429 18,513 56,105 128,329
----------- ----------- ----------- -----------
Total operating expenses 180,957 219,090 616,718 1,557,841
----------- ----------- ----------- -----------
Operating loss (169,156) (209,104) (601,973) (1,540,072)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (110,896) (93,415) (315,076) (253,346)
Interest income 7 248 656 6,023
----------- ----------- ----------- -----------
Total other income (expense) (110,889) (93,167) (314,420) (247,323)
----------- ----------- ----------- -----------
Net loss $ (280,045) $ (302,271) $ (916,393) $(1,787,395)
=========== =========== =========== ===========
Basic loss per share $ (.05) $ (.06) $ (.17) $ (.34)
=========== =========== =========== ===========
Basic number of weighted average
common shares outstanding 5,323,904 5,218,636 5,259,594 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, 1999
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNEARNED
------------------ PAID-IN- COMPENSATORY
SHARES AMOUNT CAPITAL OPTIONS
------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 5,223,493 $ 5,223 $ 7,309,201 $ (2,560)
Issuance of compensatory
options 166,410 188 77,137 --
Amortization of unearned
compensation -- -- -- 2,560
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at September 30, 1999 5,389,903 $ 5,411 $ 7,386,338 $ --
============ ============ ============ ============
</TABLE>
[RESTUBBED TABLE]
TOTAL
LOANS ACCUMULATED CAPITAL
RECEIVABLE DEFICIT DEFICIENCY
---------- ------- ----------
Balance at January 1, 1999 $ (22,931) $(10,876,114) $ (3,587,181)
Issuance of compensatory
options -- -- 77,325
Amortization of unearned
compensation -- -- 2,560
Net loss -- (916,393) (916,393)
------------ ------------ ------------
Balance at September 30, 1999 $ (22,931) $(11,792,507) $ (4,413,689)
============ ============ ============
See Accompanying Notes to Condensed Financial Statements.
4
<PAGE>
Puradyn Filter Technologies Incorporated
Condensed Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Operating activities
Net loss $(916,393) $(1,787,395)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 77,479 87,971
Provision for uncollectible accounts 10,000 -
Deferred interest on notes payable to QIP 261,546 228,059
Issuances of compensatory options 79,884 -
Changes in operating assets and liabilities:
Trade accounts receivable, net (37,327) 31,035
Inventories 111,444 169,704
Prepaid expenses and other current assets 1,489 109,229
Other assets - 17,127
Accounts payable 24,549 16,779
Accrued expenses 95,110 222,160
Customer deposits and other 8,260 (53,112)
--------- ---------
Net cash used in operating activities (283,959) (958,443)
--------- ---------
Investing activities
Purchases of property and equipment (1,564) (34,987)
------- --------
Net cash used in investing activities (1,564) (34,987)
------- --------
Financing activities
Proceeds from issuances of common stock and
exercise of stock options, net - 11,696
Proceeds from notes payable issued to QIP - 500,000
Proceeds from bank loan 275,000 250,000
Proceeds from issuance of notes payable to shareholder
and other notes payable - 150,000
Increase in deferred issuance and financing costs - (17,891)
Collection of loans receivable - 13,000
Payment of notes payable and capital lease obligations (14,207) (34,918)
Payment of note payable to former shareholder - (103,769)
Increase in bank overdraft 24,730 -
--------- ----------
Net cash provided by financing activities 285,523 768,118
--------- ----------
Increase (decrease) in cash and cash equivalents -0- (225,312)
Cash and cash equivalents at beginning of period -0- 252,874
---------- -----------
Cash and cash equivalents at end of period $ -0- $ 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, 1999 and for
the three month periods and nine month periods ended September 30, 1999 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 ("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 September 30, 1999 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 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. During May and June 1998, the Company borrowed $150,000 from the
Company's co-founder, a significant shareholder and now Chief Executive Officer,
Richard C. Ford. The Company also borrowed $250,000 in August 1998 from its bank
which was secured by substantially all of the Company's assets and guaranteed by
Mr. Ford. In January and March 1999, the Company borrowed from the bank an
additional $100,000 and $175,000, respectively, under renegotiated loan
agreements which now require the loan to be repaid in March 2000. Furthermore,
Mr. Ford has advanced funds to the Company or paid on behalf of the Company
approximately $61,000 in 1999 through September 30,1999. Also, from June 1999
through September 1999, the Company granted 187,410 options to purchase the
Company's Common Stock for nominal consideration to certain employees in lieu of
cash compensation.
The reports of the Company's independent auditors as of December 31, 1998 and
1997 include an explanatory paragraph which states that, because the Company has
sustained recurring operating losses and negative cash flows from operating
activities, substantial doubt is raised about the Company's ability to continue
as a going concern. In order to continue as a going concern, the Company must
complete substantive additional financing in 1999. The inability to obtain
additional financing will 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.
2. INVENTORIES
At September 30, 1999, inventories consist of the following:
Raw materials $210,913
Finished goods 17,191
Supplies 1,000
--------
Total inventories $229,104
========
6
<PAGE>
3. CONTINGENCIES
TF Systems, Inc. ("Systems"), a related party (previously under common ownership
with the Company), formerly owned the manufacturing and marketing rights to the
Purifiner and transferred or sold such rights to the Company in 1995. In June
1997, the former law firm of Systems filed a complaint against the Company,
Systems, Richard C. Ford (individually) and an inactive company controlled by
Mr. Ford demanding payment of approximately $313,000 of legal fees plus interest
and attorney fees, related primarily to services in obtaining the manufacturing
and marketing rights to the Purifiner for Systems and the Company. Systems had
been 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.
However, 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 and maybe retried by Systems.
Accordingly, the ability to collect such funds 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
the Company's counsel, a favorable outcome is likely. No liability has been
recorded for these claims in the accompanying balance sheet.
4. NOTES PAYABLE TO SHAREHOLDER
During 1998, the Company borrowed $150,000 from Richard C. Ford, Chairman of the
Board of Directors, Chief Executive Officer and significant shareholder of the
Company and issued notes, secured by accounts receivable and inventories, with
interest payable at 12%. No interest has been paid to date. The notes are due on
demand.
5. NOTE PAYABLE TO BANK
On August 21, 1998, the Company borrowed $250,000 from its bank under a one year
revolving note payable with interest payable monthly at 8.75%. On January 21,
1999, the Company increased its loan with the bank to a $350,000 revolving line
of credit with interest at the bank's prime rate (7.75% at inception) and
borrowed an additional $100,000. On March 25, 1999, the company again
renegotiated its revolving line of credit to increase the amount to $525,000 at
the same rate of interest and extended the repayment date to March 25, 2000. The
company borrowed an additional $175,000 at that date to increase the aggregate
borrowing to $575,000. The note is secured by substantially all assets of the
Company and guaranteed by Richard C. Ford. Interest is paid monthly.
6. NOTE PAYABLE TO FORMER SHAREHOLDER
In 1996, the Company entered into an Agreement (the "Agreement") with the
beneficiaries of the estate of a former 50% shareholder of the Company (the
"Estate") under which the Company agreed to repay the Estate's loans of $502,206
based on a formula related to the amount of future equity financing by the
Company. However, the Company did not make the required installment
7
<PAGE>
payment of $105,512 on January 31, 1999 and the Estate has issued a letter to
the Company to declare the Agreement in default and to demand immediate payment
of the entire remaining balance. Accordingly, the entire balance of $294,756 is
classified as current as of September 30, 1999.
7. NOTES PAYABLE TO QIP, A SHAREHOLDER
On January 26, 1998, the Company and Quantum Industrial Partners LDC ("QIP")
entered into a Note Exchange Agreement whereby the a $2,000,000 promissory note
issued June 19, 1997 to QIP was exchanged for a $2,000,000 12% Senior
Subordinated Convertible Note (the "Note") due 2003.
Commencing April 1, 1998, interest is payable quarterly provided, 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 which the Company has elected to do each
quarter through September 30, 1999. Such unpaid interest bears interest at 15%
and is payable on demand. Such aggregate deferred interest at September 30, 1999
is $582,942. The Note is senior to all indebtedness of the Company, except bank
or financial institution debt, and can 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.
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. Under certain circumstances, the Note is subject to anti-dilution
provisions and the Company will register the securities.
Also 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 terms and conditions of
this $500,000 Note are identical to the $2,000,000 Note described above. As of
September 30, 1999, the Company has reserved 1,123,111 shares of its Common
Stock for issuance under the conversion provisions of the notes.
8. NET (LOSS) PER SHARE OF COMMON STOCK
The Company has adopted Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" (FAS 128) which establishes new standards for
computing and presenting earnings per share. FAS 128 requires dual presentation
of basic and diluted earnings per share. Because of losses from operations, the
effect of stock options, warrants and convertible debt is anti-dilutive.
8
<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 operations in 1991 when it obtained
worldwide manufacturing and marketing rights to the Purifiner(R) products. The
marketplace has had a long-held conviction that oil must be changed regularly in
accordance with manufacturers' recommended guidelines. Gradually, the concept of
extended oil drain intervals has become more accepted. The Company believes that
this change in acceptance is due to the results of third-party testing of the
product, awards and other recognition the Purfiner has received, and to
increasing awareness by consumers, vehicle and engine manufacturers and oil
companies of the cost benefits and the environmental benefits of conserving oil
and reducing disposal of waste oil.
The Company has also found that potential customers require extended field
testing to verify performance effects on engine wear and oil change savings for
themselves. The Company is making a more concentrated effort to assist potential
customers in the testing process and, in December 1998, documented certain
performance results by a large fleet owner that showed minimal engine wear after
616,000 miles using the Company's Purifiner without an oil change. The company
believes these results will not only help to validate the product's reliability,
but also provide new sales leads. However, there can be no assurance it can
experience any improvement.
Sales of the Company's products depend primarily 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 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.
Through 1997, the Company had been unsuccessful in reaching potential customers
through its distribution network of independent resellers. During 1998, the
Company refocused certain of its resources on the development of commercial
relationships with OEMs and medium to large size fleets and, as mentioned, is
attempting to be more involved in their testing process. While the Company
believes these developments will lead to improvements in sales and operating
results, there can be no assurance that such improvements will occur.
As previously mentioned, the Company has incurred losses from operations since
inception which has resulted in net cash outflows to fund operations. The
Company found short-term sources of cash to fund operations in 1998 and through
the first half of 1999, however, the
9
<PAGE>
Company must complete additional substantive financing in 1999 to continue its
operations and there can be no assurance it will be successful in finding
sufficient sources of such financing.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30,
1999, COMPARED TO THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 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, 1999 to
the three months and nine months ended September 30, 1998, in thousands.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
Incr. Incr.
1999 1998 (Decr) 1999 1998 (Decr)
---- ---- ------ ---- ----- ------
(in thousands) (in thousands)
-------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 147 $ 153 $ (6) $ 412 $ 501 $ (89)
------- ------- ------- ------- ------- -------
Operating costs and expenses:
Cost of sales 135 143 (8) 398 483 (85)
Selling expenses 76 132 (56) 223 947 (724)
General and administrative expenses 96 69 27 337 483 (146)
Engineering and development 9 18 (9) 56 128 (72)
------- ------- ------- ------- ------- -------
Total operating costs and expenses 316 362 (46) 1,014 2,041 (1,027)
------- ------- ------- ------- ------- -------
Operating loss (169) (209) (40) (602) (1,540) (938)
Interest (expense) income (111) (93) 18 (314) (247) 67
------- ------- ------- ------- ------- -------
Net loss $ (280) $ (302) $ (22) $ (916) $(1,787) $ (871)
======= ======= ======= ======= ======= =======
</TABLE>
NET SALES. Net sales decreased by approximately $6,000 and $89,000,
respectively, in the third fiscal quarter and the nine months ended September
30, 1999 compared to the corresponding periods in the prior year. The Company
experienced declining sales during 1998 resulting from an unsuccessful change in
marketing strategy in 1997 when the Company increased its product prices and
made product design changes that caused some performance problems. To correct
the problems encountered, the Company decreased product prices in April 1998,
market focus was changed toward OEMs and middle and large fleet companies in
mid-1998, and product quality problems were corrected in early 1998. These
changes, together with turnover in key personnel in late March 1998, resulted in
the Company having to re-establish certain customer relationships. Sales
continued to decline through the 1998 year into the first fiscal quarter of
1999. Sales have increased somewhat in the second and third fiscal quarters of
1999. Management feels it now has a good base of potential customers with very
satisfactory product performance results, however there can be no assurance
these will produce improved results in sales.
10
<PAGE>
COST OF SALES. Cost of sales decreased by approximately $8,000 in the second
fiscal quarter and decreased by $85,000 in the nine months ended September 30,
1998 compared to the corresponding periods in the prior year. The low gross
margin is due to several factors including increases in inventory costs from
vendors due to low purchase volumes, a mix of sales to customers that qualified
for lower prices, and due to an increase in rent expense. Unless the Company can
increase its revenues, its gross margins will continue to be adversely affected
by factors such as these.
SELLING EXPENSES. Selling expenses decreased by approximately $56,000 and
$724,000, respectively, in the third fiscal quarter and the nine months ended
September 30, 1998 compared to the corresponding periods in the prior year.
Beginning in late March 1998, the Company reduced many key sales personnel and
other sales and marketing expenses such as advertising, shows and consultants in
connection with the reductions in general operating expenses to reduce cash
required to fund operation. The reductions in Selling Expenses in the third
fiscal quarter and the nine months ended September 30, 1999 are the result of
these expense reduction efforts.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by approximately $27,000 in the third fiscal quarter and decreased by
approximately $146,000 the nine months ended September 30, 1999 compared to the
corresponding periods in the prior year. As noted with Selling Expenses above,
the Company began a concerted effort to reduce operating expense beginning in
late March 1998 which reduced general and administrative expenses in the areas
of salaries, communication expenses, travel, professional fees and certain other
office expenses. In the aggregate, these reductions amounted to $146,000 in the
nine month period. The third fiscal quarter in 1998 contained a credit for the
reduction of the provision for doubtful accounts of $15,000 and the third fiscal
quarter of 1999 contained a provision for doubtful accounts of $10,000. These
two items resulted in an increase in expenses in the third fiscal quarter from
1998 to1999 of $25,000.
ENGINEERING AND DEVELOPMENT EXPENSES. Engineering and development expenses
decreased by approximately $9,000 and $72,000, respectively, in the third fiscal
quarter and the nine months ended September 30, 1998 compared to the
corresponding periods in the prior year. This decrease was primarily the result
of decreased personnel costs related to the general operating expense reductions
referred to above.
INTEREST EXPENSE AND INCOME. Interest expense increased by approximately $18,000
and $67,000, respectively, in the third fiscal quarter and the nine months ended
September 30, 1999 compared to the corresponding periods in the prior year. This
increase resulted primarily from the short term loans of $150,000 obtained in
1998 from Richard C. Ford, a shareholder and now Chief Executive Officer of the
Company, and from its bank that increased from $250,000 in August 1998 to
$350,000 in January 1999 and to $525,000 in March 1999. Interest income is
insignificant in each of the periods.
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 mid-1998, the Company
11
<PAGE>
borrowed $150,000 from Richard C. Ford and in August 1998 borrowed $150,000 from
its bank which was collateralized by assets of the Company and guaranteed by Mr.
Ford. The Company borrowed from the bank an additional $100,000 in January 1999
and $175,000 in late March 1999. The aggregate bank loan of $575,000 is due in
March 2000. In addition in 1999, Mr. Ford has personally advanced approximately
$61,000 to the Company through September 30, 1999. The Company must complete
additional substantive financing in 1999 to continue its operations, and there
is no assurance that the Company can complete this financing or that Mr. Ford or
the bank will loan additional funds to the Company.
During 1998, the Company significantly reduced personnel and operating expenses
and intensified its efforts to increase sales of its products to potential
customers with medium and large fleets of vehicles and original equipment
manufacturers. The Company continues to closely monitor its operating expenses
and cash flow. 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, 1999, the Company had negative working capital of $1,559,648
and its current ratio (current assets to current liabilities) was .16 to 1.00.
At September 30, 1999, the Company owed approximately $576,000 in current
liabilities to various trade and unrelated creditors. Most of these creditors
continue to provide services to the Company or defer payment of these
obligations for the current time. There can be no assurances that creditors will
continue to provide service to the Company or that other creditors will refrain
from initiating lawsuits against the Company in the future.
The Company continues to pursue substantive long-term investment commitments
from various institutions and investor groups in the form of either a loan or
equity investment. Management believes it will need additional financing to
continue operations in 1999. There can be no assurances that the Company will be
able to obtain such additional financing. In the absence of sufficient revenues
or financing, the Company may be unable to sustain 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
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.
12
<PAGE>
IMPACT OF YEAR 2000 ISSUE
The Company is continuing to assess 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.
13
<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)
November 12, 1999 By: /s/ Alan J. Sandler
----------------------------
Alan J. Sandler
President
14
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