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, 2000
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
of incorporation or organization) Identification No.)
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: October 31, 2000: 14,163,003 shares of Common Stock.
<PAGE>
Puradyn Filter Technologies, Inc.
Condensed Consolidated Balance Sheet
As of September 30, 2000 and December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 2,081,474 $ 8,121
Short term investments 6,658,729 0
Trade accounts receivable, net 208,352 78,876
Inventories 453,376 209,531
Prepaid expenses and other current assets 66,635 4,031
------------ ------------
Total current assets 9,468,566 300,559
Property and equipment, net 273,150 182,347
Other assets 100,794 10,236
------------ ------------
Total assets 9,842,510 493,142
============ ============
Liabilities and Stockholders' Equity (Deficiency)
Current Liabilities:
Accounts payable 123,913 179,544
Accounts payable and accrued expenses, related parties 64,049 194,240
Accrued expenses 78,905 97,263
Customer deposits 90,194 60,076
Current portion of capital lease obligations 9,109 12,537
Note payable to bank 0 525,000
Note payable to shareholder 0 150,000
Note payable and accrued interest to QIP, a shareholder 0 3,191,086
------------ ------------
Total current liabilities 366,170 4,409,746
Capital lease obligation 11,280 0
------------ ------------
Total liabilities 377,450 4,409,746
------------ ------------
Stockholders' Equity (Deficiency):
Preferred Stock, $.001 par value, 500,000 shares
authorized; none issued and outstanding 0 0
Common Stock, $.001 par value, 20,000,000
shares authorized; 14,163,003 and 5,998,628
issued and outstanding, respectively 14,163 5,999
Additional paid-in-capital 22,706,795 8,017,398
Loans receivable, net (19,506) (50,931)
Accumulated deficit (13,236,392) (11,889,070)
------------ ------------
Total stockholders' equity (deficiency) 9,465,060 (3,916,604)
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 9,842,510 $ 493,142
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Operations
For the Three Months and Nine Months Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 358,831 $ 147,621 $ 1,042,959 $ 412,904
Cost of sales 334,036 135,820 965,270 398,159
------------ ------------ ------------ ------------
Gross profit 24,795 11,801 77,689 14,745
------------ ------------ ------------ ------------
Operating expenses
Selling 317,032 75,574 826,671 223,363
General and administrative 402,815 95,954 801,498 337,250
Engineering and development 51,833 9,429 171,882 56,105
------------ ------------ ------------ ------------
Total operating expenses 771,680 180,957 1,800,051 616,718
------------ ------------ ------------ ------------
Operating loss (746,885) (169,156) (1,722,362) (601,973)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 143,462 7 200,640 656
Interest expense (1,452) (110,896) (39,691) (315,076)
Contributed assets 0 0 178,660 0
Forgiveness of debt 1,295 0 35,431 0
------------ ------------ ------------ ------------
Total other income (expense) 143,305 (110,889) 375,040 (314,420)
------------ ------------ ------------ ------------
Net loss $ (603,580) $ (280,045) $ (1,347,322) $ (916,393)
============ ============ ============ ============
Basic loss per share $ (.04) $ (.05) $ (.11) $ (.17)
============ ============ ============ ============
Basic number of weighted average
common shares outstanding 14,069,816 5,323,904 12,535,301 5,259,594
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficiency)
For The Nine Months Ended September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Stockholders'
-------------------------- Paid-In Loans Accumulated Equity
Shares Amount Capital Receivable Deficit (Deficiency)
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 5,998,628 $ 5,999 $ 8,017,398 $ (50,931) $(11,889,070) $ (3,916,604)
Conversion of debt to stock 3,175,000 3,175 3,889,822 0 0 3,892,997
Issuance of stock for cash 4,592,935 4,593 10,458,695 0 0 10,463,288
Issuance of stock for services 25,313 25 89,395 0 0 89,420
Exercise of stock options 371,127 371 251,485 0 0 251,856
Payments on loans receivable 0 0 0 31,425 0 31,425
Net loss 0 0 0 0 (1,347,322) (1,347,322)
------------ ------------ ------------ ------------ ------------ ------------
Balance at September 30, 2000 14,163,003 $ 14,163 $ 22,706,795 $ (19,506) $(13,236,392) $ 9,465,060
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial 6statements.
4
<PAGE>
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999
(Unaudited)
Nine Months Ended
September 30,
----------------------------
2000 1999
------------ ------------
Operating activities:
Net loss $ (1,347,322) $ (916,393)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 79,849 77,479
Contributed assets (178,660) 0
Issuance of stock for services 89,420 0
Provision for doubtful accounts 6,000 10,000
Issuances of compensatory stock options 0 79,884
Changes in operating assets and liabilities:
Trade accounts receivable, net (135,476) (37,327)
Inventories (113,980) 111,444
Prepaid expenses and other current assets (62,604) 1,489
Accounts payable (185,822) 24,549
Accrued expenses (18,358) 95,110
Accrued interest payable to QIP 26,910 261,546
Customer deposits and other 23,418 8,260
------------ ------------
Net cash used in operating activities (1,816,625) (283,959)
------------ ------------
Investing activities:
Additions to investments (6,658,729) 0
Additions to patents and trademarks (92,600) 0
Purchases of property and equipment (114,115) (1,564)
------------ ------------
Net cash used in investing activities (6,865,444) (1,564)
------------ ------------
Financing activities:
Proceeds from issuance of common stock 10,463,288 0
Proceeds from exercise of stock options, net 251,856 0
Proceeds from bank loan payable 0 275,000
Stock issued for conversion of debt 3,892,997 0
Cancellation of notes payable to QIP (3,217,997) 0
Cancellation of bank loan payable (525,000) 0
Cancellation of note payable to shareholder (150,000) 0
Payments received on notes receivable 32,425 0
Proceeds from capital lease obligation 27,716 0
Payment of capital lease obligations (19,863) (14,207)
Increase in bank overdraft 0 24.730
------------ ------------
Net cash provided by financing activities 10,755,422 285,523
------------ ------------
Increase in cash and cash equivalents 2,073,353 0
Cash and cash equivalents at beginning of period 8,121 0
------------ ------------
Cash and cash equivalents at end of period $ 2,081,474 $ 0
============ ============
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
Puradyn Filter Technologies Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation and Company
The accompanying condensed consolidated financial statements as of September 30,
2000 and for the three month and nine month periods ended September 30, 2000 and
1999 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 nine month period ended September 30, 2000 are not necessarily
indicative of the results to be expected for the entire year.
Following the dissolution of the Company's joint venture company located in
England effective May 31, 2000 (discussed in Note 6), the Company formed a
subsidiary company in June, 2000, called Puradyn Filter Technologies, Ltd. The
accompanying financial statements include the balance sheet at September 30,
2000 and results of operations since the date of inception of the subsidiary
company.
2. Basic and Diluted Loss Per Share. The Company has adopted Statement of
Financial Accounting Standards Board No. 128, "Earnings Per Share" (FAS 128)
which requires dual presentation of basic and diluted earnings per share.
However, because of losses from operations, the effect of stock options,
warrants and convertible debt (in 1999) is anti-dilutive.
2. Inventories
At September 30, 2000, inventories consist of the following:
Raw materials $ 337,283
Finished goods 116,093
---------
Total inventories $ 453,376
=========
3. Notes Payable to Shareholder
On two occasions in 1998, Richard C. Ford, Chief Executive Officer, member of
the Board of Directors and significant shareholder of the Company, loaned the
Company a total of $150,000. For each loan, the Company issued notes payable due
one year from the date of issuance at 12% interest and secured by accounts
receivable and inventories. On January 24, 2000, Mr. Ford converted these loans
into 150,000 shares of common stock and the related unpaid accrued interest to
that date totaling $25,504 was forgiven by Mr. Ford.
4. Note Payable to Bank
On January 21, 1999, the Company converted a $250,000 loan from its bank to a
one year $350,000 revolving line of credit with interest at the bank's prime
rate (7.75% at inception). The note was secured by substantially all assets of
the Company and by certificates of deposit in the name of Richard C. Ford, and
6
<PAGE>
the note was personally guaranteed by Mr. Ford. On March 25, 1999, the company
increased the line of credit to $525,000 and extended the repayment date to
March 25, 2000. The Company borrowed the full amount of each loan. On January
24, 2000, Mr. Ford and his daughter, Traci Ford, personally repaid the bank and
simultaneously converted the loan into 525,000 shares of the Company's common
stock.
5. 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 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. 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 were
identical to the $2,000,000 Note as described below.
On January 24, 2000, QIP converted the principal balance of the Notes totaling
$2,500,000 together with accrued interest (which the company had elected to add
to the principal amount of the Notes) totaling $717,997 into 2,500,000 shares of
the Company's common stock. In addition, on that date, QIP agreed to surrender
warrants to purchase 500,000 shares of the Company's common stock that were
exercisable at $2.75 per share and which would have expired on December 31,
2000.
Terms of both Notes included the following. Interest was 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 which the Company elected to do each quarter through December 31,
1999. Such unpaid interest bore interest at 15% and was payable on demand. The
Notes were senior to all indebtedness of the Company, except bank or financial
institution debt. The Notes could 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 the Notes were outstanding, the Company could not, 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 could be converted
into Common Stock of the Company at a conversion price of $2.75 per share. Under
certain circumstances, the Notes were subject to anti-dilution provisions and
the Company would register the securities.
6. Joint Venture
In 1996, the Company entered into a joint venture agreement with Centrax Ltd.
(with the Company owning 45% and Centrax owning 45%) called TF Purifiner Ltd.
("Ltd."). Ltd. sold the Company's products in Europe, the Middle East and
certain African countries. The joint venture had operating losses and negative
net worth, and, consequently, the Company had no recorded investment on its
books. Effective May 31, 2000, the Company and Centrax agreed to dissolve Ltd.
with no obligation on the part of the Company to have any liability for or to
fund any part of the dissolution.
7
<PAGE>
At the time of the dissolution, Centrax, sold to the Company for approximately
$38,000 certain foreign patents on the Puradyn technology it had on its books.
In addition it gave to the Company for no consideration certain other inventory
(having a stated value of approximately $230,000) and factory machines and tools
and dies it had used in manufacturing products for the joint venture (having an
estimated value of approximately $49,000). The patents were recorded at cost.
The fixed assets were recorded at their estimated fair market value of $49,000
and the inventories of $260,000 were recorded at their stated value with an
initial estimated valuation allowance of $130,000. The Company is using these
assets to conduct operations in England and to sell into the countries formerly
serviced by the joint venture.
7. 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 obtaining the manufacturing and
marketing rights to the Purifiner for Systems and the Company. 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. 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.
8. Stockholders' Equity.
As discussed in Notes 3, 4 and 5, the Company in January, 2000, converted
$3,892,997 of debt into 3,175,000 shares of its Common Stock. The Company also
sold shares of its Common Stock under two private offerings, one completed in
March, 2000, raised $3,594,240 through the issuance of 3,672,000 shares and
being completed at September 30, 2000, raised $9,869,000 through the issuance of
920,935 shares. Other shares were issued during the six months ended September
30, 2000 for the exercise of stock options (371,127 shares) and in exchange for
services (28,313 shares).
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 limited operations in 1991 when it
obtained worldwide manufacturing and marketing rights to the Purifiner(R)
product, now called the Puradyn Onboard Oil Filtration System or "Puradyn
System". The Puradyn System can be attached to any internal combustion engine to
filter impurities from the oil in the engine. Acceptance of the Puradyn products
is dependent on various factors, including the desire of potential users to
extend the oil change intervals to reduce maintenance costs, to extend engine
life and to preserve the envrionment.
The sales effort not only involves educating a potential customer on the
benefits of the product, but often allowing the customer to test the Puradyn
System on its fleet vehicles. Consequently the sales cycle can be relatively
long. The Company is currently in test with a number of major automotive, truck
and engine OEM's and related manufacturing companies. In the case of OEM's, the
goal is to obtain their approval to eventually install the Puradyn System on
their products as standard or optional equipment at their factories and to
distribute the Puradyn System throughout their dealer networks.
In the case of large vehicle fleets the goal is to obtain performance approval
and to retrofit existing fleet vehicles with the Puradyn System and to have the
Puradyn System installed on all new vehicle engines. The Company just completed
an initial test with a company having one of the largest private fleets in the
country began retrofitting its products on a portion of their fleet vehicles
beginning in July, 2000 for a second stage evaluation test. After two years of
tests on vehicles subject to heavy, intensive road use, the Texas Department of
Transportation, General Services Division, approved the Puradyn System for use
on its vehicles. As a result of testing and approval for use of the Puradyn
System by most branches of the U.S. military, the Environmental Division of the
U.S. Navy for Souda Bay (Greece) has placed an initial order with the Company to
begin installation of the Puradyn System on their vehicles and equipment.
Further, the Company recently received approval from a large oil company in
Kuwait and is expecting continuing orders from this company for their stationary
generators beginning in the fourth fiscal quarter.
The Company feels there is increasing awareness on the part of vehicle and
engine manufacturers and on the part of vehicle fleet managers of the cost
benefits of the Puradyn System, the Company's warranties and the environmental
benefits of conserving oil and reducing the disposal of waste oil. The
credibility of the Puradyn System and the concept of extended oil drain
intervals are now becoming more readily accepted. The Company believes that this
increasing acceptance is also due to third-party testing of the product and
awards and other recognition the Puradyn System has received.
9
<PAGE>
The Company curtailed its operations and reduced its remaining workforce to key
personnel in March, 1998 due to continuing operating losses and negative cash
flow. These actions were taken to reduce the amount of cash required to maintain
operations of the Company. At the same time, the Company sought to arrange
additional financing. In November, 1999, the Company formulated a plan to
convert all of its outstanding notes payable into common stock and to sell
additional common stock to raise cash in excess of $3,500,000.
On January 24, 2000, the Company completed the conversion of $3,175,000 of
principal amount of debt of five notes payable (together with accrued interest
of $718,000 that had been added to principal of two of the notes payable) into
3,175,000 shares if its common stock. The Company also obtained forgiveness of
$26,000 in unpaid interest on two other notes payable. On March 6, 2000, the
Company completed the sale of 4,172,000 shares of its Common Stock with net
proceeds of approximately $4,100,000 (of which $500,000 had been paid in
December, 1999). Furthermore, at September 30, 2000, the Company was completing
the sale of an additional 920,935 shares of its Common Stock to raising an
additional $6,869,000.
The Company filed an application in early November, 2000, to list its common
stock on the NASDAQ small cap market.
Results of Operations for the Three Months Ended September 30, 2000 Compared to
the Three Months Ended September 30, 1999 and for the Nine Months Ended
September 30, 2000 Compared to the Nine Months Ended September 30, 1999.
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, 2000 to the
corresponding periods ended September 30, 1999, in thousands.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
Incr. Incr.
2000 1999 (Decr.) 2000 1999 (Decr.)
------- ------- ------- ------- ------- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 359 $ 147 $ 212 $ 1,043 $ 412 $ 631
------- ------- ------- ------- ------- -------
Operating costs and expenses:
Cost of sales 334 135 199 965 398 567
Selling expenses 317 76 241 826 223 603
General and administrative expenses 403 96 307 802 337 465
Engineering and development 52 9 43 172 56 116
------- ------- ------- ------- ------- -------
Total operating costs and expenses 1,106 316 790 2,765 1,014 1,751
------- ------- ------- ------- ------- -------
Operating loss (747) (169) 578 (1,722) (602) 1,120
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
Incr. Incr.
2000 1999 (Decr.) 2000 1999 (Decr.)
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income 143 0 143 201 1 200
Interest (expense) (1) (111) 110 (40) (315) 275
Contributed assets 0 0 0 179 0 179
Forgiveness of debt 1 0 1 35 0 35
------- ------- ------- ------- ------- -------
Total other income (expense) 143 (111) 254 375 (314) 689
------- ------- ------- ------- ------- -------
Net loss $ (604) $ (280) $ 324 $(1,347) $ (916) $ 431
======= ======= ======= ======= ======= =======
</TABLE>
Net Sales. Net sales increased by approximately $212,000 and $631,000,
respectively, in the third fiscal quarter and the nine months ended September
30, 2000 compared to the corresponding periods in the prior year. The Company
changed the focus of its sales efforts toward OEMs and companies having large
fleets of trucks during 1998 and 1999 and the effects of this change began to
show late in 1999 and is continuing through the first three quarters of 2000.
Management feels it now has a good base of potential customers with satisfactory
product performance results. However there can be no assurance these factors
will produce continued improvements in sales.
Cost of Sales. Cost of sales increased by approximately $199,000 and $567,000,
respectively, in the third fiscal quarter and the nine months ended September
30, 2000 compared to the corresponding periods in the prior year. The increases
are related to increased sales volume in the respective periods.
The Company's gross margin decreased to 6.9% in the third fiscal quarter from
8.0% in the corresponding period in 1999, but for the first nine months of 2000,
gross margin increased to 7.4% from 3.6% in the corresponding period of the
prior year. The overall improvement year to date is due to the effect of the
increased sales volume in beginning to offset the costs of excess manufacturing
capacity.
Selling Expenses. Selling expenses increased by approximately $241,000 and by
$603,000 respectively, in the third fiscal quarter and the nine months ended
September 30, 2000 compared to the corresponding periods in the prior year.
During the first three fiscal quarters of 2000 the Company increased its sales
force and increased its promotional efforts to reach additional potential
customers including hiring a public relations firm, increased advertising and
exhibiting at various trade shows. Sales efforts had been curtailed during 1998
and 1999 due to the Company's limited cash flow and cash resources. The Company
expects increases in Selling Expenses in the near future as it expands its
selling efforts.
General and Administrative Expenses. General and administrative expenses
increased by approximately $307,000 and $465,000 in the third fiscal quarter and
the nine months ended September 30, 2000 compared to the corresponding periods
in the prior year. As noted with Selling Expenses above, the Company had
curtailed its spending in 1998 and 1999 due to limited cash resources. In 2000,
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<PAGE>
the Company increased its staff size and the salary amounts to existing
executives and staff, and added an outside investor relations firm and
consulting expenses in the form of amortized cost of stock warrants given to in
lieu of cash to consultants. In the third fiscal quarter the Company added its
President and experienced increases in travel among executives in sales efforts.
Also, during the third fiscal quarter the expenses of the new subsidiary company
in England added approximately $50,000 to the overall increase. The Company
expects increases in General and Administrative Expenses in the near future as
it expands its administrative staff and capabilities.
Engineering and Development Expenses. Engineering and development expenses
increased by approximately $43,000 and by $116,000, respectively, in the third
fiscal quarter and the nine months ended September 30, 2000 compared to the
corresponding periods in the prior year. This increase in the nine month period
is due to expenses paid for outside engineering work in the first fiscal quarter
of 2000 related to the re-design of the Puradyn unit referred to above, and the
cost in the third fiscal quarter of prototypes of the new products.
Interest Income and Interest Expense and Forgiveness of Debt. Interest income
increased by approximately $143,000 and $200,000, respectively, in the third
fiscal quarter and the nine months ended June 30, 2000 compared to the
corresponding periods in the prior year. The increased income is due to income
from the investment of funds received from the stock sold in the first three
fiscal quarters of 2000. Invested funds total approximately $6,600,000 plus
approximately $2,000,000 which is in cash equivalent investments. There were
virtually no invested funds in the prior year.
Interest expense decreased by approximately $110,000 and by $275,000,
respectively, in the third fiscal quarter and the nine months ended September
30, 2000 compared to the corresponding periods in the prior year due to the
cancellation of all outstanding notes payable (having a principal balance of
approximately $3,900,000) in January, 2000.
Contributed assets of $179,000 resulted from inventories, patents and fixed
assets given to the Company by its joint venture partner in connection with the
dissolution of the European joint venture company.
Forgiveness of debt of approximately $35,000 in nine months ended September 30,
2000 is related to interest on two notes payable that were converted to common
stock in January, 2000 that were discussed above, and settlement discounts
received from vendors.
Liquidity and Capital Resources.
The Company has had operating losses since inception and, consequently, its
capital requirements in connection with its business activities have been and
may continue to be significant. To fund its activities from inception to date,
the Company has been entirely dependent upon the proceeds of sales of its
securities to investors and from loans of which $3,893,000 was converted to
stock in January, 2000. In addition, on March 6, 2000, the Company completed the
sale of 4,172,000 shares of its Common Stock with net proceeds of approximately
$4,100,000 (of which $500,000 had been paid in December, 1999). The Company is
completing a second private offering of its common stock in process from which
it has received $6,869,000 through September 30, 2000 for the sale of 920,935
shares.
12
<PAGE>
As a direct result of the recent infusion of cash discussed above, at September
30, 2000, the Company had working capital of approximately $9,102,396 and with a
current ratio (current assets to current liabilities) of 25.86 to 1. The Company
believes it has sufficient cash for the foreseeable future, however there is no
assurance that sales will increase to the level required to generate profitable
operations and to provide positive cash flow from 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. 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.
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 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.
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ITEM 2. CHANGES IN SECURITIES.
On March 6, 2000, the Company completed the sale of 4,172,000 shares of
its Common Stock with net proceeds of approximately $4,100,000 (of
which $500,000 had been paid in December, 1999). The Company is
completing a second private offering of its common stock at September
30, 2000, from which it has received $6,869,000 through for the sale of
920,935 shares.
ITEM 5. OTHER INFORMATION.
On June 23, 2000, the Board of Directors approved an amendment to the
Company's 1999 Stock Option Plan to increase the number of shares of
Common Stock covered by such Plan from 2,000,000 shares to 3,000,000
shares. On November 8, 2000, the Board of Directors approved a
Non-Employee Directors' Stock Plan underwhich 400,000 shares of the
Company's common stock has been reserved for issuance.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
Exhibit 10.21 - Non-Employee Directors' Stock Plan
Exhibit 27 - Financial Data Schedule (Electronic filing only)
b) Reports on Form 8-K.
1. None
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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)
Date: November 9, 2000
By /s/
-----------------------------------
Alan J. Sandler
Vice President
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