Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - PURADYN FILTER TECHNOLOGIES INCFinancial_Report.xls
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION - PURADYN FILTER TECHNOLOGIES INCpfti_ex31z1.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION - PURADYN FILTER TECHNOLOGIES INCpfti_ex31z2.htm
EX-32.1 - SECTION 1350 CERTIFICATION - PURADYN FILTER TECHNOLOGIES INCpfti_ex32z1.htm


 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549


———————

FORM 10-Q

———————

(Mark One)

þ

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

 

 ACT OF 1934

For the quarterly period ended: June 30, 2013

or

 

 

¨

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

 

 ACT OF 1934

For the transition period from: _____________ to _____________


COMMISSION FILE NUMBER: 001-11991


PURADYN FILTER TECHNOLOGIES INCORPORATED

(Name of registrant as specified in its charter)


DELAWARE

14-1708544

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

2017 HIGH RIDGE ROAD, BOYNTON BEACH, FL

33426

(Address of principal executive offices)

(Zip Code)


(561) 547-9499

(Registrant's telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.

 

þ

 Yes

¨

 No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

þ

 Yes

¨

 No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer

¨

 

 

Accelerated filer

¨

 

Non-accelerated filer

¨

 

 

Smaller reporting company

þ

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

¨

 Yes

þ

 No

 

 

Indicated the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 48,540,677 shares of common stock are issued and outstanding as of August 6, 2013.

 

 






TABLE OF CONTENTS


Page No.

PART I. - FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS.

4


CONDENSED CONSOLIDATED BALANCE SHEETS

4


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

5


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

6


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

7


CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’

DEFICIT FOR THE SIX MONTHS ENDED JUNE 30, 2013 (UNAUDITED)

8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

9


ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.

15


ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

24


ITEM 4.

CONTROLS AND PROCEDURES.

24


PART I. - FINANCIAL INFORMATION


ITEM 1.

LEGAL PROCEEDINGS.

25


ITEM 1A.

RISK FACTORS.

25


ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

25


ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

25


ITEM 4.

MINE SAFETY DISCLOSURE.

25


ITEM 5.

OTHER INFORMATION.

25


ITEM 6.

EXHIBITS.

26

 







2



OTHER PERTINENT INFORMATION


Our web site is www.puradyn.com.  The information which appears on our web site is not part of this report.


When used in this report, the terms "Puradyn," the "Company," "we," "our," and "us" refers to Puradyn Filter Technologies Incorporated, a Delaware corporation, and our subsidiaries.


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION


Certain statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to:

·

our history of losses and uncertainty that we will be able to continue as a going concern,

·

our ability to generate net sales in an amount to pay our operating expenses,

·

our need for additional financing and uncertainties related to our ability to obtain these funds,

·

our ability to repay the outstanding debt of $9.1 million at June 30, 2013 due our Chairman and CEO,

·

our reliance on sales to a limited number of customers,

·

our dependence on a limited number of distributors,

·

our ability to compete,

·

our ability to protect our intellectual property and

·

the application of penny stock rules to the trading in our stock.

Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review our Annual Report on Form 10-K for the year ended December 31, 2012 including the risks described in Part I. Item 1A. Risk Factors, together with our subsequent filings with the Securities and Exchange Commission in their entirety.  Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.



3



PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.


PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS


 

 

June 30,
2013

 

December 31
2012

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

 

$

48,958

 

$

114,512

 

Accounts receivable, net of allowance of $16,876 and $16,485, respectively

 

 

168,019

 

 

140,117

 

Inventories, net of allowance of $438,896 and $396,194, respectively

 

 

581,222

 

 

717,795

 

Prepaid expenses and other current assets

 

 

168,119

 

 

98,319

 

Total current assets

 

 

966,318

 

 

1,070,743

 

Property and equipment, net

 

 

81,232

 

 

78,343

 

Other noncurrent assets

 

 

255,298

 

 

233,692

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,302,848

 

$

1,382,778

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ deficit

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

177,614

 

$

195,898

 

Accrued liabilities

 

 

311,099

 

 

288,645

 

Current portion of capital lease obligation

 

 

7,751

 

 

7,428

 

Deferred compensation

 

 

1,315,921

 

 

1,275,388

 

Notes Payable - stockholders

 

 

-

 

 

125,000

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

1,812,385

 

 

1,892,359

 

 

 

 

 

 

 

 

 

Long term liabilities:

 

 

 

 

 

 

 

Capital lease obligation, less current portion

 

 

7,418

 

 

11,377

 

Notes Payable -  stockholder

 

 

9,354,192

 

 

8,714,037

 

 

 

 

 

 

 

 

 

Total Long Term Liabilities

 

 

9,361,610

 

 

8,725,414

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

11,173,995

 

 

10,617,773

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

Preferred stock, $.001 par value: Authorized shares – 500,000; None issued and outstanding

 

 

 

 

 

Common stock, $.001 par value: Authorized shares – 100,000,000; Issued and outstanding – 48,487,105 and 47,399,233, respectively

 

 

48,487

 

 

47,399

 

Additional paid-in capital

 

 

46,924,991

 

 

46,671,332

 

Accumulated deficit

 

 

(56,844,625

)

 

(55,953,726

)

 

 

 

 

 

 

 

 

Total stockholders’ deficit

 

 

(9,871,147

)

 

(9,234,995

)

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ deficit

 

$

1,302,848

 

$

1,382,778

 



See accompanying notes to unaudited condensed consolidated financial statements


4



PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)


 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

600,390

 

 

$

804,099

 

 

$

1,174,878

 

 

$

1,555,601

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

506,030

 

 

 

514,526

 

 

 

909,563

 

 

 

1,086,745

 

Salaries and wages

 

 

 274,313

 

 

 

269,079

 

 

 

 554,138

 

 

 

551,279

 

Selling and administrative

 

 

250,484

 

 

 

251,477

 

 

 

508,184

 

 

 

487,029

 

Total operating costs 

 

 

 1,030,827

 

 

 

1,035,082

 

 

 

1,971,885

 

 

 

2,125,053

 

Loss from operations

 

 

(430,437

)

 

 

(230,983

)

 

 

(797,007

)

 

 

(569,452

)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gain on foreign currency

 

 

 

 

 

 

 

 

— 

 

 

 

146,255

 

Other income

 

 

10,000

 

 

 

 

 

 

10,000

 

 

 

 

Interest expense

 

 

(53,778

)

 

 

(42,136

)

 

 

(103,892

)

 

 

(81,900

)

Total other expense, net

 

 

(43,778

)

 

 

(42,136

)

 

 

(93,892

)

 

 

64,355

 

Loss before income taxes

 

 

(474,215

)

 

 

(273,119

)

 

 

(890,899

)

 

 

(505,097

)

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(474,215

)

 

$

(273,119

)

 

$

(890,899

)

 

$

(505,097

)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

$

(.01

)

 

$

(.01

)

 

$

(.01

)

 

$

(.01

)

Weighted average common shares outstanding (basic and diluted)

 

 

48,441,050 

 

 

 

47,185,445

 

 

 

48,170,048

 

 

 

47,119,622

 




See accompanying notes to unaudited condensed consolidated financial statements


5



PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 

 

Six Months Ended

June 30

 

  

 

2013

 

 

2012

 

Operating activities

 

 

 

 

 

 

Net loss

 

$

(890,899

)

 

$

(505,097

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

18,210

 

 

 

23,741

 

Realized gain on foreign currency adjustment

 

 

 

 

 

(146,255

)

Provision for bad debts

 

 

 

 

 

(6,202

)

Provision for slow moving inventory

 

 

42,702

 

 

 

 

Amortization of deferred financing costs included in interest expense

 

 

125

 

 

 

251

 

Deferred compensation

 

 

40,533

 

 

 

36,591

 

Compensation expense on stock-based arrangements with employees, consultants, investors and vendors

 

 

95,629

 

 

 

116,433

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(27,902

)

 

 

(51,555

)

Inventories

 

 

93,872

 

 

 

(36,648

)

Prepaid expenses and other current assets

 

 

(69,799

)

 

 

(91,773

)

Accounts payable

 

 

(18,284

)

 

 

87,244

 

Accrued liabilities

 

 

31,572

 

 

 

41,578

 

Net cash used in operating activities

 

 

(684,241

)

 

 

(531,692

)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Capitalized patent costs

 

 

(25,421

)

 

 

 

Purchases of property and equipment

 

 

(17,411

)

 

 

(23,658

)

Net cash used in investing activities

 

 

(42,832

)

 

 

(23,658

)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Additions to deferred financing costs

 

 

 

 

 

1,179

 

Proceeds from exercise of warrants

 

 

 

 

 

4,808

 

Proceeds from issuance of notes payable to stockholders

 

 

665,155

 

 

 

470,000

 

Proceeds from shareholder note receivable

 

 

 

 

 

34,535

 

Borrowings on capital lease

 

 

 

 

 

12,569

 

Payment of capital lease obligations

 

 

(3,636

)

 

 

(3,116

)

Net cash provided by financing activities

 

 

661,519

 

 

 

519,975

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net  (decrease) in cash

 

 

(65,554

)

 

 

(35,375

)

Cash at beginning of period

 

 

114,512

 

 

 

51,152

 

Cash at end of period

 

$

48,958

 

 

$

15,777

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

115,598

 

 

$

73,387

 

Cash paid for taxes

 

$

 

 

$


During the six months ended June 30, 2013, the Company converted $150,000 of notes payable and accrued interest of $9,118 into 933,009 shares of common stock at a conversion price of $0.17 per share.



See accompanying notes to unaudited condensed consolidated financial statements


6



PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)


 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

  

 

2013

 

 

2012

 

 

2013

 

 

2012

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(484,215

)

 

$

(273,119

)

 

$

(890,899

)

 

$

(505,097

)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(146,255

)

Comprehensive loss

 

$

(484,215

)

 

$

(273,119

)

 

$

(890,899

)

 

$

(651,352

)




See accompanying notes to unaudited condensed consolidated financial statements


7



PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 2013
(UNAUDITED)

 

 

 

 

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Total

Stockholders'

Deficit

 

 

 

Common Stock

Shares

 

Amount

Balance at December 31, 2012

     

 

47,399,233

 

$

47,399

 

$

46,671,332

 

 

$

(55,953,726

)

 

$

(9,234,995)

Common Stock issued in satisfaction of note payable and accrued interest

 

 

933,009

 

 

933

 

 

158,185

 

 

 

 

 

 

159,118

Common Stock to consultant

 

 

154,863

 

 

155

 

 

23,845

 

 

 

 

 

 

24,000

Compensation expense associated with option awards

 

 

 

 

 

 

71,629

 

 

 

 

 

 

71,629

Net loss

 

 

 

 

 

 

 

 

 

(890,899

)

 

 

(890,899)

Balance at June 30, 2013

 

 

48,487,105

 

$

48,487

 

$

 46,924,991

 

 

$

(56,844,625

)

 

$

(9,871,147)



See accompanying notes to unaudited condensed consolidated financial statements


8





PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.

Basis of Presentation, Going Concern and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim information and with the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments consisting of a normal and recurring nature considered necessary for a fair presentation have been included. Operating results for the three and six - month periods ended June 30, 2013 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2013.

For further information, refer to Puradyn Filter Technologies Incorporated’s (the “Company”) consolidated financial statements and footnotes thereto included in the Form 10-K for the year ended December 31, 2012.


Since its formation June 1, 2000, Puradyn Filter Technologies, Ltd. (“Ltd.”), the Company’s United Kingdom subsidiary, has been included in the Company’s condensed consolidated financial statements. In March, 2009, Ltd.’s office in the UK was closed and all assets, except for bank cash accounts, were transferred to the United States. Effective January, 2012, Ltd., ceased as a legal entity.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates in the accompanying unaudited condensed consolidated financial statements include the allowance for doubtful accounts receivable, valuation of inventory, future warranty claims, valuation of share based payments, and the valuation of intangible assets including patents.

Basic and Diluted Loss Per Share

FASB ASC 260, Earnings Per Share, requires a dual presentation of basic and diluted earnings per share. However, because of the Company's net losses, the effect of outstanding stock options and warrants would be anti-dilutive and, accordingly, is excluded from the computation of diluted loss per share. The number of such shares excluded from the computation of loss per share totaled 6,695,260 and 6,925,507 for the three months and six months ended  June 30, 2013 and 2012, respectively.

Stock Compensation

The Company adopted FASB ASC 718, Compensation – Stock Compensation, effective January 1, 2006 using the modified prospective application method of adoption which requires us to record compensation cost related to unvested stock awards as of December 31, 2005, recognizing the amortized grant date fair value in accordance with provisions of FASB ASC 718 on straight line basis over the service periods of each award.  We have estimated forfeiture rates based on our historical experience.  Stock option compensation expense for the periods ended  June 30, 2013 and June 30, 2012 have been recognized as a component of cost of goods sold and general and administrative expenses in the accompanying Condensed Consolidated Financial Statements.

Stock options and warrants issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable in accordance with FASB ASC 718 and FASB ASC 505 Equity, including related amendments and interpretations. The related expense is recognized over the period the services are provided.




9



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Inventories


Inventories are stated at the lower of cost or market using the first in, first out (FIFO) method. Production costs, consisting of labor and overhead, are applied to ending inventories at a rate based on estimated production capacity and any excess production costs are charged to cost of products sold. Provisions have been made to reduce excess or obsolete inventories to their net realizable value.


Inventories consisted of the following at June 30, 2013 and December 31, 2012, respectively:

 

 

June 30

2013

 

December 31,

2012

 

 

 

(unaudited)

 

 

 

Raw materials

 

$

914,265

 

$

981,458

 

Work In Progress

 

 

 

 

409

 

Finished goods

 

 

105,853

 

 

132,122

 

Valuation allowance

 

 

(438,896

)

 

(396,194

)

Inventory, net

 

$

581,222

 

$

717,795

 


During the three months ended June 30, 2013 the Company recorded an additional reserve for slow moving inventory of $42,702.


Deferred Financing Costs

The Company capitalizes financing costs and amortizes them using the straight-line method, which approximates the effective interest method, over the term of the related debt. Amortization of deferred financing costs is included in interest expense and totaled $62 and $125 for the three and six months ended June 30 2013 compared to $715 and $1,430 for the three and six months ended June 30, 2013 and 2012, respectively.  Accumulated amortization of deferred financing costs as of June 30, 2013 and 2012 was $680,773 and $682,084, respectively. Net deferred financing costs as of June 30, 2013 and December 31, 2012 was $377 and $503, respectively.


Revenue Recognition


The Company recognizes revenue from product sales to customers, distributors and resellers when products that do not require further services or installation by the Company are shipped, when there are no uncertainties surrounding customer acceptance and when collectability is reasonably assured in accordance with FASB ASC 605, Revenue Recognition, as amended and interpreted. Cash received by the Company prior to shipment is recorded as deferred revenue. Sales are made to customers under terms allowing certain limited rights of return and other limited product and performance warranties for which provision has been made in the accompanying condensed consolidated financial statements.


Amounts billed to customers in sales transactions related to shipping and handling, represent revenues earned for the goods provided and are included in net sales. Costs of shipping and handling are included in cost of products sold.

Product Warranty Costs

As required by FASB ASC 460, Guarantor’s Guarantees, the Company is including the following disclosure applicable to its product warranties.

The Company accrues for warranty costs based on the expected material and labor costs to provide warranty replacement products. The methodology used in determining the liability for warranty cost is based upon historical information and experience.  The Company's warranty reserve is included in accrued liabilities in the accompanying condensed consolidated financial statements and is calculated as the gross sales multiplied by the historical warranty expense return rate. As of June 30, 2013, there was no change to the reserve for warranty liability as the reserve balance was deemed sufficient to absorb any warranty costs that might be incurred from the sales activity for the period.



10



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



The following table shows the changes in the aggregate product warranty liability for the six-months ended June 30, 2013:


Balance as of December 31, 2012

     

$

20,000

 

Less: Payments made

 

 

 

Add:  Provision for current period warranties

 

 

 

Balance as of June 30, 2013 (unaudited)

 

$

20,000

 


Comprehensive Income


FASB ASC 220, Comprehensive Income establishes rules for reporting and displaying of comprehensive income and its components. Comprehensive income is the sum of net loss as reported in the condensed consolidated statements of operations and other comprehensive income transactions. Other comprehensive income transactions that currently apply to the Company result from changes in exchange rates used in translating the financial statements of its wholly owned subsidiary, Puradyn Filter Technologies, Ltd. (“Ltd.”). Comprehensive loss as of June 30, 2013 and 2012 is not shown net of taxes because the Company’s deferred tax asset has been fully offset by a valuation allowance. There was no comprehensive income or loss attributable to the six months ended June 30, 2013 as Ltd.’s business license was surrendered with the British authorities in January, 2012.


New Accounting Pronouncements


During the three months ended June 30, 2013 there were no new accounting pronouncements that were deemed to have a material impact on the Company’s financial results.


2.

Going Concern


The Company's financial statements have been prepared on the assumption that it will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has sustained losses since inception and used net cash in operations of $684,241 and $531,692 during the six-months ended June 30, 2013 and 2012, respectively. As a result, the Company has had to rely principally on private placements of equity and debt securities, including the conversion of debt into stock as well as stockholder loans to fund its activities to date.


These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from two stockholders led the Company’s independent registered public accounting firm, Liggett, Vogt & Webb, P.A., to include a statement in its audit report relating to the Company’s audited consolidated financial statements for the year ended December 31, 2012 expressing substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.

The Company has been addressing the liquidity and working capital issues and continues to attempt to raise additional capital with institutional and private investors and current stockholders. Cost reductions were and continue to be implemented by the Company, including acquiring alternative suppliers for raw materials and volume purchase discounts when appropriate. The Company expects to see results from these reductions, as well as other cost reduction plans through 2013.  


3.

Common Stock


As partial compensation per an agreement dated May 19, 2011, and renewed on June 8, 2012, for consultant work, the Company issued to Monarch Communications, Inc. the following:

·

On January 8, 2013, 28,571 shares of its common stock valued at $0.14 per share

·

On February 8, 2013, 26,667 shares of its common stock valued at $0.15 per share.

·

On March 11, 2013, 21,053 shares of its common stock valued at $0.19 per share.



11



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


·

On April 23, 2013, 25,000 shares of its common stock valued at $0.16 per share.

·

On May 15, 2013, 25,000 shares of its common stock valued at $0.16 per share.

·

On June 12, 2013, 28,572 shares of its common stock valued at $0.14 per share.


On February 13, 2013 the Company issued 882,353 shares of its common stock valued at $0.17 per share as payment for the note payable in the amount of $150,000 from a stockholder who is also a director. On April 8, 2013 the Company issued 50,656 shares of its common stock valued at $0.18 per share as payment for the interest, in the amount of $9,118, on a note payable in the amount of $150,000 from a stockholder who is also a director.

 

4.

Stock Options and Warrants


For the three months and six months ended June 30, 2013 and June 30, 2012, respectively, the Company recorded stock-based compensation expense of $32,151, $44,518, $71,629 and $80,009, respectively, relating to employee stock options.   


Stock options and warrants issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable in accordance with FASB ASC 505, Equity, and FASB ASC 718, Compensation – Stock Compensation. The related expense is recognized over the period the services are provided. Unrecognized expense remaining at June 30, 2013 and 2012 for the options is $175,857 and $308,812, respectively, and will be recognized through June 30, 2017.


A summary of the Company’s stock option plans as of  June 30, 2013, and changes during the six-month period then ended is presented below:  


 

 

Six Months Ended

June 30,

 

  

 

Number of Options

 

 

Weighted Average

Exercise Price

 

Options outstanding at December 31, 2012

 

 

3,863,972

 

 

$

.27

 

Options granted

 

 

 

 

 

 

Options exercised

 

 

 

 

 

 

Options cancelled

 

 

 

 

 

 

Options expired

 

 

(129,000

)

 

 

1.80

 

Options at end of period

 

 

3,734,972

 

 

$

.27

 

Options exercisable at June 30, 2013

 

 

2,888,298

 

 

$

.29

 


Changes in the Company’s unvested options for the six months ended June 30, 2013 are summarized as follows:


  

 

Six Months Ended

June 30, 2013

 

  

 

Number of

Options

 

 

Weighted Average

Exercise Price

 

Nonvested options at December 31, 2012

 

 

1,687,000

 

 

$

.13

 

Options granted

 

 

 

 

 

 

Options vested

 

 

(840,236

)

 

 

.12

 

Options cancelled

 

 

 

 

 

 

Non-Vested options at June 30, 2013

 

 

846,674

 

 

$

.14

 




12



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



 

 

 

Options Outstanding

 

 

Options Exercisable

 

Range of Exercise Price

 

 

Number Outstanding

 

 

Remaining Average Contractual Life (In Years)

 

 

Weighted Average Exercise Price

 

 

Number Exercisable

 

 

Weighted Average Exercise Price

 

$

0.11 – $1.70

 

 

 

3,719,972

 

 

 

6.16

 

 

$

.26

 

 

 

2,873,298

 

 

$

.28

 

$

1.99 – $2.60

 

 

 

15,000

 

 

 

0.04

 

 

 

2.60

 

 

 

15,000

 

 

 

2. 608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

 

 

3,734,972

 

 

 

6.14

 

 

$

.27

 

 

 

2,888,298

 

 

$

.29

 


Warrants


At June 30, 2013, 2,960,288 warrants with an average exercise price of $0.77 remain outstanding and were fully vested.


A summary of the Company’s warrant activity as of June 30, 2013 and changes during the six month period then ended is presented below:


 

 

Six months ended

June 30, 2013

 

  

 

Weighted Average Exercise

 

  

 

Warrants

 

 

Price

 

Warrants outstanding at December 31, 2012

 

 

3,899,758

 

 

$

.77

 

Granted

 

 

 

 

 

— 

 

Exercised

 

 

 

 

 

 

Expired

 

 

(939,470)

 

 

 

1.25

 

Warrants outstanding at June 30, 2013

 

 

2,960,288

 

 

 

.61

 


 

 

 

Warrants Outstanding

 

Range of Exercise Price

 

 

Number Outstanding

 

 

Remaining Average Contractual Life (In Years)

 

 

Weighted Average Exercise Price

 

$

0.35 – $0.75

 

 

 

2,446,483

 

 

 

1.49

 

 

$

.48

 

$

1.25

 

 

 

513,805

 

 

 

.20

 

 

 

1.25

 

Totals

 

 

 

2,960,288

 

 

 

1.36

 

 

$

.61

 


5.

Notes Payable to Stockholder


Beginning on March 28, 2002 the Company executed a binding agreement with one of its principal stockholders, who is also the Chairman of the Board and an executive officer, to fund up to $6.1 million. Under the terms of the agreements, the Company can draw amounts as needed to fund operations. Amounts drawn bear interest at the BBA LIBOR Daily Floating Rate plus 1.4 percentage points (1.544% per annum at June 30, 2013), payable monthly and were to become due and payable on December 31, 2005 or upon a change in control of the Company or consummation of any other financing over $7.0 million. Beginning in March 2006, annually, through March 2013, the maturity date for the agreement was extended annually from December 31, 2007 to December 31, 2014.  


On April 25, 2013, May 9, 2013 and May 31, 2013, the Company received $100,000, $140,000 and $50,000, respectively, from the Company’s Chairman and CEO, as an advance for working capital needs. The loans bear interest at the same rate of interest as the credit facility provided by the stockholder under the note dated March 28, 2002.


At June 30, 2013 the Company had drawn the full funding amount under the agreement of $6.1 million plus an additional $1,589,092, plus direct loans of $1,665,100, for a total amount due of $9,354,192.  




13



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For the three months ended June 30, 2013 and 2012, the Company recorded $52,306 and $40,370 of interest expense, respectively, and for the six-months ended June 30, 2013 and 2012, the Company recorded $102,420 and $78,865 respectively, of interest expense related to the notes payable, as noted above, which is included in interest expense in the accompanying condensed consolidated statements of operations.


6.

Commitments and Contingencies


On October 20, 2009, the Company entered into a consulting agreement with Boxwood Associates, Inc., whereby the Company pays $2,000 monthly for management and strategic development services performed. The contract will remain in effect until terminated by either party providing 30 days written notice. Mr. Telesco, a member of our board of directors, a note holder and a significant stockholder, is also the President of Boxwood Associates, Inc.  


On June 8, 2012, we renewed a consulting agreement with Monarch Communications, Inc. for services rendered as public relations firm and media relations consultants for the Company. The term of the agreement is for twelve months. As compensation for their services, Monarch will receive a fee of $7,000 per month, for the first six months, payable as $2,000 cash and $5,000 in shares of common stock. For the final six months of the agreement, Monarch will receive a fee of $7,000, payable as $3,000 in cash and $4,000 in shares of common stock.  Either party may terminate the agreement with 30 days’ notice. The recipient is an accredited or otherwise sophisticated investor who had such knowledge and experience in business matters and was capable of evaluating the merits and risks of the prospective investment in our securities.  The issuance of the shares is exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


On September 27, 2012, the Company entered into a 72 month lease for its corporate offices and warehouse facility in Boynton Beach, Florida. The lease commences August 1, 2013 and requires an initial rent of $12,026 per month beginning in the second month for the first year, increasing in varying amounts to $13,941 per month in the sixth year. In addition, the Company is responsible for all operating expenses and utilities.


In December 2012, the Company renewed the lease at an annual expense of $6,750, on a condominium in Ocean Ridge, Florida until December 31, 2013.


7.

Subsequent Events


On July 1, the Company received $136,272 from Richard C. Ford as payment of the balance remaining on the default final judgment in the amount of $134,160 in principal and $2,112 in accumulated interest.


On July 1, 2013, as partial compensation per an agreement dated May 19, 2011, and renewed on June 8, 2012 for consulting work, the Company issued 28,572 shares of its common stock valued at $0.14 per share to Monarch Communications, Inc.


On August 1, 2013, as partial compensation per an agreement dated May 19, 2011, and renewed on June 8, 2012 for consulting work, the Company issued 25,000 shares of its common stock valued at $0.16 per share to Monarch Communications, Inc.






14





ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.


Overview


Sales of the Company’s products, the puraDYN® bypass oil filtration system and replaceable filter elements will depend principally upon end user demand for such products and acceptance of the Company’s products by end-user customers and OEMs. 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 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 benefits and cost advantages of its products. As a result of our limited resources, we have not had adequate funds available to undertake these necessary marketing efforts.

To our knowledge, currently no bypass oil filtration system has captured a substantial share of the market. We believe we are in a unique position to capitalize on the growing acceptance of bypass oil filtration given that our products and our Company are positioned as, including, but not limited to:

·

A competitively priced, value-added product based on an advanced, patented technology that keeps clean oil clean to extend oil service intervals.

·

An alternative solution to the rising costs of lubricating oils, national concerns over dependence on foreign oil, and the growing trend toward ‘greening’ of existing technologies.

·

Providing an operational maintenance solution to end users in recognition of existing and reasonably foreseeable federal environmental legislation such as new regulation affecting diesel engines and diesel fuels, mandating cleaner diesel engines, causing greater load demands on engine lubricating oils.

·

Safely extending the lubricating and hydraulic oil service intervals to substantially reduce the carbon footprint of equipment, providing a significant environmental benefit.

·

Providing significant oil maintenance savings and reduced engine life cycle costs from continuously clean lubricating and hydraulic oil.

·

Providing potential fuel efficiency due to a reduction of friction in the engine components from continuously clean lubricating oil and the opportunity to minimize equipment downtime for improved operating productivity.


By keeping engine and hydraulic oil continuously clean, equipment runs at optimum efficiency and the oil can be kept in use instead of changing it, possibly extending the life of the oil over numerous oil drain cycles. We focus our sales strategy on individual end users and distributor sales efforts as well as on the development of a nationwide distribution network that will not only sell but also install and support our product. We currently have approximately 75 active distributors  in the U.S. and internationally. The number of distributors frequently changes as we add new distributors as well as when OEM comes onboard with their distribution networks.


We continue to concentrate our sales and marketing efforts to target industries open to innovative methods to reduce oil maintenance operating costs. These industries are searching for new and progressive technologies to optimize their equipment use, including bypass oil filtration. This strategy includes focus on:


·

The expansion of existing strategic relationships we have with Nabors Industries, Inc., Deere and Company, and others;

·

Continued development and expansion of our distribution network with distributors who have an established customer base of our target industries;

·

Continued development of relationships with identified and target markets;

·

Creating customer ‘pull-through’, a sustained level of request for our product at the OEM level; and

·

Initiating and monitoring customer evaluations for conversion into sales, both immediate and long-term.



15





While this is a long-term and ongoing commitment, we believe we have achieved a limited amount of product acceptance based on recent accomplishments:


·

In April 2013 we entered into a three-year exclusive distribution agreement with Honghua America LLC in the territories of mainland China, Hong Kong, Macau, and Taiwan,

·

In December 2012 we entered into a one year exclusive distribution agreement with MER Equipment, Inc. for the commercial marine industry on the West Coast of the United States, including Alaska and Hawaii.  This agreement, if not terminated, automatically remains in force after the expiration of the initial one year term,

·

In 2011 the Company was named an authorized supplier of its Puradyn system for John Deere Construction and Forestry division.  The product was selected after over four years of evaluation and testing; and

·

Continued activity toward potential sales growth with distributors in Europe, the Middle East, Asia, and South and Central America.

We believe that our customers have found that bypass oil filtration technology affords the similar benefit and claims made by alternative energy source providers – reduce significant oil consumption and minimize a company’s carbon footprint. We believe the advantages our Company offers versus alternative energy source providers to existing and potential customers include not having to invest in new equipment; continued use of existing fleet equipment; and offering a relatively low-cost aftermarket product, installation, training, and support.  

We believe that the significant reduction in the amount of waste oil the Puradyn technology affords a major benefit for many of our customers, and a positive impact on the environment.  In addition, this technology has provided a reduction in the amount of man-hours needed to service and handle the oil, therefore allowing the saved man-hours to be diverted to other maintenance requirements and allowing the end-user to be more proactive and less reactive with maintenance, generating even more saving to operations.

We believe that industry acceptance will continue to grow in 2013 based in part upon the new exclusive distributor arrangements we have entered into in 2013; however, there can be no assurance that any of our sales efforts or strategic relationships will meet management’s expectations or result in an increase in our revenues.

The Company’s sales effort not only involves educating the potential customer on the benefits of our product, but also allowing the end-user to test and evaluate the Puradyn system on its fleet equipment. While set for a specific period of time, typically ranging from three to twelve months, evaluations are often influenced by a number of variables including equipment downtime or servicing, which may extend the evaluation period. Consequently, the sales cycle can be relatively long; however, doing business with several large target industry-known customers and having official supplier status at John Deere may help in achieving high end-user confidence levels to reduce evaluation times.

We believe international sales are especially well suited to our product for a number of reasons, including the fact that lubricating oil products in foreign countries are usually more expensive than in the United States.

Our focus on specific industries for the past several years and most recently, an article published in ‘Drilling Contractors Magazine’, has demonstrated a positive impact on potential customers, resulting in interest in our product.  However, while this new interest has not culminated in significant sales through the first half of 2013, the level and strength of the interest and verbal commitments should lead to stronger sales throughout the remainder of 2013.

Our most recent multi-year distributor agreements with Honghua America, LLC and MER Equipment, Inc. were achieved within the diverse industries of oil and gas services and commercial marine, and ones in which we are gaining ground, could be important contributors to our growth in 2013 and beyond.  We believe that our product provides rapid and material return on investment in these industries, and it does not take the end user long to realize such benefits.

MER Equipment, Inc. has hosted several luncheons introducing the Puradyn product to their potential customers, and dealer network.  Since these meetings were held, several new dealers have been appointed by MER Equipment, Inc. to support our product in many different areas of the Great Northwest.  In addition, several new marine customers have agreed to evaluate the systems for implementation in their fleet.  These recent developments have prompted MER Equipment, Inc. to issue a $500,000 blanket purchase order for Puradyn products to be purchased during the first year of the agreement, to be specified by MER Equipment, Inc. in accordance with



16





periodic forecasts and ship dates to be determined and confirmed at unspecified future dates.  In the discussions leading up to this agreement, MER Equipment, Inc. provided us with an internal, non-binding three year sales forecast estimating that it could potentially purchase approximately $2.6 million of Puradyn products from us.  There are no assurances, however, that MER Equipment, Inc. will fulfill the first year’s purchase commitment, or the non-binding estimation for future sales, and the terms of the agreement require us to provide credits for return products, subject to restocking charges.  Accordingly, while we expect that sales to MER Equipment, Inc. will have the potential to positively impact our revenues in future periods, there are no assurances that these potential sales will be realized.  

Optimizing our limited resources and obtaining sufficient capital is pivotal to accomplishing our goals. We will need to remain focused on working with end-users and OEMs, and continue developing the independent distributors we have onboard while maintaining growth within the specific niche industries using our system. To accomplish these tasks, we need to obtain adequate capital funding and add appropriate sales and marketing support to be sure our distributors and customers are well-served. We anticipate the short-term need for  more sales and sales support personnel. Expansion into the OEM area can be rewarding in that it provides a steady flow of material requirements for our manufacturing facility. Additionally, OEM business may allow us more stability in retaining trained manufacturing personnel, a stronger supply chain with steady production, economies of scale, and the ability to better utilize our overhead with higher average material turn rates.


We continue to address our liquidity and working capital issues as we seek to raise additional capital. Historically, we have faced difficulties in raising adequate capital and we anticipate that those efforts will continue given the uncertainties facing the capital markets in the U.S. We also continue to implement cost reductions in an effort to improve margins, including securing alternative suppliers for raw materials and manufacturing and we anticipate these cost reductions will impact our results of operations during the balance of 2013 and beyond. We also continue to review cost of material increases, some of which were passed through to our customers as product price increases in the past few years.  


Going Concern


Our financial statements have been prepared on the basis that we will operate as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  We have incurred net losses each year since inception and have relied on the sale of our stock from time to time and loans from third parties and from related parties to fund our operations.  These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from current stockholders have led our independent registered public accounting firm Liggett, Vogt & Webb, P.A. to include a statement in its audit report relating to our audited consolidated financial statements for the years ended December 31, 2012 and 2011 expressing substantial doubt about our ability to continue as a going concern.  Our ability to continue as a going concern is dependent upon our ability to obtain the necessary financing to meet our obligations and repay our liabilities when they become due and to generate profitable operations in the future.  We plan to continue to provide for our capital requirements through the sale of equity securities, however, we have no firm commitments from any third party to provide this financing and we cannot assure you we will be successful in raising working capital as needed.  We are also materially dependent upon loans from related parties to provide working capital. There are no assurances that we will have sufficient funds to execute our business plan, pay our obligations as they become due, or generate positive operating results.


Critical Accounting Policies and Estimates


Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, bad debts, inventories, financing operations, warranty obligations and contingencies and litigation.  We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.




17





We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.


Allowance for doubtful accounts


We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.  We provide for potential uncollectible accounts receivable based on customer specific identification and historical collection experience. If market conditions continue to decline, actual collection experience may not meet expectations and may result in decreased cash flows and increased bad debt expense.


The policy for determining past due status is based on the contractual payment terms of each customer, which is generally net 30 or net 60 days. Once collection efforts by us are exhausted, the determination for charging off uncollectible receivables is made.


Estimation of Product Warranty Cost


We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or costs or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.


Inventory and estimation of inventory obsolescence


Inventories are valued at the lower of cost or market using the first in, first out (FIFO) method. Valuation allowances for obsolete and excess inventory and shrinkage are also recorded. Shrinkage is estimated as a percentage of sales for the period from the last physical inventory date to the end of the applicable period. Such estimates are based on experience and the most recent physical inventory results. The valuation allowances for obsolete and excess inventory in multiple stages of processing, requires management judgment and estimates that may impact the ending inventory valuation and valuation allowances that may affect the reported gross margin for the period.


We provide for estimated inventory obsolescence or unmarketable inventory in amounts equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.


Impairment of long-lived assets


We periodically evaluate the recoverability of the carrying amount of our long-lived assets under the guidelines of FASB ASC 360, Property, Plant and Equipment.  Factors that we consider in making this evaluation include estimating the undiscounted net cash flows estimated to result from the assets over their remaining useful life. Should our estimates of these factors change our results of operations and financial condition could be adversely impacted.


Revenue recognition


Revenue is recognized when earned.  Our revenue recognition policies are in compliance with the provisions issued in FASB ASC 605, Revenue Recognition. Revenue from product sales to customers, distributors and resellers is recorded when products that do not require further services or installation by us are shipped, when there are no uncertainties surrounding customer acceptance and for which collectability is reasonably assured.  We provide for sales returns based on an historical analysis of returns. The estimate is updated for current return activity and the provision is adjusted accordingly. Should actual returns exceed management’s estimates, the provision may require further adjustment and accordingly, net sales may decrease.




18





Impact of Inflation and Foreign Currency Translation

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. During the six months ended June 30, 2013 our cash was not impacted by foreign currency translations. The impact of fluctuations in foreign currency was not significant during the six  month period ended June 30, 2012.

Off Balance Sheet Financing

The Company has not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties, nor has it entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our condensed consolidated financial statements. Furthermore, the Company does not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing or hedging services with us.


Results of Operations for the Three-months Ended June 30, 2013 Compared to the Three-months Ended June 30, 2012


The following table sets forth the amount of increase or decrease represented by certain items reflected in the Company's condensed consolidated statements of operations in comparing the three-months ended June 30, 2013 to the three-months ended June 30, 2012:


 

 

Three Months Ended June 30,

 

 

 

2013

 

 

2012

 

 

Change

 

Net sales

 

$

600,390

 

 

$

804,099

 

 

$

(203,709

)

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

506,030

 

 

 

514,526

 

 

 

(8,496

)

Salaries and wages

 

 

274,313

 

 

 

269,079

 

 

 

5,234

 

Selling and administrative

 

 

250,484

 

 

 

251,477

 

 

 

(993

)

Total costs and expenses

 

 

1,030,827

 

 

 

1,035,082

 

 

 

(4,255

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

Other Income

 

 

10,000

 

 

 

 

 

 

10,000

 

Interest expense

 

 

(53,778

)

 

 

(42,136

)

 

 

(11,462

)

Total other expense

 

 

(43,778

)

 

 

(42,136

)

 

 

(1,462

)

Net loss

 

$

(474,215

)

 

$

(273,119

)

 

$

(201,096

)


Net Sales


Net sales decreased 25% in the three months ending June 30, 2013 compared to the three months ending June 30, 2012.  The majority of our sales decrease in the 2013 period resulted from reduced orders from two customers of $146,926 or 18.2%


Sales to three customers accounted for 20.3%, 19.3%, and 15.2% (for a total of 41.8%) of net sales for the three-months ended June 30, 2013. Sales to four customers accounted for 15.2%, 14.5%, 11.4% and 10.9% (for a total of 52%) of net sales for the three-months ended June 30, 2012.




19





Cost of Products Sold


Gross profit, the amount of profit to the Company after cost of products sold is deducted from net sales, as a percentage of net sales, decreased from 36.1% in the three months ending June 30, 2012 to 15.8% in the three months ending June 30, 2013.  The increase in cost of goods sold, which generates a lower gross profit, is primarily attributable to the reserve for slow moving inventory of $42,702 recorded during the three months ended June 30, 2013 and increased allocation of manufacturing overhead due to lower than expected sales. We anticipate higher gross profits in the third quarter as we do not expect any further reserves for slow moving inventory in the upcoming quarter. Fourth quarter gross profits should be at comparable levels to the current reporting period.


Salaries and Wages


Salaries and wages increased 2% for the three months ending June 30, 2013 compared to the three months ending June 30, 2012.  This minor variance resulted from an increase in salaries and wages.


Salaries and wages, as a percentage of net sales, were 45.7% for the three months ending June 30, 2013 and 33.5% for the three months ending June 30, 2012. The increase in salaries and wages as a percentage of net sales was due primarily to the decrease in net sales for the three months ending June 30, 2013 compared to the same period in 2012.


Management does not anticipate any changes to our salaries and wages at our current sales volume.


Selling and Administrative Expenses


Selling and administrative expenses decreased by less than 1% for the three months ended June 30, 2013 from the comparable period in 2012.  The decreased expenses primarily resulted from lower employee benefit costs and patent costs which were partially offset by higher travel and engineering costs.


Our outreach to international markets and additional trade show participation resulted in the increase in travel and marketing expenses in the 2013 period. As we extend our reach to international customers and continue to develop more specialized products for niche industries, we anticipate that travel and marketing costs will increase, but all other expenses will remain stable for the balance of the year. The following table lists the major categories of expenses included in Selling and Administrative expenses:


 

 

Three Months Ended June 30,

 

  

 

2013

 

 

2012

 

 

Change

 

Employee Benefits

 

$

54,390

 

 

$

66,878

 

 

$

(12,488

)

Travel & Marketing

 

 

56,305

 

 

 

45,633

 

 

 

10,672

 

Depreciation & Amortization

 

 

5,805

 

 

 

8,997

 

 

 

(3,192

)

Engineering

 

 

13,431

 

 

 

(1,888

)

 

 

15,319

 

Professional Fees

 

 

50,861

 

 

 

54,517

 

 

 

(3,656

)

Investor Relations

 

 

1,841

 

 

 

1,204

 

 

 

637

 

Occupancy Expense

 

 

27,920

 

 

 

28,573

 

 

 

(653

)

Patent Expense

 

 

21,206

 

 

 

25,917

 

 

 

(4,711

)

Stock Compensation

 

 

1,260

 

 

 

1,440

 

 

 

(180

)

Bad Debts

 

 

174

 

 

 

419

 

 

 

(245

)

Other Expenses

 

 

17,291

 

 

 

19,787

 

 

 

(2,496

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

250,484

 

 

$

251,477

 

 

$

(993

)


Reduced medical insurance premiums and stock option costs contributed to the decrease in employee benefits for the three months ending June 30, 2013 compared to the three months ending June 30, 2012.


Engineering expenses for the three months ended June 30, 2012 are a negative amount as a result of standard engineering fee assessed in the production of units, which exceeded the costs of engineering incurred during this period.



20






Professional fees decreased during the three months ended June 30, 2013 compared to 2012 primarily due to reduced fees paid to consultants which were associated with SEC filings.




21





Interest Expense


Interest expense increased 27% for the three months ending June 30, 2013 as compared to the three months  ending June 30, 2012 and was incurred primarily on the outstanding balance of the stockholder notes payable. The increase was due to higher borrowings.


Results of Operations for the Six-months Ended June 30, 2013 Compared to the Six-months Ended June 30, 2012


The following table sets forth the amount of increase or decrease represented by certain items reflected in the condensed consolidated statements of operations in comparing the six-months ended June 30, 2013 to the six-months ended June 30, 2012:


 

 

Six Months Ended June 30,

 

 

 

2013

 

 

2012

 

 

Change

 

Net sales

 

$

1,174,878

 

 

$

1,555,601

 

 

$

(380,723

)

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

909,563

 

 

 

1,086,745

 

 

 

(177,182

)

Salaries and wages

 

 

554,138

 

 

 

551,279

 

 

 

2,859

 

Selling and administrative

 

 

508,184

 

 

 

487,029

 

 

 

21,155

 

Total costs and expenses

 

 

1,971,885

 

 

 

2,125,053

 

 

 

(153,168

)

Other (expense)  income:

 

 

 

 

 

 

 

 

 

 

 

 

Realized gain on Foreign Currency

 

 

 

 

 

146,255

 

 

 

(146,255

)

Other Income

 

 

10,000

 

 

 

 

 

 

10,000

 

Interest expense

 

 

(103,892

)

 

 

(81,900

)

 

 

(21,992

)

Total other (expense) income

 

 

(93,892

)

 

 

64,355

 

 

 

(158,247

)

Net loss

 

$

(890,899

)

 

$

(505,097

)

 

$

(385,802

)


Net Sales


Net sales decreased 24.5% in the six months ending June 30, 2013 compared to the six months ending June 30, 2012.  The majority of our sales decrease in the 2013 period resulted from reduced orders from two customers in the amount of $356,591or 22.9%.  


Sales to two customers individually accounted for 15.5%, and 12.4% (for a total of 27.9%) for the six months ending June 30, 2013. Sales to four customers individually accounted for 18.8%, 11.8%, 11.4% and 9.7% (for a total of 51.7%) for the six months ending June 30, 2012.


Cost of Products Sold


Gross profit, as a percentage of sales, decreased from 30.1% in the six months ending June 30, 2012 to 22.6% in the six months ending June 30, 2013. The increase in cost of goods sold, which generates a lower gross profit, is primarily attributable to the reserve for slow moving inventory of $42,702 recorded during the six  months ended June 30, 2013 and increased allocation of manufacturing overhead due to lower than expected sales.


Salaries and Wages


Salaries and wages increased by less than 1% for the six months ending June 30, 2013 compared to the six months ending June 30, 2012.  This increase was primarily due to increased salaries and wages, as a percentage of sales, of 47.7% for the six months ending June 30, 2013 and 35.4% for the six months ending June 30, 2013.




22





Selling and Administrative Expenses


Selling and administrative expenses increased 4.3% for the six months ending June 30, 2013 compared to the six months ending June 30, 2012. The following table represents the major components of Selling and Administrative expenses for the six months ended June 30, 2013 and 2012 and the change of those components over their respective periods:


 

 

Six Months Ended June 30,

 

  

 

2013

 

 

2012

 

 

Change

 

Employee Benefits

 

$

112,739

 

 

$

132,327

 

 

$

(19,588

)

Travel & Marketing

 

 

120,332

 

 

 

89,920

 

 

 

30,412

 

Depreciation & Amortization

 

 

11,267

 

 

 

18,421

 

 

 

(7,154

)

Engineering

 

 

17,496

 

 

 

(1,207

)

 

 

18,703

 

Professional Fees

 

 

106,821

 

 

 

106,577

 

 

 

244

 

Investor Relations

 

 

2,594

 

 

 

1,518

 

 

 

1,076

 

Occupancy Expense

 

 

54,378

 

 

 

55,055

 

 

 

(677

)

Patent Expense

 

 

43,593

 

 

 

42,953

 

 

 

640

 

Stock Compensation

 

 

2,424

 

 

 

2,863

 

 

   

(439

)

Bad Debts

 

 

391

 

 

 

896

 

 

 

(505

)

Other Expenses

 

 

36,149

 

 

 

37,706

 

 

 

(1,557

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

508,184

 

 

$

487,029

 

 

$

(21,155

)


The changes in most components of selling and administrative expenses for the six months ended June 30, 2013 from the comparable period in 2012 are the result of the same factors which impacted period to period changes described earlier in this section.  


Our investor relations expense increased as a result of the cancellation of our contract with Emerging Markets. We anticipate that our expenses for investor relations will remain at or below 2012 levels for the remainder of the current year.


In May 2011 we entered into an agreement with Monarch Communications, Inc., to pay a portion of our public relations firm fees in stock. This agreement was renewed in May of 2012 and 2013. This amount has been reported as a marketing expense. Amounts reported as stock compensation for 2012 and 2013 represent the value of options issued to Directors pursuant to our 2000 Non-Employee Directors Stock Option Plan.


We anticipate expenses for the remainder of 2013 should be similar to those incurred in the six months ending June 30, 2013.


Interest Expense


Interest expense increased constant for the period ending June 30, 2013 as compared to the period ending June 30, 2012 and was incurred primarily on the outstanding balance of the stockholder notes payable. The increase was due to higher borrowings. The Company pays interest monthly on the notes payable to the stockholder at the LIBOR Daily Floating Rate plus 1.4%, which was a weighted average of 2.244% as of June 30, 2013 as compared to 1.99% as of June 30, 2012.  


Liquidity and Capital Resources


As of June 30, 2013, the Company had cash of $48,958, as compared to $114,512 at December 31, 2012. At June 30, 2013, we had negative working capital of ($846,067) and our current ratio (current assets to current liabilities) was 0.53 to 1.  At December 31, 2012 we had negative working capital of ($821,616) and our current ratio was 0.61 to 1.  The decrease in working capital deficit and increase in current ratio is primarily attributable to the increase in cash, inventories and prepaid expenses offset by a satisfaction of a note payable to one of our stockholders who is also a member of our Board of Directors.




23





We have incurred net losses each year since inception and at June 30, 2013 we had an accumulated deficit of $56,844,625. Our net sales are not sufficient to fund our operating expenses. Historically, we have relied on the sale of our stock from time to time and loans from related parties to fund our operations. During the six months ended June 30, 2013 we raised an additional $665,135 from stockholder loans.  During 2012, we raised $220,000 from stockholder loans, together with $39,335 from the exercise of options and collection on notes receivable for options and $11,146, net, from a capital lease. As of June 30, 2013, we owe our principal stockholder who is also an executive officer and director of the Company $9.3 million for funds he has advanced to us from time to time for working capital.  Interest expense on our loans was $103,892 for the six months ended June 30, 2013.


We do not currently have any commitments for capital expenditures.  Our current cash position is insufficient to cover our current operating needs for the next twelve months, and we do not have any external sources of working capital.  Additional cash is needed to support operations, meet our working capital needs and satisfy our obligations as they become due.  Although we are actively seeking additional equity investments, we have no firm commitments from any third parties and there are no assurances we will be successful in attracting additional capital.  In addition, as set forth above, we owe our stockholder $9.3 million which is due on December 31, 2014 or (i) at such time as we have raised an additional $7 million over the $3.5 million raised in prior offerings, or (ii) at such time as we are operating within sufficient cash flow parameters to sustain operations, or (iii) until a disposition of our company, such as an acquisition or merger, occurs.  During the first quarter of 2013 the due date of this note was extended from December 31, 2013 to the current due date of December 31, 2014.  We do not have sufficient funds to pay the loan when due and there are no assurances the note holder will extend the due date.


We have implemented measures to preserve our ability to operate, including organizational changes, a reduction and/or deferral of salaries, reduction in personnel and renegotiating creditor and collection arrangements. If we are not successful in raising additional capital in the near future, it is possible we will be required to accelerate our contingent plans to more aggressively reduce spending, including drastic reductions in our work force, severe cutbacks in our production facilities and elimination of overhead costs that do not contribute to our level of sales activity. If budgeted sales levels are not achieved and/or significant unanticipated expenditures occur, or if we are not able to raise additional investment capital, we may have to modify our business plan, reduce or discontinue some of our operations or seek a buyer for part of its assets to continue as a going concern through 2013. There can be no assurance that we will be able to raise additional capital or that sales will increase to the level required to generate profitable operations to provide positive cash flow from operations. In that event, it is possible that stockholders could lose their entire investment in our company.  These factors raise substantial doubt about our ability to continue as a going concern.


Cash Flows


Operating activities


For the six-month period ended June 30, 2013 net cash used in operating activities was $684,241, which primarily resulted from the net loss of $890,899. For the six-month period ended June 30, 2012 net cash used in operating activities was $531,692, which primarily resulted from the net loss of $505,097. In addition to the cash used in funding the operating loss, the utilization of cash in operations is also attributable to the increase in prepaid expenses and other current assets in the amount of $69,799.  


Investing activities


For the six months ending June 30, 2013, $42,832 was used in investing activities for the purchase of software and capitalized patent costs. For the six months ending June 30, 2012, $23,658 was used in investing activities for the purchase of equipment.


Financing activities


Net cash provided by financing activities was $661,519 for the six months ended June 30, 2013, which was composed of $665,155 in loans from our stockholders as described above, offset by $3,636 in payments of capital lease obligations.




24





Net cash provided by financing activities was $519,975 for the six months ending June 30, 2012, composed of borrowings on capital leases, proceeds from a shareholder note receivable related to warrants exercised, proceeds from the exercise of warrants and $470,000 of advances under the line of credit from our stockholder as described above less $3,116 in payment of capital lease obligations


ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.


Not applicable for a smaller reporting company.


ITEM 4.

CONTROLS AND PROCEDURES.


Evaluation of Disclosure Controls and Procedures


Our management, which includes our CEO and our Vice President who serves as our principal financial officer, have conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-14(c) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2013 (the "Evaluation Date"). Our management does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.


Based on their evaluation as of the end of the period covered by this report, our CEO and our Vice President who also serves as our principal financial officer have concluded that our disclosure controls and procedures were effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Vice President who serves as our principal financial officer, to allow timely decisions regarding required disclosure as a result of material weaknesses in our internal controls over financial reporting.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



25





PART II.   OTHER INFORMATION


ITEM 1.

LEGAL PROCEEDINGS.


As previously reported, on July 7, 2009 the Company filed a lawsuit in the Circuit Court in 15th Judicial District in and for Palm Beach County, Florida, styled Puradyn Filter Technologies, Inc. versus Richard C. Ford case number 502009CA023128XXXXMB. On August 22, 2012 we reached a settlement with the plaintiff in this civil suit.  On December 31, 2012, Mr. Ford defaulted on the terms of the settlement agreement. On February 26, 2013 the Company obtained a default final judgment in the amount of $144,160.

On April 9, 2013 Mr. Ford made a payment to the Company in the amount of $10,000.


On July 1, 2013 Mr. Ford made a payment to the company for the balance of the default final judgment in the amount of $136,272, representing principal of $134,160 and accumulated interest of $2,112.


ITEM 1A.

RISK FACTORS.


Risk factors describing the major risks to our business can be found under Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the year ended December 31, 2012. There has been no material change in our risk factors from those previously discussed in the Annual Report on Form 10-K.


ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.


On July 1, 2013 we issued 28,572 shares of our common stock valued at $4,000 to Monarch Communications, Inc. as partial compensation for services to us under the terms of a consulting agreement.  On August 1, 2013 we issued Monarch Communications, Inc. an additional 25,000 shares of our common stock valued at $4,000 as partial compensation for services to us under the terms of a consulting agreement.  The recipient is an accredited or otherwise sophisticated investor who had such knowledge and experience in business matters and was capable of evaluating the merits and risks of the prospective investment in our securities. The issuance of the shares is exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.


None.


ITEM 4.

MINE SAFETY DISCLOSURE.


Not Applicable


ITEM 5.

OTHER INFORMATION.


On May 31, 2013, the Company received a loan in the amount of $50,000 from the Company’s Chairman and CEO, as an advance for working capital needs. The loan bears interest at the same rate of interest as the credit facility provided by the stockholder under the note dated March 28, 2002. This advance does not have a specific due date but is to be paid based on management’s determination of the Company’s ability to pay and cash flow. We are using the proceeds for working capital.



26





ITEM 6.

EXHIBITS.


31.1

     

Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer *

31.2

 

Rule 13a-14(a)/15d-14(a) certificate of principal financial and accounting officer *

32.1

 

Section 1350 certification of Chief Executive Officer and principal financial and accounting officer*

101.INS

 

XBRL Instance Document **

101.SCH

 

XBRL Taxonomy Extension Schema Document **

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document **

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document **

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document **

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document **


*

filed herewith.

**

In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 to this report shall be deemed furnished and not filed.




27





SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



 

PURADYN FILTER TECHNOLOGIES INCORPORATED

 

 

 

 

 

 

Date:  August 13, 2013

By:

/s/ Joseph V. Vittoria

 

 

Joseph V. Vittoria, Chairman and Chief Executive Officer, principal executive officer

  

 

 

Date:  August 13, 2013

By:

/s/ Alan J. Sandler

 

 

Alan J. Sandler, Secretary to the Board,
Vice President and principal financial and principal accounting officer




28