10-Q 1 pfti10q.htm QUARTERLY REPORT Quarterly Report


 

 

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: September 30, 2011

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

¨

 (Do not check if a smaller

 

Smaller reporting company

þ

 

 

 

 reporting company)

 

 

 

 

 

 

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. 46,621,055 shares of common stock are issued and outstanding as of November 13, 2011.

 

 






TABLE OF CONTENTS

Page No.

 

PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

4


Condensed Consolidated Balance Sheets – As of September 30, 2011 (unaudited) and

December 31, 2010

4


Condensed Consolidated Statements of Operations – Three Months and

Nine Months Ended September 30, 2011 and 2010 (unaudited)

5


Condensed Consolidated Statements of Cash Flows – Nine Months Ended

September 30, 2011 and 2010 (unaudited)

6


Condensed Consolidated Statements of Changes in Stockholders’ Deficit – Nine Months

Ended September 30, 2011 (unaudited)

7


Notes to Condensed Consolidated Financial Statements

8


Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

16


Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24


Item 4.

Controls and Procedures

24


PART II – OTHER INFORMATION


Item 1

Legal Proceedings.

26


Item 1A.

Risk Factors.

26


Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26


Item 3.

Default Upon Senior Securities.

26


Item 4.

(Removed and Reserved.)

26


Item 5.

Other Information

26


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 $7.3 million at September 30, 2011 due our Chairman/CEO and a member of our board,

·

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,

·

market overhang issues, 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, 2010, 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
AS OF SEPTEMBER 30, 2011 AND DECEMBER 31, 2010

 

 

September 30,

2011

 

December 31,

2010

 

 

 

(Unaudited)

 

 

 

 

Assets

     

 

                    

     

 

                    

 

Current assets:

     

 

 

 

 

 

 

Cash

 

$

184,285

 

$

49,813

 

Accounts receivable, net of allowance for uncollectible
accounts of $32,859 and $32,654, respectively

 

 

160,313

 

 

166,367

 

Inventories, net

 

 

818,766

 

 

774,818

 

Prepaid expenses and other current assets

 

 

67,572

 

 

52,828

 

Total current assets

 

 

1,230,936

 

 

1,043,826

 

Property and equipment, net

 

 

109,010

 

 

123,506

 

Other noncurrent assets

 

 

40,725

 

 

78,625

 

Deferred financing costs, net

 

 

1,258

 

 

2,013

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,381,929

 

$

1,247,970

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ deficit

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

239,486

 

$

217,248

 

Accrued liabilities

 

 

1,420,533

 

 

1,262,798

 

Current portion of capital lease obligation

 

 

2,691

 

 

1,989

 

Deferred revenue

 

 

 

 

2,743

 

Note Payables - stockholders

 

 

100,000

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

$

1,762,710

 

$

1,484,778

 

 

 

 

 

 

 

 

 

Capital lease obligation, less current portion

 

 

10,784

 

 

 

 

 

 

 

 

 

 

 

Notes Payable - stockholders

 

 

7,226,914

 

 

6,361,914

 

 

 

 

 

 

 

 

 

Total Long Term Liabilities

 

 

7,237,698

 

 

6,361,914

 

 

 

 

 

 

 

 

 

Total Liabilities

 

$

9,000,408

 

$

7,846,692

 

 

 

 

 

 

 

 

 

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 – 46,620,694 and 46,070,076, respectively

 

 

46,621

 

 

46,071

 

Additional paid-in capital

 

 

46,334,341

 

 

46,079,970

 

Notes receivable from stockholders

 

 

(756,250

)

 

(756,250

)

Accumulated deficit

 

 

(53,389,461

)

 

(52,114,411

)

Accumulated other comprehensive income

 

 

146,270

 

 

145,898

 

 

 

 

 

 

 

 

 

Total stockholders’ deficit

 

$

(7,618,479

)

$

(6,598,722

)

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ deficit

 

$

1,381,929

 

$

1,247,970

 



See accompanying notes to condensed consolidated unaudited financial statements.


4



PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(UNAUDITED)

 

 

Three Months Ended

September 30

 

Nine Months Ended
September 30

 

 

 

2011

 

2010

 

2011

 

2010

 

 

     

 

                    

     

 

                    

     

 

                    

     

 

                    

 

Net sales

 

$

554,960

 

$

1,107,163

 

$

1,937,775

 

$

2,542,766

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

488,653

 

 

696,857

 

 

1,474,971

 

 

1,635,010

 

Salaries and wages

 

 

261,392

 

 

261,895

 

 

804,184

 

 

772,307

 

Selling and administrative

 

 

255,887

 

 

237,875

 

 

805,010

 

 

851,974

 

 

 

 

1,005,932

 

 

1,196,627

 

 

3,084,165

 

 

3,259,291

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(450,972

)

 

(89,464

)

 

(1,146,390

)

 

(716,525

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1

 

 

9

 

 

2

 

 

335

 

Interest expense

 

 

(46,113

)

 

(42,568

)

 

(128,662

)

 

(121,123

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other expense, net

 

 

(46,112

)

 

(42,559

)

 

(128,660

)

 

(120,787

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(497,084

)

 

(132,023

)

 

(1,275,050

)

 

(837,312

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(497,084

)

$

(132,023

)

$

(1,275,050

)

$

(837,312

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

 

$

(0.01

)

$

(0.003

)

$

(0.03

)

$

(0.02

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares
outstanding (basic and diluted)

 

 

46,576,786

 

 

45,533,367

 

 

46,511,613

 

 

44,465,956

 




See accompanying notes to condensed consolidated unaudited financial statements.


5



PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(UNAUDITED)

 

 

Nine Months Ended

September 30,

 

 

 

2011

 

2010

 

 

     

 

                    

     

 

                    

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(1,275,050

)

$

(837,312

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

35,838

 

 

33,752

 

Provision for bad debts

 

 

205

 

 

25

 

Provision for obsolete and slow moving inventory

 

 

(4,420

)

 

(39,860

)

Amortization of deferred financing costs included in interest expense

 

 

755

 

 

1,511

 

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

 

 

154,921

 

 

137,619

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

5,848

 

 

(311,117

)

Inventories

 

 

(39,529

)

 

(201,563

)

Prepaid expenses and other current assets

 

 

23,155

 

 

(40,611

)

Accounts payable

 

 

22,239

 

 

140,083

 

Accrued liabilities

 

 

157,735

 

 

135,531

 

Current portion of capital lease obligation

 

 

2,691

 

 

 

Deferred revenues

 

 

(2,743

)

 

(34,277

)

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

$

(918,355

)

$

(1,016,219

)

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(21,340

)

 

(17,649

)

Net cash used in investing activities

 

$

(21,340

)

$

(17,649

)

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Proceeds from sale of common stock

 

 

100,000

 

 

445,100

 

Proceeds from issuance of notes payable to stockholders

 

 

965,000

 

 

631,500

 

Proceeds of capital lease

 

 

10,784

 

 

 

Payment of capital lease obligations

 

 

(1,989

)

 

(2,284

)

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

1,073,795

 

 

1,074,316

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

372

 

 

(467

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

134,472

 

 

39,981

 

 

 

 

 

 

 

 

 

Cash at beginning of period

 

 

49,813

 

 

140,266

 

 

 

 

 

 

 

 

 

Cash at end of period

 

$

184,285

 

$

180,247

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

120,871

 

$

161,966

 

 

 

 

 

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

Expense associated with stock issued in private placement

 

$

 

$

7,000

 




See accompanying notes to condensed consolidated unaudited financial statements.


6



PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011

(UNAUDITED)

 

 

 

 

 

 

Additional

Paid-in

Capital

 

Notes

Receivable

From

Stockholders

 

Accumulated

Deficit

 

Accumulated

Other

Comprehensive

Income (Loss)

 

Total

Stockholders'

Deficit

 

 

 

 

Common Stock

Shares

 

Amount

                                                       

     

 

                     

     

 

              

     

 

                     

     

 

                      

     

 

                       

     

 

                           

     

 

                        

 

Balance at December 31, 2010

 

 

46,070, 076

 

$

46,071

 

$

46,079,970

 

$

(756,250

)

$

(52,114,411

)

$

145,898

 

$

(6,598,722

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

372

 

 

372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

(1,275,050

)

 

 

 

(1,275,050

)

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

(1,275,050

)

 

372

 

 

(1,274,678

)

Common stock issued for private placement, net of issuance costs

 

 

392,184

 

 

392

 

 

99,608

 

 

 

 

 

 

 

 

100,000

 

Issuance of shares and warrants to vendors

 

 

158,434

 

 

158

 

 

37,842

 

 

 

 

 

 

 

 

38,000

 

Compensation expense associated with unvested option awards

 

 

 

 

 

 

116,921

 

 

 

 

 

 

 

 

116,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2011

 

 

46,620,694

 

$

46,621

 

$

46,334,341

 

$

(756,250

)

$

(53,389,461

)

$

146,270

 

$

(7,618,479

)





See accompanying notes to condensed consolidated unaudited financial statements.


7



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(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-month and nine month periods ended September 30, 2011 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2011.

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, 2010. Certain amounts in the 2010 information have been classified to conform to the 2011 presentation. These reclassifications had no impact on the Company’s net loss or cash flows.

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.

Basic and Diluted Loss Per Share

Financial Accounting Standards Board (FASB) Accounting Standards Codification (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 7,585,848 for the three-month and nine-month periods ended September 30, 2011 and 6,354,092 and 6,419,225 respectively for the three-month and nine-month periods ended September 30, 2010.

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 September 30, 2011 and September 30, 2010 have been recognized as a component of cost of goods sold and general and administrative expenses in the accompanying 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.

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.



8



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2011

(UNAUDITED)


Inventories consisted of the following at September 30, 2011 and December 31, 2010:

 

 

September 30,

2011

 

December 31,

2010

 

Raw materials

 

$

910,122

 

$

864,812

 

Work In Progress

 

 

46,309

 

 

11,682

 

Finished goods

 

 

129,004

 

 

169,413

 

Valuation allowance                                                   

 

 

(266,669

)

 

(271,089

)

Inventory, net

 

$

818,766

 

$

774,818

 

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 $252 and $503 for the three-months ended September 30, 2011 and September 30, 2010 and $755 and $1,510 for the nine-months ended September 30, 2011 and 2010, respectively. Accumulated amortization of deferred financing costs as of September 30, 2011 and 2010 was $679,892 and $678,634, 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 calculated as the gross sales multiplied by the historical warranty expense return rate.

The following table shows the changes in the aggregate product warranty liability for the nine months ended September 30, 2011:

Balance as of December 31, 2010

     

$

38,787

 

Less: Payments made

 

 

(235

)

Add:  Provision for current period warranties

 

 

(1,360

)

Balance as of September 30, 2011

 

$

37,192

 




9



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2011

(UNAUDITED)


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 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 September 30, 2011 and 2010 is not shown net of taxes because the Company’s deferred tax asset has been fully offset by a valuation allowance.

Comprehensive loss consisted of the following for the three and nine months ended September 30, 2011 and 2010:

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(497,084

)

$

(132,023

)

$

(1,275,050

)

$

(837,312

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

     

 

                    

     

 

                    

     

 

                    

     

 

                    

 

Foreign currency translation adjustment

 

 

267

 

 

714

 

 

372

 

 

(467

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

267

 

 

714

 

 

372

 

 

(467

)

Comprehensive loss

 

$

(496,817

)

$

(131,309

)

$

(1,274,678

)

$

(837,779

)

New Accounting Standards

In September 2011 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles-Goodwill and Other (Topic 350), permitting entities the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. ASU No. 2011-08 is effective for annual and interim reporting periods beginning after December 15, 2011 and the adoption of ASU 2011-08 is not expected to have a material impact on the Company’s financial position or results of operations.

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 $918,355 and $1,016,219 during the nine months ended September 30, 2011 and 2010, respectively. As a result, the Company has had to rely principally on private equity investments, 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 an institutional investor and current stockholder led the Company’s independent registered public accounting firm, Webb & Company, 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, 2010 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.



10



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2011

(UNAUDITED)


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 2011.

3.

Common Stock

On July 7, 2011 Puradyn Filter Technologies Incorporated filed a Certificate of Amendment to its Certificate of Incorporation increasing the number of authorized shares of its common stock from 50,000,000 shares to 100,000,000 shares effective as of the close of business on July 26, 2011. The par value of the common stock did not change as a result of this charter amendment.

The Certificate of Amendment was adopted by our Board of Directors on May 23, 2011, and by the holders of a majority of our outstanding common stock by written consent dated July 1, 2011, as described in greater detail in our Definitive Information Statement on Schedule 14C as filed with the Securities and Exchange Commission on July 5, 2011.

On July 1, 2011, by written consent the holders of a majority of our outstanding common stock approved an Amendment, which was adopted by our Board of Directors on May 23, 2011, to the 2010 Stock Option Plan, increasing the number of shares of Common Stock covered by the Plan from 2,000,000 shares to 4,000,000 shares of Common Stock of the Corporation.

On July 27, the Company issued to Monarch Communications, Inc. 14,815 shares of common stock valued at $0.27 per share as partial compensation per the agreement for consultant work as financial public relations firms and media relations counsel.

On August 22, the Company issued to Monarch Communications, Inc. 16,000 shares of common stock valued at $0.25 per share as partial compensation per the agreement for consultant work.

On September 20, the Company issued to Monarch Communications, Inc. 20,000 shares of common stock valued at $0.20 per share as partial compensation per the agreement for consultant work.

4.

Stock Options

During the three-month periods ending September 30, 2011 and 2010, the Company recorded no direct stock-based compensation expense. During the nine-month periods ended September 30, 2011 and 2010, the Company recognized compensation expense of $-0- and $34,438, respectively.  

For the three-month and nine-month periods ended September 30, 2011, the Company recorded stock-based compensation expense of $36,912 and $116,853, related to unvested employee stock options. For the three-month and nine-month periods ended September 30, 2010, the Company recorded stock-based compensation expense of $14,493 and $44,764, related to unvested 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.

The Company issued 53,571 common stock purchase warrants in 2007 in connection with a share issuance at that time. Those warrants were incorrectly excluded from the total warrants outstanding in previous filings. These warrants have an exercise price of $1.25 per share of common stock and expire March 14, 2012. The exercise price of the warrants is subject to pro-rata adjustment in the event of stock splits, recapitalizations and similar corporate events. These warrants are included in the opening warrant balance in this schedule. This correction did not have any impact on the operating results of the Company.



11



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2011

(UNAUDITED)


A summary of the Company’s stock option plans as of September 30, 2011, and changes during the nine month period then ended is presented below:

 

 

Nine Months Ended
September 30, 2011

 

 

 

Number of

Options

 

Weighted Average

Exercise Price

 

Options outstanding at December 31, 2010

 

 

2,161,583

 

$

.42

 

 

 

 

 

 

 

 

 

Options granted

 

 

827,500

 

 

.28

 

Options exercised

 

 

 

 

 

Options expired

 

 

15,000

 

 

.37

 

Options cancelled

 

 

40,000

 

 

.38

 

Options at September 30, 2011

 

 

2,934,083

 

$

.38

 

Options exercisable at September 30, 2011

 

 

1,386,828

 

$

.54

 

A summary of the Company’s stock option plans as of September 30, 2011, and changes during the three month period then ended is presented below:

 

 

Three Months Ended
September 30, 2011

 

 

 

Number of

Options

 

Weighted Average

Exercise Price

 

Options outstanding at June 30, 2011

 

 

2,941,583

 

$

.38

 

 

 

 

 

 

 

 

 

Options granted

 

 

7,500

 

 

.18

 

Options expired

 

 

15,000

 

 

.37

 

Options cancelled

 

 

 

 

 

Options at September 30, 2011

 

 

2,934,083

 

$

.38

 

Options exercisable at September 30, 2011

 

 

1,386,828

 

$

.52

 

Changes in the Company’s unvested options for the nine months ended September 30, 2011 are summarized as follows:

 

 

Nine Months Ended
September 30, 2011

 

 

 

Number of

Options

 

Weighted Average

Exercise Price

 

Non-vested options at December 31, 2010

 

 

1,240,795

 

$

.23

 

 

 

 

 

 

 

 

 

Options granted

 

 

827,500

 

 

.28

 

Options vested

 

 

481,040

 

 

.26

 

Options cancelled

 

 

40,000

 

 

.25

 

Non-vested options at September 30, 2011

 

 

1,547,255

 

$

.25

 




12



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2011

(UNAUDITED)


Changes in the Company’s unvested options for the three months ended September 30, 2011 are summarized as follows:

 

 

Three Months Ended
September 30, 2011

 

 

 

Number of

Options

 

Weighted Average

Exercise Price

 

Non-vested options at June 30, 2011

 

 

1,658,042

 

$

.12

 

 

 

 

 

 

 

 

 

Options granted

 

 

7,500

 

 

 

Options vested

 

 

118,287

 

 

.40

 

Options cancelled

 

 

 

 

 

Non vested options September 30, 2011

 

 

1,547,255

 

$

.25

 


 

 

 

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

 

$   .14 – $ 1.70

 

 

2,886,083

 

5.50

 

$

0.35

 

1,338,828

 

$

0.46

 

   1.99 –    3.13

 

 

48,000

 

1.33

 

 

2.32

 

48,000

 

 

2.32

 

Totals

 

 

2,934,083

 

4.80

 

$

0.38

 

1,386,828

 

$

0.52

 

5.

Warrants

At September 30, 2011, 4,651,765 warrants with an average exercise price of $0.97 remain outstanding and were fully vested.

A summary of the Company’s warrant activity as of September 30, 2011 and changes during the nine and three month periods then ended is presented below:

 

 

Nine Months Ended

September 30, 2011

 

 

 

Weighted Average Exercise

 

 

 

Warrants

 

Price

 

Warrants outstanding at December 31, 2010

 

4,612,546

 

$

.97

 

Granted

 

39,219

 

 

.50

 

Exercised

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

 

Warrants outstanding at September 30, 2011

 

4,651,765

 

$

.97

 


 

 

Three Months Ended

September 30, 2011

 

 

 

Weighted Average Exercise

 

 

 

Warrants

 

Price

 

Warrants outstanding at June 30, 2011

 

4,651,765

 

$

.97

 

Granted

 

 

 

 

Exercised

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

 

Warrants outstanding at September 30, 2011

 

4,651,765

 

$

.97

 




13



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2011

(UNAUDITED)



 

 

Warrants Outstanding

 

Range of Exercise Price

 

Number

Outstanding

 

Remaining

Average

Contractual

Life

(In Years)

 

Weighted Average

Exercise Price

 

$0.50 – $0.75

 

1,809,122

 

3.02

 

$

0.52

 

$1.25

 

2,842,643

 

1.28

 

 

1.25

 

Totals

 

4,651,765

 

2.10

 

$

0.97

 

6.

Notes Payable to Stockholder

Beginning on March 28, 2002, the Company executed a binding agreement with one of its stockholders, who is also its CEO and a Board member, to fund up to $6.1 million. The original loan agreements, dated March 28, 2002 and March 14, 2003, were due and payable on December 31, 2003 and December 31, 2004.

On February 2, 2004, this executive officer, director and stockholder amended the original loan agreements to extend the maturity dates to December 31, 2005 and to waive the funding requirement mandating maturity terms until such time as the Company has raised an additional $7.0 million over the $3.5 million raised in the Company’s private placement offering; or until such time as the Company is operating within sufficient cash flow parameters, as defined, to sustain its operations; or until a disposition of the Company occurs.

In April 2005, the maturity date of the loan agreement was extended to December 31, 2006. As consideration of this extension, this executive officer, director and stockholder was granted an additional 100,000 common stock purchase warrants at an exercise price equal to the closing market price of the Company’s stock on the date of grant. In March of 2006 and in subsequent March’s through 2010, the executive officer, director and stockholder extended the maturity date of the loan agreement annually. On February 24, 2011, the maturity date of the stockholder loan was extended from December 31, 2011 to December 31, 2012.

As of September 30, 2011, the Company had drawn all of the $6.1 million from the available line-of-credit plus an additional $261,914. Additionally, the stockholder has loaned the Company $865,000 directly. Amounts drawn bear interest at a weighted average between two facilities, one is based on a minimum of 2.75% or the prime rate minus one-half percent and the other is based on LIBOR plus 1.40 (a weighted average of 2.58% as of September 30, 2011) payable monthly and become due and payable on December 31, 2012, or upon a change in control of the Company or consummation of any other financing over $7.0 million. Previously, this executive officer, director and stockholder waived this funding requirement.

On May 23, 2011 a stockholder and director of the Company loaned the Company $100,000 which is due and payable on October 1, 2011 and bears an interest rate of 5% per annum. This loan was extended to April 1, 2012.

For the three months ended September 30, 2011 and 2010, the Company recorded $45,263 and $41,154 respectively; and for the nine months ended September 30, 2011 and 2010, the Company recorded $126,453 and $116,833, respectively, of interest expense related to the notes payable to these stockholders, which is included in interest expense in the accompanying condensed consolidated statements of operations.



14



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2011

(UNAUDITED)


7.

Commitments and Contingencies

On October 20, 2009, we entered into a consulting agreement with Boxwood Associates, Inc., whereby we pay $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, is the President of Boxwood Associates, Inc.

On May 19, 2011, we entered into 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 $6,000 per month, payable as $2,000 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.




15





ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statements 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 the Company's actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, the Company's ability to operate as a going concern and to raise sufficient capital to fund its operations, its ability to satisfy its obligations as they become due, acceptance of the Company's products, the Company's dependence on distributors and a few significant customers, risks associated with international operations and international distribution and other factors. 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 this report in its entirety. Except for the Company's 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.

Overview

Sales of the Company’s products, the puraDYN® bypass oil filtration system (the "Puradyn") and replaceable filter elements will depend principally upon end user demand for such products and acceptance of the Company’s products by original equipment manufacturers (“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 perceived benefits and cost advantages of its products. As a result of our limited resources, to date we have not had adequate funds available to undertake these necessary marketing efforts. As of May, 2011, we have engaged the services of a public relations/media relations firm in an effort to reach the market with information about our product offerings.

Currently no bypass oil filtration system has captured a substantial share of the estimated recurring $15 billion potential bypass oil filtration market, based upon figures supplied by The Rhein Report, a diesel engine industry consulting, publishing and market research company. We believe we have a unique position in the industry and we are able to capitalize on the growing acceptance of bypass oil filtration given that our product and our Company are positioned as, including, but not limited to:

·

A competitively priced, value-added product, delivering cost savings, equipment life extension and down time reduction based on an advanced, patented technology;

·

An alternative solution to the rising costs and national concerns over dependence on foreign oil; and

·

Providing an operational maintenance solution to end users in conjunction with existing and reasonably foreseeable federal environmental legislation. This includes regulations affecting diesel engines and diesel fuels, mandating cleaner diesel engines which first went into effect January 1, 2007, with additional, more stringent legislation that took effect in 2010, affecting Tier 4 engines.

We focus our sales strategy on direct sales and distribution efforts as well as on the development of a strong international distribution network that will not only sell but also install and support our product. We currently have 103 independent distributors in the U.S. and internationally, and a number of OEM dealers, which sales are controlled through these OEMs.

We continue to focus our sales and marketing efforts to target industries more open to innovative methods to reduce oil maintenance operating costs. These industries are searching for new and progressive ways, including bypass oil filtration, to maintain their equipment.



16





This strategy includes focus on:

·

The expansion of existing strategic relationships we have with John Deere, Avis, and others;

·

Continued development and expansion of our distribution network with distributors who are trained by us and stock inventory in order to establish a sales- and service-oriented nationwide infrastructure;

·

Continuing to target existing and new industrial/construction equipment fleets and major diesel engine and generator set OEMs;

·

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

·

Converting customer evaluations into sales, both immediate and long term.

While this is a long-term and ongoing commitment, we believe we have achieved growing industry acceptance based on recent accomplishments:

·

Announcement that Puradyn will supply bypass oil filtration systems to John Deere for Construction and Forestry products

·

Increased activity in South and Central America, Europe and Asia.

·

Increased activity in the mining industry for bypass oil filtration.

·

Increased activity in the oil and gas industry for bypass oil filtration

·

Extended retrofit programs with domestic and international industrial service companies.

We believe that the renewed interest shown in the technology of bypass oil filtration as an economic alternative to rising oil prices, dependence upon foreign oil, coupled with the added benefits of being environmentally beneficial and a means to conserve oil, has timely and favorably positioned the Company as a manufacturer of a cost efficient “green” product.

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 type and applications downtime or servicing, which may extend the evaluation period. Consequently, the sales cycle can be relatively long.

We believe international sales are especially well suited to our product given that much of the equipment is located in remote areas, therefore, due solely to logistics of manpower resources and physically being able to reach the equipment in a timely manner to perform the necessary oil related maintenance. In addition, in certain countries, fuel and emission regulations are not as stringent as in North America, causing engines to operate under more severe conditions. Certain applications representing a higher and more immediate return on investment are prevalent in use outside of North America and end-users consequently are more receptive to the total maintenance package including the use of oil analysis, which the Puradyn system requires to verify oil condition.

Our focus on specific industries, which began in 2009, has shown to pay dividends into 2011, with these certain niche industries representing 61% of 2010 sales, 52% of 2011 sales as compared to 20% in the base period in 2009.

Key to accomplishing our goals will be optimizing our limited resources and obtaining sufficient capital. We will need to remain focused on working with OEMs, continue developing the independent distributors committed to our products and maintain growth within the major accounts using our system. To accomplish these tasks, we will need to obtain capital funding and add appropriate sales and marketing support so that we may serve our distributors and customers. We will evaluate further manpower needs as we grow our OEM account list. The expansion into the OEM area is rewarding in the aspect that it provides a steady flow of material requirements for our manufacturing facility. Additionally, OEM business allows 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.



17





We continue to address our liquidity and working capital issues as we continue to seek additional capital from institutional and private investors and current stockholders. Historically, we have faced difficulties in raising adequate capital and we anticipate that those efforts will continue given the current 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. While we anticipate these costs reductions would positively impact our results of operations during the balance of 2011 and beyond, the significant decline in our net sales in the three and nine months ended September 30, 2011 has offset any expected positive results. To facilitate improved cost reductions, during the fourth quarter of 2010 we added a buyer whose focus is on better material acquisition costs and more efficient purchasing methods. Although our product costs have increased over the past few years, we have not fully passed on these cost increases. We announced a price increase effective in the third quarter of 2011, to recoup a portion of the increased costs we have previously absorbed.

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 an institutional investor and current stockholder have led our independent registered public accounting firm Webb & Company P.A. to include a statement in its audit report relating to audited consolidated financial statements for the years ended December 31, 2010 and 2009 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. 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 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.

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.



18





Results of Operations for the Three-months Ended September 30, 2011 Compared to the Three-months Ended September 30, 2010.

The following table sets forth the amount of increase or decrease represented by certain items reflected in our condensed consolidated statements of operations in comparing the three-months ended September 30, 2011 to the three-months ended September 30, 2010:

 

 

Three Months Ended September 30,

 

 

 

2011

 

2010

 

Change

 

Net sales

 

$

554,960

 

$

1,107,163

 

$

(552,203

)

Costs and expenses:

     

 

                    

     

 

                    

     

 

                    

 

Cost of products sold

 

 

488,653

 

 

696,853

 

 

(208,200

)

Salaries and wages

 

 

261,392

 

 

261,895

 

 

(503

)

Selling and administrative                  

 

 

255,887

 

 

237,875

 

 

18,012

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

$

1,005,933

 

$

1,196,627

 

 

(190,694

)

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1

 

 

9

 

 

(8

)

Interest expense

 

 

(46,113

)

 

(42,568

)

 

3,545

 

 

 

 

 

 

 

 

 

 

 

 

Total other expense

 

 

(46,112

)

 

(42,559

)

 

3,553

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(497,084

)

$

(132,023

)

$

(365,061

)

Net sales decreased 49.9% in the three months ending September 30, 2011 compared to the three months ending September 30, 2010. The decrease in sales was attributable to one international customer who outfitted their engines in 2010 with Puradyn units but only purchased filters in 2011. This resulted in a 90% decrease in sales to that customer.

Sales to four customers accounted for 14%, 14%, 13% and 11% (for a total of 52%) of net sales for the three-months ended September 30, 2011. Sales to one customer accounted for 70% of net sales for the three-months ended September 30, 2010.

Although, as noted above, net sales for the three months ending September 30, 2011 declined compared to the same period in 2010, when sales to the one customer who comprised 70% of net sales for the three months ending September 30, 2010 are removed, we experienced an increase in sales. Excluding that one customer, net sales increased 44% from $330,500 for the three months ending September 30, 2010 to $475,830 for the three months ending September 30, 2011. Although there was a price increase on September 15, 2011, the impact of that increase was minor as the majority of our customers did not incur increased prices until October, 2011. Approximately $8,300 of our net sales revenue for the three months ending September 30, 2011, was from the price increase.

We anticipate that net sales in the fourth quarter of 2011 will remain at third quarter 2011 levels.

Cost of Products Sold

Gross profit, as a percentage of sales, decreased from 37.1% in the three months ending September 30, 2010 to 11.9% in the three months ending September 30, 2011. The increase in cost of goods sold, which generates a lower gross profit, is primarily attributable to the fixed manufacturing overhead costs that aren’t absorbed under lower sales volumes. Other increases in cost of products sold included higher costs of raw materials (particularly steel and cotton), rework charges and increased wages and benefit costs. Although we instituted a price increase effective September 15, 2011, which we anticipate will improve our gross profit margins in the future, the impact of the price increase will not be materially reflected in our gross margin until 2012.

Salaries and Wages

Salaries and wages, as a percentage of sales, were 47.1% for the three months ending September 30, 2011 and 23.7% for the three months ending September 30, 2010. The increase in salaries and wages as a percentage of sales was due primarily to the decrease in sales for the three months ending September 30, 2011 compared to the



19





same period in 2010. Salaries and wages decreased 0.2% for the three months ended September 30, 2011 from the comparable period in 2010. The decrease in salaries and wages for this time period resulted primarily from the termination of a sales person which was offset by increased health and benefit costs.

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

Selling and Administrative Expenses

Selling and administrative expenses increased by 7.6% for the three months ended September 30, 2011 from the comparable period in 2010. The increase in expenses resulted from the increase in health insurance costs, conversion of a contract engineer to an employee in 2011, higher spending on promotion and marketing and increased patent costs described later in this section.

Although the current period experienced an increase in selling and administrative expenses for the three months ended September 30, 2011 as compared to the same period ended September 30, 2010, the Company expects to see overall decreases in selling and administrative costs through 2012 as cost cutting programs are executed on a continuing basis and one time patent costs are not anticipated to repeat in the short term.

The following table lists the major categories of expenses included in Selling and Administrative expenses:

 

 

Three Months Ended September 30,

 

 

 

2011

 

2010

 

Change

 

Employee Benefits

 

$

57,064

 

$

48,324

 

$

8,740

 

Travel & Marketing

 

 

41,845

 

 

47,668

 

 

(5,823

)

Depreciation & Amortization

 

 

9,441

 

 

8,553

 

 

888

 

Professional Fees

 

 

65,534

 

 

52,667

 

 

12,867

 

Investor Relations

 

 

322

 

 

13,535

 

 

(13,213

)

Occupancy Expense

 

 

28,651

 

 

28,817

 

 

(166

)

Patent Expense

 

 

27,740

 

 

23,322

 

 

4,418

 

Stock Compensation

 

 

1,535

 

 

1,628

 

 

(93

)

Bad Debts

 

 

(16

)

 

 

 

(16

)

Other Expenses

 

 

23,772

 

 

13,360

 

 

10,412

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

255,887

 

$

237,875

 

$

18,014

 

Employee Benefit costs increased as a result of higher health insurance premiums.

Travel & Marketing expenses include the costs of providing evaluation units to potential customers. During 2010, we changed our policy requiring potential customers to purchase or place a deposit on test units. As a result of this change in policy, in 2010 we expensed units that were sent out for promotional and test purposes that we believe will not be returned. We did not have this cost in 2011. Additionally, during 2010 we incurred higher travel expenses in sending engineers to assist with installation issues, sales personnel travel to trade shows and international travel by sales and management to reach targeted niche industry customers.

Professional fees increased during the three months ending September 30, 2011 compared to 2010 primarily due to additional financial consulting fees in implementing XBRL reporting and accounting services.

We terminated the month to month agreement with our investor relations firm in March, 2011. Accordingly, we did not incur any investor relations expense during the three months ending September 30, 2011.

Interest Expense

Interest expense increased by 8% for the three months ended September 30, 2011 from the comparable period in 2010 as a result of additional borrowings on the stockholder notes payable. The Company pays interest on the notes payable to two members of our board, one of which is also an executive officer. One loan calls for interest to be paid at maturity, the other loan interest is paid monthly. The interest rates on one of the loans is at 5% and the other loans are at prime rate less one-half percent, which was 2.58% as of September 30, 2011 as opposed to 2.60% as of September 30, 2010.



20





Results of Operations for the Nine-months Ended September 30, 2011 Compared to the Nine-months Ended September 30, 2010

The following table sets forth the amount of increase or decrease represented by certain items reflected in our condensed consolidated statements of operations in comparing the nine-months ended September 30, 2011 to the nine-months ended September 30, 2010:

 

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

Change

 

Net sales

 

$

1,937,775

 

$

2,542,766

 

$

(604,991

)

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

     

 

                    

     

 

                    

     

 

                    

 

Cost of products sold

 

 

1,474,971

 

 

1,635,010

 

 

(160,039

)

Salaries and wages

 

 

804,184

 

 

772,307

 

 

31,877

 

Selling and administrative

 

 

805,010

 

 

851,974

 

 

(46,964

)

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

 

3,084,165

 

 

3,259,291

 

 

(175,126

)

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

2

 

 

335

 

 

(333

)

Interest expense

 

 

(128,662

)

 

(121,123

)

 

7,539

 

 

 

 

 

 

 

 

 

 

 

 

Total other expense

 

 

(128,660

)

 

(120,787

)

 

7,873

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(1,275,050

)

$

(837,312

)

$

(437,738

)

Net Sales

Net sales decreased 23.8% in the nine months ending September 30, 2011 compared to the nine months ending September 30, 2010. The majority of our sales decrease resulted from a major customer’s purchases of units in 2010 which did not occur in 2011. Sales of the Puradyn units depend on customer trial periods to identify savings and return on investment for potential customers. Filter sales are a function of units already deployed. Based on current trial units and established units, we anticipate that future sales will remain at levels consistent with the first three quarters of this year.

Sales to four customers individually accounted for 17%, 14%, 11% and 10% (for a total of 52%) for the nine months ending September 30, 2011, while sales to two customers individually accounted for 43% and 13% (for a total 56%) of net sales for the nine months ending September 30, 2010.

Cost of Products Sold

Gross profit, as a percentage of sales, decreased from 35.7% in the nine months ending September 30, 2010 to 23.9% in the nine months ending September 30, 2011. Although sales decreased 23.8% as noted above, cost of products sold increased as a percentage of sales. As set forth above, the increase in cost of goods sold, which generates a lower gross profit, is primarily attributable to the fixed manufacturing overhead costs that are not absorbed under lower production volumes. Other increases in cost of products sold during the nine months ending September 30, 2011 included rework charges and increased wages and benefit costs. Additionally, an adjustment to inventory reserves in the first quarter of 2010 reduced cost of sales; there was no adjustment recorded in 2011.

Salaries and Wages

Salaries and wages increased 4.1% for the nine months ended September 30, 2011 from the comparable period in 2010. The increase in salaries and wages for this time period resulted primarily from higher benefit costs. Salaries and wages, as a percentage of sales, were 41.5% for the nine months ending September 30, 2011 and 30.4% for the nine months ending September 30, 2010. Management anticipates minimal hiring if the OEM and niche industry targets increase sales. Otherwise, management does not anticipate any changes to our salaries and wages at our current sales volume.



21





Selling and Administrative Expenses

The following table lists the major categories of expenses included in Selling and Administrative expenses:

 

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

Change

 

Employee Benefits

 

$

177,667

 

$

135,570

 

$

42,097

 

Travel & Marketing

 

 

118,351

 

 

191,081

 

 

(72,730

)

Depreciation & Amortization                 

 

 

27,806

 

 

26,188

 

 

1,618

 

Engineering

 

 

3,211

 

 

32,995

 

 

(29,784

)

Professional Fees

 

 

180,127

 

 

207,088

 

 

(26,961

)

Investor Relations

 

 

18,335

 

 

46,730

 

 

(28,395

)

Occupancy Expense

 

 

82,452

 

 

80,888

 

 

1,564

 

Patent Expense

 

 

138,244

 

 

58,591

 

 

79,653

 

Stock Compensation

 

 

4,820

 

 

37,767

 

 

(32,947

)

Bad Debts

 

 

148

 

 

25

 

 

123

 

Other Expenses

 

 

53,849

 

 

35,051

 

 

18,798

 

 

     

 

                    

     

 

                    

     

 

                    

 

Total

 

$

805,010

 

$

851,974

 

$

(46,964)

 

In February 2011 we issued stock options to employees, which accounts for the majority of the increased employee benefits costs for the nine months ending September 30, 2011 compared to the same period in 2010. Increased medical insurance premiums also contributed to the increase in employee benefits for the nine months ending September 30, 2011 compared to the nine months ending September 30, 2010.

Travel & Marketing decreased 38% for the nine months ending September 30, 2011 compared to the nine months ending September 30, 2010. As previously mentioned, the write off of promotional units in 2010 increased our marketing expenses during the nine months ending September 30, 2010 compared to the nine months ending September 30, 2011.

Engineering expenses decreased substantially as a contract engineer was converted to an employee in the first quarter of 2011. The expense of this former contractor is currently included in Salaries and Wages and a reduction in contract engineering expense resulted from this change. Additionally, we reduced travel and trade show attendance during 2011 compared to the same period in 2010.

Professional fees decreased 13% for the nine months ending September 30, 2011 compared to the nine months ending September 30, 2010. We incurred higher professional fees in 2010 as a result of legal expenses associated with former employees. We also incurred additional accounting fees in 2010 relating to our United Kingdom subsidiary which was closed in 2009. During 2010 we incurred additional expenses as a result of higher utilization of outsourced services, such as accounting and finance support.

Our investor relations expense decreased as a result of the cancellation of our contract with Emerging Markets. We are currently evaluating our investor relations program to identify what areas provide the most benefit to our shareholders. We anticipate that our expenses for investor relations will remain at or below 2010 levels for the remainder of the current year.

Patent expense for the nine months ending September 30, 2011 compared to the nine months ending September 30, 2010 was substantially higher as a result of several new patent applications and submission of certain existing patents for international recognition. We anticipate that these costs will remain consistent with 2010 levels for the balance of the year.

In February, 2010 we paid a consultant for services with stock options. During 2011 we did not have this expense, and accordingly, there was a reduction in stock compensation during the nine months ending September 30, 2011 compared to the nine months ending September 30, 2010. 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 amount has been reported as a marketing expense. Amounts reported as stock compensation for 2011 represent the value of options issued to Directors pursuant to our 2000 Non-Employee Directors Stock Option Plan. We do not anticipate issuing stock for services other than for those marketing services and Director compensation through the end of the current year.



22





Interest Expense

Interest expense increased 6.2% as a result of increased borrowing on the stockholder notes payable.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate adequate amounts of cash to meet its obligations. As of September 30, 2011, the Company had cash and cash equivalents of $184,285, as compared to $49,813 at December 31, 2010. At September 30, 2011, we had negative working capital of ($531,774) and our current ratio (current assets to current liabilities) was 0.70 to 1. At December 31, 2010 we had negative working capital of ($440,952) and our current ratio was 0.70 to 1. The increase in our working capital deficit is primarily attributable to an increase in accrued liabilities which was partially offset by proceeds received on notes payable to stockholders.

We have incurred net losses each year since inception and at September 30, 2011 we had an accumulated deficit of $53,389,461. 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 third parties and from related parties to fund our operations. During the nine months ended September 30, 2011 we raised $100,000 from the sale of common stock. In addition, during the nine months ended September 30, 2011 we have borrowed $965,000 from our stockholders. At September 30, 2011, we owed one stockholder approximately $7.2 million for funds he has advanced to us from time to time for working capital under a line of credit facility and direct loans. In addition, a Director has advanced $100,000 due April 1, 2012 which bears interest at 5% per annum. Interest expense on both loans totaled $128,662 for the nine months ended September 30, 2011.

We do not currently have any commitments for capital expenditures. Our current cash position is insufficient to cover our current operating needs. While we anticipate cash inflows from 2011 sales activity, additional cash will still be needed to support operations, meet our working capital needs and satisfy our obligations as they become due. While 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 one of our stockholders approximately $7.2 million which is due on December 31, 2012 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. We do not have sufficient funds to pay this loan when it becomes 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 our assets to continue as a going concern through 2012. 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.

Operating activities

For the nine month period ended September 30, 2011 net cash used in operating activities was $918,355, which primarily resulted from the net loss of $1,275,050. The negative effect of the net loss on working capital is offset by an increase in accrued liabilities of $157,735 and an increase in shareholder notes payable in the amount of $100,000.

Investing activities

For the nine months ending September 30, 2011, $21,341 cash was used in investing activities for the purchase of property and equipment.




23





Financing activities

Net cash provided by financing activities was $1,073,795 for the nine months ending September 30, 2011, composed of $100,000 of net proceeds received from stock issued for cash and $965,000 in notes payable under the line of credit from our stockholder as described above and net capital lease activity of $8,795.

Critical Accounting Policy

General

The preparation of financial statements requires management to utilize estimates and make judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. The estimates are evaluated by management on an ongoing basis, and the results of these evaluations form a basis for making decisions about the carrying value of assets and liabilities that are not readily apparent from other sources. Although actual results may differ from these estimates under different assumptions or conditions, management believes that the estimates used in the preparation of our financial statements are reasonable. The critical accounting policies affecting our financial reporting are summarized in Note 1 to the consolidated financial statements included elsewhere.

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. While we no longer have operations in Great Britain, we maintain a small amount of cash on deposit in a bank account related to Ltd.’s previous operations and we continue to collect outstanding accounts receivable. These activities resulted in a minor foreign currency translation adjustment during the nine month period ending September 30, 2011. The impact of fluctuations in foreign currency has not been significant during the nine month period ended September 30, 2010. The exchange rate, the Great British pound to the U.S. dollar fluctuated from 1.59 on December 31, 2010 to 1.56 on September 30, 2011.

Off Balance Sheet Financing

None. 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 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.

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 a date (the "Evaluation Date") as of the end of the period covered by this report. 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



24





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.

None.

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, 2010. 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

None.

ITEM 3.

DEFAULT UPON SENIOR SECURITIES.

None

ITEM 4.

(REMOVED AND RESERVED.)

ITEM 5.

OTHER INFORMATION

None

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 officer

32.1

 

Section 1350 certification of Chief Executive Officer

32.2

 

Section 1350 certification of principal financial 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



26






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.

Date: November 14, 2011


 

PURADYN FILTER TECHNOLOGIES INCORPORATED

 

 

 

 

 

 

 

By:

/s/ Joseph V. Vittoria

 

 

Joseph V. Vittoria, Chairman and Chief Executive Officer

  

 

 



Date: November 14, 2011


 

By:

/s/ Alan J. Sandler

 

 

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




27