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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2001
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from to
Commission File Number 0-29192
PURADYN FILTER TECHNOLOGIES INCORPORATED
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(Exact name of small business issuer as specified in its charter)
DELAWARE 14-1708544
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3020 High Ridge Road, Suite 100, Boynton Beach, Florida 33426
(Address of principal executive offices) (Zip Code)
(561) 547-9499
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
-----------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by the court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares outstanding of
each of the issuer's classes of common equity, as of the latest practicable
date: August 1, 2001: 14,322,791 shares of Common Stock.
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Puradyn Filter Technologies Incorporated
Index to Quarterly Report on Form 10-QSB
Part I. Financial Information
Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 2001 and
December 31, 2000...................................................................3
Condensed Consolidated Statements of Operations - Three-months
ended June 30, 2001 and June 30,
2000................................................................................4
Condensed Consolidated Statements of Operations - Six-months
ended June 30, 2001 and June 30,
2000................................................................................5
Condensed Consolidated Statements of Cash Flows - Three-months
ended June 30, 2001 and June 30,
2000................................................................................6
Condensed Consolidated Statements of Cash Flows - Six-months
ended June 30, 2001 and June 30,
2000................................................................................7
Notes to Condensed Consolidated Financial Statements................................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................................12
Part II. Other Information
Item 1. Legal Proceedings...................................................................15
Item 2. Changes in Securities and Use of Proceeds...........................................15
Item 3. Defaults Upon Senior Securities.....................................................15
Item 4. Submission of Matters to a Vote of Security Holders.................................15
Item 5. Other Information...................................................................15
Item 6. Exhibits and Reports on Form 8-K....................................................15
Signatures............................................................................................16
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Puradyn Filter Technologies Incorporated
Condensed Consolidated Balance Sheets
June 30, 2001 December 31, 2000
(Unaudited) (Note)
-------------------------------------
Assets:
Current assets:
Cash and cash equivalents $ 1,993,243 $ 479,158
Restricted cash 22,238 --
Short-term investments 4,752,919 6,685,138
Accounts receivable, net of allowance for uncollectible
accounts of $23,024 and $61,163 at June 30, 2001 and
December 31, 2000, respectively 273,573 79,880
Note receivable, related party -- 150,000
Inventories 255,052 284,040
Accrued interest receivable 97,832 193,459
Prepaid expenses and other current assets 112,701 51,617
------------ ------------
Total current assets 7,507,558 7,923,292
Long-term investments -- 452,630
Property and equipment, net 205,203 228,369
Other non-current assets 513,114 230,224
------------ ------------
Total assets $ 8,225,875 $ 8,834,515
============ ============
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 144,901 $ 156,999
Accounts payable and accrued expenses, related parties 24,826 24,340
Accrued liabilities 259,361 267,021
Current portion of capital lease obligations 4,100 10,374
Loan payable 1,025,000 --
------------ ------------
Total current liabilities 1,458,188 458,734
Capital lease obligations, less current portion 10,232 11,705
------------ ------------
1,468,420 470,439
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares authorized; none
issued and outstanding -- --
Common stock, $.001 par value, 20,000,000 shares authorized;
Issued and outstanding 14,315,108 and 14,206,541 at June 30,
2001 and December 31, 2000, respectively 14,315 14,207
Additional paid-in capital 30,350,596 30,226,556
Unearned compensation -- (29,326)
Stockholder notes receivable (21,506) (21,506)
Accumulated deficit (23,593,957) (21,828,861)
Accumulated other comprehensive income 8,007 3,006
------------ ------------
Total stockholders' equity 6,757,455 8,364,076
------------ ------------
Total liabilities and stockholders' equity $ 8,225,875 $ 8,834,515
============ ============
Note: The condensed consolidated balance sheet at December 31, 2000 has been
derived from the audited consolidated financial statements at that date but does
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements.
See notes to condensed consolidated financial statements.
3
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended June 30,
2000
2001 (as restated)
------------ ------------
Net sales $ 398,523 $ 366,603
Costs and expenses:
Cost of products sold 531,206 369,967
Selling expenses 255,110 331,385
General and administrative 313,367 (71,985)
------------ ------------
Total costs and expenses 1,099,683 629,367
------------ ------------
(701,160) (262,764)
Other income (expense):
Investment income 87,923 34,296
Interest expense (10,718) (3,316)
Other 1,882 --
------------ ------------
Total other income, net 79,087 30,980
------------ ------------
$ (622,073) $ (231,784)
============ ============
Basic and diluted loss per common share $ (0.04) $ (0.02)
============ ============
Weighted average common shares outstanding 14,271,152 13,178,225
============ ============
See notes to condensed consolidated financial statements.
4
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Operations
(Unaudited)
Six months ended June 30,
2000
2001 (as restated)
------------ ------------
Net sales $ 763,977 $ 581,392
Costs and expenses:
Cost of products sold 934,244 650,271
Selling expenses 703,423 1,070,517
General and administrative 1,136,541 4,795,413
------------ ------------
Total costs and expenses 2,774,208 6,516,201
------------ ------------
(2,010,231) (5,934,809)
Other income (expense):
Investment income 254,991 57,552
Interest expense (11,738) (80,982)
Other 1,882 --
------------ ------------
Total other income (expense), net 245,135 (23,430)
------------ ------------
Net loss $ (1,765,096) $ (5,958,239)
============ ============
Basic and diluted loss per common share $ (0.12) $ (0.51)
============ ============
Weighted average common shares outstanding 14,240,945 11,757,393
============ ============
See notes to condensed consolidated financial statements.
5
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended June 30,
2000
2001 (as restated)
----------- -----------
Net cash used in operating activities $(1,189,284) $ (368,160)
Investing activities:
Purchases of investments (2,637,433) --
Proceeds from the maturity or sale of investments 4,468,347 --
Purchases of property and equipment (6,037) (63,477)
----------- -----------
Net cash provided by (used in) investing activities 1,824,877 (63,477)
Financing activities:
Proceeds from the sale of common stock -- 5,320,750
Proceeds from exercise of stock options 75,000 155,729
Proceeds from borrowings 1,025,000 --
Payments on capital lease obligations (722) 2,103
----------- -----------
Net cash provided by financing activities 1,099,278 5,478,582
----------- -----------
Change in cash and cash equivalents 1,734,871 5,046,945
Cash and cash equivalents at beginning of period 280,610 1,946,431
----------- -----------
Cash and cash equivalents at end of period 2,015,481 6,993,376
Less restricted cash (22,238) --
----------- -----------
Unrestricted cash and cash equivalents $ 1,993,243 $ 6,993,376
=========== ===========
Non-cash financing activities
Conversion of notes payable to stockholder and notes payable
to QIP, and related accrued interest, into common stock $ -- $ 3,918,501
=========== ===========
Fair value of stock purchase warrants issued to agent for services
in 1999 relating to 2000 equity offering and netted against
proceeds in 2000 $ -- $ 114,000
=========== ===========
See notes to condensed consolidated financial statements
6
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30,
2000
2001 (as restated)
----------- -----------
Net cash used in operating activities $(2,126,284) $ (907,690)
Investing activities:
Purchases of investments (2,637,433) (1,094,943)
Proceeds from the maturity of investments 5,068,347 --
Purchases of property and equipment (18,060) (75,950)
----------- -----------
Net cash provided by (used in) investing activities 2,412,854 (1,170,893)
----------- -----------
Financing activities:
Proceeds from the sale of common stock -- 8,744,738
Proceeds from exercise of stock options 82,500 260,801
Collection of notes receivable, related party 150,000 --
Proceeds from borrowings 1,025,000 --
Payments on capital lease obligations (7,747) (4,625)
----------- -----------
Net cash provided by financing activities 1,249,753 9,000,914
----------- -----------
Change in cash and cash equivalents 1,536,323 6,922,331
Cash and cash equivalents at beginning of period 479,158 71,045
----------- -----------
Cash and cash equivalents at end of period 2,015,481 6,993,376
Less restricted cash (22,238) --
----------- -----------
Unrestricted cash and cash equivalents $ 1,993,243 $ 6,993,376
=========== ===========
Non-cash financing activities
Conversion of notes payable to stockholder and notes payable
to QIP, and related accrued interest, into common stock $ -- $ 3,918,501
=========== ===========
Fair value of stock purchase warrants issued to agent for services in 1999
relating to 2000 equity offering and netted against
proceeds in 2000 $ -- $ (114,000)
See notes to condensed consolidated financial statements.
7
Puradyn Filter Technologies Incorporated
Notes to Condensed Consolidated Financial Statements
June 30, 2001
(Unaudited)
1. Basis of Presentation 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-QSB
and Regulation S-B. 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 six-month periods ended June 30, 2001 may not necessarily be indicative of
the results that may be expected for the year ended December 31, 2001.
For further information, refer to Puradyn Filter Technologies Incorporated's
(the Company) consolidated financial statements and footnotes thereto included
on the Form 10-KSB/A for the year ended December 31, 2000.
Adoption of New Accounting Pronouncements
In January 2001, the Company adopted the provisions of FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended. The
adoption of FASB Statement No. 133 did not have a material effect on the
Company's financial position or results of operations because the Company is not
currently using derivatives.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Accounting for Goodwill and Other Intangible Assets", effective for
the Company's fiscal year 2002. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives. The
Company will apply the new rules on accounting for goodwill and other intangible
assets, if applicable to the Company's financial circumstances, in the first
quarter of fiscal 2002.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Puradyn Filter Technologies Ltd, formed during May
2000. All significant intercompany transactions and balances have been
eliminated.
7
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
The Company has adopted FASB Statement No. 128, Earnings Per Share, which
requires a dual presentation of basic and diluted earnings per share. However,
because of the Company's net losses, the effect of stock options, warrants and
convertible debt would be anti-dilutive and, accordingly, are excluded from the
computation of loss per share. The number of such shares excluded from the
computation of loss per share totaled approximately 3,467,498 and 3,213,650 at
June 30, 2001 and 2000, respectively.
Restricted Cash
Restricted cash consists of funds set aside in accordance with the order of a
court for attorney's fees and court costs in connection with certain litigation,
see Note 4.
Inventories
Inventories are stated at the lower of cost or market. Production costs 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.
Inventories consisted of the following at:
June 30, 2001 December 31, 2000
--------------- -----------------
Raw materials $250,039 $200,170
Finished goods 5,013 83,870
-------- --------
$255,052 $284,040
======== ========
Reclassification
Certain prior period amounts have been reclassified to conform with the current
period presentation.
2. Loan Payable
The Company borrows working capital against its investment portfolio managed by
Salomon Smith Barney. Salomon Smith Barney charges the Company approximately 6%
on cash advances requested. At June 30, 2001, the Company's total portfolio was
valued at $6,693,803; of which, $4,452,919 was in corporate bonds and $2,240,884
was in money market funds and certificates of deposits. The Company is able to
borrow approximately 85% of corporate bond values and 65% of money market and
certificate of deposit values. Loan repayment provisions are a function of
future margin calls or management's decision to retire all or a portion of
amounts due . The Company is reviewing its investment strategy to insure its
maximum borrowing power.
8
3. Stock-Based Compensation
During 1999, the Company granted 100,000 warrants to a promoter. Such warrants
were recorded, at the fair value of $114,000 and recorded as a deferred offering
cost at December 31, 1999 and reflected as an adjustment of the net proceeds
from the sale of common stock in the quarter ended March 31, 2000.
The Company granted 168,000 warrants to vendors for services during the
three-month period ended March 31, 2000. Such warrrants were recorded, at their
fair value of approximately $553,000, as selling expenses for the quarter ended.
During the three-month period ended June 30, 2001 and 2000, the Company
recognized credits against compensation expense previously recognized of
approximately $49,707 and $459,659, respectively, relating to variable option
awards outstanding. As of June 30, 2001, cumulative compensation expense
recognized for such variable awards totaled $1,070,737.
During the six-month period ended June 30, 2001 and 2000, the Company recognized
compensation expense of approximately $44,841 and $2,494,772, respectively,
relating to variable option awards outstanding. At June 30, 2001, approximately
260,604 awards subject to variable accounting remain outstanding with an average
exercise price of $.47.
In January 2001, the Company granted one of its non-employee directors 7,500
stock options for past services. Such options were recorded, at their fair value
of approximately $48,000 which is included in general and administrative
expenses for the quarter ended March 31, 2001. For the quarter ended June 30,
2001, an additional 2,500 stock options, valued at $11,725, was granted to the
same director.
4. Related Party Transactions
On December 31, 1999, the Company and Quantum Industrial Partners LDC (QIP)
entered into an agreement for QIP to convert the outstanding principal amount
payable to QIP into 2,500,000 shares of the Company's common stock at a
conversion rate of $1 per share. As a result of the modification of the
conversion terms, the Company recognized interest expense in 1999 totaling
approximately $2,116,000, equal to the fair market value of the additional
shares to be received by QIP resulting from the modification, pursuant to SFAS
No. 84, Induced Conversions of Convertible Debt. On January 24, 2000, QIP
converted the principal balance of the notes, totaling $2,500,000, and forgave
the related accrued interest of approximately $718,000, into 2,500,000 shares of
the Company's common stock.
On January 24, 2000, Mr. Ford and his daughter, on behalf of the Company, repaid
the Company's note payable to a bank of $525,000 and simultaneously converted
this amount as well as his previous note totaling $150,000 into 675,000 shares
of the Company's common stock. As a result of this conversion, the Company
9
recorded, in 2000, compensation expense of $1,687,500, which represents the
excess of the fair market value of the common stock received by Mr. Ford and his
daughter over conversion price at the date of the conversion.
In January 2000, Richard C. Ford was repaid approximately $200,000 for amounts
owed for cash advances to the Company and for expenses incurred by the Company
and paid by Mr. Ford on behalf of the Company.
5. Contingencies
In May 1994, the Company and a patent owner entered into a settlement agreement
relating to royalties under which the patent owner was entitled to a minimum
annual royalty of $24,000, payable in monthly installments of $2,000. In
February 1997, the patent owner filed an action against the Company for
nonpayment of approximately $21,000 of royalties claimed by him, seeking a
permanent injunction against the Company's manufacturing and selling of the
covered Purifiner products. On March 2, 1999, the trial court ruled that the
patent owner was not entitled to any injunctive relief but was entitled to
$20,169 in past royalties, which the Company paid. The patent owner filed a
motion for additional damages and attorney fees and on December 13, 2000, the
Court found the patent owner was entitled to an additional $15,505. The Company
appealed that judgment but has paid the additional judgment. Thereafter, on
February 22, 2001, the trial court ordered the Company to pay the sum of
$18,049, which is included in other liabilities in the accompanying June 30,
2001 balance sheet, for the patent owner's attorney's fees and court costs. That
order has been appealed and will be combined with the first appeal. The judgment
for attorney's fees and court costs has not been paid and the Company has posted
a surety bond in accordance with the order of the court in the amount of $22,238
to cover the judgment while the appeals are pending. Management does not expect
the ultimate resolution of this matter to have a significant effect on the
Company's financial position or results of operations.
TF Systems, Inc. (Systems), a related party (previously under common ownership
with the Company), formerly owned the manufacturing and marketing rights to the
Purifiner and transferred or sold such rights to the Company in 1995. In June
1997, the former law firm of Systems filed a complaint against the Company,
Systems, Richard C. Ford, individually and an inactive company controlled by
Richard C. Ford, demanding payment of approximately $313,000 of legal fees and
other costs, plus interest and attorney fees, related primarily to obtaining the
manufacturing and marketing rights to the Purifiner for Systems and the Company.
Systems was awaiting a judgment of an appellate court which, if adjudicated in
Systems' favor, would have provided it with sufficient funds to pay such legal
fees and other possible claims aggregating approximately $75,000. On February
26, 1997, the appellate court ruled against Systems and, accordingly, the funds
discussed above are not currently available to Systems to satisfy such claims.
Puradyn did not assume these obligations as part of its purchase of Systems in
1995 and management believes such amounts are not the responsibility of the
Company. However, Systems is an inactive company whose only asset is the claim
that was reversed on appeal and maybe retried by Systems. Accordingly, the
ability to collect such funds from Systems is uncertain. The ultimate outcome of
this litigation cannot be determined at this time. However, management has
determined, based upon the opinion of the Company's counsel, that an adverse
judgment against the Company is unlikely. Accordingly, no accrual has been
recorded for these claims in the accompanying balance sheets since management
believes that it is not probable that the Company has incurred any loss
associated with these matters.
10
6. Restatement
The Company's results of operations for the six months ended June 30, 2000, as
previously reported, have been restated to reflect certain adjustments necessary
for a fair presentation in conformity with accounting principals generally
accepted in the United States. These adjustments included approximately
$1,687,500 in charges relating to the beneficial conversion of debt into common
stock (see Note 4), approximately $553,000 in charges related to common stock
and options issued to vendors in lieu of cash (see Note 3), and approximately
$2,495,000 in charges related to variable compensatory options (see Note 3). The
Company adjusted sales by approximately $102,736 and cost of products sold by
approximately $19,037 to properly recognize revenue and reflect inventory at its
net realizable value. Additionally, the Company made adjustments of $255,165 to
other income primarily as the result of the reversal of the gain previously
recorded on contributed assets of approximately $180,000.
For the Six-Month Period As Previously
Ended Jun30, 2000 Reported Adjustments As Restated
------------------------- ----------- ----------- -----------
Net sales $ 684,128 $ (102,736) $ 581,392
Cost of products sold 631,234 19,037 650,271
----------- ----------- -----------
Gross margin 52,894 (121,773) (68,879)
----------- ----------- -----------
Selling, general and 1,028,371 4,837,559 5,865,930
administrative expenses
Other income (expense), net 231,735 (255,165) (23,430)
----------- ----------- -----------
Net loss $ (743,742) $(5,214,497) $(5,958,239)
=========== =========== ===========
Basic and diluted loss per
Common share $ (0.06) $ (0.44) $ (0.50)
=========== =========== ===========
The Company's results of operations for the three months ended June 30, 2000, as
previously reported, have been restated to reflect certain adjustments necessary
for a fair presentation in conformity with accounting principals generally
accepted in the United States. These adjustments included approximately $460,000
of credits against compensation expense previously recorded relating to variable
option awards outstanding (see Note 3), offset by miscellaneous adjustments
aggregating to approximately $102,000. The Company adjusted sales by
approximately $23,162 and cost of products sold by approximately $27,628 to
properly recognize revenue and reflect inventory at its net realizable value.
Additionally, the Company made adjustments of $190,457 to other income primarily
as the result of the recognition reversal of the gain previously recorded on
contributed assets of approximately $180,000.
11
For the Six-Month Period As Previously
Ended Jun30, 2000 Reported Adjustments As Restated
------------------------- ----------- ----------- -----------
Net sales $ 389,765 $ (23,162) $ 366,603
Cost of products sold 342,339 27,628 369,967
--------- --------- ---------
Gross margin 47,426 (50,790) (3,364)
Selling, general and
administrative expenses 568,331 (308,931) 259,400
Other Income 221,437 190,457 30,980
--------- --------- ---------
Net loss $(299,468) $ 67,684 $(231,784)
========= ========= =========
Basic and diluted loss per
Common share $ (0.02) $ -- $ (0.02)
========= ========= =========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Form 10-KSB/A for the year ended December 31, 2000.
Other than historical and factual statements, the matters and items discussed in
this Quarterly Report on Form 10-QSB are forward-looking statements that involve
risks and uncertainties. Actual results of the Company may differ materially
from the results discussed in the forward-looking statements. Certain factors
that could contribute to such differences are discussed with the forward-looking
statements throughout this report.
General
The Company was formed in 1987, and commenced limited operations in 1991 when it
obtained worldwide manufacturing and marketing rights to the Purifiner(R)
product, now called the Puradyn Onboard By-pass Oil Filtration System or
Puradyn(R).
Through 1997, the Company had been unable to significantly increase its revenues
through its distribution network, which caused the Company to change its sales
strategy. In 1998, it began to refocus its sales effort toward the development
of commercial relationships with original equipment manufacturers (OEM's) and
companies having medium to large size fleets of vehicles. The sales effort not
only involves selling the benefits to the potential customer, but allowing the
customer to test the Puradyn on its fleet vehicles. Consequently the sales cycle
is long. The Company is currently working with several large OEM's and a large
number of companies having large vehicle fleets to enable them to evaluate the
benefits of the Puradyn.
The Company has had operating losses each year since inception and has relied on
the sale of its stock from time to time, including the conversion of debt into
stock, to fund its operations. Most recently, on January 24, 2000, the Company
completed the conversion of $3,893,000 of debt and interest into its common
stock. In March 2000, the Company completed the sale of 4,172,000 shares of its
common stock with net proceeds of approximately $3,423,988, and in September,
2000, the Company completed the sale of an additional 920,935 shares of it
common stock with net proceeds of approximately $6,907,000.
12
While this debt restructuring has improved the balance sheet of the Company and
provided cash for the foreseeable future, there is no assurance that sales will
increase to the level required to generate profitable operations and to provide
positive cash flow from operations, and there is no assurance that the Company
will not have to seek additional financing in the future.
Results of Operations for the Six Months Ended June 30, 2001 Compared to the Six
Months Ended June 30, 2000
The following table sets forth for the amount of increase or decrease
represented by certain items reflected in the Company's statements of operations
in comparing the six months ended June 30, 2001 (the 2001 period) to the six
months ended June 30, 2000 (the 2000 period):
Six Months ended June 30 Increase
2001 2000 (Decrease)
----------- ----------- -----------
Net sales $ 763,977 $ 581,392 $ 182,585
Operating costs and expenses:
Cost of products sold 934,244 650,271 283,973
Selling expenses 703,423 1,070,517 (367,094)
General and administrative
expenses 1,136,541 4,795,413 (3,658,872)
----------- ----------- -----------
Total operating costs and expenses 2,774,208 6,516,201 (3,741,993)
----------- ----------- -----------
Operating loss (2,010,231) (5,934,809) (3,924,578)
Investment income
254,991 57,552 197,439
Interest expense (11,738) (80,982) 69,244
Other 1,882 1,882
----------- ----------- -----------
Net loss $(1,765,096) $(5,958,239) $(4,193,143)
=========== =========== ===========
Net Sales. Net sales increased by approximately 31% from $581,392 in the 2000
period to $763,977 in the 2001 period as a result of the Company's continuing
efforts to refocus its marketing toward OEMs and companies having large fleets
of trucks.
Cost of Products Sold. Cost of sales increased by approximately 43% from
$650,271 in the 2000 period to $934,244 in the 2001 period due to primarily to
an increase in sales of approximately $182,585 in the 2001 period. In addition
to the foregoing, excess overhead production capacity also contributed to the
Company generating negative margins on products sold during the 2001 and 2000
periods.
Selling Expenses. Selling expenses decreased by approximately 34% from
$1,070,517 in the 2000 period to $703,423 in the 2001 period. Selling expenses
for the 2000 period included the issuance of 168,000 warrants with a fair value
$552,780 to various vendors to assist the Company in marketing and selling of
their products. Excluding the foregoing amount, selling expenses increased 35%
13
in the 2001 period as compared to the 2000 period primarily as a result of an
increase in sales, expansion of the Company's sales force, increased advertising
and marketing costs and travel costs.
General and Administrative Expenses. General and administrative expenses
decreased by approximately 77% from $4,795,413 in the 2000 period to $1,136,541
in the 2001 period. General and administrative expenses in the 2000 period
included $1,687,500 in compensation expense recognized in connection with the
conversion of the Company's notes payable to Richard Ford into common stock in
January 2000. Additionally, the 2000 period included $2,954,431 due to the
effect of variable options accounting for options granted to certain employees
whereas the effect of such variable options for the 2001 period was only
approximately $45,293. Exclusive of these transactions, general and
administrative expenses increased by approximately 723% in the 2001 period as
compared to the 2000 period primarily as a result of an increase in sales as
well as an increase in Company personnel.
Investment Income and Interest Expense. Investment income increased by
approximately $197,439 or 343% in the 2001 period over the 2000 period due to
interest and dividend earnings generated from the Company's investments in
various securities. The investment securities were purchased during the latter
part of the 2000 period from proceeds received from the Company's private
placements. Interest expense decreased by approximately $69,244 or 86% in the
2001 period as compared to the 2000 period due to the Company's extinguishment
of all its existing interest-bearing obligations in the early part of the 2000
period.
The following table sets forth for the amount of increase or decrease
represented by certain items reflected in the Company's statements of operations
in comparing the three months ended June 30, 2001 (the 2001 period) to the three
months ended June 30, 2000 (the 2000 period):
Three Months ended June 30 Increase
2001 2000 (Decrease)
----------- ----------- -----------
Net sales $ 398,523 $ 366,603 $ 31,920
Operating costs and expenses:
Cost of products sold 531,206 369,967 161,239
Selling expenses 255,110 331,385 (76,275)
General and administrative
Expenses 313,367 (71,985) (385,352)
----------- ----------- -----------
Total operating costs and expenses 1,099,683 629,367 (470,316)
----------- ----------- -----------
Operating loss (701,160) (262,764) (438,396)
Investment income
87,923 34,296 53,627
Interest expense (10,718) (3,316) 7,402
Other 1,882 1,882
----------- ----------- -----------
Net loss $ (622,070) $ (231,784) $ (390,289)
=========== =========== ===========
14
Net Sales. Net sales increased by approximately 9% from $366,603 in the 2000
period to $398,523 in the 2001 period as a result of the Company's continuing
efforts to refocus its marketing toward OEMs and companies having large fleets
of trucks.
Cost of Products Sold. Cost of sales increased by approximately 43% from
$369,967 in the 2000 period to $531,206 in the 2001 period due to primarily to
an increase in sales. In addition to the foregoing, excess overhead production
capacity also contributed to the Company generating negative margins on products
sold during the 2001 and 2000 periods.
Selling Expenses. Selling expenses decreased by approximately 23% from $331,385
in the 2000 period to $255,110 in the 2001 period. The reduction was
attributable in large part to a reduction in sales salaries and advertising
costs.
General and Administrative Expenses. General and administrative expenses
decreased from $387,674, as adjusted, in the 2000 period to $313,367 in the 2001
period after taking into consideration the reversing effect of $459,659 in
variable options.
Investment Income and Interest Expense. Investment income increased by
approximately $53,627 or 157% in the 2001 period over the 2000 period due to
interest and dividend earnings generated from the Company's increased
investments in various securities. The investment securities were purchased
during the latter part of the 2000 period from proceeds received from the
Company's private placements. Interest expense increased by approximately $7,402
or 224% in the 2001 period as compared to the 2000 period due to the Company's
borrowing strategy.
Liquidity and Capital Resources.
The Company's capital requirements in connection with its business activities
have been and will continue to be significant. To fund its activities since
inception, the Company has been dependent upon the proceeds of sales of its
securities and from time to time upon the proceeds from loans. In December 1999,
the Company began a private offering of its common stock at $1.00 per share
which was completed in March 2000 with net proceeds of approximately $3,423,988
and then completed a second private offering in September 2000 at $7.50 per
share with net proceeds of $6,907,000.
At June 30, the Company had working capital of approximately $6,049,370 with
current ratio (current assets to current liabilities) of 5.15 to 1. The Company
believes it has sufficient cash for the foreseeable future, however there is no
assurance that sales will increase to the level required to generate profitable
operations and to provide positive cash flow from operations, and there is no
assurance that the Company will not have to seek additional financing in the
future.
15
The Company borrows working capital against its investment portfolio managed by
Salomon Smith Barney. Salomon Smith Barney charges the Company approximately 6%
for all such margin loan advances. At June 30, 2001, the Company's total
portfolio was valued at $6,693,803; of which, $4,452,919 was in corporate bonds
and $2,240,884 was in money market funds and certificates of deposits. The
Company is able to borrow approximately 85% of corporate bond values and 65% of
money market and certificate of deposit values. The Company is reviewing its
investment strategy to insure its maximum borrowing power.
Management believes the response from potential customers it has seen in through
June 30, 2001 will result in continued improvement in sales, however, there can
be no assurance such improvements will occur or that such improvements will be
sufficient to generate positive cash flow from its operations.
Consistent with industry practices, the Company may accept product returns or
provide other credits in the event that a distributor holds excess inventory of
the Company's products. The Company's sales are made on credit terms, which vary
significantly depending on the nature of the sale. The Company believes it has
established sufficient reserves to accurately reflect the amount or likelihood
of product returns or credits and uncollectible receivables. However, there can
be no assurance that actual returns and uncollectible receivables will not
exceed the Company's reserves.
Sales of the Company's products will depend principally on end user demand for
such products and acceptance of the Company's products by 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, particularly worldwide, for the Company's existing and proposed
products will require substantial marketing and sales efforts and the
expenditure of a significant amount of funds to inform customers of the
perceived benefits and cost advantages of its products.
Impact of Inflation
Inflation has not had a significant impact on the Company's operations. However,
any significant decrease in the price for oil or labor, environmental compliance
costs, and engine replacement costs could adversely impact the Company's end
users cost/benefit analysis as to the use of the Company's products.
16
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain litigation involving the Company is described in the
Company's Form 10-KSB for the year ended December 31, 2000.
Subsequent to the filing of such Form 10-KSB, no material
developments have occurred with respect to such litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
None
b) Reports on Form 8-K.
None
17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PURADYN FILTER TECHNOLOGIES INCORPORATED
(Registrant)
Date: August 14, 2001 By /s/ Frederick W. Smith
------------------------------------
Frederick W. Smith
Chief Financial Officer
18