U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
(Mark one)
{x} QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended MARCH 31, 2005
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{ } TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
(No Fee Required)
For the transition period from ________________ to
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Commission file number 0-29192
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PURADYN FILTER TECHNOLOGIES INCORPORATED
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(Name of small business issuer in its charter)
Delaware 14-1708544
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2017 High Ridge Road, Boynton Beach, Florida 33426
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (561) 547-9499
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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 Puradyn Filter Technologies Incorporated 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 CORPORATE REGISTRANTS)
As of May 23, 2005, there were 17,455,434 shares of registrant's common stock
outstanding, par value $.001.
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 Sheet - March 31, 2005..... 3
Condensed Consolidated Statements of Operations -
Three months ended March 31, 2005 and 2004................ 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2005 and 2004................ 5
Notes to Condensed Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 14
Item 3. Controls and Procedures................................. 20
Part II. Other Information
Item 1. Legal Proceedings....................................... 20
Item 2. Changes in Securities and Use of Proceeds............... 20
Item 3. Default Upon Senior Securities.......................... 20
Item 4. Submission of Matters to a Vote of Security Holders..... 20
Item 5. Other Information........................................ 20
Item 6. Exhibits and Reports on Form 8-K......................... 20
Signatures............................................................... 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Puradyn Filter Technologies Incorporated
Condensed Consolidated Balance Sheet
March 31, 2005
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 484,267
Accounts receivable, net of allowance for uncollectible
accounts of $32,058 405,425
Inventories 1,176,923
Prepaid expenses and other current assets 410,926
Deferred financing costs 101,844
------------
Total current assets 2,579,385
Property and equipment, net 484,739
Other noncurrent assets 40,930
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Total assets $ 3,105,055
============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 227,488
Accrued liabilities 601,856
Current portion of capital lease obligation 4,520
Deferred revenue 55,048
------------
Total current liabilities 888,912
Capital lease obligation, less current portion 9,525
Notes Payable to stockholder 6,150,000
------------
Total Liabilities 7,048,437
Stockholders' deficit:
Preferred stock, $.001 par value:
Authorized shares - 500,000; none issued
and outstanding --
Common stock, $.001 par value:
Authorized shares - 30,000,000; 17,455,434 issued
and outstanding 17,455
Additional paid-in capital 35,522,781
Notes receivable from stockholders (1,052,376)
Accumulated deficit (38,361,600)
Accumulated other comprehensive loss (69,643)
------------
Total stockholders' deficit (3,943,382)
------------
Total liabilities and stockholders' deficit $ 3,105,055
============
See accompanying notes to consolidated financial statements.
3
Puradyn Filter Technologies Incorporated
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2005 and 2004
(Unaudited)
Three Months Ended
March 31,
2005 2004
------------ ------------
Net sales $ 597,693 $ 613,403
Costs and expenses:
Cost of products sold 624,514 629,667
Salaries and wages 368,517 408,985
Selling and administrative 359,649 394,175
Stock-based compensation (34,215) 271,103
------------ ------------
1,318,465 1,703,930
------------ ------------
Loss from operations (720,772) (1,090,527)
Other income (expense):
Interest income 12,667 14,139
Interest expense (113,642) (88,016)
------------ ------------
Total other income (expense) (100,975) (73,877)
------------ ------------
Net loss $ (821,747) $ (1,164,404)
============ ============
Basic and diluted loss per common share $ (0.05) $ (0.07)
============ ============
Weighted average common shares outstanding 17,455,434 16,753,483
============ ============
See accompanying notes to consolidated financial statements.
4
Puradyn Filter Technologies Incorporated
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2005 and 2004
(Unaudited)
THREE MONTHS ENDED
2005 2004
---------------------------
OPERATING ACTIVITIES
Net loss $ (821,747) $(1,164,404)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 61,260 61,020
Provision for bad debts (2,409) 3,487
Amortization of deferred financing costs included in interest expense 33,961 37,788
Interest receivable from shareholders' notes (11,852) (11,984)
Loss on disposal of property and equipment -- --
Compensation expense on stock-based arrangements with employees and
vendors (34,215) 383,604
Changes in operating assets and liabilities:
Accounts receivable 90,043 (67,876)
Inventories 93,718 89,643
Prepaid expenses and other current assets 38,551 (42,807)
Other noncurrent assets -- (93,750)
Accounts payable 6,180 145,918
Accrued liabilities 99,445 23,356
Deferred revenues 12,657 976
Other noncurrent liabilities -- --
---------------------------
Net cash used in operating activities (434,408) (635,029)
INVESTING ACTIVITIES
Purchases of property and equipment -- (36,457)
---------------------------
Net cash used in investing activities -- (36,457)
FINANCING ACTIVITIES
Proceeds from sale of common stock, net of issuance costs -- 2,000,000
Proceeds from exercise of stock options 3,423 10,000
Proceeds from notes payable to stockholder 648,100 --
Payment of notes payable to stockholder -- (2,000,000)
Proceeds from short term loan payable to officer -- --
Payment of short term loan payable to officer -- --
Payment of capital lease obligations (1,095) (976)
---------------------------
Net cash provided by financing activities 650,428 9,024
Effect of exchange rate changes on cash and cash equivalents 11,037 (7,839)
---------------------------
Net (decrease) increase in cash and cash equivalents 227,057 (670,301)
Cash and cash equivalents at beginning of period 257,210 1,394,830
---------------------------
Cash and cash equivalents at end of period $ 484,267 $ 724,529
===========================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 49,852 $ 51,264
===========================
NONCASH INVESTING AND FINANCING ACTIVITIES:
Office equipment acquired under capital lease obligation $ -- $ --
===========================
Common stock options issued in lieu of officer cash bonus $ -- $ --
===========================
Warrants issued for deferred financing costs $ -- $ 112,500
===========================
See accompanying notes to consolidated financial statements.
5
Puradyn Filter Technologies Incorporated
Notes to Condensed Consolidated Financial Statements
March 31, 2005
(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-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
period ended March 31, 2005 may not necessarily be indicative of the results
that may be expected for the year ending December 31, 2005.
For further information, refer to Puradyn Filter Technologies Incorporated's
(the Company) consolidated financial statements and footnotes thereto included
in the Form 10-KSB for the year ended December 31, 2004.
Going Concern
The Company's financial statements have been prepared on the basis that it will
operate as a going concern, which comtemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses each year since inception and has relied on the sale of its
stock from time to time and loans from third parties and from related parties to
fund its operations.
These recurring operating losses, liabilities exceeding assets and the reliance
on cash inflows from an institutional investor and current stockholder have led
the Company's independent auditor DaszkalBolton to include a statement in its
audit report relating to the Company's audited consolidated financial statements
for the year ended December 31, 2004 expressing substantial doubt about the
Company's ability to continue as a going concern.
Additionally, the Company continues to address liquidity concerns because of
inadequate revenue growth. As a result, cash flow from operations is
insufficient to cover our liquidity needs for the immediate future. The Company
is in the process of aggressively seeking to raise capital and is exploring
financing availability and options with investment bankers, funds, private
sources, members of management and existing stockholders. The Company has
implemented further measures to preserve its ability to operate, including
organizational structural changes, a reduction and/or deferral of salaries,
reduction in personnel and renegotiating creditor and collection arrangement.
There can be no assurance that the Company will be able to raise the additional
capital needed or reduce the level of expenditures in order to sustain
operations.
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.
6
Basic and Diluted Loss Per Share
SFAS No. 128, 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
2,816,070 and 2,908,570 for the three months ended March 31, 2005 and 2004,
respectively.
Inventories
Inventories are stated at the lower of cost or market using the first in, first
out (FIFO) method. Production costs, consisting of labor and overhead, are
applied to ending inventories at a rate based on estimated production capacity
and any excess production costs are charged to cost of products sold. Provisions
have been made to reduce excess or obsolete inventories to their net realizable
value.
Inventories consisted of the following at March 31, 2005:
Raw materials $ 755,389
Finished goods
421,534
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$ 1,176,923
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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 $33,960 and $37,788 for the three-months ended
March 31, 2005 and 2004, respectively. The deferred financing costs related to
the $2.5 million commitment provided by the Company's stockholder, who is also a
Board Member, totaled $318,000 and were initially amortized over the nine-month
draw down period ending December 31, 2002. Upon the first draw in August 2002,
the amortization period was extended to 18 months or through December 31, 2003.
On March 14, 2003, the Company recorded additional deferred financing costs of
$214,400 related to an additional $3.5 million commitment provided by the same
stockholder, with a payback date of December 31, 2004. The $214,400 of deferred
financing costs is being amortized over the payback period. In addition, the
repayment period for the $2.5 million commitment was extended to December 31,
2004. Effective March 14, 2003, the Company began amortizing the remaining
balance of deferred financing costs for the $2.5 million commitment
prospectively over the extended payback period. On February 2, 2004 the payback
period for both the $2.5 and $3.5 million commitments was extended to December
31, 2005 (see Note 2), resulting in the addition of approximately $94,000 of
related deferred financing costs. Effective February 2, 2004, the Company began
amortizing the remaining balance of deferred financing costs for both the $2.5
and $3.5 million commitments prospectively over the extended payback period. On
April 14, 2005 the payback period for both commitments were extended from
December 31, 2005 to December 31, 2006, resulting in the addition of
approximately $74,000 of related deferred financing costs. Accumulated
amortization of deferred financing costs as of March 31, 2005 and 2004, was
$524,266 and $388,421, respectively.
Stock Option Plans
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25) and FASB Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation (FIN 44), and provides pro forma disclosures of the
compensation expense determined under the fair value provisions of SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123). The Company does not record
compensation expense using the fair value provisions, because the alternative
fair value accounting provided for under SFAS 123 requires the use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, in situations where the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
7
The Company leases its employees from a payroll leasing company. The Company's
leased employees meet the definition of employees as specified by FIN 44 for
purposes of applying APB 25.
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 SFAS
123 and EITF 96-18, Accounting for Equity Investments That are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling Goods or Services.
The related expense is recognized over the period the services are provided.
Pro forma information regarding net loss and loss per common share as if the
Company had accounted for its employee stock options under the fair value method
of SFAS 123 is presented below. For purposes of pro forma disclosure, the
estimated fair value of the options is amortized to expense over the options'
vesting period. The Company's pro forma information is as follows:
Three Months Ended
March 31,
2005 2004
-------------------------------
Net loss as reported
$ (821,747) $ (1,164,404)
Stock-based employee compensation cost
(intrinsic value method) -- --
Fair value method stock option expense 126,080 (358,415)
-------------------------------
Pro forma net loss $ (695,667 $ (1,522,819)
===============================
Loss per common share:
Basic and diluted loss as reported $ (0.05) $ (0.07)
Basic and diluted loss pro forma $ (0.04) $ (0.09)
Weighted average fair value per option
granted during the period1 $ .59 $ 1.86
Assumptions:
Average Risk Free Interest Rate 3.74% 3.08%
Average Volatility Factor .733 1.078
Expected Dividend Yield 0% 0%
Expected Life (in years) 5 5
------------
1A Black-Scholes option-pricing model was used to develop the fair values of the
options granted.
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 collectibility is reasonably assured in accordance with
Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements
(SAB 104), 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.
8
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 Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), 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 three-months ended March 31, 2005:
Balance as of December 31, 2004 $ 44,203
Less: Payments made (7,143)
Change in prior period estimate 428
Add: Provision for current period warranties 9,519
----------
Balance as of March 31, 2005 $ 47,007
==========
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income (SFAS 130) 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, Ltd. Comprehensive loss as of March 31, 2005 and
2004 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-months ended March
31, 2005 and 2004:
Three Months Ended
March 31,
2005 2004
-----------------------------
Net loss $(821,747) (1,164,404)
Other comprehensive loss:
Foreign currency translation adjustment (11,037) (7,839)
-----------------------------
Comprehensive loss $(832,784) (1,172,243)
=================================
2. ISSUES AFFECTING LIQUIDITY AND MANAGEMENT'S PLANS
The Company's financial statements have been prepared assuming that the Company
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 in 1987 and used net cash in operations of
approximately $434,000 and $635,000 during the three-months ended March 31, 2005
and 2004, respectively. As a result, the Company has had to rely principally on
private equity funding, including the conversion of debt into stock, as well as
stockholder loans to fund its activities to date.
9
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, DaszkalBolton to
include a statement in its audit report relating to the Company's audited
consolidated financial statements for the year ended December 31, 2004
expressing substantial doubt about the Company's ability to continue as a going
concern.
Additionally, the Company continues to address liquidity concerns because of
inadequate revenue growth. As a result, cash flow from operations is
insufficient to cover our liquidity needs for the immediate future. The Company
is in the process of aggressively seeking to raise capital and is exploring
financing availability and options with investment bankers, funds, private
sources, members of management and existing shareholders. The Company has
implemented further measures to preserve its ability to operate, including
organizational changes, a reduction and/or deferral of salaries, reduction in
personnel and renegotiating creditor and collection arrangement. There can be no
assurance that the Company will be able to raise additional capital needed or
reduce the level of expenditure in order to sustain operations.
On March 28, 2002 and March 14, 2003, respectively, the Company executed a
binding agreement with one of its stockholders, who is also a Board Member, to
fund up to $2.5 million through March 31, 2003 and an additional $3.5 million
through December 31, 2003. Under the terms of the agreements, the Company can
draw amounts as needed in multiples of $500,000 to fund operations subject to
Board of Director approval. Amounts drawn bear interest at the prime rate per
annum (5.75% at March 31, 2005), payable monthly and were to become due and
payable on December 31, 2003 and December 31, 2004, respectively, or upon a
change in control of the Company or consummation of any other financing over
$3.0 million or over $7.0 million in the aggregate. In March 2003, the payback
date for the first agreement was extended to December 31, 2004.
On February 2, 2004, the stockholder amended both agreements to extend the
payback dates to December 31, 2005 and to waive the funding requirement
mandating payback terms until such time as the Company has raised an additional
$7.0 million over the $3.5 million raised in the Company's recent 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. As of March 31, 2004, the Company had drawn
a total of $5.0 million of the available funds and repaid $2.0 million. Both of
the lines allow for discretionary principal payments, which add to the
availability of additional funds that the Company may draw.
In addition, as part of the February 2, 2004 amendment described above, the
second agreement was amended to allow the Company to draw the remaining
available balance ($3.0 million as of March 31, 2004) through December 31, 2004.
In consideration for the amendments, as well as for efforts in obtaining private
placement funding, the Company granted the stockholder 150,000 common stock
purchase warrants at an exercise price equal to the closing market price of the
Company's stock on the date of grant (see Note 3).
In April 2005, the payback dates of the March 28, 2002 and March 14, 2003
agreements were extended from December 31, 2005 to December 31, 2006. As
consideration of this extension, this shareholder 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, for a period of five
years.
In December 2003, the Company issued 750,000 shares of common stock for gross
proceeds of $1.5 million from its recent private placement offering
(approximately $1.46 million net of related expenses) to a third party investor.
In March 2004, an additional 1.0 million shares of common stock were issued to
the same investor for gross proceeds of $2.0 million (approximately $1.98
million net of related expenses.) The $2.0 million of gross proceeds was used to
reduce the outstanding principal balance of the notes payable to stockholder.
The Company then drew amounts, per the terms of the stockholder commitment
letters dated March 28, 2002 and March 14, 2003, and amendments thereto, as
needed, for operating and capital expenditures.
10
The Company anticipates increased cash flows from 2005 sales activity; however,
additional cash will still be needed to support operations. If additional
capital is not raised, budgeted sales levels are not achieved and/or significant
unanticipated expenditures occur, the Company will have to modify its business
plan, reduce or discontinue some of its operations or seek a buyer for part of
its assets to continue as a going concern through 2005. There can be no
assurance that the Company will be able to raise the additional capital needed
to continue as a going concern.
3. COMMON STOCK
On March 12, 2004, the Company received gross cash proceeds of $2.0 million from
the sale of 1.0 million shares of common stock from its private placement
offering, which expired on April 30, 2004. The funds were used to reduce the
outstanding principal balance of the notes payable to stockholder. The Company
will then draw amounts, per the terms of the stockholder commitment letters
dated March 28, 2002 and March 14, 2003, and amendments thereto, as needed, for
operating and capital expenditures. The Company recorded related offering costs
of approximately $20,000.
On February 2, 2004, the two binding funding agreements with a stockholder, who
is also a Board member, were amended (see Note 2). In consideration for the
amendments, as well as for efforts in obtaining private placement funding, the
Company granted the stockholder 150,000 fully vested common stock purchase
warrants. The fair value of the warrants was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions: risk
free interest rate of 2.43%, volatility factor of the expected market price of
the Company's common stock of .526, a dividend yield of zero, and a weighted
average expected life of 3 years. The warrants have an exercise price of $2.00,
which was equal to quoted market value on the date of grant. The fair value of
the warrants was estimated at $112,500. The Company accrued $18,750 of the fair
value related to the services rendered by the stockholder in association with
the private placement funds raised in December 2003, in the 2003 consolidated
balance sheet in Form 10-KSB, and recorded a deferred charge of $93,750 in
February 2004 for the amendments to the commitment agreements, which is being
amortized over the repayment period of 23 months.
4. STOCK OPTIONS
During the three-months ended March 31, 2005 and 2004, employees of the Company
exercised 3,270 and 10,000, respectively, of common stock options. The Company
received $2,936 and $10,000, respectively, in cash proceeds in exchange for the
shares issued.
During the three-month periods ended March 31, 2005 and March 31, 2004, the
Company recognized compensation income and expense (under the intrinsic value
method) of approximately $42,000 and $8,000, respectively, relating to
outstanding variable option awards. At March 31, 2005, approximately 212,000
awards subject to variable accounting remained outstanding with an average
exercise price of $0.47.
On March 9, 2004, the Company extended the expiration date of the exercise
period of 270,000 fully vested stock options for a terminated employee who left
the Company in August 2003. The Company's Stock Option Plan permits an employee
to exercise their stock options for up to one month after their termination
date, at which time they expire. The exercise price of the options ranges from
$1.00 to $8.50. In accordance with FIN 44, the Company compared the options'
intrinsic value on the modification date to the original intrinsic value on the
date of grant. The Company recorded approximately $263,000 of compensation
expense related to this modification, which is included in the accompanying
condensed consolidated statement of operations for the three-month period ended
March 31, 2004.
On March 11, 2005, the Company granted a total of 80,000 non-qualified options
to two consultants for services rendered. The total value of the options is
$45,600, of which $7,785 was expensed and $37,815 was capitalized as of March
31, 2005.
11
5. NOTES PAYABLE TO STOCKHOLDER
As of March 31, 2005, the Company had drawn an aggregate of approximately $6.150
million from the two available lines-of-credit, which are provided by a
stockholder, who is also a Board Member, of the Company (see Notes 2 and 3).
Amounts drawn bear interest at the prime rate (5.75% as of March 31, 2005)
payable monthly and will become due and payable on December 31, 2006; or until
such time as the Company has raised an additional $7.0 million over the $3.5
million raised in the Company's recent 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 March 2004, the Company repaid $2.0 million of the outstanding
balance, using the funds received from the private placement, which expired in
April 2004, leaving an outstanding balance of approximately $3.0 million as of
March 31, 2004. Both of the lines allow for discretionary principal payments,
which add to the availability of additional funds that the Company may draw.
During the year ended December 31, 2004, the Company had drawn an additional
$2.0 million of the available balance. During the period ended March 31, 2005,
the Company had drawn an additional $648,100 of available balance, leaving no
available balance. On March 22, 2005, the original $2.5 million funding
agreement was amended to increase the funds available to $2.65 million and in
March 2005, that draw was made, leaving no available balance.
For the three-months ended March 31, 2005 and 2004, the Company recorded
approximately $79,101 and $49,500, respectively, of interest expense related to
the notes payable to stockholder, which is included in interest expense in the
accompanying condensed consolidated statements of operations.
6. COMMITMENTS AND CONTINGENCIES
INVESTMENT BANKING AGREEMENTS
On October 26, 2004, the Company engaged Imperial Capital, LLC ("IC") as an
exclusive financial advisor to the Company. IC will assist the Company in
raising additional capital, as well as possibly pursuing a strategic partner
from a mutually related field to enhance the Company's ability to develop
business.
In consideration for IC's services, the Company agreed to pay a $100,000
non-refundable retainer, as well as an advance for future out-of-pocket expenses
incurred by IC. Upon the consummation of a transaction, as defined by the
agreement, the Company will pay a success fee of 2.5% of the principal amount of
any debt or equity securities sold or the consideration received from a
strategic relationship. The agreement may be terminated by either party upon
30-day written notice. No equity capital has been raised pursuant to this
agreement through the date of this filing.
The Company has also engaged the services of two additional investment banking
firms for assistance in obtaining additional financing. Fees for both of these
firms are performance-based and do not require any retainers or fees in advance.
7. SUBSEQUENT EVENTS
On April 14, 2005, the repayment dates of the notes payables to stockholder,
dated March 28, 2002 and March 14, 2003, were extended from December 31, 2005 to
December 31, 2006. As consideration of this extension, this shareholder 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, for a period of five years. The fair value of the warrants was estimated
at $74,000.
On April 28, 2005, the Company received a notice from the Staff of the American
Stock Exchange (AMEX) indicating that the Company is below certain of the
Exchange's continued listing standards. Specifically, as set forth in Sections
1003(a)(i) and (ii) of the AMEX Company Guide, the Company has sustained losses
from continuing operations and/or net losses in two out of its three most recent
fiscal years with stockholders' equity of less than $2 million, and losses from
continuing operations and/or net losses in three out of its four most recent
fiscal years with stockholders' equity of less than $4 million.
12
The Company has been given the opportunity to submit a plan to the AMEX
outlining actions it has taken, or will take, over the next 18 months that will
bring it into compliance with continued listing standards. The Company intends
to submit a compliance plan to AMEX by May 31, 2005 and the Company's Common
Stock continues to trade on AMEX.
If AMEX accepts the plan, the Company may be able to continue its listing during
the plan period of up to 18 months, during which time the Company will be
subject to periodic review to determine whether it is making progress consistent
with the plan. If the plan is not accepted by AMEX, or if accepted but the
Company is not in compliance with continued listing standards at the end of the
18-month period or has not made progress consistent with the plan, the AMEX may
still elect to initiate delisting proceedings with regard to the Company's
Common Stock.
On April 21, 2005, the company entered into an agreement with Biscayne Capital
Markets, Inc ("BCMI") an investment banking firm, to provide assistance in
obtaining financing. The company agreed to pay a fee of 7% of gross proceeds
received by the Company as a result of services performed under the agreement.
Fees paid in consideration of services rendered are based upon performance and
there is no obligation to pay any fees unless financing is closed.
On April 28, 2005, the Company entered into a one-year non-exclusive agreement
with CapitalLink, L.C., an investment banking firm, to assist in additional
financing. The company agreed to pay a fee of 7% of gross proceeds received by
the Company as a result of services performed under the contract, as well as
reimbursement of pre-approved out of pocket expenses.
13
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 for the year ended December 31, 2004.
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. Except as required by law or regulation, we
do not undertake any obligation to publicly update forward-looking statements to
reflect events or circumstances after the date on which the statement is made or
to reflect the occurrence of unanticipated events.
Going Concern
The Company's financial statements have been prepared on the basis that it will
operate as a going concern, which comtemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses each year since inception and has relied on the sale of its
stock from time to time and loans from third parties and from related parties to
fund its operations.
These recurring operating losses, liabilities exceeding assets and the reliance
on cash inflows from an institutional investor and current stockholder have led
the Company's independent auditor DaszkalBolton to include a statement in its
audit report relating to the Company's audited consolidated financial statements
for the year ended December 31, 2004 expressing substantial doubt about the
Company's ability to continue as a going concern.
Additionally, the Company continues to address liquidity concerns because of
inadequate revenue growth. As a result, cash flow from operations is
insufficient to cover our liquidity needs for the immediate future. The Company
is in the process of aggressively seeking to raise capital and is exploring
financing availability and options with investment bankers, funds, private
sources, members of management and existing stockholders. The Company has
implemented further measures to preserve its ability to operate, including
organizational changes, a reduction and/or deferral of salaries, reduction in
personnel and renegotiating creditor and collection arrangements. There can be
no assurance that the Company will be able to raise the additional capital
needed or reduce the level of expenditures in order to sustain operations.
General
The Company was formed in 1987 and was inactive until it commenced limited
operations in 1991 when it obtained worldwide manufacturing and marketing rights
to the Purifiner(R) product, now called the PURADYN(R) Bypass Oil Filtration
System or the "PURADYN" system.
Sales of the Company's products will depend principally upon 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 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.
Through industry data research, we have been able to identify the potential
applications where management believes market penetration is most accessible.
Currently no bypass oil filtration system has captured a substantial share of
the estimated recurring $13 billion potential industry. We believe we are in a
unique
14
position 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:
o A competitively priced, value-added product offering a unique
selling concept based on an advanced, patented technology
o An alternative solution to the rising costs and increasing
dependence on foreign oil
o Providing an operational maintenance solution to end users in
conjunction with existing and reasonable foreseeable federal
environmental applications
In 2001, the Company redirected the focus of its sales strategy from individual
sales and distribution efforts to the development of a strong nationwide
distribution network that will not only sell but also install and service our
product.
Additionally, we began to refocus our sales and marketing efforts to target
areas and issues specific to the bypass oil filtration industry. These efforts
include identifying customer needs and educating the customer on the total
values of our system concerning oil maintenance costs and procedures,
specifically, that oil does not need to be changed on a regular basis and the
drain interval is safely extended, provided that oil analysis verifies the oil
is clean.
This strategy includes focus on:
o The expansion of existing strategic relationships
o Continued development and expansion of our distribution
network with qualified distributors in order to establish a
sales- and service-oriented nationwide infrastructure
o Continuing to target existing and new medium-to-large sized
fleets, industrial/construction business and major diesel
engine and generator set OEMs
o Creating customer 'pull-through', a sustained level of request
for our product on the OEM level
o Closely monitoring customer evaluations to ensure the salient
aspects of our system are addressed on a timely basis
o Converting customer evaluations into sales, both immediate and
long term
While this is a long-term and ongoing commitment, we believe we have achieved a
limited amount of industry acceptance based on recent accomplishments:
o 2001 approved by one of the largest private fleets in the U.S.
to install PURADYN on their new equipment, a program still
currently ongoing.
o 2002 approval and purchase of the PURADYN system by a major
international OEM of medium-sized power generators.
o 2003 selection as a Strategic Supplier for one of the larger
equipment rental companies in North America. Although the
system is fully supported at the customer's corporate level,
the program is expected to take some time to gain momentum as
all branches become familiar enough with the benefits of the
PURADYN system to begin purchasing.
o 2004 ongoing test results released by the US Department of
Energy (DOE) estimating an 80% savings in oil using bypass oil
filtration. Our system was used in this ongoing test
evaluating the benefits and cost savings of the technology.
o 2004 announcement that Miami-Dade County, Florida has again
specified the PURADYN system on new equipment purchases.
o 2004 announcement of combined international expansion with the
introduction of two potential distributors in the bus and
construction markets in China.
15
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, with the added benefit of being environmentally beneficial, will
timely and favorable position the Company as a manufacturer of this type of
product. We also believe that industry acceptance resulting in sales will
continue to grow in 2005; however, there can be no assurance that any of our
sales efforts or strategic relationships will meet management's expectations or
result in actual revenues.
The Company's sales effort not only involves educating the potential customer on
the benefits of our product, but also allowing the customer to test and evaluate
the PURADYN system on its fleet vehicles. 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 applications downtime or
servicing, which may extend the evaluation period. Consequently, the sales cycle
can be relatively long. Management believes that this evaluation period will
continue to be shortened as our products gain wider acceptance, support and
usage from well-known customers and OEMs. In 2003, the Company conducted record
number of 80 evaluations, of which approximately 65 continued through 2004 and
are still ongoing.
Effective June 1, 2000, the Company formed a wholly owned subsidiary, Puradyn
Filter Technologies, Ltd ("Ltd."), in the United Kingdom to sell the Company's
products in Europe, the Middle East and Africa. The subsidiary was the result of
the dissolution of a joint venture (TF Purifiner, Ltd.) the Company had with
Centrax, Ltd. The results of Ltd. have been consolidated with the Company since
June 1, 2000.
International sales are especially well suited to our product given that
environmental controls are not as regulated in countries outside North America.
Certain applications representing a higher return on investment are more
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 represents. In first quarter 2005, total international
sales accounted for 40.2% of the Company's consolidated net sales.
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 for which collectibility is reasonably assured in accordance with
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial
Statements, as amended and interpreted. Cash received by the Company prior to
shipment is recorded as deferred revenue. Sales are made to certain 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. Management believes, based on past
experience and future expectations, that such limited return rights and
warranties will not have a material adverse effect on the Company's financial
statements.
16
RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED MARCH 31, 2005 COMPARED TO THE
THREE-MONTHS ENDED MARCH 31, 2004
The following table sets forth the amount of increase or decrease represented by
certain items reflected in the Company's condensed consolidated statements of
operations in comparing the three-months ended March 31, 2005 to the
three-months ended March 31, 2004:
(In thousands) Three Months Ended March 31,
------------------------------
2005 2004 Change
------------------------------
Net sales $ 598 $ 613 (15)
-----------------------------
Costs and expenses:
Cost of products sold 625 630 (5)
Salaries and wages 369 409 (40)
Selling and administrative 360 394 (34)
Stock-based compensation (34) 271 (305)
-----------------------------
Total costs and expenses 1,318 1,704 (386)
-----------------------------
Other (expense) income:
Interest income 13 14 1
Interest expense (114) (88) 26
-----------------------------
Total other (expense) income
(101) (74) 27
-----------------------------
Net loss (822) (1,165) (343)
=============================
NET SALES
Net sales decreased by approximately 3% from approximately $613,000 in 2004 to
approximately $598,000 in 2005.
Sales to three customers accounted for approximately 30%, 17% and 11% of the
consolidated net sales for the three-months ended March 31, 2005. For the
three-months ended March 31, 2004, sales to three customers accounted for
approximately 27%, 17% and 11% of the consolidated net sales. The UK
subsidiary's sales increased by approximately 7% for the three-month period
ended March 31, 2005 compared to the three-month period ended March 31, 2004.
COST OF PRODUCTS SOLD
Cost of products sold decreased by approximately 1% from approximately $630,000
in 2004 to approximately $625,000 in 2004. The decrease is primarily due to the
3% decrease in net sales. Based on current sales volumes, the Company is unable
to fully utilize its production capacity. Because of this, the decrease in cost
of products sold is not proportionate to the decrease in sales.
SALARIES AND WAGES
Salaries and wages decreased approximately $40,000, or 10%. This decrease is the
result of a net reduction of three employees, representing approximately a
$38,000 decrease.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased by approximately $35,000, or 9%,
due primarily to a reduction in audit fees by $23,000. Selling and marketing
expenses decrease and travel, entertainment and lodging expenses decreased by
approximately $9,000 and $8,000 respectively.
STOCK-BASED COMPENSATION
The Company recorded stock based compensation income and expense of
approximately $34,000 and $271,000 for the three-months ended March 31, 2005 and
2004, respectively, related to certain variable equity awards and other stock
based compensation. Approximately $269,000 of the decrease is due to the
extension in March 2004 of the expiration date of the exercise period of 270,000
fully vested stock options for a terminated employee who left the Company in
August 2003. The Company's Stock Option Plan permits an employee to exercise
their stock options for up to one month after their termination date, at which
time they expire. The exercise price of the options ranges from $1.00 to $8.50.
In accordance with FIN 44, the Company compared the options' intrinsic value on
the modification date to the original intrinsic value on the date of grant and
recorded the corresponding charge to compensation expense. As stock-based
compensation expense related to variable awards is subject to changes in the
quoted market value of the Company's common stock, the Company cannot predict
the impact of stock-based compensation expense on operations in the future.
Approximately $40,000 of the decrease in stock-based compensation expense was
attributed to the decrease in the stock price from $1.20 at December 31, 2004 to
$.99 at March 31, 2005.
17
INTEREST EXPENSE
Interest expense increased by approximately $25,000 as a result of an increase
in the outstanding balance of the stockholder notes payable. The Company pays
interest monthly on the notes payable to stockholder at the prime rate, which
was 5.75% as of March 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005, the Company had cash and cash equivalents of approximately
$484,000. For the three-month period ended March 31, 2005, net cash used in
operating activities was approximately $434,400 which primarily resulted from
the net loss of approximately $822,000. There was no cash used in investing
activities for the purchase of property and equipment. Net cash provided by
financing activities was approximately $650,000 for the period, due to proceeds
received from a shareholder loan and the exercise of employee stock options.
The Company has incurred net losses each year since its inception and has relied
on the sale of its stock from time to time and loans from third parties and from
related parties to fund its operations.
On March 28, 2002, the Company executed a binding agreement with one of its
stockholders, who is also a Board Member, to fund up to $2.5 million through
March 31, 2003. Under the terms of the agreement, the Company could draw amounts
as needed in multiples of $500,000 to fund operations subject to Board of
Director approval. Amounts drawn bear interest at the prime rate per annum
(5.75% at March 31, 2004) payable monthly and were to become due and payable on
December 31, 2003, or upon a change in control of the Company or consummation of
any other financing over $3.0 million. In March 2003, the payback date was
extended to December 31, 2004. In consideration for the stockholder entering
into this agreement, the Company granted the stockholder 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. As of December 31, 2004, the Company had
drawn the entire $2.5 million of the available funds.
On March 14, 2003, the Company executed a second binding agreement with the same
stockholder to fund up to an additional $3.5 million through December 31, 2003.
Under the terms of the second agreement, the Company can draw amounts as needed
in multiples of $500,000 to fund operations subject to Board of Director
approval. Amounts drawn bear interest at the prime rate per annum (5.750% at
March 31, 2004) payable monthly and become due and payable on December 31, 2004,
or upon a change in control of the Company or consummation of any other
financing over $7.0 million. In consideration, the Company granted the
stockholder 125,000 common stock purchase warrants at an exercise price equal to
the closing market price of the Company's stock on the date of grant. As of
March 31, 2004, the Company had drawn $2.5 million of the available funds and
repaid $2.0 million of the loan. Both of the lines allow for discretionary
principal payments, which add to the availability of additional funds that the
Company may draw.
On February 2, 2004, the Company granted this same stockholder an additional
150,000 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 consideration for
extending the payback dates of the March 28, 2002 and March 14, 2003 agreements
from December 31, 2004 to December 31, 2005; for waiving the funding requirement
mandating payback terms until such time as the Company has raised an additional
$7.0 million over the amount raised during the Company's recent 2004 private
placement offering, the Company is operating within sufficient cash flow
parameters, as defined, or a disposition of the Company occurs; and for his
involvement in equity financing in 2003 and 2004, to date.
In April 2005, the payback dates of the March 28, 2002 and March 14, 2003
agreements were extended from December 31, 2005 to December 31, 2006. As
consideration of this extension, this shareholder 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, for a period of five
years.
18
On December 10, 2003, the Company completed the sale of 750,000 shares of its
common stock through its recent private placement to a third party investor,
initiated in November 2003, with gross proceeds of approximately $1.5 million,
all of which will be used for capital equipment purchases, marketing, working
capital and general corporate purposes. In March 2004, the same investor
purchased an additional 1.0 million shares of common stock for $2.0 million. The
funds were used to reduce the outstanding balance of the notes payable to
stockholder. The Company will then draw amounts, per the terms of the
stockholder commitment letters dated March 28, 2002 and March 14, 2003, and
amendments thereto, as needed, for operating and capital expenditures. There can
be no assurance that the Company will raise any additional proceeds from future
private placements. Subscriptions for the current private placement expired on
April 30, 2004.
Furthermore, on December 18, 2003, the Company entered into an agreement with an
investment-banking firm in Boca Raton, Florida to assist in raising
approximately $3.0 to $5.0 million in equity capital. The Company has agreed to
pay a fee of 7% of any gross proceeds received by the Company as a result of
this firm's services, as well as all reasonable out-of-pocket fees, expenses and
costs incurred in connection with the performance of its services under the
agreement. The agreement excludes the above capital raised in December 2003 and
March 2004. No equity capital has been raised pursuant to this agreement through
the date of this filing.
At March 31, 2005, the Company had working capital of approximately $1.7
million and its current ratio (current assets to current liabilities) was 2.90
to 1. The Company anticipates increased cash flows from 2004 sales activity;
however, additional cash will still be needed to support operations. Management
believes that the commitments received from its stockholder and the current
private placement offering, as well as cash from sales and current working
capital will be sufficient to sustain its operations at its current level
through January 1, 2006. However, if budgeted sales levels are not achieved
and/or significant unanticipated expenditures occur, the Company may have to
modify its business plan, reduce or discontinue some of its operations or seek a
buyer for part of its assets to continue as a going concern through 2005.
The Company's wholly owned subsidiary, Ltd., moved to new office space in
September 2003 by assuming the existing lease, which expired in August 2004. The
Company is in the process of negotiating of a new lease.
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
depending on the nature of the sale. The Company believes it has established
sufficient reserves to accurately reflect the amount or likelihood of product
returns or credits and uncollectible receivables. However, there can be no
assurance that actual returns and uncollectible receivables will not exceed the
Company's reserves.
Sales of the Company's products will depend principally on end user demand for
such products and acceptance of the Company's products by original equipment
manufacturers ("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.
19
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Puradyn Filter Technologies Incorporated's Chief Executive Officer and Chief
Financial Officer have evaluated the Company's disclosure controls and
procedures as of March 31, 2005, and they concluded that these controls and
procedures are effective.
(b) Changes in Internal Controls
There are no significant changes in internal controls or in other factors that
could significantly affect these controls subsequent to March 31, 2005.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 14, 2005, in consideration for the amendments of the two
binding funding agreements with a stockholder, who is also a Board member, the
Company granted the stockholder 100,000 fully vested common stock purchase
warrants. The warrants have an exercise price of $0.95, which was equal to
quoted market value on the date of grant.
On March 11, 2005, the Company granted a total of 80,000 non-qualified
options to two consultants for services rendered. The total value of the options
is $45,600, of which $7,785 was expensed and $37,815 was capitalized as of March
31, 2005.
The issuance of these securities was exempt from section 4(2) of the
Securities and Exchange Act
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:
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.1 Class A Warrants to Purchase Common Stock
20
SIGNATURES
In accordance with the requirements of the Exchange Act, Puradyn Filter
Technologies Incorporated caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PURADYN FILTER TECHNOLOGIES INCORPORATED
(Registrant)
By /s/ Cindy Lea Gimler Date: May 23, 2005
-----------------------------------------
Cindy Lea Gimler, Chief Financial Officer
By /s/ Richard C. Ford Date: May 23, 2005
----------------------------------------
Richard C. Ford, Chief Executive Officer