UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

———————

FORM 10-Q

———————

(Mark One)

þ

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

 

 ACT OF 1934

For the quarterly period ended: June 30, 2011

Or

 

 

¨

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

 

 ACT OF 1934

For the transition period from: _____________ to _____________


COMMISSION FILE NUMBER: 001-11991


PURADYN FILTER TECHNOLOGIES INCORPORATED

(Name of registrant as specified in its charter)


DELAWARE

14-1708544

( State or other jurisdiction
of incorporation or organization)

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

2017 HIGH RIDGE ROAD, BOYNTON BEACH, FL 33426

( Address of principal executive offices) (Zip Code)

(561) 547-9499

(Registrant's telephone number, including area code)

NOT APPLICABLE

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

þ

 Yes

¨

 No

 

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

 

þ

 Yes

¨

 No

 

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

 

 

Large accelerated filer

¨

 

 

Accelerated filer

¨

 

Non-accelerated filer

¨

 (Do not check if a smaller

 

Smaller reporting company

þ

 

 

 

 reporting company)

 

 

 

 

 

 

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

 

¨

 Yes

þ

 No

 

 

Indicated the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 46,570,240 shares of common stock are issued and outstanding as of August 12, 2011.

 

 






PURADYN FILTER TECHNOLOGIES INCORPORATED

TABLE OF CONTENTS

PAGE NO.

 

PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

1


Condensed Consolidated Balance Sheets – As of June 30, 2011 (unaudited) and December 31, 2010

1


Condensed Consolidated Statements of Operations – Three Months and Six Months Ended

June 30, 2011 and 2010 (unaudited)

2


Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2011

and 2010 (unaudited)

3


Condensed Consolidated Statements of Changes In Stockholders’ Deficit – Six Months Ended

June 30, 2011 (unaudited)

4


Notes to Condensed Consolidated Financial Statements (unaudited)

5


Item 2.

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

13


Item 3.

Quantitative and Qualitative Disclosures About Market Risk

21


Item 4.

Controls and Procedures

22


PART II – OTHER INFORMATION


Item 1.

Legal Proceedings

23


Item 1A.

Risk Factors

23


Item 2.

Unregistered Sales Of Equity Securities And Use Of Proceeds

23


Item 3.

Default Upon Senior Securities

23


Item 4.

(Removed And Reserved.)

23


Item 5.

Other Information

23


Item 6.

Exhibits

24

 





ii



OTHER PERTINENT INFORMATION


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

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

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

·

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

·

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

·

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

·

our ability to repay the outstanding debt of $6.5 million at June 30, 2011 due our Chairman and CEO,

·

our reliance on sales to a limited number of customers,

·

our dependence on a limited number of distributors,

·

our ability to compete,

·

our ability to protect our intellectual property,

·

market overhang issues, and

·

the application of Penny Stock Rules to the trading in our stock.

Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review our Annual Report on Form 10-K for the year ended December 31, 2010, including the risks described in Part I. Item 1A. Risk Factors, together with our subsequent filings with the Securities and Exchange Commission in their entirety.  Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.




iii



PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2011 AND DECEMBER 31, 2010

 

 

June 30, 2011

 

December 31, 2010

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

     

 

 

 

 

 

 

Cash and cash equivalents

 

$

70,483

 

$

49,813

 

Accounts receivable, net of allowance for uncollectible
accounts of $33,056 and $32,654, respectively

 

 

181,940

 

 

166,367

 

Inventories, net

 

 

810,942

 

 

774,818

 

Prepaid expenses and other current assets

 

 

103,439

 

 

52,828

 

Total current assets

 

 

1,166,804

 

 

1,043,826

 

Property and equipment, net

 

 

106,026

 

 

123,506

 

Other noncurrent assets

 

 

40,725

 

 

78,625

 

Deferred financing costs, net

 

 

1,510

 

 

2,013

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,315,065

 

$

1,247,970

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ deficit

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

353,251

 

$

217,248

 

Accrued liabilities

 

 

1,419,781

 

 

1,262,798

 

Current portion of capital lease obligation

 

 

 

 

1,989

 

Deferred revenue

 

 

693

 

 

2,743

 

Notes Payable – stockholders

 

 

100,000

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

1,873,725

 

 

1,484,778

 

 

 

 

 

 

 

 

 

Notes Payable -  stockholders

 

 

6,611,914

 

 

6,361,914

 

 

 

 

 

 

 

 

 

Total Long Term Liabilities

 

 

6,611,914

 

 

6,361,914

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

8,485,639

 

 

7,846,692

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

Preferred stock, $.001 par value:

Authorized shares – 500,000;
None issued and outstanding

 

 

 

 

 

Common stock, $.001 par value:

Authorized shares – 100,000,000
Issued and outstanding – 46,570,240 and 46,070,437,
respectively

 

 

46,571

 

 

46,071

 

Additional paid-in capital

 

 

46,285,479

 

 

46,079,970

 

Notes receivable from stockholders

 

 

(756,250

)

 

(756,250

)

Accumulated deficit

 

 

(52, 892,377

)

 

(52, 114,411

)

Accumulated other comprehensive income

 

 

146,003

 

 

145,898

 

 

 

 

 

 

 

 

 

Total stockholders’ deficit

 

 

(7,170,574

)

 

(6,598,722

)

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ deficit

 

$

1,315,065

 

$

1,247,970

 



See accompanying notes to condensed consolidated financial statements.


1



PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(UNAUDITED)

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Net sales

     

$

499,423

     

$

761,341

     

$

1,382,815

     

$

1,435,603

 

 

     

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

397,146

 

 

536,655

 

 

986,319

 

 

938,153

 

Salaries and wages

 

 

268,628

 

 

270,925

 

 

542,792

 

 

510,412

 

Selling and administrative

 

 

243,475

 

 

349,055

 

 

549,122

 

 

614,099

 

 

 

 

909,249

 

 

1,156,635

 

 

2,078,233

 

 

2,062,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(409,826

)

 

(395,294

)

 

(695,418

)

 

(627,061

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1

 

 

270

 

 

1

 

 

327

 

Interest expense

 

 

(41,704

)

 

(41,199

)

 

(82,549

)

 

(78,555

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other expense, net

 

 

(41,703

)

 

(40,929

)

 

(82,548

)

 

(78,228

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(451,529

)

 

(436,223

)

 

(777,966

)

 

(705,289

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(451,529

)

$

(436,223

)

$

(777,966

)

$

(705,289

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

 

$

(0.01

)

$

(0.01

)

$

(0.02

)

$

(0.02

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares
outstanding (basic and diluted)

 

 

46,546,062

 

 

43,990,570

 

 

46,471,940

 

 

43,940,103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 




See accompanying notes to condensed consolidated financial statements.


2



PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(UNAUDITED)

 

 

Six Months Ended June 30

 

 

 

2011

 

2010

 

Operating activities

     

 

 

 

 

 

 

Net loss

 

$

(777,966

)

$

(705,289

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

23,670

 

 

22,728

 

Provision for bad debts

 

 

402

 

 

(369

)

Provision for obsolete and slow moving inventory

 

 

 

 

(28,682

)

Amortization of deferred financing costs included in interest expense

 

 

503

 

 

1,007

 

Deferred compensation

 

 

70,783

 

 

32,755

 

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

 

 

106,009

 

 

63,471

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(15,975

)

 

(163,931

)

Inventories

 

 

(36,125

)

 

(136,207

)

Prepaid expenses and other current assets

 

 

(50,611

)

 

(44,274

)

Other Assets

 

 

37,900

 

 

(5,618

)

Accounts payable

 

 

136,004

 

 

308,864

 

Accrued liabilities

 

 

86,200

 

 

81,319

 

Deferred revenues

 

 

(2,050

)

 

(21,350

)

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

(421,256

)

 

(595,576

)

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(6,190

)

 

(9,832

)

Net cash used in investing activities

 

 

(6,190

)

 

(9,832

)

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Proceeds from sale of common stock

 

 

100,000

 

 

102,100

 

Proceeds from issuance of notes payable to stockholders

 

 

350,000

 

 

581,500

 

Payment of capital lease obligations

 

 

(1,989

)

 

(1,425

)

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

448,011

 

 

682,175

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

105

 

 

(1,179

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

20,670

 

 

75,588

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

49,813

 

 

140,266

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

 

70,483

 

 

215,853

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

78,939

 

$

122,447

 

 

 

 

 

 

 

 

 




See accompanying notes to condensed consolidated financial statements.


3



PURADYN FILTER TECHNOLOGIES INCORPORATED

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

(UNAUDITED)

 

 

 

 

 

 

Additional

Paid-in

Capital

 

Notes

Receivable

From

Stockholders

 

Accumulated Deficit

 

Accumulated

Other

Comprehensive

Income (Loss)

 

Total

Stockholders'

Deficit

 

 

 

 

Common Stock

Shares

 

Amount

Balance at December 31, 2010

     

 

46,070, 076

     

$

46,071

     

$

46,079,970

     

$

(756,250

)

$

(52,114,411

)

$

145,898

     

$

(6,598,722

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

     

 

 

     

 

105

 

 

105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(777,966

)

 

 

 

 

(777,966

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(777,966

)

 

105

 

 

(777,861

)

Common stock issued for private placement, net of issuance costs

 

 

392,184

 

 

392

 

 

99,608

 

 

 

 

 

 

 

 

 

 

 

100,000

 

Issuance of shares and warrants to vendors

 

 

107,619

 

 

108

 

 

25,892

 

 

 

 

 

 

 

 

 

 

 

26,000

 

Compensation expense associated with unvested option awards

 

 

 

 

 

 

 

 

80,009

 

 

 

 

 

 

 

 

 

 

 

80,009

 

                                                     

 

 

                     

 

 

             

 

 

                     

 

 

                      

 

 

                           

 

 

                           

 

 

                        

 

Balance at June 30, 2011

 

 

46,570,240

 

$

46,571

 

$

46,285,479

 

$

(756,250

)

$

(52,892,377

)

$

146,003

 

$

(7,170,574

)





See accompanying notes to condensed consolidated financial statements.


4





PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim information and with the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments consisting of a normal and recurring nature considered necessary for a fair presentation have been included. Operating results for the three-month and six month periods ended June 30, 2011 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2011.

For further information, refer to Puradyn Filter Technologies Incorporated’s (the “Company”) consolidated financial statements and footnotes thereto included in the Form 10-K for the year ended December 31, 2010.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Basic and Diluted Loss Per Share

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 260, Earnings Per Share, requires a dual presentation of basic and diluted earnings per share. However, because of the Company's net losses, the effect of outstanding stock options and warrants would be anti-dilutive and, accordingly, is excluded from the computation of diluted loss per share.  The number of such shares excluded from the computation of loss per share totaled 6,759,777 for the three-month and six-month period ended June 30, 2011 and 6,492,608 for the three-month and six-month period ended June 30, 2010.

Stock Compensation

The Company adopted FASB ASC 718, Compensation – Stock Compensation, effective January 1, 2006 using the modified prospective application method of adoption which requires us to record compensation cost related to unvested stock awards as of December 31, 2005, recognizing the amortized grant date fair value in accordance with provisions of FASB ASC 718 on straight line basis over the service periods of each award.  We have estimated forfeiture rates based on our historical experience.  Stock option compensation expense for the periods ended June 30, 2011 and June 30, 2010 have been recognized as a component of cost of goods sold and general and administrative expenses in the accompanying Consolidated Financial Statements.

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

Inventories

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




5



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)


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

 

 

June 30, 2011

 

December 31, 2010

 

Raw materials

 

$

965,217

 

$

864,812

 

Work In Progress

 

 

4,692

 

 

11,682

 

Finished goods

 

 

112,122

 

 

169,413

 

Valuation allowance                                                   

 

 

(271,089

)

 

(271,089

)

Inventory, net

 

$

810,942

 

$

774,818

 

 

     

 

 

 

 

 

 

Deferred Financing Costs

The Company capitalizes financing costs and amortizes them using the straight-line method, which approximates the effective interest method, over the term of the related debt. Amortization of deferred financing costs is included in interest expense and totaled $251 and $504 the three-months ended June 30, 2011 and June 30, 2010 and $503 and $1,007 for the six-months ended June 30, 2011 and 2010, respectively.  Accumulated amortization of deferred financing costs as of June 30, 2011 and 2010 was $679,640 and $678,130, respectively.

Revenue Recognition

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

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

Product Warranty Costs

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

The Company accrues for warranty costs based on the expected material and labor costs to provide warranty replacement products. The methodology used in determining the liability for warranty cost is based upon historical information and experience.  The Company's warranty reserve is calculated as the gross sales multiplied by the historical warranty expense return rate.

The following table shows the changes in the aggregate product warranty liability for the six-months ended June 30, 2011:

Balance as of December 31, 2010

     

$

38,787

 

Less: Payments made

 

 

(153

)

Add:  Provision for current period warranties

 

 

(325

)

Balance as of June 30, 2011

 

$

38,309

 




6



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)


Comprehensive Income

FASB ASC 220, Comprehensive Income establishes rules for reporting and displaying of comprehensive income and its components. Comprehensive income is the sum of net loss as reported in the consolidated statements of operations and other comprehensive income transactions. Other comprehensive income transactions that currently apply to the Company result from changes in exchange rates used in translating the financial statements of its wholly owned subsidiary, Puradyn Filter Technologies, Ltd. (“Ltd.”). Comprehensive loss as of June 30, 2011 and 2010 is not shown net of taxes because the Company’s deferred tax asset has been fully offset by a valuation allowance.

Comprehensive loss consisted of the following for the three and six-months ended June 30, 2011 and 2010:

 

 

Three Months Ended

June 30,

 

Six Months Ended

June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

     

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(451,529

)

$

(436,223

)

$

(777,966

)

$

(705,289

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(359

)

 

(203

)

 

105

 

 

(1,179

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(451,888

)

$

(436,426

)

$

(777,861

)

$

(706,468

)

New Accounting Standards

In May 2011, FASB issued Accounting Standards Update (ASU) 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04), which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. The Company is currently evaluating ASU 2011-04 and has not yet determined the impact that adoption will have on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (ASU 2011-05), which is effective for annual reporting periods beginning after December 15, 2011. Accordingly, the Company will adopt ASU 2011-05 on January 1, 2012. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, items of other comprehensive income that are reclassified to profit or loss are required to be presented separately on the face of the financial statements. This guidance is intended to increase the prominence of other comprehensive income in financial statements by requiring that such amounts be presented either in a single continuous statement of income and comprehensive income or separately in consecutive statements of income and comprehensive income. The adoption of ASU 2011-05 is not expected to have a material impact on the Company’s financial position or results of operations.



7



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)


2.

Going Concern

The Company's financial statements have been prepared on the assumption that it will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has sustained losses since inception and used net cash in operations of $421,256 and $595,577 during the six-months ended June 30, 2011 and 2010, respectively. As a result, the Company has had to rely principally on private equity investments, including the conversion of debt into stock, as well as stockholder loans to fund its activities to date.

These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from an institutional investor and current stockholder led the Company’s independent registered public accounting firm, Webb & Company, P.A., to include a statement in its audit report relating to the Company’s audited consolidated financial statements for the year ended December 31, 2010 expressing substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.

The Company has been addressing the liquidity and working capital issues and continues to attempt to raise additional capital with institutional and private investors and current stockholders.  Cost reductions were and continue to be implemented by the Company, including acquiring alternative suppliers for raw materials and volume purchase discounts when appropriate. The Company expects to see results from these reductions, as well as other cost reduction plans through 2011.  

3.

Common Stock

On April 11, 2011, the Company issued to Emerging Markets, LLC, 60,000 shares of common stock valued at $0.30 per share as compensation per the month-to-month agreement for consultant work rendered during the three months ended March 31, 2011.

On May 27, 2011, pursuant to an obligation under an agreement dated May 19, 2011, for services rendered as financial public relations firm and media relations counsel, the Company issued to Monarch Communications, Inc., 13,333 shares of common stock valued at $0.30 per share. The recipient is an accredited investor and the issuances were exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.

On June 20, the Company issued to Monarch Communications, Inc. 14,286 shares of common stock valued at $0.28 per share as partial compensation per the agreement for consultant work.

4.

Stock Options.

For the three months ended June 30, 2011 and June 30, 2010, respectively, the Company recorded stock-based compensation expense of $36,106 and $14,364, relating to unvested employee stock options.   

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



8



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)


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

 

 

Six Months Ended

June 30, 2011

 

 

 

Number of

Options

 

Weighted Average

Exercise Price

 

 

     

 

 

 

 

 

Options outstanding at December 31, 2010

 

2,161,583

 

$

.42

 

 

 

 

 

 

 

 

Options granted

 

820,000

 

 

.28

 

Options exercised

 

 

 

 

Options expired

 

 

 

 

Options cancelled

 

40,000

 

 

.25

 

Options at June 30, 2011

 

2,941,583

 

$

.38

 

Options exercisable at June 30, 2011

 

1,283,541

 

$

.54

 

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

 

 

Three Months Ended

June 30, 2011

 

 

 

Number of

Options

 

Weighted Average

Exercise Price

 

 

     

 

 

 

 

 

Options outstanding at March 31, 2011

 

2,981,583

 

$

.38

 

 

 

 

 

 

 

 

Options exercised

 

 

 

 

Options cancelled

 

40,000

 

 

.25

 

Options at June 30, 2011

 

2,941,583

 

$

.38

 

Options exercisable at June 30, 2011

 

1,283,541

 

$

.54

 

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

 

 

Six Months Ended

June 30, 2011

 

 

 

Number of

Options

 

Weighted Average

Exercise Price

 

Non-Vested options at December 31, 2010

 

1,240,795

 

$

.23

 

Options granted

 

820,000

 

 

.28

 

Options vested

 

362,753

 

 

.23

 

Options cancelled

 

40,000

 

 

.25

 

Non-Vested options at June 30, 2011

 

1,658,042

 

$

.12

 

 

     

 

 

 

 

 




9



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)


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

 

 

Three Months Ended

June 30, 2011

 

 

 

Number of

Options

 

Weighted Average

Exercise Price

 

Non-Vested options at March 31, 2011                               

 

1,957,542

 

$

.14

 

Options granted

 

 

 

 

Options vested

 

(259,500

)

 

.47

 

Options cancelled

 

(40,000

)

 

.25

 

Non-Vested options at June 30, 2011

 

1,658,042

 

$

.12

 


 

 

 

Options Outstanding

 

Options Exercisable

 

Range of

Exercise

Price

 

 

Number

Outstanding

 

Remaining

Average

Contractual

Life

(In Years)

 

 

Weighted

Average

Exercise Price

 

Number

Exercisable

 

 

Weighted

Average

Exercise

Price

 

$ .14  – $ 1.70

 

 

2,893,583

 

5.75

 

$

.27

 

1,235,541

 

$

.47

 

1.99   –   2.60

 

 

48,000

 

1.58

 

 

2.32

 

48,000

 

 

2.32

 

Totals

 

 

2,941,583

 

4.98

 

$

.38

 

1,283,541

 

$

.54

 

5.

Warrants

At June 30, 2011, 4,598,194 warrants with an average exercise price of $0.96 remain outstanding and were fully vested.

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

 

 

Six Months Ended

June 30, 2011

 

 

 

Weighted Average Exercise

 

 

 

Warrants

 

Price

 

Warrants outstanding at December 31, 2010

 

4,558,975

 

$

.97

 

Granted

 

39,219

 

 

.50

 

Exercised

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

 

Warrants outstanding at June 30, 2011

 

4,598,194

 

$

.96

 


 

 

Three Months Ended

June 30, 2011

 

 

 

Weighted Average Exercise

 

 

 

Warrants

 

Price

 

Warrants outstanding at March 31, 2011

 

4,598,194

 

$

.96

 

Granted

 

 

 

 

Exercised

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

 

Warrants outstanding at June 30, 2011

 

4,598,194

 

$

.96

 





10



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



 

 

Warrants Outstanding

 

Range of Exercise Price

 

Number

Outstanding

 

Remaining

Average

Contractual

Life

(In Years)

 

Weighted Average

Exercise Price

 

$0.50 – $0.75

 

1,809,122

 

3.27

 

$

.52

 

$1.25

 

2,789,072

 

1.56

 

 

1.25

 

Totals

 

4,598,194

 

2.38

 

$

.96

 

6.

Notes Payable to Stockholders

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

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

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

As of June 30, 2011, the Company had drawn the full funding amount under the agreement of approximately $6.1 million plus an additional $261,914. Additionally, the stockholder has loaned the Company $250,000 directly, for a total amount due of $6,611,914. Amounts drawn and received from direct borrowings bear interest at a weighted average between two facilities, one is based on a minimum of 2.75% or the prime rate minus one-half percent and the other is based on LIBOR plus 1.40 (a weighted average of 2.54% as of June 30, 2011) payable monthly and becoming due and payable on December 31, 2012, or upon a change in control of the Company or consummation of any other financing over $7.0 million.  Previously, this executive officer, director and stockholder waived this funding requirement.

For the three-months ended June 30, 2011 and 2010, the Company recorded $40,769 and $39,971, respectively; and for the six-months ended June 30, 2011 and 2010, the Company recorded $81,190 and $75,679, 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.

7.

Commitments and Contingencies and Concentrations

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

On April 28, 2011, the Company terminated the month-to-month agreement with Emerging Markets, LLC.

On May 19, 2011, we entered into a consulting agreement with Monarch Communications, Inc. for services rendered as public relations firm and media relations consultants for the Company. The term of the agreement is for twelve months.  As compensation for their services, Monarch will receive a fee of $6,000 per month, payable as $2,000 cash and $4,000 in shares of common stock.  Either party may terminate the agreement with 30 days’ notice.



11



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)


The recipient is an accredited or otherwise sophisticated investor who had such knowledge and experience in business matters and was capable of evaluating the merits and risks of the prospective investment in our securities.  The issuance of the shares is exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.

On July 7, 2009 the Company filed a lawsuit against former Chief Executive Officer, Richard C. Ford, alleging non-payment of three promissory notes totaling $756,250 with interest at a rate of 5.63% per annum since July 25, 2001, the execution date of the notes.  The case has been preliminary set for trial on February 22, 2012.

8.

Subsequent Events

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

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

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





12





ITEM 2.

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

Cautionary Statements Regarding Forward Looking Information

Certain statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause the Company's actual results to differ materially from those in the forward-looking statements.  These factors include, but are not limited to, the Company's ability to operate as a going concern and to raise sufficient capital to fund its operations, its ability to satisfy its obligations as they become due, acceptance of the Company's products, the Company's dependence on distributors and a few significant customers, risks associated with international operations and international distribution and other factors.  Most of these factors are difficult to predict accurately and are generally beyond our control.  You should consider the areas of risk described in connection with any forward-looking statements that may be made herein.  Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety.  Except for the Company's ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

Overview

Sales of the Company’s products, the pura DYN ® bypass oil filtration system (the "Puradyn" ) and replaceable filter elements will depend principally upon end user demand for such products and acceptance of the Company’s products by original equipment manufacturers (“OEMs”).  The oil filtration industry has historically been competitive and, as is typically the case with innovative products, the ultimate level of demand for the Company’s products is subject to a high degree of uncertainty. Developing market acceptance for the Company’s existing and proposed products will require substantial marketing and sales efforts and the expenditure of a significant amount of funds to inform customers of the perceived benefits and cost advantages of its products.  As a result of our limited resources, to date we have not had adequate funds available to undertake these necessary marketing efforts.

Currently no bypass oil filtration system has captured a substantial share of the estimated recurring $15 billion potential market, based upon figures supplied by The Rhein Report, a diesel engine industry consulting, publishing and market research company.  We believe we are in a unique 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:

·

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

·

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

·

Providing an operational maintenance solution to end users in conjunction with existing and reasonably foreseeable federal environmental legislation such as new regulation affecting diesel engines and diesel fuels, mandating cleaner diesel engines which first went into effect January 1, 2007, with additional and more stringent legislation in 2010.

We focus our sales strategy on direct sales and distribution efforts as well as on the development of a strong nationwide distribution network that will not only sell but also install and support our product.  We currently have more than 100 active distributors in the U.S. and internationally.  The number of distributors will constantly change as we add new distributors as well as when OEMs come onboard with their distribution network.

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



13





This strategy includes focus on:

·

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

·

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

·

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

·

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

·

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

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

·

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

·

Increased activity in the open pit mining industry for bypass oil filtration.

·

Extended retrofit programs with domestic and international industrial service companies.

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

We also believe, drawing upon feedback received from potential customers, that industry acceptance will continue to grow in 2011, but at a slower pace than what we expected in the first quarter of 2011. 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 end-user to test and evaluate the Puradyn system on its fleet equipment.  While set for a specific period of time, typically ranging from three to twelve months, evaluations are often influenced by a number of variables including equipment type and applications downtime or servicing, which may extend the evaluation period.  Consequently, the sales cycle can be relatively long.  

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

Our focus on specific industries, which began in 2009, has shown to pay dividends into 2011, with these certain niche industries representing over 50% of sales as compared to 20% in the base period in 2009.

Key to accomplishing our goals will be optimizing our limited resources and obtaining sufficient capital.  We will need to remain focused on working with OEMs, continue developing the independent distributors we have onboard and maintain growth within the major accounts using our system.  To accomplish these tasks, we will need to obtain capital funding and add appropriate sales and marketing support to be sure our distributors and customers are served.  We will evaluate further manpower needs as we grow our OEM account list.  The expansion into the OEM area is rewarding in the aspect that it provides a steady flow of material requirements for our manufacturing facility.  Additionally, OEM business allows us more stability in retaining trained manufacturing personnel, a stronger supply chain with steady production, economies of scale, and the ability to better utilize our overhead with higher average material turn rates.



14





We continue to address our liquidity and working capital issues as we continue to seek additional capital from institutional and private investors and current stockholders.  Historically, we have faced difficulties in raising adequate capital and we anticipate that those efforts will continue given the current uncertainties facing the capital markets in the U.S.  We also continue to implement cost reductions in an effort to improve margins, including securing alternative suppliers for raw materials and manufacturing and anticipate these costs reductions will positively impact our results of operations during the balance of 2011 and beyond.  To facilitate improved cost reductions, during the fourth quarter of 2010 we added a buyer whose focus is on better material acquisition costs and more efficient purchasing methods. Although our product costs have increased over the past few years, we have not fully passed on these cost increases. We announced a price increase effective in the third quarter of 2011, to recoup a portion of the increased costs we have previously absorbed.  

Going Concern

Our financial statements have been prepared on the basis that we will operate as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  We have incurred net losses each year since inception and have relied on the sale of our stock from time to time and loans from third parties and from related parties to fund our operations.  These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from an institutional investor and current stockholder have led our independent registered public accounting firm Webb & Company P.A. to include a statement in its audit report relating to audited consolidated financial statements for the years ended December 31, 2010 and 2009 expressing substantial doubt about our ability to continue as a going concern.  Our ability to continue as a going concern is dependent upon our ability to obtain the necessary financing to meet our obligations and repay our liabilities when they become due and to generate profitable operations in the future.  We plan to continue to provide for our capital requirements through the sale of equity securities, however, we have no firm commitments from any third party to provide this financing and we cannot assure you we will be successful in raising working capital as needed.  There are no assurances that we will have sufficient funds to execute our business plan, pay our obligations as they become due, or generate positive operating results.

Critical Accounting Policies and Estimates

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

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



15





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

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

 

 

Three Months Ended June 30,

 

 

 

2011

 

2010

 

Change

 

 

     

 

                    

     

 

                    

     

 

                    

 

Net sales

 

$

499,423

 

$

761,341

 

$

(261,918

)

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

397,146

 

 

536,655

 

 

(139,509

)

Salaries and wages

 

 

268,628

 

 

270,925

 

 

(2,297

)

Selling and administrative

 

 

243,475

 

 

349,055

 

 

(105,580

)

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

 

909,249

 

 

1,156,635

 

 

(247,386

)

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1

 

 

270

 

 

(269

)

Interest expense

 

 

(41,704

)

 

(41,199

)

 

(505

)

 

 

 

 

 

 

 

 

 

 

 

Total other expense

 

 

(41,703

)

 

(40,929

)

 

(774

)

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(451,529

)

$

(436,223

)

$

(15,306

)

Net Sales

Net sales decreased 34.4% in the three months ending June 30, 2011 compared to the three months ending June 30, 2010.  The decrease in sales was attributable to two international customers who scaled down their purchases to approximately 30% of their purchases for the same period in 2010.

Sales to four customers accounted for 13%, 13%, 13% and 12% (for a total of 51%) of net sales for the three-months ended June 30, 2011. Sales to two customers accounted for 28% and 17% (for a total of 45%) of net sales for the three-months ended June 30, 2010.  

During the three months ended June 30, 2011, we experienced a decline in sales as companies indicated to us that they were postponing purchases to conserve resources. However, we believe that eventually these deferred purchase decisions will result in improved sales as strategic plans are changed by the management of our customers, although there can be no assurances that this will occur or, it it occurs, during which periods.

Cost of Products Sold

Gross profit, as a percentage of sales, decreased from 29.6% in the three months ending June 30, 2010 to 20.5% in the three months ending June 30, 2011.  The increase in cost of goods sold, which generates a lower gross profit, is primarily attributable to the fixed manufacturing overhead costs that aren’t absorbed under lower sales volumes. Other increases in cost of products sold included higher costs of raw materials (particularly steel and cotton), rework charges and increased wages and benefit costs.  Further, for the three months ended June 30, 2010, there was an adjustment to inventory reserves that reduced cost of sales; there was no such adjustment during the same period in 2011. We have announced a price increase effective September 15, 2011, which we anticipate will improve our gross profit margins in the future.

Salaries and Wages

Salaries and wages decreased 0.8% for the three months ending June 30, 2011 compared to the three months ending June 30, 2010.  This minor variance resulted from the addition of one engineer (a former consultant to the company) and a buyer that occurred after June 30, 2010, offset by the departure of one sales person in the first quarter of 2011 and accounting personnel changes that occurred in the second quarter of 2010.



16





Salaries and wages, as a percentage of sales, were 53.8% for the three months ending June 30, 2011 and 35.6% for the three months ending June 30, 2010. The increase in salaries and wages as a percentage of sales was due primarily to the decrease in sales for the three months ending June 30, 2011 compared to the same period in 2010.

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

Selling and Administrative Expenses

Selling and administrative expenses decreased by 30.2% for the three months ended June 30, 2011 from the comparable period in 2010.  The reduced expense resulted from restructuring the commission costs in 2011, write off in 2010 of sample units, conversion of a contract engineer to an employee in 2011 and reduced professional fees in 2011. These expense reductions were slightly offset by an increase in patent expenses for new patent applications.

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

 

 

Three Months Ended June 30,

 

 

 

2011

 

2010

 

Change

 

Employee Benefits

 

$

56,354

 

$

49,455

 

$

6,899

 

Travel & Marketing

 

 

39,513

 

 

97,996

 

 

(58,483

)

Depreciation & Amortization

 

 

9,172

 

 

8,929

 

 

243

 

Engineering

 

 

1,451

 

 

22,623

 

 

(21,172

)

Professional Fees

 

 

59,732

 

 

106,583

 

 

(46,851

)

Investor Relations

 

 

 

 

11,400

 

 

(11,400

)

Occupancy Expense

 

 

26,178

 

 

23,922

 

 

2,256

 

Patent Expense

 

 

34,121

 

 

21,471

 

 

12,650

 

Stock Compensation

 

 

1,585

 

 

1,702

 

 

(117

)

Bad Debts

 

 

164

 

 

 

 

164

 

Other Expenses

 

 

15,205

 

 

4,974

 

 

10,231

 

  

     

 

 

 

 

 

 

 

 

 

Total

 

$

243,475

 

$

349,055

 

$

(105,580

)

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

Engineering expenses decreased substantially as a contract engineer was converted to an employee in the first quarter of 2011. The expense of this former contractor is currently included in Salaries and Wages and a reduction in contract engineering expense resulted from this change.

Professional fees decreased during the three months ended June 30, 2011 compared to 2010 primarily due to legal expenses that were incurred in 2010 which were associated with a former employee’s dispute on wages.  Additionally, we incurred consulting expenses in the United Kingdom subsidiary in 2010 that were not incurred in 2011, and additional financial consulting fees during the three month period ending June 30, 2010.

We terminated the month to month agreement with our investor relations firm in March, 2011. Accordingly, we did not incur any investor relations expense during the three months ending June 30, 2011.  Patent expenses increased 59% during the three months ending June 30, 2011 as compared to the three months ending June 30, 2010 as a result of US and international patent applications submitted during the first six months of 2011.

We anticipate expenses for the remainder of 2011 should be similar to those incurred in the three months ending June 30, 2011.

Interest Expense

Interest expense remained relatively constant for the three months ending June 30, 2011 compared to the three months ending June 30, 2010. The Company pays interest monthly on the notes payable to an executive officer, director and stockholder at prime rate less one-half percent, which was 2.54% as of June 30, 2011 as opposed to 2.64% as of June 30, 2010.  



17





Results of Operations for the Six-months Ended June 30, 2011 Compared to the Six-months Ended June 30, 2010

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


 

 

Six Months Ended June 30,

 

 

 

2011

 

2010

 

Change

 

Net sales

     

$

1,382,815

 

$

1,435,603

 

$

(52,788

)

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

986,319

 

 

938,153

 

 

48,166

 

Salaries and wages

 

 

542,792

 

 

510,412

 

 

32,380

 

Selling and administrative

 

 

549,122

 

 

614,099

 

 

(64,977

)

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

 

2,078,233

 

 

2,062,664

 

 

15,569

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1

 

 

327

 

 

(326

)

Interest expense

 

 

(82,549

)

 

(78,555

)

 

(3,994

)

 

 

 

 

 

 

 

 

 

 

 

Total other (expense) income

 

 

(82,548

)

 

(78,228

)

 

(4,320

)

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(777,966

)

$

(705,289

)

$

(72,677

)


Net Sales

Net sales decreased 3.7% in the six months ending June 30, 2011 compared to the six months ending June 30, 2010.  The majority of our sales decrease occurred in the months of April and June of this year as we believe this to be a result of our customers’ hesitation to commit their resources in an unknown economic environment. We anticipate that our future sales will also be influenced by the overall spending patterns of our major customers.

Sales to three customers individually accounted for 19%, 15% and 11% (for a total of 45%) for the six months ending June 30, 2011, while sales to two customers individually accounted for 22% and 19% (for a total 41%) of net sales for the six-months ended June 30, 2010.  

Cost of Products Sold

Gross profit, as a percentage of sales, decreased from 34.7% in the six months ending June 30, 2010 to 28.7% in the six months ending June 30, 2011.  Although sales decreased 3.7% as noted above, cost of products sold increased 5.1%. The increase in cost of goods sold, which generates a lower gross profit, is primarily attributable to the fixed manufacturing overhead costs that aren’t absorbed under lower sales volumes. Other increases in cost of products sold during the six months ended June 30, 2011 included rework charges and increased wages and benefit costs.  Additionally, an adjustment to inventory reserves in the first quarter of 2010 reduced cost of sales; there was no adjustment recorded in 2011. We have announced a price increase effective September 15, 2011, which we anticipate will improve our gross profit margins in the future.

Salaries and Wages

Salaries and wages increased 6.3% for the six months ending June 30, 2011 compared to the six months ending June 30, 2010.  This increase was primarily due to the addition of a buyer in November 2010 and, as previously described, the conversion of a contract engineer to employee status. Salaries and wages, as a percentage of sales, were 39.3% for the six months ending June 30, 2011 and 35.6% for the six months ending June 30, 2010. Management does not anticipate any changes to our salaries and wages at our current sales volume.



18





Selling and Administrative Expenses

Selling and administrative expenses decreased 10.6% for the six months ending June 30, 2011 compared to the six months ending June 30, 2011. The following table represents the major components of Selling and Administrative expenses for the six months ended June 30, 2011 and 2010 and the change of those components over their respective periods:

 

 

Six Months Ended June 30,

 

 

 

2011

 

2010

 

Change

 

 

     

 

 

 

 

 

 

 

 

 

Employee Benefits

 

$

120,603

 

$

87,245

 

$

33,358

 

Travel & Marketing

 

 

76,506

 

 

143,413

 

 

(66,907

)

Depreciation & Amortization

 

 

18,365

 

 

17,635

 

 

730

 

Engineering

 

 

4,103

 

 

32,845

 

 

(28,742

)

Professional Fees

 

 

114,592

 

 

154,421

 

 

(39,829

)

Investor Relations

 

 

18,013

 

 

33,195

 

 

(15,182

)

Occupancy Expense

 

 

53,801

 

 

52,071

 

 

1,730

 

Patent Expense

 

 

110,505

 

 

35,267

 

 

75,238

 

Stock Compensation

 

 

3,285

 

 

36,139

 

 

(32,854

)

Bad Debts

 

 

164

 

 

25

 

 

139

 

Other Expenses

 

 

29,185

 

 

21,843

 

 

7,342

 

  

 

 

 

 

 

 

 

 

 

 

Total

 

$

549,122

 

$

614,099

 

$

(64,977

)

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

Travel & Marketing decreased 47% for the six months ending June 30, 2011 compared to the six months ending June 30, 2010. As previously mentioned, the write off of promotional units in 2010 increased our marketing expenses during the six months ending June 30, 2010 compared to the six months ending June 30, 2011. Additionally, we changed the commission structure during 2010 which resulted in lower sales and marketing costs in the six months ending June 30, 2011 when compared to the same period in 2010.

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

Professional fees decreased 25.8% for the six months ending June 30, 2011 compared to the six months ending June 30, 2010. We incurred higher professional fees in 2010 as a result of legal expenses associated with former employees. We also incurred additional accounting fees in 2010 relating to our United Kingdom subsidiary which was closed in 2009.  During 2010 we incurred additional expenses as a result of higher utilization of outsourced services, such as accounting and finance support.

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

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

In February, 2010 we paid a consultant for services with stock options. During 2011 we did not have this expense, and accordingly, there was a reduction in stock compensation during the six months ending June 30, 2011 compared to the six months ending June 30, 2010.  In May 2011 we entered into an agreement with Monarch Communications, Inc., to pay a portion of our public relations firm fees in stock. This amount has been reported as a



19





marketing expense. Amounts reported as stock compensation for 2011 represent the value of options issued to Directors pursuant to our 2000 Non-Employee Directors Stock Option Plan. We do not anticipate issuing stock for services other than for those marketing services and Director compensation through the end of the current year.

Interest Expense

Interest expense remained relatively constant for the period ending June 30, 2011 as compared to the period ending June 30, 2010 and was incurred primarily on the outstanding balance of the notes payable to an executive officer, director and stockholder. The Company pays interest monthly on the notes payable at the prime rate less one-half percent, which was a weighted average of 2.54% as of June 30, 2011 as opposed to 2.64% as of June 30, 2010.  

Liquidity and Capital Resources

Liquidity is the ability of a company to generate adequate amounts of cash to meet its obligations. As of June 30, 2011, the Company had cash and cash equivalents of $70,483, as compared to $49,813 at December 31, 2010. At June 30, 2011, we had negative working capital of ($706,921) and our current ratio (current assets to current liabilities) was 0.62 to 1. At December 31, 2010 we had negative working capital of ($440,952) and our current ratio was 0.70 to 1. The increase in our working capital deficit and the decrease in our current ratio is primarily attributable to the increase in accounts payable, notes payable to stockholders and accrued liabilities.  

We have incurred net losses each year since inception and at June 30, 2011 we had an accumulated deficit of $52,892,377.  Our net sales are not sufficient to fund our operating expenses.  Historically, we have relied on the sale of our stock from time to time and loans from third parties and from related parties to fund our operations.  During 2010, we raised a total of $445,100 in capital from an institutional investor and current stockholders and during the six months ended June 30, 2011 we raised an additional $100,000.  In addition, as of June 30, 2011, we owed our stockholder approximately $6.6 million for funds he has advanced to us from time to time for working capital under a line of credit facility.  In addition, a Director has advanced $100,000 due October 1, 2011 which bears interest at 5% per annum. Interest expense on both loans totaled $81,190 for the six months ended June 30, 2011.

We do not currently have any commitments for capital expenditures. Our current cash position is insufficient to cover our current operating needs. While we anticipate cash flows from 2011 sales activity, additional cash will still be needed to support operations, meet our working capital needs and satisfy our obligations as they become due. While we are actively seeking additional equity investments, we have no firm commitments from any third parties and there are no assurances we will be successful in attracting additional capital. In addition, as set forth above, we owe our stockholder $6.6 million which is due on December 31, 2012 or (i) at such time as we have raised an additional $7 million over the $3.5 million raised in prior offerings, or (ii) at such time as we are operating within sufficient cash flow parameters to sustain operations, or (iii) until a disposition of our company, such as an acquisition or merger, occurs. We do not have sufficient funds to pay this loan when it becomes due and there are no assurances the note holder will extend the due date.  

We have implemented measures to preserve our ability to operate, including organizational changes, a reduction and/or deferral of salaries, reduction in personnel and renegotiating creditor and collection arrangements. If we are not successful in raising additional capital in the near future, it is possible we will be required to accelerate our contingent plans to more aggressively reduce spending, including drastic reductions in our work force, severe cutbacks in our production facilities and elimination of overhead costs that do not contribute to our level of sales activity. If budgeted sales levels are not achieved and/or significant unanticipated expenditures occur, or if we are not able to raise additional investment capital, we may have to modify our business plan, reduce or discontinue some of our operations or seek a buyer for part of our assets to continue as a going concern through 2011. There can be no assurance that we will be able to raise additional capital or that sales will increase to the level required to generate profitable operations to provide positive cash flow from operations. In that event, it is possible that stockholders could lose their entire investment in our company.  These factors raise substantial doubt about our ability to continue as a going concern.




20





Operating activities

For the six-month period ended June 30, 2011 net cash used in operating activities was $421,256, which primarily resulted from the net loss of $777,966.  The negative effect of the net loss on working capital is offset by an increase in accounts payable in the amount of $136,004, an increase in accrued liabilities of $86,200 and a positive effect on working capital resulted from a decrease in prepaid expenses in the amount of $50,611.

Investing activities

For the six months ending June 30, 2011, $6,190 cash was used in investing activities for the purchase of property and equipment.

Financing activities

Net cash provided by financing activities was $448,011 for the six months ending June 30, 2011, composed of $100,000 of net proceeds received from stock issued for cash and $350,000 in advances under the line of credit from our stockholder as described above less $1,989 in payment of capital lease obligations.

Critical Accounting Policy

General

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

Impact of Inflation and Foreign Currency Translation

Inflation has not had a significant impact on the Company's operations. However, any significant decrease in the price for oil or labor, environmental compliance costs, and engine replacement costs could adversely impact the Company's end users cost/benefit analysis as to the use of the Company's products. While we no longer have operations in Great Britain, we maintain a small amount of cash on deposit in a bank account related to Ltd.’s previous operations and we continue to collect outstanding accounts receivable. These activities resulted in a minor foreign currency translation adjustment during the six month period ending June 30, 2011. The impact of fluctuations in foreign currency has not been significant during the six month period ended June 30, 2010.  The exchange rate, the Great British pound to the U.S. dollar fluctuated from 1.59 on December 31, 2010 to 1.60 on June 30, 2011.

Off Balance Sheet Financing

None. The Company has not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties, nor has it entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, the Company does not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing or hedging services with us.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable for a smaller reporting company.



21





ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

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




22





PART II. – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

As previously reported, on July 7, 2009 the Company filed a lawsuit in the Circuit Courts in 15th Judicial District in and for Palm Beach County, Florida, styled Puradyn Filter Technologies, Inc. versus Richard C. Ford case number 502009CA023128XXXXMB. The case has been preliminary set for trial on February 22, 2012.

ITEM 1A.

RISK FACTORS.

Risk factors describing the major risks to our business can be found under Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the year ended December 31, 2010. There has been no material change in our risk factors from those previously discussed in the Annual Report on Form 10-K.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On April 11, 2011, the Company issued to Emerging Markets, LLC, 60,000 shares of common stock valued at $0.30 per share as compensation per the month-to-month agreement for consultant work pursuant to the terms of an agreement entered into with that firm in January 2011. On April 28, 2011, the Company terminated the month-to-month agreement with Emerging Markets, LLC. The recipient was an accredited or otherwise sophisticated investor who had such knowledge and experience in business matters and was capable of evaluating the merits and risks of the prospective investment in our securities. The recipient had access to business and financial information concerning our company.  The issuance of the shares is exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.

On May 19, 2011, we entered into a consulting agreement with Monarch Communications, Inc. for services rendered as public relations firm and media relations consultants for the Company. The term of the agreement is for twelve months.  As compensation for their services, Monarch will receive a fee of $6,000 per month, payable as $2,000 cash and $4,000 in shares of common stock, valued at the closing price on the date of issue.  Either party may terminate the agreement with 30 days’ notice.

On May 27, 2011, the Company issued to Monarch Communications, Inc., 13,333 shares of common stock valued at $0.30 per share as compensation for its services during the month of May 2011, and on June 20, 2011 the Company issued Monarch Communications, Inc. 14,286 shares of its common stock valued at $0.28 per share as compensation for services in June 2011. The recipient is an accredited or otherwise sophisticated investor who had such knowledge and experience in business matters and was capable of evaluating the merits and risks of the prospective investment in our securities.  The issuance of the shares is exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.

ITEM 3.

DEFAULT UPON SENIOR SECURITIES.

None

ITEM 4.

(REMOVED AND RESERVED.)

ITEM 5.

OTHER INFORMATION.

Between February 9, 2011 and April 5, 2011, the Company received loans in various amounts totaling $250,000, from an executive officer, director and stockholder, as advances for working capital needs. The loans bear interest at the same rate of interest as the credit facility provided by the stockholder under the note dated March 28, 2002. These advances do not have a specific due date but are to be paid based on Management’s determination of the Company’s ability to pay and cash flow. We are using the proceeds for working capital.

On May 23, 2011, the Company received a loan in the amount of $100,000 from one of our Board members, Mr. Dominic Telesco, as advances for working capital needs. The loan bears interest at 5% per annum and is due October 1, 2011.



23






ITEM 6.

EXHIBITS.

3.4

 

Certificate of Amendment to the Certificate of Incorporation

 

 

 

10.13

 

Agreement Monarch Communications, Inc.

 

 

 

31.1

     

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

 

 

 

31.2

 

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

 

 

 

32.1

 

Section 1350 certification of Chief Executive Officer

 

 

 

32.2

 

Section 1350 certification of principal financial officer

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 





24





SIGNATURES

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

Date:  August 15, 2011

 

PURADYN FILTER TECHNOLOGIES INCORPORATED

 

 

 

 

 

 

 

By:

/s/ Joseph V. Vittoria

 

 

Joseph V. Vittoria, Chairman and Chief Executive Officer

  

 

 

Date:  August 15, 2011

 

By:

/s/ Alan J. Sandler

 

 

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




25


Exhibit 3.4


State of Delaware

Secretary of State

Division of Corporations

Delivered 02:43 PM 7/11/11

Filed 02:30 PM 7/11/11

SRV 110808091 - 2153143 FILE


CERTIFICATE OF AMENDMENT

TO THE CERTIFICATE OF INCORPORATION

OF

PURADYN FILTER TECHNOLOGIES INCORPORATED

(A Delaware Corporation)


Pursuant to Section 242 of the Delaware General Corporations Law, the undersigned, being the Chairman and Chief Executive Officer of Puradyn Filter Technologies Incorporated, a corporation organized and existing under the laws of the State of Delaware (the “ Corporation ”), does hereby certify that the following resolutions were adopted by the Corporation’s Board of Directors and its stockholders as hereinafter described:


RESOLVED , that the Certificate of Incorporation of the Corporation, as amended, shall be further amended by deleting the first paragraph of Article V Capital Stock and replacing it as follows:


The aggregate number of shares of all classes of capital stock which the Corporation has authority to issue is 100,500,000 of which 100,000,000 are to be shares of Common Stock, $.001 par value per share, and of which 500,000 are to be shares of Preferred Stock, $.001 par value per share.  The shares may be issued by the Corporation from time to time as approved by the Board of Directors of the Corporation without the approval of the stockholders.


FURTHER RESOLVED, except for the deletion and substitution of the first paragraph of Article V Capital Stock of the Corporation’s Certificate of Incorporation, as amended, all other provisions of the Corporation’s Certificate of Incorporation, as amended, shall remain in full force and effect.


FURTHER RESOLVED , that the effective date of this Certificate of Amendment shall be July 26, 2011.


The foregoing resolution and this Certificate of Amendment were adopted by the Board of Directors of the Corporation pursuant to a written consent of the Directors of the Corporation dated May 23, 2011 in accordance with Section 141 of the Delaware General Corporation Law, and by the written consent dated July 1, 2011 of the holders of shares of the Corporation’s voting stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted in accordance with Section 228 of the Delaware General Corporation Law.


IN WITNESS WHEREOF , the Corporation has caused this certificate to be signed by Joseph V. Vittoria, its Chief Executive Officer, this 7th day of July, 2011.



 

Puradyn Filter Technologies Incorporated

 

 

 

By:   /s/ Joseph V. Vittoria

 

Joseph V. Vittoria, Chairman and CEO




[PFTI_EX10Z13002.GIF]

May 19, 2011


Mr. Joseph Vittoria

Puradyn Filter Technologies

2017 High Ridge Road

Boynton Beach, FL 33426


Dear Joe:


Monarch Communications (Monarch) is very pleased to provide financial public relations services on behalf of Puradyn Filter Technologies (Puradyn) under the terms and conditions which are set forth in this Agreement.  


I.   Services : Monarch, during the term of this Agreement, shall provide Puradyn with financial public relations services and activities and will act as media relations counsel.


II. Fees : Monarch will bill for our services as follows.


A fixed fee of $6,000 per month, payable as $2,000 cash and $4,000 in Puradyn common stock. The first installment is due upon receipt of this document. The official start of our contract will be May 19, 2011, and we will provide an invoice at the start of each month. The fixed fee shall cover the services described above. Monarch will provide a written summary of public relations activities on or around the 19 th of each month.


If, for any reason, either party should elect to discontinue our business relationship, the party that wishes to terminate the agreement shall give the second party thirty (30) days notice.


III. Expenses :  Monarch will obtain your authorization before making any commitments for any expenditure in excess of $200 on your behalf.  Monarch will maintain records of expenses incurred and will bill you monthly for all incidental and other expenses incurred on your behalf, including, but not limited to, items such as travel, messengers, press mailings, copies of video and written transcripts, printing, etc. You agree to reimburse these expenses within ten days of Monarch’s submission for payment.


IV. Term : The term of this agreement be deemed to commence as of May 19, 2011, and shall continue for a period of twelve (12) months.




1



V. Indemnification : Puradyn agrees to hold Monarch and all of its officers, employees and agents harmless from and against all liabilities, losses, damages or expenses, including reasonable attorneys’ fees and costs, which Monarch or such other party may incur as the result of any claim, suit or proceeding brought or threatened arising out of any agreement or assertions we may make on your behalf, including assertions about your organization and your members, in any materials we may prepare for you if the assertions are based on information, representations, reports, data or releases supplied to us by or through you, or which you have previously approved.  


VI. Confidential Information : Monarch and Puradyn agree to keep confidential and not to disclose or use for their own benefit or for the benefit of any third party, any information, documents or materials which are identified by a party, at the time that they are made available, to be proprietary or confidential. The obligations of this agreement shall survive termination and shall continue for a period of 24 months after the effective date of termination of this contract.


VII. Publicity Disclosure : Monarch may publicize our agreement to work with you in the form of press releases and announcements and may include your name in our client roster for the purpose of further business developments efforts. If requested by you, you will be given reasonable opportunity to review and approve all information pertaining to your company prior to public disclosure.  


VIII. Dispute Resolution :  In the event that a dispute arises between us, we both agree to

make a good faith effort to resolve our differences by negotiation. In the event that the

dispute is not resolved by our mutual efforts and within 30 days, we agree to arbitrate any

dispute arising under this agreement before an arbitrator under the auspices of the American Arbitration Association in the County of Palm Beach, State of Florida.  In such arbitration, the prevailing party shall have its costs associated with the arbitration, including its reasonable attorneys’ fees, paid by the other party.


IX. Limitation of Liability : Except as specifically set forth in this letter Agreement, Monarch makes no express or implied warranties of any kind, whether alleged to arise by law, by reason of custom or usage in the trade or by course of dealing. In no event will Monarch be liable for any loss of profits, business interruption or any form of special, incidental, consequential or punitive damages of any kind arising out of or relating to performance under this agreement, unless caused by gross negligence or intentional acts.


X. Miscellaneous : Monarch is an independent contractor. Nothing contained in this Agreement shall create any partnership or joint venture between the parties. Monarch will be acting as your agent when purchasing materials or services on your behalf.    


This Agreement may only be assigned with the prior written approval of the other party.  This Agreement embodies the entire Agreement between parties hereto and may not be amended or modified except by a writing signed by both parties. Each party acknowledges that it has not relied upon any promise or representation not specifically set forth herein.



2




This Agreement shall be construed and governed by the laws of the State of New York.


If the above comports with your understanding of our agreement, please sign below where indicated and return a copy to me, keeping the original for your files.


Monarch looks forward to a very successful and mutually beneficial relationship with Puradyn.


Sincerely,


Jeff Siegel



Approved:


Jeff Siegel

                 

Date: May 17, 2011

Mr. Jeff Siegel

President

Monarch Communications


___________________________________

Date: May 17, 2011

Mr. Joseph Vittoria,

Chairman & CEO

Puradyn Filter Technologies





3


EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Joseph V. Vittoria, certify that:

1.

I have reviewed this quarterly report on Form 10-Q for the six months ended June 30, 2011 of Puradyn Filter Technologies Incorporated (the "Company");

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) an 15d-15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: August 15, 2011

 

By:

/s/ Joseph V. Vittoria

 

 

Joseph V. Vittoria

 

 

Chairman and Chief Executive Officer,
principal executive officer




EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Alan J. Sandler, certify that:

1.

I have reviewed this quarterly report on Form 10-Q for the six months ended June 30, 2011 of Puradyn Filter Technologies Incorporated (the "Company");

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) an 15d-15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 15, 2011

 

By:

/s/ Alan J. Sandler

 

 

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

 

 

principal accounting officer




EXHIBIT 32.1

SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Joseph V. Vittoria, Chief Executive Officer of Puradyn Filter Technologies Incorporated (“the Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

1.

The Quarterly Report on Form 10-Q of the Company for the six months ended June 30, 2011 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.  

August 15, 2011


 

By:

/s/ Joseph V. Vittoria

 

Name:

Joseph V. Vittoria

 

Title:

Chairman and Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.



EXHIBIT 32.2

SECTION 1350 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Alan J. Sandler, Secretary to the Board, Vice President and principal financial officer, of Puradyn Filter Technologies Incorporated (“the Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

1.

The Quarterly Report on Form 10-Q of the Company for the six months ended June 30, 2011 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and


2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.  

August 15, 2011

 

By:

/s/ Alan J. Sandler

 

Name:

Alan J. Sandler,

 

Title:

Secretary to the Board, Vice President and

 

 

principal financial officer and

 

 

principal accounting officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.