ITEM 1.

BUSINESS.

The Company

We design, manufacture, market and distribute worldwide the pura DYN ^® bypass oil filtration system (the "Puradyn" ) for use with substantially all internal combustion engines and hydraulic equipment that use lubricating oil. Working in conjunction with the equipment’s full-flow oil filter, the Puradyn system cleans oil by continually removing solid, liquid and gaseous contaminants from the oil through a sophisticated and unique filtration and evaporation process. For engine lubricating oil, our filters are unique in that it incorporates an additive package. Because Puradyn filtered lubricating oil is kept in a continually clean state, our system has been used effectively to safely extend oil-drain intervals and to extend the time between engine overhauls. We are the exclusive manufacturer of the disposable replacement filter elements ("Element") for the Puradyn system .

Products  

The core product, the patented Puradyn bypass oil filtration system, is offered in two families of models, TF and PFT, and can be attached to almost any engine and hydraulic system. The concept of the Puradyn bypass filtration system is similar to a kidney dialysis machine that filters blood to rid it of impurities, keeping the oil continually clean. Whenever the engine or machinery is operating, the Puradyn is extracting from the oil solid particles down to less than one micron (1/39 millionth of an inch), as well as gaseous and liquid contaminants, protecting the engine or hydraulic equipment from harmful wear caused by these contaminants. Replacement elements used for filtration of engine oil contain an additive package in which base additives are replenished in the oil, helping to maintain the oil’s proper chemical balance and viscosity.

The condition of the oil is monitored through use of a simple oil analysis sample taken at the time the Element is changed in lieu of performing a regularly scheduled oil change. If the sample results, typically received in five to seven days, show that the condition of the oil is considered good for continued use, there is no need to change the oil.

Consequently, the Puradyn significantly reduces maintenance costs by decreasing oil consumption, engine wear and certain other types of general maintenance as well as reducing environmental concerns and costs associated with the storage and disposal of waste oil. These potential savings are achieved from utilizing the Puradyn, which generally has a relatively short payback period of, on average, six to 14 months, depending upon the application.

The Puradyn system is currently manufactured in six different sizes suitable for placement on engines or equipment with oil sump capacities ranging from a minimum of eight quarts to a maximum of 85 gallons (322 liters)  By utilizing multiple systems, sump capacities up to 510 gallons (1,931 liters) can be serviced. The PFT model uses the same filter and offers the same benefits and features of the TF model, with the added enhancements of easier serviceability and the main component of the system being more corrosion-resistant.

All Puradyn systems are compatible with virtually all standard and synthetic oils on the market and they work with engines using gasoline, diesel, propane or natural gas. The Puradyn system, ordinarily, cannot be used on engines that do not have a pressurized lubricating system.

We also manufacture and distribute replacement filter Elements for the Puradyn system. Depending upon the application, we generally recommend that the Element be replaced at the engine manufacturer's recommended/approved periodic oil change interval or as oil analysis dictates. The type of Element used also depends upon the specific type of engine or hydraulic application. A customer can change the Element and take the required oil sample in approximately five to 10 minutes.

The Puradyn has no moving parts and consequently requires no significant ongoing maintenance. As long as Elements are changed at the recommended intervals and other standard preventive maintenance procedures such as changing factory full flow and air filters and oil analyses are completed, the Company believes the Puradyn will perform as designed; such belief is established and supported by independent lab tests and historical field performance.

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Warranties

The Puradyn carries a six-month ‘money-back’ performance guarantee, and is currently warranted to the original user to be free of defects in material and workmanship for five years from date of purchase, with a one-year limited warranty on the heating element. The Company will accept returns of products that are defective at the time of sale to the distributor or prove to be defective during the limited warranty period. Returns are subject to specific conditions.

For the Company’s performance guarantee and warranty to remain in effect, users must, among other things, maintain a record of the laboratory oil analysis results and use Puradyn replacement parts. The Company has received letters from numerous OEMs which have all stated that the installation and use of the Puradyn does not void their manufacturer warranties if there is no oil related engine failure or malfunction attributed to the Puradyn . To date, there have been no significant warranty claims, although there can be no assurances that such a trend will continue.

Marketing

The Company has established an in-house marketing department.

The Company’s products are marketed to numerous industries including but not limited to, oil and gas services,  agricultural, bus, generator, construction, mining, industrial, a multitude of hydraulic applications, and other users of engines or equipment that utilize up to 50 weight oil for lubrication.

We rely on management's ability to determine the existence and extent of available markets for our product. Company management has considerable sales and marketing backgrounds and devotes a significant portion of their time to sales-related activities.

Distribution

We currently have over 100 domestic and international active distributors. Currently, international sales are administered by Puradyn from the United States. The international distributors are located primarily in South America, Europe, and Asia. Our international distributors purchase product directly from the Company and sell to their existing or new customers.

Sales

Direct Sales

The Company directly and/or with the assistance of its manufacturer's representatives, distributors or other agents, markets its products directly to OEMs, other distributors and national accounts. We are dependent upon sales to a limited number of customers. During 2013 six customers together accounted for 53.5% of the Company’s net sales and during 2012 four customers together accounted for 50% of the Company’s net sales. There were four customers at December 31, 2013, whose trade receivable balances equaled or exceeded 5% of total receivables, representing approximately 37.1%, 12.0%, 10.7%, and 7.1% respectively of total receivables. There were four customers at December 31, 2012, whose trade receivable balances equaled or exceeded 5% of total receivables, representing approximately 33.9%, 17.2%, 16.9%, and 16.9% of total receivables. The loss of business from one or a combination of the Company’s significant customers could adversely affect its operations.

International Sales

The Company, directly and/or with the assistance of commission-based manufacturer's representatives, has established primarily non-exclusive distributors and sales representation in various countries, including Germany, South Africa, Turkey, United Kingdom, Thailand, Colombia, and others. The ultimate success of these and other distributors depends upon, among other things, their abilities to successfully introduce and sell the product in their territories including obtaining local evaluations, establishing distribution and other factors similar to those faced by the Company in the United States. Unlike domestic sales, the Company has a policy on international sales for them to be paid in advance before shipping or secured by a letter of credit. The Company’s credit risk is minimal with international sales as a result of this policy. Total international sales amounted to approximately 10.2% and 16.7% of consolidated net sales in 2013 and 2012, respectively.

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Manufacturing and Production

The Company purchases component parts for unit housing and filter Elements. The component parts are assembled, packed and shipped from our facility in Boynton Beach, Florida.

We currently source (i.e., purchase each raw material and component part from a specific vendor) substantially all of our raw materials and component parts from various vendors in the United States. Substantially all the tools and dies used by certain of our vendors are owned by the Company. We have researched alternative sources of supply and do not anticipate that the loss of any single supplier would have a material long-term adverse effect on our business, operations or financial condition. However, there can be no assurance that our current or future suppliers will be able to meet our requirements on commercially reasonable terms or within scheduled delivery times. An interruption of our arrangements with suppliers could cause a delay in the production of our products for timely delivery to distributors and customers which could result in a loss of sales revenue in future periods.

The company has achieved ISO 9001:2008 registration from the International Organization for Standardization, validating its Quality Management Standards process for ‘design, manufacture, sales and distribution of bypass oil filtration systems and replacement filters for various industries.’

Engineering and development costs are expensed as incurred. During the years ended December 31, 2013 and 2012, we incurred engineering and development costs in the amount of $26,280 and $21,238, respectively, and are included in selling and administrative expenses in the accompanying consolidated statements of operations.

Competition

Competitive bypass oil filters produced by other companies in varying degrees address the issues of solid or liquid contaminant filtration through centrifugal design, media filtration or evaporation. However, Puradyn believes that it designs and manufactures the only bypass oil filtration system that incorporates all of the following features which we believe provides us with a competitive advantage:

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Filtering solid contaminants to below one micron, including enhanced soot retention through the use of a patent-pending process for chemical grafting;

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Effectively removing harmful gaseous and liquid contaminants through a heated evaporation chamber  or patented chemical formulation; and

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Replenishing the base additives so as to maintain proper oil total base number (TBN) and viscosity

The proper use of our products reduces the need for oil maintenance services, replacement parts, original oil sales and consumption and waste oil disposal.  

Some of our competitors may have more capital, greater brand recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do.  Our competitors' products may achieve greater acceptance in the marketplace than our own, limiting our ability to gain market share and customer loyalty and to generate sufficient revenues to achieve a profitable level of operations.  

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We have registered the product trademark “ Puradyn” in the United States and other countries where the " Purifiner " trademark was registered, and have registered the product trademarks “ CGP” and “Keep It Clean!” in the United States.

We have also obtained the rights to the domain name www.puradyn.com as well as the domain names puradyn.asia, puradyn.org, puradyn.us, puradyn.info and puradyn.biz.  As with telephone numbers, we do not have and cannot acquire any property rights in an Internet address. We do not expect to lose the ability to use these Internet addresses; however, there can be no assurance in this regard.

During 2013 and 2012 we spent $25,955 and $20,263, respectively, on research and development.  

Employees

At March 26, 2014, the Company had 22 full-time employees, including our executive officers.

None of the employees are covered by collective bargaining agreements, and we believe our relationships with our employees to be good.

History of our Company

The company has been incorporated in the State of Delaware since February 1988.  On February 4, 1998, the company filed a Certificate of Amendment to its Certificate of Incorporation, changing its name to Puradyn Filter Technologies Incorporated.

ITEM 1A.

RISK FACTORS.

An investment in our common stock involves a significant degree of risk. You should not invest in our common stock unless you can afford to lose your entire investment. You should consider carefully the following risk factors and other information in this annual report before deciding to invest in our common stock. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected and you could lose your entire investment in our company.

WE HAVE A HISTORY OF LOSSES AND OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM HAS SUBSTANTIAL DOUBTS ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.

We have incurred substantial operating and net losses, as well as negative operating cash flows, since our inception through December 31, 2013. For the years ended December 31, 2013 and 2012, we reported net losses of $1,332,292 and $2,227,473, respectively. Our net sales declined 1.2% for 2013 from 2012. At December 31, 2013, we had an accumulated deficit of approximately $57 million. These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from our principal stockholder who is also an executive officer and director of our company have led our independent registered public accounting firm to include a statement in its audit report relating to our audited consolidated financial statements for the years ended December 31, 2013 and 2012 expressing substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. We anticipate that we will continue to incur losses in future periods until we are successful in significantly increasing our revenues. There are no assurances that we will be able to raise our revenues to a level which supports profitable operations and provides sufficient funds to pay our obligations. If we are unable to meet those obligations, we could be forced to cease operations in which event investors would lose their entire investment in our company.

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OUR NET SALES ARE NOT SUFFICIENT TO FUND OUR OPERATING EXPENSES. THERE ARE NO ASSURANCES WE WILL BE ABLE TO INCREASE OUR SALES, IN THE NEAR FUTURE, TO A LEVEL WHICH WILL FUND OUR OPERATING EXPENSES.

We used cash in operations of approximately $1.0 million and approximately $1.1 million in 2013 and 2012, respectively. Our net sales have never been sufficient to fund our operating expenses and we are dependent on loans from our principal stockholder who is also an executive officer and director of our company.  During 2013 this stockholder advanced us an additional $1.1 million and an additional $150,000 to date during 2014. We continue to implement cost reductions in an effort to improve margins, including securing alternative suppliers for raw materials and manufacturing and we anticipate these cost reductions will continue to assist us in future periods to reduce our cash used in operations. However, as long as our cash flow from operations remains insufficient to fund our operations, we will continue depleting our cash and other financial resources, which are extremely limited. Our failure to achieve profitable operations in future periods will adversely affect our ability to continue as a going concern. In this event, you could lose all of your investment in our company.

WE NEED ADDITIONAL FINANCING WHICH WE MAY NOT BE ABLE TO OBTAIN ON ACCEPTABLE TERMS. IF WE CANNOT RAISE ADDITIONAL CAPITAL AS NEEDED, OUR ABILITY TO EXECUTE OUR GROWTH STRATEGY AND FUND OUR ONGOING OPERATIONS WILL BE IN JEOPARDY.

Historically, our operations have been financed primarily through a credit line from one of our principal stockholder, as well as the issuance of equity and short-term loans, primarily from other affiliates. Our future capital requirements, however, depend on a number of factors, including our ability to internally grow our revenues, manage our business and control our expenses. At December 31, 2013, we had a working capital deficit of $769,904 as compared to a working capital deficit of $821,615 at December 31, 2012. We need to raise additional capital to fund our ongoing operations, pay our existing obligations and for future growth of our company. We do not have any commitments for additional capital and we cannot assure you that any additional capital will be available to us in the future upon terms acceptable to us. Given our history of losses, debt levels and general uncertainties of the capital markets, we face a number of challenges in our ability to raise capital. If we do not raise funds as needed, our ability to provide for current working capital needs, pay our obligations as they become due, grow our company, and continue our existing business and operations is in jeopardy. In this event, you could lose all of your investment in our company.

WE OWE APPROXIMATELY $ 10.0 MILLION WHICH IS DUE BY DECEMBER 31, 2015.

Since March 2002, our principal stockholder has been providing funding to us for working capital on an unsecured basis. The original amount of the credit line extended to us in 2002 was $2.5 million.  At December 31, 2013, we owed him approximately $9.8 million and he has advanced us an additional $150,000 in 2014. As extended, this loan is due on December 31, 2015 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. Although he has continually extended the due date of this obligation since the credit line was first extended to us in 2002, most recently extending the maturity date from December 31, 2014 to December 31, 2015, there are no assurances this stockholder will continue to provide extensions to us indefinitely.  While the loan is unsecured, the repayment terms of this obligation makes it more difficult for us to secure the additional financing we need to fund our operations.  

WE RELY ON SALES TO A LIMITED NUMBER OF CUSTOMERS AND THERE ARE NO ASSURANCES THAT THESE CUSTOMERS WILL CONTINUE TO PURCHASE PRODUCTS FROM US.

We are dependent upon sales to a limited number of customers. During 2013 six customers individually accounted for approximately 13.9%, 13.4%, 7.7%, 7.4%, 6.0% and 5.1% respectively (for a total of 53.5%) of our net sales. During 2012 four customers individually accounted for approximately 15%, 13%, 11% and 11% respectively (for a total of 50%) of our net sales. We do not have contracts with our customers and the loss of sales from one or more of these customers could materially impact our results of operations in future periods.

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THERE ARE NO ASSURANCES OUR AGREEMENTS WITH HONGHUA AMERICA LLC (HHA) OR MER EQUIPMENT, INC. (MER) WILL ACHIEVE ESTIMATED NET SALES.

In December 2012 we entered into a one year exclusive distribution agreement with MER Equipment, Inc. (MER) for the commercial marine industry on the West Coast of the United States, including Alaska and Hawaii, which has now been extended for an additional two years.  While we initially estimated that t he agreement represented potential orders of $2.6 million over a three year period, s ales through the end of 2013 were approximately $61,000.  In addition, in April 2013 we entered into a three year exclusive distribution agreement with Honghua America LLC (HHA) in the territories of mainland China, Hong Kong, Macau, and Taiwan.  We initially estimated that the agreement could possibly represent $5.75 million in sales through 2015 however, sales through the end of 2013 were approximately $80,000.  Although based upon our ongoing discussions with both MER and HHA we believe both companies have demonstrated a commitment to the program, there are no assurances that our initial estimates of sales under one or both of these agreements will ever been achieved.

IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY OUR ABILITY TO CONDUCT OUR BUSINESS AS IT IS PRESENTLY CONDUCTED IS IN JEOPARDY.

Our success is heavily dependent on our proprietary technology and we rely on a combination of contractual rights, patents, trade secrets, trademarks and non-disclosure agreements to establish and protect our proprietary rights. There can be no assurances that the steps we take to protect our proprietary rights will be adequate to prevent misappropriation of the technology or independent development by others of products with features based upon, or otherwise similar to, our products. In addition, although we believe that any new technology currently in development or patent pending has been independently developed and does not infringe on the proprietary rights of others, there can be no assurance that we are correct or that third parties will not assert infringement claims against us in the future. If instituted, there can be no assurances we will have adequate resources to defend a patent infringement or other proprietary rights infringement action. If we are unable to adequately protect our proprietary rights or if other products should be developed which are substantially similar to ours, our ability to continue our operations as they are presently conducted could be in jeopardy and we could be forced to cease operations.

THE EXERCISE OF OUTSTANDING WARRANTS AND OPTIONS WILL BE DILUTIVE TO OUR EXISTING STOCKHOLDERS.

At December 31, 2013, we had 48,632,481 shares of our common stock issued and outstanding and the following securities, which are exercisable into shares of our common stock, were outstanding:

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3,899,758 shares of our common stock issuable upon the exercise of warrants with exercise prices ranging from $0.167 to $1.25 per share; and

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4,194,972 shares of our common stock issuable upon the exercise of options with exercise prices ranging from $0.11 per share to $2.60 per share.

The issuance of these shares will be dilutive to our existing stockholders.

BECAUSE OUR STOCK CURRENTLY TRADES BELOW $5.00 PER SHARE, AND IS QUOTED ON THE OTC BULLETIN BOARD, OUR STOCK IS CONSIDERED A "PENNY STOCK" WHICH CAN ADVERSELY AFFECT ITS LIQUIDITY.

As the trading price of our common stock is less than $5.00 per share, our common stock is considered a "penny stock," and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction.

Securities and Exchange Commission regulations also require additional disclosure in connection with any trades involving a "penny stock," including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of our common stock in the secondary market because few brokers or dealers are likely to undertake these compliance activities. Purchasers of our common stock may find it difficult to resell the shares in the secondary market.

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ITEM 1B.