PURADYN FILTER TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion together with our audited financial statements and the related notes appearing elsewhere in this report. In addition to historical financial information, this discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Actual results could differ from these expectations as a result of factors including those described under "Cautionary Statement Regarding Forward-Looking Information" and Item 1A, "Risk Factors," and elsewhere in this Annual Report on Form 10-K.
Overview
We focus our sales strategy on individual sales and distribution efforts as well
as on the development of a global distribution network that will not only sell,
but also install and support our product. DistributionNow (DNOW) joined the
Puradyn distributor network in 2016 and became exclusive distributor for the oil
and gas industry in
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2019 business highlights
· Revenues throughout 2019 were negatively impacted by the continued
delays in expected orders, especially from new customers in the Oil &
Gas category. Our sales in Oil & Gas were down 79% in 2019 compared to
the 2018. Customers within the drilling and pressure pumping segments
are reducing active equipment, which has a combined effect of reduced
demand of replacement filters among existing customers and the pausing
of orders by prospective customers. While we believe these orders may
eventually be received, it has become difficult to predict the timing.
Two major customers in the midstream category have also delayed orders
despite the fact that results from their respective pilots met or
exceeded targets.
· Our efforts to diversify our customer base continue to show promise as
our Commercial Marine business grew 17% during 2019 compared to 2018.
In 2019 we secured new business from industry leader, Campbell
Transportation, who purchased Puradyn systems for their entire fleet.
· A major government contractor that manages the maintenance of
generators at remote U.S. military operations purchased new systems
for one of their primary locations.
· We launched a completely updated website at www.puradyn.com including
an e-commerce component to facilitate direct-to-consumer sales.
2019 financial highlights:
· A 64% decline in net sales during 2019 compared to 2018;
· Gross profit margins declined from 41% in 2018 to 14% in 2019; and
· A net loss of $(1,686,641) for 2019 compared to a loss of $(216,382) in 2018.
Key strategies:
We are focusing our sales and marketing efforts in 2020 on:
· Finding new partners to help broaden Puradyn's reach and relevance
· Continuing to build on our sales momentum in commercial marine and
power generation to help diversify from historical dependence on the
Oil & Gas category;
· Re-opening efforts with operators of transit buses and other fleets;
and
· Further expanding in key international markets through new and
existing distributors.
In addition, from an operating standpoint we are placing additional emphasis on:
· Finding new partners for access to capital
· Reducing general and administrative costs to help offset lower sales;
and
· Managing materials costs and preparing for any impacts from new
tariffs or supply chain disruption due to COVID-19
Outlook
We attribute the decrease in 2019 sales to a virtual halt of new system orders and reduced filter orders due to oversupply in late 2018 from customers within the Oil & Gas industry. Our primary business segment is now Commercial Marine, which may likely continue to drive the majority of sales in 2020. While the Oil & Gas segment will likely remain weak in 2020 due to continued downsizing of active rigs, we do anticipate an increase in filter demand for the remaining active equipment later in 2020 as customer inventories diminish. We are also continuing to try and finalize a large transit bus opportunity that has been worked on for two years, which is now only being held up by financing on the customer side. And finally, we are working to increase sales with government contractors maintaining large generator fleets for remote operations. Our business in 2020 will likely be negatively impacted by the reduction in customer demand associated to Covid-19 closures, but the degree of this impact is difficult to determine at this time.
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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 loans from related parties to fund
our operations. These recurring operating losses, liabilities exceeding assets
and the reliance on cash inflows from our principal stockholder, as set forth
above, have led our independent registered public accounting firm
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition and accounts receivable allowances. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 1 to our audited financial statements appearing elsewhere in this report.
Recent Accounting Pronouncements
Information concerning recently issued accounting pronouncements is set forth in Note 1 of our Notes to Financial Statements appearing elsewhere in this report.
Results of Operations
The following table provides certain selected financial information for the
periods presented:
Years Ended December 31,
2019 2018 % change
Net sales $ 1,526,429 $ 4,203,556 (64%)
Gross profit $ 218,807 $ 1,740,348 (87%)
Total operating costs 1,498,214 1,629,278 (8%)
Income (loss) from operations $ (1,279,407 ) $ 111,070 (1,252%)
Total other (expense), net (407,234 ) (327,452 ) (24%)
Net loss $ (1,686,641 ) $ (216,382 ) 679%
Basic and diluted earnings (loss) per share
Net sales
The decrease in net sales in 2019 as compared to 2018 was driven primarily by a 79% decline in sales to the Oil & Gas segment where customers within the drilling and pressure pumping segments reduced active equipment, which has a combined effect of reduced demand of replacement filters among existing customers and the pausing of new system orders by prospective customers.
Gross profit
The decrease in our gross profit margins in the 2019 periods is attributable to
reduced facility utilization and operating efficiencies due to decreased sales
which were partially offset by an increase in the reserve for slow moving
inventory from amounts recorded in 2018. We have been advised by several of our
suppliers that prices for various raw materials are being increased as a result
of the loss of some of their primary suppliers and higher prices with their
secondary suppliers and the unknown impact of recently enacted tariffs by the
current administration. However, we are exploring and implementing measures to
help mitigate the impact on our costs. We notified our customers of pricing
increases effective
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Total operating costs
Our total operating costs, which include salaries and wages and selling and
administrative expenses, increased during 2019 due to increases in early 2019 of
salary and advertising expenses which were then offset by cost-cutting measures,
including staff reductions and a 20% reduction in factory hours and office
salaries that began late in the second quarter of 2019. The additional expense
was offset by the impact of two employees who are now being paid only from
deferred compensation. The increase also attributable to increases in non-cash
expenses associated with stock compensation to employees and our decision to
restart targeted advertising. The Company also recorded an expense of
Total other expense, net
Total other expense, net represents interest we pay to related parties on amounts advanced to us for working capital.
LIQUIDITY AND CAPITAL RESOURCES
We had cash on hand of
Our net sales are not sufficient to pay our operating expenses or satisfy our
obligations as when they become due. Historically, we have been materially
reliant on working capital advances from our Executive Chairman to address our
liquidity and working capital issues through the utilization of the borrowing
agreement with him. In 2019 we borrowed an additional
On
We also owe two of our executive officers and two former employees
Our net sales are not sufficient to pay our operating expenses. Our capital
requirements depend on a number of factors, including our ability to increase
revenues, increase gross profit margins and control our expenses. Over the past
few years we have not had any external sources of liquidity, and our discussions
with third parties for potential investments have not been successful. We
historically have encountered resistance from potential investors on a variety
of fronts, including our revenue levels, operating losses, and the amount of
debt due to our Executive Chairman. At
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Accordingly, during
Given our declining revenues, history of losses and debt levels, we face a number of challenges in our ability to raise capital from third parties. Our ability to provide for our current working capital needs, pay our obligations as they become due, grow our company, and continue our existing business and operations is in jeopardy. If we are unsuccessful in our efforts to significantly increase our net sales over sustained quarters and/or raise significant outside capital, we will no longer be able to continue as a going concern. The adverse impact of the Covid-19 pandemic on our business and operations as discussed earlier in this report is further exacerbating our already precarious financial position. It is possible that we may elect to seek bankruptcy protection if our operations continue to be adversely impacted to levels which make our ability to continue as a going concern unachievable. In that event, you would lose all of your investment in our company.
Summary cash flows
Years Ended
December 31,
2019 2018
Net cash (used) by operating activities
During 2019 net cash used by our operating activities was principally related to
an increase in inventory, which was offset by decreases in accrued liabilities
and accounts receivable. During 2019, the Company entered into an accounts
receivable financing agreement, similar to accepting credit cards, which
improved cash flow by accelerating accounts receivable. The increases in
inventory and accounts payable were a result of the Company's expected increase
in sales and timing of receiving raw materials. The decrease in accrued
liabilities was mainly the result of the conversion of
During 2019 and 2018, net cash used by investing activities represented capitalized patent costs and purchases of equipment.
During 2019, net cash provided by financing activities represented increase in
notes payable to stockholder and proceed of
Off Balance Sheet Arrangements
As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
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ITEM 7A.
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