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: March 31, 2014
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	¨			Smaller reporting company	þ

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

¨ Yes   þ No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 48,745,288 shares of common stock are issued and outstanding as of May 13, 2014.

 

 

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TABLE OF CONTENTS

 

		Page No.
	PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS.	1
	Condensed Balance Sheets – As of March 31, 2014 (unaudited) and December 31, 2013	1
	Condensed Statements of Operations – Three months ended March 31, 2014 and 2013 (unaudited)	2
	Condensed Statements of Cash Flows – Three months ended March 31, 2014 and 2013 (unaudited)	3
	Condensed Statements of Changes In Stockholders’ Deficit – Three months ended March 31, 2014 (unaudited)	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	10
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	14
ITEM 4.	CONTROLS AND PROCEDURES.	14
	PART II.   OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS.	15
ITEM 1A.	RISK FACTORS.	15
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	15
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.	15
ITEM 4.	MINE SAFETY DISCLOSURE.	15
ITEM 5.	OTHER INFORMATION.	15
ITEM 6.	EXHIBITS.	16

 

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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.

CAUTIONARY STATEMENT 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 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 $10.2 million at May 13, 2014 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 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, 2013 including the risks described in Part I. Item 1A. Risk Factors, and this report 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.

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PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED BALANCE SHEETS

		March 31, 2014			December 31, 2013
		(Unaudited)
ASSETS
Current assets:
Cash		$	125,085		$	161,503
Accounts receivable, net of allowance for uncollectible accounts of $17,294 and $16,236, respectively			362,058			182,143
Inventories, net			603,153			593,783
Prepaid expenses and other current assets			81,851			84,279
Total current assets			1,172,147			1,021,708
Property and equipment, net			60,276			57,046
Other noncurrent assets			328,907			317,508
Total assets		$	1,561,330		$	1,396,262
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	149,435		$	103,252
Accrued liabilities			288,719			279,470
Current portion of capital lease obligation			7,558			8,097
Deferred compensation			1,441,121			1,400,796
Total current liabilities			1,886,833			1,791,615
Capital lease obligation, less current portion			1,861			3,280
Notes Payable - stockholders			10,079,292			9,829,242
Total Long Term Liabilities			10,081,153			9,832,522
Total Liabilities			11,967,986			11,624,137
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 – 48,707,106 and 48,632,482, respectively			48,707			48,632
Additional paid-in capital			47,049,741			47,010,511
Accumulated deficit			(57,505,104	)		(57,287,018	)
Total stockholders’ deficit			(10,406,656	)		(10,227,875	)
Total liabilities and stockholders’ deficit		$	1,561,330		$	1,396,262

See accompanying notes to unaudited condensed financial statements

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PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)

		For the Three Months Ended March 31,
		2014			2013
Net sales		$	894,303		$	574,488
Cost of products sold			537,770			403,533
Gross profit			356,533			170,955
Costs and expenses:
Salaries and wages			277,969			279,825
Selling and administrative			237,933			257,701
Total Operating Costs			515,902			537,526
Loss from operations			(159,369	)		(366,571	)
Other income (expense):
Interest expense			(58,717	)		(50,114	)
Net loss before income tax expense			(218,086	)		(416,685	)
Income tax expense			—			—
Net loss		$	(218,086	)	$	(416,685	)
Loss per share – basic and diluted:		$	(0.00	)	$	(0.01	)
Basic and diluted weighted average common shares outstanding			48,679,675			47,896,035

See accompanying notes to unaudited condensed financial statements

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PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		For the Three Months Ended March 31,
		2014			2013
Operating activities
Net loss		$	(218,086	)	$	(416,685	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			9,593			8,861
Provision for bad debts			1,058			217
Amortization of deferred financing costs included in interest expense			—			63
Compensation expense on stock-based arrangements with employees and consultants			39,305			51,478
Changes in operating assets and liabilities:
Accounts receivable			(180,976	)		(8,011	)
Inventories			(9,369	)		(26,869	)
(Increase) / decrease in prepaid expenses and other current assets			2,223			(26,638	)
Accounts payable			46,186			39,754
Deferred compensation			40,325			30,092
Accrued liabilities			9,247			28,248
Net cash used in operating activities			(260,494	)		(319,490	)
Investing activities
Purchases of property and equipment			(9,999	)		(4,480	)
Capitalized patent costs			(14,017	)		(14,292	)
Net cash used in investing activities			(24,016	)		(18,772	)
Financing activities
Proceeds from issuance of notes payable to stockholders			250,050			375,080
Payment of capital lease obligations			(1,958	)		(1,799	)
Net cash provided by financing activities			248,092			373,281
Net Increase (decrease) in cash and cash equivalents			(36,418	)		35,019
Cash and cash equivalents at beginning of period			161,503			114,512
Cash and cash equivalents at end of period		$	125,085		$	149,531
Supplemental cash flow information:
Cash paid for interest		$	55,629		$	46,140
Common Stock issued in satisfaction of note payable		$	—		$	150,000

See accompanying notes to unaudited condensed financial statements

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PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2014
(UNAUDITED)

								Additional Paid-in Capital				Accumulated Deficit				Total Stockholders' Deficit
		Common Stock
		Shares			Amount
Balance at December 31, 2013			48,632,482		$	48,632		$	47,010,511			$	(57,287,018	)		$	(10,227,875	)
Common Stock to consultant			74,624			75			11,925				—				12,000
Compensation expense associated with option awards			—			—			27,305				—				27,305
Net loss			—			—			—				(218,086	)			(218,086	)
Balance at March 31, 2014			48,707,106		$	48,707		$	47,049,741			$	(57,505,104	)		$	(10,406,656	)

See accompanying notes to unaudited condensed financial statements

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PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

1.

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

Basis of Presentation

The accompanying unaudited condensed 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 period ended March 31, 2014 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2014.

For further information, refer to Puradyn Filter Technologies Incorporated’s (the “Company”) financial statements and footnotes thereto included in the Form 10-K for the year ended December 31, 2013.

Use of Estimates

The preparation of condensed 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 financial statements and accompanying notes. Actual results could differ from those estimates.

Basic and Diluted Loss Per Share

FASB 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 5,941,455 and 7,763,730 for the three months ended March 31, 2014 and 2013, respectively.

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 March 31, 2014 and March 31, 2013 have been recognized as a component of cost of goods sold and general and administrative expenses in the accompanying Condensed 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.

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PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

Inventories consisted of the following at March 31, 2014 and December 31, 2013, respectively:

		March 31, 2014			December 31, 2013
		(unaudited)
Raw materials		$	977,605		$	953,575
Work In Progress			276			5,988
Finished goods			89,809			98,757
Valuation allowance			(464,537	)		(464,537	)
Inventory, net		$	603,153		$	593,783

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 collectability 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 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 included in accrued liabilities in the accompanying condensed financial statements and is calculated as the gross sales multiplied by the historical warranty expense return rate. For the three months ended March 31, 2014, there was no change to the reserve for warranty liability as the reserve balance was deemed sufficient to absorb any warranty costs that might be incurred from the sales activity for the period.

The following table shows the changes in the aggregate product warranty liability for the three-months ended March 31, 2014:

Balance as of December 31, 2013		$	20,000
Less: Payments made			—
Add: Provision for current period warranties			—
Balance as of March 31, 2014 (unaudited)		$	20,000

New Accounting Pronouncements

During the three months ended March 31, 2014 there were no new accounting pronouncements that were deemed to have a material impact on the Company’s financial results.

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PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS
(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 $260,494 and $319,490 during the three-months ended March 31, 2014 and 2013, respectively. As a result, the Company has had to rely principally on 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 two stockholders led the Company’s independent registered public accounting firm, Liggett, Vogt & Webb, P.A., to include a statement in its audit report relating to the Company’s audited financial statements for the year ended December 31, 2013 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.

3.

Common Stock

As partial compensation per an agreement dated May 19, 2011, and subsequently renewed on June 8, 2012 and July 24, 2013, for consultant work, the Company issued to Monarch Communications, Inc. the following:

·

On January 6, 2014, 28,571 shares of its common stock valued at $0.14 per share

·

On February 7, 2014, 25,000 shares of its common stock valued at $0.16 per share.

·

On March 5, 2014, 21,053 shares of its common stock valued at $0.19 per share.

4.

Stock Options and Warrants

For the three months ended March 31, 2014 and March 31, 2013, respectively, the Company recorded stock-based compensation expense of $27,305 and $39,478, relating to 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. Unrecognized expense remaining at March 31, 2014 and 2013 for the options is $115,744 and $175,857, respectively, and will be recognized through March 30, 2018.

A summary of the Company’s stock option plans as of March 31, 2014, and changes during the three month period then ended is presented below:  

		Three Months Ended March 31,
		Number of Options				Weighted Average Exercise Price
Options outstanding at December 31, 2013			4,194,972			$	.25
Options granted			—				—
Options exercised			—				—
Options cancelled			—				—
Options expired			—				—
Options at end of period			4,194,972				.25
Options exercisable at March 31, 2014			3,280,374			$	.27

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PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

Changes in the Company’s nonvested options for the three months ended March 31, 2014 are summarized as follows:

		Three Months Ended March 31, 2014
		Number of Options				Weighted Average Exercise Price
Nonvested options at December 31, 2013			1,311,674			$	.18
Options granted			—				.18
Options forfeited			(397,076	)			—
Nonvested options  at March 31, 2014			914,598			$	.18

			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
$.17 - 1.70				4,194,972				5.22			$	.25				3,280,374			$	.27
Totals				4,194,972				5.22			$	.25				3,280,374			$	.27

A summary of the Company’s warrant activity as of March 31, 2014 and changes during the three month period then ended is presented below:

		Three months ended March 31, 2014
		Weighted Average Exercise
		Warrants				Price
Warrants outstanding at December 31, 2013			2,271,483			$	.46
Granted			—				—
Exercised			—				—
Expired			(525,000	)			.50
Warrants outstanding at March 31, 2014			1,746,483			$	.45

			Warrants Outstanding
Range of Exercise Price			Number Outstanding				Remaining Average Contractual Life (In Years)				Weighted Average Exercise Price
$0.35 – 0.75				1,746,483				.86			$	.45
Totals				1,746,483				.86			$	.45

5.

Notes Payable to Stockholder

Beginning on March 28, 2002 the Company executed a binding agreement with one of its principal stockholders, who is also the Chairman of the Board and an executive officer, to fund up to $6.1 million. Under the terms of the agreements, the Company can draw amounts as needed to fund operations. Amounts drawn bear interest at the BBA LIBOR Daily Floating Rate plus 1.4 percentage points (2.658% per annum at March 31, 2014), payable monthly and were to become due and payable on December 31, 2005 or upon a change in control of the Company or consummation of any other financing over $7.0 million. Beginning in March 2006, annually, through March 2014, the maturity date for the agreement was extended annually from December 31, 2007 to December 31, 2015.  

Between January 1, 2014 and March 31, 2014, the Company received loans in various amounts totaling $250,050, from the Company’s Chairman and CEO, as advances for working capital needs. The loans bear interest at the BBA LIBOR Daily Floating Rate plus 1.4 percentage points.

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PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

At March 31, 2014 the Company had drawn the full funding amount under the agreement of $6.1 million plus an additional $3,465,275 plus direct loans of $250,000 for a total amount due of $10,079,292.  

For the three-months ended March 31, 2014 and 2013, the Company recorded $58,403 and $50,114, respectively, of interest expense related to the notes payable, as noted above, which is included in interest expense in the accompanying condensed statements of operations.

6.

Commitments and Contingencies

On September 27, 2012, the Company entered into a 72 month lease for its corporate offices and warehouse facility in Boynton Beach, Florida. The lease commences August 1, 2013 and requires an initial rent of $12,026 per month beginning in the second month for the first year, increasing in varying amounts to $13,941 per month in the sixth year. In addition, the Company is responsible for all operating expenses and utilities.

On July 24, 2013 with an effective date of May 1, 2013, we renewed 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 monthly fee of $7,000, payable as $3,000 in cash and $4,000 in shares of common stock.  Either party may terminate the agreement with 30 days’ notice. 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(a)(2) of that act.

On October 20, 2009, the Company entered into a consulting agreement with Boxwood Associates, Inc., whereby the Company pays $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, a note holder and a significant stockholder, is President of Boxwood Associates, Inc.  

In January 2014, the Company renewed the lease at an annual expense of $8,500, on a condominium in Ocean Ridge, Florida until December 31, 2014.

7.

Subsequent Events

As partial compensation per an agreement dated May 19, 2011, and subsequently renewed on June 8, 2012 and July 24, 2013, for consultant work, the Company issued to Monarch Communications, Inc. the following:

·

On April 1, 2014, 18,182 shares of its common stock valued at $0.22 per share

·

On May 1, 2014, 20,000 shares of its common stock valued at $0.20 per share.

On April 30, 2014, the Company received a loan in the amount of $100,000, from the Company’s Chairman and CEO, as advances for working capital needs. The loans bear interest at the BBA Libor Daily Floating Rate plus 1.4 points.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

Puradyn, which has been in business for over 25 years, and designs, manufactures, and sells the Puradyn^® System, a high-efficiency bypass oil filtration system and replacement filter elements.  We generate revenues through the initial sale of the bypass oil filtration systems and through the sale of the replacement filter elements.  We purchase component parts for unit housing and filter elements and the component parts are assembled, packed and shipped from our facility in Boynton Beach, Florida.

Sales of the Company’s products depend principally upon acceptance and demand by end-user customers and OEMs.  We focus our sales strategy on the development of OEM and individual end user relationships, along with building distributor sales efforts to continue expansion of a nationwide distribution network that will not only sell but also install and support our product. We currently have approximately 100 active distributors in the U.S. and internationally.

We also focus our sales and marketing efforts to target industries open to innovative methods to reduce oil maintenance operating costs and overhaul cycles. These industries are also searching for new and progressive technologies to optimize their equipment use, including bypass oil filtration. While this is a long-term and ongoing process, we believe we have achieved a degree of product acceptance based on recent accomplishments, including:

·

Expansion of existing strategic relationships we have with Nabors Industries, Inc., Deere & Company, and others:

·

Three-year exclusive distribution agreement with Honghua America LLC (HHA) in the territories of mainland China, Hong Kong, Macau, and Taiwan.  Senior management at Honghua Group Ltd, the parent company to HHA, announced it will standardize the Puradyn System on all new rig production as well as incorporate the Puradyn System throughout their drilling division.  Engineering has been completed on the incorporation of the Puradyn Systems on new rig designs.  Puradyn was recently notified by HHA that two contracts for new rigs were recently signed, all of which will include the Puradyn System as standard equipment.  These are the first new rig contracts since announcing the Puradyn Systems will be standard on all new rigs.  Total sales to date were approximately $81,000, including $80,000 in 2013 and $1,000 in the first quarter of 2014, which is under the forecasted amounts provided by HHA. Management believes that, based on the following that HHA has satisfactorily demonstrated to Puradyn its commitment to the purchase, sales and service of the Puradyn System.

o

Recent purchase of oil analysis equipment to provide the necessary oil analysis data for safe extension of oil drains,

o

Purchase and installation of our  systems for evaluation on government owned and operated rigs,

o

Addition of sales and support personnel,

·

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. MER issued a $500,000 blanket purchase order for Puradyn products to be purchased during the first year of the agreement in accordance with periodic forecasts based upon a three-year sales forecast. Total sales to date were approximately $67,000, including $61,000 in 2013 and $6,000 in the first quarter of 2014, which is under the initial forecast. An increased number of evaluations initiated in 2012 and 2013 are beginning to successfully conclude. Management believes, based on the following that MER has satisfactorily demonstrated to Puradyn its commitment to the purchase sales and service of the Puradyn System:

o

MER-sponsored extended seminars, advertising, and marketing of the product,

o

Investment in private labeling of the product to MER customers,

o

Addition of sales personnel by MER, and

o

Installation of private-labeled Puradyn Systems on all generator sets assembled at MER for their customers,

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On April 9, management announced the receipt of an initial order from one of its distributors for Puradyn Systems for a military contract planned for 750 generator sets to be built by a major military contractor utilizing John Deere engines starting in October of 2014 and concluding in September of 2017. Following receipt of this initial order, we expect to receive future orders through our distributor to supply Puradyn systems for this military contract in accordance with military build requirement over this period.  Puradyn is a second tier supplier to this military contractor and as such does not have a separate contract with the military for this order.  If the military carries out its contract in full, it is estimated to generate around $300,000 in revenue over the three years.

Our net sales for the first quarter of 2014 increased 56% from the comparable period in 2013.  This increase is attributable to increased activity from a number of our accounts at the beginning of the third quarter of 2013.  We believe that industry acceptance will grow in fiscal 2014 based in part upon the above-mentioned exclusive arrangements we have entered into as well as sales leads attributable to several articles promoting the benefits of using Puradyn filtration systems appearing in various industrial publications.  However, there can be no assurance that any of our sales efforts or strategic relationships will meet management’s expectations or result in an increase in our revenues.

Going Concern

The Company’s financial statements have been prepared on the basis that it will operate as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred net losses each year since inception and has relied on the sale of its stock from time to time and loans from third parties and from related parties to fund its operations.

These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from a current stockholder have led the Company’s management to conclude there is substantial doubt about the Company’s ability to continue as a going concern.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We believe the critical accounting policies in Note 1 to the financial statements appearing elsewhere in this report affect our more significant judgments and estimates used in the preparation of our financial statements. Actual results may differ from these estimates under different assumptions and conditions.

Results of Operations for the Three-months Ended March 31, 2014 Compared to the Three-months Ended March 31, 2013

Net Sales

Net sales increased 56% in the first quarter of 2014 as compared to the first quarter of 2013. The increase in sales was primarily due to eight customers who increased purchases accounted for 78% of the increase in sales.  In addition a couple of our new distributors are beginning to generate sales in their areas, and helped to contribute to the increase in the first quarter.

We are dependent upon sales to a limited number of customers. Sales to eight customers accounted for approximately 18%. 16%, 10%, 9%, 8%, 6%, 6% and 5%, respectively (for a total of 78%), of the  net sales for the three-months ended March 31, 2014.  While we remain dependent upon sales to a limited number of customers, our sales dependence is now on a larger group of customers. Sales to four customers accounted for approximately 15%, 12%, 10% and 9%, respectively (for a total of 46%), of the net sales for the three-months ended March 31, 2013.

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Cost of Products Sold

Gross profit, as a percentage of sales, increased from 30% in the first quarter of 2013 to 40% in the first quarter of 2014.  The increase in gross profit was also attributable to sales of higher margin products and sales to customers in higher margin price categories. The last area that contributed to the increase in gross profit resulted from better pricing in the cost of cotton, purchased during the period. We have obtained alternative sources for cotton and this has contributed to improved margins.

Salaries and Wages

Salaries and wages were substantially the same for the quarter ended March 31, 2014 compared to March 31, 2013.

Selling and Administrative Expenses

Selling and administrative expenses decreased by 7.7% for the three months ended March 31, 2014 from the comparable period in 2013. This decrease was due to a decrease in travel, marketing expense and professional fees to outside consultants. As we extend our reach to international customers and develop more specialized products for niche industries, we anticipate that travel and marketing costs will increase, but all other expenses will remain stable for the balance of the year. The following table lists the major categories of expenses included in Selling and Administrative expenses:

		Three Months Ended March 31, (unaudited)
		2014				2013				Change
Employee Benefits & Payroll		$	54,772			$	58,349			$	(3,577	)
Travel & Marketing			61,397				64,027				(2,630	)
Depreciation & Amortization			5,252				5,462				(210	)
Engineering			(1,865	)			4,065				(5,930	)
Professional Fees			48,493				55,961				(7,468	)
Occupancy Expense			24,463				26,459				(1,996	)
Patent Expense			24,038				22,387				1,651
Stock Compensation			993				1,164				(171	)
Bad Debts			1,058				217				841
Other Expenses			19,332				19,610				(278	)
Total		$	237,933			$	257,701			$	(19,768	)

Interest Expense

Interest expense increased 17% for the period ending March 31, 2014 as compared to the period ending March 31, 2013 and was incurred primarily on the outstanding balance of the stockholder notes payable. The increase was due to higher borrowings. The Company pays interest monthly on the notes payable to the stockholder at the LIBOR Daily Floating Rate plus 1.4%, which was a weighted average of 2.658% as of March 31, 2014 as compared to 2.198% as of March 31, 2013.  

Liquidity and Capital Resources

As of March 31, 2014, the Company had cash of $125,085, as compared to $161,503 at December 31, 2013. At March 31, 2014, we had negative working capital of ($714,686) and our current ratio (current assets to current liabilities) was 0.6 to 1.  At December 31, 2013 we had negative working capital of ($769,907) and our current ratio was 0.57 to 1.  The decrease in working capital deficit and increase in current ratio is primarily attributable to the increase in cash, inventories and prepaid expenses offset by a satisfaction of a note payable to one of our stockholders who is also a member of our Board of Directors.

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We have incurred net losses each year since inception and at March 31, 2014 we had an accumulated deficit of $57,505,104. 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 the first quarter of 2014 we raised an additional $250,050 from stockholder loans.  During the three months ended March 31, 2013, we raised $375,080 from stockholder loans.  As of March 31, 2014, we owe our principal stockholder who is also an executive officer and director of the Company $10.1 million for funds he has advanced to us from time to time for working capital and we borrowed an additional $100,000 from him in the second quarter of 2014.  Interest expense on our loans was $58,403 for the three months ended March 31, 2014.

We do not currently have any commitments for capital expenditures.  Our current cash position is insufficient to cover our current operating needs for the next twelve months, and we do not have any external sources of working capital.  While we anticipate an increase in cash flows from 2014 sales activity, we expect additional cash will still be needed to support operations, meet our working capital needs and satisfy our obligations as they become due this year.  Although 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 $10.2 million which 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 and there are no assurances our stockholder will extend the due date.

We continue to address liquidity concerns because of inadequate revenue growth. As a result, cash flow from operations is insufficient to cover our liquidity needs for the next twelve months of operations. 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 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 2014. 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.

Cash Flows

Operating activities

For the three-month period ended March 31, 2014 net cash used in operating activities was $260,494, which primarily resulted from the net loss of $218,086. In addition to the cash used in funding the operating loss, the utilization of cash in operations is also attributable to the increase in accounts receivable of $180,976 as a result of our increased sales.  For the three-month period ended March 31, 2013 net cash used in operating activities was $319,490, which primarily resulted from the net loss of $416,685.

Investing activities

For the three months ending March 31, 2014, $24,016 was used in investing activities for the purchase of software and capitalized patent costs. For the three months ending March 31, 2013, $18,772 was used in investing activities for the purchase of equipment.

Financing activities

Net cash provided by financing activities was $248,092 for the three months ended March 31, 2014, which was composed of $250,050 in loans from our stockholders as described above, offset by $1,958 in payments of capital lease obligations.

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Net cash provided by financing activities was $373,281 for the three months ended March 31, 2013, which was composed of $375,080 in loans from our stockholders as described above, offset by $1,799 in payments of capital lease obligations.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable for a smaller reporting company.

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 March 31, 2014 (the "Evaluation Date"). 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 controls 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 controls over financial reporting.

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PART II.   OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

None.

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, 2013. 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 1, 2014, we issued 18,182 shares of our common stock valued at $4,000 to Monarch Communications, Inc. as partial compensation for services to us under the terms of a consulting agreement.  On May 1, 2014, we issued an additional 20,000 shares of our common stock valued at $4,000 to Monarch Communications, Inc. as partial compensation for services to us under the terms of a consulting agreement. 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 issuances of the shares were exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(a)(2) of that act.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.

MINE SAFETY DISCLOSURE.

Not Applicable.

ITEM 5.

OTHER INFORMATION.

On April 30, 2014, the Company received a loan in the amount of $100,000 from the Company’s Chairman and CEO, as an advance 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.  We are using the funds for general working capital.

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ITEM 6.

EXHIBITS.

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 **

*

filed herewith.

**

In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 to this report shall be deemed furnished and not filed.

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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.

	PURADYN FILTER TECHNOLOGIES INCORPORATED
Date:  May 14, 2014	By:	/s/ Joseph V. Vittoria
		Joseph V. Vittoria, Chairman and Chief Executive Officer, principal executive officer
Date:  May 14, 2014	By:	/s/ Alan J. Sandler
		Alan J. Sandler, Secretary to the Board, Vice President and principal financial officer and principal accounting officer

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