PURADYN FILTER TECHNOLOGIES INC

To date, and as described later in this report, we have been materially and adversely impacted by the disruptions in our business as a result of the Covid-19 pandemic.  Our company is located in Palm Beach County, Florida which is subject to a “stay at home” order. While we are able to continue operations as a non-consumer facing company that can fulfill shipments with a minimal staff that can maintain social distancing, we have reduced manufacturing and shipping to approximately 1 day per week. Even before we reduced operations, we were experiencing a general slowdown on all business as our customers slowed or ceased orders due to their limited or suspended operations. Notably, the Oil & Gas segment, traditionally our largest customer segment, has been especially impacted by the reduction in oil and gas demand as well as steep declines in oil and gas pricing, which has resulted in a significant reduction in planned capital expenditures. The ultimate impact of the Covid-19 pandemic on our company is unknown.

As described elsewhere in this report, in March 2019 under the terms of a note exchange agreement with our Executive Chairman, we granted him a first position security interest in our assets in exchange for his agreement to extend the due date of the obligations due to our Executive Chairman to December 31, 2021.  At December 31, 2019 we owe him approximately $9.5 million.  In March 2020, the Company entered into a Revolving Credit Agreement with Christian Meissner pursuant to which Mr. Meissner agreed to make a $250,000 credit line available to us from time to time until September 30, 2020which is secured by a first position security interest in our assets.  In connection with this transaction, our Executive Chairman entered a Subordination Agreement subordinating his first position security interest to this new secured lender.  If we were to default on our obligations under these security agreements, one or both of the lenders could seek to foreclose on our assets in which event we would be unable to continue our operations, even assuming such operations resume once the “stay at home” order described earlier in this report is lifted.  In that event, you would lose your entire investment in our company.

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.

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 December 31, 2019 we owe him in excess of $9 million. He is not obligated to lend us any additional funds and a substantial amount of what we owe him is secured by our assets under the terms of a secured note which matures in December 2021. He has advised us that he does not expect to continue to provide working capital advances to the Company at historic levels, if at all.

Accordingly, during October 2019 we obtained a one year $43,100 principal amount, high-interest secured loan from a third party commercial lender to provide operating capital. While our Executive Chairman subordinated his first position security interest in our assets to accommodate our need to take out this loan, there are no assurances we will do so in the future should we be forced to seek additional third party loans. On March 9, 2020 the Company entered into a Revolving Credit Agreement with Christian Meissner pursuant to which Mr. Meissner agreed to make a $250,000 credit line available to us from time to time until September 30, 2020.  Under the terms of the Agreement, amounts we borrow from Mr. Meissner will be evidenced by a 5% Senior Secured Revolving Note.  The Note will pay interest at the rate of 5% per annum, matures on September 30, 2020 and our obligations thereunder are secured by a first position security interest in our assets as evidenced by a Security Agreement of even date by and between the Company and Mr. Meissner.  Our secured creditor, Mr. Joseph V. Vittoria, our Executive Chairman, entered a Subordination Agreement subordinating his first position security interest in our assets which secures a Senior Secured Promissory Note in the principal amount of $8,385,132 due Mr. Vittoria to Mr. Meissner. On March 9, 2020 we drew an initial $100,000 under this credit line and on March 12, 2020 used $33,618 of the proceeds to satisfy our obligations under the Business Loan Agreement with Kabbage dated October 24, 2019.  We are using the balance of the proceeds for working capital.

The Company’s operation has been materially and adversely impacted by the Covid-19 pandemic. The Company is located in Palm Beach County, Florida which is subject to a “stay at home” order effective April 3, 2020. While the Company is able to continue operations as a non-consumer facing company that can fulfill shipments with a minimal staff that can maintain social distancing, the Company has reduced operations to approximately 1 day per week. While the stay at home order is presently set to expire on May 1, 2020, there are no assurances the Florida governor will not extend the duration of the stay at home order for an unknown additional period of time. Until this stay at home order is lifted and the Company can resume its normal operations, the Company is unable to predict the impact of the Covid-19 pandemic at this time.