NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1.
Basis of Presentation, Going Concern and Summary of Significant Accounting Policies
Organization
Puradyn Filter Technologies Incorporated (the Company), a Delaware corporation, is engaged in the manufacturing, distribution and sale of bypass oil filtration systems under the trademark Puradyn
®
primarily to companies within targeted industries. The Company holds the exclusive worldwide manufacturing and marketing rights for the Puradyn products through direct ownership of various patents.
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 and nine-month periods ended September 30, 2017 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2017.
For further information, refer to the Company's financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2016.
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 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.
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.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original maturities of three months or less at the time of purchase. At September 30, 2017 and December 31, 2016, the Company did not have any cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, prepaid expenses and other assets, accounts payable, accrued liabilities and notes payable to stockholder approximate their fair values as of September 30, 2017 and December 31, 2016, respectively, because of their short-term natures.
4
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Accounts Receivable
Accounts receivable are recorded at fair value on the date revenue is recognized. The Company provides allowances for doubtful accounts for estimated losses resulting from the inability of its customers to repay their obligation. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to repay, additional allowances may be required. The Company provides for potential uncollectible accounts receivable based on specific customer identification and historical collection experience adjusted for existing market conditions. If market conditions decline, actual collection experience may not meet expectations and may result in decreased cash flows and increased bad debt expense.
The policy for determining past due status is based on the contractual payment terms of each customer, which are generally net 30 or net 60 days. Once collection efforts by the Company and its collection agency are exhausted, the determination for charging off uncollectible receivables is made.
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 finished goods inventories at a rate based on estimated production capacity. 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.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets, except for assets held under capital leases, for which the Company records depreciation and amortization based on the shorter of the assets useful life or the term of the lease. The estimated useful lives of property and equipment range from 3 to 5 years. Upon sale or retirement, the cost and related accumulated depreciation and amortization are eliminated from their respective accounts, and the resulting gain or loss is included in results of operations. Repairs and maintenance charges, which do not increase the useful lives of the assets, are charged to operations as incurred.
Patents
Patents are stated at cost. Amortization is provided using the straight-line method over the estimated useful lives of the patents. The estimated useful lives of patents are 17 to 20 years. Upon retirement, the cost and related accumulated amortization are eliminated from their respective accounts, and the resulting gain or loss is included in results of operations.
Impairment of Long-Lived Assets
Management assesses the recoverability of its long-lived assets when indicators of impairment are present. If such indicators are present, recoverability of these assets is determined by comparing the undiscounted net cash flows estimated to result from those assets over the remaining life to the assets net carrying amounts. If the estimated undiscounted net cash flows are less than the net carrying amount, the assets would be adjusted to their fair value, based on appraisal or the present value of the undiscounted net cash flows.
Sales Incentives and Consideration Paid to Customers
The Company accounts for certain promotional costs such as sales incentives and cooperative advertising as a reduction of sales.
5
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Product Warranty Costs
As required by FASB ASC 460,
Guarantors 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 nine months ended September 30, 2017, 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 nine -months ended September 30, 2017:
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
20,000
|
|
Less: Payments made
|
|
|
|
|
Add: Provision for current period warranties
|
|
|
|
|
Balance as of September 30, 2017 (unaudited)
|
|
$
|
20,000
|
|
Advertising Costs
Advertising costs are expensed as incurred. During the three and nine months ended September 30, 2017 and 2016, advertising costs incurred by the Company totaled approximately $430, $731, $0, and $761, respectively, and are included in selling and administrative expenses in the accompanying statements of operations.
Research and Development
Research and development costs are expensed as incurred. During the three and nine months ended September 30, 2017 and 2016, research and development costs incurred by the Company totaled $4,970, $4,970, $4,766 and $7,575, respectively, and are included in selling and administrative expenses in the accompanying statements of operations.
Income Taxes
The Company accounts for income taxes under FASB ASC 740,
Income Taxes
. Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Stock Option Plans
We 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 by 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 year ended December 31, 2016 has been recognized as a component of cost of goods sold and general and administrative expenses in the accompanying financial statements for the three and nine months ended September 30, 2017.
6
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The Company leases its employees from a payroll leasing company. The Companys leased employees meet the definition of employees as specified by FASB Interpretation No. 44 for purposes of applying FASB ASC 718.
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,
including related amendments and interpretations. The related expense is recognized over the period the services are provided.
Credit Risk
The Company minimizes the concentration of credit risk associated with its cash by maintaining its cash with high quality federally insured financial institutions. However, cash balances in excess of the FDIC insured limit of $250,000 are at risk. At September 30, 2017 and December 31, 2016, respectively, the Company did not have cash balances above the FDIC insured limit. The Company performs ongoing evaluations of its significant trade accounts receivable customers and generally does not require collateral. An allowance for doubtful accounts is maintained against trade accounts receivable at levels which management believes is sufficient to cover probable credit losses. The Company also has some customer concentrations, and the loss of business from one or a combination of these significant customers, or an unexpected deterioration in their financial condition, could adversely affect the Companys operations. Please refer to Note 15 for further details.
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 was 4,175,126 and 5,241,196 for the nine months ended September 30, 2017 and 2016, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements
In August 2015, FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
defers the effective date ASU No. 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU No. 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in Update 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU No. 2014-09. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
7
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
In August 2016, the FASB issued ASU 2016-15, "
Classification of Certain Cash Receipts and Cash Payments
," which aims to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company has not yet determined the potential effects of the adoption of ASU 2016-15 on its financial statements. In March 2016, the FASB issued ASU No. 2016-09,
Compensation Stock Compensation (Topic 718)
(ASU 2016-09). This guidance which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those annual reporting periods. Early adoption is permitted. We are currently evaluating the full impact of the new standard.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessees obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessees right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.
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 through the nine-months ended September 30, 2017, and used net cash in operations of $431,108 and $1,045,567 during the nine-months ended September 30, 2017 and 2016, respectively. As a result, the Company has had to rely principally on stockholder loans to fund its activities to date. The principal stockholder, who is a member of our Board of Directors and Chief Executive Officer, has recently advised the Company that he is unable to continue to provide working capital advances to the Company. In addition, we owe this affiliate $7,768,349 in notes payable which mature on December 31, 2018. We do not have sufficient funds to pay our operating expenses through the balance of the fiscal year or to satisfy our obligations as they become due. If the Company does not raise funds as needed, of which there are no assurances, the Company will be unable to continue our existing business and operations.
These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from affiliates have led the Companys independent registered public accounting firm, Liggett & Webb, P.A., to include a statement in its audit report relating to the Companys audited financial statements for the year ended December 31, 2016 expressing substantial doubt as to the Companys ability to continue as a going concern. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.
8
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
3.
Inventories
Inventories consisted of the following at September 30, 2017 and December 31, 2016, respectively:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
|
(Unaudited)
|
|
|
|
Raw materials
|
|
$
|
917,189
|
|
|
1,074,156
|
|
Work In Progress
|
|
|
1,962
|
|
|
|
|
Finished goods
|
|
|
128,082
|
|
|
112,535
|
|
Valuation allowance
|
|
|
(626,580
|
)
|
|
(504,583
|
)
|
Inventory, net
|
|
$
|
420,653
|
|
|
682,108
|
|
4.
Prepaid Expenses and Other Current Assets
At September 30, 2017 and December 31, 2016, prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
|
(Unaudited)
|
|
|
|
Prepaid expenses
|
|
$
|
45,052
|
|
|
27,447
|
|
Deposits
|
|
|
35,692
|
|
|
28,000
|
|
|
|
$
|
80,744
|
|
|
55,447
|
|
5.
Property and Equipment
At September 30, 2017 and December 31, 2016, property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
|
(Unaudited)
|
|
|
|
Machinery and equipment
|
|
$
|
1,050,462
|
|
$
|
1,045,217
|
|
Furniture and fixtures
|
|
|
56,558
|
|
|
56,558
|
|
Leasehold improvements
|
|
|
152,322
|
|
|
129,722
|
|
Software and website development
|
|
|
88,842
|
|
|
88,842
|
|
Computer hardware and software
|
|
|
153,249
|
|
|
153,249
|
|
|
|
|
1,501,433
|
|
|
1,473,588
|
|
Less accumulated depreciation and amortization
|
|
|
(1 ,445,837
|
)
|
|
(1,431,086
|
)
|
|
|
$
|
55 ,596
|
|
$
|
42,502
|
|
Depreciation and amortization expense of property and equipment for the three and nine months ended September 30, 2017 and 2016 is $9,010, $14,751, $5,381 and $17,363, respectively.
9
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
6.
Patents
Included in other assets at September 30, 2017 and December 31, 2016 are capitalized patent costs as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
|
(Unaudited)
|
|
|
|
Patent costs
|
|
$
|
535,527
|
|
$
|
482,142
|
|
Less accumulated amortization
|
|
|
(57,739
|
)
|
|
(47,555
|
)
|
|
|
$
|
477,788
|
|
$
|
434,587
|
|
Amortization expense for the three and nine months ended September 30, 2017 and 2016 amounted to $3,394, $10,184, $3,395, and $10,647, respectively.
7.
Leases
The Company leases its office and warehouse facilities in Boynton Beach, Florida under a long-term non-cancellable lease agreement, which contains renewal options and rent escalation clauses. As of September 30, 2017, a security deposit of $34,970 is included in noncurrent assets in the accompanying balance sheet. On September 27, 2012 the Company entered into a non-cancellable six-year lease agreement for the same facilities commencing August 1, 2013 and expiring July 31, 2019. The total minimum lease payments over the term of the current lease amount to $302,639.
In January 2017, the Company renewed the lease at an annual expense of $8,500 on a condominium in Ocean Ridge, Florida until December 20, 2017.
In January 2015 the Company entered into a capital lease for office equipment in the amount of $15,020.
8.
Accrued Liabilities
At September 30, 2017 and December 31, 2016, accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
|
(Unaudited)
|
|
|
|
Accrued vacation and benefits
|
|
$
|
64,230
|
|
$
|
60,904
|
|
Accrued expenses relating to vendors and others
|
|
|
106,143
|
|
|
138,863
|
|
Accrued warranty costs
|
|
|
20,000
|
|
|
20,000
|
|
Accrued interest payable relating to stockholder notes
|
|
|
145,435
|
|
|
84,988
|
|
Deferred rent
|
|
|
24,773
|
|
|
30,155
|
|
|
|
$
|
360,581
|
|
$
|
334,910
|
|
9.
Deferred Compensation
Deferred compensation represents amounts owed to three employees for salary. As there is no written agreement with these employees which memorializes the terms of the salary deferral, only a voluntary election to do so. It is possible that one or more of the employees could demand payment in full at any time. As of September 30, 2017 and December 31, 2016 the Company recorded deferred compensation of $1,594,283 and $1,602,826, respectively.
10
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
10.
Sales Incentives
On September 7, 2017 the Company entered into an exclusive distribution agreement for the worldwide rights to sell its product in the oil and gas industry effective August 1, 2017. The distributor will receive sales incentive credits toward future product, based upon the difference in current pricing and new pricing detailed in the agreement. The credits toward future product are only redeemable if targeted quarterly goals are achieved. If the goals are not achieved the credits will be carried forward and are redeemable when the quarterly goals are achieved. As of September 30, 2017 the Company recorded a credit toward future product of $30,708.
Targeted quarterly goals, if achieved, represent an aggregate of approximately $4 million in sales revenue between August 1, 2017 and June 30, 2018. Sales under the agreement amount to $154,470 for the period from August 1, 2017 to September 30, 2017.
11.
Notes Payable to Stockholders Related Party
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 Chief Executive Officer, to initially fund up to $2.5 million. In March 2003 the Company and its Chairman and CEO entered into a second funding commitment pursuant to which he agreed to fund up to an additional $3 million which was subsequently increased to $3.5 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 (3.61% per annum at September 30, 2017), payable monthly and were to become due and payable on December 31, 2005 or upon a change in control of the Company or the consummation of any other financing over $7.0 million. Beginning in March 2006 and through February 2012, the maturity date for the agreements was extended annually from December 31, 2007 to the agreements current maturity date of December 31, 2018. Refer to Note 14.
During the year ended December 31, 2016 we borrowed an additional $1,363,732 from him and repaid $100,000, and at September 30, 2017 and December 31, 2016 we owed him $7,688,349 and $7,088,349, respectively which represented approximately 78% and 76%, respectively of our total liabilities. During the nine months ended September 30, 2017, he has advanced an additional $575,000 in working capital funding. On November 11, 2016, $6.1 million of principal and interest was converted into 20
,
333,333 shares of our common stock at a conversion price of $0.30 per share. This conversion was above the market price of our common stock. The balance of this loan, which is unsecured, matures on December 31, 2018. While he has continued to fund our working capital needs and extend the due date of the obligation, he is under no contractual obligation to do so. He has recently advised us he does not expect to continue to provide working capital advances to us. If we are unable to meet our obligation to our Chairman and Chief Executive Officer prior to maturity, he has advised us that he may forgive substantially all, or a portion, of this obligation.
Additionally, the Company had unsecured loans outstanding from a member of the board of directors who is also a significant stockholder, totaling $100,000 at December 31, 2016. During the nine months ended September 30, 2017 we repaid him $50,000 and in addition he forgave $25,000 and accrued interest of $1,374. The forgiveness was treated as a capital contribution. The notes bear interest at a rate of 5% per annum and are due upon demand.
During the three and nine months ended September 30, 2017 and 2016, the Company incurred interest expense of $111,555, $200,405, $93,759, and $268,139, respectively, on its loan from the Chairman of the Board, which is included in interest expense in the accompanying statements of operations as well as interest expense of $0 and $753 for the three and nine months ended September 30, 2017 related to the loan from a former Board member. These amounts, in addition to interest expense of $1,495, $1,996, $364, and $802, for the three and nine months ended September 30, 2017 and 2016, respectively, related to capital lease obligations, financing and loans from a stockholder.
11
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Notes payable and capital leases consisted of the following at September 30, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31, 2016
|
|
Notes payable to stockholders
|
|
$
|
7,688,349
|
|
$
|
7,188,349
|
|
Capital lease obligation
|
|
|
4,382
|
|
|
7,198
|
|
|
|
|
7,692,731
|
|
|
7,195,547
|
|
Less: long term maturities
|
|
|
(7,688,976
|
)
|
|
(3,443
|
)
|
|
|
$
|
3,755
|
|
$
|
7,192,140
|
|
Maturities of Long Term Obligations for Five Years and Beyond
The minimum annual principal payments of notes payable and capital lease obligations at September 30, 2017 were:
|
|
|
|
|
2017
|
|
$
|
3,755
|
|
2018
|
|
|
7,688,976
|
|
|
|
$
|
7,692,731
|
|
12.
Commitments and Contingencies
Agreements
In January 2017, the Company renewed the lease at an annual expense of $8,500 on a condominium in Ocean Ridge, Florida until December 20, 2017.
On March 7, 2016, the Company entered into an Advisory Agreement for duration of six months with an outside consultant, who is also a stockholder. We issued the consultant five year warrants to purchase 350,000 shares of the Company's common stock with an exercise price of $0.05 per share. These warrants vested immediately.
On September 27, 2012, the Company entered into a 72 month lease for its corporate offices and warehouse facility in Boynton Beach, Florida. The renewed lease commences August 1, 2013 and requires an initial rent of $12,026 per month beginning in the second month of 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 October 20, 2009, the Company entered into a consulting agreement for management and strategic development services with Boxwood Associates, Inc., pursuant to which the Company pays a $2,000 monthly service fee. The contract remains in effect until terminated by either party providing 30 days written notice. A former member of our board of directors and a significant stockholder is President of Boxwood Associates, Inc. Refer to Note 14.
13.
Stock Options and Warrants
For the three and nine months ended September 30, 2017 and September 30, 2016, respectively, the Company recorded non-cash stock-based compensation expense of $9,999, $31,396, $17,699, and $80,861, relating to employee stock options and warrants issued for consulting services.
12
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30, 2017 and 2016 for the options is $24,705 and $73,697, respectively, and will be recognized through September 30, 2019.
A summary of the Companys stock option plans as of September 30, 2017, and changes during the nine month period then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2017
|
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Options outstanding at December 31, 2016
|
|
|
3,365,500
|
|
|
$
|
0.20
|
|
Options granted
|
|
|
5,000
|
|
|
|
0.03
|
|
Options exercised
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(37,500
|
)
|
|
|
0.34
|
|
Options expired
|
|
|
(148,000
|
)
|
|
|
0.18
|
|
Options at end of period
|
|
|
3,185,000
|
|
|
$
|
0.20
|
|
Options exercisable at September 30, 2017
|
|
|
2,914,160
|
|
|
$
|
0.20
|
|
Changes in the Companys nonvested options for the nine months ended September 30, 2017 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2017
|
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Nonvested options at December 31, 2016
|
|
|
560,840
|
|
|
$
|
0.16
|
|
Granted
|
|
|
5,000
|
|
|
|
0.03
|
|
Vested
|
|
|
258,333
|
|
|
|
0.16
|
|
Forfeited
|
|
|
(36,667
|
)
|
|
|
0.14
|
|
Nonvested options at September 30, 2017
|
|
|
270,840
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$0.04-$0.35
|
|
|
|
3,185,000
|
|
|
|
3.87
|
|
|
$
|
0.20
|
|
|
|
2,914,160
|
|
|
$
|
0.20
|
|
Totals
|
|
|
|
3,185,000
|
|
|
|
3.87
|
|
|
$
|
0.20
|
|
|
|
2,914,160
|
|
|
$
|
0.20
|
|
13
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
A summary of the Companys warrant activity as of September 30, 2017 and changes during the nine month period then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 30, 2017
|
|
|
|
Weighted Average Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
Warrants outstanding at December 31, 2016
|
|
|
1,315,340
|
|
|
$
|
0.24
|
|
Granted
|
|
|
|
|
|
|
|
|
Expired
|
|
|
325,178
|
|
|
|
0.35
|
|
Warrants outstanding at September 30, 2017
|
|
|
990,162
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding
|
|
Range of Exercise Price
|
|
|
Number Outstanding
|
|
|
Remaining Average Contractual Life (In Years)
|
|
|
Weighted Average
Exercise Price
|
|
$0.05-$0.35
|
|
|
|
990,162
|
|
|
|
2.17
|
|
|
$
|
0.20
|
|
Totals
|
|
|
|
990,162
|
|
|
|
2.17
|
|
|
$
|
0.20
|
|
14.
Related Party Transactions
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 Chief Executive Officer, to initially fund up to $2.5 million. In March 2003 the Company and its Chairman and CEO entered into a second funding commitment pursuant to which he agreed to fund up to an additional $3 million which was subsequently increased to $3.5 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 (3.61% per annum at September 30, 2017), payable monthly and were to become due and payable on December 31, 2005 or upon a change in control of the Company or the consummation of any other financing over $7.0 million. Beginning in March 2006 and through February 2012, the maturity date for the agreements was extended annually from December 31, 2007 to the agreements current maturity date of December 31, 2018.
During the year ended December 31, 2016 we borrowed an additional $1,363,732 from him and repaid $100,000, and at September 30, 2017 and December 31, 2016 we owed him $7,688,349 and $7,088,349, respectively, which represented approximately 78% and 76%, respectively, of our total liabilities. During the nine months ended September 30, 2017, he has advanced an additional $575,000 in working capital funding. On November 11, 2016, $6.1 million of principal and interest was converted into 20
,
333,333 shares of our common stock at a conversion price of $0.30 per share. This conversion was above the market price of our common stock. The balance of this loan, which is unsecured, matures on December 31, 2018. While he has continued to fund our working capital needs and extend the due date of the obligation, he is under no contractual obligation to do so. He has recently advised us he does not expect to extend the due date of the obligation. If we are unable to meet our obligation to our Chairman and Chief Executive Officer prior to maturity, he has advised us that he may forgive substantially all, or a portion, of this obligation.
Additionally, the Company had unsecured loans outstanding from a member of the board of directors who is also a significant stockholder, totaling $100,000 at December 31, 2016. During the nine months ended September 30, 2017 we repaid him $50,000 and in addition he forgave $25,000 and accrued interest of $1,374. The forgiveness was treated as a capital contribution. The notes bear interest at a rate of 5% per annum and are due upon demand.
14
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 remains in effect until terminated by either party providing 30 days written notice. During each of three and nine months ended September 30, 2017 and 2016, we paid Boxwood Associates, Inc. $6,000 and $18,000, respectively under this agreement. A former member of our board of directors is President of Boxwood Associates, Inc.
15.
Major Customers
There are concentrations of credit risk with respect to accounts receivables due to the amounts owed by five customers at September
30, 2017 whose balances each represented approximately 11%, 12%, 13%, 20% and 30%, for a total of 86% of total accounts receivables. Comparatively, there are concentrations of credit risk with respect to accounts receivables due to the amounts owed by three customers at December 31, 2016 whose balances each represented approximately 50%, 18%, and
13%
,
for a total of 81% of total accounts receivables.
The loss of business from one or a combination of the Companys significant customers, or an unexpected deterioration in their financial condition, could adversely affect the Companys operations. During the three months ended September 30, 2017 sales from four customers represented 33%, 17%, 16% and 11% for a total of 77% of sales. During the three months ended September 30, 2016 sales from three customers represented 17%, 17%, and 14% for a total of 48% of sales. During the nine months ended September 30, 2017 sales from three customers represented 39%, 12%, and 11% for a total of 62% of sales. During the nine months ended September 30, 2016 sales from three customers represented 20%, 17%, and 10% for a total of 47% of sales The loss of business from one or a combination of the Companys significant customers, or an unexpected deterioration in their financial condition, could adversely affect the Companys operations.
16.
Subsequent Events
From October 1, 2017 through November 17, 2017, the Company received additional loans in the amount of $80,000 from the Companys Chairman and CEO, as advances for working capital needs. The loans bear interest at the BBA Libor Daily Floating Rate plus 1.4 points.
In November 2017, the Company received an additional loan in the amount of $25,000 from a former member of the Board of Directors. The loan bears interest at a rate of 5% per annum.
On November 16, 2017, our Chairman and Chief Executive Officer extended the due date of the funding commitment to December 31, 2018.
15
ITEM 2.