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 six-month periods ended June 30, 2019 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2019.
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, 2018.
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. 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 unaudited 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.
The Company accounts for revenue in accordance with Topic 606 which was adopted at the beginning of fiscal year 2018 using the modified retrospective method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company did not recognize any cumulative-effect adjustment to retained earnings upon adoption as the effect was immaterial. The adoption of these standards did not have a material impact on the Company's condensed statements of operations during the six months ended June 30, 2019 and 2018.
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 accompanying unaudited 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 June 30, 2019 and December 31, 2018, the Company did not have any cash equivalents.
6
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 June 30, 2019 and December 31, 2018, respectively, because of their short-term natures.
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 net realizable value using the first in, first out (FIFO) method. Net realizable value is defined as sales price less cost of completion, disposable and transportation and a normal profit margin. 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 approximately 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.
7
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 six months ended June 30, 2019, 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 six months ended June 30, 2019:
|
|
|
|
|
Balance as of December 31, 2018
|
|
$
|
20,000
|
|
Less: Payments made
|
|
|
|
|
Add: Provision for current period warranties
|
|
|
|
|
Balance as of June 30, 2019 (unaudited)
|
|
$
|
20,000
|
|
Advertising Costs
Advertising costs are expensed as incurred. During the three and six months ended June 30, 2019 and 2018, advertising costs incurred by the Company totaled approximately $3,256 and $11,917, $2,904 and $3,333, respectively, and are included in selling and administrative expenses in the accompanying statements of operations.
Engineering and Development
Engineering and development costs are expensed as incurred. During the three and six months ended June 30, 2019 and 2018, engineering and development costs incurred by the Company totaled $313 and $2,678, $1,384 and $2,814, 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 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 six months ended June 30, 2019.
8
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
,
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 June 30, 2019 and December 31, 2018, 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 14 for further details.
Basic and Diluted Income / (Loss) Per Share
The Company uses ASC 260-10,
Earnings Per Share
for calculating the basic and diluted income (loss) per share. The Company computes basic income (loss) per share by dividing net income (loss) and net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding. As of June 30, 2019 and 2018, there were 12,018,336 and 13,276,412 shares, respectively, issuable upon the exercise of options and warrants, respectively.
Common stock equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive. The Company had net income for the three month period ended June 30, 2019. A separate computation of diluted earnings per share is presented using the treasury stock method and the common stock equivalents did not have any effect on net income per share.
Leases
In connection with our lease agreement for our Office in Boynton Beach, Florida, the Company adopted the provisions of ASU 2016-02,
Leases
. As such, the Company recorded an operating right of use asset and an operating lease liability as of June 30, 2019.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements
All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.
2.
Going Concern
The Company's unaudited condensed 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 does not have sufficient revenues and income to fully fund the operations. During the six months ended June 30, 2019 and 2018 the Company used net cash in operations of $509,302 and $413,949, respectively. As a result, the Company has had to rely on stockholder loans and related parties to fund its activities to date.
9
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from two stockholders 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, 2018 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.
3.
Inventories
Inventories consisted of the following at June 30, 2019 and December 31, 2018, respectively:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
Raw materials
|
|
$
|
1,183,644
|
|
$
|
1,053,147
|
|
Finished goods
|
|
|
409,201
|
|
|
257,623
|
|
Valuation allowance
|
|
|
(432,009
|
)
|
|
(476,062
|
)
|
Total inventory, net
|
|
$
|
1,160,836
|
|
$
|
834,708
|
|
4.
Prepaid Expenses and Other Current Assets
At June 30, 2019 and December 31, 2018, prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
Prepaid expenses
|
|
$
|
92,695
|
|
$
|
27,854
|
|
Deposits
|
|
|
|
|
|
38,436
|
|
|
|
$
|
92,695
|
|
$
|
66,290
|
|
5.
Property and Equipment
At June 30, 2019 and December 31, 2018, property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
Machinery and equipment
|
|
$
|
1,030,196
|
|
$
|
1,030,196
|
|
Furniture and fixtures
|
|
|
56,558
|
|
|
56,558
|
|
Leasehold improvements
|
|
|
188,012
|
|
|
188,012
|
|
Software and website development
|
|
|
88,842
|
|
|
88,842
|
|
Computer hardware and software
|
|
|
179,258
|
|
|
179,258
|
|
|
|
|
1,542,866
|
|
|
1,542,866
|
|
Less accumulated depreciation and amortization
|
|
|
(1,478,615
|
)
|
|
(1,464,224
|
)
|
|
|
$
|
64,251
|
|
$
|
78,642
|
|
Depreciation and amortization expense of property and equipment for the three and six months ended June 30, 2019 and 2018 are $6,950 and $14,391, and $5,026 and $10,053 respectively.
10
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
6.
Patents
Included in other noncurrent assets at June 30, 2019 and December 31, 2018 are capitalized patent costs as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
Patent costs
|
|
$
|
530,214
|
|
$
|
533,496
|
|
Less accumulated amortization
|
|
|
(95,311
|
)
|
|
(84,429
|
)
|
|
|
$
|
434,903
|
|
$
|
449,067
|
|
Amortization expense for the three and six months ended June 30, 2019 and 2018 are $5,410 and $10,819, and $6,823 and $10,558, respectively. During the six months ended June 30, 2019 the Company impaired $11,417 of patent costs as it was determined that it had no future economic value.
7.
Leases
Operating right of use assets and operating lease liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating right of use assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. As we have outstanding secured debt, we used the rate based on loan of 4%.
Our office lease contains rent escalations over the lease term. We recognize expense for this office lease on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.
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 June 30, 2019, 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 remaining term of the current lease amount to $180,826.
On June 29, 2018, the Company entered into a non-cancellable five-year lease for the same facilities commencing August 1, 2019 and expiring July 31, 2024. The lease will require an initial rent of $14,899 per month, beginning August 1, 2019 for the first year, increasing by 3% per year to $16,769 per month in the fifth year. In addition, the Company is responsible for all operating expenses and utilities. As part of the lease the landlord agreed to reimburse the Company $58,000 towards the replacement of air conditioning units, upon written request. As of December 31, 2018 the Company had received all of the reimbursement.
In September 2018, the Company entered into a new capital lease for office equipment in the amount of $559, which commenced in December 2018 for a term of 48 months.
11
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
Operating Leases
|
|
Classification
|
|
2019
|
|
Right-of-use assets
|
|
Operating right of use assets
|
|
$
|
811,772
|
|
|
|
|
|
|
|
|
Current lease liabilities
|
|
Current operating lease liabilities
|
|
|
152,161
|
|
Non-current lease liabilities
|
|
Long-term operating lease liabilities
|
|
|
737,708
|
|
Total lease liabilities
|
|
|
|
$
|
889,869
|
|
Lease term and discount rate were as follows:
|
|
|
|
|
June 30,
|
|
|
2019
|
|
Weighted average remaining lease term (years)
|
|
5.05
|
|
Weighted average discount rate
|
|
4
|
%
|
The component of lease costs were as follows:
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
|
|
|
2019
|
|
Operating lease cost
|
|
|
$
|
46,663
|
|
Variable lease cost (1)
|
|
|
|
34,771
|
|
Total lease costs
|
|
|
$
|
81,434
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
|
|
|
|
2019
|
|
Operating lease cost
|
|
|
$
|
93,332
|
|
Variable lease cost (1)
|
|
|
|
61,686
|
|
Total lease costs
|
|
|
$
|
155,018
|
|
(1) Variable lease cost primarily relates to common area maintenance, property taxes and insurance on leased real estate.
Supplemental disclosures of cash flow information related to leases were as follows:
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2019
|
|
Cash paid for operating lease liabilities
|
|
|
$
|
71,827
|
|
Operating right of use assets obtained in exchange for operating lease liabilities
|
|
|
$
|
890,009
|
|
Maturities of lease liabilities were as follows as of June 30, 2019:
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
Remainder of 2019
|
|
$
|
92,023
|
|
2020
|
|
|
188,196
|
|
2021
|
|
|
193,627
|
|
2022
|
|
|
197,427
|
|
2023
|
|
|
197,807
|
|
2024
|
|
|
117,383
|
|
Total
|
|
|
986,463
|
|
Less: Imputed interest
|
|
|
(96,594
|
)
|
Present value of lease liabilities
|
|
$
|
889,869
|
|
12
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
8.
Accrued Liabilities
At June 30, 2019 and December 31, 2018, accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
Accrued wages and benefits
|
|
$
|
43,819
|
|
$
|
52,753
|
|
Accrued expenses relating to vendors and others
|
|
|
170,612
|
|
|
128,114
|
|
Accrued warranty costs
|
|
|
20,000
|
|
|
20,000
|
|
Accrued interest payable relating to stockholder notes
|
|
|
111,635
|
|
|
329,801
|
|
Deferred rent
|
|
|
|
|
|
74,689
|
|
|
|
$
|
346,066
|
|
$
|
605,357
|
|
9.
Deferred Compensation
Deferred compensation represents amounts owed to two current employees and two former employees for salary. As there is no written agreement with these employees which memorializes the terms of salary deferral, only a voluntary election to do so, it is possible that the employees could demand payment in full at any time. As of June 30, 2019 and December 31, 2018, the Company recorded deferred compensation of $1,520,665 and $1,564,253, respectively.
10.
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 Executive Chairman of the Board, to fund up to $6.1 million. Under the terms of the agreement, 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 (4.02% and 3.678% per annum at June 30, 2019 and 2018, respectively), 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, annually, through February 2012, the maturity date for the agreement was extended annually from December 31, 2007, to December 31, 2018. On May 9, 2018 he extended the maturity rate to December 31, 2019.
On March 25, 2019 we entered into a note exchange agreement with our Executive Chairman pursuant to which he exchanged $7,989,622 of principal and $395,510 of accrued interest which would have been due on December 31, 2019 under an unsecured loan for a secured promissory note in the principal amount of $8,385,132. The secured note which matures on December 31, 2021, and bears interest at 4% per annum, payable monthly, is secured by a first position security interest in our assets.
From January 1, 2019 through June 30, 2019, the Company received additional loans in the amount of $483,000 from the Companys Executive Chairman, as advances for working capital needs. The loans bear interest at the BBA Libor Daily Floating Rate plus 1.4 points. As of June 30, 2019 the total balance due was $808,000.
In January 7, 2019, the Company received an additional loan in the amount of $25,000 from a stockholder and former member of the Board of Directors. The loan bears interest at a rate of 5% per annum and is due January 7, 2020.
During the three and six months ended June 30, 2019 and 2018, the Company incurred interest expense of $92,405 and $177,344, and $80,354 and $154,719, respectively, on its loan from the Executive Chairman of the Board, which is included in interest expense in the accompanying condensed statements of operations, as well as interest expense of $312 and $600, and $310 and $620 for the three and six months ended June 30, 2019 and 2018, respectively, related to the loan from a former Board member. These amounts, in addition to interest expense of $6,748 and $10,807, and $314 and $652 for the three and six months ended June 30, 2019 and 2018, respectively, are related to financing and late fees.
13
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Notes payable and operating lease liabilities consisted of the following at June 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31, 2018
|
|
Notes payable to stockholders
|
|
$
|
9,218,132
|
|
$
|
8,314,622
|
|
Operating lease liabilities
|
|
|
889,869
|
|
|
|
|
|
|
|
10,108,001
|
|
|
8,314,622
|
|
Less: current maturities
|
|
|
(985,161
|
)
|
|
(325,000
|
)
|
Long-term maturities
|
|
$
|
9,122,840
|
|
$
|
7,989,622
|
|
11.
Commitments and Contingencies
Agreements
On May 18, 2018 we entered into a letter agreement with Mr. Edward S. Vittoria pursuant to which he agreed to be employed by us as our Chief Executive Officer for an initial term ending May 31, 2019, which such term may be extended by mutual agreement upon terms and conditions to be mutually agreed upon prior to the expiration of such initial term. Under the terms of the letter agreement we agreed to pay him: (i) an annual base salary of $200,000, payable in accordance with our normal payroll practices; (ii) an annual cash bonus to be awarded by our Board of Directors in January in a minimum amount of $50,000; and (iii) granted him options to purchase 6,500,000 shares of our common stock, vesting one-third in arrears, at an exercise price equal to fair market value on the date of grant pursuant to the terms and conditions of our 2018 Equity Compensation Plan. He is also entitled to: (i) participate in all of our benefit programs currently existing or hereafter made available to executive and/or salaried; (ii) an amount of annual paid vacation consistent with his position and length of service to us; and (iii) reimbursement for all reasonable, out of-pocket expenses incurred by him.
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 13.
12.
Stock Options and Warrants
For the three and six months ended June 30, 2019 and 2018, respectively, the Company recorded non-cash stock-based compensation expense of $13,628 and $14,391, and $27,558 and $24,732, respectively, relating to employee stock options and warrants issued for consulting services.
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 June 30, 2019 and 2018 for the options is $97,034 and $180,427, respectively, and will be recognized through June 30, 2021.
On April 12, 2018 the Board of Directors approved the adoption of a 2018 Equity Compensation Plan. The Company has reserved 20,000,000 shares of our common stock for grants under this plan.
The 2018 Plan provides for the granting of both incentive and non-qualified stock options to key personnel, including officers, directors, consultants and advisors to the Company, at the discretion of the Board of Directors. Each plan limits the exercise price of the options at no less than the quoted market price of the common stock on the date of grant. The option term is determined by the Board of the Directors, provided that no option may be exercisable more than 10 years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of the Companys common stock, no more than five years after the date of the grant. Generally, under both plans, options to employees vest over three years at 33.33% per annum unless the Board of Directors designates a different vesting schedule.
14
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
On March 28, 2019, the Company filed a definitive information statement on Schedule 14C with the Securities and Exchange Commission to notify our common shareholders that effective March 27, 2019, the holders of 35,713,727 shares of our common stock, representing 51.7% of the outstanding shares of our common stock, executed a written consent in lieu of a special meeting of shareholders ratifying the adoption of our 2018 Equity Compensation Plan, as amended.
A summary of the Companys stock option plans as of June 30, 2019, and changes during the six-month period then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2019
|
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Options outstanding at December 31, 2018
|
|
|
11,785,000
|
|
|
$
|
0.05
|
|
Options granted
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(200,000
|
)
|
|
|
0.02
|
|
Options expired
|
|
|
(340,000
|
)
|
|
|
0.14
|
|
Options at end of period
|
|
|
11,245,000
|
|
|
$
|
0.05
|
|
Options exercisable at June 30, 2019
|
|
|
5,046,672
|
|
|
$
|
0.09
|
|
Changes in the Companys non-vested options for the six months ended June 30, 2019 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2019
|
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Nonvested options at December 31, 2018
|
|
|
9,595,000
|
|
|
$
|
0.02
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(3,196,672
|
)
|
|
|
0.02
|
|
Forfeited
|
|
|
(200,000
|
)
|
|
|
0.02
|
|
Nonvested options at June 30, 2019
|
|
|
6,198,328
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$0.017- $0.30
|
|
|
|
11,245,000
|
|
|
|
7.86
|
|
|
|
$0.05
|
|
|
|
5,045,672
|
|
|
|
$0.09
|
|
Totals
|
|
|
|
11,245,000
|
|
|
|
7.86
|
|
|
|
$0.05
|
|
|
|
5,046,672
|
|
|
|
$0.09
|
|
15
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
A summary of the Companys warrant activity as of June 30, 2019 and changes during the six-month period then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30, 2019
|
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
Warrants outstanding at December 31, 2018
|
|
|
773,336
|
|
|
$
|
0.16
|
|
Granted
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable at June 30, 2019
|
|
|
773,336
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding and Exercisable
|
|
Range of Exercise Price
|
|
|
Number Outstanding
|
|
|
Remaining Average Contractual Life (In Years)
|
|
|
Weighted Average
Exercise Price
|
|
$0.05 - $0.25
|
|
|
|
773,336
|
|
|
|
0.90
|
|
|
$
|
0.16
|
|
Totals
|
|
|
|
773,336
|
|
|
|
0.90
|
|
|
$
|
0.16
|
|
13.
Related Party Transactions
On March 28, 2002 the Company executed a binding agreement with one of its principal stockholders, who is also the Executive Chairman of the Board, to fund up to $6.1 million. Under the terms of the agreement, 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 (4.02% and 3.678% per annum at June 30, 2019 and 2018, respectively), 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, annually, through February 2012, the maturity date for the agreement was extended annually from December 31, 2007, to December 31, 2018. On May 9, 2018 he extended the maturity rate to December 31, 2019.
On March 25, 2019 we entered into a note exchange agreement with our Executive Chairman pursuant to which he exchanged $7,989,622 of principal and $395,510 of accrued interest which would have been due on December 31, 2019 under an unsecured loan for a secured promissory note in the principal amount of $8,385,132. The secured note which matures on December 31, 2021, and bears interest at 4% per annum, payable monthly, is secured by a first position security interest in our assets.
From January 1, 2019 through June 30, 2019, the Company received additional loans in the amount of $483,000 from the Companys Executive Chairman, as advances for working capital needs. The loans bear interest at the BBA Libor Daily Floating Rate plus 1.4 points. As of June 30, 2019 the total balance due was $808,000.
In January 7, 2019, the Company received an additional loan in the amount of $25,000 from a stockholder and former member of the Board of Directors. The loan bears interest at a rate of 5% per annum and is due January 7, 2020.
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 the three- and six-month periods ended June 30, 2019 and 2018, we paid Boxwood Associates, Inc. $6,000 and $12,000, respectively, under this agreement. A former member of our Board of Directors is President of Boxwood Associates, Inc.
16
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
14.
Major Customers
There are concentrations of credit risk with respect to accounts receivables due to the amounts owed by three customers at June 30, 2019 whose balances each represented approximately 34%, 28% and 13%, for a total of 75% of total accounts receivables. Comparatively, there are concentrations of credit risk with respect to accounts receivables due to the amounts owed by two customers at December 31, 2018 whose balances each represented approximately 53%, and 30%, for a total of 83% of total accounts receivables. Sales to three customers for the six months ended June 30, 2019 were 41%, 25% and 10% for total of 76% of sales. During the six months ended June 30, 2018 sales from two customers represented 40% and 25% for a total of 65% 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.
15.
Subsequent Events
Subsequent to June 30, 2019, the Company received additional loans in the amount of $175,000 from the Companys Executive Chairman, as advances for working capital needs. The loans bear interest at the BBA Libor Daily Floating Rate plus 1.4 points.
17
ITEM 2.