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EX-32.2 - SECTION 1350 CERTIFICATION - PURADYN FILTER TECHNOLOGIES INCpfti_ex32z2.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION - PURADYN FILTER TECHNOLOGIES INCpfti_ex31z1.htm
EX-32.1 - SECTION 1350 CERTIFICATION - PURADYN FILTER TECHNOLOGIES INCpfti_ex32z1.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION - PURADYN FILTER TECHNOLOGIES INCpfti_ex31z2.htm


 

 

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: June 30, 2015

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

(Exact 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. 48,683,135 shares of common stock are issued and outstanding as of August 11, 2015.

 

 






TABLE OF CONTENTS

 


 

 

Page No.

                  

PART I. FINANCIAL INFORMATION

                  

 

 

 

ITEM 1.

FINANCIAL STATEMENTS.

1

 

 

 

 

Condensed Balance Sheets – As of June 30, 2015 (unaudited) and December 31, 2014

1

 

 Condensed Statements of Operations –Three months and Six months ended June 30, 2015 and 2014 (unaudited)

2

 

Condensed Statements of Cash Flows –  Six months ended June 30, 2015 and 2014 (unaudited)

3

 

Notes to Condensed Financial Statements (Unaudited)

4

 

 

 

ITEM 2.

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

14

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

19

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES.

20

 

 

 

 

PART II.   OTHER INFORMATION

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS.

20

 

 

 

ITEM 1A.

RISK FACTORS.

20

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

20

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

20

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURE.

21

 

 

 

ITEM 5.

OTHER INFORMATION.

21

 

 

 

ITEM 6.

EXHIBITS.

21

 







i



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.


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 $11,499,542 million 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, 2014 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.





ii



 


PART I - FINANCIAL INFORMATION


ITEM 1.

FINANCIAL STATEMENTS.


PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED BALANCE SHEETS



 

 

June 30,

2015

 

December 31,

2014

 

 

 

(Unaudited)

 

 

 

ASSETS

     

 

                       

    

 

                       

  

Current assets:

 

 

 

 

 

 

 

Cash

 

$

119,692

 

$

53,288

 

Accounts receivable, net of allowance for uncollectible accounts of $17,000 and $17,000, respectively

 

 

242,811

 

 

205,314

 

Inventories, net

 

 

771,069

 

 

587,690

 

Prepaid expenses and other current assets

 

 

95,687

 

 

91,893

 

Total current assets

 

 

1,229,259

 

 

938,185

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

74,376

 

 

57,891

 

Other noncurrent assets

 

 

368,078

 

 

347,836

 

Total assets

 

$

1,671,713

 

$

1,343,912

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

104,408

 

$

130,597

 

Accrued liabilities

 

 

312,939

 

 

308,387

 

Current portion of capital lease obligation

 

 

3,755

 

 

3,280

 

Deferred compensation

 

 

1,559,820

 

 

1,513,931

 

Notes Payable - stockholders

 

 

25,000

 

 

25,000

 

Total current liabilities

 

 

2,005,922

 

 

1,981,195

 

 

 

 

 

 

 

 

 

Capital lease obligation, less current portion

 

 

9,075

 

 

 

Notes Payable - stockholders

 

 

11,374,517

 

 

10,574,367

 

Total Long Term Liabilities

 

 

11,383,592

 

 

10,574,367

 

Total Liabilities

 

 

13,389,514

 

 

12,555,562

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 48,683,135 and 48,683,135, respectively

 

 

48,683

 

 

48,683

 

Additional paid-in capital

 

 

47,265,536

 

 

47,183,545

 

Accumulated deficit

 

 

(59,032,020

)

 

(58,443,878

)

Total stockholders’ deficit

 

 

(11,717,801

)

 

(11,211,650

)

Total liabilities and stockholders’ deficit

 

$

1,671,713

 

$

1,343,912

 





See accompanying notes to unaudited condensed financial statements


1



 


PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)


 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Net sales

 

$

519,700

 

 

$

772,880

 

 

$

1,226,329

 

 

$

1,667,182

 

Cost of products sold

 

 

369,906

 

 

 

491,046

 

 

 

810,929

 

 

 

1,028,816

 

Gross Profit

 

 

149,794

 

 

 

281,834

 

 

 

415,400

 

 

 

638,366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and wages

 

 

207,455

 

 

 

258,781

 

 

 

433,057

 

 

 

536,750

 

Selling and administrative

 

 

192,592

 

 

 

212,269

 

 

 

431,680

 

 

 

450,201

 

Total operating costs 

 

 

400,047

 

 

 

471,050

 

 

 

864,737

 

 

 

986,951

 

Loss from operations

 

 

(250,253

)

 

 

(189,216

)

 

 

(449,337

)

 

 

(348,585

)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(71,906

)

 

 

(62,301

)

 

 

(138,805

)

 

 

(121,018

)

Total other expense, net

 

 

(71,906

)

 

 

(62,301

)

 

 

(138,805

)

 

 

(121,018

)

Loss before income taxes

 

 

(322,159

)

 

 

(251,517

)

 

 

(588,142

)

 

 

(469,603

)

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(322,159

)

 

$

(251,517

)

 

$

(588,142

)

 

$

(469,603

)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

$

(.01

)

 

$

(.01

)

 

$

(.01

)

 

$

(.01

)

Weighted average common shares outstanding (basic and diluted)

 

 

48,683,135

 

 

 

48,743,498

 

 

 

48,683,135

 

 

 

48,771,763

 





See accompanying notes to unaudited condensed financial statements


2



 


PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)


 

 

Six Months Ended

June 30

 

  

 

2015

 

 

2014

 

Operating activities

  

 

 

 

 

 

Net loss

 

$

(588,142

)

 

$

(469,603

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

21,456

 

 

 

20,010

 

Provision for slow moving inventory

 

 

912

 

 

 

1,053

 

Loss on disposal of fixed asset

 

 

4,322

 

 

 

 

Gain on extinguishment of lease

 

 

(3,307

)

 

 

 

Compensation expense on stock-based arrangements with employees and consultants

 

 

81,992

 

 

 

69,477

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(37,498

)

 

 

(218,133

)

Inventories

 

 

(184,290

)

 

 

24,693

 

Prepaid expenses and other current assets

 

 

(3,794

)

 

 

(41,732

)

Accounts payable

 

 

(26,192

)

 

 

(201

)

Deferred compensation

 

 

45,889

 

 

 

 

Accrued liabilities

 

 

4,552

 

 

 

42,303

 

Net cash used in operating activities

 

 

(684,100

)

 

 

(572,133

)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Capitalized patent costs

 

 

(26,749

)

 

 

(21,505

)

Purchases of property and equipment

 

 

(20,735

)

 

 

(14,999

)

Net cash used in investing activities

 

 

(47,484

)

 

 

(36,504

)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of notes payable to stockholders

 

 

800,150

 

 

 

550,100

 

Payment of capital lease obligations

 

 

(2,162

)

 

 

(3,959

)

Net cash provided by financing activities

 

 

797,988

 

 

 

546,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase / (decrease) in cash

 

 

66,404

 

 

 

(62,496

)

Cash at beginning of period

 

 

53,288

 

 

 

161,503

 

Cash at end of period

 

$

119,692

 

 

$

99,007

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

132,391

 

 

$

114,789

 

Assets acquired from capital lease

 

$

15,020

 

 

$

 






See accompanying notes to unaudited condensed financial statements


3



 


PURADYN FILTER TECHNOLOGIES INCORPORATED

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, 2015 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2015.


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, 2014.


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 June 30, 2015 and December 31, 2014, 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 June 30, 2015 and December 31, 2014, 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 asset’s 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 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.


Product Warranty Costs


As required by FASB ASC 460, Guarantor’s Guarantees, the Company is including the following disclosure applicable to its product warranties.




5



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)



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, 2015, 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, 2015:


Balance as of December 31, 2014

     

$

20,000

 

Less: Payments made

 

 

 

Add: Provision for current period warranties

 

 

 

Balance as of June 30, 2015 (unaudited)

 

$

20,000

 


Advertising Costs


Advertising costs are expensed as incurred. During the three and six months ended June, 2015 and 2014, advertising costs incurred by the Company totaled approximately $0, $1,115 and $0 and $0, 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, 2015 and 2014, engineering and development costs incurred by the Company totaled $2,113, $4,223, $3,764 and $6,515, 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, 2014 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.


The Company leases its employees from a payroll leasing company. The Company’s leased employees meet the definition of employees as specified by FASB Interpretation No. 44 for purposes of applying FASB ASC 718.




6



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, 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, 2015 and December 31, 2014, 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 Company’s operations.  Please refer to Note 14 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 were 5,187,135 and 5,421,818 for the three and six months ended June 30, 2015 and 2014, respectively.


Reclassifications


Certain prior year amounts have been reclassified to conform to the current year presentation.


Recent Accounting Pronouncements


In June 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”. The update gives entities a single comprehensive model to use in reporting information about the amount and timing of revenue resulting from contracts to provide goods or services to customers. The proposed ASU, which would apply to any entity that enters into contracts to provide goods or services, would supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, the update would supersede some cost guidance included in Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. The update removes inconsistencies and weaknesses in revenue requirements and provides a more robust framework for addressing revenue issues and more useful information to users of financial statements through improved disclosure requirements. In addition, the update improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial condition.




7



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)



In June 2014, ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718); Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The amendments in this ASU apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. For all entities, the amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities.


Entities may apply the amendments in this ASU either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial condition.


In August 2014, the FASB issued ASU No. 2014-15 on “Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”.  This Update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The amendments in this Update are effective for public and nonpublic entities for annual periods ending after December 15, 2016. We are currently assessing the impact of the adoption of ASU No. 2014-15, and we have not yet determined the effect of the standard on our ongoing financial reporting.


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 $684,100 and $572,133 during the six-months ended June 30, 2015 and 2014, respectively. As a result, the Company has had to rely principally on 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, 2014 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.




8



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)



3.

Inventories


Inventories consisted of the following at June 30, 2015 and December 31, 2014, respectively:


 

 

June 30,

2015

 

December 31,

2014

 

 

 

(Unaudited)

 

 

 

Raw materials

 

$

1,133, 699

 

$

961,313

 

Work In Progress

 

 

634

 

 

986

 

Finished goods

 

 

103,912

 

 

91,655

 

Valuation allowance

 

 

(467,176

)

 

(466,264

)

Inventory, net

 

$

771,069

 

$

587,690

 


4.

Prepaid Expenses and Other Current Assets


At June 30, 2015 and December 31, 2014, prepaid expenses and other current assets consisted of the following:


 

 

June 30,

2015

 

December 31,

2014

 

 

 

(Unaudited)

 

 

 

Prepaid expenses

 

$

58,952

 

$

52,893

 

Deposits

 

 

36,735

 

 

39,000

 

 

 

$

95,687

 

$

91,893

 


5.

Property and Equipment


At June 30, 2015 and December 31, 2014, property and equipment consisted of the following:


 

 

June 30,

2015

 

December 31,

2014

 

 

 

(Unaudited)

 

 

 

Machinery and equipment

 

$

1,045,217

 

$

1,023,143

 

Furniture and fixtures

 

 

56,558

 

 

56,558

 

Leasehold improvements

 

 

129,722

 

 

129,722

 

Software and website development

 

 

88,842

 

 

88,842

 

Computer hardware and software

 

 

148,885

 

 

148,885

 

 

 

 

1,469,224

 

 

1,447,150

 

Less accumulated depreciation and amortization

 

 

(1,394,848

)

 

(1,389,259

)

 

 

$

74,376

 

$

57,891

 


Depreciation and amortization expense of property and equipment for the three and six months ended June 30, 2015 and 2014 is $7,159, $14,948, $7,593 and $14,363, respectively.




9



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)



6.

Patents


Included in other assets at June 30, 2015 and December 31, 2014 are capitalized patent costs as follows:


 

 

June 30,

2015

 

December 31,

2014

 

 

 

 

 

 

 

Patent costs

 

$

359,155

 

$

332,406

 

Less accumulated amortization

 

 

(26,898

)

 

(20,390

)

 

 

$

332,257

 

$

312,016

 


Amortization expense for the three and six months ended June 30, 2015 and 2014 amounted to $3,328, $6,508, $2,824 and $5,647, 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 June 30, 2015, 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 $909,383.


8.

Accrued Liabilities


At June 30, 2015 and December 31, 2014, accrued liabilities consisted of the following:


 

 

June 30,

2015

 

December 31,

2014

 

 

 

(Unaudited)

 

 

 

Accrued vacation and benefits

 

$

50,155

 

$

61,178

 

Accrued expenses relating to vendors and others

 

 

146,689

 

 

138,523

 

Accrued warranty costs

 

 

20,000

 

 

20,000

 

Accrued interest payable relating to stockholder notes

 

 

62,103

 

 

56,158

 

Deferred rent

 

 

33,992

 

 

32,528

 

 

 

$

312,939

 

$

308,387

 


9.

Deferred Compensation


Deferred compensation represents amounts owed to four 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 the employees could demand payment in full at any time. As of June 30, 2015 and December 31, 2014 the Company recorded deferred compensation of $1,559,820 and $1,513,931, respectively.




10



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)



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 Chairman of the Board and Chief Executive Officer, 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 (2.431% per annum at December 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 the consummation of any other financing over $7.0 million. Beginning in March 2006 and through February 2012, the maturity date for the agreement was extended annually from December 31, 2007 to the agreements current maturity date of December 31, 2016. Refer to Note 13.


At June 30, 2015, 2015 the Company had drawn the full funding amount under the initial agreement of $6.1 million plus an additional advances of $5,274,517. At December 31, 2014 the Company had drawn the full funding amount under the initial agreement of $6.1 million plus an additional $4,474,367. Additionally, the Company has an unsecured loan outstanding from a member of the board of directors who is also a significant stockholder, totaling $25,000 and $25,000 at June 30, 2015 and December 31, 2014, respectively. The note bears interest at a rate of 5% per annum and is due November 22, 2015. Refer to Note 13.


During the three and six months ended June 30, 2015 and 2014, the Company incurred interest expense of $70,615, $137,171, $61,580 and $119,983, 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 $585 and $620 for the three and six months ended June 30, 2015 related to the loan from one if its other Board members. These amounts, in addition to interest expense of $409 and $444 for the three and six months ended June 30, 2015 and 2014, respectively, related to capital lease obligations, financing and loans from a stockholder.


11.

Commitments and Contingencies


Agreements


On October 1, 2014, the Company entered into a one-year agreement with Catalyst Global LLC to provide services rendered as investor relations consultant for the Company. As compensation for their services, Catalyst receives a monthly service fee of $4,000 in addition to warrants to purchase 635,000 shares of common stock exercisable at $0.25 per share, which warrants vest in lots of 52,917 warrants per month. Either party may terminate the agreement with 30 days’ notice. The Company suspended the agreement on May 31, 2015 with plans to resume at a later date.


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.  In December 2014, the Company renewed the lease at an annual expense of $8,500 on a condominium in Ocean Ridge, Florida until December 31, 2015.


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 member of our board of directors and a significant stockholder is President of Boxwood Associates, Inc.  Refer to Note 13.




11



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)



12.

Stock Options and Warrants


For the three and six months ended June 30, 2015 and June 30, 2014, respectively, the Company recorded non-cash stock-based compensation expense of $33,588, $81,992, $30,172 and $69,477, 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, 2015 and 2014 for the options is $163,571 and $115,744, respectively, and will be recognized through June 30, 2018.


A summary of the Company’s stock option plans as of June 30, 2015, and changes during the six month period then ended is presented below:


 

 

Six Months Ended

June 30, 2015

 

  

 

Number of

Options

 

 

Weighted

Average

Exercise Price

 

Options outstanding at December 31, 2014

 

 

3,560,065

 

 

$

0.24

 

Options granted

 

 

755,000

 

 

 

0.16

 

Options exercised

 

 

 

 

 

 

Options cancelled

 

 

 

 

 

 

Options expired

 

 

(413,176

)

 

 

0.36

 

Options at end of period

 

 

3,901,889

 

 

$

0.21

 

Options exercisable at June 30, 2015

 

 

2,731,055

 

 

$

0.23

 


Changes in the Company’s nonvested options for the six months ended June 30, 2015 are summarized as follows:


 

 

Six Months Ended

June 30, 2015

 

  

 

Number of

Options

 

 

Weighted

Average

Exercise Price

 

Nonvested options at December 31, 2014

 

 

675,014

 

 

$

0.16

 

Granted

 

 

755,000

 

 

 

0.16

 

Vested

 

 

(259,180

)

 

 

0.14

 

Forfeited

 

 

 

 

 

 

Nonvested options at June 30, 2015

 

 

1,170,834

 

 

$

0.17

 


 

 

 

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

 

$0.16 – $0.34

 

 

 

3,901,889

 

 

 

5.63

 

 

$

0.21

 

 

 

2,731,055

 

 

$

0.23

 

Totals

 

 

 

3,901,889

 

 

 

5.63

 

 

$

0.21

 

 

 

2,731,055

 

 

$

0.23

 





12



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)



A summary of the Company’s warrant activity as of June 30, 2015 and changes during the six month period then ended is presented below:


 

 

Six months ended

June 30, 2015

 

  

 

Weighted Average Exercise

 

  

 

Warrants

 

 

Price

 

Warrants outstanding at December 31, 2014

 

 

1,068,280

 

 

$

0.37

 

Granted

 

 

264,585

 

 

 

0.25

 

Exercised

 

 

 

 

 

 

Expired

 

 

(47,619)

 

 

 

0.50

 

Warrants outstanding at June 30, 2015

 

 

1,285,246

 

 

$

0.34

 


 

 

 

Warrants Outstanding

 

Range of Exercise Price

 

 

Number Outstanding

 

 

Remaining Average Contractual Life (In Years)

 

 

Weighted Average

Exercise Price

 

$0.25 - $0.50

 

 

 

1,285,246

 

 

 

2.51

 

 

$

0.34

 

Totals

 

 

 

1,285,246

 

 

 

2.51

 

 

$

0.34

 


13.

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 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 (2.431% per annum at December 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 February 2012, the maturity date for the agreement was extended annually from December 31, 2007, to December 31, 2016.


At June 30, 2015 the Company had drawn the full funding amount under the initial agreement of $6.1 million plus an additional $5,274,517. At December 31, 2014 the Company had drawn the full funding amount under the initial agreement of $6.1 million plus an additional $4,474,367. Additionally, the Company has unsecured loans outstanding from one Board member, who is also a significant stockholder, totaling $25,000 and $25,000 at June 30, 2015 and December 31, 2014, respectively. The note bears interest at a rate of 5% per annum and is due November 22, 2015.


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 2014 and 2013 we paid Boxwood Associates, Inc. $24,000 under this agreement. A member of our board of directors is President of Boxwood Associates, Inc.


14.

Major Customers


There are concentrations of credit risk with respect to accounts receivables due to the amounts owed by two customers at June 30, 2015 whose balances each represented approximately 39%, and 39 %, for a total of 78% of total accounts receivables. There are concentrations of credit risk with respect to accounts receivables due to the amounts owed by two customers at December 31, 2014 whose balances each represented approximately 40%, and 20%, for a total of 60% of total accounts receivables. The loss of business from one or a combination of the Company’s significant customers, or an unexpected deterioration in their financial condition, could adversely affect the Company’s operations.


15.

Subsequent Events


From July 1, 2015 through August 11, 2015, the Company received additional loans in the amount of $125,025 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.



13



 


ITEM 2.

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


Overview


We focus our sales strategy on individual sales and distribution efforts as well as on the development of a nationwide distribution network that will sell, install and support our product. We currently have approximately 100 distributors and dealers that sell and/or service the Puradyn system in the U.S. and internationally.


In October 2014, we released two new additions to our line of bypass filtration products:


·

Puradyn Millennium Technology System (MTS) which removes solid contaminants - down to less than one micron in size - from engine lubrication oil or hydraulic oil – to safely extend the oil's useful life. The MTS technology utilizes new polymer technology that eliminates the need for electrical power connection required for liquid contamination removal in the TF and PFT models. The reduced mechanical complexity and smaller profile of the MTS enable simpler, faster and lower cost installation. The MTS can be used on all engine types and configurations using any fuel type, including natural gas and biofuels, where the incidence of water formation during combustion can be more prevalent.


·

Puradyn Polydry® patented replacement filter element was specifically designed for use with the MTS. Polydry filter elements incorporate polymer-based technology formulated specifically to absorb water contamination occurring naturally in engine oil and hydraulic systems.  Water trapped in the polymer-based material within Polydry filter elements is eliminated with each filter element replacement.


Sales of the Company’s products, the Puradyn® bypass oil filtration system and replaceable filter elements, depend principally upon end user demand for such products and acceptance of the Company’s products by OEMs.  Developing market acceptance for the Company’s existing and new products requires substantial marketing and sales efforts and the expenditure of a significant amount of funds to inform customers of the benefits and cost advantages of its products. As a result of our limited resources in the past few years, we have not had adequate funds available to fully undertake these necessary marketing efforts.


Our marketing efforts target industries and potential customers willing to consider innovative methods to protect their high-value engine assets, to reduce oil maintenance costs, to reduce engine overhaul costs and to reduce engine downtime.  We believe that many businesses, such as one customer who recently specified our systems for all their drill rig engines, has been receptive to new and progressive ways to better maintain their equipment using bypass oil filtration. In addition, due to the positive systems performance regarding engine oil, we have been asked to assist a couple of customers to expand their filtration efficiency to hydraulics.  Based upon the present status of this project, we believe that this expanded activity for hydraulic filtration is anticipated to begin in late third quarter to early fourth quarter of 2015. While this is a long-term and ongoing process, we believe we have achieved a degree of product acceptance based on the expansion of existing strategic relationships we have with Nabors Industries, Inc. and other end-users and distributors, including:


·

The recent successful completion of evaluations by a global oil and gas industry contractor in Italy which transitioned to an initial purchase order in early 2nd quarter 2015.


·

New relationships established over the past twelve months in Africa, Asia, Europe, and South America to bolster international sales; and


·

Several evaluations targeted or underway with commercial marine, construction, transportation, and mining applications.




14



 


Net sales for the second quarter of 2015 decreased 33% from second quarter 2014 and 26% for the comparable six month period.  These decreases are attributable to decreased purchases by several accounts during the 2015 periods primarily as a result of the decline in oil prices and general business conditions inside and outside the U.S., which led to a reduction in orders.  Efforts to diversify our sales activities to other industries heavily dependent on high annual hours of equipment operation, which started in the latter half of the last year, have generated some initial positive responses from this targeted sales focus.  While we continue to seek to expand our customer base in an effort to continually increase our product population, we have experienced, on occasion, a long sales cycle and the process of converting leads into sales involves a number of variables, some of which are beyond our control. In addition, due to the volatility of crude oil prices, and the uncertainty of world economy, many businesses are reluctant to invest in new technology, even if the return on investment is relatively short. Nonetheless, we believe that industry acceptance will grow in the long run based in part upon strategic arrangements with certain customers and increased interest shown from both domestic and international territories. Additionally, we have experienced positive sales leads attributable to several articles in industry publications highlighting the benefits of Puradyn filtration systems.  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 fiscal 2015 revenues.


Our revenues historically have not been sufficient to fund our operating expenses.  During the second quarter of 2015 we implemented steps to reduce our operating expenses to amounts below 2014 levels; however, as a result of certain fixed operating expenses, and the decline in sales and lower gross margins during the quarter have led to an increase in our operating loss in 2015. We continue to implement measures to preserve our ability to operate, including organizational changes and reductions in personnel.  In addition, as described below, certain key employees continue to defer a portion of their cash compensation in an effort to conserve our cash resources.


We continue to address our liquidity and working capital issues through the utilization of the borrowing agreement with the Company’s Chairman. During the quarter ended June 30, 2015 we borrowed an additional $800,150 from him, and at June 30, 2015 we owed our Chairman $11,374,517 which represented approximately 85% of our total liabilities. Subsequent to June 30, 2015, he has advanced an additional $125,025 in working capital funding. While he has continued to fund our working capital needs and extend the due date of the $6.1 million credit agreement, he is under no contractual obligation to do so and there are no assurances he will continue to make funds available to us or extend the due date of the obligations.  


We also owe certain of our employees $1,559,820 in deferred cash compensation at June 30, 2015, which represents 78% of our current liabilities on that date.  Since 2005, Messrs. Sandler and Kroger, two of our executive officers, and two other employees have deferred a portion of the compensation due them to assist us in managing our cash flow and working capital needs.  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 the employees could demand payment in full at any time. We do not have the funds to pay these amounts in entirety, and any demand by these officers and employees for full payment would reduce the amount of funds we have available for our operations.  We could be required to pay these obligations at a time when it is disadvantageous for us, and could result in our inability to satisfy our other obligations as they become due.


If budgeted sales levels are not achieved and/or significant unanticipated expenditures occur, or if we are not able to borrow or 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 2015. There can be no assurance 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 the event we are unable to secure needed capital, it is possible that stockholders could lose their entire investment in our company.




15



 


Going Concern


Our financial statements have been prepared on the basis that we will operate as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred net losses each year since inception and have relied on loans from related parties to fund our operations. These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from our principal stockholder, as set forth above, have led our independent registered public accounting firm Liggett, Vogt & Webb, P.A. to include a statement in its audit report relating to our audited financial statements for the years ended December 31, 2014 and 2013 expressing substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain the necessary financing to meet our obligations and repay our liabilities when they become due and to generate profitable operations in the future. There are no assurances that we will have sufficient funds to execute our business plan, pay our obligations as they become due or generate positive operating results.


Critical Accounting Policies and Estimates


The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition and accounts receivable allowances. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 1 to our audited financial statements appearing elsewhere in this report.


Recent Accounting Pronouncements


Information concerning recently issued accounting pronouncements is set forth in Note 1 of our notes to condensed financial statements appearing elsewhere in this report.


Results of Operations for the Three-months Ended June 30, 2015 Compared to the Three-months Ended June 30, 2014


Net Sales


Net sales decreased 33% in the second quarter of 2015 as compared to the second quarter of 2014 due to a number of customers that have purchased the larger product models, and who continue to be negatively impacted by the volatility in oil prices.  We believe certain customers and potential customers of ours in targeted markets continue to internally adapt to volatile oil prices and are reluctant to enter into new purchases or evaluations until a certain measure of stability is achieved.  These customers in our targeted markets effected by the downturn in oil prices may have either postponed ordering additional systems until oil pricing begins to stabilize and again rise, or have temporarily interrupted production on their end, slowing replacement filter sales.  The decrease in sales was primarily due to reduced orders from several customers.


Cost of Products Sold


Gross profit, as a percentage of sales, decreased by 7%, from 36% in the second quarter of 2014 to 29% in the second quarter of 2015 due to reduced sales that resulted in increased overhead allocations. We continue to review cost of materials increases, some of which were passed through to our customers as product price increases in the past few years.


Total Operating Costs


Our total operating costs declined 15% in the second quarter of 2015 from the comparable period in 2014 primarily as a result of a decrease in salaries and wages and the termination of a service agreement with an outside public relations firm.




16



 


Salaries and wages decreased 20% from the second quarter of 2014 compared to June 30, 2015. The reduction was attributable to reduction in staffing during fourth quarter of 2014.


Selling and administrative expenses decreased slightly between June 30, 2015 and 2014. The following table sets forth the components of selling and administrative expenses:


 

 

Three Months Ended June 30,

(unaudited)

 

  

 

2015

 

 

2014

 

 

Change

 

Employee Benefits & Payroll Processing

 

$

32,135

 

 

$

43,655

 

 

$

(11,520

)

Travel & Marketing

 

 

27,029

 

 

 

50,515

 

 

 

(23,486

)

Depreciation & Amortization

 

 

5,555

 

 

 

5,892

 

 

 

(237

)

Engineering

 

 

(2,238

)

 

 

191

 

 

 

(2,429

)

Professional Fees

 

 

38,778

 

 

 

38,510

 

 

 

268

 

Investor Relations

 

 

26,552

 

 

 

302

 

 

 

26,250

 

Occupancy Expense

 

 

26,598

 

 

 

24,757

 

 

 

1,841

 

Patent Expense

 

 

9,029

 

 

 

22,772

 

 

 

(13,743

)

Stock Compensation

 

 

1,503

 

 

 

1,139

 

 

 

364

 

Bad Debts

 

 

256

 

 

 

(32

)

 

 

288

 

Other Expenses

 

 

27,395

 

 

 

24,568

 

 

 

2,827

 

 

     

 

 

 

     

 

 

 

     

 

 

 

Total

 

192,592

 

 

$

212,269

 

 

$

(19,677

)


The decrease in employee benefits resulted from the impact of vested employee stock option expenses. Travel and marketing expenses decreased due to reduced international travel and termination of a service agreement with an outside public relations firm. The increase in investor relations was due to our arrangement with an outside investor relation firm; the agreement was suspended in May 2015. The decrease in patent costs was due to certain patent annuities reaching full-term and additional patent filings associated with our MTS and future products filed in 2014. Other Expenses represents various expenses including communication costs, office supplies and other components of administrative expenses. We anticipate that our selling and administration expenses for the full year 2015 will remain at the same as for the full year 2014.


Interest Expense


Interest expense increased 17% for the period ending June 30, 2015 as compared to the period ending June 30, 2014 primarily due to higher borrowings. The Company pays interest monthly on the Chairman note at the LIBOR Daily Floating Rate plus 1.4%, which was a weighted average of 2.67% as of June 30, 2015 as compared to 2.66% as of June 30, 2014.


Results of Operations for the Six-months Ended June 30, 2015 Compared to the Six-months Ended June 30, 2014


Net Sales


Net sales decreased 26% for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014 due to a number of customers that have purchased the larger product models, and who continue to be negatively impacted by the volatility in oil prices. These customers in our targeted markets affected by the downturn in oil prices may have either postponed ordering additional systems until oil pricing begins to stabilize and again rise, or have temporarily interrupted production on their end, slowing replacement filter sales. The decrease in sales was primarily due to reduced orders from several customers.  


Cost of Products Sold


Gross profit, as a percentage of sales, decreased by 4%, from 38% in the six months ended June 30, of 2014 to 34% in the six months ended June 30, 2015 which was also due to reduced sales that resulted in increased overhead allocations.




17



 


Total Operating Costs


Our total operating costs declined 12% in the six months ended June 30, 2015 from the comparable period in 2014 primarily as a result of a decrease in salaries and wages and the termination of a service agreement with an outside public relations firm.


Salaries and wages decreased 19% from six months ended June 30, 2014 compared to June 30, 2015. The reduction was attributable to reduction in staffing during fourth quarter of 2014.


Selling and administrative expenses remained constant between June 30, 2015 and 2014. The following table sets forth the components of selling and administrative expenses:


 

 

Six Months Ended June 30,

(unaudited)

 

  

 

2015

 

 

2014

 

 

Change

 

Employee Benefits & Payroll Processing

 

$

76,971

 

 

$

98,426

 

 

$

(21,455)

 

Travel & Marketing

 

 

51,737

 

 

 

111,912

 

 

 

(60,175)

 

Depreciation & Amortization

 

 

11,590

 

 

 

11,143

 

 

 

477

 

Engineering

 

 

(9.372

)

 

 

(1,673

)

 

 

(7,699)

 

Professional Fees

 

 

95,314

 

 

 

87,004

 

 

 

8,310

 

Investor Relations

 

 

69,810

 

 

 

908

 

 

 

68,902

 

Occupancy Expense

 

 

51,342

 

 

 

49,220

 

 

 

2,122

 

Patent Expense

 

 

34,794

 

 

 

46,810

 

 

 

(12,016

)

Stock Compensation

 

 

3,007

 

 

 

2,132

 

 

 

875

 

Bad Debts

 

 

256

 

 

 

1,026

 

 

 

(770)

 

Other Expenses

 

 

46,231

 

 

 

43,293

 

 

 

2,938

 

 

     

 

 

 

     

 

 

 

     

 

 

 

Total

 

431,680

 

 

$

450,201

 

 

$

(18,521)

 


The decrease in employee benefits resulted from the impact of vested employee stock option expenses. Travel and marketing expenses decreased due to reduced international travel and termination of a service agreement with an outside public relations firm. Professional fees increased as a result of outsourcing IT as well as increased legal and accounting fees associated with our year-end SEC filings. The increase in investor relations was due to an agreement with an outside investor relation firm, the agreement was suspended in May 2015. The increase in patent costs was due to certain patent annuities reaching full-term and additional patent filings associated with our MTS and future products filed in 2014. Other Expenses represents various expenses including communication costs, office supplies and other components of administrative expenses. We anticipate that our selling and administration expenses for the full year 2015 will remain at the same level as for the full year 2014.


Interest Expense


Interest expense increased 16% for the period ending June 30, 2015 as compared to the period ending June 30, 2014 primarily due to higher borrowings and an increase in the weighted average interest rate.


Liquidity and Capital Resources


As of June 30, 2015, the Company had cash of $119,692, as compared to $53,288 at December 31, 2014. At June 30, 2015, we had negative working capital of ($776,663) and our current ratio (current assets to current liabilities) was 0.61 to 1.  At December 31, 2014 we had negative working capital of ($1,043,010) and our current ratio was 0.47 to 1. The decrease in working capital deficit and increase in current ratio is primarily attributable to the increase in cash and inventories, offset by increases in accounts payable and deferred compensation.




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We have incurred net losses each year since inception and at June 30, 2015 we had an accumulated deficit of $59,032,020. Our net sales are not sufficient to fund our operating expenses. Historically, we have relied on loans from related parties to fund our operations. During the six months ended June 30, 2015 we raised an additional $800,150 from stockholder loans. As of June 30, 2015, we owe our Chairman $11,374,517 for funds advanced to us over time to fund working capital needs, and we borrowed an additional $125,025 from him to date in the third quarter of 2015.  Interest expense on our loans was $138,805 for the six months ended June 30, 2015.


Cash Flows  


Operating activities


For the six month period ended June 30, 2015 net cash used in operating activities was $684,100, which primarily resulted from the net loss, after taxes, of $588,142, as found in the Condensed Statement of Operations.  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 $37,498and increased inventory of $184,290 as a result of purchases related to our new MTS product line, an increase in prepaid expenses of $3,794, as well as reduced accounts payable of $26,192. The amounts were partially offset by increased deferred compensation of $45,889and increased accrued liabilities of $4,552. For the six-month period ended June 30, 2014 net cash used in operating activities was $572,133, which primarily resulted from the net loss of $469,603. 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 $218,133 as a result of our increased sales.


Investing activities


For the six months ending June 30, 2015, $47,484 was used in investing activities for the purchase of software and capitalized patent costs. For the six months ending June 30, 2014, $36,504 was used in investing activities for the purchase of software and capitalized patent costs.


Financing activities


Net cash provided by financing activities was $797,988 for the six months ended June 30, 2015, which was composed of $800,150 in loans from our stockholders as described above, offset by $2,162 in payments of capital lease obligations. Net cash provided by financing activities was $546,141 for the six months ended June 30, 2014, which was composed of $550,100 in loans from our stockholders as described above, offset by $3,959 in payments of capital lease obligations.


Off Balance Sheet Arrangements


As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.  The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.


ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.


Not applicable for a smaller reporting company.




19



 


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 June 30, 2015 (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.


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.


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, 2014. 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.


Under the terms of the consulting agreement with Catalyst Global LLC, the Company is required to issue it warrants on a monthly basis as partial compensation for its services.  On each of April 1, 2015 and May 1, 2015 we issued the firm five year warrants to purchase 52,917 shares of the Company's common stock with an exercise price of $0.25 per share.  The recipient is a sophisticated investor with access to business and financial information on the Company and the issuances were exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(a)(2) of that act.


ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.


None.




20



 


ITEM 4.

MINE SAFETY DISCLOSURE.


Not Applicable.


ITEM 5.

OTHER INFORMATION.


None.


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.






21



 


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:  August 14, 2015

By:

/s/ Joseph V. Vittoria

 

 

Joseph V. Vittoria, Chairman and Chief Executive Officer, principal executive officer

  

 

 

Date:  August 14, 2015

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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