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EX-32.1 - SECTION 1350 CERTIFICATION - PURADYN FILTER TECHNOLOGIES INCpfti_ex32z1.htm
EX-32.2 - SECTION 1350 CERTIFICATION - PURADYN FILTER TECHNOLOGIES INCpfti_ex32z2.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION - PURADYN FILTER TECHNOLOGIES INCpfti_ex31z2.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION - PURADYN FILTER TECHNOLOGIES INCpfti_ex31z1.htm
EX-4.6 - WARRANT - PURADYN FILTER TECHNOLOGIES INCpfti_ex4z6.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: March 31, 2016

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 May 11, 2016.

 

 






TABLE OF CONTENTS

 


 

 

Page No.

                  

PART I. FINANCIAL INFORMATION

                  

 

 

 

ITEM 1.

FINANCIAL STATEMENTS.

1

 

 

 

 

Condensed Balance Sheets – As of March 31, 2016 (unaudited) and December 31, 2015

1

 

 Condensed Statements of Operations –Three months ended March 31, 2016 and 2015 (unaudited)

2

 

Condensed Statements of Cash Flows – Three months ended March 31, 2016 and 2015 (unaudited)

3

 

Notes to Condensed Financial Statements (Unaudited)

4

 

 

 

ITEM 2.

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

15

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

19

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES.

20

 

 

 

 

PART II.   OTHER INFORMATION

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS.

21

 

 

 

ITEM 1A.

RISK FACTORS.

21

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

21

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

21

 

 

 

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 $12,524,717 million at May 11, 2016 due our Chairman and CEO, and the possibility he may not continue to advance funds to us;

·

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, 2015, 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


 

 

March 31,

2016

 

December 31,

2015

 

 

 

(Unaudited)

 

 

 

ASSETS

     

 

                       

    

 

                       

  

Current assets:

 

 

 

 

 

 

 

Cash

 

$

84,132

 

$

34,471

 

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

 

 

237,969

 

 

116,425

 

Inventories, net

 

 

789,507

 

 

817,437

 

Prepaid expenses and other current assets

 

 

63,037

 

 

23,594

 

Total current assets

 

 

1,174,645

 

 

991,927

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

57,380

 

 

61,919

 

Other noncurrent assets

 

 

393,370

 

 

374,720

 

Total assets

 

$

1,625,395

 

$

1,428,566

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

190,947

 

$

73,844

 

Accrued liabilities

 

 

320,663

 

 

321,508

 

Current portion of capital lease obligation

 

 

3,755

 

 

3,755

 

Deferred compensation

 

 

1,632,228

 

 

1,609,585

 

Notes Payable - stockholders

 

 

25,000

 

 

 

Total current liabilities

 

 

2,172,593

 

 

2,008,692

 

 

 

 

 

 

 

 

 

Capital lease obligation, less current portion

 

 

6,259

 

 

7,198

 

Notes Payable - stockholders

 

 

12,324,692

 

 

11,924,617

 

Total Long Term Liabilities

 

 

12,330,951

 

 

11,931,815

 

Total Liabilities

 

 

14,503,544

 

 

13,940,507

 

 

 

 

 

 

 

 

 

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

 

 

47,378,192

 

 

47,329,344

 

Accumulated deficit

 

 

(60,305,024

)

 

(59,889,968

)

Total stockholders’ deficit

 

 

(12,878,149

)

 

(12,511,941

)

Total liabilities and stockholders’ deficit

 

$

1,625,395

 

$

1,428,566

 


See accompanying notes to unaudited condensed financial statements




1



 


PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)


 

 

For the

Three Months Ended

March 31,

 

 

 

2016

 

2015

 

Net sales

 

$

438,186

 

$

706,629

 

Cost of products sold

 

 

316,820

 

 

441,023

 

Gross profit

 

 

121,366

 

 

265,606

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

Salaries and wages

 

 

237,290

 

 

225,602

 

Selling and administrative

 

 

213,277

 

 

239,088

 

Total Operating Costs

 

 

450,567

 

 

464,690

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(329,201

)

 

(199,084

)

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

Interest expense

 

 

(85,856

)

 

(66,899

)

 

 

 

 

 

 

 

 

Net loss before income tax expense

 

 

(415,057

)

 

(265,983

)

 

 

 

 

 

 

 

 

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(415,057

)

$

(265,983

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share – basic and diluted:

 

$

(0.01

)

$

(0.01

)

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding

 

 

48,683,135

 

 

48,683,135

 


See accompanying notes to unaudited condensed financial statements



2



 


PURADYN FILTER TECHNOLOGIES INCORPORATED

CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)


 

 

For the

Three Months Ended

March 31,

 

 

 

2016

 

2015

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(415,057

)

$

(265,983

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

10,100

 

 

10,958

 

Loss on disposal of fixed asset

 

 

 

 

4,332

 

Gain on extinguishment of lease

 

 

 

 

(3,280

)

Compensation expense on stock-based arrangements with employees and consultants

 

 

48,848

 

 

48,403

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(121,545

)

 

(26,367

)

Increase/decrease in prepaid expenses and other current assets

 

 

(39,443

)

 

41,296

 

Inventories

 

 

27,931

 

 

(149,930

)

Accounts payable

 

 

117,103

 

 

93,828

 

Deferred compensation

 

 

22,643

 

 

50,353

 

Accrued liabilities

 

 

(845

)

 

(8,002

)

Net cash used in operating activities

 

 

(350,265

)

 

(204,392

)

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,702

)

 

(20,735

)

Capitalized patent costs

 

 

(22,508

)

 

(13,289

)

Net cash used in investing activities

 

 

(24,210

)

 

(34,024

)

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Proceeds from issuance of notes payable to stockholders

 

 

400,075

 

 

400,075

 

Proceeds from stockholder loan

 

 

25,000

 

 

 

Payment of capital lease obligations

 

 

(939

)

 

(1,251

)

Net cash provided by financing activities

 

 

424,136

 

 

398,824

 

 

 

 

 

 

 

 

 

Net Increase in cash and cash equivalents

 

 

49,661

 

 

160,408

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

34,471

 

 

53,288

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

84,132

 

$

213,696

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

83,571

 

$

68,887

 

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 period ended March 31, 2016 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2016.


For further information, refer to Puradyn Filter Technologies Incorporated’s (the “Company”) financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2015.


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 March 31, 2016 and December 31, 2015, 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 March  31, 2016 and December 31, 2015, 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 17-20 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 three months ended March 31, 2016, there was no change to the reserve for warranty liability as the reserve balance was deemed sufficient to absorb any warranty costs that might be incurred from the sales activity for the period.


The following table shows the changes in the aggregate product warranty liability for the three-months ended March 31, 2016:


Balance as of December 31, 2015

     

$

20,000

 

Less: Payments made

 

 

 

Add: Provision for current period warranties

 

 

 

Balance as of March 31, 2016 (unaudited)

 

$

20,000

 


Advertising Costs


Advertising costs are expensed as incurred. During the three months ended March 31, 2016 and March 31, 2015, advertising costs incurred by the Company totaled approximately $460 and $1,155, 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 months ended March 31, 2016 and 2015, engineering and development costs incurred by the Company totaled $2,809 and $2,119, 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, 2015 has been recognized as a component of cost of goods sold and general and administrative expenses in the accompanying financial statements for the three months ended March 31, 2016.


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 March 31, 2016 and December 31, 2015, 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 5,268,696 and 4,482,969 for the three months ended March 31, 2016 and 2015, 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 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.


In July 2015, FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS).  The amendments in this ASU do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, this ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, this ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments in this ASU should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.


In August 2015, FASB issued ASU No.2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” defers the effective date ASU No. 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU No. 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in Update 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU No. 2014-09. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.


All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.


2.

Going Concern


The Company's financial statements have been prepared on the assumption that it will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has sustained losses since inception and used net cash in operations of $350,265 and $204,392 during the three-months ended March 31, 2016 and 2015, respectively. As a result, the Company has had to rely principally on the conversion of debt into stock as well as stockholder loans to fund its activities to date.




8



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 Company’s independent registered public accounting firm, Liggett & 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, 2015 expressing substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.


3.

Inventories


Inventories consisted of the following at March 31, 2016 and December 31, 2015, respectively:


 

 

March 31,

2016

 

December 31,

2015

 

 

 

(Unaudited)

 

 

 

Raw materials

 

$

1,048,485

 

 

1,145,452

 

Work In Progress

 

 

1,965

 

 

 

Finished goods

 

 

226,532

 

 

159,460

 

Valuation allowance

 

 

(487,475

)

 

(487,475

)

Inventory, net

 

$

789,507

 

 

817,437

 


4.

Prepaid Expenses and Other Current Assets


At March 31, 2016 and December 31, 2015, prepaid expenses and other current assets consisted of the following:


 

 

March 31,

2016

 

December 31,

2015

 

 

 

(Unaudited)

 

 

 

Prepaid expenses

 

$

26,458

 

 

23,594

 

Deposits

 

 

36,579

 

 

 

 

 

$

63,037

 

 

23,594

 


5.

Property and Equipment


At March  31, 2016 and December 31, 2015, property and equipment consisted of the following:


 

 

March 31,

2016

 

December 31,

2015

 

 

 

(Unaudited)

 

 

 

Machinery and equipment

 

$

1,045,217

 

 

1,045,217

 

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

 

 

151,771

 

 

150,069

 

 

 

 

1,472,110

 

 

1,470,408

 

Less accumulated depreciation and amortization

 

 

(1,414,730

)

 

(1,408,489

)

 

 

$

57,380

 

 

61,919

 


Depreciation and amortization expense of property and equipment for the three months ended March 31, 2016 and 2015 is $6,241and $7,778, respectively.




9



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)



6.

Patents


Included in other assets at March 31, 2016 and December 31, 2015 are capitalized patent costs as follows:


 

 

March 31,

2016

 

December 31,

2015

 

 

 

 

 

 

 

Patent costs

 

$

394,918

 

$

372,411

 

Less accumulated amortization

 

 

(37,369

)

 

(33,512

)

 

 

$

357,549

 

$

338,899

 


Amortization expense for the three months ended March 31, 2016 and 2015 amounted to $3,858 and $3,180, 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 March 31, 2016, 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 $538,429.


In January 2015 the Company entered into a capital lease for office equipment in the amount of $15,020.


8.

Accrued Liabilities


At March  31, 2016 and December 31, 2015, accrued liabilities consisted of the following:


 

 

March 31,

2016

 

December 31,

2015

 

 

 

(Unaudited)

 

 

 

Accrued vacation and benefits

 

$

63,577

 

$

64,844

 

Accrued expenses relating to vendors and others

 

 

135,222

 

 

133,646

 

Accrued warranty costs

 

 

20,000

 

 

20,000

 

Accrued interest payable relating to stockholder notes

 

 

71,673

 

 

69,419

 

Deferred rent

 

 

30,191

 

 

33,599

 

 

 

$

320,663

 

$

321,508

 


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 March 31, 2016 and December 31, 2015, the Company recorded deferred compensation of $1,632,228 and $1,609,585, 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 an 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 (2.81% per annum at March 31, 2016), 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, 2017. Refer to Note 13.


At March 31, 2016 the Company had drawn the full funding amount under the initial agreement of $6.1 million plus additional advances of $6,224,692. At December 31, 2015 the Company had drawn the full funding amount under the initial agreement of $6.1 million plus an additional $5,824,614.  


On January 6, 2016 the Company entered into an unsecured loan outstanding from another member of the Board of Directors, totaling $25,000. The note bears interest at a rate of 5% per annum and is due January 7, 2017. Accrued interest at March 31, 2016 was $295.


During the three months ended March 31, 2016 and 2015, the Company incurred interest expense of $85,530 and $66,556, 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 $295 for the three months ended March 31, 2016 related to the loan from one if its other Board members. These amounts, in addition to interest expense of $31 and $35 for the three months ended March 31, 2016 and 2015, respectively, related to capital lease obligations, financing and loans from a stockholder.


11.

Commitments and Contingencies


Agreements


On March 7, 2016, the Company entered into an Advisory Agreement for duration of six months with an outside consultant, who is also a stockholder.  We issued the consultant five year warrants to purchase 350,000 shares of the Company's common stock with an exercise price of $0.05 per share.  These warrants vest immediately.


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 2015, the Company renewed the lease at an annual expense of $8,500 on a condominium in Ocean Ridge, Florida until December 21, 2016.


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.




11



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)



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.


12.

Stock Options and Warrants


For the three months ended March 31, 2016 and March 31, 2015, respectively, the Company recorded non-cash stock-based compensation expense of $48,848 and $48,403, 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 March 31, 2016 and 2015 for the options is $111,701 and $55,374, respectively, and will be recognized through March 30, 2019.


A summary of the Company’s stock option plans as of March 31, 2016, and changes during the three month period then ended is presented below:  


 

 

Three Months Ended

March 31, 2016

 

  

 

Number of

Options

 

 

Weighted

Average

Exercise Price

 

Options outstanding at December 31, 2015

 

 

3,858,000

 

 

$

0.22

 

Options granted

 

 

 

 

 

 

Options exercised

 

 

 

 

 

 

Options cancelled

 

 

 

 

 

 

Options expired

 

 

 

 

 

 

Options at end of period

 

 

3,858,000

 

 

 

.22

 

Options exercisable at March 31, 2016

 

 

2,851,333

 

 

$

.23

 


Changes in the Company’s nonvested options for the three months ended March 31, 2016 are summarized as follows:


 

 

Three Months Ended

March 31, 2016

 

  

 

Number of

Options

 

 

Weighted

Average

Exercise Price

 

Nonvested options at December 31, 2015

 

 

1,006,667

 

 

$

0.17

 

Granted

 

 

 

 

 

 

Vested

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

Nonvested options at March 31, 2016

 

 

1,006,667

 

 

$

.017

 




12



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)




 

 

 

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

 

0.17 – 0.34

 

 

 

3,858,000

 

 

 

4.98

 

 

 

0.22

 

 

 

2,880,223

 

 

 

0.23

 

Totals

 

 

 

3,858,000

 

 

 

4.98

 

 

 

0.22

 

 

 

2,880,223

 

 

 

0.23

 


A summary of the Company’s warrant activity as of March 31, 2016 and changes during the three month period then ended is presented below:



On March 7, 2016, warrants to purchase 350,000 shares of its common stock, priced at $0.05 per share. The warrants vest immediately and expire March 7, 2021. The quoted market price of the common stock at the time of issuance of the options was $0.09 per share. The fair value of the options totaled $30,277 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 0.90%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 173%


 

 

Three months ended

March 31, 2016

 

  

 

Weighted Average Exercise

 

  

 

Warrants

 

 

Price

 

Warrants outstanding at December 31, 2015

 

 

1,099,915

 

 

$

0.32

 

Granted

 

 

350,000

 

 

 

0.05

 

Exercised

 

 

 

 

 

 

 

 

Expired

 

 

39,219

 

 

 

0.50

 

Warrants outstanding at March 31, 2016

 

 

1,410,696

 

 

$

0.25

 


 

 

 

Warrants Outstanding

 

Range of Exercise Price

 

 

Number Outstanding

 

 

Remaining Average Contractual Life (In Years)

 

 

Weighted Average

Exercise Price

 

$0.25 - $0.50

 

 

 

1,410,696

 

 

 

2.6

 

 

$

0.25

 

Totals

 

 

 

1,410,696

 

 

 

2.6

 

 

$

0.25

 


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 an 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 (2.81% per annum at March 31, 2016), 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, 2017.


At March 31, 2016 the Company had drawn the full funding amount under the initial agreement of $6.1 million plus additional advances of $6,224,692. At December 31, 2015 the Company had drawn the full funding amount under the initial agreement of $6.1 million plus an additional $5,824,614.  


On January 6, 2016 the Company entered into an unsecured loan outstanding from another member of the Board of Directors, totaling $25,000. The note bears interest at a rate of 5% per annum and is due January 7, 2017. Accrued interest at March 31, 2016 was $295.




13



PURADYN FILTER TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)



During the three months ended March 31, 2016 and 2015, the Company incurred interest expense of $85,530 and $66,556, 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 $295 for the three months ended March 31, 2016 related to the loan from one if its other Board members. These amounts, in addition to interest expense of $31 and $35 for the three months ended March 31, 2016 and 2015, respectively, related to capital lease obligations, financing and loans from a stockholder.


On October 20, 2009, the Company entered into a consulting agreement with Boxwood Associates, Inc., whereby the Company pays $2,000 monthly for management and strategic development services performed. The contract remains in effect until terminated by either party providing 30 days written notice. During each of three months ended March 31, 2016 and 2015 we paid Boxwood Associates, Inc. $6,000 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 three customers at March 31, 2016 whose balances each represented approximately 43%, 12% and 10%,  for a total of 65% 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, 2015 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 April 1, 2016 through May 11, 2016, the Company received additional loans in the amount of $200,025 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.

















14





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. In the first quarter of 2016, there were a total of 45 distributors and dealers that sold the Puradyn system in the U.S. and internationally.


DistributionNow (DNOW) recently joined the Puradyn distributor network and now provides the potential to more consistently support our product on a worldwide basis.  The addition of DNOW as our new distributor for the industries they serve increases our worldwide coverage and brings with them immediate name recognition of quality products and a dedication to customer service.  Although we have sold only to 11 DNOW locations in the initial rollout of the product, the acceptance from a number of their customers has been extremely encouraging.  DNOW brings to the Puradyn distribution network a potential of 300 locations that may purchase our product. These opportunities have led to a number of new orders and evaluations in 2016.


In October 2014, we released two additional technologies to our line of bypass filtration products:


·

Puradyn Millennium Technology System (MTS) which utilizes a closed lubricating system to remove, as do all the Puradyn products, solid contaminants down to less than one micron while safely extending the lubrication or hydraulic oil's useful life. The MTS technology eliminates the legacy electrical power connection and electric evaporation plate, required for liquid contamination removal in the TF and PFT models, thus bringing the product into compliance with all new emission standards required for Tier 4 engines. The MTS also offers the added benefits of reduced mechanical complexity and a smaller profile for a simpler and faster 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, 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 through condensation or the combustion process. 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.  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. We continue to market our product and its benefits through direct contact efforts with our distributors, direct customers, and original equipment manufacturers.


Our sales and marketing efforts target industries and potential customers open to innovative methods to reduce oil maintenance costs. We believe these businesses are searching for new and progressive ways to better maintain their equipment, including bypass oil filtration. While this is a long-term and ongoing process, we believe we have achieved a degree of product acceptance based on the expansion of existing relationships we have with Nabors Industries, Inc., Scandrill, Inc and other end-users and distributors, including:

·

A recent announcement that a global oil and gas industry contractor headquartered in the European Union purchased approximately $300,000 of Puradyn product shipped to the Middle East in April 2016.  This is in addition to an order placed by this same customer in April 2015 as part of ongoing implementation of the Puradyn System.




15





·

Development of hydraulic filtration systems which can handle hydraulic power units (HPU) with volumes ranging from 88 gal. (333.1 L.) to 1,200 gal. (4,542.5 L.) is receiving interest from customers who have been using our engine oil bypass filtration systems for several years.  The hydraulic filtration project has been underway for over one year. With lab and field testing behind us and the slow recovery of the oil and gas industry, we are finally starting to see our work come to fruition. To date, a limited number of systems have been shipped to these customers.


·

Evaluations begun in 2015 in Africa, Asia, Europe, and South America are still currently underway with commercial marine, construction, transportation, and mining applications.


Our revenues historically have not been sufficient to fund our operating expenses.  During the first quarter of 2016 we maintained our operating expenses at approximate 2015 levels; however, as a result of certain fixed operating expenses, the decline in sales and lower gross margins during the quarter led to an increase in our operating loss in 2016. We continue to implement measures to preserve our ability to operate, including organizational changes and reductions in personnel.  In addition, as described below, certain of our employees continue to defer a portion of their cash compensation.


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 March 31, 2016 we borrowed an additional $400,075 from him, and at March 31, 2016 we owed our Chairman $12,324,692 which represented approximately 85% of our total liabilities. Subsequent to March 31, 2016, he has advanced an additional $200,025 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 $1,632,228 in deferred cash compensation at March 31, 2016, which represents 75% of our current liabilities on that date.  Since 2005, Messrs. Sandler and Kroger, two of our executive officers, and two other employees, have elected to defer 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 that 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 2016. There can be no assurance that we will be able to raise additional capital or that sales will increase to the level required to generate profitable operations to provide positive cash flow from operations. In the event we are unable to secure needed capital, it is possible that stockholders could lose their entire investment in our company.


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 & Webb, P.A. to include a statement in its audit report relating to our audited financial statements for the years ended December 31, 2015 and 2014 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.




16





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 March 31, 2016 Compared to the Three-months Ended March 31, 2015


Net Sales


Net sales decreased 38% in the first quarter of 2016 as compared to the first quarter of 2015 due to a number of customers that have purchased and we believe will purchase again, the larger product models, and who have been negatively impacted by the downturn in oil prices.  In addition, we had experienced congestion at a major port of entry, causing a delay in shipment of product to a customer until April 2016. 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.  However, as our net sales have generally been declining quarter over quarter since 2015, there are no assurances that we will ever return our net sales to earlier levels even if oil prices begin rising to 2014 and earlier levels.


Cost of Products Sold


Gross profit, as a percentage of sales, decreased by 10%, from 38% in the first quarter of 2015 to 28% in the first quarter of 2016 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 3% in the first quarter of 2016 from the comparable period in 2015 primarily as a result of a decrease in selling and administrative costs.


Salaries and wages increased 5% from the first quarter of 2015. compared to the period ended March 31, 2016. The increase was attributable to a new hire in the first quarter of 2016.




17






Selling and administrative expenses remained constant between March 31, 2016 and 2015. The following table sets forth the components of selling and administrative expenses:


 

 

Three Months Ended March 31,

(unaudited)

 

  

 

2016

 

 

2015

 

 

Change

 

Employee Benefits and Payroll Processing

 

$

37,359

 

 

$

44,836

 

 

$

(7,477

)

Travel and Marketing

 

 

35,665

 

 

 

24,708

 

 

 

10,957

 

Depreciation and Amortization

 

 

4,843

 

 

 

6,035

 

 

 

(1,192

)

Engineering

 

 

(877

)

 

 

(7,134

)

 

 

6,257

 

Professional Fees

 

 

75,915

 

 

 

56,536

 

 

 

19,379

 

Investor Relations

 

 

 

 

 

43,258

 

 

 

(43,258

)

Occupancy Expense

 

 

25,827

 

 

 

24,744

 

 

 

1,083

 

Patent Expense

 

 

9,113

 

 

 

25,765

 

 

 

(16,652

)

Stock Compensation

 

 

1,294

 

 

 

1,503

 

 

 

(209

)

Other Expenses

 

 

24,138

 

 

 

18,837

 

 

 

5,301

 

 

     

 

 

 

     

 

 

 

     

 

 

 

Total

 

213,277

 

 

$

239,088

 

 

$

(25,811

)


The decrease in employee benefits resulted from the impact of vested employee stock option expenses. Travel and marketing expenses increased due to extended travel as a result of helping to roll out Puradyn product to individual DNOW locations and provide product introduction to several of its customers. Professional fees increased as a result of stock compensation issued to a consultant which was partially offset by reduced IT and accounting consulting services. The decrease in investor relations was due to our suspension of a service agreement with an outside public relations firm in 2015. The decrease in patent expense was due to expiration of several patents. Other Expenses represents various expenses including communication costs, office supplies and other components of administrative expenses. We anticipate that our selling and administration expenses will remain at the same level in 2016 as for the full year 2015.


Interest Expense


Interest expense increased 28% for the period ending March 31, 2016 as compared to the period ending March 31, 2015 primarily due to higher borrowings and an increase in the weighted average interest rate. The Company pays interest monthly on the Chairman note at the LIBOR Daily Floating Rate plus 1.4%, which was a weighted average of 2.81% as of March 31, 2016 as compared to 2.74% as of March 31, 2015.


Liquidity and Capital Resources


As of March 31, 2016, the Company had cash of $84,132, as compared to $34,471 at December 31, 2015. At March 31, 2016, we had negative working capital of $997,948 and our current ratio (current assets to current liabilities) was 0.554 to 1.  At December 31, 2015, we had negative working capital of $1,016,765 and our current ratio was 0.49 to 1. The decrease in working capital deficit and increase in current ratio is primarily attributable to the increase in cash, offset by decreased inventory and increases in accounts payable and deferred compensation.


We have incurred net losses each year since inception and at March 31, 2016 we had an accumulated deficit of $60,305,024. Our net sales are not sufficient to fund our operating expenses. Historically, we have relied on the sale of our stock from time to time and loans from third parties and from related parties to fund our operations. During the three months ended March 31, 2016 we raised an additional $400,075 from stockholder loans and from another member of the Board of Directors, totaling $25,000. During the three months ended March 31, 2015, we raised $400,075 from stockholder loans.  As of March 31, 2016, we owe our Chairman $12,324,692 for funds advanced to us over time to fund working capital needs, and we borrowed an additional $200,025 from him to date in the second quarter of 2016.  Interest expense on our loans was $85,530 for the three months ended March 31, 2016.




18





Cash Flows  


Operating activities


For the three-month period ended March 31, 2016 net cash used in operating activities was $350,265, which primarily resulted from the net loss, after taxes, of $415,057, as found in the Condensed Unaudited 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 $121,545 and decreased inventory of $27,931 as a result of reduced orders. These amounts were partially offset by a decrease in prepaid expenses of $39,443 , increased accounts payable of $117,103, and increased deferred compensation of $22,643.  For the three-month period ended March 31, 2015 net cash used in operating activities was $204,392, which primarily resulted from the net loss, after taxes, of $265,983, as found in the Condensed Unaudited 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 $26,367 and increased inventory of $149,930 as a result of purchases related to our new MTS product line. These amounts were partially offset by a decrease in prepaid expenses of $41,296 as well as reduced accounts receivable of $26,367, increased accounts payable of $93,828, and increased deferred compensation of $50,353.


Investing activities


For the three months ending March 31, 2016, $24,210 was used in investing activities for the purchase of software and capitalized patent costs. For the three months ending March 31, 2015, $34,024 was used in investing activities for the purchase of software and capitalized patent costs.


Financing activities


Net cash provided by financing activities was 424,136 for the three months ended March 31, 2016, which was composed of $400,075 in loans from our stockholders as described above,  an unsecured loan from a member of  the Board of Directors, totaling $25,000 which was partially offset by $939 in payments of capital lease obligations.Net cash provided by financing activities was $398,824 for the three months ended March 31, 2015, which was composed of $400,075 in loans from our stockholders as described above, offset by $1,251 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 March 31, 2016 (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.




20





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, 2015. 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.


None, except as previously reported.


ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.


None.


ITEM 4.

MINE SAFETY DISCLOSURE.


Not Applicable.


ITEM 5.

OTHER INFORMATION.


None.


ITEM 6.

EXHIBITS.


4.6

 

Common Stock Purchase Warrant Dated March 7, 2016 issued to Rainerio Reyes *

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:  May 13, 2016

By:

/s/ Joseph V. Vittoria

 

 

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

  

 

 

Date:  May 13, 2016

By:

/s/ Alan J. Sandler

 

 

Alan J. Sandler, Secretary to the Board,
Vice President and principal financial officer and principal accounting officer
























22