Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $1,038,421on June 29, 2019.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 69,016,468 shares of common stock are outstanding as of April 7, 2020.
Certain statements in this annual 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:
the terms of secured loans for which we have granted security interests in our assets;
the significant amount of deferred compensation owed to two of our executive officers and two former employees and our ability to pay these amounts;
anti-takeover provisions of Delaware law and our Board's ability to issue preferred stock without stockholder consent;
potential dilution to our stockholders from the exercise of outstanding options and warrants;
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 this annual report in its entirety, including the risks described in Part I. Item 1A. Risk Factors. 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 annual report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.
When used in this annual report, the terms "Puradyn", the “Company,” "we," "our," and "us" refers to Puradyn Filter Technologies Incorporated, a Delaware corporation. “2018” refers to the year ended December 31, 2018; “2019” refers to the year ended December 31, 2019; and “2020” refers to the year ending December 31, 2020.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers
The following individuals serve as our executive officers and/or members of our Board of Directors:
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Name
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Age
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Positions
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Joseph V. Vittoria
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84
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Executive Chairman of the Board of Directors
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Edward S. Vittoria
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48
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Chief Executive Officer and Director
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Kevin G. Kroger
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68
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President, Chief Operating Officer and Director
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John S. Caldwell
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75
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Director
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Joseph V. Vittoria was appointed to the Puradyn Board of Directors as Chairman on February 8, 2000 and to the office of Chief Executive Officer on October 24, 2006. On May 18, 2018, he resigned from his position as Chief Executive Officer and has been appointed Executive Chairman of the Board of Directors. Mr. Vittoria was Chairman and Chief Executive Officer of Travel Services International, Inc. from 1997 until it was sold in 2000. From 1987 to 1997, Mr. Vittoria served as Chairman and Chief Executive Officer of Avis, Inc., and was its President and Chief Operating Officer from 1982 to 1987. Mr. Vittoria also serves on the Board of Yachtico.com. He is also an Emeritus Member of the Columbia Business School’s Board of Overseers.
Mr. Vittoria’s extensive management, banking, organizational growth and experience bring oversight and guidance to the Company’s entire organization. The Board believes that Mr. Vittoria has the experience, qualifications, attributes and skills necessary to serve as Executive Chairman.
Edward S. Vittoria was appointed on May 18, 2018 as Chief Executive Officer of Puradyn Filter Technologies Incorporated and as a member of its Board of Directors. Mr. Vittoria brings 25 years of corporate marketing, business development and strategic leadership to Puradyn, beginning with over a dozen years at American Express. In 2006, he joined Starwood Hotels & Resorts to lead their Luxury Collection brand, the third largest luxury hotel brand in the world after which he joined Steve Case’s payments start-up, Revolution Money, where he led customer acquisition and branding. After Revolution Money was purchased by American Express, he led New Business Development for Time Inc.’s Synapse division until 2012 when he joined Simon Property Group, where he developed and launched a first of its kind loyalty program for mall shoppers. Mr. Vittoria holds a B.A. in Economics from Yale University and is the son of Mr. Joseph Vittoria.
The Board believes that Mr. Vittoria has the experience, qualifications, attributes and skills necessary to serve as Chief Executive Officer and a Director.
Kevin G. Kroger joined Puradyn July 3, 2000 as President and Chief Operating Officer and was appointed to the Board of Directors in November 2000. Mr. Kroger was with Detroit Diesel Corporation from 1989 to the time he joined our Company, serving in various executive and Board positions prior to his appointment in 1998 to the position of Vice President and General Manager of Series 55/40/30/Cento Industrial product line. From 1987 to 1989 he was Vice President of R.E.S. Leasing and of VE Corporation. From 1971 to 1987, he held several management positions with Caterpillar Corporation.
With significant experience in the heavy-duty engine industry, Mr. Kroger provides our company with operations oversight and guidance in engineering, which facilitates our research and development area. The Board believes that Mr. Kroger has the experience, qualifications, attributes and skills necessary to serve as a Director.
Lieutenant General (Retired) John S. Caldwell, Jr. was appointed to the Puradyn Board of Directors on August 25, 2005 and served as Chairman of the Compensation Committee until it was disbanded in March 2016. Gen. Caldwell served as the Army’s top ranking officer for Acquisition, Logistics and Technology when he retired in January 2004. He also served as Director of the 50,000-person Army Acquisition Workforce, responsible for personnel development and training policy and key assignment recommendations. Prior to these positions, Gen. Caldwell served as the Commanding General of the US Army Tank-Automotive and Armaments Command (TACOM), in which capacity he developed, fielded and supported lethality, survivability and mobility capabilities for approximately 70% of the Army’s ground force. He served 4 years as the Project Manager, Abrams Tank System, leading R&D, production, quality assurance, procurement and logistical support of the Army’s tank program, a $600 million R&D, $15 billion procurement program with major international components. General Caldwell currently consults in various capacities, including as a Member of The Spectrum Group. General Caldwell holds the degrees of Bachelor of Science from the US Military Academy, West Point, in New York; Master in Mechanical Engineering from Georgia Institute of Technology in Atlanta, GA, and the Industrial College of the Armed Forces. General Caldwell served as a member of the board of Taser International from 2007 to May 2016.
17
Gen. Caldwell’s logistic and military background brings to our organization oversight and guidance in the planning and execution of our financial and operational growth plan. The Board believes that Gen. Caldwell has the experience, qualifications, attributes and skills necessary to serve as a Director.
There are no family relationships between any of the executive officers and directors, except as set forth above. Each director is elected at our annual meeting of stockholders and holds office until the next annual meeting of stockholders, or until his successor is elected and qualified.
If any director resigns, dies or is otherwise unable to serve out his or her term, or if the Board increases the number of directors, the Board may fill any vacancy by a vote of a majority of the directors then in office, although less than a quorum exists. A director elected to fill a vacancy shall serve for the unexpired term of his or her predecessor. Vacancies occurring by reason of the removal of directors without cause may only be filled by vote of the stockholders.
CFO Consultant
During2019 and 2018 we engaged a company owned by Mr. Martin Scott, to assist us in the preparation of our financial statements. Under the scope of this engagement, Mr. Scott, who is not an executive officer or employee of our company, also serves as our principal financial and accounting officer. Mr. Scott is the President of Martin Scott CFO Consulting Services Inc., which provides chief financial officer services to various companies. Mr. Scott holds a Bachelor of Science from the Florida State University, is a member of The American Institute of Certified Public Accountants and a Certified Public Accountant licensed in the State of Florida.
Compliance With Section 16(a) of the Exchange Act
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(d) of the Securities Exchange Act of 1934 during the year ended December 31, 2019 and Forms 5 and amendments thereto furnished to us with respect to the year ended December 31, 2019, as well as any written representation from a reporting person that no Form 5 is required, we are not aware of any officer, director or 10% or greater stockholder that failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Securities Exchange Act of 1934 during the year ended December 31, 2019.
Code of Ethics
We have adopted a Business Ethics and Conflicts of Interest Statement outlining business ethics and conflicts of interest for all officers, directors and employees of the Company, including procedures for prompt internal reporting of violations of the code to the appropriate persons.
You will find a copy of our Business Ethics and Conflicts of Interest Statement posted on our website at https://www.puradyn.com under Investor Relations, or you may write to us at Puradyn Investor Relations, 2017 High Ridge Road, Boynton Beach, FL 33426. Our Code of Ethics applies to all directors, officers and employees. We will provide a copy to you upon request at no charge.
Board Leadership Structure and the Role of our Board in Risk Oversight
The Board of Directors oversees our business affairs and monitors the performance of management. One of our three directors is independent and we do not have a lead independent director. In accordance with our corporate governance principles, our independent director does not involve himself in day-to-day operations. The independent director keeps informed through discussions with our Chief Executive Officer and our other executive officers, and by reading the reports and other materials that we send them and by participating in meeting of the Board of Directors. Our independent director may meet at any time in his sole discretion without any other directors or representatives of management present. Our independent director has access to the members of our management team or other employees as well as full access to our books and records. We have no policy limiting, and exert no control over, meetings of our independent directors. Our Board of Directors believes our current structure provides independence and oversight and facilitates the communication between senior management and the Board of Directors regarding risk oversight, which the Board believes strengthens its risk oversight activities.
Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including liquidity risk, operational risk, strategic risk and reputation risk. Management is responsible for the day-to-day management of the risks we face, while the Board, as a whole, has responsibility for the oversight of risk management. In his role and as independent director, General Caldwell meets regularly with management to discuss strategy and risks we face and to address any questions or concerns they may have on risk management and any other matters.
18
Nominees the Board of Directors
We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. We do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees.
Committees of the Board of Directors
We do not have any committees of comprised of members of our Board of Directors, including an Audit Committee, a Compensation Committee or a Nominating Committee, any committee performing a similar function. The functions of those committees are being undertaken by Board of Directors as a whole. None of our directors is an “audit committee financial expert” within the meaning of Item 401(e) of Regulation S-K. In general, an “audit committee financial expert” is an individual member of the audit committee or board of directors who:
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·
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understands generally accepted accounting principles and financial statements,
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·
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is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves,
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·
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has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements,
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·
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understands internal controls over financial reporting, and
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·
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understands audit committee functions.
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Our securities are not quoted on an exchange that has requirements that a majority of our Board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our board of directors include “independent” directors, nor are we required to establish or maintain an Audit Committee or other committee of our Board of Directors.
ITEM 11.
EXECUTIVE COMPENSATION.
The following table summarizes all compensation recorded by us in the last completed fiscal year for:
·
our principal executive officer or other individual serving in a similar capacity, and
·
two most highly compensated executive officer other than our principal executive officer was were serving as an executive officer at December 31, 2019.
For definitional purposes in this annual report these individuals are sometimes referred to as the "named executive officers." The value attributable to any option awards is computed in accordance with FASB ASC 718, Compensation-Stock Compensation. Two executives deferred 5% and 23% in 2019 and 0% and 2% in 2018 of base wages, respectively. The amounts included below reflect wages actually earned during the respective periods.
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SUMMARY COMPENSATION TABLE –
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Name and principal position
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Year
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Salary
($)
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Bonus
($)
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Stock
Awards
($)
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Option
Awards
($)
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Non-Equity
Incentive Plan
Compensation
($)
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Nonqualified
Deferred
Compensation
Earnings
($)
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All
Other
Compensation
($)
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Total
($)
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Joseph V. Vittoria 1
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2019
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—
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—
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—
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—
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—
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—
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—
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—
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2018
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—
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—
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—
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—
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—
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—
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—
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—
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Edward S. Vittoria2
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2019
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180,000
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180,000
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2018
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108,574
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50,000
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101,437
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260,011
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Kevin Kroger 3
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2019
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186,000
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11.385
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197,385
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2018
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186,000
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—
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—
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10,854
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—
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—
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15,460
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212,314
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———————
1.
Mr. Joseph Vittoria is our Executive Chairman. Mr. Vittoria’s compensation excludes interest paid to him under the working capital loan he provides to our Company. See Item 13. Certain Relationships and Related Transactions, and Director Independence appearing later in this report.
19
2.
Mr. Edward Vittoria is our Chief Executive Officer. He voluntarily reduced his base salary beginning in June 2019, from $200,000 to $160,000. Annual salary and bonus deferral of $9,136 and $50,000 is included in his salary and bonus for 2019 and 2018, respectively, in the foregoing table.
3.
Mr. Kroger serves as our President and Chief Operating Officer. All Other Compensation in the foregoing table represents the aggregate dollar amount of a car allowance received by Mr. Kroger during each fiscal year and disability and life insurance premiums we pay on his behalf. Annual salary and other compensation deferral of $46,186 and $2,994 is included in his salary and other compensation for 2019 and 2018, respectively, in the foregoing table. As there is no written agreement with Mr. Kroger which memorializes the terms of salary deferral, only an election to do so, it is possible that he could demand payment in full at any time, elect to no longer defer his salary, or reduce the amount he currently defers.
How our Executive Officers Compensation is Determined
On May 18, 2018 we entered into a letter agreement with Mr. Edward S. Vittoria pursuant to which he agreed to be employed by us as our Chief Executive Officer for an initial term ending May 31, 2019, which such term may be extended by mutual agreement upon terms and conditions to be mutually agreed upon prior to the expiration of such initial term. Under the terms of the letter agreement we agreed to pay him: (i) an annual base salary of $200,000, payable in accordance with our normal payroll practices; (ii) an annual cash bonus to be awarded by our Board of Directors in January in a minimum amount of $50,000; and (iii) granted him options to purchase 6,500,000 shares of our common stock, vesting one-third in arrears, at an exercise price equal to fair market value on the date of grant pursuant to the terms and conditions of our 2018 Equity Compensation Plan. He is also entitled to: (i) participate in all of our benefit programs currently existing or hereafter made available to executive and/or salaried; (ii) an amount of annual paid vacation consistent with his position and length of service to us; and (iii) reimbursement for all reasonable, out of-pocket expenses incurred by him. In June, 2019, Mr. Vittoria voluntarily reduced his base salary by 20% from $200,000 to $160,000. As a result, his net base salary was approximately $180,000 in 2019. He also deferred $9,136 of his base salary in 2019. During 2018, Mr. Vittoria’s annual cash bonus of $50,000 was deferred in entirety.
On July 3, 2000, the Company entered into an employment agreement, with an initial term of three years, with Mr. Kroger, who serves as our President and Chief Operating Officer. Thereafter, the contract was amended on December 23, 2002 and July 3, 2003. The term of the agreement automatically renews on a year to year basis on the same terms and conditions contained herein in effect as of the time of renewal. The contract initially provided for an annual salary of $166,000, minimum bonuses of $50,000, $80,000 and $80,000, respectively, for the years 2000 through 2002; 300,000 qualified stock options; a one-year salary severance clause, and certain insurance and auto allowance compensations. Mr. Kroger is also entitled to pay health insurance, a life insurance and disability policy, a $1,000 per month car allowance, five weeks paid vacation and other executive benefits which may be made available from time to time. Upon entering into the agreement we granted Mr. Kroger 10-year options to purchase 300,000 shares of our common stock at the then fair market value of our common stock which vested in equal installments on the first, second, third and fourth anniversary date of the agreement. The agreement also contains customary indemnification, non-compete, confidentiality and invention assignment clauses. The term of the agreement continues on a year-to-year basis on the same terms and conditions as were in effect at the time of renewal. The agreement may be terminated by us upon Mr. Kroger’s death or disability, by us for good cause as defined in the agreement, or by either party without cause. In the event the agreement is terminated on Mr. Kroger’s death, by us for cause or by him without cause, we do not owe any severance benefits. If the agreement is terminated as a result of his disability, we are required to pay him a lump sum equal to the greater of the base salary then in effect for the remaining term of the agreement or for one year. If the agreement is terminated by us without cause or by Mr. Kroger in the event of a change of control of our Company, we are required to pay him a lump sum equal to the greater of the base salary then in effect for the remaining term of the agreement or for one year, together with any declared but unpaid bonus. The addendum dated July 3, 2003 discontinued the bonus provision of the contract but all other terms and conditions of the contract remain in effect.
On November 16, 2017 we entered into an addendum with Mr. Kroger pursuant to which the amount of his life insurance policy was reduced, but all other terms and conditions of the contract remain in effect. During 2019 and 2018, Mr. Kroger’s base annual salary was $186,000 with approximately $46,186 and $2,994, or 23% and 2%, respectively, deferred annually. Mr. Kroger also deferred approximately $10,154 in other compensation in 2019. As there is no written agreement with Mr. Kroger which memorializes the terms of salary deferral, only an election to do so, it is possible that he could demand payment in full at any time, elect to no longer defer his salary, or reduce the amount he currently defers. In addition, on April 12, 2018, the Company granted Mr. Kroger options to purchase 600,000 shares of the Company’s common stock, at an exercise price of $0.0189. The options vest over a three-year period and expire April 12, 2028.
20
Outstanding Equity Awards at Fiscal Year End
The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of December 31, 2019:
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OPTION AWARDS
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STOCK AWARDS
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Name
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Number of securities underlying unexercised options
(#)
exercisable
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Number of securities underlying unexercised options
(#)
unexercisable
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Equity incentive plan awards: Number of securities underlying unexercised unearned options
(#)
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Option exercise price
($)
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Option expiration date
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Number of shares or units of stock that have not vested
(#)
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Market value of shares or units of stock that have not vested
($)
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Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested
(#)
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Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested
(#)
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Joseph V. Vittoria
|
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—
|
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—
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|
|
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—
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—
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—
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—
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Edward S. Vittoria
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2,166,667
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4,333,333
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0.017
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05/18/2028
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Kevin Kroger
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200,000
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400,000
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0.0189
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04/12/2028
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100,000
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—
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—
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0.21
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09/08/2020
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—
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—
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—
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—
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150,000
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—
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—
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0.28
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02/04/2021
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—
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—
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—
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—
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150,000
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—
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—
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0.14
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03/30/2022
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—
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—
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—
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—
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100,000
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—
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—
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0.16
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05/26/2025
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—
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—
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—
|
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—
|
Incentive and Non-qualified Stock Option and Stock Award Plans
We currently have three stock option plans, our 2018 Option Plan, 2010 Option Plan, and our Directors' Plan. Our earlier plans which were adopted in 1996 and 1999 have expired by their terms. Please see Note 15 to the notes to our financial statements appearing elsewhere in this report for a description of the material terms of these plans.
Director Compensation
Our management directors do not receive compensation for their Board services. Each independent member of the Board of Directors is automatically granted 5,000 options upon election or appointment as a new member of the Board of Directors. Each independent director receives an additional 5,000 options at the close of each annual meeting of stockholders or on the anniversary of their appointment to the Board. Additionally, and at such time as the Board forms committees, each independent director automatically received 2,500 options for each committee of the Board on which the director serves. Options are granted at a price equal to the fair market value of the stock on the date of grant, are exercisable commencing two years following grant, and will expire five years from the date of grant. In the event a person ceases to serve on the Board of Directors, the outstanding options expire one year from the date of cessation of service.
The following table provides information concerning the compensation of our independent Board members for their services as members of our Board of Directors for 2019. The value attributable to any option awards is computed in accordance with FASB ASC Topic 718. The assumptions made in the valuations of the option awards are included in Note 14 of the Notes to our Financial Statements for the year ended December 31, 2019 appearing elsewhere in this report.
Director Compensation
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Name
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Fees
earned or
paid in
cash
($)
|
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Stock
awards
($)
|
|
Option
awards
($)
|
|
Non-equity
Incentive
Plan
Compensation
($)
|
|
Nonqualified
Deferred
Compensation
earnings
($)
|
|
All other
compensation
($)
|
|
Total
($)
|
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John S. Caldwell (1)
|
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—
|
|
—
|
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164
|
|
—
|
|
—
|
|
—
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|
164
|
———————
(1)
On August 26, 2019, General Caldwell was granted options to purchase 5,000 shares of common stock at an exercise price of $0.033 per share, vesting on August 25, 2021 and expiring on August 25, 2024.
21
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
At March 31, 2020 we had 69,016,468 shares of our common stock issued and outstanding. The following table sets forth information regarding the beneficial ownership of our common stock as of March 31, 2020 by:
·
each person known by us to be the beneficial owner of more than 5% of our common stock;
·
each of our directors;
·
each of our named executive officers; and
·
our named executive officers, directors and director nominees as a group.
Unless otherwise indicated, the business address of each person listed is in care of 2017 High Ridge Road, Boynton Beach, Florida 33426. The percentages in the table have been calculated on the basis of treating as outstanding for a particular person, all shares of our common stock outstanding on that date and all shares of our common stock issuable to that holder in the event of exercise of outstanding options, warrants, rights or conversion privileges owned by that person at that date which are exercisable within 60 days of that date. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of our common stock owned by them, except to the extent that power may be shared with a spouse.
|
|
|
|
|
|
NAME OF BENEFICIAL OWNER
|
|
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP
|
|
% OF CLASS
|
|
Joseph V. Vittoria
|
|
21,865,998
|
|
31.7%
|
|
Edward S. Vittoria(1)
|
|
8,371,934
|
|
12.1%
|
|
Kevin G. Kroger (2)
|
|
4,742,709
|
|
6.9%
|
|
Lieutenant General John S. Caldwell, Jr. US Army (retired)(3)
|
|
34,167
|
|
*
|
|
All officers and directors as a group (four persons) (1)(2)(3)
|
|
28,164,858
|
|
50.7%
|
|
Dominick Telesco
|
|
6,237,570
|
|
9.0%
|
———————
*
represents less than 1%
(1)
The number of shares beneficially owned by Mr. Edward Vittoria includes:
·
1,546,955 shares of common stock held for the benefit of minor children;
·
options to purchase 2,166,667 shares of common stock at an exercise price of $0.017 per share through May 18, 2028; and
·
options to purchase 3,500,000 shares of common stock at an exercise price of $0.012 per share through March 8, 2025.
The number of shares beneficially owned by Mr. Ed Vittoria excludes:
·
unvested options to purchase 4,333,333 shares of common stock at an exercise price of $0.017 per share through May 18, 2028.
(2)
The number of shares beneficially owned by Mr. Kroger includes:
·
options to purchase 100,000 shares of our common stock at an exercise price of $0.21 per share through September 8, 2020;
·
options to purchase 150,000 shares of our common stock at an exercise price of $0.28 per share through February 4, 2021;
·
options to purchase 150,000 shares of our common stock at an exercise price of $0.14 per share through March 30, 2022;
·
options to purchase 100,000 shares of our common stock at an exercise price of $0.16 per share through May 26, 2025;
·
options to purchase 200,000 shares of common stock at $0.0189 per share through April 12, 2028; and
·
options to purchase 3,350,000 shares of common stock at an exercise price of $0.011 per share through March 8, 2030.
The number of shares beneficially owned by Mr. Kroger excludes:
·
unvested options to purchase 400,000 shares of common stock at $0.0189 per share through April 12, 2028.
22
(3)
The number of shares beneficially owned by General Caldwell includes:
·
options to purchase 7,500 shares of common stock at $0.13 per share through August 25, 2020;
·
options to purchase 5,000 shares of common stock at $0.04 per share through August 25, 2021;
·
options to purchase 5,000 shares of common stock at $0.034 per share through August 25, 2022; and
·
options to purchase 16,667 shares of common stock at $0.0189 per share through April 12, 2028.
The number of shares beneficially owned by General Caldwell excludes:
·
unvested options to purchase 5,000 shares of common stock at $0.045 per share through August 25, 2023;
·
unvested options to purchase 33,333 shares of common stock at $0.0189 per share through April 12, 2028; and
·
unvested options to purchase 5,000 shares of common stock at $0.033 per share through August 25, 2024
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance under any equity compensation plans approved by our stockholders as well as any equity compensation plans not approved by our stockholders as of December 31, 2019.
|
|
|
|
|
|
|
|
|
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
|
|
Weighted average
exercise price of
outstanding options,
warrants and rights
(b)
|
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column
(a) (c)
|
|
Plan category
|
|
|
|
|
|
|
|
Plans approved by stockholders:
|
|
|
|
|
|
|
|
2018 Stock Option Plan
|
|
9,225,000
|
|
0.0176
|
|
10,875,000
|
|
2010 Stock Option Plan
|
|
1,900,000
|
|
0.193
|
|
1,948,336
|
|
2000 Non-Employee Directors Plan
|
|
27,500
|
|
0.063
|
|
372,500
|
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTION, AND DIRECTOR INDEPENDENCE.
Please see Note 17 to the Company's audited financial statements appearing elsewhere in this report for a description of transactions with related parties during 2019 and 2018.
Director Independence
John S. Caldwell is considered "independent” within the meaning of Rule 5605 of the NASDAQ Marketplace Rules.
23
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
1. 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 through direct ownership of various other patents.
Revenue Recognition
The Company recognizes revenue from product sales to customers, distributors and resellers when products that do not require further services or installation by the Company are shipped, when there are no uncertainties surrounding customer acceptance and when collectability is reasonably assured. Cash received by the Company prior to shipment is recorded as deferred revenue. Sales are made to customers under terms allowing certain limited rights of return and other limited product and performance warranties for which provision has been made in the accompanying financial statements.
Amounts billed to customers in sales transactions related to shipping and handling, represent revenues earned for the goods provided and are included in net sales. Costs of shipping and handling are included in cost of products sold.
The Company accounts for revenue in accordance with Topic 606 which was adopted at the beginning of fiscal year 2018 using the modified retrospective method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company did not recognize any cumulative-effect adjustment to retained earnings upon adoption as the effect was immaterial. The adoption of these standards did not have a material impact on the Company's statements of operations during the year ended December 31, 2019 and 2018.
Use of Estimates
The preparation of 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 financial statements. Actual results could differ from those estimates. Included in those estimates are assumptions about allowances for inventory obsolescence, useful life of fixed assets, warranty reserves and bad-debt reserves, valuation allowance on the deferred tax asset, life of intangible assets, impairment of intangible assets and the assumptions used in Black-Scholes valuation models related to stock options and warrants.
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 December 31, 2019 and December 31, 2018, 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 December 31, 2019 and December 31, 2018, respectively, because of their short-term natures.
F-6
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
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.
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
Accounts receivable
|
|
$
|
19,374
|
|
$
|
310,994
|
|
|
Allowance for doubtful accounts
|
|
|
(2,000
|
)
|
|
(2,000
|
)
|
|
Allowance for returns
|
|
|
(5,000
|
)
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
12,374
|
|
$
|
293,994
|
|
In June 2019, the Company entered into an accounts receivable financing agreement, similar to accepting credit cards, which improves cash flow by selling certain eligible unsecured trade accounts receivable, without recourse, to an unrelated third-party financial institution for cash using NOWaccount®. All customers need to be approved in advance by NOWaccount, and their fees are:
3.00 % Base Transaction Fee for Invoices with up to “Net 30 Day” Payment Terms* Applied to Total Value of Invoice
0.25% Surcharge for Invoices with up to “Net 60 Day” Payment Terms* Applied to Total Value of Invoice
0.50% Surcharge for Invoices with up to “Net 90 Day” Payment Terms* Applied to Total Value of Invoice
0.75% Surcharge for Invoices with up to “Net 120 Day” Payment Terms* Applied to Total Value of Invoice (special credit approval required)
Inventories
Inventories are stated at the lower of cost or net realizable value using the first in, first out (FIFO) method. Net realizable value is defined as sales price less cost of completion, disposable and transportation and a normal profit margin. Production costs, consisting of labor and overhead, are applied to ending finished goods inventories at a rate based on estimated production capacity. Excess production costs are charged to cost of products sold. Provisions have been made to reduce excess or obsolete inventories to their net realizable value.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets, except for assets held under capital leases, for which the Company records depreciation and amortization based on the shorter of the 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 approximately 20 years. Upon retirement, the cost and related accumulated amortization are eliminated from their respective accounts, and the resulting gain or loss is included in results of operations.
`
F-7
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
Impairment of Long-Lived Assets
Management assesses the recoverability of its long-lived assets when indicators of impairment are present. If such indicators are present, recoverability of these assets is determined by comparing the undiscounted net cash flows estimated to result from those assets over the remaining life to the assets’ net carrying amounts. If the estimated undiscounted net cash flows are less than the net carrying amount, the assets would be adjusted to their fair value, based on appraisal or the present value of the undiscounted net cash flows.
Sales Incentives and Consideration Paid to Customers
The Company accounts for certain promotional costs such as sales incentives and cooperative advertising as a reduction of sales.
Product Warranty Costs
As required by FASB ASC 460, Guarantees, the Company is including the following disclosure applicable to its product warranties.
The Company accrues for warranty costs based on the expected material and labor costs to provide warranty replacement products. The methodology used in determining the liability for warranty cost is based upon historical information and experience. The Company's warranty reserve is calculated as the gross sales multiplied by the historical warranty expense return rate.
The following table shows the changes in the aggregate product warranty liability for the year ended December 31, 2019 and December 31, 2018, respectively:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
Balance as of beginning of year
|
|
$
|
20,000
|
|
$
|
20,000
|
|
|
Less: Payments made
|
|
|
—
|
|
|
—
|
|
|
Add: Provision for current years warranty
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$
|
20,000
|
|
$
|
20,000
|
|
Advertising Costs
Advertising and marketing costs are expensed as incurred. During the years ended December 31, 2019 and 2018, advertising costs incurred by the Company totaled approximately $17,165 and $28,613, 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 years ended December 31, 2019 and 2018, engineering and development costs incurred by the Company totaled $7,097 and $5,866, 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.
F-8
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
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, 2019 has been recognized as a component of cost of goods sold and general and administrative expenses in the accompanying financial statements.
In 2019 and 2018, respectively, 5,000 and 10,980,000 options were granted at fair market value on the date of grant pursuant to the Stock Option Plan.
The Company leases its employees from a payroll leasing company. The Company’s leased employees meet the definition of employees as specified by FIN 44 for purposes of applying FASB ASC 718.
Stock options and warrants issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable in accordance with FASB ASC 505, Equity, and FASB ASC 718, Compensation-Stock Compensation, including related amendments and interpretations. The related expense is recognized over the period the services are provided.
Credit Risk
The Company minimizes the concentration of credit risk associated with its cash by maintaining its cash with high quality federally insured financial institutions. However, cash balances in excess of the FDIC insured limit of $250,000 are at risk. At December 31, 2019 and December 31, 2018, respectively, the Company did not have cash balances above the FDIC insured limit. The Company performs ongoing evaluations of its significant trade accounts receivable customers and generally does not require collateral. An allowance for doubtful accounts is maintained against trade accounts receivable at levels which management believes is sufficient to cover probable credit losses. The Company also has some customer concentrations, and the loss of business from one or a combination of these significant customers, or an unexpected deterioration in their financial condition, could adversely affect the Company’s operations. Please refer to Note 18 for further details.
Basic and Diluted Income / (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 effects of stock options and warrants would be anti-dilutive and, accordingly, are excluded from the computation of earnings per share. The number of such shares excluded from the computations of diluted loss per share totaled 11,502,500 in 2019 and 12,518,336 in 2018.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements
All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.
F-9
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
2. Going Concern
The Company has sustained losses since inception and does not have sufficient revenues and income to fully fund the operations. As a result, the Company has relied on stockholder loans to fund its activities to date. For the year ended December 31, 2019, the Company has a net loss of $1,686,641. At December 31, 2019, the Company has a working capital deficit of $2,820,926 and an accumulated deficit of approximately $64.5 million. The Company anticipates that it will continue to incur losses in future periods until the Company is successful in significantly increasing its revenues, if ever, particularly in light of the adverse impact of the Covid-19 pandemic on its Company’s operations. There are no assurances that the Company will be able to raise its revenues to a level which supports profitable operations and provides sufficient funds to pay our obligations. If the Company is unable to meet those obligations, the Company’s existing business and operations will be in jeopardy. The Company could be forced to cease its operations.
The Company’s financial statements have been prepared on the basis that it will operate as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.
3. Inventories
At December 31, 2019 and December 31, 2018 inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
1,116,075
|
|
$
|
1,053,147
|
|
|
Finished goods
|
|
|
313,307
|
|
|
257,623
|
|
|
Valuation allowance
|
|
|
(506,430
|
)
|
|
(476,062
|
)
|
|
Total inventory, net
|
|
$
|
922,952
|
|
$
|
834,708
|
|
4. Prepaid Expenses and Other Current Assets
At December 31, 2019 and December 31, 2018, prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
26,144
|
|
$
|
27,854
|
|
|
Deposits
|
|
|
—
|
|
|
38,436
|
|
|
|
|
$
|
26,144
|
|
$
|
66,290
|
|
5. Property and Equipment
At December 31, 2019 and December 31, 2018, property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
1,030,196
|
|
$
|
1,030,196
|
|
|
Furniture and fixtures
|
|
|
56,558
|
|
|
56,558
|
|
|
Leasehold improvements
|
|
|
188,012
|
|
|
188,012
|
|
|
Software and website development
|
|
|
88,842
|
|
|
88,842
|
|
|
Computer hardware and software
|
|
|
179,258
|
|
|
179,258
|
|
|
|
|
|
1,542,866
|
|
|
1,542,866
|
|
|
Less accumulated depreciation and amortization
|
|
|
(1,492,270
|
)
|
|
(1,464,224
|
)
|
|
|
|
$
|
50,596
|
|
$
|
78,642
|
|
Depreciation and amortization expense of property and equipment for the years ended December 31, 2019 and 2018 is $28,046 and $24,628, respectively, of which $6,285 and $5,841 is included in cost of products sold, $21,761 and $18,787 is included in selling and administrative costs, respectively, in the accompanying statements of operations. During the years ended December 31, 2019 and 2018 the Company recognized a gain of $0 and ($1,244) on the disposal of fixed assets, respectively.
F-10
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
6. Patents
Included in other noncurrent assets at December 31, 2019 and 2018 are capitalized patent costs as follows:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Patent costs
|
|
$
|
477,149
|
|
$
|
533,496
|
|
|
Less accumulated amortization
|
|
|
(102,227
|
)
|
|
(84,429
|
)
|
|
|
|
$
|
374,922
|
|
$
|
449,067
|
|
Amortization expense for the year ended December 31, 2019 and 2018 amounted to $19,693 and $23,319, respectively. During the year ended December 31, 2019 and 2018, the Company recorded an expense of $66,234 and $105,665 for the impairment of patents it determined had no future economic value.
7. Leases
Operating right of use assets and operating lease liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating right of use assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. As we have outstanding secured debt, we used the rate based on loan of 4%.
Our office lease contains rent escalations over the lease term. We recognize expense for this office lease on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.
The Company leases its office and warehouse facilities in Boynton Beach, Florida under a long-term non-cancellable lease agreement, which contains renewal options and rent escalation clauses. As of December 31, 2019, a security deposit of $34,970 is included in noncurrent assets in the accompanying balance sheet. On September 27, 2012 the Company entered into a non-cancellable six-year lease agreement for the same facilities commencing August 1, 2013 and expiring July 31, 2019. The total minimum lease payments over the remaining term of the current lease amount to $853,116.
On June 29, 2018, the Company entered into a non-cancellable five-year lease for the same facilities commencing August 1, 2019 and expiring July 31, 2024. The lease will require an initial rent of $14,899 per month, beginning August 1, 2019 for the first year, increasing by 3% per year to $16,769 per month in the fifth year. In addition, the Company is responsible for all operating expenses and utilities. As part of the lease the landlord agreed to reimburse the Company $58,000 towards the replacement of air conditioning units, upon written request. As of December 31, 2018 the Company had received all of the reimbursement.
In September 2018, the Company entered into a new capital lease for office equipment in the amount of $559, which commenced in December 2018 for a term of 48 months.
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Operating Leases
|
|
Classification
|
|
2019
|
|
|
Right-of-use assets
|
|
Operating right of use assets
|
|
$
|
739,273
|
|
|
|
|
|
|
|
|
|
|
Current lease liabilities
|
|
Current operating lease liabilities
|
|
|
158,453
|
|
|
Non-current lease liabilities
|
|
Long-term operating lease liabilities
|
|
|
656,577
|
|
|
Total lease liabilities
|
|
|
|
$
|
815,030
|
|
F-11
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
Lease term and discount rate were as follows:
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
Weighted average remaining lease term (years)
|
|
4.54
|
|
|
Weighted average discount rate
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2019
|
|
|
Operating lease cost
|
|
|
$
|
191,797
|
|
|
Variable lease cost (1)
|
|
|
|
114,075
|
|
|
Total lease costs
|
|
|
$
|
305,872
|
|
(1) Variable lease cost primarily relates to common area maintenance, property taxes and insurance on leased real estate.
Supplemental disclosures of cash flow information related to leases were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2019
|
|
|
Cash paid for operating lease liabilities
|
|
|
$
|
146,666
|
|
|
Operating right of use assets obtained in exchange for operating lease liabilities
|
|
|
$
|
890,009
|
|
Maturities of lease liabilities were as follows as of September 30, 2019:
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
Leases
|
|
|
2020
|
|
$
|
188,196
|
|
|
2021
|
|
|
193,627
|
|
|
2022
|
|
|
197,427
|
|
|
2023
|
|
|
197,807
|
|
|
2024
|
|
|
117,383
|
|
|
Total
|
|
|
894,440
|
|
|
Less: Imputed interest
|
|
|
(79,410
|
)
|
|
Present value of lease liabilities
|
|
$
|
815,030
|
|
8. Accrued Liabilities
At December 31, 2019 and December 31, 2018, accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
Accrued wages and benefits
|
|
$
|
47,029
|
|
$
|
52,753
|
|
|
Accrued expenses relating to vendors and others
|
|
|
125,996
|
|
|
128,114
|
|
|
Accrued warranty costs
|
|
|
20,000
|
|
|
20,000
|
|
|
Accrued interest payable relating to stockholder notes
|
|
|
303,735
|
|
|
329,801
|
|
|
Deferred rent
|
|
|
—
|
|
|
74,689
|
|
|
|
|
$
|
496,760
|
|
$
|
605,357
|
|
9. Deferred Compensation
Deferred compensation represents amounts owed to two current employees and two former employees for salary. As there is no written agreement with these employees which memorializes the terms of salary deferral, only a voluntary election to do so, it is possible that the employees could demand payment in full at any time. As of December 31, 2019 and 2018 the Company recorded deferred compensation of $1,542,423 and $1,564,253, respectively. One former employee has formally demanded the full repayment of his remaining deferred compensation in the amount of approximately $356,000 and filed a complaint in the circuit court of the 15th judicial circuit in and for Palm Beach County, Florida (See Note 19).
F-12
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
10.
Sales Incentives
The Company entered into an exclusive distribution agreement for the worldwide rights to sell its product in the oil and gas industry effective September 7, 2017. The agreement included an incentive program that rewarded credits toward future product redeemable only if targeted quarterly goals are achieved. The incentive-earning period ended on June 30, 2018, and no incentives were earned. The exclusivity agreement continues but can be terminated by Company with 60 days’ notice.
11. Short-term Loan
On October 24, 2019 we entered into a Business Loan Agreement with Kabbage® pursuant to which we borrowed $43,100 under the terms of a one year secured loan. The terms of the loan provided for a loan fee of $7,111.50 which results in an effective annual interest rate of 26.56%. We utilized these proceeds for working capital. We granted Kabbage® a security interest in our assets as collateral for this loan. The loan, which provides for monthly payments, may be prepaid by us at any time without penalty. The loan agreement includes customary events of default, as well as a cross default against any other loan and/or security agreement to which we are a party or if a judgment is entered against us in excess of $250, subject to a 30 day cure period. This loan has been personally guaranteed by Mr. Edward S. Vittoria, our Chief Executive Officer. As of December 31, 2019 the Company had a balance owed of $39,508. Interest expense for the year ended December 31, 2019 amounted to $1,291. On March 12, 2020 the loan was repaid in full. (Refer to Note 19)
12. Notes Payable to Stockholders
On March 28, 2002 the Company executed a binding agreement with one of its principal stockholders, who is also the former Chief Executive Officer, now Executive Chairman of the Board, to fund up to $6.1 million. Under the terms of the agreement, the Company can draw amounts as needed to fund operations. Amounts drawn bear interest at the BBA LIBOR Daily Floating Rate plus 1.4 percentage points (4.06% and 3.88% per annum at December 31, 2019 and 2018 respectively), payable monthly and were to become due and payable on December 31, 2005 or upon a change in control of the Company or the consummation of any other financing over $7.0 million. Beginning in March 2006, annually, through February 2012, the maturity date for the agreement was extended annually from December 31, 2007, to December 31, 2018. On May 9, 2018 he extended the maturity rate to December 31, 2019. On March 25, 2019 we entered into a note exchange agreement with our Executive Chairman pursuant to which he exchanged $7,989,622 of principal and $395,510 of accrued interest which would have been due on December 31, 2019 under an unsecured loan for a secured promissory note in the principal amount of $8,385,132. The secured note which matures on December 31, 2021, and bears interest at 4% per annum, payable monthly, is secured by a first position security interest in our assets. (Refer to Note 17).
During the year ended December 31, 2019 and 2018, the Company received additional loans in the amount of $833,000 and $325,000, respectively from the Company’s Executive Chairman as advances for working capital needs. The loans bear interest at the BBA Libor Daily Floating Rate plus 1.4 points and is payable upon demand. As of December 31, 2019 the total balance due was $9,543,132.
On January 7, 2019, the Company received an additional loan in the amount of $25,000 from a stockholder and former member of the Board of Directors. On November 19, 2019, the Company received an additional loan in the amount of $25,000 from the same stockholder and former member of the Board of Directors. The loan bears interest at a rate of 5% per annum and is due on January 7, 2020 and November 18, 2020, respectively. On April 13, 2020, the maturity date for loan received on January 7, 2019 was extended to December 31, 2020.
During the years ended December 31, 2019 and 2018, the Company incurred interest expense of $367,829 and $324,087, respectively, on its loans from the executive chairman, which is included in interest expense in the accompanying statements of operations. Also included in interest expense at December 31, 2019 and 2018 were $39,405 and $3,365 of interest related to capital lease obligations, financing, late fees, short term loan and loans from a stockholder.
F-13
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
Notes payable and capital leases consisted of the following at December 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
Notes payable to stockholders
|
|
$
|
9,593,132
|
|
$
|
8,314,622
|
|
|
Short-term loans
|
|
|
39,508
|
|
|
—
|
|
|
|
|
|
9,632,640
|
|
|
8,314,622
|
|
|
Less: current maturities
|
|
|
(1,247,508
|
)
|
|
(325,000
|
)
|
|
Long-term maturities
|
|
$
|
8,385,132
|
|
$
|
7,989,622
|
|
13. Income Taxes
2017 U.S. Tax Reform
The JOBS Act significantly revised the U.S. Corporate income tax by lowering the corporate federal income tax rate from 35% to 21% effective January 1, 2018.
The significant components of the Company’s net deferred tax assets are as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
12,204,312
|
|
$
|
12,291,278
|
|
|
Provision for reserves
|
|
|
134,908
|
|
|
129,745
|
|
|
Compensatory stock options and warrants
|
|
|
193,066
|
|
|
179,275
|
|
|
Other
|
|
|
1,252
|
|
|
1,252
|
|
|
Total deferred tax assets
|
|
|
12,533,538
|
|
|
12,601,550
|
|
|
Valuation allowance
|
|
|
(12,533,538
|
)
|
|
(12,601,550
|
)
|
|
Net deferred tax assets
|
|
$
|
—
|
|
$
|
—
|
|
FASB ASC 740, Income Taxes, requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a full valuation allowance of $12,533,538 and $12,601,550 against its net deferred taxes is necessary as of December 31, 2019 and December 31, 2018, respectively. The change in valuation allowance for the years ended December 31, 2019 and 2018 is $(68,012) and $54,454, respectively.
At December 31, 2019 and December 31, 2018, respectively, the Company had approximately $48,152,000 and $48,495,000, respectively, of U.S. net operating loss carryforwards remaining.
As a result of certain ownership changes, the Company may be subject to an annual limitation on the utilization of its U.S. net operating loss carryforwards pursuant to Section 382 of the Internal Revenue Code. A study to determine the effect, if any, of this change, has not been undertaken.
Tax returns for the years ended December 31, 2019, 2018, 2017, 2016, and 2015 are subject to examination by the Internal Revenue Service.
A reconciliation of the Company’s income taxes to amounts calculated at the federal statutory rate is as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory taxes
|
|
|
(21.00
|
)%
|
|
|
(21.00
|
)%
|
|
|
State income taxes, net of federal tax benefit
|
|
|
(4.35
|
)%
|
|
|
(4.35
|
)%
|
|
|
Nondeductible items
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
Change in net loss carryforwards
|
|
|
29.35
|
|
|
|
—
|
|
|
|
Change in valuation allowance
|
|
|
(4.00
|
)%
|
|
|
25.35
|
%
|
|
|
|
|
|
—
|
%
|
|
|
—
|
%
|
|
F-14
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
14. Commitments and Contingencies
Agreements
On October 24, 2019 we entered into a Business Loan Agreement with Kabbage® pursuant to which we borrowed $43,100 under the terms of a one year secured loan. The terms of the loan provided for a loan fee of $7,111.50 which results in an effective annual interest rate of 26.56%. We utilized these proceeds for working capital. We granted Kabbage® a security interest in our assets as collateral for this loan. The loan, which provides for monthly payments, may be prepaid by us at any time without penalty. The loan agreement includes customary events of default, as well as a cross default against any other loan and/or security agreement to which we are a party or if a judgment is entered against us in excess of $250, subject to a 30-day cure period. This loan has been personally guaranteed by Mr. Edward S. Vittoria, our Chief Executive Officer. As of December 31, 2019 the Company had a balance owed of $39,508. Interest expense for the year ended December 31, 2019 amounted to $1,291. On March 12, 2020 the loan was repaid in full. (See Note 19)
On May 18, 2018 we entered into a letter agreement with Mr. Edward S. Vittoria pursuant to which he agreed to be employed by us as our Chief Executive Officer for an initial term ending May 31, 2019, which such term may be extended by mutual agreement upon terms and conditions to be mutually agreed upon prior to the expiration of such initial term. Under the terms of the letter agreement we agreed to pay him: (i) an annual base salary of $200,000, payable in accordance with our normal payroll practices; (ii) an annual cash bonus to be awarded by our Board of Directors in January in a minimum amount of $50,000; and (iii) granted him options to purchase 6,500,000 shares of our common stock, vesting one-third in arrears, at an exercise price equal to fair market value on the date of grant pursuant to the terms and conditions of our 2018 Equity Compensation Plan. He is also entitled to: (i) participate in all of our benefit programs currently existing or hereafter made available to executive and/or salaried; (ii) an amount of annual paid vacation consistent with his position and length of service to us; and (iii) reimbursement for all reasonable, out of-pocket expenses incurred by him.
The Company entered into an exclusive distribution agreement for the worldwide rights to sell its product in the oil and gas industry effective September 7, 2017. The agreement included an incentive program that rewarded credits toward future product redeemable only if targeted quarterly goals are achieved. The incentive-earning period ended on June 30, 2018, and no incentives were earned. The exclusivity agreement continued at a minimum through the end of 2019. (Refer to Note 10.)
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 commenced August 1, 2013 and requires an initial rent of $12,026 per month beginning in the second month for 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 June 29, 2018, the Company entered into a non-cancellable five-year lease for the same facilities commencing August 1, 2019 and expiring July 31, 2024. The lease will require an initial rent of $14,899 per month, beginning August 1, 2019 for the first year, increasing by 3% per year to $16,769 per month in the fifth year. In addition, the Company is responsible for all operating expenses and utilities. As part of the lease the landlord agreed to reimburse the Company $58,000 towards the replacement of air conditioning units, upon written request. As of December 31, 2018 the Company had received all of the reimbursement
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 will remain in effect until terminated by either party providing 30 days written notice. Mr. Telesco, a former member of our board of directors and a significant stockholder, is President of Boxwood Associates, Inc. (Refer to Note 17)
15. Stock Options
The Company has three stock option plans, one adopted on November 8, 2000 (the “Directors’ Plan”), one adopted in July 2010 (the “2010 Option Plan”), and one adopted in April 2018 (the “2018 Option Plan”). The 2010 Option Plan provides for the granting of 4,000,000 options; the Directors’ Plan provides for the granting of up to 400,000 options, and the 2018 Option Plan provides for the granting of 20,000,000 options.
F-15
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
On April 12, 2018 the Board of Directors approved the adoption of a 2018 Equity Compensation Plan. The Company has reserved 20,000,000 shares of our common stock for grants under this plan.
The 2018 Plan provides for the granting of both incentive and non-qualified stock options to key personnel, including officers, directors, consultants and advisors to the Company, at the discretion of the Board of Directors. Each plan limits the exercise price of the options at no less than the quoted market price of the common stock on the date of grant. The option term is determined by the Board of the Directors, provided that no option may be exercisable more than 10 years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of the Company’s common stock, no more than five years after the date of the grant. Generally, under both plans, options to employees vest over three years at 33.33% per annum unless the Board of Directors designates a different vesting schedule.
On March 28, 2019, the Company filed a definitive information statement on Schedule 14C with the Securities and Exchange Commission to notify our common shareholders that effective March 27, 2019, the holders of 35,713,727 shares of our common stock, representing 51.7% of the outstanding shares of our common stock, executed a written consent in lieu of a special meeting of shareholders ratifying the adoption of our 2018 Equity Compensation Plan, as amended.
On June 24, 2014, the Company filed a registration statement on Form S-8 with the Securities and Exchange Commission amending the shares of Common Stock included within its 2010 Stock Option from 2,000,000 shares to 4,000,000 shares.
The 2010 Plan provides for the granting of both incentive and non-qualified stock options to key personnel, including officers, directors, consultants and advisors to the Company, at the discretion of the Board of Directors. Each plan limits the exercise price of the options at no less than the quoted market price of the common stock on the date of grant. The option term is determined by the Board of the Directors, provided that no option may be exercisable more than 10 years after the date of its grant and, in the case of an Incentive Option granted to an eligible employee owning more than 10% of the Company’s common stock, no more than five years after the date of the grant. Generally, under both plans, options to employees vest over four years at 25% per annum, except for certain grants to employees that vest 25% upon grant with remaining amounts over two years at 50% and 25% per annum, respectively.
The Directors’ Plan provides for the granting of non-qualified options to members of the Board of Directors at exercise prices not less than the quoted market price of the common stock on the date of grant and options expire five years from the date of grant. In the event a person ceases to serve on the Board of Directors, the outstanding options expire one year from the date of cessation of service. Such options may be exercised commencing two years from the date of grant.
On August 26, 2019, the Company granted one director options to purchase 5,000 shares of the Company’s common stock, at an exercise price of $0.030 per share. The options vest over a two year period and expire August 25, 2024. The quoted market price of the common stock at the time of issuance of the options was $0.030 per share. The fair value of the options totaled $164 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 1.43%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 255%.
On April 12, 2018, the Company granted employees and directors options to purchase 4,475,000 shares of the Company’s common stock, at exercise prices ranging from $0.0189 to $0.208 per share. The options vest over a three-year period and expire April 12, 2028. The fair value of the options totaled $69,989 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 2.64%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 217%. On April 30, 2018 our Executive Chairman and former CEO voluntarily cancelled the grant on April 12, 2018 of options awarded him to purchase an aggregate of 1,400,000 shares of the common stock.
On May 18, 2018, the Company, upon recommendation and approval by the compensation committee of the Board of Directors, granted its new Chief Executive Officer, options to purchase 6,500,000 shares of the Company’s common stock, at an exercise price of $0.017 per share. The options vest over a three-year period and expire May 18, 2028. The fair value of the options totaled $101,437 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 2.64%; ii) expected life of 5 years; iii) dividend yield of 0%; iv) expected volatility of 217%.
F-16
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
On August 24, 2018, the Company granted one director options to purchase 5,000 shares of the Company’s common stock, at an exercise price of $0.045 per share. The options vest over a two year period and expire August 25, 2023. The quoted market price of the common stock at the time of issuance of the options was $0.045 per share. The fair value of the options totaled $223 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 2.70%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 188%.
At December 31, 2019 there was $69,867 of unrecognized compensation cost related to nonvested share-based payments, which is expected to be recognized over a weighted-average period of 4 years. At December 31, 2018 there was $128,059 of unrecognized compensation cost related to nonvested share-based payments, which is expected to be recognized over a weighted-average period of 4 years.
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for those awards that have an exercise price currently below the closing price. As of December 31, 2019 and 2018, the Company had options outstanding to purchase an aggregate of 11,152,500 and 11,785,000 shares respectively, with an exercise price above the quoted price of the Company’s stock, resulting in an intrinsic value $33,329 and $285, respectively.
Additional information concerning the activity in the four option plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
|
Outstanding, beginning of year
|
|
|
11,785,000
|
|
$
|
0.05
|
|
|
3,180,000
|
|
$
|
0.20
|
|
|
Granted
|
|
|
5,000
|
|
|
0.03
|
|
|
10,980,000
|
|
|
0.02
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
|
(233,333
|
)
|
|
0.02
|
|
|
(1,408,334
|
)
|
|
0.02
|
|
|
Expired
|
|
|
(404,167
|
)
|
|
0.14
|
|
|
(966,666
|
)
|
|
0.10
|
|
|
Outstanding, end of year
|
|
|
11,152,500
|
|
|
0.05
|
|
|
11,785,000
|
|
|
0.05
|
|
|
Exercisable, end of year
|
|
|
4,987,505
|
|
|
0.08
|
|
|
2,190,000
|
|
|
0.19
|
|
|
Options available for future grant, end of year
|
|
|
10,602,864
|
|
|
|
|
|
2,463,336
|
|
|
|
|
Additional information concerning the unvested options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
|
Non-Vested options at beginning of year
|
|
|
9,595,000
|
|
$
|
0.02
|
|
|
270,840
|
|
$
|
0.15
|
|
|
Granted
|
|
|
5,000
|
|
|
0.03
|
|
|
10,980,000
|
|
|
0.02
|
|
|
Vested
|
|
|
(3,201,672
|
)
|
|
0.02
|
|
|
(247,506
|
)
|
|
0.16
|
|
|
Forfeited
|
|
|
(233,333
|
)
|
|
0.02
|
|
|
(1,408,334
|
)
|
|
0.10
|
|
|
Cancelled
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Non-Vested options end of year
|
|
|
6,164,995
|
|
$
|
0.02
|
|
|
9,595,000
|
|
$
|
0.02
|
|
Summarized information with respect to options outstanding under the four option plans at December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
Range of
Exercise Price
|
|
Number
Outstanding
|
|
Remaining
Average
Contractual
Life (In Years)
|
|
Weighted
Average
Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise Price
|
|
|
$0.017 -$.0446
|
|
11,152,500
|
|
7.38
|
|
$0.050
|
|
4,987,505
|
|
$0.085
|
|
F-17
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
The estimated fair value of each stock option grant on the date of grant was computed using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
Risk-free interest rate
|
1.02% - 3.68
|
%
|
|
2.64% - 2.70
|
%
|
|
Expected term (life) of options (in years)
|
7.38
|
|
|
5
|
|
|
Expected dividends
|
—
|
|
|
—
|
|
|
Expected volatility
|
138% - 234
|
%
|
|
188% - 217
|
%
|
16. Warrants
At December 31, 2019 and 2018, 350,000 and 773,336 shares, respectively, of common stock have been reserved for issuance under outstanding warrants. All of the warrants are fully vested and began expiring on March 24, 2013 with the remaining warrants expiring at various dates through October 1, 2019. Information concerning the Company’s warrant activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
Warrants
|
|
Weighted
Average
Exercise
Price
|
|
Warrants
|
|
Weighted
Average
Exercise
Price
|
|
|
Outstanding, at the beginning of year
|
|
|
773,336
|
$
|
|
0.16
|
|
|
990,162
|
|
$
|
0.20
|
|
|
Granted
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Expired
|
|
|
(423,336
|
)
|
|
0.25
|
|
|
(216,826
|
)
|
|
0.35
|
|
|
Outstanding, at the end of year
|
|
|
350,000
|
|
$
|
0.05
|
|
|
773,336
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding – December 31, 2019
|
|
|
Range of
Exercise Price
|
|
|
Number
Outstanding
|
|
|
Remaining Average
Contractual Life
(In Years)
|
|
|
Weighted Average
Exercise Price
|
|
|
$0.05
|
|
|
|
350,000
|
|
|
|
1.2
|
|
|
$
|
0.09
|
|
|
Totals
|
|
|
|
350,000
|
|
|
|
1.2
|
|
|
$
|
0.09
|
|
17. Related Party Transactions
Beginning on March 28, 2002, the Company executed a binding agreement with one of its principal stockholders, who is also the former Chief Executive Officer, now Executive Chairman of the Board, 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 (3.88% and 3.62% per annum at December 31, 2018 and 2017, respectively), 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, 2018. On May 9, 2018, our Executive Chairman extended the due date of the funding commitment to December 31, 2019).
On March 25, 2019 we entered into a note exchange agreement with our Executive Chairman pursuant to which he exchanged $7,989,622 of principal and $395,510 of accrued interest which would have been due on December 31, 2019 under an unsecured loan for a secured promissory note in the principal amount of $8,385,132. The secured note which matures on December 31, 2021, and bears interest at 4% per annum, payable monthly, is secured by a first position security interest in our assets.
In March 2019, the Company entered into a note exchange agreement with him whereby he agreed to extend the due date of these obligations to December 31, 2021 and granted him a first position security interest in our assets. (Refer to Note 12.)
F-18
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
During the year ended December 31, 2019, we borrowed an additional $833,000 from our Executive Chairman, together under a demand note not covered by this line of credit. During the year ended December 31, 2018, we borrowed an additional $26,273 from our Executive Chairman, together with $325,000 under a demand note not covered by this line of credit. This demand note bears interest at 4% per annum. As of December 31, 2019 and December 31, 2018 we owed him an aggregate of $9,543,132 and $8,314,622, respectively, which represented approximately 74% and 76% of our total liabilities, respectively.
On January 7, 2019, the Company received an additional loan in the amount of $25,000 from a stockholder and former member of the Board of Directors. On November 19, 2019, the Company received an additional loan in the amount of $25,000 from the same stockholder and former member of the Board of Directors. The loan bears interest at a rate of 5% per annum and is due on January 7, 2020 and on November 18, 2020, respectively. On April 13, 2020, the maturity date for loan received on January 7, 2019 was extended to December 31, 2020.
From April 1, 2018 through May 15, 2018, the Company received additional loans in the amount of $250,000 from a related party to both the Company’s Executive Chairman and its Chief Executive Officer, as advances for working capital needs. The amounts are non-interest bearing and are payable upon demand. On July 15, 2018, $250,000 was repaid.
In November 2017, the Company received an additional loan in the amount of $25,000 from a stockholder and former member of the Board of Directors. The loan bears interest at a rate of 5% per annum and is due December 31, 2018. During the year ended December 31, 2018 the Company recorded interest expense of $1,092. On November 16, 2018 the former member of the Board of Directors forgave the loan and the accrued interest amounting to $26,250 and recorded the amount as a capital contribution.
On April 12, 2018, the Company granted officers and directors options to purchase 2,050,000 shares of the Company’s common stock, at exercise prices ranging from $0.0189 to $0.208 per share. The options vest over a three-year period and expire April 12, 2028. The fair value of the options totaled $36,806 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 2.64%; ii) expected life of 5 years; iii) dividend yield of 0%; iv) expected volatility of 217%. On April 30, 2018 our Executive Chairman and former CEO voluntarily cancelled the grant on April 12, 2018 of options awarded him to purchase an aggregate of 1,400,000 shares of the common stock.
On May 18, 2018, Mr. Edward S. Vittoria was appointed Chief Executive Officer of the Company and as a member of its Board of Directors. Immediately prior to such appointment, Mr. Joseph V. Vittoria resigned from his position as Chief Executive Officer and has been appointed Executive Chairman of the Board of Directors. Prior to his appointments, Mr. Edward Vittoria had been providing advisory services to us beginning in December 2017.
On May 18, 2018, the Company, upon recommendation and approval by the compensation committee of the Board of Directors, granted its new Chief Executive Officer options to purchase 6,500,000 shares of the Company’s common stock, at an exercise price of $0.017 per share. The options vest over a three-year period and expire May 18, 2028.
On August 26, 2019, the Company granted one director options to purchase 5,000 shares of the Company’s common stock, at an exercise price of $0.030 per share. The options vest over a two year period and expire August 25, 2024. The quoted market price of the common stock at the time of issuance of the options was $0.030 per share. The fair value of the options totaled $164 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 1.43%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 255%.
On August 24, 2018, the Company granted one director options to purchase 5,000 shares of the Company’s common stock, at an exercise price of $0.045 per share. The options vest over a two year period and expire August 25, 2023. The quoted market price of the common stock at the time of issuance of the options was $0.045 per share.
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 2019 and 2018 we recorded consulting fees for Boxwood Associates, Inc. $24,000 and $24,000, respectively, under this agreement. A former member of our board of directors is President of Boxwood Associates, Inc.
F-19
PURADYN FILTER TECHNOLOGIES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
18. Major Customers
There are concentrations of credit risk with respect to accounts receivables due to the amounts owed by one customer at December 31, 2019 whose balances each represented approximately 64% of total accounts receivables. During the year ended December 31, 2019, sales from two customers represented 37% and 30%, for a total of 67% of sales. There are concentrations of credit risk with respect to accounts receivables due to the amounts owed by one customer at December 31, 2018 whose balances each represented approximately 95% of total accounts receivables. During the year ended December 31, 2018, sales from four customers represented 41%, 21%, 11%, and 10% for a total of 83% of sales.
19. Subsequent Events
On March 9, 2020 the Company entered into a Revolving Credit Agreement with Christian Meissner pursuant to which Mr. Meissner agreed to make a $250,000 credit line available to us from time to time until September 30, 2020. Our ability to draw amounts under the credit line is at the discretion of Mr. Meissner. Under the terms of the Agreement, amounts we borrow from Mr. Meissner will be evidenced by a 5% Senior Secured Revolving Note. The Note will pay interest at the rate of 5% per annum, matures on September 30, 2020 and our obligations thereunder are secured by a first position security interest in our assets as evidenced by a Security Agreement of even date by and between the Company and Mr. Meissner. Our secured creditor, Mr. Joseph V. Vittoria, our Executive Chairman, entered a Subordination Agreement subordinating his first position security interest in our assets which secures a Senior Secured Promissory Note in the principal amount of $8,385,132 due Mr. Vittoria to Mr. Meissner.
On March 9, 2020 we drew an initial $100,000 under this credit line and on March 12, 2020 used $33,618 of the proceeds to satisfy our obligations under the Business Loan Agreement with Kabbage dated October 24, 2019. We are using the balance of the proceeds for working capital. On April 1, 2020 the Company drew down an additional $100,000 under the credit line.
On March 9, 2020 the Company, upon recommendation and approval by the Board of Directors, granted its Chief Executive Officer options to purchase 3,500,000 shares of the Company’s common stock, at an exercise price of $0.012 per share. The options vest upon date of grant and expire March 8, 2025.
On March 9, 2020, the Company granted its President who is also a member of the Board of Directors options to purchase 3,350,000 shares of the Company’s common stock, at an exercise price of $0.011 per share. The options vest upon date of grant and expire March 8, 2030.
On March 9, 2020, the Company granted several employees options to purchase 4,050,000 shares of the Company’s common stock, at an exercise price of $0.011 per share. The options vest upon date of grant and expire March 8, 2030.
The Company’s operation has been materially and adversely impacted by the Covid-19 pandemic. The Company is located in Palm Beach County, Florida which is subject to a “stay at home” order effective April 3, 2020. While the Company is able to continue operations as a non-consumer facing company that can fulfill shipments with a minimal staff that can maintain social distancing, the Company has reduced operations to approximately 1 day per week. While the stay at home order is presently set to expire on May 1, 2020, there are no assurances the Florida governor will not extend the duration of the stay at home order for an unknown additional period of time. Until this stay at home order is lifted and the Company can resume its normal operations, the Company is unable to predict the impact of the Covid-19 pandemic at this time.
On or about April 9, 2020 a former employee of the Company filed a complaint in the circuit court of the 15th judicial circuit in and for Palm Beach County, Florida, alleging breach or oral contract for failure to pay deferred salary, demanding relief of approximately $356,500 in deferred salary, plus applicable interests and attorneys’ fees and costs. While as of the date of this filing the Company has not been served with the complaint, the Company intends to vigorously defend itself against the claims.
On April 13, 2020, the maturity date for $25,000 loan received on January 7, 2019 from a stockholder and former member of the Board of Directors was extended from January 7, 2020 to December 31, 2020.
F-20