The accompanying notes are integral part of these consolidated financial statements.
The accompanying notes are integral part of these consolidated financial statements.
The accompanying notes are integral part of these consolidated financial statements.
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements of EnerTeck Corporation have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in EnerTeck’s Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal 2016 as reported in the Form 10-K have been omitted. In preparing the accompanying condensed consolidated financial statements, management has made certain estimates and assumptions that affect reported amounts in the condensed consolidated financial statements and disclosures of contingencies. Actual results may differ from those estimates.
NOTE 2 - INCOME (LOSS) PER COMMON SHARE
The basic net income (loss) per common share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding.
Diluted net income (loss) per common share is computed by dividing the net income (loss) applicable to common stockholders, adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. The calculation of diluted weighted-average shares outstanding excludes 6,187,213 shares issuable upon the exercise of outstanding stock options and warrants because their effect would be anti-dilutive.
NOTE 3 - STOCKHOLDERS’ EQUITY
During the second quarter of 2016, the Company issued 71,676 shares of common stock to two accredited investors for an aggregate of $21,503 received in a private placement offering of common stock at $0.30 per share. Of such proceeds, $10,050 was received in the fourth quarter of 2015 and $11,453 was received in the first quarter of 2016. The Company issued no additional common stock during the first quarter of 2017.
NOTE 4 - STOCK WARRANTS AND OPTIONS
Stock Warrants
During the third quarter of 2016, the Board of Directors extended the term of 3,590,000 warrants with a strike price of $0.60 per share and an additional 100,000 warrants with the strike price of $0.75 per share for an additional five years. In addition to the foregoing, there were 750,000 warrants granted to the Board of Directors in the fourth quarter of 2016. No other warrants were granted or exercised in 2016. Due to the extension of all warrants previously set to expire during 2016, no warrants expired during the year ended December 31, 2016.
There were no warrants granted or exercised for the three months ended March 31, 2017. However, 166,667 warrants expired during the three months ended March 31, 2017.
Warrants outstanding and exercisable as of March 31, 2017 are as follows:
Exercise
Price
|
|
|
Number of
Warrants
|
|
|
Weighted Average
Remaining Life
|
|
|
Exercisable Number
of Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.60
|
|
|
|
3,590,000
|
|
|
|
4.2
|
|
|
|
3,590,000
|
|
$
|
0.75
|
|
|
|
100,000
|
|
|
|
4.4
|
|
|
|
100,000
|
|
$
|
0.50
|
|
|
|
546,334
|
|
|
|
3.3
|
|
|
|
546,334
|
|
$
|
0.30
|
|
|
|
750,000
|
|
|
|
4.6
|
|
|
|
750,000
|
|
|
|
|
|
|
4,986,334
|
|
|
|
|
|
|
|
4,986,334
|
|
Stock Options
In September 2003, shareholders of the Company approved an employee stock option plan (the “2003 Option Plan”) authorizing the issuance of options to purchase up to 1,000,000 shares of common stock. The 2003 Option Plan is intended to give the Company greater ability to attract, retain, and motivate officers, key employees, directors and consultants; and is intended to provide the Company with the ability to provide incentives more directly linked to the success of the Company’s business and increases in shareholder value. During the third quarter of 2013, the board of directors increased the number of shares reserved for issuance under the 2003 Option Plan from 1,000,000 to 1,250,000.
During the third quarter of 2016 the Board of Directors extended 225,001 employee options with a strike price of $0.60 per share, which were otherwise due to expire during 2016. In addition, the Board issued an additional 227,510 employee options for calendar years 2015 and 2016 with a strike price of $0.30 per share.
In 2016 an additional 150,000 options with a $0.30 strike price were granted as part of a grievance settlement agreement with an employee. The fair value of the $26,921 is to be vested through December 31, 2017 with $7,852 vesting during 2016.
The fair value of options extended during 2016 was $1,020,580 at the date of grant and was recognized along with the $46,412 fair value for the newly issued employee options as non-cash compensation for the year ended December 31, 2016. The fair value of these options was estimated using the Black-Scholes Model with the following weighted average assumptions:
|
|
2016
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.0
|
%
|
Expected term
|
|
|
5.0
|
|
Expected volatility
|
|
|
201
|
%
|
Risk-free interest rate
|
|
|
1.07
|
%
|
Fair value per option
|
|
$
|
.17
|
|
The expected term of the options represents the estimated period of time until exercise and is based on the Company’s historical experience of similar options, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. The expected stock price volatility is based on the historical volatility of our stock. The risk-free interest rate is based on the U.S. Treasury bill rate in effect at the time of grant with an equivalent expected term or life. The Company has not paid dividends in the past and does not currently plan to pay any dividends in the future.
Information regarding activity for stock options under our plan is as follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
exercise
|
|
|
|
shares
|
|
|
Price
|
|
|
shares
|
|
|
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
1,200,879
|
|
|
$
|
.38
|
|
|
|
823,369
|
|
|
$
|
.41
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
377,510
|
|
|
|
.30
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited/expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,200,879
|
|
|
$
|
.38
|
|
|
|
1,200,879
|
|
|
$
|
.38
|
|
NOTE 5 - INCOME TAXES
The Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which it operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the quarter in which they occur. The Company recorded no income tax expense for the quarter ended March 31, 2017 because the Company expects to incur a tax loss in the current year. Similarly, no income tax expense was recognized for the quarter ended March 31, 2016 for this same reason.
The Company had a net deferred tax asset related to federal net operating loss carryforwards of approximately $23 million at March 31, 2017 and December 31, 2016, respectively. The federal net operating loss carryforward will begin to expire in 2023. Realization of the deferred tax asset is dependent, in part, on generating sufficient taxable income prior to expiration of the loss carryforwards. The Company has placed a 100% valuation allowance against the net deferred tax asset because future realization of these assets is not assured.
NOTE 6 - RELATED PARTY NOTES AND ADVANCES
Notes and Advances
On July 7, 2009, the Company entered into a $100,000 unsecured promissory note with an officer, due on demand. Interest is payable at 12% per annum. Also, on December 11, 2009, the Company entered into a $50,000 note with a shareholder/director. Interest is 5% per annum. The principal balance of the note was due on the earlier of December 11, 2013, or upon completion by the Company of equity financing in excess of $1.0 million in gross proceeds. Interest on the loan is payable on the maturity date at the rate of 5% per annum. This note is now overdue for payment.
On June 1, 2010, the Company entered into a $50,000 convertible promissory note with a shareholder/director which was due on June 1, 2013 and accrues interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock. The assignment of the conversion feature of the note resulted in a loan discount being recorded. The discount amount of $36,207 was fully amortized over the original thirty-six month term of the debt as additional interest expense. This note is now overdue for payment.
On June 1, 2010, the Company entered into $300,000 of convertible promissory notes with a shareholder/director which was due on June 1, 2013 and accrues interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock the number of which is to be determined at that time. This note is now overdue for payment.
On July 20, 2010, the Company entered into $400,000 convertible promissory notes with a shareholder/director which was due on July 20, 2013 and accrues interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock. This note is now overdue for payment.
On July 20, 2010, the Company entered into a $100,000 convertible promissory note with a shareholder which was due on July 20, 2013 and accrues interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock. This note is now overdue for payment.
On December 10, 2010, the Company entered into $150,000 of convertible promissory notes with a shareholder/director which was due on December 10, 2013 and accrues interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock. This note is now overdue for payment.
On October 20, 2011, the Company entered into a $70,000 convertible promissory note with a shareholder/director which was due on October 20, 2014 and accrues interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock. This note is now overdue for payment.
During 2010, 2011 and 2012, such shareholder/director advanced the Company $100,000, $150,000 and $370,000 respectively. Such advances are due on demand and bear interest at 8%, 8% and 8% per annum respectively. During the second quarter of 2015, $320,000 of the advances during 2012 were converted into 3,173,811 shares of common stock of the Company.
During 2013, such shareholder/director advanced the Company $175,000 expected to be applied to stock subscriptions to be issued at a future date. Such advances do not bear interest. During the second quarter of 2015, all of these advances totaling $175,000 were converted into shares of common stock of the Company.
During 2014, such shareholder/director advanced the Company $300,000 expected to be applied to stock subscriptions to be issued at a future date. Such advances do not bear interest. During the second quarter of 2015, all of these advances totaling $300,000 were converted into shares of common stock of the Company.
During 2015, such shareholder/director contributed $200,000 to the Company expected to be applied to stock subscriptions to be issued at a future date. Such advances do not bear interest. This amount has been recorded as additional notes payable.
During 2016, such shareholder/director contributed $430,000 and a second shareholder/director contributed an additional $9,000, respectively, to the Company expected to be applied to stock subscriptions to be issued at a future date. Such advances do not bear interest. These amounts have been recorded as additional notes payable.
During the first quarter of 2017, such shareholder/director contributed $91,250 to the Company which is expected to be applied to stock subscriptions to be issued at a future date.
It is anticipated that most if not all of the outstanding convertible notes (which by their terms are convertible into shares of common stock at variable conversion ratios set forth therein) and open advances will be converted into shares of common stock in the Company on new terms to be negotiated with such related parties and issued during 2017.
Compensation Owed to Officers and Employees
As of March 31, 2017 and December 31, 2016, the Company owed approximately $3.7 million and $3.6 million, respectively, to its chief executive officer and other employees of the Company. The CEO and employees agreed to salary deferrals pending available resources to make such payments.
Other
One of the Company’s shareholders owns 100% of BATL Trading, Inc. and BATL Bioenergy, LLC, which are distributors of EnerBurn. There was no activity with BATL Trading, Inc. during 2017 and 2016. During 2017 and 2016, BATL Bioenergy, LLC distributed approximately $79,000 and $0 of EnerBurn.
One of the Company’s shareholders owns 100% of Petro-Chem Industries, Inc., which is a distributor of EnerBurn. During 2017 and 2016, PetroChem Industries, Inc. distributed approximately $0 and $83,000 of EnerBurn.
One of the Company’s employees owns 15% of EnerTeck Environmental, LLC, which is the owner of the Company’s PEx unit and partners with the Company for the sale and use of the PEx unit for marine purposes only. There was no activity with EnerTeck Environmental, LLC during the first quarter of 2017 or during 2016.
Several of the Company’s shareholders and employees are distributors of EnerBurn. During 2017 and 2016, these individuals distributed approximately $0 and $16,000 of EnerBurn.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Office Lease
EnerTeck leases office space under a non-cancelable operating lease. Future minimum rentals due under the non-cancelable operating lease with an original maturity of at least one-year are approximately as follow:
2017
|
|
$
|
54,000
|
|
2018
|
|
|
54,000
|
|
2019
|
|
|
36,000
|
|
Total
|
|
$
|
144,000
|
|
This lease provides for a rent-free period as well as increasing rental payments. In accordance with generally accepted accounting principles, rent expense for financial statement purposes is being recognized on a straight-line basis over the lease term. A deferred lease liability arises from the timing difference in the recognition of rent expense and the actual payment of rent.
Rent expense for the periods ended March 31, 2017 and 2016 totaled $12,708 and $12,707, respectively.
Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the quarters ended March 31, 2017 and 2016, the Company incurred recurring net losses of approximately $206,000 and $305,000, respectively. Further, most of the Company’s notes payable are overdue and payment may be demanded at any time. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company’s continuation as a going concern is contingent upon its ability to obtain additional financing and to generate revenues and cash flow to meet its obligations on a timely basis. The Company has been able to obtain cash in the past through private placements and issuance of promissory notes and believes that these avenues remain available to the Company. Management believes that these financings are probable of occurring and mitigating the substantial doubt raised by our historical operating results and satisfying the Company’s estimated liquidity needs 12 months from the issuance of the financial statements. No assurance can be made that these efforts will be successful.
NOTE 8 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. ASU 2014-09 stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual and interim reporting periods beginning on or after December 15, 2017, and limited early adoption is permitted. ASU 2014-09 permits the use of two transition methods, either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The Company has not yet selected a transition method, and is currently evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, “
Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
” (“ASU 2014-15”). Under U.S. GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. Financial reporting under this presumption is commonly referred to as the going concern basis of accounting. The going concern basis of accounting establishes the fundamental basis for measuring and classifying assets and liabilities. The update provides guidance on when there is substantial doubt about an organization’s ability to continue as a going concern and how the underlying conditions and events should be disclosed in the footnotes. It is intended to reduce diversity that existed in footnote disclosures because of the lack of guidance about when substantial doubt existed. The amendments in this update are effective beginning in the first quarter of 2017. Early application is permitted. The Company adopted ASU 2014-15 in 2016 and has included appropriate disclosures required by this update in these financial statements.
In July 2015, the FASB issued ASU 2015-11, “
Inventory: Simplifying the Measurement of Inventory”
, which simplifies the measurement of inventories valued under most methods. Under this new guidance, inventories valued under these methods would be valued at the lower of cost and net realizable value, with net realizable value defined as the estimated selling price less reasonable costs to sell the inventory. The new guidance is effective prospectively for fiscal periods starting after December 15, 2016 and early adoption is permitted. The Company does not expect the adoption of ASU 2015-11 to have a significant effect on our consolidated financial statements or related disclosures.
In February 2016, the FASB issued ASU 2016-02, “
Leases (Topic 842)
,” which requires lessees to recognize most lease liabilities on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. The update states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The update is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08, “
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
.” The amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance. The effective date and transition of these amendments is the same as the effective date and transition of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. Public entities should apply the amendments in ASU 2014-09 for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
On March 30, 2016, the FASB issued ASU 2016-09, “
Compensation - Stock Compensation
” which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. For public business entities, the ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. Early adoption will be permitted in any interim or annual period for which financial statements have not yet been issued or have not been made available for issuance. If early adoption is elected, all amendments in the ASU that apply must be adopted in the same period. In addition, if early adoption is elected in an interim period, any adjustments should be reflected as of the beginning of the annual period that includes that interim period. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.