UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 1-09478
PureSafe Water Systems, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 86-0515678 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 25 Fairchild Avenue - Suite 250, Plainview, New York | 11803 |
| (Address of principal executive offices) | (Zip Code) |
(516) 208-8250
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 10, 2009, 268,161,102 shares of common stock of the issuer were outstanding.
PART I - FINANCIAL INFORMATION
| Item 1. | Financial Statements. |
PureSafe Water Systems, Inc.
(A Development Stage Company Commencing January 1, 2002)
Condensed Balance Sheets
| | | June 30, 2009 | | | December 31, 2008 | |
| | | (Unaudited) | | | | |
| ASSETS | | | | | | |
| Current assets | | | | | | |
| Cash | | $ | 85,813 | | | $ | 29,411 | |
| Prepaid expenses and other current assets | | | 48,459 | | | | 53,890 | |
| Total current assets | | | 134,272 | | | | 83,301 | |
| Property and equipment, net of accumulated depreciation of $22,166 and $17,130, respectively | | | 118,041 | | | | 142,437 | |
| Other assets | | | | | | | | |
| Patents and trademarks, net of accumulated amortization of $20,563 and $17,882, respectively | | | 64,452 | | | | 62,044 | |
| Security deposit | | | 26,860 | | | | 26,860 | |
| Total other assets | | | 91,312 | | | | 88,904 | |
| Total Assets | | $ | 343,625 | | | $ | 314,642 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' DEFICIENCY | | | | | | | | |
Current liabilities | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 710,908 | | | $ | 410,925 | |
| Accrued compensation | | | 239,000 | | | | 155,000 | |
| Accrued consulting and director fees | | | 182,000 | | | | 178,000 | |
| Convertible notes payable to officer and director, including accrued interest of $11,199 and $12,171, respectively | | | 61,199 | | | | 186,891 | |
| Convertible promissory note, including accrued interest of $2,708 and $208 and net of debt discount of $8,938 and $19,283 respectively | | | 43,771 | | | | 30,925 | |
| Notes payable, including accrued interest of $274,261 and $269,833, respectively | | | 557,483 | | | | 553,056 | |
| Fair value of warrants and options | | | 398,700 | | | | 121,100 | |
| Fair value of embedded conversion options | | | 71,400 | | | | 164,900 | |
| Accrued dividends payable | | | 190,328 | | | | 190,328 | |
| Total current liabilities | | | 2,454,789 | | | | 1,991,125 | |
| | | | | | | | | |
| Stockholders' deficiency | | | | | | | | |
| Preferred stock, $.001 par value; 10,000,000 shares authorized; 184,144 shares issued and outstanding (liquidation preference of $2,538,100 and $2,483,950 as of June 30, 2009 and December 31, 2008, respectively) | | | 184 | | | | 184 | |
| Common stock $.001 par value; 450,000,000 shares authorized; 265,911,229 shares issued and 265,906,829 shares outstanding as of June 30, 2009 and 244,850,034 shares issued and 244,845,634 outstanding as of December 31, 2008 | | | 265,910 | | | | 244,849 | |
| Additional paid-in capital | | | 29,709,888 | | | | 28,528,973 | |
| Treasury stock, at cost, 4,400 shares of common stock | | | (5,768 | ) | | | (5,768 | ) |
| Subscription receivable (including accrued interest of $22,960 and $12,914, respectively) | | | (360,160 | ) | | | (350,114 | ) |
| Accumulated deficit, including $17,189,621 and $15,563,011 of deficit accumulated during the development stage as of June 30, 2009 and December 31, 2008, respectively | | | (31,721,218 | ) | | | (30,094,607 | ) |
| Total stockholders’ deficiency | | | (2,111,164 | ) | | | (1,676,483 | ) |
| Total Liabilities and Stockholders' Deficiency | | $ | 343,625 | | | $ | 314,642 | |
See notes to condensed financial statements
PureSafe Water Systems, Inc.
(A Development Stage Company Commencing January 1, 2002)
Condensed Statements of Operations
| | | Three Months Ended | | | Six Months Ended | | | January 1, 2002 | |
| | | June 30, | | | June 30, | | | to June | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | 30, 2009 | |
| Sales | | $ | -- | | | $ | -- | | | $ | -- | | | $ | -- | | | $ | 471,290 | |
| Costs and expenses (income) - | | | | | | | | | | | | | | | | | | | | |
| Cost of sales | | | -- | | | | -- | | | | -- | | | $ | -- | | | | 575,680 | |
| Selling, general and administrative, including stock based compensation of $518,042 and $131,115 for the three months ended June 30, 2009 and 2008 and $582,004 and $238,188 for the six months ended June 30, 2009 and 2008 and $3,254,698 for the period of January 1, 2002 to June 30, 2009 | | $ | 876,386 | | | $ | 479,952 | | | $ | 1,294,798 | | | | 958,566 | | | | 10,218,725 | |
| Non-dilution agreement termination costs | | | -- | | | | -- | | | | -- | | | | -- | | | | 2,462,453 | |
| Research and development | | | 5,802 | | | | 54,404 | | | | 8,036 | | | | 165,925 | | | | 713,804 | |
| Interest expense, including interest expense to a related party of $2,083 and $0 for the three months ended June 30, 2009 and 2008, respectively and $8,333 and $0 for the six months ended June 30, 2009 and 2008, respectively and $142,106 for period of January 1, 2002 to June 30, 2009 | | | 56,798 | | | | 4,823 | | | | 101,877 | | | | 84,322 | | | | 1,618,597 | |
| Financing costs - extension of warrants | | | -- | | | | -- | | | | -- | | | | -- | | | | 74,700 | |
| Interest expense - conversion provision | | | -- | | | | -- | | | | -- | | | | -- | | | | 113,000 | |
| (Gain) loss on settlement of debt | | | -- | | | | -- | | | | -- | | | | (226,467 | ) | | | 2,229,903 | |
| Change in fair value of warrants and embedded conversion option | | | 59,400 | | | | 77,400 | | | | 221,900 | | | | 705,200 | | | | (345,951 | ) |
| Total cost and expenses (income) | | | 998,386 | | | | 616,579 | | | | 1,626,611 | | | | 1,687,546 | | | | 17,660,911 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | (998,386 | ) | | | (616,579 | ) | | | (1,626,611 | ) | | | (1,687,546 | ) | | | (17,189,621 | ) |
| Deemed dividend on preferred stock | | | -- | | | | -- | | | | -- | | | | -- | | | | (2,072,296 | ) |
| Preferred stock dividends | | | (27,075 | ) | | | (27,075 | ) | | | (54,150 | ) | | | (54,150 | ) | | | (780,273 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net loss attributable to common stockholders | | $ | (1,025,461 | ) | | $ | (643,654 | ) | | $ | (1,680,761 | ) | | $ | (1,741,696 | ) | | $ | (20,042,190 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Basic and diluted net loss attributable to common stockholders per common share | | | * | | | | * | | | | (0.01 | ) | | | (0.01 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of common shares outstanding - basic and diluted | | | 245,072,651 | | | | 242,948,162 | | | | 246,116,473 | | | | 230,555,597 | | | | | |
_____
See notes to condensed financial statements
PureSafe Water Systems, Inc.
(A Development Stage Company Commencing January 1, 2002)
Condensed Statement of Stockholders’ Deficiency
(Unaudited)
| | | | | | | | | | | | | | | Additional | | | Treasury | | | | | | | | | Total | |
| | | Preferred Stock | | | Common Stock | | | Paid-In | | | Stock | | | Subscription | | | Accumulated | | | Stockholders’ | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | at Cost | | | Receivable | | | Deficit | | | Deficiency | |
| Balance at December 31, 2008 | | | 184,144 | | | $ | 184 | | | | 244,850,034 | | | $ | 244,849 | | | $ | 28,528,973 | | | $ | (5,768 | ) | | | (350,114 | ) | | $ | (30,094,607 | ) | | $ | (1,676,483 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Proceeds from sale of common stock and warrants: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $0.0330 per share – January 16, 2009 | | | -- | | | | -- | | | | 757,576 | | | | 758 | | | | 24,242 | | | | -- | | | | -- | | | | -- | | | | 25,000 | |
| $0.0320 per share – January 30, 2009 | | | -- | | | | -- | | | | 1,562,500 | | | | 1,563 | | | | 48,437 | | | | -- | | | | -- | | | | -- | | | | 50,000 | |
| $0.0 320 per share – February 09, 2009 | | | -- | | | | -- | | | | 640,625 | | | | 641 | | | | 19,859 | | | | -- | | | | -- | | | | -- | | | | 20,500 | |
| $0.0 299 per share – February 13, 2009 | | | -- | | | | -- | | | | 1,672,241 | | | | 1,672 | | | | 48,328 | | | | -- | | | | -- | | | | -- | | | | 50,000 | |
| $0.0 290 per share – February 17, 2009 | | | -- | | | | -- | | | | 1,724,138 | | | | 1,724 | | | | 48,276 | | | | -- | | | | -- | | | | -- | | | | 50,000 | |
| $0.0 410 per share – April 29, 2009 | | | -- | | | | | | | | 609,756 | | | | 610 | | | | 24,390 | | | | -- | | | | -- | | | | -- | | | | 25,000 | |
| $0.0 440 per share – May 28, 2009 | | | -- | | | | -- | | | | 568,182 | | | | 568 | | | | 24,432 | | | | -- | | | | -- | | | | -- | | | | 25,000 | |
| $0.0 420 per share – June 3, 2009 | | | -- | | | | -- | | | | 595,238 | | | | 595 | | | | 24,405 | | | | -- | | | | -- | | | | -- | | | | 25,000 | |
| $0.0600 per share – June 17, 2009 | | | -- | | | | -- | | | | 416,667 | | | | 416 | | | | 24,584 | | | | -- | | | | -- | | | | -- | | | | 25,000 | |
| $0.0 700 per share – June 23, 2009 | | | -- | | | | -- | | | | 714,286 | | | | 714 | | | | 49,286 | | | | -- | | | | -- | | | | -- | | | | 50,000 | |
| Common stock issued in repayment of debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $0.0547 per share – March 14, 2009 | | | -- | | | | -- | | | | 500,000 | | | | 500 | | | | 26,868 | | | | -- | | | | -- | | | | -- | | | | 27,368 | |
| $0.039 per share – April 17, 2009 | | | -- | | | | -- | | | | 2,694,438 | | | | 2,694 | | | | 102,391 | | | | | | | | | | | | | | | | 105,085 | |
| $0.040 per share – April 17, 2009 | | | -- | | | | -- | | | | 2,605,548 | | | | 2,606 | | | | 101,613 | | | | | | | | | | | | | | | | 104,219 | |
| Common stock issued for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $0.0200 per share – February 23, 2009 | | | -- | | | | -- | | | | 1,000,000 | | | | 1,000 | | | | 19,000 | | | | -- | | | | -- | | | | -- | | | | 20,000 | |
| $0.041 per share – April 17, 2009 | | | -- | | | | -- | | | | 4,750,000 | | | | 4,750 | | | | 190,000 | | | | -- | | | | -- | | | | -- | | | | 194,750 | |
| $0.035 per share – May 6, 2009 | | | -- | | | | -- | | | | 250,000 | | | | 250 | | | | 8,500 | | | | -- | | | | -- | | | | -- | | | | 8,750 | |
| Stock for receivables | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | (10,046 | ) | | | -- | | | | (10,046 | ) |
| Reclassification of warrants to derivative liability | | | | | | | | | | | -- | | | | -- | | | | 37,800 | | | | -- | | | | -- | | | | -- | | | | 37,800 | |
| Amortization of warrants and options for employees and non-employees | | | | | | | | | | | | | | | | | | | 358,504 | | | | | | | | | | | | | | | | 358,504 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | | | | | (1,626,611 | ) | | | (1,626,611 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| BALANCE – June 30, 2009 | | | 184,144 | | | $ | 184 | | | | 265,911,229 | | | $ | 265,910 | | | $ | 29,709,888 | | | $ | (5,768 | ) | | $ | (360,160 | ) | | $ | (31,721,218 | ) | | $ | (2,111,164 | ) |
PureSafe Water Systems, Inc.
(A Development Stage Company Commencing January 1, 2002)
Condensed Statements of Cash Flow
(Unaudited)
| | | Six Months Ended | | | January 1, 2002 | |
| | | June 30, | | | to June | |
| | | 2009 | | | 2008 | | | 30, 2008 | |
| Cash Flows from Operating Activities: | | | | | | | | | | |
| Net Loss | | $ | (1,626,611 | ) | | $ | (1,687,546 | ) | | $ | (17,189,621 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities - | | | | | | | | | | | | |
| Depreciation | | | 11,869 | | | | 2,313 | | | | 28,999 | |
| Loss on sale of property and equipment | | | 8,177 | | | | -- | | | | 8,177 | |
| Amortization of patents | | | 2,680 | | | | 2,060 | | | | 19,180 | |
| Interest expense - amortization of deferred financing | | | -- | | | | 2,510 | | | | 22,530 | |
| Stock based compensation | | | 582,004 | | | | 238,188 | | | | 3,254,698 | |
| Interest expense - conversion provision | | | - | | | | -- | | | | 113,000 | |
| Stock subscription - interest receivable | | | (10,046 | ) | | | -- | | | | (22,960 | ) |
| Accretion of debt discount | | | 85,626 | | | | 67,900 | | | | 654,704 | |
| Change in fair value of warrants and embedded conversion option | | | 221,900 | | | | 705,200 | | | | (345,951 | ) |
| (Gain) loss on settlement of debt | | | | | | | (226,467 | ) | | | 2,229,903 | |
| Non-dilution agreement termination cost | | | -- | | | | -- | | | | 2,462,453 | |
| Inventory reserve | | | -- | | | | -- | | | | 159,250 | |
| Write-off of stock subscription receivable | | | -- | | | | -- | | | | 21,800 | |
| Financing costs - warrant extension | | | -- | | | | -- | | | | 74,700 | |
| Change in assets and liabilities - | | | | | | | | | | | | |
| Prepaid expenses and other current assets | | | 5,431 | | | | (1,779 | ) | | | 1,785 | |
| Security deposit | | | -- | | | | (17,441 | ) | | | (17,441 | ) |
| Accounts payable, accrued expenses, accrued dividends, accrued compensation, accrued consulting and director fees, customer deposits and other current liabilities | | | 430,611 | | | | (77,287 | ) | | | 2,225,565 | |
| Net Cash Used in Operation Activities | | | (288,359 | ) | | | (992,349 | ) | | | (6,299,229 | ) |
| | | | | | | | | | | | | |
| Cash Flows from Investing Activities: | | | | | | | | | | | | |
| Purchase of property and equipment | | | -- | | | | (101,891 | ) | | | (159,567 | ) |
| Proceeds from sale of property and Equipment | | | 4,350 | | | | -- | | | | 4,350 | |
| Patent costs | | | (5,089 | ) | | | (23,154 | ) | | | (58,960 | ) |
| Net Cash Used in Investing Activities | | | (739 | ) | | | (125,045 | ) | | | (214,177 | ) |
| | | | | | | | | | | | | |
| Cash Flows from Financing Activities: | | | | | | | | | | | | |
| Reduction of stock subscription receivable | | | -- | | | | -- | | | | 65,700 | |
| Proceeds from sale of preferred stock | | | -- | | | | -- | | | | 1,130,127 | |
| Proceeds from sale of common stock | | | 345,500 | | | | 1,070,000 | | | | 4,206,060 | |
| Proceeds from exercise of warrants | | | -- | | | | 9,350 | | | | 9,350 | |
| Proceeds from sale of common stock to be issued | | | -- | | | | -- | | | | 300,000 | |
| Deferred financing costs | | | -- | | | | -- | | | | (22,530 | ) |
| Proceeds from convertible promissory note | | | -- | | | | -- | | | | 850,000 | |
| Proceeds from officers’ and directors’ loans | | | -- | | | | -- | | | | 300,000 | |
| Repayment of notes payable | | | -- | | | | (57,958 | ) | | | (274,999 | ) |
| Net Cash Provided by Financing Activities | | | 345,500 | | | | 1,021,392 | | | | 6,563,708 | |
(Continued on following page)
PureSafe Water Systems, Inc.
(A Development Stage Company Commencing January 1, 2002)
Condensed Statements of Cash Flow
(Unaudited)
(Continued From Previous Page)
| | | Six Months Ended | | | January 1, 2002 | |
| | | June 30, | | | to June | |
| | | 2009 | | | 2008 | | | 30, 2009 | |
| Net (Decrease) Increase in Cash | | | 56,402 | | | | (96,002 | ) | | | 50,302 | |
| Cash at Beginning of Year | | | 29,411 | | | | 415,400 | | | | 35,511 | |
| | | | | | | | | | | | | |
| Cash at end of period | | $ | 85,813 | | | $ | 319,398 | | | $ | 85,813 | |
| | | | | | | | | | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | | | | | |
| Cash paid during the year for - | | | | | | | | | | | | |
| Interest | | $ | 943 | | | $ | 2,866 | | | $ | 371,296 | |
| | | | | | | | | | | | | |
| NON-CASH INVESTING ACTIVITIES: | | | | | | | | | | | | |
| Notes receivable for common stock issued | | $ | -- | | | | 1,433,100 | | | $ | 337,200 | |
| | | | | | | | | | | | | |
| NON-CASH FINANCING ACTIVITIES: | | | | | | | | | | | | |
| Compensation satisfied by issuance of common stock | | | -- | | | | -- | | | $ | 55,250 | |
| Common stock issued in satisfaction of liabilities | | $ | 236,672 | | | $ | 362,509 | | | $ | 7,037,871 | |
| Reclassification of derivative liabilities upon conversion of debt | | $ | 86,400 | | | $ | 77,700 | | | $ | 587,566 | |
| Reclassification of equity instruments to liabilities upon issuance of equity instruments | | | 48,600 | | | $ | -- | | | $ | 48,600 | |
| | | | | | | | | | | | | |
| Cancellation of debt for no consideration | | | -- | | | $ | -- | | | $ | 1,327,321 | |
See notes to condensed financial statements
PureSafe Water Systems, Inc.
(A Development Stage Company Commencing January 1, 2002)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 1: DESCRIPTION OF BUSINESS.
PureSafe Water Systems, Inc. (the "Company") is a Delaware corporation engaged in the design and development of its technology to be used in the manufacture and sale of water purification systems, the PureSafe(TM) First Response Water System (the “PureSafe FRWS”), both within and outside of the United States. The Company's corporate headquarters is located in Plainview, New York.
NOTE 2: BASIS OF PRESENTATION AND ACCOUNTING POLICIES.
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, these interim financial statements do not include all of the information and footnotes required for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included.
The operating results for the three and six months period ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. These financial statements should be read in conjunction with the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on April 15, 2009.
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 reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The most significant estimates, among other things, are used in accounting for the evaluation allowances for deferred income taxes, expected realizable values for long-lived assets (primarily intangible assets) and contingencies, as well as the recording and presentation of the Company’s common stock, preferred stock, option and warrant issuances. Estimates and assumptions are periodically reviewed and the effects of any material revisions are reflected in the financial statements in the period that they are determined to be necessary. Actual results could differ from those estimates and assumptions.
Stock-Based Compensation
The Company reports stock-based compensation under SFAS No. 123R “Share Based Payment” (“SFAS 123R”). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.
The Company accounts for equity instruments issued to non-employees as compensation in accordance with the provisions of SFAS 123R and the Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or Services” (“EITF 96-18”), which require that each such equity instrument is recorded at its fair value on the measurement date, which is typically the date the services are performed.
The Black-Scholes option valuation model is used to estimate the fair values of options. The model includes subjective input assumptions that can materially affect the fair value estimates. The model was developed for use in estimating the fair value of traded options or warrants that have no vesting restrictions and that are fully transferable. The expected volatility is estimated based on the most recent historical period of time equal to the weighted average life of the subject option.
NOTE 3: GOING CONCERN.
The accompanying unaudited condensed financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred recurring losses from operations, an accumulated deficit since its inception of approximately $31,721,000 and $30,095,000 as of June 30, 2009 and December 31, 2008, respectively, and has a working capital deficiency of approximately $2,321,000 and $1,908,000 as of June 30, 2009 and December 31, 2008, respectively. These conditions raise substantial doubt about the Company's ability to continue as a going concern.
The Company’s plans with respect to these matters include restructuring its existing debt and raising additional capital through future issuances of stock and/or debt. The Company is seeking to raise an additional $10 million in the next nine months to fund the following activities: the production of 30 commercialized PureSafe FRWS units; submitting two commercialized units for all necessary certifications; launching a marketing program for the PureSafe FRWS; establishing a sales and marketing network; and concluding agreements with strategic partners for international marketing and manufacturing. The Company can give no assurance that such financing will be available on terms advantageous to us, or at all. Should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would need to curtail certain or all of its operational activities. The accompanying unaudited condensed financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
NOTE 4: RECENT ACCOUNTING STANDARDS.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This statement became effective on January 1, 2009. The adoption of SFAS 162 did not have a material impact on the Company’s financial position and results of operations.
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the computation of earnings per share under the two-class method as described in FASB Statement of Financial Accounting Standards No. 128, “Earnings per Share.” FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning on or after December 15, 2008. The adoption of FSP EITF 03-6-1 did not have a material impact on the Company’s financial position and results of operations.
In June 2008, the Financial Accounting Standards Board (“FASB”) ratified the consensus reached by the EITF on three issues discussed at its June 12, 2008 meeting pertaining to EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”). The issues include how an entity should evaluate whether an instrument, or embedded feature, is indexed to its own stock, how the currency in which the strike price of an equity-linked financial instrument, or embedded equity-linked feature, is denominated affects the determination of whether the instrument is indexed to an entity’s own stock and how the issuer should account for market-based employee stock option valuation instruments. EITF 07-5 is effective for financial instruments issued for fiscal years and interim periods beginning after December 15, 2008 and is applicable to outstanding instruments as of the beginning of the fiscal year it is initially applied. The cumulative effect, if any, of the change in accounting principle shall be recognized as an adjustment to the opening balance of retained earnings. The adoption of EITF 07-5 did not have a material impact on the Company’s financial statements.
In April 2009, FASB issued FASB Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2 and 124-2”). FSP 115-2 and 124-2 amend the guidance on other-than-temporary impairment for debt securities and modifies the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. These FSPs are effective for interim and annual periods ending after June 15, 2009. The adoption of FSP 115-2 and 124-2 did not have a material impact on the Company’s financial position and results of operations.
In April 2009, FASB issued FASB Staff Position No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”). FSP 157-4 provides additional guidance for estimating fair value under Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” when there is an inactive market or the market is not orderly. This FSP is effective for interim and annual periods ending after June 15, 2009. The adoption of FSP 157-4 did not have a material impact on the Company’s financial position and results of operations.
In April 2009, FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP 107-1 and APB 28-1”). These FASB staff position and Accounting Principles Board opinion require disclosure about fair value of financial instruments in interim periods, as well as annual financial statements. FSP 107-1 and APB 28-1 are effective for interim periods ending after June 15, 2009. The adoption of FASB 107-1 and APB 28-1 did not have a material impact on the Company’s financial position and results of operations.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS No. 165 was issued in order to establish principles and requirements for reviewing and reporting subsequent events and requires disclosure of the date through which subsequent events are evaluated and whether the date corresponds with the time at which the financial statements were available for issue (as defined) or were issued. SFAS No. 165 is effective for interim reporting periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on the Company’s financial statements.
In July 2009, the FASB issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Codification and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS. 168”). Statement No. 168 supersedes Statement No. 162 issued in May 2008. Statement No. 168 will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. This Statement is effective for our quarterly reporting period ending September 30, 2009. The adoption of Statement No. 168 is not expected to have any impact on the Company’s financial position and results of operations.
NOTE 5: NET LOSS PER SHARE OF COMMON STOCK
Basic loss per share was computed using the weighted average number of outstanding common shares. Diluted loss per share includes the effect of dilutive common stock equivalents from the assumed exercise of options, warrants, convertible preferred stock and convertible notes. Common stock equivalents were excluded in the computation of diluted loss per share since their inclusion would be anti-dilutive. Total shares issuable upon the exercise of warrants and conversion of preferred stock and convertible promissory notes for the six months ended June 30, 2009 and 2008 were as follows:
| | | June 30, | |
| | | 2009 | | | 2008 | |
| Warrants | | | 36,353,152 | | | | 28,718,403x | |
| Convertible promissory notes | | | 3,438,554 | | | | 1,632,937 | |
| Convertible preferred stock | | | 1,545,760 | | | | 1,587,760 | |
| Total | | | 41,337,466 | | | | 31,939,100 | |
NOTE 6: STOCKHOLDERS' DEFICIENCY.
Debt
In March 2009, the Company issued 500,000 shares of Common Stock in settlement of $27,368 of accounts payable due a vendor.
Cash
During the six months ended June 30, 2009, for gross proceeds of $345,500 the Company sold an aggregate of 9,261,209 shares of common stock and warrants to purchase additional 1,852,242 shares of common stock at an exercise price of $0.0348 to $0.0840. The warrants have a term of three years.
Services
During the six months ended June 30, 2009, the Company issued the following securities of the Company as compensation for services rendered:
| 1. | 1,000,000 shares of common stock to a consultant pursuant to the term of a consulting agreement entered into in October 2007. The Company recorded $20,000 of stock-based compensation in connection with this issuance; |
| 2. | 500,000 shares of common stock and granted a five-year option to purchase an additional 500,000 shares of common stock to the Company’s director of production. The option was made fully exercisable as of its grant date and has an exercise price of $0.041 per share. Such stock and option were granted under the Company’s 2008 Equity Incentive Plan. The Company recorded stock-based compensations of $20,500 and $14,200, respectively; |
| 3. | 250,000 shares of common stock and granted a five-year option to purchase an additional 250,000 shares of common stock to the Company’s controller. The option was made fully exercisable as of its grant date and has an exercise price of $0.041 per share. Such stock and option were granted under the Company’s 2008 Equity Incentive Plan. The Company recorded stock-based compensations of $10,250 and $7,100, respectively |
NOTE 7: RELATED PARTY TRANSACTIONS.
| | (a) | In March 2007, the Company’s Chief Executive Officer and a former director each made loans of $50,000 to the Company. The loans pay simple interest at the rate of 10% per annum and were due and payable 120 days after funding. The loans from the Chief Executive Officer and the director carry an option that, if the loans were not repaid by June 14, 2007 and June 29, 2007, respectively, such options would entitle the lenders to convert their debt into shares of Common Stock at a price equal to 50% of the average closing price of the Common Stock over the three previous business days preceding the date of demand for conversion is made. Under accounting guidance provide by EITF 00-19, the conversion price of the loans did not have a determinable number of shares the loans could be settled in and as a result, have been presented as a derivative liability. Accordingly, the conversion option will be marked to market through earnings at the end of each reporting period. As of June 30, 2009, the $50,000 loan and $11,199 of accrued interest owed to the former director is still outstanding. In July 2009, the former director expressed that he would like the Company to pay him back the loan and accrued interest and did not want to convert the loan. |
| | (b) | On October 14, 2008, Leslie J. Kessler, the Company’s Chief Executive Officer, and Terry R. Lazar, the Company’s Chief Financial Officer each made loans of $50,000 to the Company. The loans accrue interest at the rate of 10% per annum. In addition, the Company issued to each officer warrants to purchase 256,420 shares of common stock at an exercise price of $0.047 per share. The loans are due and payable by or on October 14, 2009; provided , however , each executive officer may, at the officer’s option and in lieu of conversion as set in the loan agreements, demand repayment of the loan amount plus all accrued and unpaid interest as of the date demand is received by the Company. The loans are evidenced by the promissory notes of the Company issued to the two officers which each contain a conversion clause that grant the officers, exercisable at the officer’s sole discretion, to convert the loan amount plus all accrued and unpaid interest due under the note into common stock at any time. The conversion price is $0.039 per share, the closing market price of the common stock as of the funding date of the loans. |
On November 17, 2008, the Chief Executive Officer and the Chief Financial Officer each made second loans of $50,000 to the Company. The loans accrue interest at the rate of 10% per annum. In addition, in connection with these second loans, the Company issued to each officer warrants to purchase 250,000 shares of common stock at an exercise price of $0.048 per share. The loans are due and payable by or on November 17, 2009, provided , however , each of the officers may, at the officer’s option and in lieu of conversion as set in the loan agreements, demand repayment of the loan amount plus all accrued and unpaid interest as of the date demand is received by the Company. The loans are evidenced by the promissory notes the Company issued to these two officers which contain a conversion clause that grant each of the officers, exercisable at the officer’s sole discretion, the right to convert the loan amount plus all accrued and unpaid interest due under the note into common stock at any time. The conversion price is $0.04 per share, the closing market price of the common stock as of the funding date of the loans.
The Company accounted for the issuance of these convertible promissory notes in accordance with EITF 00-19. The gross proceeds from the sale of the notes, $200,000, was recorded net of a discount of approximately $78,800. The debt discounts consisted of approximately $11,200 related to the fair value of the warrants and approximately $67,600 related to the fair value of the embedded conversion options. The debt discounts are charged to interest expense ratably over the term of the convertible notes.
On April 17, 2009, the Chief Executive Officer and the Chief Financial Officer both made demands to convert the then existing loan including accrued interest into the Company’s common stock based on the term set forth in the October 14 and November 17, 2008 promissory notes. The Company issued 5,299,986 shares of common stock to the Chief Executive Officer and the Chief Financial Officer in connection of such conversions of total $200,000 debt principal and $9,304 accrued interest.
| | (c) | In April 2009, the Company granted the Company’s chief executive officer the right to receive a total of 4,000,000 shares of common stock, 2,000,000 of which were issued in April 2009 and the remaining 2,000,000 shares are issuable on January 1, 2010. In addition to such stock grants, the officer was granted a five-year option to purchase an additional 3,000,000 shares of common stock. The option was made fully exercisable as of its grant date and has an exercise price of $0.041 per share. Such stock and option are being issued and were granted under the Company’s 2008 Equity Incentive Plan. The Company incurred stock-based compensation $82,000 and $84,900, respectively, in connection with such stock and option grant. |
| | (d) | In April 2009, the Company granted the Company’s chief financial officer the right to receive a total of 4,000,000 shares of common stock, 2,000,000 of which were issued in April 2009 and the remaining 2,000,000 shares are issuable on January 1, 2010. In addition to such stock grants, the officer was granted a five-year option to purchase an additional 3,000,000 shares of common stock. The option was made fully exercisable as of its grant date and has an exercise price of $0.041 per share. Such stock and option are being issued and were granted under the Company’s 2008 Equity Incentive Plan. The Company incurred stock-based compensation $82,000 and $84,900, respectively, in connection with such stock and option grant. |
| | (e) | In April 2009, the Company granted the Company’s chief executive officer five-year warrants to purchase an aggregate 4,000,000 shares of common stock. The warrants were made fully exercisable as of their grant date and have an exercise price of $0.041 per share. The Company incurred stock-based compensation $113,200 in connection with the grant of such warrants. |
| | (f) | In May 2009, the Company issued 250,000 shares of common stock to a director in order to fulfill the Company’s obligation in connection with the appointment of the director effective March 14, 2008. The Company incurred stock-based compensation of $8,750 in connection with such stock issuance. |
NOTE 8: CREDIT RISK.
The Company maintains cash deposits with financial institutions, which from time to time may exceed federally insured limits. The Company has not experienced any losses and believes it is not exposed to any significant credit risk with respect to its cash deposits.
NOTE 9: SUBSEQUENT EVENT
Management has evaluated all subsequent events after the balance sheet date and through the financial issuance date for appropriate accounting and disclosure.
In the 3rd quarter of 2009, the Company raised $170,000 through the sale of 2,254,273 shares of common stock and warrants to purchase additional 468,421 shares of common stock at an exercise price of $0.0864 to $0.0876. The warrants have a term of three years.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Introductory Comment
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and related notes contained elsewhere in this Quarterly Report on Form 10-Q, as well as our audited financial statements and related notes at and for the year ended December 31, 2008 contained in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission (the “SEC”) on April 15, 2009.
Forward-looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). To the extent that any statements made in this Form 10-Q contain information that is not historical, these statements are essentially forward-looking. Forward-looking statements can be identified by the use of words such as “expect,” “plan,” “will,” “may,” “anticipate,” “believe,” “could,” “should,” “intend,” “estimate” and variations of such words. Forward-looking statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, without limitation:
| — | our ability to raise capital to finance our research and development and operations, when needed and on terms advantageous to us; |
| — | our ability to manage growth, profitability and marketability of our products; |
| — | general economic and business conditions; |
| — | the effect on our business of recent credit-tightening throughout the United States and the world, especially with respect to federal, state, local and foreign government procurement agencies, as well as quasi-public, charitable and private emergency response organizations; |
| — | the effect on our business of recently reported losses within the financial, banking and other industries and the effect of such losses on the income and financial condition of our potential clients; |
| — | the impact of developments and competition within the industries in which we intend to compete; |
| — | adverse results of any legal proceedings; |
| — | the impact of current, pending or future legislation and regulation on water safety, including, but not limited to, changes in zoning and environmental laws and regulations within our target areas of operations; |
| — | our ability to maintain and enter into relationships with suppliers, vendors and contractors of acceptable quality of goods and services on terms advantageous to us; |
| — | the volatility of our operating results and financial condition; |
| — | our ability to attract and retain qualified senior management personnel; and |
| — | the other risks and uncertainties detailed in this Form 10-Q and, from time to time, in our other filings with the SEC. |
Readers of this Quarterly Report on Form 10-Q should carefully consider such risks, uncertainties and other information, disclosures and discussions which contain cautionary statements identifying important factors that could cause our actual results to differ materially from those provided in forward-looking statements. Readers should not place undue reliance on forward-looking statements contained in this Form 10-Q. We do not undertake any obligation to publicly update or revise any forward-looking statements we may make in this Form 10-Q or elsewhere, whether as a result of new information, future events or otherwise.
Results of Operations
Sales. We recorded zero sales for the three months and six months periods ended June 30, 2009 and 2008.
Until the fourth quarter of 2001, we were engaged in the manufacture and marketing of water coolers and water purification and filtration products. In the fourth quarter of 2001, such business was sold so that we could concentrate on the further development, manufacturing and marketing of a line of water purification systems. In 2007, new management made a strategic decision that the existing water filtration system had not produced any significant sales. New management further recognized that the existing unit required significantly more engineering. In 2007, we signed a contract with Bircon Ltd., an Israeli-based engineering consulting company, to design our new “PureSafe First Response Water System” (the “PureSafe FRWS”) line of water decontamination systems. We believe the PureSafe FRWS product will result in our first significant sales since 2001. We currently expect to recognize the first sales of the PureSafe product in the third quarter of 2009. We will cease being a development stage enterprise at the time of our recognition of significant revenue from sales of the PureSafe FRWS product.
Cost of sales. We recorded zero cost of sales for the three months and six months ended June 30, 2009 and 2008.
Selling, general and administrative. We incurred selling, general and administrative expenses for the three months ended June 30, 2009 of $876,386 compared to $479,952 for the same period in 2008, a $396,434 or 83% increase. The primary reason for the increase is the $386,927 increase in stock-based compensation in 2009 compared with same period in 2008. In the 2nd quarter of 2009, the Company incurred $518,042 stock-based compensation from issuing 5,000,000 shares of common stock and options and warrants to purchase additional 10,750,000 shares of common stock to various parties. Marketing expense continued the trend from the first quarter of 2009 had significant increase when comparing with the same period of 2008. Marketing expense incurred in the second quarter of 2009 was $50,526, compared with $23,121 for the same period in 2008, a $27,405, or 119% increase. The contributing factor for the increase in marketing expense is the fact that since we have completed PureSafe FRWS prototype, the focus of our efforts has shifted from research and development to production, marketing and sales. Hidell-Eyster International Inc., a consulting company we retained in June 2008 continues to provide services in strategic planning, product modification, and the development and marketing services of the PureSafe FRWS.
Selling, general and administrative expenses for the six months ended June 30, 2009 and 2008 were $1,294,798 and $958,566, respectively. Main contributors to the $336,232 increase include the following: the rent and rent related expenses increased approximately $23,000. Audit and accounting fees for six months ended June 2009 was $79,835, compared to $152,913 in 2008, a $73,078 or 48% drop. The drastic drop in audit and accounting fees were credited to a more experienced accounting and finance team resulted less audit hours incurred in the preparation of 2008 10-K and 2009 first quarter 10-Q compared to the same period in 2008. Marketing expense for six months ended June 30, 2009 was $116,670, compared to $23,121 in 2008, a $93,549 increase. Again, the increase in marketing expense in 2009 was the shift in our focus from research and development to production, marketing and sales since July 2008. Stock-based compensation has the most drastic increase when comparing the six months ended June 30, 2009 to same period in 2008. We incurred $582,004 stock-based compensation in 2009 and $238,188 in 2008, a $343,816 increase.
Research and development. The research and development expense for the three months ended June 30, 2009 was $5,802. Compared with $54,404 incurred in the same period of 2008, a $48,602 or 89% decrease; and, for the six months ended June 30, 2009 and 2008 was $8,036 and $165,925, respectively, a $157,889 decrease. Since the completion of the prototype of PureSafe FRWS in July of 2008, we spent a lot less funds in research and development and put more focus on commercialization of the product, production and building marketing and sales model and team. Our director of production, with the collaborations from Hidell-Eyster International and our director of technology, Gil Tenne, is currently working on the modifications of PureSafe FRWS from the original design shown in our prototype to a commercialized product. We do expect to see the increased spending in research and development in the third or fourth quarters of 2009.
Interest expense (non-debt discount related) for the three months ended June 30, 2009 and 2008 was $5,970 and $4,823, respectively; for the six months ended June 30, 2009 and 2008 was $16,252 and $84,322, respectively.
Debt discount related interest expense for the three months ended June 30, 2009 and 2008 was $50,828 and $0, respectively. For six months ended June 30, 2009 and 2008 was $85,626 and $0, respectively. The debt discount related interest expenses incurred in this period included a one-time $45,953 charge associated with the conversion of four promissory notes held by our Chief Executive Officer and Chief Financial Officer in April 2009.
Change in fair value of warrants and embedded conversion options for the three months ended June 30, 2009 and 2008 were $59,400 and $77,400; for the six months ended June 30, 2009 and 2008 was $221,900 and $705,200, respectively. The $483,300 decrease comparing the six months ended June 30, 2009 and 2008 was the results of decreased fair value of the common stock in 2009.
For all the above-stated reasons, the net loss for three months ended June 30, 2009 and 2008 was ($998,386) and ($616,579), respectively; and for six months ended June 30, 2009 and 2008 was ($1,626,611) and ($1,687,546), respectively.
Liquidity and Capital Resources
As of June 30, 2009, we maintained a cash balance of $85,813 as compared to $319,398 as of the same date in 2008.
Net cash used in the operating activities in the six months ended June 30, 2009 and 2008 was $288,359 and $992,349, respectively. The primarily factors that we used approximately $704,000 less cash in the six months ended June 30, 2009 compared to the same period in 2008 were the following:
| | a. | We paid approximately $360,000 to Bircon Ltd on research and development for our prototype in the six months ended June 30, 2008 and made no such payments in the same period of 2009; |
| | b. | Our Chief Executive Officer, Chief Financial Officer and some of our consultants agreed to defer their compensation since August 2008 so we can utilize the limited funds in a more productive way. |
Net cash used in capital expenditures in the six months ended June 30, 2009 and 2008 was $739 and $125,045, respectively. The cash paid in 2008 for capital expenditures were spent on leasehold improvements, furniture and fixtures, equipments for the new headquarters and we also paid $23,154 in the first six months of 2008 for the pending patent we applied in 2008 for the technology used on our PureSafe FRWS.
In the six months ended June 30, 2009 and 2008, we raised $345,500 and $1,070,000 through sales of our common stock, respectively. In the first quarter of 2008, an investor exercised a warrant to purchase 110,000 shares of common stock. We received $9,350 from such transaction. We used $57,958 cash to repay notes payables in the first quarter of 2008. From all the above activities, net cash provided by financing activities for the first six months of 2009 and 2008 was $345,500 and $1,021,392, respectively.
As the results of all activities above, we had a $56,402 net increase in cash for the six months ended June 30, 2009 and a $96,002 net decrease in cash for the same period in 2008.
At June 30, 2009, we had a working capital deficit of approximately $2,321,000. Absent fluctuations due to market to market changes in our outstanding detachable warrants, options and embedded conversion option liabilities, we continue to suffer recurring losses from operations and have an accumulated deficit since inception of approximately $31,721,000. These conditions raise substantial doubt about our ability to continue as a going concern. Our plans with respect to these matters include restructuring our existing debt and raising additional capital through future issuances of stock and/or debt. We are seeking to raise an additional $10 million in the next nine months to fund the following activities: the production of 30 commercialized PureSafe FRWS units; submitting two commercialized units for all necessary certifications; launching a marketing program for the PureSafe FRWS; establishing a sales and marketing network; and concluding agreements with strategic partners for international marketing and manufacturing. Provided we are successful in obtaining such financing, we believe that there will be revenue recognition by the fourth quarter of 2009. We can give no assurance that such financing will be available on terms advantageous to us, or at all. Should we not be successful in obtaining the necessary financing to fund our operations, we would need to curtail some or all of our operational activities. The accompanying unaudited condensed financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.
Recent Accounting Pronouncements
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This statement became effective on January 1, 2009. The adoption of SFAS 162 did not have a material impact on our financial position and results of operations.
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the computation of earnings per share under the two-class method as described in FASB Statement of Financial Accounting Standards No. 128, “Earnings per Share.” FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning on or after December 15, 2008. The adoption of FSP EITF 03-6-1 did not have a material impact on our financial position and results of operations.
In June 2008, the Financial Accounting Standards Board (“FASB”) ratified the consensus reached by the EITF on three issues discussed at its June 12, 2008 meeting pertaining to EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”). The issues include how an entity should evaluate whether an instrument, or embedded feature, is indexed to its own stock, how the currency in which the strike price of an equity-linked financial instrument, or embedded equity-linked feature, is denominated affects the determination of whether the instrument is indexed to an entity’s own stock and how the issuer should account for market-based employee stock option valuation instruments. EITF 07-5 is effective for financial instruments issued for fiscal years and interim periods beginning after December 15, 2008 and is applicable to outstanding instruments as of the beginning of the fiscal year it is initially applied. The cumulative effect, if any, of the change in accounting principle shall be recognized as an adjustment to the opening balance of retained earnings. The adoption of EITF 07-5 did not have an impact on our financial statements.
In April 2009, FASB issued FASB Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2 and 124-2”). FSP 115-2 and 124-2 amend the guidance on other-than-temporary impairment for debt securities and modify the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. These FASB staff positions are effective for interim and annual periods ending after June 15, 2009. The adoption of FSP 115-2 and 124-2 did not have amaterial impact on our financial position and results of operations.
In April 2009, FASB issued FASB Staff Position No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”). FSP 157-4 provides additional guidance for estimating fair value under Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” when there is an inactive market or the market is not orderly. This FSP is effective for interim and annual periods ending after June 15, 2009. The adoption of FSP 157-4 did not have a material impact on our financial position and results of operations.
In April 2009, FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP 107-1 and APB 28-1”). FSP 107-1 and APB 28-1 require disclosure about fair value of financial instruments in interim periods, as well as annual financial statements. FSP 107-1 and APB 28-1are effective for interim periods ending after June 15, 2009. The adoption of FASB 107-1 and APB 28-1 did not have a material impact on our financial position and results of operations.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS No. 165 was issued in order to establish principles and requirements for reviewing and reporting subsequent events and requires disclosure of the date through which subsequent events are evaluated and whether the date corresponds with the time at which the financial statements were available for issue (as defined) or were issued. SFAS No. 165 is effective for interim reporting periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on our financial statements.
In July 2009, the FASB issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Codification and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS. 168”). Statement No. 168 supersedes Statement No. 162 issued in May 2008. Statement No. 168 will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. This Statement is effective for our quarterly reporting period ending September 30, 2009. The adoption of Statement No. 168 is not expected to have any impact on our financial position and results of operations.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of the statements in accordance with these principles requires that we make estimates, using available data and our judgment, for such things as valuing assets, accruing liabilities and estimating expenses. We are currently in development stage as defined by SFAS No. 7. The following is a list of what we believe are the most critical estimations that we make when preparing our financial statements.
Stock-Based Compensation
We report stock-based compensation under Statements of Financial Accounting Standards (“SFAS”) No. 123R (“123R”) “Share Based Payment.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.
We account for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123R and the Emerging Issues Task Force (“EITF”) Issue No. 96-18, ”Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or Services” (“EITF 96-18”), which require that such equity instruments are recorded at their fair value on the measurement date, which is typically the date the services are performed.
The Black-Scholes option valuation model is used to estimate the fair value of the options or their equivalent granted. The model includes subjective input assumptions that can materially affect the fair value estimates. The model was developed for use in estimating the fair value of traded options or warrants that have no vesting restrictions and that are fully transferable. The expected volatility is estimated based on the most recent historical period of time equal to the weighted average life of the options granted.
We have issued equity instruments in the past to raise capital and as a means of compensation to employees and for the settlement of debt.
Derivative Financial Instruments
In connection with the issuance of certain convertible promissory notes, the terms of the convertible notes included an embedded conversion feature which provided for a conversion of the convertible promissory notes into shares of our common stock at a rate which was determined to be variable. We determined that the conversion feature was an embedded derivative instrument pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and Emerging Issues Task Force (“EITF”) Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”
The accounting treatment of derivative financial instruments requires that we record the conversion option and related warrants at their fair values as of the inception date of the convertible debenture agreements and at fair value as of each subsequent balance sheet date. In addition, under the provisions of EITF Issue No. 00-19, as a result of issuing the convertible promissory notes, we were required to reclassify all other non-employee warrants and options as derivative liabilities and record them at their fair values at each balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. We reassess the classification of the instruments at each balance sheet date. If the classification required under EITF Issue No. 00-19 changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
Registration Payment Arrangements
We account for registration rights agreements in accordance with FASB Staff Position (FSP) No. EITF 00-19-2, “Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”), which specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies.” FSP EITF 00-19-2 also requires additional disclosure regarding the nature of any registration payment arrangements, alternative settlement methods, the maximum potential amount of consideration and the current carrying amount of the liability, if any.
Income taxes
Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of net operating loss carry forward or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of FIN 48.
In accordance with FIN 48, interest costs related to unrecognized tax benefits are required to be calculated (if applicable) and would be classified as “Interest expense, net” in the consolidated statements of operations. Penalties would be recognized as a component of “General and administrative expenses.”
Our uncertain tax positions are related to tax years that remain subject to examination by relevant tax authorities. We file income tax returns in the United States (federal) and in various state and local jurisdictions. We are no longer subject to federal, state and local income tax examinations by tax authorities for years prior to 2004. The adoption of the provisions of FIN 48 did not have a material impact on our financial position and results of operations.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
This Item is not applicable to smaller reporting companies.
| Item 4T. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is also based in part on certain assumptions regarding the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Given these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their stated goals under all potential future conditions.
Changes in Internal Control Over Financial Reporting
We have taken actions and implemented new policies to mitigate certain weakness we identified in 2008 which were disclosed in the 10-K we filed with SEC on April 15, 2009.
Entity Level. We recognized the need to provide leadership and clear guidance to our employees regarding the maintenance and preparation of financial matters. We have completed in January 2009, PureSafe Employee Handbook and provided a copy to each of our employee. We are in the process of completing the policy and procedures manual and are expecting to complete and implement the policy and procedures in the third quarter of 2009.
Financial Reporting. In 2008, we recognized that we needed to implement a more structured mechanism for evidence of review in the financial reporting process. The following procedures have been implemented since the beginning of 2009, (a) CFO signs and date all financial documents upon the completion of reviewing such documents, (b) all approval or permission will be evidenced by either email or in writing. No oral approval or permission is allowed, (c) General Journal is recorded only after CFO approves (in writing) such entry and (d) monthly bank reconciliations must complete within 15 days after month ends and reviewed by CFO 5 days after the completion of bank reconciliation.
Confidential Reporting mechanism. In January 2009, we implemented a whistleblower program. A toll-free number, as well as an email address, were posted on the homepage of our website to encourage our employee, contractors, sub-contractors, vendors to report any unethical or illegal behavior they suspect.
The above changes, implementation on our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently completed fiscal quarter will have materially affected, or are reasonably likely to materially strengthen our internal control over financial reporting.
PART II - OTHER INFORMATION
| Item 1. | Legal Proceedings. |
Reference is hereby made to Item 3 of our Annual Report on Form 10-K, for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission on April 15, 2009 (Commission File No.: 0-5418), and to the references made in such Item, for a discussion of all material pending legal proceedings to which we are a party.
This Item is not applicable to smaller reporting companies.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
In the six months of 2009, we sold an aggregate 9,261,209 shares of common stock and warrants to purchase an additional 1,852,242 shares of common stock at an exercise price of $0.0348 to $0.0840 to multiple investors for total proceeds of $345,500.
On March 14, 2009, we issued 500,000 shares of common stock to repay outstanding debt of $27,368 to a service provider.
In February 2009, we issued 1,000,000 shares of common stock to a consultant pursuant to the term of a consulting agreement entered into in October 2007. The Company recorded $20,000 of stock-based compensation in connection with this issuance.
In April 2009, we issued 5,299,986 shares of common stock to our Chief Executive Officer and our Chief Financial Officer in connection of such conversions of total $200,000 debt principal and $9,304 accrued interest.
In April 2009, we issued 500,000 shares of common stock to the Company’s director of production.
In April 2009, we issued 250,000 shares of common stock to the Company’s controller.
In April, 2009, we issued fully-exercisable five-year warrants to purchase 4,000,000 shares of common stock, at an price of $.041 per share, to our Chief Executive Officer.
In April, 2009, we issued 2,000,000 shares of common stock to our Chief Executive Officer which was part of a total of 4,000,000 granted to the officer. The remaining 2,000,000 shares are issuable on January 1, 2010.
In April, 2009, we issued 2,000,000 shares of common stock to our Chief Financial Officer which was part of a total of 4,000,000 granted to the officer. The remaining 2,000,000 shares are issuable on January 1, 2010.
In May 2009, we issued 250,000 shares of common stock to a director, who is not an officer of the Company.
We believe the issuances of the securities noted in this Item 2 were each exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), by reason of the exemption from registration granted under Section 4(2) of the Securities Act due to the fact that the subject issuance was a transaction not involving any public offering.
| Item 3. | Defaults Upon Senior Securities. |
None
| Item 4. | Submission of Matters to a Vote of Security Holders. |
None.
| Item 5. | Other Information. |
None
The following exhibits are being filed as part of this Quarterly Report on Form 10-Q.
Exhibit Number | Exhibit Description |
| | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer. |
| | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer. |
| | Section 1350 Certification of Principal Executive Officer. |
| | Section 1350 Certification of Principal Financial Officer. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated: August 13, 2009 | PureSafe Water Systems, Inc. |
| | | |
| | By: | /s/ Leslie J. Kessler |
| | | Leslie J. Kessler |
| | | Chief Executive Officer |
| | | (Duly Authorized Officer and |
| | | Principal Executive Officer) |
| | | |
| | By: | /s/ Terry R. Kessler |
| | | Terry R. Kessler |
| | | Chief Financial Officer |
| | | (Duly Authorized Officer and |
| | | Principal Financial Officer) |
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