Attached files

file filename
EX-31.2 - SECTION 302 CFO CERTIFICATION - 374Water Inc.dex312.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - 374Water Inc.dex321.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - 374Water Inc.dex322.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - 374Water Inc.dex311.htm
Table of Contents

 

 

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 March 31, 2011

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 000-27866

 

 

POWERVERDE, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   88-0271109

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

23429 N. 35th Drive, Glendale, Arizona 85310

(Address of principal executive offices)

(623) 780-3321

(Registrant’s telephone number including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for 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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of May 23, 2011 the issuer had 24,876,398 shares of common stock outstanding.

 

 

 


Table of Contents

Index to Form 10-Q

 

           Page  
PART I    FINANCIAL INFORMATION      1   
Item 1.    Financial Statements      1   
   Condensed Consolidated Balance Sheets      1   
   Condensed Consolidated Statements of Operations      2   
   Consolidated Statements of Changes in Stockholders’ Deficiency (Equity)      3   
   Condensed Consolidated Statements of Cash Flows      4   
   Notes to Unaudited Condensed Consolidated Financial Statements      5   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      9   
Item 3.    Quantitative and Qualitative Disclosures about Market Risk      11   
Item 4.    Controls and Procedures      12   
PART II    OTHER INFORMATION      13   
Item 1.    Legal Proceedings      13   
Item 1A.    Risk Factors      13   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      13   
Item 3.    Defaults upon Senior Securities      13   
Item 4.    (Removed and Reserved)      13   
Item 5.    Other Information      13   
Item 6.    Exhibits      13   
SIGNATURES      14   


Table of Contents

PART I FINANCIAL INFORMATION

Item 1. Financial Statements.

PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Balance Sheets

March 31, 2011 and December 31, 2010

(Unaudited)

 

     2011     2010  

Assets

    

Current Assets:

    

Cash and cash equivalents

   $ 438,784      $ 15,646   

Accounts receivable

     10,438        5,350   

Inventory

     140,105        —     
                

Total Current Assets

     589,327        20,996   
                

Property and Equipment

    

Property and equipment, net of accumulated depreciation of $14,782 and $13,103, respectively

     21,547        12,034   
                

Total Assets

   $ 610,874      $ 33,030   
                

Liabilities and Stockholders’ Equity (Deficiency)

    

Current Liabilities

    

Accounts payable and accrued expenses

   $ 64,791      $ 153,891   

Deposit on Unit – build to suit

     30,000        —     
                

Total Current Liabilities

     94,791        153,891   
                

Commitments and Contingencies

    

Stockholders’ Equity (Deficiency)

    

Preferred stock:

    

50,000,000 preferred shares authorized, par value $0.0001 per share, no shares issued and outstanding at March 31, 2011 and December 31, 2010

     —          —     

Common stock:

    

100,000,000 common shares authorized, par value $0.0001 per share, 29,376,398 common shares issued and outstanding at March 31, 2011, and 28,043,065 common shares issued and outstanding at December 31, 2010

     2,937        2,804   

Additional paid-in capital

     3,210,946        2,179,625   

Deficit accumulated in the development stage

     (2,697,800     (2,303,290
                

Total Stockholders’ Equity (Deficiency)

     516,083        (120,861
                

Total Liabilities and Stockholders’ Equity (Deficiency)

   $ 610,874      $ 33,030   
                

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

1


Table of Contents

PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Statements of Operations

For the three months ended March 31, 2011 and 2010, and the

period from March 9, 2007 (Date of Inception) to March 31, 2011

(Unaudited)

 

     Three months ended
March 31,
    Cumulative  from
inception through
March 31, 2011
 
   2011     2010    

Licensing and Royalty Revenue

   $ 10,438      $ 13,047      $ 101,803   
                        

Operating Expenses

      

Research and development

     200,086        45,042        1,213,150   

General and administrative

     228,519        63,313        1,368,455   
                        

Total Operating Expenses

     428,605        108,355        2,581,605   
                        

Loss from Operations

     (418,167     (95,308     (2,479,802
                        

Other Income (Expenses)

      

Interest income

     —          —          2,401   

Interest expense

     —          —          (333,475

Other

     23,657        —          16,011   
                        

Total Other Income (Expense)

     23,657        —          (315,063
                        

Loss before Income Taxes

     (394,510     (95,308     (2,794,865

Provision for Income Taxes

     —          —          —     
                        

Net Loss

   $ (394,510   $ (95,308   $ (2,794,865
                        

Net Loss per Share - Basic and Diluted

   $ (0.01   $ (0.00  
                  

Weighted Average Common Shares Outstanding - Basic and Diluted

     28,644,526        27,620,472     
                  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2


Table of Contents

PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Consolidated Statement of Changes in Stockholders’ Equity (Deficiency)

For the three months ended March 31, 2011

(Unaudited)

 

     Common
Shares
     Common
Stock
     Additional
Paid in
Capital
     Deficit
Accumulated
during the
Development
Stage
    Total
Stockholders’
Equity
(Deficiency)
 

Balances, December 31, 2010

     28,043,065       $ 2,804       $ 2,179,625       $ (2,303,290   $ (120,861

Sale of common stock at $.75 per share, net of stock issuance costs of $100,000

     1,333,333         133         899,867         —          900,000   

Stock-based Compensation

           131,454           131,454   

Net loss for the three months ended March 31, 2011

     —           —           —           (394,510     (394,510
                                           

Balances, March 31, 2011

     29,376,398       $ 2,937       $ 3,210,946       $ (2,697,800   $ 516,083   
                                           

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3


Table of Contents

PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 2011 and 2010, and the

period from March 9, 2007 (Date of Inception) to March 31, 2011

(Unaudited)

 

     2011     2010     Cumulative from
inception  through
March 31, 2011
 

Cash Flows from Operating Activities

      

Net loss

   $ (394,510   $ (95,308   $ (2,697,800

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

      

Depreciation, amortization, and impairment charges

     1,680        1,417        14,783   

Amortization of discount

     —          —          329,462   

Stock-based compensation

     131,454        —          187,704   

Changes in operating assets and liabilities:

      

Accounts receivable and other assets

     (5,088     (5,421     (10,438

Stock subscription receivable

       (60,000     —     

Inventory

     (140,105       (140,105

Deposit on build to suit unit

     30,000          30,000   

Accounts payable and accrued liabilities

     (89,100     63,186        (165,750
                        

Cash Used in Operating Activities

     (465,669     (96,126     (2,452,144
                        

Cash Flows From Investing Activities

      

Purchase of fixed assets

     (11,193     —          (36,329

Cash acquired in business acquisition

     —          —          872   
                        

Cash Used in Investing Activities

     (11,193     —          (35,457
                        

Cash Flows from Financing Activities

      

Proceeds from issuance of common stock

     1,000,000        85,000        3,030,000   

Proceeds from notes payable

     —          —          300,000   

Payment of line of credit

     —          —          (50,000

Payment of note payable

     —          —          (90,217

Payment of stock issuance costs

     (100,000     (8,500     (263,398
                        

Cash Provided by Financing Activities

     900,000        76,500        2,926,385   
                        

Net Increase (Decrease) in Cash

     423,138        (19,626     438,784   

Cash, at Beginning of Period

     15,646        20,457        —     
                        

Cash, at End of Period

   $ 438,784      $ 831      $ 438,784   
                        

Supplemental Disclosure of Cash Flow Information

      

Cash paid during the period for interest

   $ —        $ —        $ 24,221   
                        

Cash paid during the period for income taxes

   $ —        $ —        $ —     
                        

Supplemental Schedule of Non-Cash Financing Activities

      

Common stock issued for convertible debt

   $ —        $ —        $ 189,261   
                        

Common stock issued for services

   $ —        $ —        $ 56,250   
                        

Warrants issued in connection with debt

   $ —        $ —        $ 299,984   
                        

Common stock issued in connection with debt forgiveness and services rendered

   $ —        $ —        $ 250,000   
                        

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4


Table of Contents

PowerVerde, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2011

Note 1 – Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the annual report of PowerVerde, Inc. (“PowerVerde,” “we,” “us,” “our” or the “Company”) as of and for the year ended December 31, 2010. The results of operations for the three months ended March 31, 2011, are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements include the accounts of PowerVerde, Inc., formerly known as Vyrex Corporation, and PowerVerde Systems, Inc., formerly known as PowerVerde, Inc., its wholly-owned subsidiary. Intercompany balances and transactions have been eliminated in consolidation.

Note 2 – Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has had recurring operating losses and negative cash flows from operations. Those factors, as well as uncertainty in securing additional funds for continued operations, create an uncertainty about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Note 3 – Summary of Significant Accounting Policies

Inventories

Inventories, which consist of raw materials, work in progress, and finished goods are stated at the lower of cost or market value, cost being determined using the first-in, first-out method. The Company records reserves for inventory shrinkage and obsolescence, when considered necessary. As of March 31, 2011 and December 31, 2010 inventories were $140,105 and $0 of work in progress, respectively. No reserve was required at March 31, 2011.

Revenue Recognition

Sales revenues and associated cost of sales are recognized when title of the goods sold pass to the buyer, when shipped, and when accounts receivable are determined to be reasonably collectable.

Licensing and royalty revenue from royalty agreements is recognized in accordance with the terms of the specific agreement.

Stock-based Compensation

The Company accounts for share-based compensation in accordance with ASC Topic 718 “Share-Based Payments.” The Company has used the Black-Scholes option pricing model to estimate the fair value of stock options on the date of grant.

 

5


Table of Contents

Note 4 – Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued ASU 2009-13 (an update to ASC 605-25), Revenue Recognition: Multiple-Element Arrangements (“ASU 2009-13”) which is effective for annual periods beginning on or after June 15, 2010; however, early adoption is permitted. In arrangements with multiple deliverables, ASU 2009-13 permits entities to use management’s best estimate of selling price to value individual deliverables when those deliverables have never been sold separately or when third-party evidence is not available. In addition, any discounts provided in multiple-element arrangements will be allocated on the basis of the relative selling price of each deliverable. The implementation of ASU 2009-13 did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued authoritative guidance that requires new disclosures related to fair value measurements and clarifies existing disclosure requirements about the level of disaggregation, inputs and valuation techniques. Specifically, reporting entities now must disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, in the reconciliation for Level 3 fair value measurements, a reporting entity should present separately information about purchases, sales, issuances and settlements. The guidance clarifies that a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities for disclosure of fair value measurement, considering the level of disaggregated information required by other applicable U.S. GAAP guidance and should also provide disclosures about the valuation techniques and inputs used to measure fair value for each class of assets and liabilities. This guidance was effective for the Company on January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the reconciliation for Level 3 fair value measurements, which became effective for the Company on January 1, 2011. The adoption of the applicable sections of this guidance effective on January 1, 2010 and 2011 did not have a material impact on the Company’s consolidated financial statements.

In April 2010, the FASB issued ASU No. 2010-17, Milestone Method of Revenue Recognition, a consensus of the FASB Emerging Issues Task Force (“ASU 2010-17”). ASU 2010-17 provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. This statement is effective prospectively for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The implementation of ASU 2010-17 did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB amended its existing guidance for goodwill and other intangible assets. This authoritative guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if there are qualitative factors indicating that it is more likely than not that a goodwill impairment exists. The qualitative factors are consistent with the existing guidance which requires goodwill of a reporting unit to be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This authoritative guidance becomes effective for the Company in fiscal 2012. The implementation of this authoritative guidance is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

In April 2011, the FASB issued new guidance clarifying when a debt restructuring by a creditor constitutes a troubled debt restructuring, which is effective July 1, 2011 for all restructurings that occurred on or after January 1, 2011. Specifically, the guidance clarifies that a troubled debt restructuring only exists when a creditor makes a concession in interest rates or payment terms to a debtor experiencing financial difficulties. It provides additional guidance on determining what constitutes a concession, and on the use of probability in determining if a debtor could be experiencing financial difficulty prior to defaulting on payments. The adoption of this new guidance is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

 

6


Table of Contents

Note 5 – Property and Equipment

A summary of property and equipment at March 31, 2011 and December 31, 2010 is as follows:

 

     March 31, 2011      December 31, 2010      Estimated Useful
Lives (in years)
 

Equipment

   $ 25,426       $ 22,339         5   

Computer equipment (hardware)

     6,974         2,798         3-5   

Software

     3,929         —           3   
                    
     36,329         25,137      

Less: Accumulated depreciation

     14,782         13,103      
                    
   $ 21,547       $ 12,034      
                    

The amounts charged to operations for depreciation for the three months ended March 31, 2011 and 2010 were $1,680 and $1,417, respectively.

Note 6 – Stockholders’ Equity

Warrants

In 2008, the Company issued warrants to purchase 250,000 and 50,000 shares of the Company’s common stock at exercise prices of $1.50 and $2.30 per share, respectively. These warrants are still outstanding as of March 31, 2011. The warrants expire on various dates through November 2011. As of May 23, 2011, none of these warrants was exercised and 25,000 had expired.

During March through December 2010, the Company issued warrants to purchase 439,999 shares of the Company’s common stock at an exercise price of $0.75 per share. These warrants expire on various dates through December 2013. As of May 23, 2011, none of these warrants was exercised or had expired.

During January through March 2011, the Company issued warrants to purchase 1,333,333 shares of the Company’s common stock at an exercise price of $0.75 per share. These warrants expire on various dates through March 2014. As of May 23, 2011, none of these warrants was exercised or had expired.

A summary of warrants issued, exercised and expired during the three months ended March 31, 2011 is as follows:

 

     Shares      Weighted
Average
Exercise
Price
 

Balance at December 31, 2010

     739,999         1.11   

Issued

     1,333,333         0.75   

Exercised

     —           —     

Expired

     —           —     
                 

Balance at March 31, 2011

     2,073,332         0.88   
                 

 

7


Table of Contents

Note 6 – Stockholders’ Equity (continued)

Private Placement of Common Stock

During January through March 2011, the Company raised $1,000,000 through the private placement of 1,333,333 shares of its common stock to accredited investors at $.75 per share. Each investor received a three-year warrant to purchase stock at $.75 per share for a number of shares of common stock equal to the number of shares purchased by the investor in this offering. On January 31, 2011, the Company entered into a Binding Letter of Intent for European Distribution (the “BLOI”) with Newton Investments BV, a Dutch corporation based in Leeuwarden, Netherlands (“Newton”), as disclosed in Note 8, below. The $1,000,000, referred to above, included $250,000 purchased by a Newton affiliate in conjunction with the Newton BLOI.

Preferred Shares

The Company has 50,000,000 shares of authorized, $0.0001 par value preferred stock. At March 31, 2011, no shares had been issued.

Note 7 – Stock Options

On January 1, 2011 the Company entered into a Nonqualified Stock Option Agreement with an employee, granting 1,350,000 option shares at an exercise price of $0.59 per option share. The stock options have a term of 10 years and vest as follows: 25% upon execution and 25% at the six-, twelve- and eighteen-month anniversaries from the date of execution.

Stock options issued and outstanding at March 31, 2011 totaled 1,350,000 at a weighted average exercise price of $0.59. There were no stock options outstanding at December 31, 2010.

The fair value of these options was estimated using the Black-Scholes stock option pricing model. The following weighted average assumptions were used in the Black Scholes model: expected price volatility of 87%, risk-free interest rate of 2.02% and expected life of options of 5.75 years. Total stock compensation for the three months ended March 31, 2011 and 2010 was $131,454 and $0, respectively. Remaining stock compensation of $394,362 will be recognized ratably over 18 months from the grant date.

Note 8 – Commitments

On January 31, 2011, the Company entered into a Binding Letter of Intent for European Distribution (the “BLOI”) with Newton Investments BV, a Dutch corporation based in Leeuwarden, Netherlands (“Newton”). Pursuant to the BLOI, the Company and Newton agreed to enter into a definitive agreement within 60 days (since extended to 120 days), pursuant to which Newton will, for a period of 10 years, be the exclusive manufacturer and distributor of the Company’s proprietary emissions-free electrical power generation systems (the “Systems”) in the 27 countries which are currently members of the European Union, subject to Newton achieving minimum sales of at least 100 Systems per year and investing at least $750,000 in establishing its manufacturing facility and distribution network. Pursuant to the BLOI, the Company will receive as a royalty an amount equal to 20% of the gross sale price of each System sold by Newton. The Company has authorized Newton to manufacture our Systems under a strict licensing agreement with a Dutch/German foundry and machine shop. Of the 27 European Union nations, the Company is initially focusing on the Netherlands, Belgium, Germany and Scandinavian countries. Newton also agreed to purchase an initial System from us for a discounted price of $90,000. In connection with the BLOI, an affiliate of Newton invested $250,000 in PowerVerde by privately purchasing 333,333 restricted shares of our common stock at a price of $.75 per share. In connection with this purchase, the Company issued to the investor a three-year warrant to buy an additional 333,333 shares at a price of $.75 per share. In February 2011, the Company received $30,000 from Newton as a deposit on the $90,000 purchase price for the initial System.

 

8


Table of Contents

Note 9 – Subsequent Events

On April 7, 2011, in order to enhance the Company’s ability to raise capital and limit dilution of its stockholders, it entered into an agreement with its co-founder and President and Chief Executive Officer, George Konrad, pursuant to which Mr. Konrad agreed to surrender to the treasury 4,500,000 shares of common stock owned by him since inception in exchange for the Company (i) entering into an employment agreement with him; and (ii) agreeing to pay to Mr. Konrad’s company, Arizona Research and Development (“ARD”), $200,000, representing the cost of certain equipment owned by ARD which is principally used by the Company.

Consequently, on April 7, 2011, the Company entered into a two-year employment agreement with Mr. Konrad, pursuant to which Mr. Konrad serves as President. Pursuant to this employment agreement, the Company pays Mr. Konrad a salary of $10,000 per month. The employment agreement contains standard confidentiality provisions, as well as standard non-competition and non-solicitation provisions which survive for two years following termination of employment.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Readers are cautioned that the statements in this Report that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are based on the beliefs of our management, as well as on assumptions made by and information currently available to us as of the date of this Report. When used in this Report, the words “plan,” “will,” “may,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project” and similar expressions are intended to identify such forward-looking statements. Although we believe these statements are reasonable, actual actions, operations and results could differ materially from those indicated by such forward-looking statements as a result of the risk factors included in our 2010 Annual Report, or other factors. We must caution, however, that this list of factors may not be exhaustive and that these or other factors, many of which are outside of our control, could have a material adverse effect on us and our ability to achieve our objectives. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above.

The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.

Critical Accounting Policies

The condensed consolidated financial statements of PowerVerde, Inc. are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these condensed consolidated financial statements requires our management to make estimates and assumptions about future events that effect the amounts reported in the financial statements and related notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. We believe the following critical accounting policies affect its more significant judgments and estimates used in the preparation of financial statements.

Accounting for Uncertainty in Income Taxes

The Company adopted the accounting standard regarding “Accounting for Uncertain Tax Positions” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

9


Table of Contents

Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Our evaluation was performed for the tax years ended December 31, 2007, 2008, 2009 and 2010, the tax years which remain subject to examination by major tax jurisdictions as of March 31 2011.

We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the financial statements as selling, general and administrative expense.

Inventories

Inventories, which consist of raw materials, work in progress, and finished goods are stated at the lower of cost or market value, cost being determined using the first-in, first-out method. We record reserves for inventory shrinkage and obsolescence, when considered necessary.

Revenue Recognition

Sales revenues and associated cost of sales are recognized when title of the goods sold pass to the buyer, when shipped, and when accounts receivable are determined to be reasonably collectable.

Licensing and royalty revenue from royalty agreements is recognized in accordance with the terms of the specific agreement.

Stock-based Compensation

We account for share-based compensation in accordance with ASC Topic 718 “Share-Based Payments.” We have used the Black-Scholes option pricing model to estimate the fair value of stock options on the date of grant.

Common Stock Purchase Warrants

The Company accounts for common stock purchase warrants in accordance with ASC Topic 815-40, “Derivatives and Hedging – Contracts in Entity’s Own Equity” (“ASC 815-40”). Based on the provisions of ASC 815-40, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement, or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).

Overview

From January 1991 until October 2005, the Company devoted substantially all of its efforts and resources to research and development related to its unsuccessful Biotech Business, in particular the study of biological oxidation and antioxidation directed to the development of potential therapeutic products for the treatment of various diseases and conditions. In the most recent years, the Company’s research focused mainly on targeted antioxidant therapeutics and nutraceuticals. The Company is a development stage company, has never generated any substantial revenue from product sales and has relied primarily on equity financing, licensing revenues, and various debt instruments for its working capital. The Company has been unprofitable since its inception.

Following the cessation of material Biotech Business operations in October 2005, the Company turned its primary focus to seeking an appropriate merger partner for its public shell. This resulted in the February 2008 Merger with Vyrex. In March 2009, we assigned our Biotech IP to an investor in exchange for his agreement to pay all future expenses relating to the Biotech IP and to pay us 20% of any net proceeds received from sale and/or licensing of the Biotech IP. We do not expect this arrangement to generate material revenues.

 

10


Table of Contents

Since the Merger, we have focused on the development and testing of our electric power systems, in particular, their applicability to thermal and natural gas pipeline operations. Our business is subject to significant risks, including the risks inherent in our research and development efforts, uncertainties associated with obtaining and enforcing patents and intense competition.

Except as specifically noted to the contrary, the following discussion relates only to PowerVerde since, as a result of the Merger, the only historical financial statements presented for the Company in periods following the Merger are those of the operating entity, PowerVerde.

Results of Operations

Three Months Ended March 31, 2011 as Compared to Three Months Ended March 31, 2010

Since inception, we have focused on the development and testing of our clean energy electric power generation systems. We had no material revenues in the first quarter of 2011 or 2010 – just $10,438 and $13,047 in Biotech IP licensing fees in 2011 and 2010, respectively — while we had substantial expenses due to our research and development activities in the first quarter of 2010 and production of our initial System for sale to Newtown and a prototype in the first quarter 2011. We also had substantial administrative expenses during both periods, including those associated with our status as a public company. During the first quarter of 2011, administrative expenses included stock compensation expense of $131,454 associated with a stock option issuance. Our net loss in the first quarter of 2011 and 2010 was $394,510 and $95,308, respectively. Substantial net losses will continue until we are able to successfully commercialize and market our products, as to which there can be no assurance.

Liquidity and Capital Resources

We have financed our operations since inception through the sale of debt and equity securities. As of March 31, 2011, we had working capital of $494,536 compared to a working capital deficit of $132,895 at December 31, 2010.

During January through March 2011, we raised gross proceeds of $1,000,000 through the private placement of 1,333,333 shares of our common stock to accredited investors at $.75 per share. Each investor received a three-year warrant to purchase stock at $.75 per share for a number of shares of common stock equal to the number of shares purchased by the investor in this offering. The $1,000,000 included $250,000 purchased by a Newton affiliate in conjunction with the Newton BLOI, as referred to in Note 4, above. We paid a 10% commission on the gross proceeds of this offering to our placement agent, Martinez-Ayme Securities.

In February 2011, we received $30,000 from Newton as a deposit on the $90,000 purchase price for the initial System. See Note 8 of “Notes to Unaudited Condensed Consolidated Financial Statements.”

We believe that our current level of working capital will be sufficient to sustain our current operations through at least approximately the next six months. However, we continue to seek more funding from private equity investors, as well as governmental sources, as we will need to raise substantial additional capital in order to finance our plan of operations. There can be no assurance that we will be able to raise the necessary funds. If we do not raise the necessary funds, we will be forced to cease operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

 

11


Table of Contents

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and President, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There were no significant changes in internal control over financial reporting during the quarter ended March 31, 2011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

12


Table of Contents

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the 2010 Annual Report. Please refer to that section for disclosure regarding the risks and uncertainties related to our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During January through March 2011, we raised $1,000,000 through the private placement of 1,333,333 shares of our common stock to accredited investors at $.75 per share. Each investor received a three-year warrant to purchase stock at $.75 per share for a number of shares of common stock equal to the number of shares purchased by the investor in this offering.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved).

Item 5. Other Information.

None.

Item 6. Exhibits.

 

(a) Exhibits

 

31.1    Certification of Principal Executive Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

13


Table of Contents

SIGNATURES

In accordance with Section 13(a) or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 23, 2011

 

POWERVERDE, INC.
By:  

/s/ George Konrad

  George Konrad
  President and Chief Executive Officer and Chief Financial Officer

 

14


Table of Contents

Exhibit Index

 

Exhibit
No.

  

Description

31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

15