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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_____________________

 

FORM 10-K

_____________________

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011

 

Commission File No. 000-27866

_____________________

 

PowerVerde, Inc.

(Exact name of registrant as specified in its charter)

_____________________

 

Delaware   88-0271109

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

   

420 S. Dixie Highway Suite 4-B

Coral Gables, FL

  33146
(Address of principal executive offices)   (Zip Code)

 

(305) 666-0024

(Registrant’s telephone number, including area code)

_____________________

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001 per share

_____________________

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes 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 x No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 as defined in Rule 12b-2 of the Exchange Act.

 

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 aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and ask prices of such stock equity, as of June 30, 2011, the last business day of the issuer’s most recently completed second fiscal quarter: $47,183,402.

 

As of April 13, 2012, the number of outstanding shares of common stock, $0.0001 par value per share, of the registrant was 28,303,315.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 


 

 

PowerVerde, Inc.

Annual Report on Form 10-K

Year Ended December 31, 2010

 

INDEX

 

      Page
PART I     1
ITEM 1. BUSINESS.   1
ITEM 1A. RISK FACTORS.   6
ITEM 1B. UNRESOLVED STAFF COMMENTS.   12
ITEM 2. PROPERTIES.   12
ITEM 3. LEGAL PROCEEDINGS.   12
ITEM 4. MINE SAFETY DISCLOSURES.   12
PART II     13
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.   13
ITEM 6. SELECTED FINANCIAL DATA.   14
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.   15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.   18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.   18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.   18
ITEM 9A. CONTROLS AND PROCEDURES.   18
ITEM 9B. OTHER INFORMATION.   19
PART III     20
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.   20
ITEM 11. EXECUTIVE COMPENSATION.   23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.   25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.   26
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.   26
PART IV     27
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.   27

  

i
 

 

PART I

 

ITEM 1. BUSINESS.

 

General

 

Vyrex Corporation (“Vyrex” or the “Company”) was incorporated in Nevada in 1991, and operated as a research and development stage company seeking to discover and develop pharmaceuticals, nutraceuticals and cosmeceuticals for the treatment and prevention of respiratory, cardiovascular and neurodegenerative diseases and conditions associated with aging (the “Biotech Business”). The Biotech Business was unsuccessful and, as a result, the Company ceased material operations relating to that business in October 2005; however, the Company retained its intellectual property rights and contract rights relating to that business (the “Biotech IP”). On October 17, 2005, the Company reincorporated in Delaware.

 

On February 11, 2008, Vyrex, PowerVerde, Inc. (“PowerVerde”) and Vyrex Acquisition Corporation (“VAC”), a wholly-owned subsidiary of Vyrex, all Delaware corporations, entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, on February 12, 2008, VAC merged with and into PowerVerde, with PowerVerde remaining as the surviving corporation and a wholly-owned subsidiary of Vyrex (the “Merger”). As consideration for the Merger, as of the closing of the Merger, each issued and outstanding share of common stock of PowerVerde was converted into the right to receive 1.2053301 shares of the common stock of Vyrex and each share of VAC was converted into one share of PowerVerde common stock. As a result of the Merger, the former shareholders of PowerVerde hold 95% of the common stock of Vyrex. Pursuant to the Merger Agreement, PowerVerde paid $233,000 in accounts payable and other liabilities owed by Vyrex.

 

On August 6, 2008, at a special meeting of shareholders, Vyrex’s name was changed to “PowerVerde, Inc.” Simultaneously, the name of our operating company, PowerVerde, Inc., was changed to “PowerVerde Systems, Inc.”

 

In March 2009, we sold all of the Biotech IP to Dr. Edward Gomez, a pre-Merger investor in PowerVerde and now a shareholder of the Company. In exchange for the assignment of the Biotech IP to him, Dr. Gomez agreed to (i) pay all future costs and expenses relating to the Biotech IP, including, but not limited to, patent fees, license fees and legal fees, and (ii) pay to the Company 20% of all net revenues received from the sale and/or licensing of any of the Biotech IP.

 

Please note that the information provided below relates to the combined company after the Merger. Since our operations after the Merger consist solely of PowerVerde operations, except where the context otherwise requires, references throughout this Report hereafter to “PowerVerde,” “we,” “us,” “our” and the “Company” will mean or refer to PowerVerde’s business and operations.

 

The Company is a Delaware corporation formed in March 2007 by George Konrad and Fred Barker, who remain as officers and directors and are our two largest stockholders. The Company was formed in order to further develop, commercialize and market a series of unique electric generating power systems designed to produce electrical power with zero emissions or waste byproducts, based on a patented pressure-driven motor and related organic pressure-driven cycle components. The design of the motor was conceived by Mr. Barker in January 2001. Mr. Barker previously had a working relationship with Mr. Konrad and enlisted Mr. Konrad and his manufacturing expertise, together with Mr. Barker’s own engineering expertise, to co-develop the motor. As a research and development company, we have tested and continue to test other style drivers as well.

 

1
 

 

An initial prototype of the motor was created and tested in early 2002, and, based on positive test results, Messrs. Barker and Konrad concluded that the concept could lead to a commercial product. A new design was developed in early 2007, which resulted in a motor that produced more torque and horsepower, as well as being easier to mass produce. The prototype was tested extensively, and substantial tooling and engineering with CAM/CNC programming was completed at the facility of Mr. Konrad’s company, Arizona Research and Development (“ARD”), for the possibility of an eventual mass production model.

 

Based on data learned from these earlier prototypes, PowerVerde has manufactured three 25/50kW motors and additional next generation motors or drivers as well. The Company has been testing these devices on a more powerful and advanced organic pressure-driven cycle (OPDC) referred to as the Liberator. During 2009, the Company also built and tested a 100kW pressure-driven motor at another machining and manufacturing facility, Global Machine Works, in Arlington, WA. These two related but distinct systems are designed for two different markets. The 25/50kW system uses low-grade heat (waste heat) as a fuel source, expanding a working fluid thereby driving the motor/generator, while the 100kW system (without organic rankine cycle (“ORC”) or OPDC systems), uses wasted energy (pressure) from natural gas pipeline and wellhead infrastructures to drive the motor/generator and create electric power. In early 2010, our Board of Directors created two separate product lines: waste heat/solar organic rankine cycle powered systems; and gas pipeline/wellhead waste energy recovery systems. Because the markets and customers for these two systems are entirely different and the design and manufacturing are geographically separate, we believe that this bifurcation will result in a more streamlined and efficient business structure. The development of the natural gas pipeline system has been delayed due to our decision to dedicate our limited human and financial resources to commercialize our waste heat/solar thermal system, which we believe has more near term potential.

 

In January 2011, we 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, Newton purchased one Liberator system for a discounted price of $130,000, which was delivered in July 2011. In September 2011, we entered into a definitive License Agreement with Newton as contemplated by the BLOI. Under the Agreement, Newton will, for a period of 10 years, be the exclusive manufacturer and distributor of the our 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, beginning in the second year of the Agreement. Pursuant to the Agreement, we are entitled to a royalty equal to 20% of the gross sale price of each System sold by Newton. We have authorized Newton to manufacture our Systems under a strict licensing agreement with a Dutch foundry and machine shop, Autonational BV, based in Ijlst, Netherlands, and capable of producing hundreds of units per year. Of the 27 European Union nations, we are initially focusing on the Netherlands, Belgium, Germany and the Scandinavian countries.

 

In March 2009, we entered into a non-binding letter of intent (the “LOI”) with Keahole Solar Power LLC (“KSP”), a subsidiary of Sopogy, Inc. (“Sopogy”), based in Honolulu, Hawaii. Sopogy has developed a modular and scalable solar energy solution designed for on-site energy generation in the range of 250kW-20MW. The LOI reflects the parties’ intent to work together on development of smaller Sopogy systems in the 50kW to 500kW range. Under the terms contemplated by the LOI, we would install a 25/50kW PowerVerde motor for use at KSP’s solar thermal power generation facility at the Natural Energy Laboratory of Hawaii located in Kona, Hawaii. We would operate the system and the parties would share performance data for five years. After three years of working with Sopogy, we believe that the contemplated 25/50kW system may be too small for Sopogy’s market, and designs for up to a 250kW system have been developed; however, these designs are still in the early stages. While we are optimistic about our relationship with Sopogy and KSP, there can be no assurance that we will ever enter into a definitive agreement with Sopogy or KSP, that we will ever install our motor as contemplated in the LOI or that we will ever generate any revenues from this relationship.

 

2
 

 

In November 2011, we entered into a binding letter of intent for the acquisition of all of the membership interests in Cornerstone Conservation Group LLC, Scottsdale, Arizona (“Cornerstone”). The acquisition was consummated pursuant to a definitive agreement executed in March 2012. Cornerstone’s main asset is its proprietary Combined Cooling, Heating and Power (“CCHP”) technology, which utilizes waste heat from commercial and residential heating, ventilation air conditioning and refrigeration (“HVACR”) systems. Cornerstone also has substantial experience and technology relating to geothermal or ground source heat pumps.

 

As consideration for the Cornerstone acquisition, we issued (i) a total of 2,250,000 restricted shares of our common stock to Cornerstone’s members, Bryce Johnson (“Johnson”), Paul Kelly (“Kelly”) and Vincent Hils (“Hils”) in the amounts of 1,575,000, 337,500 and 337,500 shares, respectively, (ii) 10,000 restricted shares to a Cornerstone employee, and (iii) three-year warrants to purchase 150,000 shares each to Johnson and Kelly at exercise prices of $2.00-$4.00 per share. In November 2011, Johnson joined our Board of Directors, and in January 2012 we moved our operations to a facility in Scottsdale, Arizona, owned by Johnson. See “Item 2 - Properties.” Johnson also became our chief operating officer in January 2012.

 

We believe that Cornerstone’s technology is very complementary to PowerVerde’s platform and existing markets – mainly through the conversion of thermal energy into electric power generation. While we believe that the Cornerstone acquisition brings substantial opportunities for synergy, there can be no assurance that the acquisition will prove successful.

 

Our focus for the remainder of 2012 is on working with Newton and Autonational to commercialize our waste heat solar power systems in Europe. We plan to complete our development and testing by the summer of 2012 and have a market-ready system by the end of 2012; however, there can be no assurance that we will meet this timetable or ever have a market-ready system. We and Newton continue discussions with certain manufacturers of integrated components and service providers in the oil, natural gas manufacturing industries, methane plants, as well as with electric utility companies and government entities. There can be no assurance that any manufacturing, distribution or marketing agreements will be successfully consummated or executed or that we will ever achieve material sales in Europe or elsewhere.

 

Employees

 

We currently have three full-time employees, Messrs. Keith Johnson, Mark Prinz and Les Hetrick, all based in Scottsdale, Arizona. All of these employees were hired in 2011.

 

Patents

 

Messrs. Barker and Konrad together obtained U.S. Patent No. 6,840,151 for a “push-push type fluid pressure actuated motor,” which was issued on January 11, 2005. On June 6, 2007, Messrs. Barker and Konrad and the Company’s predecessor, PowerVerde, LLC, permanently and exclusively assigned to PowerVerde all rights to the patent and the other intellectual property relating to the PowerVerde systems. On July 16, 2008, Messrs. Barker and Konrad filed U.S. Patent application No. 61/081,298 for a “system to produce electricity using waste energy in natural gas pipelines.” This application was assigned to the Company; however, it was abandoned in 2009 because we decided to replace it with a new and improved provisional patent application regarding the natural gas pipeline technology. Mr. Barker filed on behalf of PowerVerde a new provisional patent application regarding this technology on April 7, 2010. On October 17, 2008, Mr. Konrad and Mr. Brian K. Gray filed U.S. Patent application No. 12/253,580 for a “low temperature organic rankine cycle system.” This application was assigned to the Company. There can be no assurance that these patents will be issued or maintained.

 

3
 

 

In late 2010, we began filing several provisional patents covering our new organic pressure-driven cycle technology. In January 2011, we hired the inventor of this technology, Keith Johnson, as a specialist in advanced pressure-driven systems. He has assigned to PowerVerde his patent application in this field, U.S. Patent Application 61/424,249 filed on December 17, 2010. There can be no assurance that these patents will be issued or maintained.

 

Pursuant to the Cornerstone acquisition, we acquired all rights to U.S. Patent Application No. 12,749,416 filed on March 29, 2010, entitled “Solar Photovoltaic Closed Fluid Loop Evaporation Tower.” This application was filed by Bryce Johnson as inventor and assigned to Cornerstone in connection with the acquisition. There can be no assurance that this patent will be issued or maintained.

 

We expect to file additional patent applications pertaining to our advanced organic pressure driven cycle later in 2012. There can be no assurances that we will be able to do so or that any patents will be issued based on these applications.

 

Product Description

 

The 2007 advanced generation PowerVerde motor, with its related organic rankine cycle (ORC) system, produced 10kW of net power. Our larger 25/50kW waste heat/solar design is a next generation system This system was designed to be installed in single- or multiple-stacked units for businesses, factories, or any waste heat or solar application such as schools, hospitals, ships and other users of electric power. These non-combustion motors are fueled by heat, via an ORC related system, and create a pressure source powering the PowerVerde motor/generator while emitting zero carbon emissions or waste stream byproducts. This system operates with relatively low pressure (100-300psi) producing substantial torque and horsepower. The second PowerVerde system is designed to operate on wellhead or natural gas pipeline infrastructure and lacks the ORC component, but uses wasted latent energy (pressure) inherent in “city gate” letdowns or wellheads as its fuel source. Both systems are designed to operate on pressure. The latter system is designed to operate on relatively high pressure (1000 psi) associated with pipeline or wellhead infrastructure. The PowerVerde expansion and pressure driven motors have been tested over the past several years, and we believe have demonstrated the durability and reliability necessary to function as commercial renewable electric power generation systems. As noted above, in 2008, we decided to scale the ORC waste heat/solar system to 25/50kW and the natural gas pressure motor (without ORC) to 100kW. We anticipate, and have designed systems, that will be scaled even larger in the future. In 2011 we enhanced our pressure cycle to a unique and proprietary cycle called organic pressure driven cycle (OPDC). We believe that our systems can deliver more pressure with less heat than our predecessor ORC system.

 

Our ORC or OPDC system requires:

 

  A heat source (solar, waste heat, geothermal or bio-mass);
     
  An organic rankine cycle (ORC) or organic pressure driven cycle (OPDC) style system to convert heat into pressure;
     
  PowerVerde patented motor to convert the pressure into horsepower; and
     
  A generator to convert the horsepower into electricity.

 

4
 

 

We have built and tested the 25/50kW and ORC and OPDC systems, and we believe that the overall design meets or exceeds performance parameters. We believe that we have successfully enhanced the system’s power capacity to as much as 50kW or more of gross electrical power.

 

Our other electric power system, the gas pressure motor, is engineered to operate on any adequate pressure source without an ORC system. This 100kW system expands wasted energy or pressure from natural gas pipelines or wellheads into mechanical energy and requires:

 

  Natural Gas Pipeline or Natural Gas utility infrastructure, specifically “City Gates” or gas wellheads;
     
  Any adequate wellhead or pressure release infrastructure such as pumping stations;
     
  PowerVerde’s patented engine to convert the pressure into horsepower; and
     
  A generator to convert the horsepower into electricity.

 

We have built a 100kW system and hope to build a next generation 150kW system in the future. It is anticipated the first commercial beta test will be delayed until 2013, as our efforts have been focused on the waste heat/solar markets since 2011.

 

Government Regulations and Incentives

 

We believe that the time is right for the PowerVerde systems. Regulatory proposals to limit greenhouse gases are moving forward, particularly in Europe. One such measure would be a carbon tax placed on fuels in proportion to their carbon content. Another would be a tax on oil. Yet another would be a “cap and trade” system. All of these would drive up the price of electricity from fossil fuel sources, yet have no impact on carbon-free renewable sources such as those offered by us; however, due to the weak economy and strong political opposition, there can be no assurance that any of these measures will be implemented.

 

Governments, utilities, businesses, and consumers alike are acutely aware of the negative effects of pollution and use of fossil fuels. Fossil fuel-based emissions contribute to serious health and environmental conditions such as acid rain, particulate pollution, nitrogen deposition, and global climate change. Consequently, government agencies in the United States and Europe at the national, state/provincial and local levels have implemented and proposed various economic incentives in the form of tax credits, rebates, deductions, accelerated depreciation and other subsidies designed to enhance the use of energy-efficient and clean power sources. We believe that these incentives will have a substantial positive impact on demand for the PowerVerde systems; however, there can be no assurance that, even with these incentives, our systems will be economically competitive or that the incentives will continue to be available.

 

We have applied and continue to apply for federal grants, loans and/or other programs designed to assist development of renewable “green” energy sources, and we have previously retained specialized consultants to assist in this endeavor; however, we have not been successful in these ongoing efforts, and there can be no assurance that we will ever receive any governmental assistance.

 

5
 

 

Competition

 

We face substantial competition from numerous other companies, most of whom have financial and other resources substantially greater than ours. Our competition is worldwide, ranging from solo inventors and small businesses all the way to major utility companies and multinational corporations, all of whom are attempting to design, develop and market clean and efficient methods for the generation and delivery of electricity. This competition is expected to increase due to pressures arising from high prices of fossil fuels, environmental concerns and the increased availability of governmental incentives and subsidies. These competitors may prove more successful in offering similar products and/or may offer alternative products which prove superior in performance and/or more popular with potential customers than our products. Our ability to commercialize our products and grow and achieve profitability in accordance with our business plan will depend on our ability to satisfy our customers and withstand increasing competition by providing high-quality products at reasonable prices. There can be no assurance that we will be able to achieve or maintain a successful competitive position.

 

ITEM 1A RISK FACTORS.

 

Investing in our common stock is speculative and involves a high degree of risk. Prospective investors should carefully consider the following risks and uncertainties and all other information contained or referred to in this Report before making an investment decision. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. Our business, financial condition or results of operations could be materially and adversely affected by some or all of the matters described below or other currently unknown factors. In that case, the trading price of our common stock could decline, and you could lose all of your investment.

 

Risks Related to General Economic Conditions

 

The current general economic and market conditions and the volatility and disruption in the financial and capital markets has impacted us and could materially and adversely affect our business and financial results in future periods.

 

The United States economy continues to suffer from very unfavorable economic conditions, including a weak recovery from a severe recession in the general economy which continues to impair the banking system and the financial markets, all accompanied by huge federal and state budget deficits and a ballooning national debt. These negative conditions could persist or become even worse. General economic conditions have deteriorated due to reduced credit resulting from weak economic conditions, resulting in slower economic activity, concerns about inflation, deflation and government debt and deficits, volatility in energy prices, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns in our markets and other adverse effects on our potential customers and markets. These poor economic conditions continue to make it very difficult for us to raise the capital we need to complete the development and testing of our products so that we can begin sales. In the event that we are able to begin sales of our products, these poor economic conditions may adversely affect our business and our financial condition and results of operations by extending the length of the sales cycle and causing potential customers to delay, defer or decline to make purchases of our products due to limitations on their capital expenditures and the adverse effects of the economy and the credit markets on them.

 

The weak economy is projected by many economic experts to continue or deteriorate further throughout 2012 or longer. These conditions may make it extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities. We cannot predict the timing, strength or duration of this current weak economy or of a subsequent economic recovery, or the effects thereof on our customers and our markets. Our results of operations may be negatively impacted in future periods and experience substantial fluctuations from period to period as a consequence of these factors, and such conditions and other factors affecting capital spending may affect the timing of orders from major customers. These factors could adversely affect our ability to meet our capital requirements, support our working capital requirements and growth objectives, maintain our existing or secure new financing arrangements, or otherwise materially and adversely affect our business, financial condition and results of operations.

 

6
 

 

An increase in interest rates or lending rates or tightening of the supply of capital in the global financial markets could make it difficult for end-users to finance the cost of a PowerVerde system and could reduce the demand for our products and/or lead to a reduction in the average selling price for our products.

 

We believe that, in the event that we are able to commercialize our products, many of our end-users will depend on debt financing to fund the initial capital expenditure required to purchase and install a PowerVerde system. As a result, an increase in interest rates or lending rates could make it difficult for our end-users to secure the financing necessary to purchase and install PowerVerde systems on favorable terms, or at all and thus lower demand and reduce our net sales. Due to the overall economic outlook, our end-users may change their decision or change the timing of their decision to purchase and install PowerVerde systems. In addition, we believe that a significant percentage of our end-users will install PowerVerde systems as an investment, funding the initial capital expenditure through a combination of equity and debt. An increase in interest rates and/or lending rates could lower an investor’s return on investment in PowerVerde systems, or make alternative investments more attractive relative to PowerVerde systems, and, in each case, could cause these end-users to seek alternative investments. A reduction in the supply of project debt financing or equity investments could reduce the number of our projects that receive financing and thus lower demand for PowerVerde system.

 

Reduced growth in or the reduction, elimination or expiration of government subsidies, economic incentives and other support for renewable energy-sourced electricity applications could reduce demand for our systems.

 

Reduced growth in or the reduction, elimination or expiration of government subsidies, economic incentives and other support for renewable-sourced electricity may result in the diminished competitiveness of our systems relative to conventional and non-renewable sources of energy, and could materially and adversely affect our business.

 

Electric utility companies or generators of electricity from fossil fuels or other renewable energy sources could also lobby for a change in the relevant legislation in their markets to protect their revenue streams. Reduced growth in or the reduction, elimination or expiration of government subsidies and economic incentives for renewable electricity generation applications, especially those in our target markets, could cause our net sales to decline and materially and adversely affect our business, financial condition and results of operations.

 

Existing regulations and policies and changes to these regulations and policies may present technical, regulatory and economic barriers to the purchase and use of our renewable electricity generation systems, which may significantly reduce demand for our systems.

 

The market for electricity generation products is heavily influenced by foreign, federal, state and local government regulations and policies concerning the electric utility industry, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the United States and in a number of other countries, these regulations and policies have been modified in the past and may be modified again in the future. These regulations and policies could deter end-user purchases of our systems.

 

We anticipate that our systems and their installation will be subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, environmental protection, utility interconnection and metering and related matters. It is difficult to track the requirements of individual states and design equipment to comply with the varying standards. Any new government regulations or utility policies pertaining to our systems may result in significant additional expenses to us and our potential customers and, as a result, could cause a significant reduction in demand for our systems.

 

7
 

 

Risks Related to Our Business

 

We need to raise substantial additional capital to fund our business.

 

We will need to raise promptly substantial additional funds. Without such additional funds, we may have to cease operations. We will require substantial additional funding for our contemplated research and development activities, commercialization of our products and ordinary operating expenses. Adequate funds for these purposes may not be available when needed or on terms acceptable to us, especially due to the ongoing weak economy. Insufficient funds may require us to delay or scale back our activities or to cease operations.

 

We face substantial competition in our industry, and we may be unable to attract customers and maintain a viable business.

 

We face substantial competition from numerous other companies, most of whom have financial and other resources substantially greater than ours. Our competition is worldwide, ranging from solo inventors and small businesses all the way to major utility companies and multinational corporations, all of whom are attempting to design, develop and market clean and efficient methods for the generation and delivery of electricity. This competition is expected to increase due to pressures arising from high prices of fossil fuels, environmental concerns and the availability of governmental incentives and subsidies. These competitors may prove more successful in offering similar products and/or may offer alternative products which prove superior in performance and/or more popular with potential customers than our products. Our ability to commercialize our products and grow and achieve profitability in accordance with our business plan will depend on our ability to satisfy our customers and withstand increasing competition by providing high-quality products at reasonable prices. There can be no assurance that we will be able to achieve or maintain a successful competitive position.

 

Our success is dependent on the services of our key management and personnel.

 

Our success will depend in large part upon the skill and efforts of our founders, George Konrad and Fred Barker, and other key personnel hired or who may be hired, including our chief operating officer Bryce Johnson, and our system specialists, Keith Johnson and Mark Prinz. Loss of any such personnel, whether due to resignation, death, and disability or otherwise, could have a material adverse effect on our business. In addition, Messrs. Konrad, Barker and Bryce Johnson do not intend to work for PowerVerde on a full-time basis, as they have substantial other business activities. They intend to dedicate the time they deem appropriate to meet PowerVerde’s needs; however, there can be no assurance that they will be willing or able to dedicate such time and attention as would maximize PowerVerde’s chances for success.

 

We have a limited operating history.

 

We have only a limited operating history. We have yet to generate any material revenues, as we have sold only one system, in a discounted sale to Newton, and the commercial value of our products is uncertain. There can be no assurance that we will ever be profitable. Further, we are subject to all the risks inherent in a new business including, but not limited to: intense competition; lack of sufficient capital; loss of protection of proprietary technology and trade secrets; difficulties in commercializing its products, managing growth and hiring and retaining key employees; adverse changes in costs and general business and economic conditions; and the need to achieve product acceptance, to enter and develop new markets and to develop and maintain successful relationships with customers, third party suppliers and contractors.

 

8
 

 

We may have difficulty in protecting our intellectual property and may incur substantial costs to defend ourselves in patent infringement litigation.

 

We rely primarily on a combination of trade secrets, patents, copyright and trademark laws, and confidentiality procedures to protect our proprietary technology, which is our principal asset.

 

Our ability to compete effectively will depend to a large extent on our success in protecting our proprietary technology, both in the United States and abroad. There can be no assurance that (i) any patents that we have applied or apply for will be issued, (ii) any patents issued, including our existing U.S. Patent No. 6,840,151, on which our current products are based, will not be challenged, invalidated, or circumvented, (iii) that we will have the financial resources to enforce our patents or (iv) the patent rights granted will provide any competitive advantage. We could incur substantial costs in defending any patent infringement suits or in asserting our patent rights, including those granted by third parties, and we might not be able to afford such expenditures.

 

We have limited protection over our trade secrets and know-how.

 

Although we have entered into confidentiality and invention agreements with our key personnel, there can be no assurance that these agreements will be honored or that we will be able to protect our rights to our non-patented trade secrets and know-how effectively. There can be no assurance that competitors will not independently develop substantially equivalent or superior proprietary information and techniques or otherwise gain access to our trade secrets and know-how.

 

We may be unable to obtain required licenses from third-parties for product development.

 

We may be required to obtain licenses to patents or other proprietary rights from third parties. If we do not obtain required licenses, we could encounter delays in product development or find that the development, manufacture or sale of products requiring these licenses could be foreclosed.

 

The reduction, elimination or unavailability of contemplated government incentives may force our business plan to be changed and may materially adversely affect our business.

 

Our business plan relies to a significant extent on the availability of substantial federal, state and local governmental incentives for the development, production and purchase of energy-saving, environmentally-friendly products such as our systems. These incentives include, among others, tax deductions, tax credits, rebates, accelerated depreciation and government loans, grants and other subsidies. There can be no assurance that some or all of these incentives will not be substantially reduced or eliminated, nor can there be any assurance that any currently proposed incentives will actually take effect. Similarly, there can be no assurance that we will ever receive any government loans, grants or other subsidies.

 

Lower energy prices may hinder our ability to attract customers and be profitable.

 

Our products are energy-efficient electric generators which compete primarily with conventional fossil fuel-generated electricity produced and delivered by conventional utility companies. A significant decrease in the price of oil and/or natural gas could therefore materially adversely affect our competitive position. We were adversely affected by the substantial drop in oil and natural gas prices following the onset of the financial crisis in September 2008. While oil prices have risen substantially in recent months due to increased global demand, Middle East tension and inflation fears, they remain well below their pre-crisis peaks, Natural gas prices have decreased substantially in recent months due to increased supply. A repeat of substantial and sustained decreases in these prices, as experienced in 2008 and 2009, could be very detrimental to our business.

 

9
 

 

We may be unable to purchase materials and parts on commercially reasonable terms from suppliers.

 

If we are able to commercialize our systems, our success will depend to a large extent on our ability to obtain a reliable supply of materials and parts from our suppliers on commercially reasonable terms. This may not prove possible due to competition, inflation, shortages, international crises, adverse economic and political conditions and business failures of suppliers or other reasons.

 

Our insurance may not provide adequate coverage.

 

Although we maintain general and product liability, property and commercial crime insurance coverage which we consider prudent, there can be no assurance that such insurance will prove adequate in the event of actual casualty losses or broader calamities such as terrorist attacks, earthquakes, financial crises, economic depressions or other catastrophic events, which are either uninsurable or not economically insurable. Any such losses could have a material adverse effect on the Company.

 

We may be unable to obtain or maintain insurance for our commercial products.

 

The design, development and manufacture of our products involve an inherent risk of product liability claims and associated adverse publicity. There can be no assurance we will be able to maintain insurance for any of our proposed commercial products. Such insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms or at all. We are also exposed to product liability claims in the event the use of our proposed products result in injury.

 

Risks Related to Our Common Stock; Liquidity Risks

 

Our stock price is highly volatile.

 

The market prices for securities of emerging and development stage companies such as ours have historically been highly volatile, and our limited history has reflected this volatility. Difficulty in raising capital as well as future announcements concerning us or our competitors, including the results of testing, technological innovations or new commercial products, government regulations, developments concerning proprietary rights, litigation or public concern as to safety of potential products developed by us or others, may have a significant adverse impact on the market price of our stock.

 

We do not pay dividends on our common stock, and we have no intention to do so in the future.

 

For the near-term, we intend to retain remaining future earnings, if any, to finance our operations and do not anticipate paying any cash dividends with respect to our common stock or may be unable to sell at a fair price.

 

There has been limited trading in our stock.

 

Our common stock is currently quoted on the OTCBB under the symbol “PWVI.” Since our February 2008 Merger with our predecessor Vyrex Corporation, our stock has been thinly traded, and no assurance can be given as to when, if ever, an active trading market will develop or, if developed, that it will be sustained. As a result, investors may be unable to sell their shares of our common stock.

 

10
 

 

We may issue additional shares of our stock which may dilute the value of our stock.

 

Shares which we issue pursuant to private placements generally may be sold in the public market after they have been held for six months, pursuant to Rule 144. The sale or availability for sale of substantial amounts of common stock in the public market under Rule 144 or otherwise could materially adversely affect the prevailing market prices of our common stock and could impair our ability to raise additional capital through the sale of our equity securities.

 

We may issue shares of preferred stock that could defer a change of control or dilute the interests of holders of our common stock shareholders.

 

Our Board of Directors is authorized to issue up to 50,000,000 shares of preferred stock. The Board of Directors has the power to establish the dividend rates, liquidation preferences, voting rights, redemption and conversion terms and privileges with respect to any series of preferred stock. The issuance of any series of preferred stock having rights superior to those of the common stock may result in a decrease in the value or market price of the common stock and could further be used by the Board of Directors as a device to prevent a change in control favorable to the Company. Holders of preferred stock to be issued in the future may have the right to receive dividends and certain preferences in liquidation and conversion rights. The issuance of such preferred stock could make the possible takeover of the Company or the removal of management of the Company more difficult, and adversely affect the voting and other rights of the holder of the common stock, or depress the market price of the common stock.

 

Our common stock is covered by SEC “penny stock” rules which may make it more difficult for you to sell or dispose of our common stock.

 

Since we have net tangible assets of less than $1,000,000, transactions in our securities are subject to Rule 15g-9 under the Exchange Act which imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000 or $300,000 together with their spouses). For transactions covered by this Rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. Consequently, this Rule may affect the ability of broker-dealers to sell our securities, and may affect the ability of shareholders to sell any of our securities in the secondary market.

 

The Commission has adopted regulations which generally define a “penny stock” to be any non-NASDAQ equity security of a small company that has a market price (as therein defined) less than $5.00 per share, or with an exercise price of less than $5.00 per share subject to certain exceptions, and which is not traded on any exchange or quoted on NASDAQ. For any transaction by broker-dealers involving a penny stock (unless exempt), the rules require delivery, prior to a transaction in a penny stock, of a risk disclosure document relating to the penny stock market. Disclosure is also required to be made about compensation payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in an account and information on the limited market in penny stocks.

 

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FORWARD-LOOKING STATEMENTS

 

Prospective investors 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, as they relate to PowerVerde, are intended to identify such forward-looking statements. Although PowerVerde believes 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 this 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 PowerVerde and our ability to achieve our objectives. All forward-looking statements attributable to PowerVerde or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2. PROPERTIES.

 

We do not own any real property. Through December 31, 2010, we shared use of a full-service machining and manufacturing facility located at 21615 N. 2nd Avenue, Phoenix, Arizona, owned by Arizona Research and Development, Inc. (“ARD”), a company wholly-owned by George Konrad, the Company’s co-founder. We paid monthly rent to ARD in addition to our proportional share of the facility’s utilities. The lease terms with ARD were month to month and renewed monthly. No formal rent or lease agreement existed between ARD and the Company. Effective January 2011, we entered into a lease agreement with Konrad Holdings, LLC, a limited liability company wholly-owned by Mr. Konrad, for the use of approximately 5,000 square feet of his new facility located at 23429 N. 35th Drive, Glendale, Arizona (the “Facility”) at a monthly base rent of approximately $4,400. The term of this agreement was one year. On January 1, 2012 our Board of Directors agreed to end the rental agreement with ARD and moved our operations to a 5,000 foot facility owned by our Director and Chief Operating Officer Bryce Johnson located at 7595 E. Gray Rd. Scottsdale, Arizona. We expect to substantially increase our use of this facility by the end of 2012, and we believe that the facility will be adequate to satisfy our needs through that time. We intend to negotiate with Mr. Johnson a lease on fair market terms.

 

ITEM 3. LEGAL PROCEEDINGS.

 

We are not party to any disputes or legal proceedings at the time of this Report.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Our common stock trades on the Over-The-Counter Bulletin Board (“OTCBB”) under the symbol “PWVI.” The over-the-counter market quotations provided below reflect inter-dealer prices, without retail mark-ups, mark-down or commission and may not represent actual transactions. The following table sets forth the range of high and low sales prices on the OTCBB for the periods indicated.

 

Period Beginning   Period Ending   High   Low  
January 1, 2010   March 31, 2010   $ 0.90   $ 0.30  
April 1, 2010   June 30, 2010   $ 0.67   $ 0.25  
July 1, 2010   September 30, 2010   $ 0.80   $ 0.51  
October 1, 2010   December 31, 2010   $ 0.75   $ 0.35  
January 1, 2011   March 31, 2011   $ 1.48   $ 0.35  
April 1, 2011   June 30, 2011   $ 4.00   $ 0.51  
July 1, 2011   September 30, 2011   $ 3.30   $ 1.05  
October 1, 2011   December 31, 2011   $ 1.75   $ 1.20  
January 1, 2012   March 31, 2012   $ 2.10   $ 1.01  
April 1, 2012   April 13, 2012   $ 1.37   $ 1.00  

 

Dividends

 

We have never declared or paid any cash dividends on our common stock, nor do we intend to declare or pay any cash dividends on our common stock in the foreseeable future. Subject to the limitations described below, the holders of our common stock are entitled to receive only such dividends (cash or otherwise) as may (or may not) be declared by our Board of Directors.

 

Recent Sales of Unregistered Securities

 

All of PowerVerde’s sales of unregistered securities since inception have been made pursuant to private offerings to accredited investors. These sales, which are set forth below, were made pursuant to an exemption from registration requirements under Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended. Except as otherwise noted below, we paid a placement agent fee of 10% of the gross price of each offering to Martinez-Ayme Securities (“MAS”), and net proceeds were used for working capital.

 

From March through October 2009, we raised $950,000 through private placements of an aggregate of 1,266,667 shares of our common stock to accredited investors at $.75 per share. The net proceeds from these offerings were $865,000. The Company paid a placement agent fee of 10% to MAS with respect to $625,000 of the gross proceeds, a finder’s fee of 6% and a placement agent fee to MAS of 4% with respect to $250,000, and there was no placement agent fee or finder’s fee with respect to $100,000 of these proceeds. The net proceeds of these offerings were used (i) to pay $81,500 principal amount of our Series A Promissory Notes due July 31, 2009, together with $8,717 in accrued interest thereon; (ii) to pay in full a $50,000 loan made by our co-founder, George Konrad, to the Company in 2008; and (iii) for working capital.

 

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The remaining $168,500 principal amount of Notes, together with accrued interest thereon of $20,761, was converted in July 2009 into 378,521 shares of our common stock, reflecting a conversion price of $.50 per share.

 

In October 2009, we issued 75,000 shares of our common stock, valued at $56,250, to Del Mar Corporate Consulting, LLC (the “Consultant”) pursuant to a Market Awareness Consulting Agreement, dated October 20, 2009. Pursuant to this agreement, we also paid the Consultant $25,000 upon signing; however, we declined to pay the additional $25,000 due under this agreement due to our belief that the Consultant failed to perform under this agreement. We also claimed that the Consultant was entitled to only 12,500 of the 75,000 shares due to its failure to perform. In November 2011, we received a lawsuit by Del Mar. All of Del Mar’s claims were settled in exchange for payment of $32,500 in December 2011. All 75,000 disputed shares were returned to us and cancelled.

 

During 2010, we raised gross proceeds of $330,000 through the private placement of 439,999 shares of our common stock to accredited investors at $.75 per share, $85,000 of which was raised in the first quarter through the private placement of 113,333 shares, $130,000 of which was raised in the second quarter through the private placement of 173,333 shares, $75,000 of which was raised in the third quarter through the private placement of 100,000 shares, and $40,000 of which was raised in the fourth quarter through the private placement of 53,333 shares. 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.

 

During the first quarter of 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 $0.75 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 noted above.

 

During the second quarter of 2011, we raised gross proceeds of $500,000 through the private placement of 666,667 shares of common stock to accredited investors at $0.75 per share. Each investor received a three-year warrant to purchase stock at $0.75 per share for a number of shares of common stock equal to the number of shares purchased by the investor in this offering.

 

In the first quarter of 2012, we raised an additional $500,000 exclusively from accredited European investors (including $275,000 from a Newton affiliate) pursuant to a private placement of 500,000 shares of common stock at a price of $1.00 per share. There was no warrant issued pursuant to this round; however, simultaneously Newton affiliates received three-year warrants to purchase 500,000 shares at $1.00 per share in connection with the settlement of certain claims by and between PowerVerde and Newton.

 

ITEM 6. SELECTED FINANCIAL DATA.

 

Not required for smaller reporting companies.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

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

 

Critical Accounting Policies

 

The 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 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

 

We adopted the Standards in FASB ASC Topic 740 regarding accounting for uncertainty in income taxes. The standard 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.

 

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 2010 and 2011, the tax years which remain subject to examination by major tax jurisdictions as of December 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.

 

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. Certain sales agreements also require installation and training by PowerVerde once goods are received and accepted by the customer. The Company defers all revenues and costs of sales until the agreement is 100% complete.

 

Licensing and royalty revenue from royalty agreements is recognized in accordance with the terms of the specific agreement, which generally includes a quarterly minimum payment by the licensee.

 

15
 

 

Common Stock Purchase Warrants

 

The Company accounts for common stock purchase warrants in accordance with FASB ASC Topic 815-10, “Derivatives and Hedging” (ASC 815-10). Based on the provisions of ASC 815-10, 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 intellectual property other than our rights under existing licensing agreements (the “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 future sale and/or licensing of the Biotech IP. We do not expect this arrangement to generate material revenues.

 

Since the Merger, we have focused on the development and testing of our electric power systems, and since 2008 we have focused on their applicability to thermal and natural gas pipeline operations. The Company’s 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. See “Risk Factors.”

 

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

 

Year ended December 31, 2011 and 2010

 

During 2011 and 2010, we focused on the development and testing of our systems, in particular, our next generation waste heat/solar 25/50k WORC, and in 2011 we also focused on developing the European market and our relationship with Newton. We had no material revenues in 2010 — just $33,842 in Biotech IP licensing fees, while in 2011 we generated revenues of $193,391, of which $130,000 was the price of the system sold to Newton, $7,221 was other revenue paid by Newton and $56,170 was Biotech IP licensing fees. In both years, we had substantial expenses due to our ongoing research and development activities, as well as substantial administrative expenses associated with our status as a public company. Our research and development expenses increased by $824,954 (486%) in 2011 as compared to 2010, and our general and administrative expenses increased by $1,429,839 (719%). These increases were due to our substantially increased scale of operations to develop, test and commercialize our systems and our efforts to establish and develop our relationship with Newton. We incurred substantially increased expenses in 2011 for employee/consultant compensation as well as for travel expenses. Our net loss was $2,553,465 in 2011, a 728% increase over the net loss of $308,352 in 2010. The substantial increase in our net loss in 2011 was due to our vigorous efforts to develop our technology and products and implement our business plan. Substantial net losses will continue until we are able to successfully commercialize and market our products, as to which there can be no assurance.

 

16
 

 

Years ended December 31, 2010 and 2009

 

During 2010 and 2009, we focused on the development and testing of our systems, in particular, our next generation waste heat/solar 25/50kW ORC. We had no material revenues in either year — just $33,842 and $33,860, in Biotech IP licensing fees at December 31, 2010 and 2009, respectively — while we had substantial expenses due to our ongoing research and development expenses, as well as substantial administrative expenses associated with our status as a public company. Our net loss was $308,352 in 2010 and $890,980 in 2009. The substantial decrease in our net loss in 2010 was due to our general cost-cutting efforts, as well as the absence of interest expense since our investor Notes were paid in full in 2009. 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 December 31, 2011 and 2010, we had a working capital deficit of $128,599 and $132,895, respectively.

 

During the first quarter of 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 $0.75 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 noted above.

 

During the second quarter of 2011, we raised gross proceeds of $500,000 through the private placement of 666,667 shares of common stock to accredited investors at $0.75 per share. Each investor received a three-year warrant to purchase stock at $0.75 per share for a number of shares of common stock equal to the number of shares purchased by the investor in this offering.

 

In the first quarter of 2012, we raised an additional $500,000 exclusively from accredited European investors (including $275,000 from a Newton affiliate) pursuant to a private placement of 500,000 shares of common stock at a price of $1.00 per share. There was no warrant issued pursuant to this round; however, simultaneously Newton affiliates received three-year warrants to purchase 500,000 shares at $1.00 per share in connection with the settlement of certain claims by and between PowerVerde and Newton.

 

By the end of 2011, we had spent all of our $15,646 opening cash balance plus almost all of the $1,500,000 raised during 2011, so that our year-end cash balance was only $7,530, while our accounts payable and accrued expenses were $179,304. As of the date of this Report, after spending most of the funds raised in the first quarter of 2012, we have only enough cash to finance operations for approximately one month.

 

We continue to seek more funding from private debt and equity investors, as we need to promptly 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 may be forced to cease operations.

 

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not required for smaller reporting companies.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

The financial statements of the Company and other information required by this Item are set forth herein in a separate section beginning with the Index to the Financial Statements on page F-1.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

On January 6, 2011, we were informed by Robert P. Bedwell, CPA of our former auditing firm, Berenfeld, Spritzer, Shechter & Sheer LLP (“Berenfeld”), that Berenfeld had dissolved and Mr. Bedwell had joined Cherry, Bekaert & Holland, L.L.P. (“CBH”), and therefore, Berenfeld could not continue as the independent registered public accounting firm for the Company. Mr. Bedwell’s role as our audit engagement partner, however, has continued uninterrupted at CBH. As a result, CBH has become our independent registered public accounting firm. This change in our independent registered public accounting firm was accepted by our Board of Directors. Additional detailed information concerning this matter was disclosed in a Form 8-K filed on January 13, 2011.

 

ITEM 9A. CONTROLS AND PROCEDURES.

 

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.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining adequate control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of financial statements.

 

All internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding of controls. Therefore, even effective internal control over financial reporting can provide only reasonable, and not absolute, assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal controls over financial reporting may vary over time. Because of its inherent limitations, internal controls over financial reporting may also fail to prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

 

Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal controls over financial reporting as of December 31, 2011. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this evaluation, our management concluded that, as of December 31, 2011, our internal controls over financial reporting were effective.

 

18
 

 

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

Changes in Internal Control Over Financial Reporting

 

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

 

ITEM 9B. OTHER INFORMATION.

 

None.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

The names of our officers and directors, as well as certain information about them are set forth below:

 

Name   Age   Position(s)   Held Since
George Konrad   53   President, Director   2007
Fred Barker   78   Vice President, Secretary, Director   2007
Richard H. Davis   55   Chief Executive Officer, Director   2008
Bryce Johnson   48   Chief Operating Officer, Director   2012, 2011
John Hofmann   54   Chief Financial Officer   2011

 

George Konrad. Mr. Konrad is a co-founder of PowerVerde. HeMr. Konrad has served as a Director and Officer since inception. He served as our Chief Executive Officer until August 2011, and since then he has served as President. His company, ARD, is involved in various advanced technology projects. ARD is a full-service R & D machine shop with CNC and CAD-CAM capabilities. Mr. Konrad has substantially improved the design of the JimmyJib, a camera boom that is used by cinematographers all over the world. This boom has electronic remote capabilities and is utilized at most movie locations and major sporting events around the world. ARD manufactures all of the major components for the JimmyJib and turns out thousands of parts each month.

 

Fred Barker. Mr. Barker, our other co-founder, has served since inception as a Director and Vice President, focusing on our engineering activities. He is a graduate of the University of Washington, with a degree in mechanical engineering, and has done advanced studies at the University of Puget Sound and the University of Arizona. He was awarded two National Defense Education Act (NDEA) scholarships for science and math and was a Fulbright Scholar. From 1958 to 1972, Mr. Barker worked as an engineer for The Boeing Company, focusing on the structures, wing groups and instrumentation of the 737, 747, 757 and 767 aircraft. From 1987 to 2002, Mr. Barker owned and operated VertiFan, Inc., which designed and developed vertical take-off and landing aircraft under a U.S. Department of Defense contract. Mr. Barker has been honored for outstanding contributions by the Seattle chapters of the American Societies of Manufacturing Engineers and Automotive Engineers.

 

Richard H. Davis. Mr. Davis joined our Board in February 2008 in connection with the Vyrex Merger, and he became Chief Executive Officer in August 2011. He received a B.S degree in economics from Florida State University in 1982. He joined First Equity Corporation (“First Equity”) in Miami that same year. First Equity operated as a regional full-service brokerage and investment bank. Mr. Davis’ duties included equity deal structure and brokerage-related activities. After First Equity was acquired in 2001, Mr. Davis joined the corporate finance department of William R. Hough & Company (“Hough”), where he continued structuring equity finance and private acquisitions. Hough was acquired in 2004 by RBC Dain Rauscher (“Dain”), a global investment banking firm. Dain consolidated Hough’s corporate finance activities into its New York offices. Mr. Davis elected to remain in Miami and joined Martinez-Ayme Securities, assuming the newly-created position of managing director of corporate finance.

 

Bryce Johnson. Mr. Johnson joined our Board in November 2011 in connection with the Cornerstone acquisition, and he became Chief Operating Officer in January 2012. He is an EPA licensed contractor and HVAC master technician and advises the HVAC industry and utilities (both locally and nationally) on the opportunities for energy conservation in buildings. Since his start in the HVAC industry in 1985, Mr. Johnson has owned and operated one of the most successful award winning HVAC businesses in the country. In 2008, Mr. Johnson founded Cornerstone, merging renewable and sustainable technologies with traditional air conditioning and heating technologies, creating extremely efficient HVAC hybrid systems. Also in 2008, Mr. Johnson started to develop and market environmentally friendly hybrid geothermal systems. Mr. Johnson attended The Refrigeration School, Inc., an HVAC & refrigeration training program in Phoenix, Arizona.

 

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John Hofmann. Mr. Hofmann became our Chief Financial Officer in August 2011. He is president of J L Hofmann & Associates, P.A., Coral Gables, Florida (“JLHA”), which has provided financial consulting and accounting services to select clientele since 1990. JLHA has provided services to PowerVerde since July 2010. Mr. Hofmann also serves as Operating Partner of Taft Street Partners I, Ltd., providing consulting services and capital for commercial and residential real estate projects. Mr. Hofmann started his career working with multinational companies for ten years as a Senior Manager for PricewaterhouseCoopers LLP (“PWC”). While at PWC, he traveled extensively primarily working on international tax matters and issues concerning the Internal Revenue Service. Locally, Hofmann has worked with the Miami Dolphins, Carnival Cruise Line, Royal Caribbean Cruise Line, Resorts International and Terremark Worldwide. Mr. Hofmann earned his Bachelor of Science in Accounting at the University of Florida and obtained his Master of Science in Taxation from Florida International University. Mr. Hofmann became a Certified Public Accountant through the Florida Board of Accountancy in 1982. He is a member of the Florida Institute of CPAs.

 

Election of Directors

 

Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of the stockholders, including the election of directors. Cumulative voting with respect to the election of directors is not permitted by our Certificate of Incorporation.

 

Our Board of Directors shall be elected at the annual meeting of the shareholders or at a special meeting called for that purpose. Each director shall hold office until the next annual meeting of shareholders and until the director’s successor is elected and qualified.

 

Committees

 

Our Board of Directors does not yet have any committees; however, we intend to establish an audit committee and a compensation/stock option committee in the near future.

 

Advisory Board Members

 

In March 2010, our Board of Directors created an Advisory Board to advise and recommend, on a non-legally-binding basis, certain directions or actions deemed to be beneficial to the Company’s success. The Advisory Board’s members may be shareholders or non-shareholders; however, each member represents a specific industry or vocation complementary to the Company’s anticipated markets, customers and technical needs. It is anticipated that the Advisory Board will meet once a year in person and meet by conference call quarterly. We expect to compensate the Advisory Board members with restricted stock and/or options; however, the compensation plan has not yet been established. The initial members of the Advisory Board are as follows:

 

  Stephen H. McKnight. Mr. McKnight is active in real estate investment and management. Through his firms, he has created a portfolio in excess of 2.0 million square feet of commercial property, mostly in the Southwest United States. Mr. McKnight is also active in both equity and debt holdings, managing both trusts and family estates. He received an MBA from the University of Pittsburg in 1975.

 

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  Robert Eakins. Mr. Eakins is founder and President of The Eakins Group, a privately owned company providing maintenance service to the oil, refining, pipeline, telecommunications and construction industry. This Chicago-based company operates in a multi-state footprint with operations in the Midwest, South, Southwest and Northwest United States.
     
  Randy Hinson. Mr. Hinson founded and successfully operated a pump manufacturing business in Houston, Texas. Mr. Hinson recently sold the company to a publicly-traded oil company, and remains under a non-compete contract during an agreed-upon transition process.
     
  Leon Breece. Mr. Breece has operated as an entrepreneur and CPA in the Los Angeles, California area for many years. Mr. Breece’s company, Breece and Associates, handles accounting and tax matters for established companies and high profile individuals. He is an active investor in both the stock market and early stage private companies.
     
  Mark Block MD. Dr. Block is a leading podiatrist in the South Florida area. Dr. Block is past President of the Florida Podiatric Medical Association. He is a diplomat of the American Board of Podiatric Surgery, and former President and/or Chairman of many medical associations, too numerous to name. Dr. Block is an author and lecturer, as well as a contributing writer of the Coding Committee APMA. He considers himself a professional investor, managing family portfolios of established large capitalization companies and early stage start-ups.
     
  Dr. Robert F. Ehrman. Dr. Ehrman is an owner and manager of commercial real estate, and has owned and managed several successful businesses. He attended the University of Miami School of Medicine, Northwestern Chiropractic College, and the University of Minnesota. Mr. Ehrman is a resident of Miami, Florida.

 

All of the initial Advisory Board Members are PowerVerde shareholders.

 

Compliance with Section 16(a) of the Securities and Exchange Act of 1934

 

Under the securities laws of the United States, our directors, executive officers and any persons holding more than 10% of the Company’s common stock are required to report their initial ownership of the Company’s common stock and any subsequent changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established and the Company is required to identify in this Report those persons who failed to timely file these reports. All of the filing requirements were satisfied in 2011, except with respect to the Form 3s reflecting initial stock ownership by Messrs. Hofmann and Johnson, who joined our company in August and November 2011, respectively. Their Form 3s were filed in March 2012 and April 2012, respectively. In making this disclosure, we have relied solely on written representations of our directors and executive officers and copies of the reports that have been filed with the Commission.

 

Code of Ethics

 

We have not adopted a code of ethics for our management because of the costs involved and our lack of resources and limited operations.

 

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ITEM 11. EXECUTIVE COMPENSATION.

 

Through March 2012, we did not pay any compensation to officers or directors in such capacity; however, we have periodically engaged the services of Messrs. Konrad (through ARD) and Barker to perform certain services at a rate of $60 per hour. On February 1, 2011, we entered into a Contracted Consulting Services Agreement with PowerVerde Consulting Services, Inc., which is wholly-owned by Mr. Barker, whereby his company received a $5,000 relocation fee and received $6,000 per month for his services beginning February 15, 2011, subject to termination at any time by either party upon written notice to the other. Mr. Barker’s services were terminated effective August 2011. In 2011, ARD and Mr. Barker received payments for services of $60,000 and $24,000, respectively. Mr. Konrad also has received $10,000 per month since April 2011 pursuant to his employment agreement described below. Since becoming PowerVerde officers, Messrs Davis, Hofmann and Bryce Johnson have not received any salary or other compensation for services in that capacity except that, in June 2011, Messrs. Davis and Hofmann received three-year warrants to purchase 600,000 and 200,000 shares, respectively, of our common stock, at a price of $1.05 per share (the market price on the date of grant). In March 2012, in exchange for his interest in Cornerstone, Bryce Johnson received 1,575,000 shares of our restricted common stock and three-year warrants to purchase 150,000 shares of our common stock at exercise prices of $2.00, $3.00 and $4.00 as to 50,000 shares each.

 

Employment Agreements

 

Effective January 1, 2011, we entered into an employment agreement with Keith Johnson, pursuant to which Mr. Johnson serves as our Chief Technical Officer. The agreement was amended as of June 15, 2011. Pursuant to this agreement, we pay Mr. Johnson a salary of $12,500 per month (which was increased from $10,000 effective June 15, 2011). We also paid Mr. Johnson a $5,000 signing bonus. This agreement is terminable by either party without cause upon 30 days’ prior written notice. In connection with the initial employment agreement, we granted Mr. Johnson, in January 2011, a 10-year option to purchase 1,350,000 shares of our common stock at a price of $.59 per share (the market price on the date of grant). One fourth of this option, i.e., 337,500, shares vested as of the date of the employment agreement and the balance vests in equal installments every six months thereafter until fully vested, provided that he is still employed by us at this time. In connection with the June 2011 amendment, we granted Mr. Johnson a 10-year option to purchase 100,000 shares of our common stock at a price of $1.23 per share (the market price on the date of grant) and a 10-year option to purchase 100,000 shares of our common stock at an exercise price of $2.00 per share. One-fourth of these option shares, i.e., 50,000 shares, vested as of the date of the amended employment agreement and the balance vests in equal installments every six months thereafter until fully vested, provided that he is still employed by us at the time and subject to PowerVerde achieving certain operational targets. Additionally, in connection with his employment agreement, Mr. Johnson assigned certain intellectual property rights to the Company, including rights under U.S. Patent Application 61/424,249 filed on December 17, 2010. 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.

 

On April 7, 2011, in order to enhance our ability to raise capital and limit dilution of our stockholders, we entered into an agreement with our co-founder George Konrad, pursuant to which Mr. Konrad agreed to surrender to our treasury 4,500,000 shares of our common stock owned by him since inception in exchange for our (i) entering into an employment agreement with him; and (ii) agreeing to pay to his company, ARD, $200,000, representing the cost of certain equipment owned by ARD which is principally used by us.

 

23
 

 

Consequently, on April 7, 2011, we entered into a two-year employment agreement with Mr. Konrad, pursuant to which Mr. Konrad serves as our President. Pursuant to this employment agreement, we pay 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.

 

On August 19, 2011, we amended our agreement with Mr. Konrad dated as of April 7, 2011, relating to his surrender to the Company’s treasury of 4,500,000 shares of common stock (the “Original Agreement”). Pursuant to this amendment, we extended the due date for payment of $200,000 to be made to Mr. Konrad’s company, ARD, under the Original Agreement to on or before April 7, 2013, except that the payment must be made within 30 days following the earlier of (i) a closing of a financing transaction by PowerVerde which involves gross proceeds equal to or greater than $2 million; (ii) a closing of a Sale Transaction (as defined below); or (iii) a determination by our Board of Directors, in its sole and absolute discretion, that PowerVerde has sufficient cash available for operations and appropriate reserves after making such payment to ARD. The term “Sale Transaction” as used in the amended agreement means (i) a sale of all or substantially all of our assets; or (ii) any merger or consolidation of PowerVerde with or into another entity or any other transaction or series of transactions, the result of which is that the holders of PowerVerde’s voting stock immediately prior to such transaction or series of transactions continue to hold less than 50% of such stock following such transaction or series of transactions.

 

Effective June 15, 2011, we entered into an employment agreement with Mark P. Prinz, pursuant to which Mr. Prinz serves as a Project Engineer. Pursuant to this agreement, we pay Mr. Prinz a salary of $11,250 per month, and we paid him a one-time signing bonus of $5,000. This agreement is terminable by either party without cause upon 30 days’ prior written notice. In connection with this employment agreement, we granted Mr. Prinz (i) a 10-year option to purchase 100,000 shares of our common stock at a price of $1.23 per share (the market price on the date of grant); and (ii) a 10-year option to purchase 100,000 shares of our common stock at a price of $2.00 per share. In each case, one-fourth of the option shares, i.e., 25,000 shares, vested as of the date of the employment agreement, and the balance vests in equal installments every six months thereafter until fully vested, provided that Mr. Prinz is still employed by us at the time and subject to PowerVerde achieving certain operational targets. Additionally, in connection with this employment agreement, Mr. Prinz assigned certain intellectual property rights to the Company. 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.

 

We may also issue to our officers and directors stock options on terms and conditions to be determined by our Board of Directors or designated committee.

 

Compensation of Directors

 

We have not yet determined a compensation plan for our directors. We intend to provide our directors with reasonable compensation for their services in cash, stock and/or options.

 

Indemnification of Directors and Officers

 

Our Certificate of Incorporation allows us to indemnify our present and former officers and directors and other personnel against liabilities and expenses arising from their service to the full extent permitted by Delaware law. The persons indemnified include our (i) present or former directors or officers, (ii) any person who while serving in any of the capacities referred to in clause (i) who served at our request as a director, officer, partner, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, and (iii) any person nominated or designated by (or pursuant to authority granted by) our Board of Directors or any committee thereof to serve in any of the capacities referred to in clauses (i) or (ii).

 

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The following table sets forth certain information as of March 30, 2012, regarding the beneficial ownership of our common stock by (i) each of our directors and “named executive officers”; and (ii) all of our executive officers and directors as a group. To our knowledge, no other person beneficially owns more than 5% of our common stock. As of April 13, 2012, we had 28,303,315 shares outstanding.

 

Name and Address of Beneficial Owner   Shares Owned   Percent of Class  
George Konrad     7,054,074     24.9%  
21615 N Second Avenue              
Phoenix, AZ 85027              
               
Fred Barker1     2,515,990     8.9%  
21615 N Second Avenue              
Phoenix, AZ 85027              
               
Richard H. Davis2     1,003,033     3.5%  
8365 SW 168 Terrace              
Palmetto Bay, FL l33157              
               
John L. Hofmann3     200,000     .7%  
420 S. Dixie Highway, Suite 4B              
Coral Gables, Florida 33146              
               
Bryce Johnson4     1,725,000     6.1%  
7595 E. Gray Road              
Scottsdale, Arizona 85266              
               
All Directors and Executive Officers as a group (5 persons)5     12,498,097     42.7%  

 

__________________

1 Mr. Barker’s shares are owned jointly by Mr. Barker and his wife indirectly through their joint ownership of PowerVerde Holdings, LLC (as to 600,000 shares) and PowerVerde Consulting Services, Inc. (as to 1,915,990 shares). Mr. Barker and his wife are the sole members of PowerVerde Holdings, LLC and the sole shareholders of PowerVerde Consulting Services, Inc., and have complete voting and investment power over the PowerVerde shares owned by those companies.

2 Mr. Davis’ shares include 600,000 shares represented by a currently exercisable warrant and 114,033 shares owned by Mr. Davis’ wife, as to which he disclaims beneficial ownership, and 10,000 shares owned by Darby Shore Management, Inc., a Florida corporation (“Darby”), for which Mr. Davis is an officer, director and 25% shareholder. Mr. Davis may be deemed to have voting and investment power over these shares held by Darby.

3 All of these shares are represented by a currently exercisable warrant.

4 Includes 150,000 shares represented by currently exercisable warrants.

5 Includes 950,000 shares represented by currently exercisable warrants.

 

25
 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

See Item 2. “Properties” and Item 11. “Executive Compensation.”

 

In April 2012, Mr. Barker sold 100,000 shares of common stock, held by him through PowerVerde Consulting Services Inc., to the Company for a price of $25,000 ($.25 per share). The 100,000 shares of common stock were surrendered to our treasury.

 

Since July 2010, Mr. Hofmann’s accounting firm, J.L. Hoffman & Associates, P.A. (“JLHPA”) has provided financial consulting and accounting services to PowerVerde. We paid a total of $57,415 to JLHPA in 2011.

 

We do not have any independent directors, as Messrs. Konrad and Barker are officers and principal shareholders, Mr. Davis is an officer and works for our investment banking firm, and Bryce Johnson is an officer. We intend to seek qualified independent directors to serve on our Board of Directors by the end of 2012.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

 

The firm of Cherry, Bekaert & Holland, L.L.P., Certified Public Accountants (“CBH”) was designated by our Board of Directors to audit the financial statements of our company for the fiscal years ended December 31, 2010 and 2011. This auditor was appointed by our Board of Directors in January 2011 to replace our prior auditor, Berenfeld Spritzer Shechter & Sheer L.L.P. (“Berenfeld”), as Berenfeld elected to cease operations.

 

The following table summarizes the aggregate fees billed and expected to be billed to us by CBH for the fiscal years ended December 31, 2011 and 2010, respectively:

 

Principal Accountant Fees and Service

 

    2011   2010  
Audit Fees   $ 49,000   $ 45,000  
Tax Fees   $ 2,000   $ 500  
               
Total   $ 51,000   $ 45,500  

 

Audit Fees

 

The aggregate fees billed and expected to be billed by CBH for professional services rendered for the fiscal years ended 2011 and 2010, respectively, including fees associated with the annual audit, the reviews of the consolidated financial statements included in our Forms 10-K, the reviews of the quarterly reports on Form 10-Q, fees related to filings with the Securities and Exchange Commission and consultations on accounting issues and the application on new accounting pronouncements were approximately $49,000 and $45,000, respectively.

 

Tax Fees

 

The aggregate fees billed or expected to be billed by John L. Hofmann & Associates P.A. and Estes Avellone, CPA for tax compliance, tax advice and tax planning rendered to the Company for the fiscal years ended December 31, 2011 and 2010 were approximately $2,000 and $500, respectively.

 

26
 

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

 

See Exhibit Index and Financial Statements Index, below.

 

PowerVerde, Inc.
Annual Report on Form 10-K
Year Ended December 31, 2011

 

EXHIBIT INDEX

 

Exhibit No.   Description
3.1   Certificate of Incorporation of Vyrex Corporation as filed with the Delaware Secretary of State on September 8, 2005. 1
     
3.2   Bylaws of Vyrex Corporation, dated as of September 9, 2005. 1
     
3.3   Amended and Restated Certificate of Incorporation of Vyrex Corporation as filed with the Delaware Secretary of State on August 14, 2008. 2
     
10.1   Agreement and Plan of Merger, dated as of February 11, 2008 by and among Vyrex Corporation, Vyrex Acquisition Corporation and PowerVerde, Inc. 1,3
     
10.2   Services Agreement dated as of February 11, 2008, between PowerVerde, Inc., and Fred Barker d/b/a Barker Engineering. 1
     
10.3   Services Agreement dated as of February 11, 2008, between PowerVerde, Inc. and Arizona Research and Development, Inc. 1
     
10.4   Intellectual Property Transfer Agreement dated as of March 4, 2009, between PowerVerde, Inc. and Edward C. Gomez. 6
     
10.5   Market Awareness Consulting Agreement dated October 20, 2009, between PowerVerde, Inc., and Del Mar Corporate Consulting, LLC. 5
     
10.6   Contracted Consulting Services Agreement dated February 1, 2011, between PowerVerde, Inc., and PowerVerde Consulting Services, Inc.
     
10.7   Binding Letter of Intent for European Distribution dated January 31, 2011, between PowerVerde, Inc., and Newton Investments BV. 7
     
10.8   Employment Agreement dated January 1, 2011, between PowerVerde, Inc., and Keith Johnson.
     
10.9   Agreement dated April 7, 2011, between PowerVerde, Inc. and George Konrad.
     
10.10   Employment Agreement dated April 7, 2011, between PowerVerde, Inc. and George Konrad.

 

27
 

 

10.11   Employment Agreement dated as of June 15, 2011, between PowerVerde, Inc. and Mark P. Prinz 8
     
10.12   Employment Agreement dated as of June 15, 2011, between PowerVerde, Inc. and Patrick Orr8
     
10.13   Amended and Restated Employment Agreement dated as of June 15, 2011, between PowerVerde, Inc. and Keith Johnson.8
     
10.14   Amendment to Agreement dated August 19, 2011, between PowerVerde, Inc. and George Konrad.8
     
10.15   License Agreement dated as of September 29, 2011, between PowerVerde, Inc. and Newton Investments BV. 9
     
10.16   Binding Letter of Intent for Acquisition dated November 1, 2011, between PowerVerde, Inc., Bryce Johnson, Paul Kelly and Vince Hils. 10,
     
10.17   Agreement dated February 9, 2012, by and between PowerVerde, Inc. and Newton Investments B.V.11
     
10.18   Membership Interest Purchase Agreement between PowerVerde, Inc., Bruce Johnson, Paul Kelly and Vince Hill dated March 30, 2012. 12
     
21.1   Subsidiaries of the Company. 1
     
31.1   Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

__________________

 

1 Previously filed on Form 8-K filed with the SEC on February 11, 2008.
   
2 Previously filed on Schedule 14A filed with the SEC on July 21, 2008.
   
3 Nonmaterial schedules and exhibits identified in the Agreement and Plan of Merger have been omitted pursuant to Item 601(b)(2) of Regulation S-B. The Company agrees to furnish supplementally to the SEC upon request by the SEC a copy of any omitted schedule(s) or exhibit(s).
   
4 Previously filed on Form 10-K for the year ended December 31, 2008 filed with the SEC on April 15, 2009.
   
5 Previously filed on Form 10-Q for the quarter ended September 30, 2009 as filed with the SEC on November 17, 2009.
   
6 Previously filed on Form 10-K for the year ended December 31, 2009 filed with the SEC on April 14, 2010.
   
7 Previously filed on Form 8-K filed with the SEC on February 4, 2011.
   
8 Previously filed on Form 10-Q/A for the quarter ended June 30, 2011 filed with the SEC on September 8, 2011.

 

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9 Previously filed on Form 8-K filed with the SEC on September 30, 2011
   
10 Previously filed on Form 8-K filed with the SEC on November 7, 2011
   
11 Previously filed on Form 8-K filed with the SEC on February 9, 2012.
   
121 Previously filed on Form 8-K filed with the SEC on April 5, 2012.

 

29
 

 

SIGNATURES

 

In accordance with Section 13 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.

 

  POWERVERDE, INC.
     
Dated: April 16, 2012 by: /s/ Richard H. Davis
    Richard H. Davis
    CEO and Principal Executive Officer

 

In accordance with the Exchange Act, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ George Konrad   President, Director   April 16, 2012
         
         
/s/ Fred Barker   Vice President, Secretary and Director   April 16, 2012
         
/s/ Richard H. Davis.   Chief Executive Officer, Director   April 16, 2012
         
/s/ Bryce Johnson   Chief Operating Officer, Director   April 16, 2012
         
/s/ John L. Hofmann   Chief Financial Officer   April 16, 2012

 

30
 

 

PowerVerde, Inc. and Subsidiary

 

Annual Report on Form 10-K

Year Ended December 31, 2011

 

INDEX TO FINANCIAL STATEMENTS

 

  Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Changes in Stockholders' Equity (DEFICIT) F-4
Consolidated Statements of Cash Flows F-5
Notes to consolidated financial statements F-6 – F-16

 

i
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of
PowerVerde, Inc. and Subsidiary

 

We have audited the consolidated balance sheets of PowerVerde, Inc. and Subsidiary (the Company), as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended and the period from March 9, 2007 (Date of Inception) to December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PowerVerde, Inc. and Subsidiary as of December 31, 2011 and 2010, and the consolidated results of its operations and its consolidated cash flows for the years then ended and the period from March 9, 2007 (Date of Inception) to December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the consolidated financial statements, the Company incurred a net loss of $2,553,465 and $308,352 for 2011 and 2010, respectively. At December 31, 2011, current liabilities exceeded current assets by $128,599. These factors, and others discussed in Note 2, raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amount and classification of liabilities that might be necessary in the event the Company cannot continue in existence.

 

/s/ Cherry, Bekaert & Holland, L.L.P.
Fort Lauderdale, Florida
April 16, 2012

 

F-1
 

 

PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Consolidated Balance Sheets

 

December 31, 2011 and December 31, 2010

 

   December 31 
   2011   2010 
Assets          
Current Assets:          
Cash and cash equivalents  $7,530   $15,646 
Accounts receivable   18,909    5,350 
Prepaid expenses   24,267     
Total Current Assets   50,706    20,996 
           
Property and Equipment          
Property and equipment, net of accumulated depreciation of $20,521 and $13,103, respectively   15,809    12,034 
           
Total Assets  $66,515   $33,030 
           
           
Liabilities and Stockholders’ Equity          
Current Liabilities          
Accounts payable and accrued expenses  $179,304   $153,891 
Total Current Liabilities   179,304    153,891 
           
           
Long-Term Liabilities          
Note payable to related party   180,988     
Total Long-Term Liabilities   180,988     
           
Total Liabilities   360,292    153,891 
           
Stockholders’ (Deficiency)          
Preferred stock:  50,000,000 preferred shares authorized, par value $0.0001 per share, no shares issued and outstanding at December 31, 2011 and December 31, 2010          
Common stock:          
100,000,000 common shares authorized, par value $0.0001 per share, 30,124,565 common shares issued and 25,624,565 shares outstanding at December 31, 2011, and 28,043,065 common shares issued and outstanding at December 31, 2010   3,012    2,804 
Additional paid-in capital   4,730,724    2,179,625 
Treasury stock, 4,500,000 shares at cost   (170,758)    
Deficit accumulated in the development stage   (4,856,755)   (2,303,290)
           
Total Stockholders’ (Deficiency)   (293,777)   (120,861)
           
Total Liabilities and Stockholders’ (Deficiency)  $66,515   $33,030 

 

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

 

F-2
 

 

PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Consolidated Statements of Operations

 

For the years ended December 31, 2011 and 2010, and the

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

 

   2011   2010   Cumulative from
inception through
December 31, 2011
 
Revenue, Net  $193,391   $33,842   $284,756 
                
Cost of Goods Sold   136,925        136,925 
                
Gross Profit   56,466    33,842    147,831 
                
Operating Expenses               
Research and development   994,619    169,665    2,007,681 
General and administrative   1,628,739    198,900    2,671,611 
Total Operating Expenses   2,623,358    368,565    4,679,292 
                
Loss from Operations   (2,566,892)   (334,723)   (4,531,461)
                
Other Income (Expenses)               
Interest income           2,401 
Interest expense   (10,230)        (343,706)
Other income (expenses)   23,657    26,371    16,011 
Total Other Income (Expenses)   13,427   26,371    (325,294)
                
Loss before Income Taxes   (2,553,465)   (308,352)   (4,856,755)
Provision for Income Taxes            
                
Net Loss  $(2,553,465)  $(308,352)  $(4,856,755)
                
Net Loss per Share - Basic and Diluted  $(0.10)  $(0.01)     
Weighted Average Common Shares Outstanding - Basic and Diluted   26,338,637    27,821,111      

 

 

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

 

F-3
 

 

PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Consolidated Statements of Changes in Stockholders’ Equity (DEFICIT)

 

For the years ended December 31, 2011 and 2010, and the

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

 

   Common Shares   Common Stock   Additional Paid in Capital   Treasury Stock   Deficit Accumulated during the Development Stage   Total Stockholders’ Equity (Deficit) 
Balance at March 9, 2007 (date of inception)      $   $   $   $   $ 
Common Stock issued for cash, net of stock issuance costs of  $45,398   20,350,000    20,350    659,252            679,902 
                               
Net Loss                   (274,402)   (274,402)
                               
Balances, December 31, 2007   20,350,000   $20,350   $659,252   $   $(274,402)  $405,200 
                               
Sale of common stock at $.50 per share   50,000    50    24,950            25,000 
                               
Stockholder Equity of Vyrex Corporation at merger   1,019,144    102    (479,771)           (479,669)
                               
Recapitalization of PowerVerde stockholders’ equity   (20,400,000)   (20,400)   20,400             
                               
Shares issued related to forgiveness of debt and issued for services   275,000    28    249,972            250,000 
                               
Shares issued in exchange for PowerVerde shares   24,588,734    2,459    (2,459)            
                               
Warrants issued with debt           299,984            299,984 
                               
Net loss                   (829,556)   (829,556)
                               
Balances, December 31, 2008   25,882,878   $2,589   $772,328   $   $(1,103,958)  $(329,041)
                               
Sale of common stock at $.75 per share, net of stock issuance costs of $85,000   1,266,667    126    864,874            865,000 
                               
Common stock issued on conversion of debt   378,521    38    189,223            189,261 
Common stock issued for services   75,000    8    56,242              56,242 
Net loss                   (890,980)   (890,980)
Balances, December 31, 2009   27,603,066   $2,761   $1,882,667   $   $(1,994,938)  $(109,510)
                               
Sale of common stock at $.75 per share, net of stock issuance costs of $85,000   439,999    43    296,958            297,001 
Net loss                   (308,352)   (308,352)
Balances, December 31, 2010   28,043,065   $2,804   $2,179,624   $   $(2,303,290)  $(120,861)
                               
Sale of common stock at $.75 per share, net of stock issuance costs of $150,000   2,000,000    200    1,349,800            1,350,000 
Stock-based compensation             466,907              466,907 
Warrants issued for services             612,150            612,150 
Warrants exercised   81,500    8    122,242              122,250 
Treasury stock   (4,500,000)             (170,758)        (170,758)
Net loss                   (2,553,465)   (2,553,465)
Balances, December 31, 2011   25,624,565   $3,012   $4,730,724   $(170,758)  $(4,856,755)  $(293,777)

 

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

 

F-4
 

 

PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Consolidated Statements of Cash Flows

 

For the years ended December 31, 2011 and 2010, and the

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

 

   2011   2010   Cumulative from inception through December 31, 2011 
Cash Flows from Operating Activities               
Net loss  $(2,553,465)  $(308,352)  $(4,856,755)
Adjustments to reconcile net loss to net cash used by operating activities:               
Depreciation   7,418    5,687    20,521 
Amortization of discount   10,230        339,692 
Stock based compensation   466,907        523,149 
Warrants issued for services   612,150        612,150 
Changes in operating assets and liabilities              
Accounts receivable and other assets   (37,826)   2,276    (43,176)
Accounts payable and accrued liabilities   25,413    2,116    (51,228)
                
Cash Used in Operating Activities   (1,469,173)   (298,273)   (3,455,647)
                
Cash Flows From Investing Activities               
Purchase of fixed assets   (11,193)   (3,538)   (36,330)
Cash acquired in business acquisition           872 
                
Cash Used in Investing Activities   (11,193)   (3,538)   (35,458)
                
Cash Flows from Financing Activities               
Proceeds from issuance of common stock and warrants   1,622,250    330,000    3,652,250 
Proceeds from notes payable           300,000 
Payment of line of credit           (50,000)
Payment of note payable           (90,217)
Payment of stock issuance costs   (150,000)   (33,000)   (313,398)
                
Cash Provided by Financing Activities   1,472,250    297,000    3,498,635 
                
Net Increase (Decrease) in Cash   (8,116)   (4,811)   7,530 
Cash, at Beginning of Period   15,646    20,457     
Cash, at End of Period  $7,530   $15,646   $7,530 
                
Supplemental Disclosure of Cashflow Information               
Cash Paid for Interest  $   $   $24,221 
Cash Paid for Income Taxes  $   $   $ 
                
Supplemental Schedule of Non-Cash Financing               
Common stock issued for convertible debt  $   $   $189,261 
Common stock issued for services  $   $   $56,250 
Purchase of treasury stock with long-term related party payable  $170,758   $   $170,758 
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 consolidated financial statements.

 

F-5
 

 

PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Nature of Business

 

PowerVerde, Inc. (the Company) is a “C” Corporation organized under the Laws of Delaware with operations in Scottsdale, Arizona. The Company’s two founders, now its largest shareholders, have conceived and developed the use of a power systems patent. The Company is in the development stage and it is presently undertaking research and development on a power generating system.

 

On February 11, 2008, Vyrex Corporation (“Vyrex” or the “Company”); PowerVerde, Inc. (“PowerVerde”) and Vyrex Acquisition Corporation (“VAC”), a wholly-owned subsidiary of Vyrex, all Delaware corporations, entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, on February 12, 2008, VAC merged with and into PowerVerde, with PowerVerde remaining as the surviving corporation and a wholly-owned subsidiary of Vyrex (the “Merger”). As consideration for the Merger, as of the closing of the Merger, each issued and outstanding share of common stock of PowerVerde was converted into the right to receive 1.2053301 shares of the common stock of Vyrex and each share of VAC was converted into one share of PowerVerde common stock. As a result of the Merger, the former shareholders of PowerVerde hold 24,588,734 shares, or 95%, of the common stock of Vyrex. Pursuant to the Merger Agreement, PowerVerde paid $233,000 in accounts payable and other liabilities owed by Vyrex. The total purchase price of the transaction of $401,894 includes $60,000 of transaction costs related to the Merger.

 

In addition, immediately prior to execution of the Merger Agreement, Vyrex paid a $200,000 promissory note through the issuance of 250,000 shares of common stock and issued an additional 25,000 shares of common stock as payment for certain consulting and administrative services.

 

At a stockholder meeting held on August 6, 2008, the Company’s stockholders approved (i) the change of the Company’s name to “PowerVerde, Inc.” and (ii) the Amended and Restated Certificate of Incorporation filed as an exhibit to the Company’s report on Form 10-Q for the quarter ended June 30, 2008. Immediately prior to the filing of the Certificate changing the Company’s name, the name of the Company’s operating subsidiary was changed from “PowerVerde, Inc.” to “PowerVerde Systems, Inc.”

 

Note 2 – Going Concern

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has had recurring operating losses and negative cashflows 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.

 

F-6
 

 

Note 3 – Summary of Significant Accounting Policies

 

Basis of Accounting

 

The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these 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.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of PowerVerde, Inc. and its wholly-owned subsidiary, PowerVerde Systems, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Development Stage Company

 

The Company is a development stage company as defined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915, “Development Stage Entities”. The Company is devoting substantially all of its present efforts to establish a new business and none of its planned principal operations have commenced. All losses accumulated since inception has been considered as part of the Company’s development stage activities.

 

Cash Equivalents

 

For purposes of reporting cash flows, cash equivalents include money market accounts and any highly liquid debt instruments purchased with a maturity of three months or less. At December 31, 2011 and December 31, 2010, the Company had cash equivalents in the amount of $7,530 and $15,646, respectively. The Company’s bank accounts are fully insured by the Federal Deposit Insurance Corporation (FDIC).

 

Inventories

 

Inventories, which consist of 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. At December 31, 2011 and December 31, 2010, the Company had no inventory.

 

Accounts Receivable

 

Accounts receivable consist of balances due from sales and royalties. The company monitors accounts receivable and provides allowances when considered necessary. At December 31, 2011, and December 31, 2010, accounts receivable were considered to be fully collectible. Accordingly, no allowance for doubtful accounts was provided.

 

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 reasonable collectable. Certain sales agreements also require installation and training by PowerVerde once goods are received and accepted by the customer.

 

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

 

Property and Equipment

 

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Expenditures for major betterments and additions are capitalized, while replacement, maintenance and repairs, which do not extend the lives of the respective assets, are expensed as incurred.

 

F-7
 

 

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.

 

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).

 

Accounting for Uncertainty in Income Taxes

 

The Company applies 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.

 

Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our consolidated 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 December 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 consolidated financial statements as selling, general and administrative expense.

 

Research and Development Costs

 

The Company’s research and development costs are expensed in the period in which they are incurred. Such expenditures amounted to $994,619 and $169,665 for the year ended December 31, 2011 and 2010, respectively.

 

Earnings (Loss) Per Share

 

Earnings (loss) per share is computed in accordance with FASB ASC Topic 260, Earnings per Share”. Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. Certain common stock equivalents were not included in the earnings (loss) per share calculation as their effect would be anti-dilutive. Warrants for 4,294,999 shares and options for 1,750,000 shares were excluded from weighted average common shares outstanding on a diluted basis.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

 

F-8
 

 

Stockholders’ Equity

 

Shares of common stock issued for other than cash have been assigned amounts equivalent to the fair value of the service or assets received in exchange.

 

Financial Instruments and Fair Values

 

The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time, based upon relevant market information about the financial instrument.

 

The carrying amount of cash and cash equivalents, trade receivables and other assets approximates fair value due to the short-term maturities of these instruments.

 

The fair values of all other financial instruments, including debt, approximate their book values as the instruments are short-term in nature or contain market rates of interest.

 

Note 4 – Recent Accounting Pronouncements

 

On January 1, 2011, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force.” This ASU amended the criteria for when to evaluate individual delivered items in a multiple deliverable arrangement and how to allocate consideration received. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

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.

 

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” which provides common requirements for measuring fair value and disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). This ASU is effective for fiscal years beginning on or after December 15, 2011. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements

 

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” which improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. This ASU is effective for fiscal years beginning on or after December 15, 2011 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

In September 2011, the FASB issued ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment”. ASU 2011-08 permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

F-9
 

 

Note 5 – Property and Equipment

 

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

 

   December 31, 2011   December 31, 2010   Estimated Useful
Lives
(in years)
 
                
Equipment  $25,426   $22,339    5 
Computer equipment (hardware)   6,975    2,798    3-5 
Software   3,929        3 
    36,330    25,137      
Less: Accumulated depreciation   (20,521)   (13,103)     
   $15,809   $12,034      

 

The amounts charged to operations for depreciation for the years ended December 31, 2011 and 2010 were $7,418 and $5,687, respectively.

 

Note 6 – Stockholders’ Equity

 

Warrants

 

In 2008, the Company issued warrants to purchase 250,000 and 50,000 unregistered shares of the Company’s common stock at exercise prices of $1.50 and $2.30 per share, respectively. The warrants expired on various dates through November 2011. At December 31, 2011, 218,500 of these warrants had expired and 81,500 were exercised.

 

During March through December 2010, the Company issued warrants to purchase 439,999 unregistered shares of the Company’s common stock at an exercise price of $0.75 per share in association with stock subscription agreements. These warrants expire on various dates through December 2013. As of December 31, 2011, none of these warrants were exercised or had expired.

 

During January through December 2011, the Company issued warrants to purchase 2,000,000 unregistered shares of the Company’s common stock at an exercise price of $0.75 per share in association with stock subscription agreements. These warrants expire on various dates through June 2014. As of December 31, 2011, none of these warrants were exercised or had expired.

 

The Company issued warrants on June 3, 2011 to various persons, including affiliates of the Company, for services provided to the Company. These warrants covered the purchase of 1,855,000 unregistered shares of the Company’s stock at an exercise price of $1.05 per share with a five-year term. These share-based payments have been accounted for in accordance with ASC 815-40 using the Black Scholes warrant pricing model to determine the fair value of each warrant.

 

Expenses related to warrants issued for services for the years ended December 31, 2011 and 2010 were $612,150 and $0, respectively.

 

A summary of warrants issued, exercised and expired during the year ended December 31, 2011 is as follows:

 

   Shares   Weighted Average Exercise Price 
           
Balance at December 31, 2010   739,999    1.11 
Issued   3,855,000    .89 
Exercised   (81,500)   1.50 
Expired   (218,500)   1.68 
Balance at December 3, 2011   4,294,999    0.88 

 

F-10
 

 

The weighted average grant date fair value of warrants issued during the year ended December 31, 2011 amounted to $1.02 per warrant. The fair value of each warrant granted as compensation for services was determined using the Black-Scholes warrant pricing model and the following assumptions:

 

   December 31, 2011 
Risk free interest rate   1.59%
Expected term   5.0 years 
Annualized volatility   131%
Expected dividends    

 

The expected term of warrants granted is based on the contractural terms of the agreement and represents the period of time that warrants granted are expected to be outstanding.

 

The warrant shares referred to above are unregistered shares of the Company’s stock and are restricted from trading as defined under Rule 144 of the United States Securities Act of 1933.

 

Private Placement of Common Stock

 

During January through June 2011, the Company raised $1,500,000 through the private placement of 2,000,000 shares of its common stock to accredited investors at $0.75 per share. Each investor received a three-year warrant to purchase unregistered stock at $0.75 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 $1,500,000 referred to above includes a $250,000 investment purchased by a Newton affiliate in conjunction with the Newton BLOI.

 

In February 2012, the Company raised gross proceeds of $500,000 through the private placement of 500,000 shares of its common stock to accredited investors at $1.00 per share. The private placement was undertaken pursuant to the Agreement between the Company and Newton, as disclosed in Note 8, below.

 

Treasury Shares

 

On April 7, 2011, 4,500,000 shares of the Company’s stock were surrendered to Treasury in exchange for a $200,000 interest-free note payable in April 2013. See Note 8 - Commitments. The note payable is reported as note payable to related party on the accompanying consolidated balance sheets. In accordance with GAAP, the Company has discounted this obligation at an imputed rate of 8%. The balance at December 31, 2011 was $180,988.

 

Preferred Shares

 

The Company has 50,000,000 shares of authorized, $0.0001 par value preferred stock. At December 31, 2011 and 2010, 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 the employee a 10-year option to purchase 1,350,000 shares of the Company’s common stock at a price of $0.59 per share, of which one-fourth of the option shares, i.e. , 337,500 shares, vested as of the date of the nonqualified stock option agreement, and the balance vests in equal installments every six months thereafter until fully vested, provided that the employee is still employed by the Company at the time.

 

F-11
 

 

On June 15, 2011 the Company entered into nonqualified stock option agreements with three employees, granting the employees 10-year options to purchase a total of 600,000 shares of the Company’s common stock consisting of 300,000 shares of the Company’s common stock at a price of $1.23 per share and 300,000 shares of the Company’s common stock at a price of $2.00 per share. In each case, one-fourth of the option shares vested as of the date of each employee’s respective nonqualified stock option agreement, and the balance vests in equal installments every six months thereafter until fully vested, provided that the relevant employee is still employed by the Company at the time. In October 2011, one of the three employees left the Company and forfeited his one-third share of these options. See “Note 8 Commitments.”

 

The fair value of each stock option granted was determined using the Black-Scholes stock option pricing model and the following weighted average assumptions:

 

   December 31, 2011 
Risk free interest rate   1.54%
Expected term   5.75 years 
Annualized volatility   131%
Expected dividends    

 

The expected term of options granted is based on the simplified method in accordance with SAB 107 issued by the U.S. Securities and Exchange Commission and represents the period of time that options granted are expected to be outstanding.

 

Stock option activity for the year ended December 31, 2011, is summarized as follows:

 

   Shares   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Life (Years)
 
Options outstanding at December 31, 2010      $      
Granted   1,950,000   $0.91      
Expired or forfeited   (200,000)         
Options outstanding at December 31, 2011   1,750,000   $0.91    10.00 
Options exercisable at December 31, 2011   875,000   $0.91    10.00 
Options vested or expected to vest at December 31, 2011   875,000   $0.91    10.00 

 

Total stock option compensation for the year ended December 31, 2011 and 2010 was $466,908 and $0, respectively. Remaining stock option compensation of $466,907 will be recognized ratably over 18 months from the grant date.

 

Note 8 – Commitments and Contingencies

 

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 (which was entered into, as described below), pursuant to which Newton would, 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 would receive as a royalty an amount equal to 20% of the gross sale price of each System sold by Newton. The Company authorized Newton to manufacture its Systems under a strict licensing agreement with a Dutch/German foundry and machine shop. Newton also agreed to purchase an initial System from the Company for a discounted price. In connection with the BLOI, an affiliate of Newton invested $250,000 in PowerVerde by privately purchasing 333,333 restricted shares of common stock at a price of $0.75 per share. In connection with this purchase, the Company issued to the investor a three-year warrant to buy an additional 333,333 unregistered shares at a price of $0.75 per share.

 

The Company’s initial System was delivered to Newton in July 2011, pursuant to the terms of the BLOI, as described above, and the balance of the purchase price was received upon delivery in July 2011. The full $130,000 sale price was recorded as revenue in the third quarter.

 

F-12
 

 

On April 7, 2011, in order to enhance the Company’s ability to raise capital and limit dilution of its stockholders, the Company entered into an agreement with its co-founder, President and then-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 agreeing to pay to Mr. Konrad’s company, Arizona Research and Development (“ARD”), a related party, $200,000 to be paid no later than April of 2013. A discount of approximately $30,000 was recognized on the long-term payable as imputed interest of 8%. Interest accreted for the year ended December 31, 2011 was $10,230.

 

In addition, 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 to Mr. Konrad’s company, ARD, $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.

 

On August 19, 2011, the Company’s Board of Directors (i) accepted the resignation of George Konrad as the Company’s Chief Executive Officer and Chief Financial Officer, although Mr. Konrad remains as the Company’s President; and (ii) elected Richard H. Davis and John L. Hofmann as the Company’s Chief Executive Officer and Chief Financial Officer, respectively, to fill the vacancies created by such resignations.

 

On August 19, 2011, the Company amended its agreement with George Konrad dated as of April 7, 2011, relating to Mr. Konrad’s surrender to the Company’s treasury of 4,500,000 shares of common stock (the “Original Agreement”). Pursuant to such amendment, the Company extended the timing of payments to be made to Mr. Konrad’s company, Arizona Research and Development (“ARD”), under the Original Agreement to on or before April 7, 2013, except that such payment shall be fully made within 30 days following the earlier of (i) a closing of a financing transaction by the Company which involves gross proceeds equal to or greater than $2 million; (ii) a closing of a Sale Transaction (as defined below); or (iii) a determination by the Company’s Board of Directors, in its sole and absolute discretion, that the Company has sufficient cash available for operations and appropriate reserves after making such payment to ARD. The term “Sale Transaction” as used herein means (i) a sale of all or substantially all of the assets of the Company; or (ii) any merger or consolidation of the Company with or into another entity or any other transaction or series of transactions, the result of which is that the holders of the Company’s voting stock immediately prior to such transaction or series of transactions continue to hold less than 50% of such stock following such transaction or series of transactions.

 

On June 3, 2011, the Company granted to Mr. Richard Davis a three-year warrant to purchase 600,000 unregistered shares of the Company’s common stock at an exercise price of $1.05 per share, in consideration for his service as a Director and for his substantial consulting services since inception, incorporated in the warrant section of Note 6 - Stockholder’s Equity. Since 2008, Richard H. Davis has served as a Director of the Company, and since August 2011 he has served as Chief Executive Officer of the Company. The Company’s Board of Directors will determine an appropriate compensation package for Mr. Davis in consideration of his serving as the Company’s Chief Executive Officer.

 

On June 3, 2011, the Company granted to Mr. John L. Hofmann a three-year warrant to purchase 200,000 unregistered shares of the Company’s common stock at an exercise price of $1.05 per share, in partial consideration for his firm’s financial consulting and accounting services since July 2010, incorporated in the warrant section of Note 6 - Stockholder’s Equity. Since August 2011, Mr. Hofmann has served as Chief Financial Officer of the Company. The Company’s Board of Directors will determine an appropriate compensation package for Mr. Hofmann in consideration of his serving as the Company’s Chief Financial Officer.

 

Effective January 1, 2011, the Company entered into an employment agreement with Keith Johnson, pursuant to which Mr. Johnson serves as Chief Technical Officer. The agreement was amended as of June 15, 2011. Pursuant to this agreement, Mr. Johnson receives a salary of $12,500 per month (which was increased from $10,000 effective June 15, 2011). The Company also paid Mr. Johnson a $5,000 signing bonus. This agreement is terminable by either party without cause upon 30 days’ prior written notice. In connection with the initial employment agreement, the Company granted Mr. Johnson, in January 2011, a 10-year option to purchase 1,350,000 shares of our common stock at a price of $.59 per share (the market price on the date of grant). One fourth of this option, i.e., 337,500, shares vested as of the date of the employment agreement and the balance vests in equal installments every six months thereafter until fully vested, provided that he is still employed by the Company at this time. In connection with the June 2011 amendment, the Company granted Mr. Johnson a 10-year option to purchase 100,000 shares of common stock at a price of $1.23 per share (the market price on the date of grant) and a 10-year option to purchase 100,000 shares of our common stock at an exercise price of $2.00 per share. One-fourth of these option shares, i.e., 50,000 shares, vested as of the date of the amended employment agreement and the balance vests in equal installments every six months thereafter until fully vested, provided that he is still employed by the Company at the time and subject to the Company achieving certain operational targets. Additionally, in connection with his employment agreement, Mr. Johnson assigned certain intellectual property rights to the Company, including rights under U.S. Patent Application 61/424,249 filed on December 17, 2010. 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.

 

F-13
 

 

Effective June 15, 2011, the Company entered into an employment agreement with Mark P. Prinz, pursuant to which Mr. Prinz serves as a Project Engineer of the Company. Pursuant to this agreement, the Company pays Mr. Prinz a salary of $11,250 per month, and paid him a one-time signing bonus of $5,000. This agreement is terminable by either party without cause upon 30 days’ prior written notice. In connection with this employment agreement, the Company granted Mr. Prinz (i) a 10-year option to purchase 100,000 shares of the Company’s common stock at a price of $1.23 per share; and (ii) a 10-year option to purchase 100,000 shares of the Company’s common stock at a price of $2.00 per share. In each case, one-fourth of the option shares, i.e. , 25,000 shares, vested as of the date of the employment agreement, and the balance vests in equal installments every six months thereafter until fully vested, provided that Mr. Prinz is still employed by the Company at the time and subject to the Company achieving certain operational targets. Additionally, in connection with this employment agreement, Mr. Prinz assigned certain intellectual property rights to the Company.   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.

 

On September 29, 2011, the Company entered into a license agreement (the “License Agreement”) with Newton. This is the definitive agreement contemplated by the BLOI, described above. Pursuant to the License Agreement, Newton will, for a period of 10 years, hold the exclusive manufacturing and distribution rights for the Systems in the 27 countries which are currently members of the European Union, subject to Newton’s achieving minimum sales of at least 100 Systems per year beginning in the second year of the License Agreement, payment of a royalty equal to 20% of the gross sales price of each System sold, and other terms and conditions set forth in the License Agreement.

 

On November 1, 2011, the Company entered into a binding letter of intent for the acquisition of all of the membership interests in Cornerstone Conservation Group LLC, Scottsdale, Arizona (“Cornerstone”). Cornerstone’s main asset is its proprietary Combined Cooling, Heating and Power (“CCHP”) technology, which utilizes waste heat from commercial and residential heating, ventilation air conditioning and refrigeration (“HVACR”) systems. Cornerstone also has substantial experience and technology relating to geothermal or ground source heat pumps.

 

As consideration for the Cornerstone acquisition, the Company agreed to issue at closing upon execution of a definitive agreement (i) a total of 2,250,000 restricted shares of common stock to Cornerstone’s members, Bryce Johnson (“Johnson”), Paul Kelly (“Kelly”) and Vincent Hils (“Hils”), in the amounts of 1,575,000, 337,500 and 337,500 shares, respectively, (ii) 10,000 restricted shares to a Cornerstone employee, and (iii) three year warrants to purchase 150,000 shares each to Johnson and Kelly, with 50,000 each exercisable beginning January 1, 2012, at a price of $2.00 per share, 50,000 each exercisable beginning July 1, 2012, at a price of $3.00 per share, and 50,000 each exercisable beginning January 1, 2013, at a price of $4.00 per share. On November 1, 2011, pursuant to the letter of intent, Mr. Johnson joined the Company’s Board of Directors.

 

Note 9 – Income Taxes

 

Deferred income taxes are provided based on the provisions of ASC 740, “Accounting for Income Taxes”, to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

The Company did not have any tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months. The tax years that remain subject to examination by major taxing jurisdictions are those for the years ended December 31, 2011, 2010, 2009 and 2008.

 

The Company classifies interest and penalties arising from underpayment of income taxes in the consolidated statements of operations as general and administrative expenses. As of December 31, 2011, the Company had no accrued interest or penalties related to uncertain tax provisions.

 

Significant components of the Company’s net deferred income taxes are as follows:

 

   For the Years ended 
   December 31, 
   2011   2010 
Deferred tax assets:          
Net operating loss carryforwards  $1,063,755   $516,347 
Start-up cost   440,340    389,868 
Stock based compensation   426,228     
Other   4,810    4,564 
Deferred tax assets   1,935,133    910,779 
Less valuation allowance   (1,935,133)   (910,779)
Net deferred tax assets after valuation allowance  $   $ 

 

F-14
 

 

A reconciliation of the U.S. statutory federal income tax rate to the effective income tax rate (benefit) follows:

 

Rate Reconciliation     
      
Federal income tax at statutory rate  $(884,000)
State Tax   (143,000)
Change in Valuation Allowance   1,024,354 
Permanent Differences   2,277 
Other   369 
      
   $(0)

 

In assessing the ability to realize a portion of the deferred tax assets, management considers whether it is more than likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making the assessment. After consideration of the evidence, both positive and negative, management has determined that a $1,935,133 valuation allowance at December 31, 2011 is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The change in the valuation allowance for the current year is $1,024,354. At December31, 2011, the Company has available net operating loss carry forwards for federal income tax purposes of $2,693,051 expiring at various times from 2027 through 2031.

 

Valuation and Qualifying Accounts

 

Description  Balance at Beginning of Period   Charged to Cost and Expenses   Write-offs   Other
Changes
   Balance at End of Period 
                          
Deferred tax asset valuation allowance                         
                          
Year ended December 31, 2011  $910,779   $1,024,354             $1,935,133 
Year ended December 31, 2010  $818,000   $92,779             $910,779 

 

Note 10 – Subsequent Events

 

In the first quarter of 2012, the Company raised $500,000 exclusively from accredited European investors (including $275,000 from a Newton affiliate) pursuant to a private placement of 500,000 shares of common stock at a price of $1.00 per share. There was no warrant issued pursuant to this round; however, simultaneously Newton affiliates received three year warrants to purchase 500,000 shares at $1.00 per share in connection with the settlement of certain claims by and between the Company and Newton.

 

F-15
 

 

The Cornerstone acquisition was closed, and the contemplated common stock and warrants issued, on March 30, 2012, pursuant to a definitive Membership Interest Purchase Agreement between the Company and Messrs. Bryce Johnson, Kelly and Hils. Bryce Johnson became the Company’s Chief Operating Officer on January 1, 2012, and on January 1, 2012, the Company moved its operations to a 5,000 square foot facility owed by Mr. Johnson in Scottsdale, Arizona. The Company intends to negotiate with Mr. Johnson a lease on fair market terms. The Company has determined that it is not practicable to provide summarized financial data for Cornerstone. The assets acquired were substantially intellectual property, and the Company did not assume any significant liabilities.

 

In April 2012, the Company purchased 100,000 shares of common stock from a company owned by its Director and co-founder Fred Barker at a price of $.25 per share. Of the $25,000 purchase price, $14,000 was paid in 2011. The shares will be held as treasury stock at the date of closing.

 

F-16