CurAegis Technologies, Inc. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - CurAegis Technologies, Inc.	Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - CurAegis Technologies, Inc.	ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - CurAegis Technologies, Inc.	ex31-2.htm
EX-32 - EXHIBIT 32 - CurAegis Technologies, Inc.	ex32.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended MARCH 31, 2012


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

For the transition period from ________ to ________

Commission File No. 000-24455

TORVEC, INC.

(Exact name of registrant as specified in its charter)

New York		16-1509512
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1999 Mt. Read Blvd. Building 3, Rochester, New York 14615

(Address of principal executive offices and Zip Code)

(585) 254-1100

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company þ

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


Class		Number of Shares Outstanding at April 30, 2012
Common Stock, $.01 par value		45,700,399

TORVEC, INC.

(a development stage company)

INDEX

Page

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011	3

Condensed Consolidated Statements of Operations – Three Month Periods Ended March 31, 2012 and 2011 and for the Period from September 25, 1996 (Inception) through March 31, 2012 (unaudited)	4

Condensed Consolidated Statements of Cash Flows – Three Month Periods Ended March 31, 2012 and 2011 and for the Period from September 25, 1996 (Inception) through March 31, 2012 (unaudited)	5

Notes to Condensed Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3. Quantitative and Qualitative Disclosures About Market Risk	25

Item 4. Controls and Procedures	25

PART II – OTHER INFORMATION

Item 1. Legal Proceedings	26

Item 1A. Risk Factors	26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3. Defaults Upon Senior Securities	26

Item 4. Mine Safety Disclosures	26

Item 5. Other Information	26

Item 6. Exhibits	27

SIGNATURE PAGE	30

EXHIBITS	31

Exhibit 31.1

Exhibit 31.2

Exhibit 32

PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

TORVEC, INC.

(a development stage company)

Condensed Consolidated Balance Sheets

	March 31, 2012			December 31, 2011
	(Unaudited)
ASSETS
Current assets:
Cash	$	5,424,000		$	5,939,000
Accounts receivable		60,000			0
Prepaid expenses and other current assets		7,000			35,000

Total current assets		5,491,000			5,974,000


Property and Equipment:
Office equipment and software		122,000			116,000
Shop equipment		112,000			112,000
Leasehold Improvements		243,000			243,000
Transportation equipment		26,000			26,000

		503,000			497,000
Less accumulated depreciation and amortization		289,000			273,000

Net property and equipment		214,000			224,000

Total Assets	$	5,705,000		$	6,198,000


LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable, current portion	$	36,000		$	36,000
Accounts payable		87,000			91,000
Accrued liabilities		428,000			437,000
Deferred liabilities		7,000			9,000

Total current liabilities		558,000			573,000

Notes payable, net of current portion		38,000			48,000

Total Liabilities		596,000			621,000

Commitments and other matters (Note G)

Stockholders' Equity:
Preferred stock, $.01 par value, 100,000,000 shares authorized
a) 3,300,000 designated as Class A, Non-voting, convertible, cumulative dividend $.40 per share per annum, shares issued and outstanding at March 31, 2012 and December 31, 2011: 587,101 and 587,101, respectively		6,000			6,000
b) 300,000 designated as Class B, Non-voting, convertible, cumulative dividend $.50 per share per annum, shares issued and outstanding at March 31, 2012 and December 31, 2011: 77,500 and 77,500, respectively		1,000			1,000
c) 16,250,000 designated as Class C, Voting, convertible, no dividend, shares issued and outstanding at March 31, 2012 and December 31, 2011: 16,250,000 and 16,250,000, respectively		162,000			162,000
Common stock, $.01 par value, 400,000,000 shares authorized, 45,700,399 and 45,700,399 issued and outstanding, at March 31, 2012 and December 31, 2011, respectively		457,000			457,000
Additional paid-in capital		64,935,000			64,650,000
Deficit accumulated during the development stage		(60,452,000	)		(59,699,000	)

Total Stockholders' Equity		5,109,000			5,577,000

Total Liabilities and Stockholders' Equity	$	5,705,000		$	6,198,000

See notes to condensed consolidated financial statements.

TORVEC, INC.

(a development stage company)

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended March 31, 2012			Three Months Ended March 31, 2011			September 25, 1996 (Inception) through March 31, 2012

Revenue	$	60,000		$	30,000		$	512,000
Cost of Goods Sold		45,000			17,000			377,000

Gross Profit		15,000			13,000			135,000

Costs and expenses:
Research and development:
R&D costs, excluding stock-based compensation expense		202,000			202,000			15,630,000
Stock-based compensation expense related to options and warrants		18,000			0			1,676,000
Total research and development		220,000			202,000			17,306,000
General and administrative:
G&A costs, excluding stock-based compensation expense		287,000			307,000			28,272,000
Stock-based compensation expense related to options and warrants		267,000			304,000			19,295,000
Total general and administrative		554,000			611,000			47,567,000
Asset impairments		0			0			1,071,000

Total costs and expenses		774,000			813,000			65,944,000

Loss from operations		(759,000	)		(800,000	)		(65,809,000	)

Reversal of liability on cancellation of debt		0			0			1,541,000
Gain on litigation settlement		0			0			1,900,000
Other income / (expense)		6,000			1,000			260,000

Loss Before Income Tax (Expense) / Benefits		(753,000	)		(799,000	)		(62,108,000	)

Income tax (expense) / benefits		0			0			384,000

Net Loss		(753,000	)		(799,000	)		(61,724,000	)

Net loss attributable to non-controlling interest in subsidiary		0			0			1,272,000

Net Loss attributable to Torvec, Inc.		(753,000	)		(799,000	)		(60,452,000	)

Preferred stock beneficial conversion feature		0			0			6,345,000
Issuance of warrants to preferred shareholders		0			0			812,000
Preferred stock dividends		67,000			68,000			2,015,000

Net Loss attributable to Torvec, Inc. common stockholders	$	(820,000	)	$	(867,000	)	$	(69,624,000	)

Net Loss per common share attributable to stockholders of Torvec, Inc.:
Basic and Diluted	$	(0.02	)	$	(0.02	)

Weighted average number of shares of common stock:
Basic and Diluted		45,700,000			45,690,000

See notes to condensed consolidated financial statements.

TORVEC, INC.

(a development stage company)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended						September 25, 1996 (Inception) Through
	March 31,						March 31,
	2012			2011			2012

Cash flows from operating activities:
Net loss	$	(753,000	)	$	(799,000	)	$	(61,724,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		16,000			19,000			2,640,000
Loss / (gain) on sale / disposition of fixed assets		0			0			(35,000	)
Gain on sale of Ice Engineering license		0			0			(1,900,000	)
Loss on impairment of license		0			0			1,071,000
Impairment of goodwill		0			0			19,000
Common stock issued for services		0			0			13,844,000
Compensatory common stock		0			0			2,463,000
Shares issued for future consulting services		0			0			103,000
Common stock issued in connection with commercializing event plan		0			0			63,000
Stock-based compensation related to stock options and warrants		285,000			304,000			20,706,000
Compensation expense attributable to common stock in subsidiary		0			0			619,000
Stockholder contribution of services		0			75,000			4,220,000
Contribution to capital, Ford Truck		0			0			16,000
Reversal of liability		0			0			(1,541,000	)
Changes in:
Accounts receivable		(60,000	)		(9,000	)		(60,000	)
Prepaid expenses and other current assets		28,000			8,000			165,000
Deferred liabilities		(2,000	)		(21,000	)		(93,000	)
Deferred rent		0			(2,000	)		9,000
Change in accrued payroll taxes		(40,000	)		(52,000	)		196,000
Accounts payable and other accrued expenses		27,000			28,000			4,037,000

Net cash used in operating activities		(499,000	)		(449,000	)		(15,182,000	)

Cash flows from investing activities:
Purchase of property and equipment		(6,000	)		0			(382,000	)
Cost of acquisition		0			0			(16,000	)
Proceeds from sale of license		0			0			1,900,000
Proceeds from sale of fixed assets		0			0			37,000

Net cash (used in) provided by investing activities		(6,000	)		0			1,539,000

Cash flows from financing activities:
Net proceeds from sales of common stock and upon exercise of options and warrants		0			0			9,223,000
Net proceeds from sales of preferred stock		0			0			9,931,000
Net proceeds from sale of subsidiary stock		0			0			234,000
Net proceeds from issuance of notes payable		0			0			57,000
Repayments of notes payable		(10,000	)		(5,000	)		(92,000	)
Proceeds from loans		0			0			335,000
Repayments of loans		0			0			(109,000	)
Repayment of officer & stockholder loans and advances		0			0			(147,000	)
Distributions		0			0			(365,000	)

Net cash (used in) provided by financing activities		(10,000	)		(5,000	)		19,067,000

Net (decrease) increase in cash		(515,000	)		(454,000	)		5,424,000

Cash at beginning of period		5,939,000			1,518,000			0

Cash at end of period	$	5,424,000		$	1,064,000		$	5,424,000

TORVEC, INC.

(a development stage company)

Condensed Consolidated Statements of Cash Flows (continued)

(Unaudited)

	Three Months Ended				September 25, 1996 (Inception) Through
	March 31,				March 31,
	2012		2011		2012

Noncash investing and financing activities:
Preferred stock issued in payment of dividend	$	0	$	0	$	61,000
Issuance of common stock for license		0		0		3,405,000
Issuance of common stock, warrant and options in settlement of liabilities, except notes payable		0		0		2,907,000
Notes payable exchanged for common stock		0		0		50,000
Advance settled with common stock		0		0		25,000
Loss on exchange of noncontrolling interest		0		0		232,000
Shares issued for future consulting services		0		0		103,000
Issuance of common stock for a finder’s fee		0		0		225,000
Advance from stockholder		0		0		250,000
Contribution of FTV Ford Truck		0		0		16,000
Ice Engineering LLC payable netted against receivable		0		0		91,000
Common stock issued in settlement of director fee payable		0		0		121,000
Common stock issued in settlement of patent expense		0		0		117,000
Issuance of common stock as payment for Preferred A and B dividends		0		0		171,000
Purchases of assets with debt		0		0		106,000

Supplemental Disclosures:
Interest paid		1,000		0		78,000
Income taxes paid		0		2,000		1,000

See notes to condensed consolidated financial statements.

TORVEC, INC.

(a development stage company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A — THE COMPANY AND BASIS OF PRESENTATION

The interim information contained herein with respect to the three month periods ended March 31, 2012 and 2011 and the period from September 25, 1996 (inception) through March 31, 2012 has not been audited but was prepared in conformity with generally accepted accounting principles for interim financial information and instructions for Form 10-Q. Accordingly, the condensed consolidated financial statements do not include all information and footnotes required by generally accepted accounting principles for financial statements. Included are ordinary adjustments which, in the opinion of management, are necessary for a fair presentation of the financial information for the three month periods ended March 31, 2012 and 2011 and since inception. The results are not necessarily indicative of results to be expected for the entire year. Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the current year presentation.

Torvec, Inc. was incorporated as a New York business corporation on September 25, 1996. Upon its incorporation, the Company acquired numerous patents, inventions and know-how created by Vernon E. Gleasman and his sons, James and Keith Gleasman, a family with more than fifty years of experience in the automotive industry. Since its inception, the Company has endeavored to design, develop, build and commercialize its automotive technology portfolio. We have not yet had any significant revenue-producing operations and, as such, we are a development stage entity. The Company currently is focusing its commercialization strategies on the following technologies: the IsoTorque® differential, the Torvec hydraulic pump, and the Torvec`s Vehicle Steer-Drive.

For the period from September 1996 (inception) through March 31, 2012, we have accumulated a deficit of $60,452,000. At March 31, 2012 we have stockholders’ equity of $5,109,000, current liabilities of $558,000 and working capital of $4,933,000. We have been dependent upon equity financing and advances from stockholders to meet our obligations and sustain operations. In September 2011, we raised $6,500,000 in gross proceeds through a private placement of a new class of preferred stock. The proceeds from this transaction are being used to support the ongoing development and marketing of our technologies. Presently, we anticipate that our operating cash requirements for the full year of 2012 will be in the range of approximately $2,000,000. We believe that based upon our current cash position and the current outlook for our business operations, we have sufficient cash to continue operations through March 31, 2013.

As used in this quarterly report, unless otherwise indicated, the terms “we”, “our”, “us” and “the Company” refer to Torvec, Inc.

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation: The financial statements include the accounts of the Company, our wholly-owned subsidiaries Iso-Torque Corporation and Variable Gear LLC, our majority-owned subsidiary, Ice Surface Development, Inc. (56% owned at March 31, 2012 and December 31, 2011), and our majority-owned joint venture, Torvec China, LLC, (60% ownership interest at March 31, 2012). As of March 31, 2012, each of the subsidiaries and the joint venture are non-operational. During the first quarter of 2012, we dissolved Creative Performance Consultants Inc. Except for Iso-Torque Corporation, we are in the process of dissolving the other entities. All material intercompany transactions and account balances have been eliminated in consolidation.

Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the 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 revenue and expenses during the reporting period. Such estimates are used in valuing the useful lives of any intangible assets and the future realizable value of such assets. These estimates are subject to a high degree of judgment and potential change. Actual results could differ from those estimates.

Reclassifications: Certain reclassifications have been made to prior year balances to conform to the current year’s presentation.

Cash and Cash Equivalents: Cash and cash equivalents may include time deposits, certificates of deposit, and highly liquid debt instruments with original maturities of three months or less. We maintain cash and cash equivalents at financial institutions which periodically may exceed federally insured amounts.

Accounts Receivable: We carry our accounts receivable at invoice amount less an allowance for doubtful accounts. On a periodic basis, we evaluate our accounts receivable and establish an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions. We do not accrue interest on past due invoices. There was no allowance for doubtful accounts as of March 31, 2012 and December 31, 2011, as determined by management.

Property and Equipment: Property and equipment are stated at cost. Estimated useful lives are as follows:

Office Equipment and Software		3 – 7 years
Leasehold Improvements		Lesser of useful life or lease term
Shop Equipment		7 years
Transportation Equipment		7 years

Depreciation and amortization are computed using the straight-line method. Betterments, renewals and extraordinary repairs that extend the life of the assets are capitalized. Other repairs and maintenance costs are expensed when incurred. When disposed, the cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in operating income (expense). Depreciation and amortization expense for the three month periods ended March 31, 2012 and 2011 amounted to $16,000 and $19,000, respectively.

Whenever events or circumstances indicate, our long-lived assets, including any intangible assets with finite useful lives, are tested for impairment by using the estimated future cash flows directly associated with, and that are expected to arise as a direct result of, the use of the assets. If the carrying amount exceeds the estimated undiscounted cash flows, an impairment may be indicated. The carrying amount is then compared to the estimated discounted cash flows, and if there is an excess, such amount is recorded as an impairment. No impairment charge was considered necessary during the three month periods ended March 31, 2012 or 2011.

Fair Value of Financial Instruments: As defined by U.S. GAAP, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. All assets and liabilities are required to be measured and reported on a fair value basis. A hierarchy for ranking the quality and reliability of the information is used to determine fair values. Assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The FASB’s guidance for the disclosure about fair value of financial instruments requires disclosure of an estimate of the fair value of certain financial instruments. The fair value of financial instruments pursuant to FASB’s guidance for the disclosure about fair value of financial instruments approximated their carrying values at March 31, 2012 and December 31, 2011. The carrying amount of cash, accounts receivable, accounts payable, and accrued expenses approximates their fair value due to their short maturity. The carrying amount of notes payable approximates fair value because stated or implied interest rates approximate current interest rates that are available for debt with similar terms.

Revenue Recognition: Our terms provide that customers are obligated to pay for products sold to them within a specified number of days from the date that title to the products is transferred to the customers. Our standard terms are typically net 30 days. We recognize revenue when transfer of title occurs, risk of ownership passes to a customer at the time of shipment or delivery depending on the terms of the agreement with a particular customer and collection is reasonably assured. The sale price of our products is substantially fixed and determinable at the date of the sale based upon purchase orders generated by a customer and accepted by us.

We occasionally enter into prototype development contracts with customers. In such cases, revenue is recognized using either (a) the proportional effort method based on the relationship of costs incurred to date to the total estimated cost to complete a contract, or (b) where appropriate, the milestone method, if milestones are clearly identifiable and substantive. In January 2011, we adopted FASB Accounting Standards Update (“ASU”) No. 2010-17, “Revenue Recognition — Milestone Method (Topic 605): Milestone Method of Revenue Recognition — a consensus of the FASB EITF”. The adoption of this pronouncement did not have a significant impact on our financial statements.

During the three month period ended March 31, 2011, we entered into a prototype development agreement to design, build and integrate our IsoTorque differential into the product of a customer for total consideration of $120,000. Milestones include completion of design, manufacturing of a prototype, and installation / integration of the prototype. The payment required for each milestone was considered to be substantive based on the fact that performance required by us in order to achieve the milestone enhanced the value of the item delivered and is reasonable in relation to all of the deliverables. The first milestone consisted of completion and delivery of the design for the prototype, which was completed and delivered as of March 31, 2011 and resulted in the recognition of revenue in the amount of $30,000, as well as the related costs incurred to complete this milestone. The second milestone consisted of the manufacture and delivery of two prototype differentials to our customer, which was completed in March 2012 and resulted in the recognition of revenue in the amount of an additional $60,000, as well as the related costs incurred to complete this milestone. Further revenue will be recognized, as well as related costs, upon reaching other milestones defined in the contract.

Research and Development and Patents: Research and development costs and patent expenses are charged to operations as incurred. Research and development includes personnel-related costs, materials and supplies, depreciation, consulting services, and amortization of the Ice technology. Depreciation expense for the three month periods ended March 31, 2012 and 2011 that was charged to research and development was $5,000 and $6,000, respectively.

Patent costs for the three month periods ended March 31, 2012 and 2011 amounted to $43,000 and $18,000, respectively, and are included in General and Administrative expenses.

Stock-based Compensation: ASC 718-10 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values on the grant date. Under the modified prospective method that we adopted, awards that were granted, modified, or settled on or after January 1, 2006 are measured and accounted for in accordance with ASC 718-10. Unvested equity-classified awards that were granted prior to January 1, 2006 will continue to be accounted for in accordance with ASC 718-10, except that the grant date fair value of all awards are recognized in the results of operations over the remaining vesting periods. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity in accordance with ASC 718-10.

No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets. We elected to adopt the alternative method of calculating the historical pool of windfall tax benefits as permitted by ASC 718-10-65 (previously known as: FASB Staff Position (FSP) No. SFAS 123(R)-c, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards”). This is a simplified method to determine the pool of windfall tax benefits that is used in determining the tax effects of stock compensation in the results of operations and cash flow reporting for awards that were outstanding as of the adoption of ASC 718-10.

Income Taxes: We account for income taxes using the asset and liability method, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax bases of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. We adopted FASB ASC 740-10 relating to “Accounting for uncertainty in income taxes” on January 1, 2008. As a result of the implementation of FASB ASC 740-10, we recognized no adjustment for uncertain tax positions. As of March 31, 2012, we have not recognized an increase or decrease to reserves for uncertain tax positions nor have we accrued interest and penalties related to uncertain tax positions. The tax years 2008 through 2011 remain open to examination by the federal and state tax jurisdictions to which we are subject.

Earnings / Loss per Common Share: FASB’s ASC 260-10 ( Previously known as: FASB Statement 128, “Earnings Per Share”) requires the presentation of basic earnings per share, which is based on weighted average common stock outstanding, and dilutive earnings per share, which gives effect to options, warrants and convertible securities in periods when they are dilutive. At March 31, 2012 and 2011, we excluded 28,973,631 and 10,065,499 potential common shares, respectively, relating to convertible preferred stock, options and warrants outstanding from the diluted net loss per common share calculation because their inclusion would be anti-dilutive. In addition, we excluded 625,000 warrants from the diluted net loss per common share calculation at March 31, 2012 and 2011 as the conditions for their vesting are not time-based.

Recent Accounting Pronouncements: In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. ASU No. 2011-05 requires entities to present the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements of net income and other comprehensive income. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. ASU No. 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. Furthermore, in December 2011, the FASB issued ASU No. 2011-12 “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This update defers the effective date of ASU No. 2011-05’s requirement to present on the face of the financial statements reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income so that the FASB can reconsider those requirements during calendar 2012. These standards were effective retrospectively for annual and interim reporting periods beginning after December 15, 2011, with early adoption permitted. Our adoption of these standards during the first quarter of 2012 did not have a significant impact on our financial statements, as we currently do not have any adjustments to net income in the determination of such comprehensive income.

NOTE C — RELATED PARTY TRANSACTIONS

[1] Effective January 1, 2008, the board instituted a compensation plan for James Gleasman, our chief executive officer, and Keith Gleasman, our president, each of whom were major shareholders and co-founders of the Company. The compensation plan was designed to compensate each of them for services performed, and inventions and know-how transferred to us, at the rate of $300,000 per year. Actual payment of this compensation, or any portion thereof, was conditioned upon a determination by the board that we had the requisite cash to make payment, after the complete funding of all ongoing Company projects.

We did not have the requisite cash available to pay the Gleasmans’ compensation under this arrangement from January 1, 2008 through August 17, 2009, the date on which each of the Gleasmans waived all of his rights and interest in and to the board-created compensation plan, including all of his rights and interest in and to the amount(s) under the plan accrued to such date. As a result of such waiver, of the $942,000 accrued under the plan at June 30, 2009, $900,000 was reclassified to equity as a contribution of services and $42,000 accrued under the plan for payroll taxes was recorded as a reduction to general and administrative expenses in the quarter ended June 30, 2009.

For subsequent periods, there had not been a compensation plan in place for the Gleasmans. However, due to the significance of their ownership interest at the time and their influence within the Company, we were required to record the estimated value of each of the Gleasman’s services rendered to us (estimated at $300,000 each per annum) as a contribution of services in accordance with generally accepted accounting principles, and we allocated the amount of such contribution between research and development expenses and general and administrative expenses, based upon management’s estimate of the Gleasmans’ time allocation. Effective March 14, 2010, James Gleasman retired as our chief executive officer, interim chief financial officer and as a member of the board of directors. As of October 1, 2011 following our September 2011 private placement, we reassessed the estimated value of the services we were receiving from Keith Gleasman as a result of the reduction of his overall ownership interest, and reduced the amount we were recording for his contribution for shareholder services to the equivalent of $100,000 per annum. On January 9, 2012, the board approved a base salary for Keith Gleasman of $100,000 per annum to be effective as of January 1, 2012. The board’s decision was based upon the recommendation of our chief executive officer and our Governance and Compensation Committee, composed entirely of independent directors.

Effective as of January 1, 2012, we no longer imputed an expense related to the contributed shareholder services for the Gleasmans. For the three month period ended March 31, 2011, we recorded a total expense for the Gleasmans’ contributed services of $75,000, and we allocated $25,000 to research and development expense and $50,000 to general and administrative expense.

[2] On September 14, 2007, we moved our executive offices from Pittsford, New York to Rochester, New York, which includes both a manufacturing and executive office facility. The Rochester facility is owned by a partnership, with which Asher J. Flaum, a Company director, is associated. On April 28, 2008, our board of directors approved the terms of a lease and such lease was executed on April 29, 2008. (See Note G[1].)

[3] On December 13, 2010, we executed a consultant agreement with a director to provide consulting services to us at a rate of $200 per hour. Pursuant to the agreement, we also agreed to pay the consultant an incentive fee equal to $10,000 or proportionate part thereof for each $1,000,000 of revenue or proportionate part thereof actually received by us for a period of five years, provided the definitive agreement with the third party results from the material efforts of the consultant. During the three month periods ended March 31, 2012 and 2011, we recorded an expense of $2,000 and $0, respectively, for services rendered in relation to this agreement.

[4] On September 23, 2011, we sold and issued a total of 16,250,000 shares of Series C Voting Convertible Preferred Stock and warrants to purchase 1,625,000 shares of our common stock in a private placement transaction, generating gross proceeds of $6,500,000. Three members of our board of directors and one executive officer participated in the transaction, acquiring 687,500 preferred shares and associated warrants for $275,000 (approximately 4.2 percent of the entire transaction). (See Note F[2](c).)

[5] Effective on March 27, 2012, we engaged Dr. William Mark McVea as our Chief Technology Officer. Prior to joining the Company, Dr. McVea provided us with his consulting services through KBE+, Inc., a group of consulting engineers engaged in the design and development of gear trains and power transmission devices, and of which Dr. McVea is the president. At March 31, 2012, we had an outstanding liability of approximately $41,000 to KBE+, Inc. related to consulting services provided during the first quarter of 2012.

On April 30, 2012, we purchased various test equipment, office furniture, and supplies from KBE+, Inc. for a total of $162,500. We have entered into a financing agreement with KBE+, Inc., whereby we will pay KBE+, Inc. over 24 months in equal monthly installments of approximately $6,771, beginning on May 1, 2012. Based on an imputed interest rate of approximately 5%, the initial principal of the note is approximately $154,000.

NOTE D — ACCRUED LIABILITIES

At March 31, 2012 and December 31, 2011, accrued liabilities consist of the following:

	March 31,		December 31,
	2012		2011
Accrued Compensation	$	22,000	$	45,000
Accrued Payroll Taxes Payable		334,000		374,000
Accrued Legal		16,000		12,000
Other		56,000		6,000
	$	428,000	$	437,000

NOTE E — NOTES PAYABLE

As of March 31, 2012 and December 31, 2011, notes payables consist of the following:

	March 31,		December 31,
	2012		2011
Additional Office Space (1)	$	15,000	$	20,000
Copy Machine (2)		7,000		7,000
Engineering Design Software (3)		52,000		57,000
	$	74,000	$	84,000

(1)

In November 2010, we completed a construction project for some additional office space at our leased corporate office facility. The cost of the leasehold improvement was $32,500 and the landlord agreed to finance this cost over the remaining initial term of the lease which expires in May 2013. The monthly payments are approximately $1,100 per month, with an implicit interest rate of approximately 2.5%. At December 31, 2011, the outstanding balance on this note was approximately $20,000, of which $6,000 was classified as a non-current liability. At March 31, 2012, the outstanding balance on this note was approximately $15,000, of which $2,000 was classified as a non-current liability.

(2)

In November 2010, we entered into a capital lease for a copy machine over a 5 year term, with a fair market value buyout. The capitalized value of the lease was approximately $8,900, and the monthly payment is approximately $170 with an implicit interest rate of approximately 5.3%. At December 31, 2011, the outstanding balance on this note was approximately $7,000, of which $6,000 was classified as a non-current liability. At March 31, 2012, the outstanding balance on this note was approximately $7,000, of which $5,000 was classified as a non-current liability.

(3)

In August 2011, we financed the purchase of engineering design software, along with a one-year maintenance agreement, through a three year loan maturing in August 2014, and collateralized by the software. The total cost of the software and the maintenance agreement was approximately $64,800. The monthly payments are approximately $2,100 per month with an implicit interest rate of approximately 9.6%. At December 31, 2011, the outstanding balance on this note was approximately $57,000, of which $36,000 was classified as a non-current liability. At March 31, 2012, the outstanding balance on this note was approximately $52,000, of which $31,000 was classified as a non-current liability.

NOTE F — STOCKHOLDERS’ EQUITY

[1] Private Placements of Common Stock

During the three month periods ended March 31, 2012 and 2011, we did not issue any shares of common stock as a result of private placement transactions. For the twelve month period ended December 31, 2011, we did not issue any shares of common stock as a result of private placement transactions.

[2] Preferred Stock

On August 30, 2000, we amended our certificate of incorporation to permit the Company to issue up to 100,000,000 shares of $.01 par value preferred stock. Under the amendment, the board of directors has the authority to allocate these shares into as many separate classes of preferred as it deems appropriate and with respect to each class, designate the number of preferred shares issuable and the relative rights, preferences, seniority with respect to other classes and to our common stock and any limitations and/or restrictions that may be applicable without obtaining shareholder approval.

(a)	Class A Preferred Stock

In March 2002, our board designated the first series of preferred shares, authorizing the issuance of up to 3,300,000 Class A Non-Voting Cumulative Convertible Preferred Shares. Each Class A Preferred Share is convertible after a one year holding period, at the holder’s election, into one share of our common stock. The conversion rate is subject to adjustment in the event of the issuance of our common stock as a dividend or distribution and in the case of the subdivision or combination of our common stock. The Class A Preferred has no voting rights, except with respect to matters directly impacting upon the rights and privileges accorded to such Class.

In connection with the 2002 offering of Class A Preferred, we granted the placement agent 5,000 Class A Warrants, exercisable for five years at an exercise price of $1.52 per share into common stock. Such warrants were treated as a cost of the offering. Also, the placement agent was granted 10,000 warrants for providing certain financial analysis for us. The warrants were immediately exercisable at $.30 per share for five years. The warrant contained a cashless exercise feature. We valued the warrant at $8,000 using the Black-Scholes option-pricing model and charged operations.

We also granted to these investors 2,500 Class A Warrants, exercisable for five years at an exercise price of $0.01 per share. On July 8, August 14, and September 11, 2003 and August 4, 2006, we issued 2,500, 7,480, 1,200 and 2,500 common shares, respectively, to the placement agent upon the exercise of warrants issued in connection with this offering.

The holders of the Class A Preferred are entitled to receive cumulative preferential dividends in the amount of $.40 per share of Class A Preferred for each annual dividend period as well as upon the liquidation, dissolution or winding up of the company.

Dividends payable on the Class A Preferred will be paid in cash out of any funds legally available for the payment of dividends or, in the discretion of the board, will be paid in Class A Preferred at a rate of 1 share of Class A Preferred for each $4.00 of dividends.

If dividends are paid in shares of Class A Preferred, such dividend shares are not entitled to accumulate additional dividends and themselves may be converted into the common stock of the company on a one for one basis. Holders of Class A Preferred are permitted to request that dividends payable in Class A Preferred be immediately converted into shares of our common stock. At times, our board may elect to settle the dividends through the issuance of common stock in lieu of cash. The number of shares of common stock issued is based on the market price of our stock at the time of the conversion.

Accumulated and unpaid dividends on the Class A Preferred will not bear interest. Class A Preferred shares are also entitled to participate pro rata in dividends declared and/or distributions made with respect to all classes of our outstanding equity.

We may, in the absolute discretion of our board, redeem at any time and from time to time from any source of funds legally available any and all of the outstanding Class A Preferred at the redemption price of $4.00 per Class A Preferred, plus all unpaid accumulated dividends payable with respect to each Class A Preferred Share.

Since its designation in March 2002, we have sold an aggregate 765,512 shares of Class A Preferred for proceeds of approximately $3,062,000. No Class A Preferred shares were sold during the three month period ended March 31, 2012 and the year ended December 31, 2011.

Since its designation in March 2002, Class A Preferred shareholders have converted an aggregate 189,750 Class A Preferred into our common stock (on a one to one basis) through March 31, 2012, with no Class A Preferred converted in each of the three month periods ending March 31, 2012 and 2011, respectively.

For the three month period ended March 31, 2012, we did not settle any Class A Preferred dividends. For the three month period ended March 31, 2011, we did not settle any Class A Preferred dividends, although holders converted 5,421 shares of Class A Preferred (that resulted from previous dividend issuances) into 5,421 shares of common stock. Since its inception in March 2002 through March 31, 2012, we have settled an aggregate Class A Preferred dividend amounting to approximately $242,000 through the issuance of 11,339 Class A Preferred shares and 100,924 common shares.

At March 31, 2012, there were 587,101 outstanding shares of Class A Preferred stock, of which 11,339 shares resulted from the settlement of dividends due to conversion, and those shares no longer accrue dividends. The value of dividends payable upon the conversion of the remaining 575,762 outstanding shares of Class A Preferred stock amounted to approximately $1,616,000 at March 31, 2012. In the event of a liquidation, Class A Preferred shareholders have a liquidation preference with respect to all accumulated and unsettled dividends. The value of the Class A Preferred shareholders’ liquidation preference was approximately $1,616,000 and $1,558,000 at March 31, 2012 and December 31, 2011, respectively. In the event of a liquidation, dissolution or winding up of the Company, unpaid accumulated dividends on the Class A Preferred are payable in Class A Preferred at a rate of 1 share of Class A Preferred for each $4.00 of dividends.

(b)	Class B Preferred Stock

In September 2004, the board created a second series of preferred stock by authorizing the issuance of up to 300,000 Class B Non-Voting, Cumulative Convertible Preferred Shares to fund the business operations of Iso-Torque Corporation, an entity incorporated to separately commercialize our IsoTorque differential technology.

Each Class B Preferred Share is convertible after a one year holding period, at the holder’s election, into one share of our common stock or one share of the common stock of IsoTorque Corporation. The conversion rate is subject to adjustment in the event of the issuance of the company’s or IsoTorque Corporation’s common stock as a dividend or distribution and in the case of the subdivision or combination of such common stock. The Class B Preferred has no voting rights, except with respect to matters directly impacting upon the rights and privileges accorded to such Class.

Subject to the dividend rights and privileges of our Class A Preferred, the holders of the Class B Preferred are entitled to receive cumulative preferential dividends in the amount of $.50 per share of Class B Preferred for each annual dividend period as well as upon the liquidation, dissolution or winding up of the company.

Dividends payable on the Class B Preferred will be paid in cash out of any funds legally available for the payment of dividends or, in the discretion of the board, will be paid in Class B Preferred at a rate of 1 share of Class B Preferred for each $5.00 of dividends.

If dividends are paid in shares of Class B Preferred, such dividend shares are not entitled to accumulate additional dividends and themselves may be converted into the common stock of the company on a one for one basis. Holders of Class B Preferred are permitted to request that dividends payable in Class B Preferred be immediately converted into shares of our common stock.

Accumulated and unpaid dividends on the Class B Preferred will not bear interest. Class B Preferred shares are also entitled to participate pro rata in dividends declared and/or distributions made with respect to all classes of our outstanding equity.

We may, in the absolute discretion of our board, redeem at any time and from time to time from any source of funds legally available any and all of the outstanding Class B Preferred at the redemption price of $5.00 per Class B Preferred, plus all unpaid accumulated dividends payable with respect to each Class B Preferred Share.

Since its designation in September 2004, we have sold an aggregate 97,500 Class B Preferred in a number of private placements for proceeds of approximately $487,500. No Class B Preferred shares were sold during the three month periods ended March 31, 2012 and 2011.

Since its designation, Class B Preferred shareholders have converted an aggregate 20,000 Class B Preferred into our common stock (on a one to one basis) through March 31, 2012.

Through March 31, 2012, no Class B Preferred shares have been issued to converting Class B Preferred shareholders as a dividend.

Depending upon our cash position, from time to time we may request that a converting preferred shareholder receiving dividends in cash consent to receive shares of restricted common stock in lieu thereof. Through March 31, 2012, we have issued 30,103 restricted common shares in payment of Class B dividends amounting to approximately $24,000, based on the market value of our stock at the time of conversion.

At March 31, 2012, dividends payable upon the conversion of 77,500 outstanding shares of Class B Preferred amounted to approximately $252,000. In the event of a liquidation, Class B Preferred shareholders have a liquidation preference with respect to all accumulated and unsettled dividends. The value of the Class B Preferred shareholders’ liquidation preference was $252,000 and $243,000 at March 31, 2012 and December 31, 2011, respectively. In the event of a liquidation, dissolution or winding up of the Company, unpaid accumulated dividends on the Class B Preferred are payable in Class B Preferred at a rate of 1 share of Class B Preferred for each $5.00 of dividends.

(c)	Class C Preferred Stock

In September 2011, the board of directors authorized, and Class A Preferred and Class B Preferred shareholders approved, a third series of preferred stock, namely 16,250,000 shares of Class C Voting Convertible Preferred Stock. On September 23, 2011, we sold and issued a total of 16,250,000 shares of Series C Voting Convertible Preferred Stock and warrants to purchase 1,625,000 shares of our common stock in a private placement transaction, generating gross proceeds of $6,500,000. Direct expenses of approximately $106,000 pertaining to the transaction, consisting of primarily external legal costs, were incurred, resulting in net proceeds of approximately $6,394,000.

Each Class C Preferred share is convertible, at the holder’s election, into one share of our common stock. The conversion rate is subject to adjustment in the event of the issuance of common stock as a dividend or distribution, and the subdivision or combination of the outstanding common stock.

The Class C Preferred shares have a liquidation preference at their stated value per share of $0.40 that is senior to our common stock, and the Company’s Class A Non-Voting Cumulative Convertible Preferred Shares and Class B Non-Voting Cumulative Convertible Preferred Shares. The liquidation preference is payable upon a liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or upon a deemed liquidation of the Company.

The Class C Preferred shares have no right to receive dividends and have no redemption right. The Class C Preferred shares vote with the common stock on an as-converted basis.

The associated warrants have a ten (10) year term and are immediately exercisable for 1,625,000 shares of common stock. The warrants are exercisable, at the holder’s election, for shares of the Company’s common stock in either a cash or cashless exercise. The warrants have an exercise price equal to the greater of (i) $0.01 or (ii) eighty percent (80%) of the volume weighted average sale price per share of our common stock during the ten (10) consecutive trading days immediately preceding the notice of exercise. The number of warrants and exercise price are subject to adjustment in the event of the issuance of common stock as a dividend or distribution, and the subdivision or combination of the outstanding common stock. We estimated a value of $.50 per warrant, or a total of approximately $812,000, using a weighted average of assigned probabilities for various gain scenarios at certain price points based on expected volatility. As a result of the combined issuance of the Class C Preferred stock with the associated warrants, we reflected a non-cash distribution on the Class C Preferred shares for the warrants issued in our consolidated statements of operations for the year ended December 31, 2011. (See Note F[5](o).)

In conjunction with the issuance of the 16,250,000 shares of Class C Preferred stock, we computed the value of the non-cash beneficial conversion feature associated with the right to convert the shares into common stock on a one-for-one basis. We compared the fair value of our common stock on the date of issuance with the effective conversion price after allocation of the proceeds to the related warrants, and determined that the value of the non-cash beneficial conversion feature is approximately $5,582,000, which was reflected in our consolidated statements of operations for the year ended December 31, 2011 as an adjustment to arrive at the net loss attributable to common stockholders. (See Note F[5](o).)

For the three month period ended March 31, 2012, no Class C Preferred shareholders have converted shares of Class C Preferred into common stock. At March 31, 2012, there were 16,250,000 shares of Preferred C stock outstanding. The value of the Class C Preferred shareholders’ liquidation preference was $6,500,000 at March 31, 2012.

[3] Business Consultants Stock Plan

In June 1999, we adopted the Business Consultants Stock Plan (the “Stock Plan”). The Stock Plan, as amended, provides for the issuance of up to 15,000,000 registered common shares to be awarded from time to time to officers, directors, employees and consultants in exchange for business, financial, legal, accounting, engineering, research and development, technical, governmental relations and other similar services.

Share issuances under the Stock Plan are valued generally on the date immediately prior to the date of issuance, except for shares issued to pay invoices which are valued as of the invoice date and except for shares issued under the Nonmanagement Directors Plan which are valued as of the end of each month effective February 17, 2009.

During the three month period ended March 31, 2011, there were no issuances of stock under the Stock Plan.

On September 18, 2011, the board of directors voted to terminate the Business Consultants Stock Plan, effective immediately. As of September 18, 2011, a total of 10,988,283 shares had been issued under the Business Consultants Stock Plan. On October 7, 2011, we filed a Form S-8 with the Securities and Exchange Commission to deregister the remaining 4,011,717 shares that were available for future issuance.

[4] Stock Options

(a)	1998 Stock Option Plan

In December 1997, our board approved a Stock Option Plan (the “1998 Plan”) which provided for the granting of up to 2,000,000 shares of common stock, pursuant to which officers, directors, key employees and key consultants/advisors are eligible to receive incentive, nonqualified or reload stock options which plan was ratified by the shareholders on May 28, 1998. Options granted under the 1998 Plan are exercisable for a period of up to 10 years from date of grant at an exercise price which is not less than the fair value on date of grant, except that the exercise period of options granted to a stockholder owning more than 10% of the outstanding capital stock may not exceed five years and their exercise price may not be less than 110% of the fair value of the common stock at date of grant. Options may vest over five years.

By its terms, our 1998 Plan terminated as to the grant of future options on May 27, 2008. Consequently, no additional stock options will be granted under the 1998 Plan, although outstanding options remain available for exercise in accordance with their terms. No options were granted or exercised under the 1998 Plan during the three month periods ended March 31, 2012 and 2011.

Through March 31, 2012, a total of 1,823,895 stock options had been granted under the 1998 Plan, no stock options had been exercised, and 1,282,047 stock options have expired. As of March 31, 2012, there were 541,848 outstanding stock options under the 1998 Plan, all of which were fully vested. The following table summarizes information relating to stock options outstanding under the 1998 Plan at March 31, 2012:

Options Outstanding and Exercisable
Shares	Weighted Average Exercise Price	Weighted Average Remaining Life in Years	Aggregate Intrinsic Value
541,848	$4.75	1.9	$0

As of March 31, 2012, we did not have any unrecognized stock compensation related to unvested awards under the 1998 Plan.

(b)	2011 Stock Option Plan

On November 3, 2010, the board adopted, and on January 27, 2011 the shareholders approved, the 2011 Stock Option Plan (“2011 Plan”) which provides for the grant of up to 3,000,000 common stock options to provide equity incentives to directors, officers, employees and consultants. Two types of options may be granted under the 2011 Plan: non-qualified options and incentive options.

Non-qualified options may be granted to our officers, directors, employees and outside consultants. Incentive options may be granted only to our employees, including officers and directors who are also employees. In the case of non-qualified options, the exercise price may be less than the fair market value of our stock on the date of grant. In the case of incentive options, the exercise price may not be less than such fair market value and in the case of an employee who owns more than 10% of our common stock, the exercise price may not be less than 110% of such market price. Options generally are exercisable for ten years from the date of grant, except that the exercise period for an incentive option granted to an employee who owns more than 10% of our stock may not be greater than five years.

Effective January 28, 2011, our board of directors appointed Wesley K. Clark as a member of the board of directors. Our board voted to grant Gen. Clark a non-qualified stock option for 250,000 common shares under the 2011 Plan, effective January 28, 2011 and exercisable at $.90 per share. The option is conditioned upon Gen. Clark serving as a director and vests in four tranches of 25% of the total granted shares on each of the four annual anniversary dates of January 28, 2011. The optionee must exercise each tranche within two and one-half months following the calendar year in which the tranche vests or lose the tranche. On March 20, 2012, the board approved a modification of these options to provide a uniform expiration date of January 27, 2021, subject to shareholder approval at the Company’s annual meeting of shareholders to be held on June 14, 2012.

Our board also voted to grant Gen. Clark a non-qualified stock option for 25,000 common shares under the 2011 Plan, effective January 28, 2011 and exercisable at $.90 per share. This 25,000 share option vested immediately and is exercisable for 10 years.

In the fourth quarter of 2011, we granted incentive stock options to certain of our engineering employees for 405,000 common shares at an exercise price of $1.14 per share with a ten year term and a three year vesting period. These 405,000 options were established to replace an equivalent number of previously issued and outstanding options and warrants having an exercise of price of $5.00 per share. As the new options vest, an equal number of the previously issued options and warrants will be cancelled. The expense related to these replacement options amounts to the difference between the fair value of the replacement options on the date of grant and the fair value of the options / warrants that they will replace on the same date. We used the Black-Scholes option-pricing model to value the cost of these replacement options at approximately $117,000, which is being recognized ratably over the vesting period of the new options.

During the three month periods ended March 31, 2012 and 2011, we granted 250,000 and 276,000 stock options under the 2011 Plan, and no options expired or were exercised. As of March 31, 2012, there were 931,000 stock options outstanding under the 2011 Plan, 87,750 of which were vested. At March 31, 2012, there were 2,069,000 options remaining available for future grant under the 2011 Plan.

(c)	Non-Plan Options

During the three month period ended March 31, 2011, we granted a total of 1,350,000 non-plan stock options. On January 27, 2011, our shareholders approved the issuance of stock options to 5 directors each for 250,000 common shares, and the issuance of stock options to a consultant acting in the capacity as a special advisor to the board for 100,000 common shares, exercisable at $.90 per common share. Each option is conditioned upon the optionee serving as a director or consultant and vests in four tranches of 25% of the total granted shares on each of the four annual anniversary dates of January 27, 2011. The optionee must exercise each tranche within two and one-half months following the calendar year in which the tranche vests or lose the tranche. On March 20, 2012, the board approved a modification of these options to provide a uniform expiration date of January 27, 2021, subject to shareholder approval at the Company’s annual meeting of shareholders to be held on June 14, 2012.

During the three month period ended March 31, 2012, there were no non-plan stock options granted.

As of March 31, 2012, there were a total of 7,260,000 non-plan options outstanding, of which 3,972,500 were fully vested. During the three month period ended March 31, 2012, 337,500 non-plan stock options became vested and none were exercised or cancelled. During the comparable three month period in 2011, no non-plan stock options became vested and none were exercised or cancelled.

For the three month periods ended March 31, 2012 and 2011, we recorded compensation expense of $238,000 and $244,000, respectively, related to the non-Plan options.

(d)

Summary

For the three month periods ended March 31, 2012 and 2011, compensation cost related to all stock options amounted to $285,000 and $304,000, respectively. As of March 31, 2012, there was $1,914,000 of total unrecognized compensation costs related to outstanding stock options, which are expected to be recognized over the next 4 years.

The weighted average grant-date fair value of all stock options granted during the three month periods ended March 31, 2012 and 2011 was $.74 and $1.58 per share, respectively. The total grant date fair value of all stock options vested during the three month periods ended March 31, 2012 and 2011 was approximately $605,000 and $33,000, respectively.

The fair value of each option granted during the three month periods ended March 31, 2012 and 2011was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2012		2011
Expected Term	6.0 years		3.5 years
Expected forfeiture rate	0	%		0	%
Risk-free rate	1.3	%		1.3	%
Volatility	132.5	%		153.7	%
Dividend yield	0.0	%		0.0	%

The average risk-free interest rate is based on the U.S. treasury security rate in effect as of the grant date. We determined expected volatility using the historical closing stock price. The expected life was generally determined using the simplified method as we do not believe we have sufficient historical stock option exercise experience on which to base the expected term.

The following summarizes the activity of all of our outstanding stock options for the three month period ended March 31, 2011:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2012	8,482,848		$	1.00
Granted	250,000			.82
Exercised	0			n/a
Canceled or expired	0			0

Outstanding at March 31, 2012	8,732,848	(A)	$	1.00	6.9 years	$	3,040,000

Exercisable at March 31, 2012	4,602,098		$	1.32	6.8 years	$	1,750,000

Note (A) – Figures include 405,000 options that were granted in 2011 to replace options / warrants previously granted to certain engineering personnel. The previously issued options / warrants will expire as the newer options vest on a one-to-one basis.

As of March 31, 2012, the exercise prices of all outstanding stock options, as well as all vested stock options, ranged from $.36 per share to $5.00 per share.

[5] Warrants

As of March 31, 2012, outstanding warrants to acquire shares of our common stock are as follows:

Exercise Price		Expiration	Number of Warrants Outstanding		Number of Warrants Exercisable
	(a)	(a)	125,000	(a)	—
$	.75	None	500,000	(b)	—
$	.01	2015-2016	54,500	(c)	54,500
$	.01	None	3,000	(d)	3,000
$	5.00	None	95,000	(e)	95,000
$	5.00	2016	100,000	(e)	100,000
$	.01	None	60,000	(f)	60,000
$	.01	2016	3,750	(g)	3,750
$	1.00	None	20,500	(h)	20,500
$	.44	2020	400,000	(i)	400,000
$	3.75	2016	200,000	(j)	200,000
$	5.00	2016	30,000	(k)	30,000
$	5.00	2017	50,000	(l)	50,000
$	5.00	2017	100,000	(m)	100,000
$	2.50	2020	100,000	(n)	100,000
$	(o)	2021	1,625,000	(o)	1,625,000
			3,466,750		2,841,750

(a)	Exercisable only if we have an IPO and exercisable at the IPO price five years from IPO. Through March 31, 2012, we have not conducted an IPO.

(b)	On April 15, 2002, we issued 1,000,000 warrants at prices ranging from $.30 to $.75 to our then chairman of the board of directors and chief executive officer. Of the total warrants, 250,000 were exercisable at $.30, and 250,000 were exercisable at $.50 on the date the then board elected the executive to the board and named him chief executive officer. During the year ended December 31, 2002, 250,000 warrants were exercised for $.30 per share, resulting in proceeds of $75,000. During the year ended December 31, 2003, 250,000 warrants were exercised for $.50 per share, resulting in proceeds of $125,000. The remaining 500,000 warrants are exercisable upon the occurrence of a significant transaction, which includes execution by us of a binding agreement for the sale, transfer, license or assignment for value of any and/or all of our automotive technology, at $.75 per share. We will record a charge representing the fair value of the warrants when the warrants become exercisable.

(c)	We issued an aggregate 123,500 warrants at an exercise price of $0.01 with a ten year term to our nonmanagement directors for services rendered to the board under our Nonmanagement Directors Plan prior to its amendment on October 13, 2006. No further warrants are issuable under the Plan as modified by the board of directors on October 13, 2006. An aggregate 69,000 warrants have been exercised for proceeds of $690.

(d)	In 2005, we issued 12,500 warrants to consultants, immediately exercisable at $0.01 per common share. During 2005 and 2006, 3,500 of these warrants were exercised. During 2010, an additional 6,000 of these warrants were exercised. The 3,000 remaining outstanding warrants have no expiration date.

(e)	In 2005, we issued 95,000 warrants to two engineering and administrative consultants, exercisable immediately at $5.00 per common share. During 2006, we issued an additional 100,000 warrants to these same consultants exercisable over a ten year term at $5.00 per common share, but only exercisable if there is a commercializing event as determined by the board of directors. During 2008, these warrants were cancelled and new warrants were issued to the same consultants for an aggregate 195,000 shares exercisable until 2016 at $5.00 per common share and conditioned upon the happening of a commercializing event as determined by the board. We recorded a charge of $249,000 in 2008 to general and administrative expense. In 2010, 95,000 of the total number of 195,000 warrants issued to these consultants were modified to eliminate both the term and the commercializing event condition for exercise. The charge related to the 2010 modification was insignificant. In December 2011, 110,000 of these outstanding warrants were amended so that they will be cancelled in conjunction with the vesting of stock options that were issued to replace such warrants, with each option having an exercise price of $1.14 per share, and proportionate vesting on each of the succeeding anniversary dates over a three year period. The approximately $16,000 expense related to the issuance of the stock options to replace the warrants is being amortized over the vesting period of the stock options.

(f)	During 2005, we issued 60,000 warrants to an engineering consultant exercisable immediately at $5.00 per common share and with no expiration date.

(g)	During 2005, we issued 62,500 warrants to investors in connection with their purchase of 62,500 Class A Preferred, immediately exercisable at $.01 per common share and with a ten year term. During 2006, we issued 135,849 warrants to investors along with their purchase 162,000 Class A Preferred and 20,000 Class B Preferred, all immediately exercisable at $.01 per common share and with a ten year term. Through March 31, 2012, an aggregate of 194,599 of these warrants have been exercised for proceeds of approximately $1,258. No warrants were exercised during the three month period ended March 31, 2012.

(h)	During 2006, one investor purchased 20,500 warrants with no expiration date and an exercise price of $1.00 per common share, for a purchase price of $2,000.

(i)	During 2006, we issued 400,000 warrants immediately exercisable for ten years at an exercise price of $3.27 per common share to a business consultant. Effective October 15, 2010, these warrants were modified and reissued upon the mutual agreement of the parties. Effective October 15, 2010, we issued 400,000 warrants immediately exercisable at $.44 per common share for a period of ten years from the modification date. As a result of the modification, we recorded a charge of $68,000 to general and administrative expenses in the fourth quarter of 2010.

(j)	During 2006, we issued 200,000 warrants immediately exercisable for ten years at an exercise price of $3.75 per common share to a former governmental affairs consultant.

(k)	In 2006, we issued 30,000 warrants to consultants exercisable immediately for a ten year term at $5.00 per common share.

(l)	During 2007, we issued 50,000 warrants exercisable for ten years at $5.00 per common share upon the happening of a commercializing event. The warrants were issued to a consultant who assisted us to potentially place our products in various state school bus programs. We recorded a charge of $249,000 to general and administrative expenses.

(m)	During 2007, we issued 100,000 warrants immediately exercisable for ten years at an exercise price of $5.00 per common share to two engineering consultants in connection with our engagement to furnish constant velocity joints to a military contractor. We recorded a charge of $401,000 to general and administrative expenses.

(n)	On February 17, 2010, we issued 100,000 common stock warrants exercisable for ten years at an exercise price of $2.50 per common share to an adviser. We recorded a charge of $45,000 to general and administrative expenses in the first quarter of 2010.

(o)	On September 23, 2011, we issued 1,625,000 common stock warrants in connection with the sale and issuance of a total of 16,250,000 shares of Series C Voting Convertible Preferred Stock in a private placement transaction, generating gross proceeds of $6,500,000. The warrants have a ten (10) year term and are immediately exercisable for 1,625,000 shares of common stock. The warrants are exercisable, at the holder’s election, for shares of our common stock in either a cash or cashless exercise. The warrants have an exercise price equal to the greater of (i) $0.01 or (ii) eighty percent (80%) of the volume weighted average sale price per share of our common stock during the ten (10) consecutive trading days immediately preceding the notice of exercise. The number of warrants and exercise price are subject to adjustment in the event of the issuance of common stock as a dividend or distribution, and the subdivision or combination of the outstanding common stock. (See Note F[5](c).)

	We typically use the Black-Scholes option-pricing model to estimate the fair value of stock-based awards. However, for the 1,625,000 warrants issued in September 2011, the exercise price is variable based on 80% of the price of our common stock on the date of exercise. For the valuation of these particular warrants, we used a weighted average of assigned probabilities for various gain scenarios at certain price points based on expected volatility of approximately 136% over an assumed term of five years to estimate an overall value of these warrants, which amounted to approximately $812,000, or $.50 per warrant. These inputs are unobservable inputs based on our own assumptions used to measure the value of the instrument. Accordingly, these warrants are classified within Level 3 of the fair value hierarchy in accordance with FASB ASC 820.

The following summarizes the activity of our outstanding warrants for the three month period ended March 31, 2012:

	Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2012		3,466,750	$	2.18
Granted		0		0
Exercised		0		0
Canceled or expired		0		0

Outstanding at March 31, 2012		3,466,750	$	2.18	(A)	8.3 years	(B)	$	645,000

Exercisable at March 31, 2012		2,841,750	$	2.77		8.3 years	(C)	$	555,000

(A)

The weighted average exercise price for warrants outstanding as of March 31, 2012 excludes 1,750,000 warrants with no determined exercise price.

(B)

The weighted average remaining contractual term for warrants outstanding as of March 31, 2012 excludes 803,500 warrants with no expiration date.

(C)

The weighted average remaining contractual term for warrants exercisable as of March 31, 2012 excludes 178,500 warrants with no expiration date.

NOTE G — COMMITMENTS AND OTHER MATTERS

[1] Leases

We lease a facility located at 1999 Mount Read Blvd., Rochester, New York. On April 29, 2008, we executed a five and one-half year lease for the premises (with a December 1, 2007 lease commencement date), providing for rent to be paid at a rate of $5,687 per month ($68,244 per annum) and in addition, for the payment of our proportionate share of yearly real estate taxes and yearly common area operating costs. (See Note C[2].)

Under the lease, monthly rental payments commenced June 1, 2008 and continue through May 2013. The lease contains three 5-year renewal options and grants us an option to lease additional adjacent manufacturing and assembly space.

Rental payments and certain other payments due to the landlord are to be paid in cash or our common shares, based upon the closing price per share on the 15th day of the calendar month immediately prior to the date any installment payment of monthly rent or other payment is due landlord.

Rent expense for the three month periods ended March 31, 2012 and 2011 was approximately $15,000 in each of the respective periods. Rent payments required under the lease for the full years ending December 31, 2012 and 2013 amount to approximately $68,000 and $28,000, respectively.

[2] Employment Agreements

Effective October 4, 2010, we appointed a new chief executive officer and executed a five year employment agreement pursuant to which we will pay base compensation of $50,000 per annum, which compensation increases to $200,000 per annum on the first day of the calendar year immediately following the calendar year in which we have adjusted EBITDA of at least $300,000 (earnings before interest, taxes, depreciation and amortization, but excluding all non-cash expenses associated with stock options). Under the agreement, the executive is entitled to a performance bonus based upon financial targets established each year in good faith by the Governance and Compensation Committee and the achievement of individual management objectives established annually by such committee. The executive is entitled to participate in all employee benefit plans as are provided from time to time for senior executives. If we terminate the executive, remove him as CEO, or a change in control of the Company occurs, the executive is entitled to three years’ severance pay, consisting of base pay and any incentive compensation.

On September 30, 2010, we granted a non-plan stock option for 5,150,000 common shares exercisable for ten years at an exercise price of $0.36 per common share to our newly appointed chief executive officer. The option vests and is exercisable as follows: 1,000,000 options vest and are exercisable immediately upon grant; a second 1,000,000 options vest and are exercisable upon the trading price of our common stock closing at a minimum of $1.00 per share; a third 1,000,000 options vest and are exercisable upon the trading price of our common stock closing at a minimum of $2.00 per share; a fourth 1,000,000 options vest and are exercisable upon the trading price of our common stock closing at a minimum of $3.00 per share and the balance of the options, namely 1,150,000 options, vest and are exercisable upon the trading price of our common stock closing at a minimum of $4.00 per share.

Effective October 18, 2010, we engaged a new chief financial officer under a letter agreement dated October 18, 2010 pursuant to which we will pay annual compensation equal to $125,000, with increases of $25,000 per annum effective April 1, 2011, October 1, 2011 and January 1, 2012. The executive also was granted a non-plan stock option exercisable for 10 years to acquire 250,000 shares of our common stock at $0.85 per share. The option vests and is exercisable as follows: 62,500 options vest and are immediately exercisable upon grant; 62,500 options vest and become exercisable on each of October 18, 2011, 2012 and 2013. If we terminate the executive, remove him as CFO, or a change in control of the company occurs, the executive is entitled to 12 months’ severance pay.

[3] Consulting Agreements

Effective July 1, 2010, we engaged the services of a consulting firm to provide expertise in local, state and federal governmental relations, to advise us with respect to media relations, business development and in negotiating with industry representatives. We agreed to pay the consultant an annual retainer of $48,000 to be paid in quarterly installments of $12,000 beginning July 1, 2010. The agreement was for a one year term.

Effective July 1, 2010, we engaged a consultant to provide us with assistance in the development of strategic plans, financial modeling, licensing agreements, partnership agreements and general funding opportunities. We agreed to pay the consultant an annual retainer equal to $34,500 to be paid in quarterly installments of $8,625 beginning July 1, 2010. We also agreed to pay the consultant a commission equal to 4% of the value received by us from third parties introduced by or through the auspices of the consultant for a period of a minimum of 4 years beyond the initial term of the agreement. The agreement was for a two year term.

On March 31, 2011, we signed a modification agreement pursuant to which, in exchange for a one-time payment of $17,250, all of the cash obligations under these two agreements were cancelled. The 4% commission with respect to the second agreement remains in effect through January 1, 2017.

On December 13, 2010, we executed a consultant agreement with a director to provide consulting services to us at a rate of $200 per hour. Pursuant to the agreement, we also agreed to pay the consultant an incentive fee equal to $10,000 or proportionate part thereof for each $1,000,000 of revenue or proportionate part thereof actually received by us for a period of five years, provided the definitive agreement with the third party results from the material efforts of the consultant. During the three month period ended March 31, 2012, we recorded an expense of $2,100 for consulting services under the agreement. Cumulatively, through March 31, 2012, we have recorded $2,100 of expense for services rendered in relation to this agreement.

[4] Prototype Development Agreement

On January 28, 2011, we announced that we entered into a contract with a West Virginia remanufacturer of components for the mining and associated industrial equipment industry to develop, evaluate, manufacture and sell our IsoTorque® differential technology in mining shuttle cars. The contract calls for us to design and build a prototype IsoTorque® unit for installation in a 21 SC model mining shuttle car. The remanufacturer will pay us $120,000 for the initial development. Upon successful completion of the prototype phase, the parties have agreed that we will sell 100% of the differential requirements for all 21 SC model mining shuttle cars remanufactured by the remanufacturer on an exclusive basis. Minimum purchase requirements will be established after the first anniversary of the agreement. In the three months ended March 31, 2012, we recorded $60,000 in revenue upon the completion of the second milestone under the contract. Through March 31, 2012, we have recorded a total of $90,000 in revenue associated with this agreement.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(A) Overall Business Strategy

Torvec, Inc. was incorporated as a New York business corporation on September 25, 1996. Upon its incorporation, the Company acquired numerous patents, inventions and know-how created by Vernon E. Gleasman and his sons, James and Keith Gleasman, a family with more than fifty years of experience in the automotive industry. Since its inception, we have endeavored to design, develop, build and commercialize our automotive and powertrain technology portfolio. We have not yet had any significant revenue-producing operations and, as such, we are a development stage entity.

(B) Current Status of Business Plan and Ongoing Projects

We are continuing to make significant progress optimizing the designs and productizing our two key technologies. The following summarizes the current status of the development efforts for our IsoTorque® differential and our Torvec hydraulic pump.

IsoTorque Differential – We believe we are in the final design phase of the base model IsoTorque differential that will improve overall strength, durability and performance. We are planning to be in a position during the second half of this year to be building an inventory of rear-wheel drive differentials initially for two model platforms that will be marketed and sold in the aftermarket. Our marketing plan has been drawn and we feel there is growth potential in the aftermarket. We believe that our efforts in the aftermarket will then help us break into the OEM (Original Equipment Manufacturer) market by proving our performance and safety advantages in the real world. As the base IsoTorque design is completed, we are planning to add other differential designs for additional model platforms in the aftermarket.

Following the completion of the IsoTorque for the initial entry into the aftermarket, we will be working on completing designs of front and rear-wheel drive differentials that we will test and market to certain OEMs. We are expecting to be able to deliver prototypes for rear-wheel drive differentials to certain OEMs for them to test in specific model platforms during the second half of 2012. We also are planning to improve upon the design of our differential for front-wheel drive applications during the second half of 2012. We believe that this could create a very significant breakthrough in front-wheel drive technology.

Through our China sales agent, we are working to develop relationships with two prominent Chinese auto manufacturers who have expressed interest in our IsoTorque differential design. We have established Non-Disclosure Agreements (NDAs) that will allow us to explore opportunities that will advance our technology and products further and faster into the world’s largest market.

In addition to the automotive sector, we are continuing to market into off-highway markets such as mining and construction. The development contract we have been working on for a differential in a mining car application is progressing well. In January 2011, we contracted with a West Virginia remanufacturer of components for mining and associated industrial equipment to develop an IsoTorque differential prototype to demonstrate its feasibility to alleviate steering problems associated with mining shuttle cars. The contract calls for us to jointly evaluate the performance and durability of the prototype units and upon successful evaluation, to build and sell IsoTorque differentials to our customer for incorporation in 21 SC mining cars it remanufactures for the mining industry. If successful, the contract calls for us to furnish the remanufacturer with all of their differential requirements during the three year contract term, as mutually extended. During the first quarter of 2012, we shipped two prototype IsoTorques to our customer and we are waiting for them to be installed and tested in a vehicle, which we anticipate will begin sometime during the second or third quarter of 2012. Based on the results of the test installation, we anticipate that the customer will place a production order for these differentials.

Torvec Hydraulic Pump – During the summer of 2011, we completed the initial testing of our Torvec hydraulic pump at a prominent university. From this testing, we learned a great deal about the strengths of the pump and improvements we needed to make. Because we were changing the intended use of the pump from a light duty cycle automobile transmission application to a commercial pump, we knew in advance that there would be development changes we would have to make because of the heavy duty cycle requirement for commercial use. However, from our testing we believe that the pump has notable advantages over existing technologies.

Over the past several months, we have gone through a drastic redesign to improve the overall performance of our pump while maintaining the significant advantages we have of size and weight. We are currently in the final stages of the redesign. The process of building two prototypes has been started to support testing later this year. Based upon the test results, we are planning to begin marketing this product to potential customers in the late second half of 2012. We are also applying for additional patents as a result of some engineering breakthroughs in our redesign.

In the near future, U. S. Government emissions regulations for off road diesel engines will take effect. These regulations will require diesel engines to pollute less. To help achieve these new standards, companies are attempting to run the diesel engines and thus their hydraulic pumps at a lower RPM. This requires larger displacement hydraulic pumps to be installed to compensate for the decrease in RPMs. Among other advantages, the unique design of Torvec’s hydraulic pump technology allows a larger displacement pump to fit into the same or smaller footprint of existing displacement pumps. This enables manufacturers to keep the current equipment layout without the need for expensive modifications to accommodate larger hydraulic pumps.

Our basic plan of operation for the year ending December 31, 2012 is as follows:

1) to develop and implement a strategy to sell IsoTorque differentials into the aftermarket, through both a distributor network and direct sales to end users.

2) to design, build and provide IsoTorque differentials to domestic and foreign OEMs, to engage with manufacturers in the performance and durability evaluation of our IsoTorque in rear-wheel and front wheel drive applications and to market the IsoTorque to manufacturers for use in their future vehicle platforms, including automotive and truck fleets.

3) to design and build prototype units of our IsoTorque differential for off-road uses, such as integration in the drive wheel assemblies of 21 SC mining shuttle cars under a development contract we have with a remanufacturer of mining and associated industrial equipment. In addition, we will be looking at other off-road uses.

4) to enhance the design of, build prototype units for, and evaluate the operating performance and efficiencies of our hydraulic pump for commercial and industrial applications and to market the Torvec hydraulic pump to industrial manufacturers of hydraulic pump and associated manufacturers.

In addition to the activities to be undertaken by us to implement our plan of operation detailed above, we may expand our marketing activities depending upon future circumstances and developments. Information regarding the Company and all of our inventions, including regular updates on technological and business developments, can be found on our website, www.torvec.com.

Three Month Periods Ended March 31, 2012 and 2011

Revenue for the three month period ended March 31, 2012 was $60,000, compared with $30,000 for the three month period ended March 31, 2011. The revenue that was generated in each period resulted from the completion of separate milestones on a prototype development contract for a mining car differential. The cost of goods sold in 2012 was $45,000, or 75% of revenue, compared with $17,000 in 2011, or 57% of revenue. Gross profit for the three month period ended March 31, 2012 was $15,000, or 25%, compared with $13,000, or 43% in the comparable period in 2011.

Research and development expenses for the three months ended March 31, 2012 amounted to $220,000 as compared to $202,000 for the comparable period in 2011. Non-cash stock-based compensation expense attributable to stock options and warrants for the three months ended March 31, 2012 was $18,000, compared with $0 for the three months ended March 31, 2011, resulting primarily from option grants made to engineers in the latter part of 2011. Excluding the non-cash stock compensation expense, research and development expenses for the first three months of 2012 amounted to $202,000, essentially equal to the expense reflected in the same period in 2011. An increase in expenses for outside consulting services in 2012 was offset by lower personnel-related charges and lower material costs.

General and administrative expense for the first three months of 2012 amounted to $554,000 compared to $611,000 for 2011. Non-cash stock-based compensation expense attributable to stock options and warrants for the three months ended March 31, 2012 was $267,000, a decrease of $37,000 from $304,000 for the three months ended March 31, 2011 that primarily resulted from timing of vested options. Excluding the non-cash stock compensation expense, general and administrative expense for the first three months of 2012 amounted to $287,000 compared to $307,000 in 2011. The decrease of $20,000, or 7%, is mainly related to lower fees for external accounting services, offset in part by higher legal costs and higher personnel-related costs.

The loss from operations for the first three months of 2012 was $759,000, compared with a loss from operations in 2011 of $800,000. Other income for 2012 was $6,000, compared with other income of $1,000 in 2011 that resulted primarily from higher interest income on higher cash balances. Preferred stock dividends amounted to $67,000 and $68,000 in 2012 and 2011, respectively.

The net loss attributable to common stockholders for the three month period ended March 31, 2012 was $820,000 as compared to a net loss for the same period in 2011 of $867,000. The weighted average diluted common shares outstanding amounted to 45,700,000 and 45,690,000 for the first three months of 2012 and 2011, respectively. Diluted net loss per common share for the each of the three month periods ended March 31, 2012 and 2011 was $.02.

(D) Liquidity and Capital Resources

In September 2011, we raised $6,500,000 in gross proceeds through a private placement of a new series of preferred stock. We issued a total of 16,250,000 shares of Series C Preferred Stock at a price of $0.40 per share. As part of the same private placement, the investors received common stock purchase warrants entitling them to purchase up to an aggregate total of 1,625,000 common shares at 80 percent of the volume weighted average price of our common stock based on the 10 trading days immediately preceding the date of exercise. The warrants are immediately exercisable and have a 10 year term. We intend to use the funds raised to continue developing and intensify the marketing of our IsoTorque® differential and our Torvec hydraulic pump technologies for the automotive and commercial pump industries, including our anticipated entry into the automotive aftermarket with our patented differential. We recorded approximately $106,000 in direct expenses associated with the transaction, consisting primarily of external legal costs, resulting in net proceeds realized of $6,394,000.

As of March 31, 2012, cash totaled $5,424,000, a decrease of $515,000 from the beginning of the year. During the three months ended March 31, 2012, we used $499,000 of cash in operating activities, an increase of $50,000 over the same period in 2011. A reported net loss of $753,000 in for the first three months of 2012, offset in part mainly by non-cash stock-based compensation of $285,000, resulted in cash used in operating activities amounting to $499,000 for the three month period ended March 31, 2012. In 2011, a reported net loss of $799,000, offset in part mainly by $379,000 of non-cash expenditures related to the issuance of common stock, warrants and stock options, and stockholder contribution of services, resulted in cash used in operating activities of $449,000 for the three months ended March 31, 2011.

We used $6,000 in cash for investing activities in the first quarter of 2012 to purchase software. We didn’t use any cash for investing activities during the first quarter of 2011.

During the three month periods ended March 31, 2012 and 2011, we used $10,000 and $5,000, respectively, for financing activities, primarily as a result of payments on outstanding notes payable.

During the three month period ended March 31, 2012, we issued 0 shares of common stock. During the three month period ended March 31, 2011, we issued a total of 5,421 shares of common stock related to the conversion of a comparable number of Preferred A shares.

Current Cash Outlook

(E) Critical Accounting Policies

Revenue Recognition

Our terms provide that customers are obligated to pay for products sold to them within a specified number of days from the date that title to the products is transferred to the customers. Our standard terms are typically net 30 days. We recognize revenue when transfer of title occurs, risk of ownership passes to a customer at the time of shipment or delivery depending on the terms of the agreement with a particular customer and collection is reasonably assured. The sale price of our products is substantially fixed and determinable at the date of the sale based upon purchase orders generated by a customer and accepted by us.

We occasionally enter into prototype development contracts with customers. In such cases, revenue is recognized using either (a) the proportional effort method based on the relationship of costs incurred to date to the total estimated cost to complete a contract, or (b) where appropriate, the milestone method, if milestones are clearly identifiable and substantive. In January 2011, we adopted FASB Accounting Standards Update (“ASU”) No. 2010-17, “Revenue Recognition — Milestone Method (Topic 605): Milestone Method of Revenue Recognition — a consensus of the FASB EITF”. Our adoption of this pronouncement did not have a significant impact on our financial statements.

Stock-Based Compensation

FASB ASC 718-10 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period (generally the vesting period) in the consolidated financial statements based on their fair values on the grant date. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity in accordance with FASB ASC 718-10.

No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets. We elected to adopt the alternative method of calculating the historical pool of windfall tax benefits as permitted by FASB ASC 718-10-65 (previously known as FASB Staff Position (FSP) No. SFAS 123(R)-c, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards”). This is a simplified method to determine the pool of windfall tax benefits that is used in determining the tax effects of stock compensation in the results of operations and cash flow reporting for awards that were outstanding as of the adoption of FASB ASC 718-10.

At times, we account for the settlement of our commission arrangements to non-employee consultants, directors, executives and certain administrative personnel with the issuance of our business consulting shares under FASB ASC 505 (previously known as FASB Statement 123(R) “Share Based Payment”), provided that there are sufficient shares available under the business consulting plan. Under FASB ASC 505, we measure commission arrangements at the fair value of the equity instruments issued. In the event that there are insufficient shares available to settle the obligation, we will follow the provisions of FASB ASC 815-40 (previously known as EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”). Under FASB ASC 815-40, we will record a liability instrument for the resulting changes in fair value from the date incurred to the end of each reporting period until such liability is satisfied.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

Item 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded, as of March 31, 2012, that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of such period, are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting

There have been no significant changes in our internal control over financial reporting during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no significant changes to the risk factors facing the Company as disclosed in our Form 10-K for the year ended December 31, 2011.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The following Exhibits, as applicable, are attached to this Quarterly Report (Form 10-Q). The Exhibit Index is found on the page immediately succeeding the signature page and the Exhibits follow on the pages immediately succeeding the Exhibit Index.

(2)	Plan of acquisition, reorganization, arrangement, liquidation, or succession

	2.1	Agreement and Plan of Merger, dated November 29, 2000 by and among Torvec Subsidiary Corporation, Torvec, Inc., UTEK Corporation and ICE Surface Development, Inc. incorporated by reference to Form 8-K filed November 30, 2000 and Form 8K/A filed February 12, 2001.

(3)	Articles of Incorporation, By-laws

	3.1	Certificate of Incorporation, incorporated by reference to Form 10-SB/A , Registration Statement, registering Company’s $.01 par value common stock under section 12(g) of the Securities Exchange Act of 1934;

	3.2	Certificate of Amendment to the Certificate of Incorporation dated August 30, 2000, incorporated by reference to Form SB-2 filed October 19, 2000;

	3.3	Certificate of Correction dated March 22, 2002, incorporated by reference to Form 10-KSB filed for fiscal year ended December 31, 2002;

	3.4	By-laws, as amended by shareholders on January 24, 2002, incorporated by reference to Form 10-KSB filed for fiscal year ended December 31, 2002;

	3.5	Certificate of Amendment to the Certificate of Incorporation dated October 21, 2004 setting forth terms and conditions of Class B Preferred, incorporated by reference to Form 10-QSB filed for fiscal quarter ended September 30, 2004;

	3.6	Certificate of Amendment to the Certificate of Incorporation dated January 26, 2007 increasing authorized common shares from 40,000,000 to 400,000,000;

	3.7	Certificate of Amendment to the Certificate of Incorporation dated September 21, 2011 setting forth terms and conditions of Class C Preferred, incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on September 26, 2011.

(4)	Instruments defining the rights of holders including indentures

	None.

(10)	Material Contracts

	10.1	The Company’s 1998 Stock Option Plan and related Stock Options Agreements, incorporated by reference to Form S-8, Registration Statement, registering 2,000,000 shares of the Company’s $.01 par value common stock reserved for issuance thereunder, effective December 17, 1998;

	10.2	The Company’s Business Consultants Stock Plan, incorporated by reference to Form S-8, Registration Statement, registering 200,000 shares of the Company’s $.01 par value common stock reserved for issuance thereunder, effective June 11, 1999, as amended by reference to Form S-8 Registration Statements registering an additional 200,000, 200,000, 100,000, 800,000, 250,000, 250,000, 350,000, 250,000, and 2,500,000 shares of the Company’s $.01 par value common stock reserved for issuance thereunder, effective October 5, 2000, November 7, 2001, December 21, 2001, February 1, 2002, November 12, 2002, January 22, 2003, May 23, 2003, November 26, 2003, April 20, 2004, November 16, 2006 and April 1, 2010, respectively;

	10.3	Stock Option Agreement with Samuel Bronsky, Chief Financial and Accounting Officer, dated August 28, 2001, incorporated by reference to Form 10-QSB filed for fiscal quarter ended September 30, 2001;

	10.4	Option Agreement between Matthew R. Wrona and Torvec, Inc. dated June 30, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended June 30, 2005;

	10.5	License Assignment and Transfer Agreement by and between Ice Engineering, LLC and Torvec, LLC made effective June 15, 2007 assigning license granted by Dartmouth College with respect to ice technology from Torvec to Ice Engineering, incorporated by reference to current report (Form 8-K) filed July 18, 2007;

	10.6	License Agreement by and between High Density Powertrain and Torvec, Inc. dated December 12, 2007, incorporated by reference to current report (Form 8-K) filed December 14, 2007;

	10.7	Stock Option Agreement dated September 30, 2010 between the Company and Richard A. Kaplan, incorporated by reference to current report (Form 8-K) filed October 6, 2010;

	10.8	Employment Agreement dated October 4, 2010 between the Company and Richard A. Kaplan, incorporated by reference to current report (Form 8-K) filed October 6, 2010;

	10.9	Letter Agreement dated October 18, 2010 between the Company and Robert W. Fishback, incorporated by reference to current report (Form 8-K) filed October 22, 2010;

	10.10	Stock Option Agreement dated October 18, 2010 between the Company and Robert W. Fishback, incorporated by reference to current report (Form 8-K) filed October 22, 2010;

	10.11	2011 Stock Option Plan and template agreements to be used to grant options thereunder, incorporated by reference to annual report (Form 10-K) filed March 29, 2011;

	10.12	Agreement dated December 13, 2010 between Heinrocket Inc. as Consultant and Torvec, Inc., incorporated by reference to annual report (Form 10-K) filed March 29, 2011.

	10.13	Securities Purchase Agreement by and among Torvec, Inc., a New York corporation, B. Thomas Golisano, and each purchaser listed on the Schedule of Purchasers attached thereto, dated September 23, 2011, incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on September 26, 2011.

	10.14	Form of Warrant to Purchase Common Stock of Torvec, Inc., incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on September 26, 2011.

	10.15	Form of Directors Subscription Agreement, incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on September 26, 2011.

	10.16	Investors’ Rights Agreement by and between Torvec, Inc., a New York corporation, B. Thomas Golisano, Charles T. Graham, and David Still, dated September 23, 2011, incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on September 26, 2011.

(11)	Statement re computation of per share earnings (loss)

		Not applicable.

(15)	Letter re: unaudited interim financial information

		None.

(18)	Letter re change in accounting principles

		None.

(19)	Report furnished to security holders

		None.

(22)	Published report regarding matters submitted to vote of security holders

		None.

(23)	Consents of experts and counsel

		None.

(23.1)	Registered independent accounting firm consent

		None.

(24)	Power of attorney

		None.

(31.1)	Rule 13(a)-14(a)/15(d)-14(a) Certifications – CEO

(31.2)	Rule 13(a)-14(d)/15(d)-14(d) Certifications – CFO

(32)	Section 1350 Certifications

(99)	Additional exhibits

		None.

(100)	XBRL-related documents

		None.

(101)	The following materials from Torvec, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Statement of Earnings for the three months ended March 31, 2012 and 2011 and for the Period from September 25, 1996 (Inception) through March 31, 2012, (ii) Condensed Statement of Financial Position at March 31, 2012 and December 31, 2011, (iii) Condensed Statement of Cash Flows for the three months ended March 31, 2012 and 2011, and for the Period from September 25, 1996 (Inception) through March 31, 2012 and (iv) Notes to Condensed Consolidated Financial Statements*

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TORVEC, INC.

Date: May 8, 2012	By:	/s/ Richard A. Kaplan
		Richard A. Kaplan Chief Executive Officer


Date: May 8, 2012	By:	Robert W. Fishback
		Robert W. Fishback Chief Financial Officer and Principal Accounting Officer

Attached files

CurAegis Technologies, Inc. Reports

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