Attached files
| file | filename |
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| EX-31.1 - EXHIBIT 31.1 - 374Water Inc. | ex31_1.htm |
| EX-32.1 - EXHIBIT 32.1 - 374Water Inc. | ex32_1.htm |
| EX-32.2 - EXHIBIT 32.2 - 374Water Inc. | ex32_2.htm |
| EX-31.2 - EXHIBIT 31.2 - 374Water Inc. | ex31_2.htm |
| EXCEL - IDEA: XBRL DOCUMENT - 374Water Inc. | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the Quarterly Period ended September 30, 2013 | |
| o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number: 000-27866
POWERVERDE, INC.
(Exact name of Registrant as specified in its charter)
| Delaware | 88-0271109 | |
(State
or other jurisdiction of |
(IRS
Employer |
420 S. Dixie Highway Suite 4-B
Coral Gables, FL 33146
(Address of principal executive offices)
(305) 666-0024
(Registrant’s telephone number including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| o | Large accelerated filer | o | Accelerated filer |
| o | Non-accelerated filer | x | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of November 6, 2013 the issuer had 27,600,106 shares of common stock outstanding.
Index to Form 10-Q
Item 1. Condensed Consolidated Financial Statements
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 1 |
PowerVerde, Inc. and Subsidiary
(A Development Stage Company)
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 2013 and 2012, and the
period from March 9, 2007 (Date of Inception) to September 30, 2013
(Unaudited)
| Three months ended | Nine months ended | Cumulative from | ||||||||||||||||||
| September 30, | September 30, | inception through | ||||||||||||||||||
| 2013 | 2012 | 2013 | 2012 | September 30, 2013 | ||||||||||||||||
| Revenue, Net | $ | 128,614 | $ | 33,649 | $ | 309,517 | $ | 78,006 | $ | 787,966 | ||||||||||
| Cost of Goods Sold | — | — | — | — | 136,925 | |||||||||||||||
| Gross Profit | 128,614 | 33,649 | 309,517 | 78,006 | 651,041 | |||||||||||||||
| Operating Expenses | ||||||||||||||||||||
| Research and development | 67,502 | 124,612 | 381,064 | 996,900 | 3,709,958 | |||||||||||||||
| General and administrative | 107,413 | 280,663 | 749,917 | 773,335 | 4,400,347 | |||||||||||||||
| Goodwill impairment | — | — | — | — | 2,637,760 | |||||||||||||||
| Total Operating Expenses | 174,915 | 405,275 | 1,130,981 | 1,770,235 | 10,748,065 | |||||||||||||||
| Loss from Operations | (46,301 | ) | (371,626 | ) | (821,464 | ) | (1,692,229 | ) | (10,097,024 | ) | ||||||||||
| Other Income (Expenses) | ||||||||||||||||||||
| Interest income | — | — | — | — | 2,401 | |||||||||||||||
| Interest expense | (33,671 | ) | (3,792 | ) | (75,431 | ) | (11,152 | ) | (433,338 | ) | ||||||||||
| Other income (expenses) | (40,000 | ) | — | 4,750 | — | 24,011 | ||||||||||||||
| Total Other Income (Expense) | (73,671 | ) | (3,792 | ) | (70,681 | ) | (11,152 | ) | (406,926 | ) | ||||||||||
| Loss before Income Taxes | (119,972 | ) | (375,418 | ) | (892,145 | ) | (1,703,381 | ) | (10,503,950 | ) | ||||||||||
| Provision for Income Taxes | — | — | — | — | — | |||||||||||||||
| Net Loss | $ | (119,972 | ) | $ | (375,418 | ) | $ | (892,145 | ) | $ | (1,703,381 | ) | $ | (10,503,950 | ) | |||||
| Net Loss per Share - Basic and Diluted | $ | — | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.06 | ) | |||||||||
| Weighted Average Common Shares Outstanding - Basic and Diluted | 27,425,524 | 28,142,413 | 26,626,735 | 27,397,601 | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 2 |
PowerVerde, Inc. and Subsidiary
(A Development Stage Company)
Consolidated Statement of Changes in Stockholders’ Equity
For the nine months ended September 30, 2013
(Unaudited)
| Deficit | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional Paid | during the | Total | ||||||||||||||||||||||
| Common | Common | in | Treasury | Development | Stockholders’ | |||||||||||||||||||
| Shares | Stock | Capital | Stock | Stage | Equity | |||||||||||||||||||
| Balances, December 31, 2012 | 26,011,565 | $ | 3,414 | $ | 10,278,331 | $ | (491,139 | ) | $ | (9,611,805 | ) | $ | 178,801 | |||||||||||
| Sale of common stock at $.25 per share | 1,100,000 | 111 | 274,889 | 275,000 | ||||||||||||||||||||
| Common stock issued for services | 325,000 | 32 | 124,718 | 124,750 | ||||||||||||||||||||
| Stock-based compensation | 121,237 | 121,237 | ||||||||||||||||||||||
| Warrants issued for services | 210,000 | 210,000 | ||||||||||||||||||||||
| Warrants issued in connection with Notes payable to related party | 16,500 | 16,500 | ||||||||||||||||||||||
| Common stock issued on conversion of debt | 44,791 | |||||||||||||||||||||||
| Cashless exercise of options | 18,750 | |||||||||||||||||||||||
| Net loss for the nine months ended September 30, 2013 | (892,145 | ) | (892,145 | ) | ||||||||||||||||||||
| Balances, September 30, 2013 | 27,500,106 | $ | 3,557 | $ | 11,025,675 | $ | (491,139 | ) | $ | (10,503,950 | ) | $ | 34,143 | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
PowerVerde, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2013
Note 1 – Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Annual Report of PowerVerde, Inc. (“PowerVerde,” “we,” “us,” “our,” or the “Company”) as of and for the year ended December 31, 2012. The results of operations for the three and nine months ended September 30, 2013, are not necessarily indicative of the results to be expected for the full year or for future periods. The condensed consolidated financial statements include the accounts of PowerVerde, Inc., formerly known as Vyrex Corporation (the “Company”), and PowerVerde Systems, Inc., formerly known as PowerVerde, Inc., its wholly-owned subsidiary. Intercompany balances and transactions have been eliminated in consolidation.
Note 2 – Going Concern
The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has had recurring operating losses and negative cash flows from operations. Those factors, as well as uncertainty in securing additional funds for continued operations, create an uncertainty about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Note 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of PowerVerde, Inc. and its wholly-owned subsidiary, PowerVerde Systems, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
Development Stage Company
The Company is a development stage company as defined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915, “Development Stage Entities”. The Company is devoting substantially all of its present efforts to establish a new business and none of its planned principal operations have commenced. All losses accumulated since inception has been considered as part of the Company’s development stage activities.
Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable consist of balances due from sales and royalties. The Company monitors accounts receivable and provides allowances when considered necessary. At September 30, 2013, accounts receivable were considered to be fully collectible. Accordingly, no allowance for doubtful accounts was provided.
| 5 |
Employee Advances
The employee advances represent the payroll taxes due on the issuance of common stock as compensation.
Revenue Recognition
Sales revenues and associated cost of sales are recognized when title of the goods sold pass to the buyer, when shipped and when accounts receivable are determined to be reasonably collectable. Certain sales agreements also require installation and training by PowerVerde once goods are received and accepted by the customer. The Company does not consider these agreements multiple elements arrangements as defined by ASC 605-25 “Revenue Recognition”, as the Company does not offer installation or training as services separate from the sale of its products at this time. Therefore, a “best estimate of selling price” or individual pricing in accordance with ASC 605-25 is undeterminable. The Company defers all revenues and costs of sales until the agreement is 100% complete.
Licensing and royalty revenue from royalty agreements is recognized in accordance with the terms of the specific agreement.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Expenditures for major betterments and additions are capitalized, while replacement, maintenance and repairs, which do not extend the lives of the respective assets, are expensed as incurred.
Intellectual Property and Goodwill
The Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses an estimate of the undiscounted cash flows over the remaining life of its long-lived assets, or related group of assets where applicable, in measuring whether the assets to be held and used will be realizable. In the event of impairment, the Company would discount the future cash flows using its then estimated incremental borrowing rate to estimate the amount of the impairment.
The Company assesses goodwill for potential impairment at the end of each fiscal year, or during the year if an event or other circumstance indicates that the Company may not be able to recover the carrying amount of the asset. In evaluating goodwill for impairment, first qualitative factors are assessed to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If it is concluded that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then no further testing of the goodwill assigned to the reporting unit is required. However, if it is concluded that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a two-step goodwill impairment test is performed to identify potential goodwill impairment and measure the amount of goodwill impairment to be recognized, if any.
In the first step of the review process, the estimated fair value of the reporting unit is compared with its carrying value. If the estimated fair value of the reporting unit exceeds its carrying amount, no further analysis is needed.
If the estimated fair value of the reporting unit is less than its carrying amount, a second step of the review process is performed in order to calculate the implied fair value of the reporting unit goodwill in order to determine whether any impairment is required. The implied fair value of the reporting unit goodwill is then calculated by allocating the estimated fair value of the reporting unit to all of the assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, the Company then recognizes an impairment loss for that excess amount. During the year ended December 31, 2012, the Company determined that the goodwill it had recognized in connection with its previous acquisition of Cornerstone Conservation Group LLC had been impaired and accordingly recognized an impairment charge of $2,637,760 to reduce its carrying amount to zero.
| 6 |
Stock-based Compensation
The Company has accounted for stock-based compensation under the provisions of ASC Topic 718 – “Stock Compensation” which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (stock options and common stock purchase warrants). The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on historical volatility of peer companies and other factors estimated over the expected term of the stock options. The expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term.
Common Stock Purchase Warrants
The Company accounts for common stock purchase warrants in accordance with ASC Topic 815- 40, “Derivatives and Hedging – Contracts in Entity’s Own Equity” (“ASC 815-40”). Based on the provisions of ASC 815- 40, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement, or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
Accounting for Uncertainty in Income Taxes
The Company follows the provisions of ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Research and Development Costs
The Company’s research and development costs are expensed in the period in which they are incurred.
Earnings (Loss) Per Share
Earnings (loss) per share is computed in accordance with FASB ASC Topic 260, “Earnings per Share”. Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. Certain common stock equivalents were not included in the earnings (loss) per share calculation as their effect would be anti-dilutive. Warrants exercisable for 7,239,333 shares and options for 2,750,000 shares were excluded from weighted average common shares outstanding on a diluted basis.
Financial instruments
The Company carries cash and cash equivalents, accounts receivable, accounts payable and accrued expenses at historical costs. The respective estimated fair values of these assets and liabilities approximate carrying values due to their current nature. The Company also carries notes payable to related parties at historical cost less discounts for warrants issued as loan financing costs.
| 7 |
Fair value of financial assets and liabilities
The Company measures the fair value of financial assets and liabilities in accordance with GAAP which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. GAAP describes three levels of inputs that may be used to measure fair value:
Level 1 – quoted prices in active markets for identical assets or liabilities
Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. These instruments are required to be carried as derivative liabilities, at fair value.
The Company uses the Black-Scholes valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to measure the fair value of these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective inputs that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the Company’s trading market price and the trading market price of various peer companies, which have historically had high volatility. Since derivative financial instruments are initially and subsequently carried at fair value, the Company’s income will reflect the volatility in these estimate and assumption changes.
The Company reports its derivative liabilities at fair value on the accompanying condensed consolidated balance sheets.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
Note 4 – Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-11 “Disclosures about offsetting Assets and Liabilities” requiring additional disclosure about offsetting and related arrangements. ASU 2011-11 is effective retrospectively for periods beginning on or after January 1, 2013. The adoption of ASU 2011-11 did not have a material impact on the Company’s future financial position, results of operations or liquidity.
On March 30, 2012, the Company purchased 100% of the membership interests of Cornerstone Conservation Group LLC (“Cornerstone”) pursuant to a Membership Interest Purchase Agreement (the “Agreement”). Cornerstone’s main asset is its proprietary Combined Cooling, Heating and Power (“CCHP”) technology, which utilizes waste heat from commercial and residential heating, ventilation air conditioning and refrigeration (“HVACR”) systems.
| 8 |
Cornerstone also has substantial experience and technology relating to geothermal or ground source heat pumps. The Company also moved its operations to a 5,000 square foot facility owned by one of the sellers in Scottsdale, Arizona. The Company has been using the facility rent free on a short term basis but expects to negotiate a lease on fair market terms.
In consideration for the 100% membership interests in Cornerstone, the Company issued 2,260,000 shares of the Company’s common stock (valued at $1.37 per share, the closing price on March 30, 2012) to the selling members of Cornerstone and issued to the sellers fully vested three–year warrants to purchase an aggregate of 300,000 shares of the Company’s common stock as follows:
| (i) | 100,000 shares at an exercise price of $2.00 per share, exercisable beginning January 1, 2012, through December 31, 2016; | |
| (ii) | 100,000 shares at an exercise price of $3.00 per share, exercisable beginning July 1, 2012, through June 30, 2017; and | |
| (iii) | 100,000 shares at an exercise price of $4.00 per share, exercisable beginning January 1, 2013, through December 31, 2017. |
The estimated fair value of the total warrants issued in connection with the acquisition of Cornerstone was $201,000 which was calculated using the Black-Scholes option valuation method with the following assumptions: a risk free interest rate of 1.04 percent, an estimated volatility of 79.1 percent and no dividend yield. The total present value of all consideration expected to be paid as part of this agreement was $3,297,200.
The following summarizes the fair values of the assets acquired:
| Intangible asset – Intellectual Property | $ | 659,440 | ||
| Goodwill | 2,637,760 | |||
| Total assets acquired | 3,297,200 | |||
| Aggregate purchase price | $ | 3,297,200 |
The assets acquired were recorded based on estimates of their fair values determined by management, based on information then available and on assumptions as to future operations.
Due to the departure of a key employee and as part of the Company’s annual impairment analysis, the goodwill associated with this acquisition was determined to be impaired at December 31, 2012 and accordingly, it was written off in that period.
For the nine months ended September 30, 2013, amortization expense was $54,953 and accumulated amortization of the intangible asset- intellectual property was $329,720 at September 30, 2013.
Future amortization of the intangible asset – intellectual property was as follows as of September 30, 2013:
| Year ending December 31: | ||||
| 2013 | $ | 54,953 | ||
| 2014 | 219,814 | |||
| 2015 | 54,953 | |||
| Total | $ | 329,720 | ||
| 9 |
Warrants
During March through December 2010, the Company issued warrants to purchase 439,999 unregistered shares of the Company’s common stock at an exercise price of $0.75 per share in association with stock subscription agreements. These warrants expire on various dates through December 2013. As of September 30, 2013, 386,666 of these warrants had expired.
During January through December 2011, the Company issued warrants to purchase 2,000,000 unregistered shares of the Company’s common stock at an exercise price of $0.75 per share in association with stock subscription agreements. These warrants expire on various dates through June 2014. As of September 30, 2013, none of these warrants were exercised or had expired.
The Company issued warrants on June 3, 2011 to various persons, including affiliates of the Company, for services provided to the Company. These warrants covered the purchase of 1,855,000 unregistered shares of the Company’s stock at an exercise price of $1.05 per share with a five-year term. These share-based payments have been accounted for in accordance with ASC 815-40 using the Black Scholes pricing model to determine the fair value of each warrant. As of September 30, 2013, all of these warrants were outstanding.
On February 3, 2012, The Company issued warrants to purchase 500,000 unregistered shares of the Company’s common stock at an exercise price of $1.00 per share with a five-year term for settlement of certain disputed amounts (See Note 10). These share-based payments have been accounted for in accordance with ASC 815-40 using the Black-Scholes pricing model to determine the fair value of each warrant. As of September 30, 2013, all of these warrants were outstanding.
In connection with the acquisition of Cornerstone (See Note 5), on March 30, 2012, the Company issued warrants to purchase 300,000 unregistered shares of common stock at exercise prices ranging from $2.00 to $4.00 per share. These warrants expire at various dates through December 2017. As of September 30, 2013, all of these warrants were outstanding.
During the second quarter of 2012, the Company issued warrants to purchase 335,000 unregistered shares of the Company’s common stock at an exercise price of $3.00 per share in association with stock subscription agreements. These warrants expire on various dates through 2015. As of September 30, 2013, all of these warrants were outstanding.
During the third quarter of 2012, the Company issued warrants to purchase 71,000 unregistered shares of the Company’s common stock at an exercise price of $3.00 per share in association with stock subscription agreements. These warrants expire July 30, 2015. As of September 30, 2013, all of these warrants were outstanding.
During the fourth quarter of 2012, the Company issued warrants to purchase 225,000 unregistered shares of the Company’s common stock at an exercise price of $1.00 per share in association with stock subscription agreements. These warrants expire October 31, 2015. As of September 30, 2013, all of these warrants were outstanding.
In December 2012, the Company issued warrants to purchase 325,000 unregistered shares of the Company’s common stock at an exercise price of $0.41 per share in association with the Secured Promissory Note (See Note 8). These warrants expire December 31, 2015. As of September 30, 2013, all of these warrants were outstanding.
During January 2013, the Company issued three-year warrants to purchase 75,000 unregistered shares of the Company’s common stock at an exercise price of $0.41 per share in association with the Secured Promissory Note (See Note 8). These warrants expire December 31, 2015. As of September 30, 2013, all of these warrants were outstanding.
During March 2013, the Company issued its Chief Executive Officer and Chief Financial Officer five –year warrants to purchase common stock at an exercise price of $0.30 per share (market price on date of grant) in the amounts of 1,000,000 and 500,000 shares, respectively. The Company recognized $210,000 in compensation expense. As of September 30, 2013, all of these warrants were outstanding.
| 10 |
Expenses related to warrants issued in conjunction with settlement of certain disputes for the nine months ended September 30, 2013 and 2012 were $0 and $262,700, respectively.
A summary of warrants issued, exercised and expired during the nine months ended September 30, 2013 is as follows:
| Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Balance at December 31, 2012 | 6,050,999 | $ | 1.12 | $ | — | |||||||
| Issued | 1,575,000 | .30 | — | |||||||||
| Expired | (386,666 | ) | (.75 | ) | — | |||||||
| Balance at September 30, 2013 | 7,239,333 | $ | .96 | $ | 45,000 | |||||||
The weighted average grant date fair value of warrants issued during the nine month period ended September 30, 2013 amounted to $0.11 to $0.14 per warrant. The fair value of each warrant granted as compensation for services was determined using the Black-Scholes pricing model and the following assumptions:
| September 30, 2013 | ||||
| Risk Free interest rate | 0.36% to 0.84% | |||
| Expected term | 3-5 years | |||
| Annualized volatility | 72.3% | |||
| Expected dividends | — | |||
The expected term of warrants granted is based on the contractual terms of the agreement and represents the period of time that warrants granted are expected to be outstanding.
The warrant shares referred to above are unregistered shares of the Company’s stock and are restricted from trading as defined under Rule 144 of the United States Securities Act of 1933.
Common Stock Issued for Services
In the first quarter of 2013, the Company issued 125,000 common shares to a third party for six months consulting services and 200,000 common shares were issued to an employee as part of his compensation package. The expense for the period of $124,750 is included in the general and administrative expenses on the condensed consolidated statement of operations for the nine months ended September 30, 2013.
Private Placement of Common Stock
In February 2012, the Company raised $500,000 exclusively from accredited European investors (including $275,000 from a Newton affiliate) pursuant to a private placement of 500,000 shares of common stock at a price of $1.00 per share. There were no warrants issued pursuant to this round; however, simultaneously Newton affiliates received three-year warrants to purchase 500,000 shares at $1.00 per share in connections with the settlement of certain claims by and between the Company and Newton.
In the second quarter of 2012, the Company raised gross proceeds of $335,000 through the private placement of 335,000 unregistered shares of common stock to accredited investors at $1.00 per share. Each investor received a three-year warrant to purchase shares of common stock at $3.00 per share for a number of shares equal to the number of shares purchased by the investor in this offering. The Company paid a 10% commission on the gross proceeds of this offering to its placement agent.
| 11 |
In the third quarter of 2012, the Company raised gross proceeds of $71,000 through the private placement of 71,000 unregistered shares of common stock to accredited investors at $1.00 per share. Each investor received a three-year warrant to purchase shares of common stock at $3.00 per share for a number of shares equal to the number of shares purchased by the investor in this offering. The Company paid a 10% commission on the gross proceeds of this offering to its placement agent.
In the fourth quarter of 2012, the Company raised gross proceeds of $492,030 through the private placement of 396,000 unregistered shares of common stock to accredited investors at $.43 per share and 450,000 shares at $.715 per share. Each investor who purchased the common stock at $.715 per share received a three-year warrant to purchase additional shares of common stock at $1.00 per share for a number of shares equal to one-half of the number of shares purchased by the investor in this offering. The Company paid a 10% commission on the gross proceeds of this offering to its placement agent.
In the second quarter of 2013, the Company raised gross proceeds of $125,000 through private placement of 500,000 unregistered shares of common stock to accredited investors at $.25 per share.
In the third quarter of 2013, the Company raised gross proceeds of $150,000 through private placement of 600,000 unregistered shares of common stock to accredited investors at $.25 per share.
Treasury Shares
On April 7, 2011, 4,500,000 shares of the Company’s stock were surrendered to Treasury in exchange for a $200,000 interest-free note payable due in April 2013. The note payable is reported as note payable to related party on the accompanying condensed consolidated balance sheets. In accordance with GAAP, the Company has discounted this obligation at an imputed rate of 8%. The balance of the note payable was settled on October 16, 2012 with the surrender of an additional 3,000,000 shares of the Company’s stock to Treasury in exchange for $530,000 as discussed below.
In April 2012, the Company purchased 100,000 shares of common stock from an affiliate at a price of $.25 per share. Of the $25,000 purchase price, $14,000 was paid in 2011 and the balance in April 2012. The shares have been held as treasury stock from the date of closing.
In May 2012, the Company purchased 450,000 shares of its common stock from an affiliate at a price of $.20 per share. Of the $90,000 purchase price, $10,000 was paid at closing and the balance is payable $10,000 per month through January 2013. The payable has a balance of $15,000 at September 30, 2013 and is included in “Payable to related parties” in the accompanying condensed consolidated balance sheets. The shares have been held as treasury stock from the date of closing.
On October 16, 2012, 3,000,000 shares of the Company’s stock were surrendered to Treasury in exchange for $530,000, of which $100,000 is due in six equal monthly installments, beginning on November 16, 2012. The payable has a balance of $100,000 as of December 31, 2012 and is included in the “Payable to related parties” in the accompanying condensed consolidated balance sheets. In the event that any amount due remains unpaid, some or all amounts can be converted into shares of the Company’s stock at a price of $.0667 per share. The shares have been held as treasury stock from the date of closing. As of September 30, 2013, approximately $83,000 remained outstanding. In accordance with ASC 470-20, “Debt with Conversion and Other Options,” the Company determined that the non-mandatory conversion feature represents a beneficial conversion feature that should be recorded as equity based on intrinsic value. The offset will be recorded as a discount and netted against the payable during the fourth quarter of 2013 (See Note 12).
| 12 |
Note 7 – Stock Options
Stock option activity for the nine months ended September 30, 2013, is summarized as follows:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||||||
| Options outstanding at December 31, 2012 | 2,750,000 | $ | 0.78 | 10.00 | $ | — | ||||||||||
| Granted | — | — | — | — | ||||||||||||
| Expired/forfeited | — | — | — | — | ||||||||||||
| Options outstanding at September 30, 2013 | 2,750,000 | $ | 0.78 | 10.00 | $ | — | ||||||||||
Total stock option compensation for the nine months ended September 30, 2013 and 2012 was $121,237 and $364,907, respectively. There is no unrecognized stock compensation expense at September 30, 2013.
Note 8 – Notes Payable to Related Parties
In the fourth quarter of 2012, in an effort to raise capital, the Company entered into various Secured Promissory Note agreements with accredited investors, who are also existing stockholders of the Company. As of June 30, 2013, $400,000 was raised, of which $75,000 was raised in the first quarter 2013. Upon closing, the Company issued to the investors three-year warrants for the purchase of 400,000 shares (in the aggregate) of the Company’s common stock at a price of $.41 per share. On December 1, 2013, the Company will issue additional three-year warrants for 400,000 shares to the investors at an exercise price equal to the average price of the common stock during the 10 trading days prior to December 1, 2013.
The promissory notes bear interest at the rate of 10% per annum based on a 365-day year. Accrued interest will be paid semi-annually on June 30, 2013, December 31, 2013, June 30, 2014, and December 31, 2014. The entire principal balance of the Note, together with all unpaid interest accrued thereon, shall be due and payable on December 31, 2014. In the event the Company defaults on interest and/or principal payments, the Company will use all accounts receivable obtained now or hereafter existing, pursuant to the License Agreement from VDF FutureCeuticals Inc. (the “Licensee”), as collateral. Accrued interest of $10,082 through September 30, 2013 is included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.
The Company analyzed the terms of the warrants based on the provisions of ASC 480, “Distinguishing Liabilities from Equity,” and determined that the warrants issued in conjunction with the closing of the notes payable qualified for equity accounting. The warrants that will be issued on December 1, 2013 have been determined to qualify as a derivative liability (see Note 9).
Under guidance in ASC 470, the Company allocated the $400,000 in proceeds proportionately between the Secured Promissory Note and the common stock warrants issued to the note holders based on their relative fair values. The relative fair value of the common stock warrants of $176,000, of which $88,000 ($16,500 in Q1 2013) was recorded as additional paid in capital and $88,000 ($16,500 in Q1 2013) was recorded as a derivative liability. The Secured Promissory Note was recorded at the principal amount of $400,000 less a discount of $176,000. This discount is being amortized to interest expense over the term of the Secured Promissory Note to related parties using the effective interest method. The fair value of the common stock warrants issued in conjunction with the Secured Promissory Notes was determined using the Black-Scholes pricing model. The Company determined the fair value of its common stock warrants to be $0.22 per warrant issued with an exercise price of $0.41 per warrant.
Upon payment in full of the notes, a $25,000 fee will be paid by the Company to its placement agent, Martinez-Ayme Securities, Inc. As of September 30, 2013, $20,000 has been accrued and is included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.
| 13 |
Note 9 – Derivative liabilities
The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has entered into certain other financial instruments and contracts, such as debt financing arrangements with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. These instruments are required to be carried as derivative liabilities, at fair value.
The following table discloses the fair value of the Company’s derivative liabilities as of September 30, 2013 and December 31, 2012. The Company held no asset derivatives at either reporting date.
| Liability Derivatives | ||||||||||||
| September 30, 2013 | December 31, 2012 | |||||||||||
| Balance Sheet | Fair | Balance Sheet | Fair | |||||||||
| Location | Value | Location | Value | |||||||||
| Derivatives not designated as hedging instruments | ||||||||||||
| Secured Promissory Notes Warrants | Derivative Liabilities | $ | 80,000 | Derivative Liabilities | $ | 68,250 | ||||||
The following table summarizes liabilities measured at fair value on a recurring basis for the periods presented:
| September 30, 2013 | December 31, 2012 | |||||||||||||||||||||||||||||||
| Fair Value Measurements Using: | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Derivative Liabilities | $ | — | $ | 80,000 | $ | — | $ | 80,000 | $ | — | $ | 68,250 | $ | — | $ | 68,250 | ||||||||||||||||
Note 10 – Commitments and Contingencies
On September 29, 2011, the Company entered into a license agreement (the “License Agreement”) with Newton Investments BV. Pursuant to the License Agreement, Newton will, for a period of 10 years, hold the exclusive manufacturing and distribution rights for the Systems in the 27 countries which are currently members of the European Union, subject to Newton’s achieving minimum sales of at least 100 Systems per year beginning in the second year of the License Agreement, payment of a royalty equal to 20% of the gross sales price of each System sold, and other terms and conditions set forth in the License Agreement. Due to ongoing technical problems with the Company’s Systems, the Company has deferred commencement of the minimum sales requirement until the problems are resolved.
On October 25, 2012, the Company entered into a consulting agreement with Hank Leibowitz, the principal of Waste Heat Solutions, LLC, an expert with 40 years’ experience in the field of advanced energy systems. Pursuant to this consulting agreement, which is terminable by either party on 30 days’ notice, the Company pays Waste Heat Solutions, $5,000 per month through February 2013 and $7,500 per month thereafter. In connection with this consulting agreement, the Company issued to Waste Heat Solutions (i) a fully vested 10-year option to purchase 500,000 shares of common stock at $.56 per share and (ii) a 10-year option, vesting six months from the contract date, i.e., on April 25, 2013, to purchase an additional 500,000 shares at $.56 per share. The fair value of the fully vested option was approximately $182,000 and was recorded as research and development in the consolidated statements of operations during 2012. The fair value of the option vesting six months from the contract date was approximately $182,000 of which approximately $61,000 was recorded during the fourth quarter of 2012, $91,000 was recorded during the first quarter of 2013 and the remaining $30,000 was recognized in the second quarter of 2013. All amounts were recorded in research and development expense in the accompanying condensed consolidated statements of operations.
This consulting agreement contains standard confidentiality provisions, as well as standard non-competition and non-soliciting provisions which survive for two years following termination of the consultancy.
| 14 |
On May 19, 2013, the Company entered into a Promissory Note with Edward Gomez for $30,000. The promissory note bears interest at the rate of 10% per annum based on a 365-day year. The entire principal balance, along with the accrued interest shall be paid by May 19, 2014.
Note 11 – Related Party Transactions
See Notes 6 and 8 for discussion of transactions with the Company’s Co-Founders, George Konrad and Fred Barker.
Since January 1, 2012, the Company has been using a 5,000 square foot Scottsdale, Arizona, facility owned by Bryce Johnson, the principal Cornerstone seller, who became an officer and director of the Company in connection with the Cornerstone Acquisition. The Company used the facility free of charge for two months. From March 2012 to June 2013, the Company paid Mr. Johnson $700 per month to cover overhead costs for use of the facility. Since July 2013, the Company has been using the facility free of charge with Mr. Johnson’s consent. Mr. Johnson resigned as an officer and director of the Company in March 2013; however, the Company has continued to use his facility and expects to continue doing so free of charge for at least the next year.
In the fourth quarter of 2013, the Company raised gross proceeds of $25,000 through the private placement of 100,000 unregistered shares of common stock to an accredited investor at $.25 per share. No commissions are payable in connection with this offering.
In October 2013, the Company and its Co-Founder George Konrad entered into an extension agreement whereby the due date of the $95,000 convertible debt owed to him was extended so that $50,000 is payable in November 2013 and $50,000 is payable in December 2013, in exchange for an increase in the amount due to $100,000. See Note 6.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward Looking Statements
Readers are cautioned that the statements in this Report that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are based on the beliefs of our management, as well as on assumptions made by and information currently available to us as of the date of this Report. When used in this Report, the words “plan,” “will,” “may,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project” and similar expressions are intended to identify such forward-looking statements. Although we believe these statements are reasonable, actual actions, operations and results could differ materially from those indicated by such forward-looking statements as a result of the risk factors included in our 2012 Annual Report, or other factors. We must caution, however, that this list of factors may not be exhaustive and that these or other factors, many of which are outside of our control, could have a material adverse effect on us and our ability to achieve our objectives. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above.
The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.
Critical Accounting Policies
The condensed consolidated financial statements of PowerVerde, Inc. are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these condensed consolidated financial statements requires our management to make estimates and assumptions about future events that effect the amounts reported in the financial statements and related notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. We believe the following critical accounting policies affect its more significant judgments and estimates used in the preparation of financial statements.
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Accounting for Uncertainty in Income Taxes
The Company follows the provisions of ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our condensed consolidated financial statements. Our evaluation was performed for the tax years ended December 31, 2010, 2011 and 2012, the tax years which remain subject to examination by major tax jurisdictions as of September 30, 2013.
We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the condensed consolidated financial statements as general and administrative expense.
Revenue Recognition
Sales revenues and associated cost of sales are recognized when title of the goods sold pass to the buyer, when shipped, and when accounts receivable are determined to be reasonably collectable. Certain sales agreements also require installation and training by PowerVerde once goods are received and accepted by the customer. The Company does not consider these agreements multiple elements arrangements as defined by ASC 605-25 Revenue Recognition, as the Company does not offer installation or training as services separate from the sale of its products, at this time, and therefore a “best estimate of selling price” or individual pricing in accordance with ASC 605-25 is undeterminable. The Company defers all revenues and costs of sales until the agreement is 100% complete.
Licensing and royalty revenue from royalty agreements is recognized in accordance with the terms of the specific agreement.
Common Stock Purchase Warrants
The Company accounts for common stock purchase warrants in accordance with ASC Topic 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815-40”). Based on the provisions of ASC 815-40, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement, or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
Intellectual Property and Goodwill
The Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses an estimate of the undiscounted cash flows over the remaining life of its long-lived assets, or related group of assets where applicable, in measuring whether the assets to be held and used will be realizable. In the event of impairment, the Company would discount the future cash flows using its then estimated incremental borrowing rate to estimate the amount of the impairment.
Goodwill is evaluated for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment analysis involves a two step process. Step one involves the comparison of the fair value of the reporting unit to which goodwill relates (the Company’s enterprise value) to the carrying value of the reporting unit. If the fair value exceeds the carrying value, there is no impairment. If the carrying value exceeds the fair value of the reporting unit, the Company determines the implied fair value of goodwill and records an impairment charge for any excess of the carrying value of goodwill over its implied fair value.
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For those reporting units with zero or negative carrying amounts, an entity must evaluate whether it is more likely than not that a goodwill impairment exists, regardless of the mathematical results of the Step 1 test. In making that determination, the entity should consider whether there are any adverse qualitative factors that could impact the amount of goodwill.
Stock-based compensation.
We account for stock-based compensation based on ASC Topic 718-Stock Compensation which requires expensing of stock options and other share-based payments based on the fair value of each stock option awarded. The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation model. This model requires management to estimate the expected volatility, expected dividends, and expected term as inputs to the valuation model.
Derivative instruments—Fair value of financial assets and liabilities.
We measure the fair value of financial assets and liabilities in accordance with GAAP, which defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements.
GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. GAAP describes three levels of inputs that may be used to measure fair value:
Level 1 – quoted prices in active markets for identical assets or liabilities.
Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable.
Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions).
We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we and our consolidated subsidiaries have entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding common stock purchase warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. These instruments are required to be carried as derivative liabilities, at fair value.
We estimate fair values of all derivative instruments, such as free-standing common stock purchase warrants, and embedded conversion features utilizing Level 2 inputs. We use the Black-Scholes option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective inputs that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in our trading market price and the trading market price of various peer companies, which have historically had high volatility. Since derivative financial instruments are initially and subsequently carried at fair value, our income will reflect the volatility in these estimate and assumption changes.
We report our derivative liabilities at fair value on the accompanying condensed consolidated balance sheets as of September 30, 2013.
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Overview
From January 1991 until October 2005, the Company devoted substantially all of its efforts and resources to research and development related to its unsuccessful Biotech Business, in particular the study of biological oxidation and antioxidation directed to the development of potential therapeutic products for the treatment of various diseases and conditions. In the most recent years, the Company’s research focused mainly on targeted antioxidant therapeutics and nutraceuticals. The Company is a development stage company, has generated only limited revenue from product sales and has relied primarily on equity financing, licensing revenues, and various debt instruments for its working capital. The Company has been unprofitable since its inception.
Following the cessation of material Biotech Business operations in October 2005, the Company turned its primary focus to seeking an appropriate merger partner for its public shell. This resulted in the February 2008 merger with Vyrex (the “Merger”). In March 2009, we assigned all of our Biotech IP rights other than pre-Merger licensing contracts to an investor in exchange for his agreement to pay all future expenses relating to the Biotech IP and to pay us 20% of any net proceeds received from sale and/or licensing of the Biotech IP in new transactions. We do not expect this post-Merger arrangement to generate material revenues; however, since 2011 we have generated material Biotech IP licensing fees based on pre-Merger contracts.
Since the Merger, we have focused on the development, testing and commercialization of our electric power systems, in particular, their applicability to thermal and natural gas pipeline operations. Our business is subject to significant risks, including the risks inherent in our research and development efforts, uncertainties associated with obtaining and enforcing patents and intense competition.
Except as specifically noted to the contrary, the following discussion relates only to PowerVerde since, as a result of the Merger, the only historical financial statements presented for the Company in periods following the Merger are those of the operating entity, PowerVerde.
Results of Operations
Three Months Ended September 30, 2013, as Compared to Three Months Ended September 30, 2012
Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We had no revenues from our current business in the third quarter of 2013. In the 2013 and 2012 third quarters, our revenues of $128,614 and $33,649, respectively, came solely from Biotech IP licensing fees. This 382% increase in licensing fees was due to substantially increased sales of the licensed products. In both years, we had substantial expenses due to our ongoing research and development activities and efforts to commercialize our systems, as well as substantial administrative expenses associated with our status as a public company. Our research and development expenses decreased by $57,110 (45.8%) in the third quarter of 2013 as compared to 2012, due primarily to the decrease in engineering services from third party vendors. Our general and administrative expenses decreased by $173,250 (61.7%) in the third quarter of 2013 as compared to 2012, due primarily to the decrease in compensation to employees, both salaries and stock compensation. Our net loss was $119,972 in the third quarter of 2013, a 68.0% decrease from the net loss of $375,418 in the third quarter of 2012. The substantial decrease in our net loss in the third quarter of 2013 was due to our reduced expenses in both general and administrative expenses and research and development expenses in 2013 and our vigorous cost control efforts, as well as a substantial increase in our Biotech IP revenues. Substantial net losses will continue until we are able to successfully commercialize and market our systems, as to which there can be no assurance.
Nine Months Ended September 30, 2013, as Compared to Nine Months Ended September 30, 2012
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Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We had no revenues from our current business in the first nine months of 2013. In the first nine months of 2013 and 2012, our revenues of $309,517 and $78,006, respectively, came solely from Biotech IP licensing fees. This 397% increase in licensing fees was due to substantially increased sales of the licensed products. In both years, we had substantial expenses due to our ongoing research and development activities and efforts to commercialize our systems, as well as substantial administrative expenses associated with our status as a public company. Our research and development expenses decreased by $615,836 (61.8%) in the first nine months of 2013 as compared to 2012, and our general and administrative expenses decreased by $23,418 (3.0%) in the same period. The decrease in research and development expenses was due primarily to the decrease in billings for materials and services from Arizona Research and Development (“ARD”) and the decrease in expenses resulting from warrants issued for services. Our net loss was $892,145 in the first nine months of 2013, a 47.6% decrease from the net loss of $1,703,381 in the first nine months of 2012. The decrease in our net loss in the first nine months of 2013 was due to the substantial decrease in research and development expenses and our vigorous cost control efforts, as well as a substantial increase in our Biotech IP revenues. Substantial net losses will continue until we are able to successfully commercialize and market our systems, as to which there can be no assurance.
Liquidity and Capital Resources
We have financed our operations since inception through the sale of debt and equity securities and receipt of Biotech IP licensing fees. As of September 30, 2013, we had a working capital deficit of $18,834 compared to a working capital deficit of $72,721 at December 31, 2012.
In the first quarter of 2013, we raised gross proceeds of $75,000 through the private placement of secured promissory notes to existing stockholders. See Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements.
In the second and third quarters of 2013, we raised gross proceeds of $275,000 through private placement of 1,100,000 unregistered shares of common stock to accredited investors at $.25 per share. No commissions were payable in connection with this offering.
In the fourth quarter of 2013, we have raised gross proceeds of $25,000 through private placement of 100,000 unregistered shares of common stock to an accredited investor at $.25 per share. No commissions were payable in connection with this offering.
We expect Biotech IP revenues for the fourth quarter of 2013 to substantially exceed the fourth quarter 2012 level, and we expect Biotech IP revenues for 2014 to be comparable to the revenues for 2013; however, there can be no assurance that these revenue levels will be achieved.
We continue to seek funding from private debt and equity investors, as we need to promptly raise substantial additional capital in order to finance our plan of operations. There can be no assurance that we will be able to promptly raise the necessary funds on commercially acceptable terms if at all. If we do not raise the necessary funds, we may be forced to cease operations.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
Not applicable.
| Item 4. | Controls and Procedures. |
Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and President, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of financial statements.
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All internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding of controls. Therefore, even effective internal control over financial reporting can provide only reasonable, and not absolute, assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal controls over financial reporting may vary over time. Because of its inherent limitations, internal controls over financial reporting may also fail to prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Our chief executive officer and chief financial officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In connection with this assessment, we identified the following material weaknesses in internal control over financial reporting as of December 31, 2012. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—An Integrated Framework (September 1992). Because of the material weaknesses described below, management concluded that, as of December 31, 2012, our internal control over financial reporting was not effective.
We did not maintain an effective control environment. The control environment, which is the responsibility of senior management, sets the tone of the organization, influences the control consciousness of its people, and is the foundation for all other components of internal control over financial reporting. Each of the following control environment material weaknesses also contributed to the material weaknesses discussed below. Our control environment was ineffective because of the following material weaknesses:
(a) Monitoring of internal control over financial reporting—we did not maintain effective monitoring controls to determine the adequacy of our internal control over financial reporting and related policies and procedures because of the following material weakness:
(i) Our policies and procedures with respect to the review, supervision and monitoring of our accounting operations throughout the organization were either not designed, in place or operating effectively.
No Attestation Report
This quarterly report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this quarterly report.
Changes in Internal Control Over Financial Reporting
There were no significant changes in internal control over financial reporting during the nine months ended September 30, 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as set forth above regarding the material weaknesses discovered which continued in the third quarter.
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| Item 1. | Legal Proceedings. |
None.
| Item 1A. | Risk Factors. |
There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the 2012 Annual Report. Please refer to that section for disclosure regarding the risks and uncertainties related to our business.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
All of our sales of unregistered securities since inception have been made pursuant to private offerings to accredited investors. Our sales of unregistered securities in the nine months ended September 30, 2013 were made pursuant to an exemption from registration requirements under Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended. Net proceeds were used for working capital.
In the first quarter of 2013, we raised gross proceeds of $75,000 through the private placement of secured promissory notes to existing stockholders. See Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements.
In the second quarter of 2013, the Company raised gross proceeds of $125,000 through private placement of 500,000 unregistered shares of common stock to accredited investors at $.25 per share. No commissions were payable in connection with this offering.
In the third quarter of 2013, the Company raised gross proceeds of $150,000 through private placement of 600,000 unregistered shares of common stock to accredited investors at $.25 per share. No commissions were payable in connection with this offering.
In the fourth quarter of 2013, the Company raised gross proceeds of $25,000 through private placement of 100,000 unregistered shares of common stock to an accredited investor at $.25 per share. No commissions were payable in connection with this offering.
| Item 3. | Defaults Upon Senior Securities. |
None.
| Item 4. | Mine Safety Disclosures. |
Not applicable.
| Item 5. | Other Information. |
Not applicable.
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| Item 6. | Exhibits. |
| (a) | Exhibits |
| 31.1 | Certification of Principal Executive Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | XBRL INSTANCE DOCUMENT |
| 101.SCH | XBRL TAXONOMY EXTENSION SCHEMA |
| 101.CAL | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE |
| 101.DEF | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE |
| 101.LAB | XBRL TAXONOMY EXTENSION LABEL LINKBASE |
| 101.PRE | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
| 22 |
In accordance with Section 13(a) or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| POWERVERDE, INC. | |||
| Dated: November 8, 2013 | By: | /s/ Richard H. Davis | |
| Richard H. Davis | |||
| Chief Executive Officer | |||
| Dated: November 8, 2013 | By: | /s/ John L. Hofmann | |
| John L. Hofmann | |||
| Chief Financial Officer | |||
| 23 |
Exhibit Index
Exhibit |
Description | ||
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| 101.INS | XBRL INSTANCE DOCUMENT | ||
| 101.SCH | XBRL TAXONOMY EXTENSION SCHEMA | ||
| 101.CAL | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE | ||
| 101.DEF | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE | ||
| 101.LAB | XBRL TAXONOMY EXTENSION LABEL LINKBASE | ||
| 101.PRE | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | ||
| 24 |