UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

 

Form 10-Q

 

 

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

 

For the Quarterly Period ended September 30, 2015

 

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

 

Commission file number: 000-27866

 

 

POWERVERDE, INC.

(Exact name of Registrant as specified in its charter)

 

 

Delaware		88-0271109
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

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.    ☒  Yes    ☐  No

 

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

 

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

 

	☐	Large accelerated filer	☐	Accelerated filer
	☐	Non-accelerated filer	☒	Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐  Yes    ☒  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 10, 2015 the issuer had 31,750,106 shares of common stock outstanding.

 

 

Index to Form 10-Q

 

		Page
PART I	FINANCIAL INFORMATION	1
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets at September 30, 2015 (Unaudited)   and December 31, 2014	1
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014 (Unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (Unaudited)	3
	Notes to Unaudited Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	12
Item 4.	Controls and Procedures	12
PART II	OTHER INFORMATION	13
Item 1.	Legal Proceedings	13
Item 1A.	Risk Factors	13
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 3.	Defaults upon Senior Securities	13
Item 4.	Mine Safety Disclosures	13
Item 5.	Other Information	13
Item 6.	Exhibits	13
SIGNATURES		14

 

 

PART I FINANCIAL INFORMATION

 

Item 1.     Condensed Consolidated Financial Statements

 

PowerVerde, Inc. and Subsidiary

Condensed Consolidated Balance Sheets
September 30, 2015 (Unaudited) and December 31, 2014

 

		2015				2014
Assets
Current Assets:
Cash and cash equivalents		$	13,385			$	4,736
Accounts receivable			122,107				189,220
Employee advances			—				12,292
Prepaid expenses			15,564				14,238
Note receivable, related party			38,000				—
Interest receivable, related party			4,288				—
Total Current Assets			193,344				220,486
Property and Equipment
Property and equipment, net of accumulated depreciation of $66,909 and $55,258, respectively			40,732				52,383
Other Assets
Intellectual Property, net of accumulated amortization of $662,486 and $604,487			29,788				54,953
Total Assets		$	263,864			$	327,822
Liabilities and Stockholders' (Deficiency)
Current Liabilities
Accounts payable and accrued expenses		$	91,426			$	100,006
Payable to related parties			28,000				41,900
Note payable to related party			25,000				—
Note payable			58,436				—
Total Current Liabilities			202,862				141,906
Long-Term Liabilities
Notes payable to related parties			383,869				374,235
Total Long-Term Liabilities			383,869				374,235
Total Liabilities			586,731				516,141
Stockholders' Deficiency
Preferred Stock:
50,000,000 preferred shares authorized, 0 preferred shares issued at September 30, 2015 and December 31, 2014
Common stock:
200,000,000 common shares authorized, par value $0.0001 per share, 31,750,106 common shares issued and outstanding at September 30, 2015 and December 31, 2014			3,981				3,981
Additional paid-in capital			11,533,516				11,531,516
Treasury stock, 8,550,000 shares at cost			(491,139	)			(491,139	)
Accumulated deficit			(11,369,225	)			(11,232,677	)
Total Stockholders' Deficiency			(322,867	)			(188,319	)
Total Liabilities and Stockholders' Deficiency		$	263,864			$	327,822

 

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

 

 

PowerVerde, Inc. and Subsidiary

Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 2015 and 2014
(Unaudited)

 

		Three months ended September 30,								Nine months ended September 30,
		2015				2014				2015				2014
Royalty revenue		$	122,107			$	73,398			$	309,703			$	239,527
Operating Expenses
Research and development			51,847				45,778				192,827				308,374
General and administrative			52,895				137,848				212,565				393,170
Total Operating Expenses			104,742				183,626				405,392				701,544
Income (Loss) from Operations			17,365				(110,228	)			(95,689	)			(462,017	)
Other Income (Expenses)
Interest income			570				—				570				—
Interest expense			(13,718	)			(32,825	)			(41,429	)			(96,381	)
Total Other Income (Expense)			(13,148	)			(32,825	)			(40,859	)			(96,381	)
Income (Loss) before Income Taxes			4,217				(143,053	)			(136,548	)			(558,398	)
Provision for Income Taxes			—				—				—				—
Net Income (Loss)		$	4,217			$	(143,053	)		$	(136,548	)		$	(558,398	)
Net Loss per Share - Basic and Diluted		$	—			$	(0.004	)		$	(0.004	)		$	(0.018	)
Weighted Average Common Shares Outstanding - Basic and Diluted			31,750,106				31,674,454				31,750,106				30,417,102

 

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

 

 

PowerVerde, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2015 and 2014
(Unaudited)

 

		2015				2014
Cash Flows from Operating Activities
Net loss		$	(136,548	)		$	(558,398	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			69,650				176,037
Amortization of discount			9,634				64,221
Stock based compensation			2,000				—
Changes in operating assets and liabilities:
Accounts receivable and prepaid expenses			65,787				(42,416	)
Employee advances			12,292				1,000
Interest receivable, related party			(570	)
Accounts payable and accrued expenses			(8,580	)			96,655
Payable to related parties			(13,900	)			(20,565	)
Cash Used in Operating Activities			(235	)			(283,466	)
Cash Flows From Investing Activities
Purchase of property and equipment			—				(13,591	)
Purchase of intellectual property			16,116				—
Cash Used in Investing Activities			(16,116	)			(13,591	)
Cash Flows from Financing Activities
Proceeds from note payable, related party			25,000				—
Proceeds from issuance of common stock			—				415,000
Payment of note payable to related parties			—				(100,000	)
Payment of stock issuance costs			—				(7,500	)
Cash Provided by Financing Activities			25,000				307,500
Net Increase in Cash and Cash Equivalents			8,649				10,443
Cash and Cash Equivalents at Beginning of Period			4,736				48,306
Cash and Cash Equivalents at End of Period		$	13,385			$	58,749
Supplemental Disclosure of Cash Flow Information
Cash Paid for Interest		$	19,835			$	19,836
Cash Paid for Income Taxes		$	—			$	—
Supplemental Disclosure of Non-Cash Activities
Note Receivable in connection with IP acquisition		$	38,000			$	—
Note Payable in connection with IP acquisition		$	58,436			$	—
Interest Receivable in connection with IP acquisition		$	3,718			$	—

  

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

 

 

PowerVerde, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2015

 

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, 2014. The results of operations for the three and nine months ended September 30, 2015, 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.

 

The Company continues to seek funding from private debt and equity investors, as it needs to promptly raise substantial additional capital above and beyond expected licensing revenue in order to finance its plan of operations. There can be no assurance that the Company will be able to promptly raise the necessary funds on commercially acceptable terms if at all. If it does not raise the necessary funds, it may be forced to cease operations.

 

Note 3 – Summary of Significant Accounting Policies

 

Nature of Business

 

The Company is devoting substantially all of its present efforts to establish a new business involving the development and commercialization of clean energy electric power generation systems, and none of its planned principal operations have commenced. However, royalties from licenses unrelated to planned principal operations continue to be recognized as revenue.

 

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 royalties in connection with the license agreement with VDF FutureCeuticals, Inc. The Company monitors accounts receivable and provides allowances when considered necessary. At September 30, 2015, accounts receivable were considered to be fully collectible. Accordingly, no allowance for doubtful accounts was provided.

 

 

Employee Advances

 

The employee advances at December 31, 2014 represent the payroll taxes due on the issuance of common stock as compensation prior to 2014. As of September 30, 2015, all payroll taxes have been repaid by the employee.

 

Revenue Recognition

 

Licensing and royalty revenue from royalty agreements unrelated to the Company’s planned operations is recognized in accordance with the terms of the specific agreement. Revenues recognized under these agreements amount to 100% of total revenues for the three and nine months ended September 30, 2015 and 2014.

 

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.

 

Impairment of Long-Lived Assets

 

Impairment losses are recorded on long-lived assets (property, equipment and intellectual property) used in operations when impairment indicators are present and the undiscounted expected cash flows estimated to be generated by those assets are less than the carrying value of such assets. No impairment losses have been recognized during the nine months ended September 30, 2015 or 2014.

 

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). All outstanding warrants as of December 31, 2014 and September 30, 2015 were classified as equity.

 

 

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”. 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 4,705,000 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 from warrants issued as loan financing costs. The fair value of such notes is significantly similar to the face value of the notes ($400,000).

 

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

 

Refer to the consolidated financial statements and footnotes thereto included in the PowerVerde, Inc. Annual Report on Form 10-K for the year ended December 31, 2014 for recent accounting pronouncements. Other pronouncements have been issued but the Company does not believe that their adoption will have a significant impact on the financial position or results of operations.

 

On June 10, 2014, the FASB issued Accounting Standards Update No. 2014-10 (ASU 2014-10), which eliminates development stage reporting requirements under ASC 915, as well as amends provisions of existing variable interest entity guidance under ASC 810. Additionally, the ASU indicates that the lack of commencement of principal operations represents a risk and uncertainty and, accordingly, is subject to the disclosure requirements of ASC 275. As a result of the changes, existing development stage entity presentation and disclosure requirements are eliminated. We have adopted ASU 2014-10 on our condensed consolidated financial statements effective January 1, 2015.

 

Note 5 – Intellectual Property

 

Intellectual Property partially consists of technology acquired from the purchase of 100% of the membership interests of Cornerstone Conservation Group LLC (“Cornerstone”) in March 30, 2012 for $659,440. Accumulated amortization with respect to this intellectual property was $659,440 at September 30, 2015.

 

 

On June 30, 2015, the Company entered into an Assignment Agreement with VyrexIP Holdings Inc., a company owned by Company shareholder Edward Gomez for the purchase of intellectual property. The net price of these assets was comprised of a down payment of $16,116 and a $58,436 promissory note to the seller due July 15, 2016, partially offset by assignment by the seller to the Company of a $38,000 promissory note due November 14, 2015, issued by the seller’s licensee Epalex Corporation, a company of which Mr. Gomez is chairman and a major stockholder.

 

For each of the nine months ended September 30, 2015 and 2014, amortization expense was $58,000 and $164,900 and accumulated amortization of the intangible asset- intellectual property was $662,486 at September 30, 2015.

 

Future amortization of the intangible asset – intellectual property was as follows as of September 30, 2015:

 

Year ending December 31:
2015				$	3,046
2016					12,184
2017					12,184
2018					2,374
Total				$	29,788

 

Note Payable at September 30, 2015 consists of $58,436 promissory note to VyrexIP Holdings Inc. for the purchase of intellectual property. The Company has agreed to pay principal plus accrued interest over 10 monthly payments of $6,080.64, each due on the 15th day of each month, beginning October 15th, 2015.

 

Note 6 – Stockholders’ Deficiency

 

Warrants

 

Expenses related to warrants issued in conjunction with settlement of certain disputes are included in the condensed consolidated statement of operations.

 

A summary of warrants issued, exercised and expired during the nine months ended September 30, 2015 is as follows:

 

				Shares				Weighted Average Exercise Price				Aggregate Intrinsic Value
Balance at December 31, 2014					5,586,000			$	.99			$	45,000
Issued					25,000				.12				—
Expired					(906,000	)			(1.90	)			—
Balance at September 30, 2015					4,705,000			$	.81			$	45,000

The warrant for the purchase of 25,000 shares of common stock was issued to a stockholder as additional consideration for a $25,000 loan. See note 8. The fair market value of the warrant was determined to be $0.08 per share, or $2,000.

 

 

Note 7 – Stock Options

 

Stock option activity for the nine months ended September 30, 2015, is summarized as follows:

 

				Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (Years)
Options outstanding at December 31, 2014					2,750,000			$	0.78				9.00
Grant					—				—				—
Expired/forfeited					—				—				—
Options outstanding at September 30, 2015					2,750,000			$	0.78				7.00

 

Total stock option compensation for the nine months ended September 30, 2015 and 2014 was $0. There is no unrecognized compensation expense associated with the options.

 

Note 8 – Notes Payable to Related Parties

 

Notes payable to related parties at September 30, 2015 consist of notes payable to stockholders of $400,000 (issued in 2012), less unamortized discount of $16,131 related to common stock warrants that had been issued to the stockholders with the notes. The discount is being amortized over the extended term of the notes, which are due in one principal payment on December 31, 2016. Interest is payable semiannually at 10%. The note is collaterized by all receivables now or hereafter existing pursuant to the license agreement with VDF FutureCeuticals, Inc. discussed in Notes 3 and 9.

 

The note payable to related party at September 30, 2015 consists of a promissory note to a stockholder for $25,000. The principal balance and interest at 10% is due March 30, 2016.

 

Payable to related party at September 30, 2015 consists primarily of a $20,000 unsecured note payable to Company shareholder Edward Gomez bearing interest at 10%. On June 11, 2015, the lender extended the maturity date on the balance of the note to July 31, 2016.

 

Note 9 – Commitments and Contingencies

 

On June 25, 2015, Company consultant Hank Leibowitz assigned to the Company a patent he obtained for a system and method for using high temperature sources in Rankine cycle power systems. The Company has agreed to pay Mr. Leibowitz a 2% royalty for any and all revenues of products and/or project sales by the Company based on the subject patent.

 

The Company’s license agreement with VDF FutureCeuticals, Inc., which has generated all of the Company’s revenues since 2012, will terminate in March 2018, when the underlying patents expire.

 

Note 10 – Related Party Transactions

 

Since July 2010, the accounting firm J.L. Hofmann & Associates, P.A. (“JLHPA”), whose principal is our CFO John L. Hofmann, has provided financial consulting and accounting services to the Company. The Company paid $9,335 and $30,695 to JLHPA for its services in the three and nine months ended September 30, 2015, respectively.

 

Note 11 – Subsequent Events

 

Subsequent to September 30, 2015, the Board of Directors agreed to extend all outstanding management stock options and warrants (covering 3,500,000 shares) to a common expiration date of October 26, 2022, and adjust the exercise prices to $0.15. The net effect of the change in the value of the repriced options and warrants was an increase in stock based compensation expense of $208,000, reflected in the fourth quarter financials.

 

 

The Company also issued new stock options with an exercise price of $0.15 and an expiration date of October 26, 2022, to Richard Davis for 800,000; Hank Leibowitz for 500,000; John Hofmann for 500,000; and Mark Prinz for 200,000. The fair market value of these options was determined to be $0.09 per option, or $180,000, which reflects an increase in stock based compensation expense of $180,000, reflected in the fourth quarter financials.

 

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 2014 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 affect the amounts reported in the financial statements and related notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. We believe the following critical accounting policies affect its more significant judgments and estimates used in the preparation of financial statements.

 

Accounting for Uncertainty in Income Taxes

 

The Company 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, 2011, 2012, 2013 and 2014, the tax years which remain subject to examination by major tax jurisdictions as of September 30, 2015.

 

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

 

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

 

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.

 

Stock-based compensation.

 

The Company accounts 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.

 

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 our Biotech IP to an investor in exchange for his agreement to pay all future expenses relating to the Biotech IP and to pay us 20% of any net proceeds received from new contracts for sale and/or licensing of the Biotech IP. We retained the rights to all revenue from pre-Merger Biotech IP licensing contracts.

 

 

In June 2015, we reacquired the Biotech IP from the investor for a net price of $36,552, consisting of a cash down payment of $16,116 and a $58,436 note to the investor due July 15, 2016, partially offset by an assignment by the investor to the Company of a $38,000 promissory note and accrued interest of $3,718, due November 14, 2015, issued by a post-Merger licensee of the Biotech IP. While the Company believes that it will be able to generate significant new revenue from the Biotech IP as a result of the June 2015 transaction, there can be no assurance that any such revenue will be generated. See Note 5 of Notes to Unaudited Condensed Consolidated Financial Statements.

 

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, 2015 as Compared to Three Months Ended September 30, 2014

 

Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We had no revenues from sales in the third quarter of 2015 and 2014 – but we recorded $122,107 and $73,398 in Biotech IP licensing fees (based on pre-Merger contracts), respectively. 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 increased by $6,069 (13.3%) in the third quarter of 2015 as compared to 2014. Our general and administrative expenses decreased by $84,953 (61.6%) in the third quarter of 2015 as compared to 2014, due mainly to decreased expenses in 2015 for amortization. Our net income was $4,217 in the third quarter of 2015, compared to a net loss of $143,053 in the third quarter of 2014. We expect 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, 2015 as Compared to Nine Months Ended September 30, 2014

 

Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We had no revenues from sales in the first nine months of 2015 and 2014 – but we recorded $309,703 and $239,527 in Biotech IP licensing fees (based on pre-Merger contracts), respectively. 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 $115,547 (37.5%) in the first nine months of 2015 as compared to 2014. This decrease is because we are in the process of testing and are not currently building any new generator systems. Our general and administrative expenses decreased by $180,605 (45.9%) in the first nine months of 2015 as compared to 2014, due mainly to decreased expenses in 2015 for amortization and employee compensation. Our net loss was $136,548 in the first nine months of 2015, a 75.6% decrease from the net loss of $558,398 in the first nine months of 2014. 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 primarily through the sale of debt and equity securities. Also, since 2012 we have received material amounts of Biotech IP licensing fees. As of September 30, 2015, we had a working capital deficit of $9,518 compared to a working capital surplus of $78,580 at December 31, 2014.

 

We expect 2015 Biotech IP revenues to approximate the 2014 levels; however, there can be no assurance that this revenue level 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 effective.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

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

 

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

 

Our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. 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). Based on this evaluation, our management concluded that, as of September 30, 2015, our internal control over financial reporting was effective.

 

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 third quarter of 2015 that 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 are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the 2014 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.

 

None.

 

Item 3.     Defaults Upon Senior Securities.

 

None.

 

Item 4.     Mine Safety Disclosures.

 

Not applicable.

 

Item 5.     Other Information.

 

Not applicable.

 

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

 

 

 

SIGNATURES

 

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

 

	POWERVERDE, INC.
Dated: November 10, 2015	By:	/s/ Richard H. Davis
		Richard H. Davis
		Chief Executive Officer
Dated: November 10, 2015	By:	/s/ John L. Hofmann
		John L. Hofmann
		Chief Financial Officer

 

 

Exhibit Index

 

Exhibit No.		Description
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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