374Water Inc. - Quarter Report: 2009 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

For the Quarterly Period ended September 30, 2009

Commission file number: 000-27866

POWERVERDE, INC.

(Exact name of Registrant as specified in its charter)

21615 N. 2^nd Avenue, Phoenix, Arizona 85027

(Address of principal executive offices)

(623) 780-3321

(Registrant’s telephone number including area code)

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

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

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

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

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of November 13, 2009 the issuer had 27,421,732 shares of common stock outstanding.

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Index to Form 10-Q

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PART I FINANCIAL INFORMATION

PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Balance Sheets

September 30, 2009 and December 31, 2008

(Unaudited)

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

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PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Statements of Operations

For the three and nine months ended September 30, 2009 and 2008, and the

period from March 9, 2007 (Date of Inception) to September 30, 2009

(Unaudited)

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

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PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Consolidated Statement of Changes in Stockholders’ Equity

For the nine months ended September 30, 2009

(Unaudited)

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

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PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2009 and 2008, and the

period from March 9, 2007 (Date of Inception) to September 30, 2009

(Unaudited)

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

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PowerVerde, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2009

Note 1 – Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements are prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company’s Annual Report for the year ended December 31, 2008. The results of operations for the nine months ended September 30, 2009, are not necessarily indicative of the results to be expected for the full year. The 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 – Business Acquisition

On February 11, 2008, Vyrex Corporation (“Vyrex” or the “Company”); PowerVerde, Inc. (“PowerVerde”) and Vyrex Acquisition Corporation (“VAC”), a wholly-owned subsidiary of Vyrex, all Delaware corporations, entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, on February 12, 2008, VAC merged with and into PowerVerde, with PowerVerde remaining as the surviving corporation and a wholly-owned subsidiary of Vyrex (the “Merger”). As consideration for the Merger, as of the closing of the Merger, each issued and outstanding share of common stock of PowerVerde was converted into the right to receive 1.2053301 shares of the common stock of Vyrex and each share of VAC was converted into one share of PowerVerde common stock. As a result of the Merger, the former shareholders of PowerVerde hold 24,588,734 shares, or 95%, of the common stock of Vyrex. Pursuant to the Merger Agreement, PowerVerde paid $230,000 in accounts payable and other liabilities owed by Vyrex. The total purchase price of the transaction of approximately $480,000 includes $60,000 of transaction costs related to the Merger.

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

The following is a summary of the assets and liabilities acquired as of February 12, 2008:

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

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Note 3 – Going Concern

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

Note 4 – Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In September 2009, Accounting Standards Codification (“ASC”) became the source of authoritative U.S. GAAP recognized by the Financial Accounting Standards Board (“FASB”) for nongovernmental entities, except for certain FASB Statements not yet incorporated into ASC. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative U.S. GAAP for registrants. The discussion below includes the applicable ASC reference.

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Note 4 – Recent Accounting Pronouncements (Continued)

Recently Adopted Accounting Pronouncements (Continued)

In April 2009, the Company adopted ASC Topic 820-10-65 Fair Value Measurements and Disclosures (formerly, FASB Staff Position No. SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly). The standard provides additional guidance for estimating fair value in accordance with Topic 820-10-65 when the volume and level of activity for the asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate if a transaction is not orderly. The Company adopted this pronouncement effective April 1, 2009 with no impact on its consolidated financial statements.

The Company adopted, ASC Topic 855-10 Subsequent Events (formerly SFAS 165, Subsequent Events) effective April 1, 2009. This pronouncement changes the general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.

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Note 4 – Recent Accounting Pronouncements (Continued)

Recently Adopted Accounting Pronouncements (Continued)

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, Measuring Liabilities at Fair Value, which clarifies, among other things, that when a quoted price in an active market for the identical liability is not available, an entity must measure fair value using one or more specified techniques. The Company adopted the pronouncement effective July 1, 2009 with no impact on its consolidated financial statements.

The Company adopted ASC Topic 810-10 Consolidation (formerly SFAS No. 160, Non controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51) effective January 2, 2009. Topic 810-10 changes the manner of presentation and related disclosures for the non controlling interest in a subsidiary (formerly referred to as a minority interest) and for the deconsolidation of a subsidiary. The presentation changes are reflected retrospectively in the Company’s unaudited condensed consolidated financial statements.

ASC Topic 815-10 Derivatives and Hedging (formerly SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities) was adopted by the Company effective January 2, 2009. The guidance under Topic 815-10 changes the manner of presentation and related disclosures of the fair values of derivative instruments and their gains and losses.

The Company adopted ASC Topic 825-10 Financial Instruments (formerly, FASB Staff Position No. SFAS 107-1 and APB No. 28-1, Disclosures about the Fair Value of Financial Instruments), which requires quarterly disclosure of information about the fair value of financial instruments within the scope of Topic 825-10. The Company adopted this pronouncement effective April 1, 2009. This disclosure is in included in Note 7 to the condensed consolidated financial statements.

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Note 4 – Recent Accounting Pronouncements (Continued)

Recently Issued Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140 (SFAS 166). SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company will adopt SFAS 166 in fiscal 2010 and is evaluating the impact it will have on the consolidated results of the Company.

In June 2009, the FASB finalized SFAS No. 167, Amending FASB interpretation No. 46(R), which was included in ASC Topic 810. The provisions of ASC 810 amend the definition of the primary beneficiary of a variable interest entity and will require the Company to make an assessment each reporting period of its variable interests. The provisions of this pronouncement are effective January 1, 2010. The Company is evaluating the impact of the statement on its consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, which revises the existing multiple-element revenue arrangements guidance and changes the determination of when the individual deliverables included in a multiple-element revenue arrangement may be treated as separate units of accounting, modifies the manner in which the transaction consideration is allocated across the separately identified deliverables and expands the disclosures required for multiple-element revenue arrangements. The pronouncement is effective for financial statements issued after December 31, 2010. The Company does not expect the pronouncement to have a material effect on its consolidated financial statements.

Financial Instruments and Fair Values

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

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

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

Note 5 – Notes Payable

Series A Promissory Notes

During 2008, the Company completed an offering of $250,000 in principal amount of Series A Promissory Notes (the “Notes”). The Notes were due on July 31, 2009, and interest in the Notes accrued at the rate of 10% per annum. Interest on the Notes was $11,604 and $793, respectively, for the nine months ended September 30, 2009 and 2008.

In consideration of the purchase of the Notes, the investors received three-year warrants to purchase an aggregate of 250,000 shares of the Company’s common stock at an exercise price of $1.50 per share (one warrant share for each $1.00 invested). As of September 30, 2009, none of these warrants has been exercised. These warrants will expire on various dates in May 2011 through July 2011.

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Note 5 – Notes Payable (Continued)

Series A Promissory Notes

The fair value of these warrants of $249,985 was determined using the Black-Scholes option pricing model with the assumptions listed below:

The warrants were recorded at their fair value of $249,985, and a discount in the same amount was recorded against the carrying value of the notes payable. Amortization of the discount in the amount of $117,009 and $0, respectively, was charged to interest expense in the accompanying Condensed Consolidated Statements of Operations for the nine-month period ended September 30, 2009 and 2008.

In July 2009, $168,500 principal amount of the Notes, plus accrued interest thereon of $20,761, was converted into 378,521 shares of common stock, reflecting a conversion price of $.50 per share. The remaining $81,500 principal amount of Notes, together with $8,717 in accrued interest thereon, was paid in cash in August 2009.

Line of Credit Agreement

In November 2008, the Company entered into a Line of Credit Agreement in the amount of $50,000 with its principal executive officer. The agreement expires on November 13, 2009, and bears interest at the rate of 12.25% per annum. The full amount of the line of credit was drawn in the fourth quarter of 2008. On April 3, 2009, the Company paid the line of credit in full, including accrued interest thereon. No further draws have been made on the line of credit.

In consideration of the Line of Credit Agreement, the principal executive officer received a three-year warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $2.30 per share. As of September 30, 2009, this warrant has not been exercised. This warrant will expire on November 13, 2011.

The fair value of these warrants of $49,999 was determined using the Black-Scholes option pricing model with the assumptions listed below:

The warrants were recorded at their fair value of $49,999, and a discount in the same amount was recorded against the carrying value of the notes payable. Amortization of the discount in the amount of $43,471 was charged to interest expense in the accompanying consolidated statements of operations for the nine-month period ended September 30, 2009.

Note 6 – Stockholders’ Equity

Warrants

In connection with the Notes and the Line of Credit Agreement entered into in 2008 and discussed in Note 5, above, the Company issued warrants to purchase 250,000 and 50,000 shares of the Company’s common stock at exercise prices of $1.50 and $2.30 per share, respectively. These warrants are still outstanding as of September 30, 2009. The warrants issued pursuant to the Notes expire on various dates in May 2011 through July 2011, and the warrants issued pursuant to the Line of Credit Agreement expire in November 2011. The fair value of these warrants was determined using the Black-Scholes option pricing model as discussed in Note 5, above.

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A summary of warrants issued, exercised and expired during the three months ended September 30, 2009 is as follows:

Private Placement of Common Stock

During March 2009, the Company raised $250,000 through the private placement of 333,333 shares of the Company’s common stock to accredited investors at $.75 per share. The Company’s cash received from financing activities reflects receipt at March 31, 2009, of $165,000 of the total $250,000 raised, and we received the balance in the second quarter. A 10% commission was paid to the placement agent, Martinez Ayme Securities.

On April 3, 2009, the Company paid in full the line of credit discussed in Note 5, above, to its principal executive officer using proceeds of the private placement. The related warrants have not been exercised.

In the third quarter and early in the fourth quarter of 2009, the Company raised $700,000 through the private placement of 933,333 shares of common stock to accredited investors at $.75 per share. Of these funds, $370,250 was received in the third quarter and $329,750 was received in the fourth quarter. A 10% commission was paid to the placement agent, Martinez Ayme Securities, with respect to $350,000 of the funds invested in the offering. As to $100,000 of the funds, no commission was paid as the investor was procured by the Company’s CEO. As to the remaining $250,000, a 6% finder’s fee was paid to a third party and a 4% commission was paid to Martinez Ayme.

Note 7 – Subsequent Events

In October 2009, the Company issued 75,000 shares of its common stock to Del Mar Corporate Consulting, LLC (the “Consultant”) as part of the consideration required pursuant to a Market Awareness Consulting Agreement between the Company and the Consultant dated October 20, 2009. Under this Agreement, $25,000 was paid upon signing and $25,000 is due on November 28, 2009.

The Company evaluated subsequent events through November 15, 2009, the date the financial statements were issued, and there was no subsequent event which impacted the Company’s financial position or results of operations as of September 30, 2009 or which required disclosure.

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 2008 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.

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

Critical Accounting Policies

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

Accounting for Uncertainty in Income Taxes

We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes”, 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. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Our evaluation was performed for the tax years ended December 31, 2005, 2006 and 2007, the tax years which remain subject to examination by major tax jurisdictions as of September 30, 2009 and 2008.

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

Revenue Recognition

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

Common Stock Purchase Warrants

The Company accounts for common stock purchase warrants in accordance with the provisions of Emerging Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”). Based on the provisions of EITF 00-19, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement, or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).

Overview

From January 1991 until October 2005, the Company devoted substantially all of its efforts and resources to research and development related to its unsuccessful Biotech Business, in particular the study of biological oxidation and antioxidation directed to the development of potential therapeutic products for the treatment of various diseases and conditions. In the most recent years, the Company’s research focused mainly on targeted antioxidant therapeutics and nutraceuticals. The Company is a development stage

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company, has never generated any substantial revenue from product sales and has relied primarily on equity financing, licensing revenues, and various debt instruments for its working capital. The Company has been unprofitable since its inception.

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

Since inception, we have focused on the development and testing of our electric power systems, and since 2008 we have focused on their applicability to thermal and natural gas pipeline operations. The Company’s business is subject to significant risks, including the risks inherent in our research and development efforts, uncertainties associated with obtaining and enforcing patents and intense competition.

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, 2009 as Compared to Three Months Ended September 30, 2008

Our sole revenue for the three months ended September 30, 2009 and 2008 consisted of payments of Biotech IP licensing fees of $15,681 and $6,864, respectively. We had substantial expenses in the three months ended September 30, 2009, due to our ongoing research and development activities, as well as substantial administrative expenses, including those associated with our status as a public company. Total operating expenses, which include research and development costs and general and administrative costs for the three months ended September 30, 2009, were higher when compared to the same period in 2008 and amounted to $170,125 and $163,732, respectively. Our net loss for the three months ended September 30, 2009 and 2008 was $163,391 and $170,369, respectively. Substantial net losses will continue unless and until we are able to successfully commercialize and market our products, as to which there can be no assurance.

Nine Months Ended September 30, 2009 as Compared to Nine months Ended September 30, 2008

Our sole revenue for the nine months ended September 30, 2009 and 2008 consisted of payments of Biotech IP licensing fees of $26,234 and $21,163, respectively. We had substantial expenses for the nine months ended September 30, 2009 due to our ongoing research and development activities, as well as substantial administrative expenses, including those associated with our status as a public company. Total operating expenses, which include research and development costs and general and administrative costs for the nine months ended September 30, 2009, were lower when compared to the same period in 2008 and amounted to $426,603 and $428,966, respectively. Our net loss for the nine months ended September 30, 2009 and 2008 was $606,935 and $461,804, respectively. The substantial increase in our net loss was primarily related to interest expense of $180,332 incurred during the nine months ended September 30, 2009, as compared to $0 in the same period in 2008. This increase is related to the amortization of the discounts relating to the $250,000 private issuance of the Notes and the $50,000 Line of Credit Agreement entered into by the Company during 2008. Substantial net losses will continue unless and until we are able to successfully commercialize and market our products, as to which there can be no assurance.

Liquidity and Capital Resources

We have financed our operations since inception through the sale of debt and equity securities. As of September 30, 2009, we had a working capital deficit of $211,127 compared to a working capital deficit of $339,006 at December 31, 2008.

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During 2008, we raised $250,000 from a private placement of Series A Promissory Notes (the “Notes”) accompanied by warrants. Our efforts to raise additional capital since the second half of 2008 have been severely hampered by the financial crisis and recession, which have severely damaged the U.S. and global economies and caused substantial drops in the prices of oil and natural gas.

In March 2009, we raised $250,000 through the private placement of 333,333 shares of our common stock to accredited investors at $.75 per share. We paid a 10% commission to our placement agent, Martinez-Ayme Securities, with respect to this offering.

In the third quarter and early in the fourth quarter of 2009, we raised $700,000 through the private placement of 933,333 shares of our common stock to accredited investors at $.75 per share. Of these funds, $620,250 was raised in the third quarter and $79,750 was raised in the fourth quarter. The net proceeds from this offering of $140,000 (after payment of a 10% fee to our placement agent with respect to $350,000 of the funds raised and a 4% placement agent fee and a 6% finder’s fee as to $250,000) were used (i) to pay $81,500 principal amount of our Series A Promissory Notes due July 31, 2009, together with $8,717 in accrued interest thereon; and (ii) for working capital.

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

We continue to seek more funding from private debt and equity investors, as well as governmental sources, as we will need to raise substantial additional capital in order to finance our plan of operations. There can be no assurance that we will be able to raise the necessary funds. If we do not raise the necessary funds, we will be forced to cease operations.

Not required for smaller reporting companies.

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the quarter ended September 30, 2009.

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PART II OTHER INFORMATION

None.

There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the 2008 Annual Report. Please refer to that section for disclosure regarding the risks and uncertainties related to our business.

In the third quarter and early in the fourth quarter of 2009, we raised $700,000 through the private placement of 933,333 shares of our common stock to accredited investors at $.75 per share. Of these funds, $620,250 was raised in the third quarter and $79,750 was raised in the fourth quarter. The net proceeds from this offering of $140,000 (after payment of a 10% fee to our placement agent with respect to $350,000 of the funds raised and a 4% placement agent fee and a 6% finder’s fee as to $250,000) were used (i) to pay $81,500 principal amount of our Series A Promissory Notes due July 31, 2009, together with $8,717 in accrued interest thereon; and (ii) for working capital.

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

In October 2009, we issued 75,000 shares of our common stock to Del Mar Corporate Consulting, LLC (the “Consultant”) pursuant to a Market Awareness Consulting Agreement, dated October 20, 2009, filed as Exhibit 10.5 to this Report. Pursuant to this agreement, we paid the Consultant $25,000 upon signing and $25,000 is due on November 28, 2009.

All of the shares described in this Item 2 were issued in transactions exempt from registration under Section 4(2) of the Securities Act as transactions not involving a public offering.

None.

None.

None.

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SIGNATURES

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

Date: November 16, 2009

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Exhibit Index

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