374Water Inc. - Annual Report: 2014 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014
Commission File No. 000-27866
PowerVerde, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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88-0271109
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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420 S. Dixie Highway Suite 4-B Coral Gables, FL
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33146
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(Address of principal executive offices)
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(Zip Code)
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(305) 666-0024
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of thet: Common Stock, par value $0.0001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o Disclosure not contained.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
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o
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Smaller reporting company
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x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and ask prices of such stock equity, as of June 30, 2014, the last business day of the issuer’s most recently completed second fiscal quarter: $4,775,875.
As of March 13, 2015, the number of outstanding shares of common stock, $0.0001 par value per share, of the registrant was 31,750,106.
DOCUMENTS INCORPORATED BY REFERENCE
None
PowerVerde, Inc.
Annual Report on Form 10-K
Year Ended December 31, 2014
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i
General
Vyrex Corporation (“Vyrex” or the “Company”) was incorporated in Nevada in 1991 and operated as a research and development stage company seeking to discover and develop pharmaceuticals, nutraceuticals and cosmeceuticals for the treatment and prevention of respiratory, cardiovascular and neurodegenerative diseases and conditions associated with aging (the “Biotech Business”). The Biotech Business was unsuccessful and, as a result, the Company ceased material operations relating to that business in October 2005; however, the Company retained its intellectual property rights and contract rights relating to that business (the “Biotech IP”). On October 17, 2005, the Company reincorporated in Delaware.
On February 11, 2008, Vyrex, PowerVerde, Inc. (“PowerVerde”) and Vyrex Acquisition Corporation (“VAC”), a wholly-owned subsidiary of Vyrex, all Delaware corporations, entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, on February 12, 2008, VAC merged with and into PowerVerde, with PowerVerde remaining as the surviving corporation and a wholly-owned subsidiary of Vyrex (the “Merger”). As consideration for the Merger, as of the closing of the Merger, each issued and outstanding share of common stock of PowerVerde was converted into the right to receive 1.2053301 shares of the common stock of Vyrex and each share of VAC was converted into one share of PowerVerde common stock. As a result of the Merger, the former shareholders of PowerVerde hold 95% of the common stock of Vyrex. Pursuant to the Merger Agreement, PowerVerde paid $233,000 in accounts payable and other liabilities owed by Vyrex.
On August 6, 2008, at a special meeting of shareholders, Vyrex’s name was changed to “PowerVerde, Inc.” Simultaneously, the name of our operating company, PowerVerde, Inc., was changed to “PowerVerde Systems, Inc.”
In March 2009, we sold all of the Biotech IP other than existing licensing contract rights to Dr. Edward Gomez, a pre-Merger investor in PowerVerde and now a shareholder of the Company. In exchange for the assignment of the Biotech IP to him, Dr. Gomez agreed to (i) pay all future costs and expenses relating to the Biotech IP, including, but not limited to, patent fees, license fees and legal fees, and (ii) pay to the Company 20% of all net revenues received from the sale and/or licensing of any of the Biotech IP.
Please note that the information provided below relates to the combined company after the Merger. Since our operations after the Merger consist solely of PowerVerde operations, except where the context otherwise requires, references throughout this Report hereafter to “PowerVerde,” “we,” “us,” “our” and the “Company” will mean or refer to PowerVerde’s business and operations.
The Company is a Delaware corporation formed in March 2007 by George Konrad and Fred Barker, who remain our two largest stockholders. Mr. Konrad served as an officer and director of the Company until October 2012. Mr. Barker served as an officer and director until January 2015. See Item 10 “Directors, Executive Officers and Corporate Governance.” The Company was formed in order to further develop, commercialize and market a series of unique electric generating power systems designed to produce electrical power with zero emissions or waste byproducts, based on a patented pressure-driven motor and related organic pressure-driven cycle components. The design of the motor was conceived by Mr. Barker in January 2001. Mr. Barker previously had a working relationship with Mr. Konrad and enlisted Mr. Konrad and his manufacturing expertise, together with Mr. Barker’s own engineering expertise, to co-develop the motor. As a research and development company, we have tested and continue to test other style drivers as well.
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An initial prototype of the motor was created and tested in early 2002, and, based on positive test results, Messrs. Barker and Konrad concluded that the concept could lead to a commercial product. A new design was developed in early 2007, which resulted in a motor that produced more torque and horsepower, as well as being easier to mass produce. The prototype was tested extensively, and substantial tooling and engineering with CAM/CNC programming was completed at the facility of Mr. Konrad’s company, Arizona Research and Development (“ARD”), for the possibility of an eventual mass production model.
Based on data learned from these earlier prototypes, PowerVerde has manufactured three 25/50kW motors and additional next generation motors or drivers as well. The Company has been testing these devices on a more powerful and advanced organic pressure-driven cycle (OPDC) referred to as the Liberator. During 2009, the Company also built and tested a 100kW pressure-driven motor at another machining and manufacturing facility, Global Machine Works, in Arlington, WA. These two related but distinct systems are designed for two different markets. The 25/50kW system uses low-grade heat (waste heat) as a fuel source, expanding a working fluid thereby driving the motor/generator, while the 100kW system (without organic rankine cycle (“ORC”) or organic pressure driver cycle (“OPDC”) systems), uses wasted energy (pressure) from natural gas pipeline and wellhead infrastructures to drive the motor/generator and create electric power. In early 2010, our Board of Directors created two separate product lines: waste heat/solar organic rankine cycle powered systems; and gas pipeline/wellhead waste energy recovery systems. Because the markets and customers for these two systems are entirely different and the design and manufacturing are geographically separate, we believe that this bifurcation will result in a more streamlined and efficient business structure. The development of the natural gas pipeline system has been suspended due to our decision to dedicate our limited human and financial resources to commercialize our waste heat/solar thermal system, which we believe has more near term potential.
In January 2011, we entered into a Binding Letter of Intent for European Distribution (the “BLOI”) with Newton Investments BV, a Dutch corporation based in Leeuwarden, Netherlands (“Newton”). Pursuant to the BLOI, Newton purchased one Liberator system for a discounted price of $130,000, which was delivered in July 2011. In September 2011, we entered into a definitive License Agreement with Newton as contemplated by the BLOI. Under the Agreement, Newton was designated, for a period of 10 years, to be the exclusive manufacturer and distributor of our proprietary emissions-free electrical power generation systems (the “Systems”) in the 27 countries which are currently members of the European Union, subject to Newton achieving minimum sales of at least 100 Systems per year, beginning in the second year of the Agreement. Pursuant to the Agreement, we were entitled to a royalty equal to 20% of the gross sale price of each System sold by Newton. We authorized Newton to manufacture our Systems under a strict licensing agreement with a Dutch foundry and machine shop, Autonational BV, based in Ijlst, Netherlands, and capable of producing hundreds of units per year. Of the 27 European Union nations, we focused initially on the Netherlands, Belgium, Germany and the Scandinavian countries.
Despite our initial optimism, the PowerVerde driver (motor) failed to demonstrate sufficient capacity for the uninterrupted hours of operation required for commercial performance. Due to the ongoing technical problems, Newton did not sell any of our Systems and, in August 2014, Newton terminated the License Agreement.
We have addressed the pending technical issues, and we believe that by the end of 2015 we will be able to deliver a commercial device capable of operation for 25,000 hours (almost three years) without major mechanical failure. There can be no assurance, however, that these technical issues will be resolved or that any of our Systems will ever be commercially viable.
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In November 2011, we entered into a binding letter of intent for the acquisition of all of the membership interests in Cornerstone Conservation Group LLC, Scottsdale, Arizona (“Cornerstone”). The acquisition was consummated pursuant to a definitive agreement executed in March 2012. Cornerstone’s main asset is its proprietary Combined Cooling, Heating and Power (“CCHP”) technology, which utilizes waste heat from commercial and residential heating, ventilation air conditioning and refrigeration (“HVACR”) systems. Cornerstone also has substantial experience and technology relating to geothermal or ground source heat pumps.
As consideration for the Cornerstone acquisition, we issued (i) a total of 2,250,000 restricted shares of our common stock to Cornerstone’s members, Bryce Johnson (“Johnson”), Paul Kelly (“Kelly”) and Vincent Hils (“Hils”) in the amounts of 1,575,000, 337,500 and 337,500 shares, respectively, (ii) 10,000 restricted shares to a Cornerstone employee, and (iii) three-year warrants to purchase 150,000 shares each to Johnson and Kelly at exercise prices of $2.00-$4.00 per share. In November 2011, Johnson joined our Board of Directors, and in January 2012 we moved our operations to a facility in Scottsdale, Arizona, owned by Johnson. See “Item 2 - Properties.” Johnson also became our chief operating officer in January 2012. Johnson resigned from his officer and director positions in March 2013. As a result of Johnson’s resignation, Management decided to impair the goodwill entirely as of December 31, 2012. We continue to operate our laboratory and test the Liberator within Mr. Johnson’s facility, where several infrastructure upgrades have been completed. There can be no assurance that our good relationship with Mr. Johnson regarding use of his facility will continue. See Item 2 “Properties.”
We believe that Cornerstone’s technology is complementary to PowerVerde’s platform and existing markets – mainly through the conversion of thermal energy into electric power generation. While we believe that the Cornerstone acquisition brings substantial opportunities for synergy, there can be no assurance that the acquisition will prove successful.
Our focus for the remainder of 2015 is to commercialize our waste heat power systems in our Phoenix facility for eventual commercial deployment. We plan to complete our development and testing by the summer of 2015 and have a market-ready system by year-end; however, there can be no assurance that we will meet this timetable or ever have a market-ready system. We continue discussions with certain manufacturers of integrated components and service providers in the oil/natural gas industries, methane plants, as well as with electric utility companies and government entities. There can be no assurance that any manufacturing, distribution or marketing agreements will be successfully consummated or executed or that we will ever achieve material sales.
Employees
We currently have two full-time employees: Messrs. Mark Prinz and Ellis Peterson, both based in Scottsdale, Arizona. Both of these employees were hired in 2011. Our chief engineer, Hank Leibowitz, was hired pursuant to a part-time consulting agreement in October 2012.
Patents
Messrs. Barker and Konrad together obtained U.S. Patent No. 6,840,151 for a “push-push type fluid pressure actuated motor,” which was issued on January 11, 2005. On June 6, 2007, Messrs. Barker and Konrad and the Company’s predecessor, PowerVerde, LLC, permanently and exclusively assigned to PowerVerde all rights to the patent and the other intellectual property relating to the PowerVerde systems. On July 16, 2008, Messrs. Barker and Konrad filed U.S. Patent application No. 61/081,298 for a “system to produce electricity using waste energy in natural gas pipelines.” This application was assigned to the Company; however, it was abandoned in 2009 because we decided to replace it with a new and improved provisional patent application regarding the natural gas pipeline technology. Mr. Barker filed on behalf of PowerVerde a new provisional patent application regarding this technology on April 7, 2010. On October 17, 2008, Mr. Konrad and Mr. Brian K. Gray filed U.S. Patent application No. 12/253,580 for a “low temperature organic rankine cycle system.” This application was assigned to the Company. There can be no assurance that these patents will be issued or maintained.
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In late 2010, we began filing several provisional patents covering our new organic pressure-driven cycle technology. In January 2011, we hired the inventor of this technology, Keith Johnson, as a specialist in advanced pressure-driven systems. He has assigned to PowerVerde his patent application in this field, U.S. Patent Application 61/424,249 filed on December 17, 2010. There can be no assurance that these patents will be issued or maintained.
Pursuant to the Cornerstone acquisition, we acquired all rights to U.S. Patent Application No. 12,749,416 filed on March 29, 2010, entitled “Solar Photovoltaic Closed Fluid Loop Evaporation Tower.” This application was filed by Bryce Johnson as inventor and assigned to Cornerstone in connection with the acquisition. There can be no assurance that this patent will be issued or maintained.
We expect to file additional patent applications pertaining to our advanced organic pressure driven cycle later in 2015. There can be no assurances that we will be able to do so or that any patents will be issued based on these applications.
Product Description
The 2007 advanced generation PowerVerde motor, with its related organic rankine cycle (ORC) system, produced 10kW of net power. Our subsequent larger 25/50kW waste heat/solar design was a next generation system. This system was designed to be installed in single- or multiple-stacked units for businesses, factories, or any waste heat or solar application such as schools, hospitals, ships and other users of electric power. These non-combustion motors are fueled by heat (waste heat), via an ORC related system, and create a pressure source powering the PowerVerde motor/generator while emitting zero carbon emissions or waste stream byproducts. The other PowerVerde system was designed to operate on wellhead or natural gas pipeline infrastructure and lacks the ORC component, but uses wasted latent energy (pressure) inherent in “city gate” letdowns or wellheads as its pressure source. This project (well head or natural gas pipeline applications) has been suspended so that we can focus exclusively on waste heat applications. To this end we anticipate and have designed systems that will be scaled even larger in the future.
Our ORC system requires
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A heat source (solar, waste heat, geothermal or bio-mass);
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An organic rankine cycle (ORC) or organic pressure driven cycle (OPDC) style system to convert heat into pressure;
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PowerVerde motor to convert the pressure into horsepower; and
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A generator to convert the horsepower into electricity.
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We have built and tested the 25/50kW ORC systems, and we believe that the overall design meets or exceeds performance metrics when compared to the industry at large. We have, however, remained challenged with our inability to thus far generate the continuous hours of operation that we believe necessary for commercial quality expectations. We continue to work toward our goal of a system capable of 25,000 hours (almost three years) of continuous operation. Meanwhile, we believe that we have made great strides in the evolution of the Liberator waste heat energy system and expect to achieve a successful test by the end of 2015. There can be no assurance, however, that our ongoing technical issues will be resolved or that any of our Systems will ever be commercially viable.
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Government Regulations and Incentives
We believe that the time may be right for the PowerVerde systems. Regulatory proposals to limit greenhouse gases are under consideration, particularly in Europe. One such measure would be a carbon tax placed on fuels in proportion to their carbon content. Another would be a tax on oil. Yet another would be a “cap and trade” system. All of these would drive up the price of electricity from fossil fuel sources, yet have no impact on carbon-free renewable sources such as those offered by us; however, due to the weak economy in the United States and Europe and strong political opposition, there can be no assurance that any of these measures will be implemented.
Governments, utilities, businesses, and consumers alike are acutely aware of the negative effects of pollution and use of fossil fuels. Fossil fuel-based emissions contribute to serious health and environmental conditions such as acid rain, particulate pollution, nitrogen deposition, and global climate change. Consequently, government agencies in the United States and Europe at the national, state/provincial and local levels have implemented and proposed various economic incentives in the form of tax credits, rebates, deductions, accelerated depreciation and other subsidies designed to enhance the use of energy-efficient and clean power sources. We believe that these incentives will have a substantial positive impact on demand for the PowerVerde systems; however, there can be no assurance that, even with these incentives, our systems will be economically competitive or that the incentives will continue to be available.
We have applied and continue to apply for federal grants, loans and/or other programs designed to assist development of renewable “green” energy sources, and we have previously retained specialized consultants to assist in this endeavor; however, we have not been successful in these ongoing efforts, and there can be no assurance that we will ever receive any governmental assistance.
Competition
We face substantial competition from numerous other companies, most of whom have financial and other resources substantially greater than ours. Our competition is worldwide, ranging from solo inventors and small businesses all the way to major utility companies and multinational corporations, all of whom are attempting to design, develop and market clean and efficient methods for the generation and delivery of electricity. This competition is expected to increase due to pressures arising from high prices of fossil fuels, environmental concerns and the increased availability of governmental incentives and subsidies. These competitors may prove more successful in offering similar products and/or may offer alternative products which prove superior in performance and/or more popular with potential customers than our products. Our ability to commercialize our products and grow and achieve profitability in accordance with our business plan will depend on our ability to satisfy our customers and withstand increasing competition by providing high-quality products at reasonable prices. There can be no assurance that we will be able to achieve or maintain a successful competitive position.
Where You Can Find Additional Information
The Company is subject to the reporting requirements under the Exchange Act. The Company files with, or furnishes to, the SEC quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports and will furnish its proxy statement. These filings are available free of charge on the Company’s website, http://www.powerverdeenergy.com, shortly after they are filed with, or furnished to, the SEC.
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The SEC maintains an Internet website, http://www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers.
Risks Related to General Economic Conditions
The current general economic and market conditions and the volatility and disruption in the financial and capital markets has impacted us and could materially and adversely affect our business and financial results in future periods.
The United States economy continues to suffer from unfavorable economic conditions, including a weak recovery from a severe recession in the general economy, accompanied by large federal and state budget deficits and an increasing national debt. These negative conditions could persist or become even worse. These poor economic conditions continue to make it very difficult for us to raise the capital we need to complete the development and testing of our products so that we can begin sales. In the event that we are able to begin sales of our products, poor economic conditions may adversely affect our business and our financial condition and results of operations by extending the length of the sales cycle and causing potential customers to delay, defer or decline to make purchases of our products due to limitations on their capital expenditures and the adverse effects of the economy and the credit markets on them.
The weak economy is projected by many economic experts to continue or deteriorate further throughout 2015 or longer. These conditions may make it extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities. We cannot predict the timing, strength or duration of this current weak economy or of a subsequent stronger economic recovery, or the effects thereof on our customers and our markets. Our results of operations may be negatively impacted in future periods and experience substantial fluctuations from period to period as a consequence of these factors, and such conditions and other factors affecting capital spending may affect the timing of orders from major customers. These factors could adversely affect our ability to meet our capital requirements, support our working capital requirements and growth objectives, maintain our existing or secure new financing arrangements, or otherwise materially and adversely affect our business, financial condition and results of operations.
An increase in interest rates or lending rates or tightening of the supply of capital in the global financial markets could make it difficult for end-users to finance the cost of a PowerVerde system and could reduce the demand for our products and/or lead to a reduction in the average selling price for our products.
We believe that, in the event that we are able to commercialize our products, many of our end-users will depend on debt financing to fund the initial capital expenditure required to purchase and install a PowerVerde system. As a result, an increase in interest rates or lending rates could make it difficult for our end-users to secure the financing necessary to purchase and install PowerVerde systems on favorable terms, or at all and thus lower demand and reduce our net sales. Due to the overall economic outlook, our end-users may change their decision or change the timing of their decision to purchase and install PowerVerde systems. In addition, we believe that a significant percentage of our end-users will install PowerVerde systems as an investment, funding the initial capital expenditure through a combination of equity and debt. An increase in interest rates and/or lending rates could lower an investor’s return on investment in PowerVerde systems, or make alternative investments more attractive relative to PowerVerde systems, and, in each case, could cause these end-users to seek alternative investments. A reduction in the supply of project debt financing or equity investments could reduce the number of our projects that receive financing and thus lower demand for PowerVerde systems.
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Reduced growth in or the reduction, elimination or expiration of government subsidies, economic incentives and other support for renewable energy-sourced electricity applications could reduce demand for our systems.
Reduced growth in or the reduction, elimination or expiration of government subsidies, economic incentives and other support for renewable-sourced electricity may result in the diminished competitiveness of our systems relative to conventional and non-renewable sources of energy, and could materially and adversely affect our business.
Electric utility companies or generators of electricity from fossil fuels or other renewable energy sources could also lobby for a change in the relevant legislation in their markets to protect their revenue streams. Reduced growth in or the reduction, elimination or expiration of government subsidies and economic incentives for renewable electricity generation applications, especially those in our target markets, could impede our sales efforts and materially and adversely affect our business, financial condition and results of operations.
Existing regulations and policies and changes to these regulations and policies may present technical, regulatory and economic barriers to the purchase and use of our renewable electricity generation systems, which may significantly reduce demand for our systems.
The market for electricity generation products is heavily influenced by foreign, federal, state and local government regulations and policies concerning the electric utility industry, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the United States and in a number of other countries, these regulations and policies have been modified in the past and may be modified again in the future. These regulations and policies could deter end-user purchases of our systems.
We anticipate that our systems and their installation will be subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, environmental protection, utility interconnection and metering and related matters. It is difficult to track the requirements of individual states and design equipment to comply with the varying standards. Any new government regulations or utility policies pertaining to our systems may result in significant additional expenses to us and our potential customers and, as a result, could cause a significant reduction in demand for our systems.
Risks Related to Our Business
We need to raise substantial additional capital to fund our business.
We will need to raise promptly substantial additional funds. Without such additional funds, we may have to cease operations. We will require substantial additional funding for our contemplated research and development activities, commercialization of our products and ordinary operating expenses. Adequate funds for these purposes may not be available when needed or on terms acceptable to us, especially due to the ongoing weak economy. Insufficient funds may require us to delay or scale back our activities or to cease operations.
We face substantial competition in our industry, and we may be unable to attract customers and maintain a viable business.
We face substantial competition from numerous other companies, most of whom have financial and other resources substantially greater than ours. Our competition is worldwide, ranging from solo inventors and small businesses all the way to major utility companies and multinational corporations, all of whom are attempting to design, develop and market clean and efficient methods for the generation and delivery of electricity. This competition is expected to increase due to pressures arising from high prices of fossil fuels, environmental concerns and the availability of governmental incentives and subsidies. These competitors may prove more successful in offering similar products and/or may offer alternative products which prove superior in performance and/or more popular with potential customers than our products. Our ability to commercialize our products and grow and achieve profitability in accordance with our business plan will depend on our ability to satisfy our customers and withstand increasing competition by providing high-quality products at reasonable prices. There can be no assurance that we will be able to achieve or maintain a successful competitive position.
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Our success is dependent on the services of our key management and personnel.
Our success will depend in large part upon the skill and efforts of our key personnel hired or who may be hired, including our chief engineer, Hank Leibowitz, and our system specialist, Mark Prinz. Loss of any such personnel, whether due to resignation, death, and disability or otherwise, could have a material adverse effect on our business. In addition, Mr. Leibowitz does not intend to work for PowerVerde on a full-time basis, as he has substantial other business activities. He intends to dedicate the time he deems appropriate to meet PowerVerde’s needs; however, there can be no assurance that he will be willing or able to dedicate such time and attention as would maximize PowerVerde’s chances for success.
We have a limited operating history.
We have only a limited operating history. We have yet to generate any material revenues from our systems, as we have sold only one system, in a discounted sale to Newton, and the commercial value of our products is uncertain. There can be no assurance that we will ever be profitable. Further, we are subject to all the risks inherent in a new business including, but not limited to: intense competition; lack of sufficient capital; loss of protection of proprietary technology and trade secrets; difficulties in commercializing its products, managing growth and hiring and retaining key employees; adverse changes in costs and general business and economic conditions; and the need to achieve product acceptance, to enter and develop new markets and to develop and maintain successful relationships with customers, third party suppliers and contractors.
We may have difficulty in protecting our intellectual property and may incur substantial costs to defend ourselves in patent infringement litigation.
We rely primarily on a combination of trade secrets, patents, copyright and trademark laws, and confidentiality procedures to protect our proprietary technology, which is our principal asset.
Our ability to compete effectively will depend to a large extent on our success in protecting our proprietary technology, both in the United States and abroad. There can be no assurance that (i) any patents that we have applied or apply for will be issued, (ii) any patents issued, including our existing U.S. Patent No. 6,840,151, on which our current products are based, will not be challenged, invalidated, or circumvented, (iii) that we will have the financial resources to enforce our patents or (iv) the patent rights granted will provide any competitive advantage. We could incur substantial costs in defending any patent infringement suits or in asserting our patent rights, including those granted by third parties, and we might not be able to afford such expenditures.
We have limited protection over our trade secrets and know-how.
Although we have entered into confidentiality and invention agreements with our key personnel, there can be no assurance that these agreements will be honored or that we will be able to protect our rights to our non-patented trade secrets and know-how effectively. There can be no assurance that competitors will not independently develop substantially equivalent or superior proprietary information and techniques or otherwise gain access to our trade secrets and know-how.
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We may be unable to obtain required licenses from third-parties for product development.
We may be required to obtain licenses to patents or other proprietary rights from third parties. If we do not obtain required licenses, we could encounter delays in product development or find that the development, manufacture or sale of products requiring these licenses could be prevented.
The reduction, elimination or unavailability of contemplated government incentives may force our business plan to be changed and may materially adversely affect our business.
Our business plan relies to a significant extent on the availability of substantial federal, state and local governmental incentives for the development, production and purchase of energy-saving, environmentally-friendly products such as our systems. These incentives include, among others, tax deductions, tax credits, rebates, accelerated depreciation and government loans, grants and other subsidies. There can be no assurance that some or all of these incentives will not be substantially reduced or eliminated, nor can there be any assurance that any currently proposed incentives will actually take effect. Similarly, we have never received, and there can be no assurance that we will ever receive, any government loans, grants or other subsidies.
Lower energy prices may hinder our ability to attract customers and become profitable.
Our products are energy-efficient electric generators which compete primarily with conventional fossil fuel-generated electricity produced and delivered by conventional utility companies. The significant decreases in the prices of oil and natural gas since mid-2014 have materially adversely affected our competitive position. If sustained, these lower fossil fuel prices and the corresponding lower cost of fossil fuel-generated electricity could materially adversely affect our business.
We may be unable to purchase materials and parts on commercially reasonable terms from suppliers.
If we are able to commercialize our systems, our success will depend to a large extent on our ability to obtain a reliable supply of materials and parts from our suppliers on commercially reasonable terms. This may not prove possible due to competition, inflation, shortages, international crises, adverse economic and political conditions and business failures of suppliers or other reasons.
Our insurance may not provide adequate coverage.
Although we maintain general and product liability, property and commercial crime insurance coverage which we consider prudent, there can be no assurance that such insurance will prove adequate in the event of actual casualty losses or broader calamities such as terrorist attacks, earthquakes, financial crises, economic depressions or other catastrophic events, which are either uninsurable or not economically insurable. Any such losses could have a material adverse effect on PowerVerde.
We may be unable to obtain or maintain insurance for our commercial products.
The design, development and manufacture of our products involve an inherent risk of product liability claims and associated adverse publicity. There can be no assurance we will be able to maintain insurance for any of our proposed commercial products. Such insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms or at all. We are also exposed to product liability claims in the event the use of our proposed products result in injury.
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Risks Related to Our Common Stock; Liquidity Risks
Our stock price is highly volatile.
The market prices for securities of emerging and development stage companies such as ours have historically been highly volatile, and our limited history has reflected this volatility. Difficulty in raising capital as well as future announcements concerning us or our competitors, including the results of testing, technological innovations or new commercial products, government regulations, developments concerning proprietary rights, litigation or public concern as to safety of potential products developed by us or others, may have a significant adverse impact on the market price of our stock.
We do not pay dividends on our common stock, and we have no intention to do so in the future.
For the near-term, we intend to retain remaining future earnings, if any, to finance our operations and do not anticipate paying any cash dividends with respect to our common stock.
There has been limited trading in our stock.
Our common stock is currently quoted on the OTCBB under the symbol “PWVI.” Since our February 2008 Merger with our predecessor Vyrex Corporation, our stock has been thinly traded, and no assurance can be given as to when, if ever, an active trading market will develop or, if developed, that it will be sustained. As a result, investors may be unable to sell their shares of our common stock at a fair price, if at all.
We may issue additional shares of our stock which may dilute the value of our stock.
Shares which we issue pursuant to private placements generally may be sold in the public market after they have been held for six months, pursuant to Rule 144. The sale or availability for sale of substantial amounts of common stock in the public market under Rule 144 or otherwise could materially adversely affect the prevailing market prices of our common stock and could impair our ability to raise additional capital through the sale of our equity securities.
We may issue shares of preferred stock that could defer a change of control or dilute the interests of holders of our common stock shareholders.
Our Board of Directors is authorized to issue up to 50,000,000 shares of preferred stock. The Board of Directors has the power to establish the dividend rates, liquidation preferences, voting rights, redemption and conversion terms and privileges with respect to any series of preferred stock. The issuance of any series of preferred stock having rights superior to those of the common stock may result in a decrease in the value or market price of the common stock and further, they could be used by the Board of Directors as a device to prevent a change in control favorable to the Company. Holders of preferred stock to be issued in the future may have the right to receive dividends and certain preferences in liquidation and conversion rights. The issuance of such preferred stock could make the possible takeover of the Company or the removal of management of the Company more difficult, and adversely affect the voting and other rights of the holder of the common stock, or depress the market price of the common stock.
10
Our common stock is covered by SEC “penny stock” rules which may make it more difficult for you to sell or dispose of our common stock.
Since we have net tangible assets of less than $1,000,000, transactions in our securities are subject to Rule 15g-9 under the Exchange Act which imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000 or $300,000 together with their spouses). For transactions covered by this Rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. Consequently, this Rule may affect the ability of broker-dealers to sell our securities, and may affect the ability of shareholders to sell any of our securities in the secondary market.
The Commission has adopted regulations which generally define a “penny stock” to be any non-NASDAQ equity security of a small company that has a market price (as therein defined) less than $5.00 per share, or with an exercise price of less than $5.00 per share subject to certain exceptions, and which is not traded on any exchange or quoted on NASDAQ. For any transaction by broker-dealers involving a penny stock (unless exempt), the rules require delivery, prior to a transaction in a penny stock, of a risk disclosure document relating to the penny stock market. Disclosure is also required to be made about compensation payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in an account and information on the limited market in penny stocks.
FORWARD-LOOKING STATEMENTS
Prospective investors are cautioned that the statements in this Report that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are based on the beliefs of our management as well as on assumptions made by and information currently available to us as of the date of this Report. When used in this Report, the words “plan,” “will,” “may,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project” and similar expressions, as they relate to PowerVerde, are intended to identify such forward-looking statements. Although PowerVerde believes these statements are reasonable, actual actions, operations and results could differ materially from those indicated by such forward-looking statements as a result of the risk factors included in this Report or other factors. We must caution, however, that this list of factors may not be exhaustive and that these or other factors, many of which are outside of our control, could have a material adverse effect on PowerVerde and our ability to achieve our objectives. All forward-looking statements attributable to PowerVerde or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above.
None.
We do not own any real property. On January 1, 2012 our Board of Directors agreed to end the rental agreement with ARD and moved our operations to a 5,000 foot facility owned by our then-director and chief operating officer Bryce Johnson (who resigned in March 2013), located at 7595 E. Gray Rd., Scottsdale, Arizona. We believe that the facility will be adequate to satisfy our needs for at least the next year. From March 2012 to June 2013, we used the facility for a fee of $700 per month, which covered overhead costs. Since July 2013, this fee has not been charged. We believe that our relationship with Mr. Johnson, who remains a major PowerVerde shareholder, is good, and we believe that this good relationship will continue and allow us to use the facility on current terms for at least the next year; however, there can be no assurance that this will be the case as we do not have a signed lease.
11
On November 2, 2012, Keith Johnson, our former Chief Technical Officer, filed suit against our operating subsidiary PowerVerde Systems, Inc., in Maricopa County, Arizona, Superior Court. The suit included claims for breach of his employment agreement, for back pay and related claims. Mr. Johnson, whose salary was $12,500 per month, sought back pay of $37,500, reimbursement of expenses totaling approximately $5,012 and other unspecified damages. We believe that Mr. Johnson voluntarily terminated his employment in accordance with the agreement and that he has been paid in full. In an abundance of caution, we also gave Mr. Johnson 30 days’ notice of termination without cause pursuant to the employment agreement, with this notice to be effective only if the Court determines that his employment was not previously terminated by him. Mr. Johnson ceased working for the Company in early September 2012. Based on the foregoing, we believed that we had substantial defenses to Mr. Johnson’s claims, which we denied in our answer.
In May 2014, the case was settled pursuant to our agreement to pay Mr. Johnson $30,088, with $5,088 due upon execution of the settlement agreement plus an additional $25,000 payable in installments of $12,500 each in July and August 2014. All of the settlement payments have been made, and the case is concluded.
|
ITEM 4.
|
Not applicable.
12
Our common stock trades on the Over-The-Counter Bulletin Board (“OTCBB”) under the symbol “PWVI.” The over-the-counter market quotations provided below reflect inter-dealer prices, without retail mark-ups, mark-down or commission and may not represent actual transactions. The following table sets forth the range of high and low sales prices on the OTCBB for the periods indicated.
|
Period Beginning
|
Period Ending
|
High
|
Low
|
||||||
|
January 1, 2013
|
March 31, 2013
|
$
|
.40
|
$
|
.21
|
||||
|
April 1, 2013
|
June 30, 2013
|
$
|
.30
|
$
|
.15
|
||||
|
July 1, 2013
|
September 30, 2013
|
$
|
.33
|
$
|
.15
|
||||
|
October 1, 2013
|
December 31, 2013
|
$
|
.29
|
$
|
.15
|
||||
|
January 1, 2014
|
March 31, 2014
|
$
|
.24 |
$
|
.08 | ||||
|
April 1, 2014
|
June 30, 2014
|
$
|
.24
|
$
|
.17
|
||||
|
July 1, 2014
|
September 30, 2014
|
$
|
.18
|
$
|
.09
|
||||
|
October 1, 2014
|
December 31, 2014
|
$
|
.20
|
$
|
.10
|
||||
|
January 1, 2015
|
March 13, 2015
|
$
|
.50
|
$
|
.13
|
||||
Dividends
We have never declared or paid any cash dividends on our common stock, nor do we intend to declare or pay any cash dividends on our common stock in the foreseeable future. Subject to the limitations described below, the holders of our common stock are entitled to receive only such dividends (cash or otherwise) as may (or may not) be declared by our Board of Directors.
Recent Sales of Unregistered Securities
All of PowerVerde’s sales of unregistered securities since inception have been made pursuant to private offerings to accredited investors. The sales set forth below were made pursuant to an exemption from registration requirements under Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended. Except as otherwise noted below, no placement agent fees or commissions were paid on these offerings, and net proceeds were used for working capital.
In the fourth quarter of 2012, we sold $325,000 principal amount of two-year Series A Secured Promissory Notes to accredited investors. At closing, we issued to each investor a three-year warrant to purchase one share of our common stock at an exercise price of $.41 per share. Pursuant to the terms of the Notes, on December 1, 2013, we were obligated to issue an additional three-year warrant (covering the same number of shares as the initial warrant) to each investor at an exercise price equal to $.21 per share (the average price of the common stock during the 10 trading days prior to December 1, 2013).
Each Note investor receives simple interest at the rate of 10% per annum based on a 365-day year and actual days elapsed in the period for which such interest is payable. Accrued interest was payable semi-annually on June 30, 2013, December 31, 2013, June 30, 2014, and December 31, 2014. The entire principal balance of the Notes, together with all unpaid interest accrued thereon, was due and payable on December 31, 2014. The Notes are collateralized by our Biotech license fee revenues. We agreed to pay a $25,000 fee to the placement agent, Martinez-Ayme Securities, Inc. (“MAS”); however, in December 2013, this receivable was assigned by MAS to our Director and Chief Executive Officer Richard Davis and the amount due was reduced to $20,000 in exchange for payment to Mr. Davis of $4,000, which was paid in 2014. See Note 10 of Notes to Consolidated Financial Statements.
13
In the first quarter of 2013, we sold an additional $75,000 principal amount of Series A Secured Promissory Notes. In connection with these Notes, we issued warrants to purchase 75,000 shares of common stock concurrent with issuance of the Notes and we issued warrants to purchase an additional 75,000 shares in December 2013 at an exercise price equal to $.21 per share (the average price of the common stock during the 10 trading days prior to December 1, 2013).
In the fourth quarter of 2014, the Note Holders agreed to extend the maturity date of the Note principal balance to December 31, 2016. In connection with the Note extension, we revised the terms of the original warrants issued December 31, 2012, extending the expiration date from December 31, 2015 to December 31, 2017 and the exercise price was reduced from $0.41 per share to $0.39 per share. We also revised the terms of the additional warrants to extend the expiration date to December 31, 2018, and the exercise price was reduced from $.21 per share to $0.17 per share.
In the second quarter of 2013, we 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, we raised gross proceeds of $150,000 through private placement of 600,000 unregistered shares of common stock to accredited investors at $.25 per share.
In the fourth quarter of 2013, we raised gross proceeds of $25,000 through private placement of 100,000 unregistered shares of common stock to accredited investors at $.25 per share.
In the first quarter of 2014, we raised gross proceeds of $240,000 through private placement of 2,400,000 unregistered shares of common stock to accredited investors at $.10 per share.
In the second quarter of 2014, we raised gross proceeds of $75,000 through private placement of 750,000 unregistered shares of common stock to accredited investors at $.10 per share. We paid a 10% placement agent fee to MAS for this offering.
In the third quarter of 2014, we raised gross proceeds of $100,000 through private placement of 1,000,000 unregistered shares of common stock to accredited investors at $.10 per share.
Issuer Purchases of Equity Securities
In April 2012, we purchased 100,000 shares of common stock from our former Director and founder Fred Barker for $25,000 ($.25 per share), and in May 2012 we purchased 450,000 shares from Mr. Barker for $90,000 ($.20 per share). See Item 13 “Certain Relationships and Related Transactions, and Director Independence.” In October 2012, we purchased from our founder and former President and Director George Konrad 3,000,000 shares of common stock for $530,000 ($.18 per share) in connection with his resignation from PowerVerde. See Item 11 “Executive Compensation.”
Not required for smaller reporting companies.
14
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 the consolidated 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 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 December 31, 2014.
We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the consolidated financial statements as 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 reasonable 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.
15
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.
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.
16
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 consolidated balance sheet as of December 31, 2014. There were no derivative liabilities at December 31, 2014 and 2013.
Overview
From January 1991 until October 2005, the Company devoted substantially all of its efforts and resources to research and development related to its unsuccessful Biotech Business, in particular the study of biological oxidation and antioxidation directed to the development of potential therapeutic products for the treatment of various diseases and conditions. In the most recent years, the Company’s research focused mainly on targeted antioxidant therapeutics and nutraceuticals. The Company is a development stage company, has never generated any substantial revenue from product sales and has relied primarily on equity financing, licensing revenues, and various debt instruments for its working capital. The Company has been unprofitable since its inception.
Following the cessation of material Biotech Business operations in October 2005, the Company turned its primary focus to seeking an appropriate merger partner for its public shell. This resulted in the February 2008 Merger with Vyrex. In March 2009, we assigned most of our Biotech intellectual property other than our rights under existing licensing agreements (the “Biotech IP”) to an investor in exchange for his agreement to pay all future expenses relating to the Biotech IP and to pay us 20% of any net proceeds received from future sale and/or licensing of the Biotech IP. We do not expect this arrangement to generate material revenues.
Since the Merger, we have focused on the development and testing of our electric power systems, and since 2008 we have focused on their applicability to thermal and formerly natural gas pipeline operations. We have abandoned the pipeline opportunities in terms of focusing on the thermal applications. The Company’s business is subject to significant risks, including the risks inherent in our research and development efforts, uncertainties associated with obtaining and enforcing patents and intense competition. See “Risk Factors.”
Except as specifically noted to the contrary, the following discussion relates only to PowerVerde since, as a result of the Merger, the only historical financial statements presented for the Company in periods following the Merger are those of the operating entity, PowerVerde.
17
Results of Operations
Year ended December 31, 2014 and 2013
During 2014, we continued to focus on upgrading the durability and continued operations capability of our Liberator Waste Heat System. We had no revenues in 2014 other than $428,747 in Biotech IP licensing fees, an 19.3% increase from $359,362 in royalty income for 2013. Our research and development expenses decreased by $95,556 (20.8%) in 2014 as compared to 2013, and our general and administrative expenses decreased by $342,553 (40.6%). The reduction in expenses was due to our cash flow constraints and concentrated efforts to minimize the costs associated with the use of third party consulting services. Substantial net losses will continue until we are able to successfully commercialize and market our products, as to which there can be no assurance.
Liquidity and Capital Resources
We have financed our operations since inception principally through the sale of debt and equity securities. Also, since 2012 we have received material amounts of Biotech IP licensing fees. As of December 31, 2014, we had a working capital surplus of $78,580 and as of December 31, 2013, we had a working capital deficit of $385,872. This increase in working capital was due primarily to the extension in 2014 of the maturity date of our Series A Secured Promissory Notes to December 31, 2016
During 2014, we received $428,747 in Biotech IP licensing fees and raised gross proceeds of $415,000 from private placements of securities.
By the end of 2014, we had spent all of our $48,306 opening cash balance plus almost all of the $415,000 raised during 2014, so that our year-end cash balance was only $4,736, while our accounts payable and accrued expenses were $100,006. As of the date of this Report, we have only enough cash to finance operations for approximately two months.
We expect 2015 Biotech IP revenues to exceed the 2014 level; 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. If we do not promptly raise the necessary funds, we may be forced to cease operations.
Not required for smaller reporting companies.
The consolidated financial statements of the Company and other information required by this Item are set forth herein in a separate section beginning with the Index to the Financial Statements on page F-1.
None.
18
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 December 31, 2014, our internal control over financial reporting was effective.
No Attestation Report
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
There were no significant changes in internal control over financial reporting during the fourth quarter of 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
19
The names of our officers and directors, as well as certain information about them are set forth below:
|
Name
|
Age
|
Position(s)
|
Held Since
|
|||
|
Richard H. Davis
|
58
|
Chief Executive Officer, Director
|
2008
|
|||
|
John Hofmann
|
56
|
Chief Financial Officer
|
2011
|
Richard H. Davis. Mr. Davis joined our Board in February 2008 in connection with the Vyrex Merger, and he became Chief Executive Officer in August 2011. He received a B.S. degree in economics from Florida State University in 1982. He joined First Equity Corporation (“First Equity”) in Miami that same year. First Equity operated as a regional full-service brokerage and investment bank. Mr. Davis’ duties included equity deal structure and brokerage-related activities. After First Equity was acquired in 2001, Mr. Davis joined the corporate finance department of William R. Hough & Company (“Hough”), where he continued structuring equity finance and private acquisitions. Hough was acquired in 2004 by RBC Dain Rauscher (“Dain”), a global investment banking firm. Dain consolidated Hough’s corporate finance activities into its New York offices. Mr. Davis elected to remain in Miami and joined Martinez-Ayme Securities, assuming the newly-created position of managing director of corporate finance.
John Hofmann. Mr. Hofmann became our Chief Financial Officer in August 2011. He is president of J. L. Hofmann & Associates, P.A., Coral Gables, Florida (“JLHA”), which has provided financial consulting and accounting services to select clientele since 1990. JLHA has provided services to PowerVerde since July 2010. Mr. Hofmann also serves as Operating Partner of Taft Street Partners I, Ltd., providing consulting services and capital for commercial and residential real estate projects. Mr. Hofmann started his career working with multinational companies for ten years as a Senior Manager for PricewaterhouseCoopers LLP (“PwC”). While at PwC, he traveled extensively primarily working on international tax matters and issues concerning the Internal Revenue Service. Locally, Mr. Hofmann has worked with the Miami Dolphins, Carnival Cruise Line, Royal Caribbean Cruise Line, Resorts International and Terremark Worldwide. Mr. Hofmann earned his Bachelor of Science in Accounting at the University of Florida and obtained his Master of Science in Taxation from Florida International University. Mr. Hofmann became a Certified Public Accountant through the Florida Board of Accountancy in 1982. He is a member of the Florida Institute of CPAs.
Election of Directors
Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of the stockholders, including the election of directors. Cumulative voting with respect to the election of directors is not permitted by our Certificate of Incorporation.
Our Board of Directors shall be elected at the annual meeting of the shareholders or at a special meeting called for that purpose. Each director shall hold office until the next annual meeting of shareholders and until the director’s successor is elected and qualified.
Committees
Our Board of Directors does not yet have any committees; however, we intend to establish an audit committee and a compensation/stock option committee in the near future. Additional board members are anticipated to be added in 2015.
20
Advisory Board Members
In March 2010, our Board of Directors created an Advisory Board to advise and recommend, on a non-legally-binding basis, certain directions or actions deemed to be beneficial to the Company’s success. The Advisory Board’s members may be shareholders or non-shareholders; however, each member represents a specific industry or vocation complementary to the Company’s anticipated markets, customers and technical needs. It is anticipated that the Advisory Board will meet once a year in person and meet by conference call quarterly. We expect to compensate the Advisory Board members with restricted stock and/or options; however, the compensation plan has not yet been established. The members of the Advisory Board are as follows:
|
|
•
|
Stephen H. McKnight . Mr. McKnight is active in real estate investment and management. Through his firms, he has created a portfolio in excess of 2.0 million square feet of commercial property, mostly in the Southwest United States. Mr. McKnight is also active in both equity and debt holdings, managing both trusts and family estates. He received an MBA from the University of Pittsburg in 1975.
|
|
|
•
|
Randy Hinson . Mr. Hinson founded and successfully operated a pump manufacturing business in Houston, Texas. Mr. Hinson recently sold the company to a publicly-traded oil company, and remains under a non-compete contract during an agreed-upon transition process.
|
|
|
•
|
Leon Breece . Mr. Breece has operated as an entrepreneur and CPA in the Los Angeles, California area for many years. Mr. Breece’s company, Breece and Associates, handles accounting and tax matters for established companies and high profile individuals. He is an active investor in both the stock market and early stage private companies.
|
|
|
•
|
Dr. Robert F. Ehrman . Dr. Ehrman is an owner and manager of commercial real estate, and has owned and managed several successful businesses. He attended the University of Miami School of Medicine, Northwestern Chiropractic College, and the University of Minnesota. Mr. Ehrman is a resident of Miami, Florida.
|
All of the Advisory Board Members are PowerVerde shareholders.
Compliance with Section 16(a) of the Securities and Exchange Act of 1934
Under the securities laws of the United States, our directors, executive officers and any persons holding more than 10% of the Company’s common stock are required to report their initial ownership of the Company’s common stock and any subsequent changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established and the Company is required to identify in this Report those persons who failed to timely file these reports. All of the filing requirements were satisfied in 2014. In making this disclosure, we have relied solely on written representations of our directors and executive officers and copies of the reports that have been filed with the Commission.
Code of Ethics
We have not adopted a code of ethics for our management because of the costs involved and our lack of resources and limited operations.
21
Through March 2015, we have not paid any compensation to officers or directors in such capacity, except pursuant to our former employment agreement with Mr. Konrad described below. On February 1, 2011, we entered into a Contracted Consulting Services Agreement with PowerVerde Consulting Services, Inc., which is wholly-owned by Mr. Barker, whereby his company received a $5,000 relocation fee and received $6,000 per month for his services beginning February 15, 2011, subject to termination at any time by either party upon written notice to the other. This agreement was terminated in January 2012. Mr. Konrad also received a salary of $10,000 per month from April 2011 to October 2012 pursuant to his employment agreement described below. Since becoming PowerVerde officers, Messrs. Davis and Hofmann have not received any salary or other cash compensation for services in that capacity except that, in June 2011, Messrs. Davis and Hofmann received three-year warrants to purchase 600,000 and 200,000 shares, respectively, of our common stock, at a price of $1.05 per share (the market price on the date of grant). In addition, in March 2013, Messrs. Davis and Hofmann received five-year warrants to purchase 1,000,000 and 500,000 shares, respectively, of our common stock, at a price of $.30 per share (the market price on the date of grant). In March 2012, in exchange for his interest in Cornerstone, our then officer and director Bryce Johnson received 1,575,000 shares of our restricted common stock and three-year warrants to purchase 150,000 shares of our common stock at exercise prices of $2.00, $3.00 and $4.00 as to 50,000 shares each. Mr. Johnson resigned from his positions with PowerVerde in March 2013.
Employment Agreements
On April 7, 2011, in order to enhance our ability to raise capital and limit dilution of our stockholders, we entered into an agreement with our co-founder George Konrad, pursuant to which Mr. Konrad agreed to surrender to our treasury 4,500,000 shares of our common stock owned by him since inception in exchange for our (i) entering into an employment agreement with him; and (ii) agreeing to pay to his company, ARD, $200,000, representing the cost of certain equipment owned by ARD which was principally used by us.
Consequently, on April 7, 2011, we entered into a two-year employment agreement with Mr. Konrad, pursuant to which Mr. Konrad served as our President. Pursuant to this employment agreement, we paid Mr. Konrad a salary of $10,000 per month. The employment agreement contained standard confidentiality provisions, as well as standard non-competition and non-solicitation provisions which survive for two years following termination of employment.
On August 19, 2011, we amended our agreement with Mr. Konrad dated as of April 7, 2011, relating to his surrender to the Company’s treasury of 4,500,000 shares of common stock (the “Original Agreement”). Pursuant to this amendment, we extended the due date for payment of $200,000 to be made to Mr. Konrad’s company, ARD, under the Original Agreement to on or before April 7, 2013.
On October 16, 2012, in order to enhance our ability to raise capital and limit dilution of our stockholders, as well as to satisfy our obligations to ARD for past services and Mr. Konrad under the agreement dated April 7, 2011 as amended August 19, 2011 (the “Initial Agreement”) and the employment agreement between Mr. Konrad and the Company dated April 7, 2011( the “Employment Agreement”), we entered into an agreement (the “Settlement Agreement”) with Mr. Konrad and ARD, pursuant to which Mr. Konrad agreed to surrender to our treasury 3,000,000 shares of our common stock owned by him in exchange for payment of $530,000. Of this amount, $130,000 was paid to ARD and $300,000 was paid to Mr. Konrad upon execution of the Settlement Agreement, and we agreed to pay $100,000 to Mr. Konrad in six consecutive monthly installments of $16,666.67 each due on the 16th day of each month beginning November 16, 2012. In the event any part of the $100,000 balance remained unpaid six months after the date of the Settlement Agreement, Mr. Konrad had an option to convert some or all of the unpaid balance into shares of the Company’s common stock at a price of .0667 per share. The execution of the Settlement Agreement terminated both the Initial Agreement and the Employment Agreement, and neither party had any further obligations or liabilities under those agreements. In March 2014, our debt to Mr. Konrad was paid in full following his receipt of payments totaling $116,666.67 in 2013 and 2014.
22
Pursuant to the Settlement Agreement, Mr. Konrad resigned from his positions as President and Director of PowerVerde. He was not replaced in either position.
Effective June 15, 2011, we entered into an employment agreement with Mark P. Prinz, pursuant to which Mr. Prinz serves as a Project Engineer. Pursuant to this agreement, we pay Mr. Prinz a salary of $11,250 per month, and we paid him a one-time signing bonus of $5,000. This agreement is terminable by either party without cause upon 30 days’ prior written notice. In connection with this employment agreement, we granted Mr. Prinz (i) a 10-year option to purchase 100,000 shares of our common stock at a price of $1.23 per share (the market price on the date of grant); and (ii) a 10-year option to purchase 100,000 shares of our common stock at a price of $2.00 per share. In each case, one-fourth of the option shares, i.e., 25,000 shares, vested as of the date of the employment agreement, and the balance vests in equal installments every six months thereafter until fully vested, provided that Mr. Prinz is still employed by us at the time and subject to PowerVerde achieving certain operational targets. Additionally, in connection with this employment agreement, Mr. Prinz assigned certain intellectual property rights to the Company. The employment agreement contains standard confidentiality provisions, as well as standard non-competition and non-solicitation provisions which survive for two years following termination of employment.
On October 25, 2012, we entered into a consulting agreement with Hank Leibowitz, the principal of Waste Heat Solutions, LLC and an expert with 39 years experience in the field of advanced energy systems. Pursuant to this consulting agreement, which is terminable by either party on 30 days’ notice, we paid to Mr. Leibowitz’s company, Waste Heat Solutions, $5,000 per month through February 2013 and have paid $7,500 per month thereafter. In connection with this consulting agreement, we 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. 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.
We may also issue to our officers and directors stock options on terms and conditions to be determined by our Board of Directors or designated committee.
Compensation of Directors
We have not yet determined a compensation plan for our directors. We intend to provide our directors with reasonable compensation for their services in cash, stock and/or options.
Indemnification of Directors and Officers
Our Certificate of Incorporation allows us to indemnify our present and former officers and directors and other personnel against liabilities and expenses arising from their service to the full extent permitted by Delaware law. The persons indemnified include our (i) present or former directors or officers, (ii) any person who while serving in any of the capacities referred to in clause (i) who served at our request as a director, officer, partner, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, and (iii) any person nominated or designated by (or pursuant to authority granted by) our Board of Directors or any committee thereof to serve in any of the capacities referred to in clauses (i) or (ii).
23
The following table sets forth certain information as of March 13, 2015, regarding the beneficial ownership of our common stock by (i) each of our directors and “named executive officers” and (ii) all of our executive officers and directors as a group. To our knowledge, no other person beneficially owns more than 5% of our common stock. As of March 13, 2015 we had 31,750,106 shares outstanding.
|
Name and Address of Beneficial Owner
|
Shares Owned
|
Percent of Class
|
|||||
|
George Konrad1
|
4,027,408
|
12.68
|
% | ||||
|
21615 N Second Avenue
|
|||||||
|
Phoenix, AZ 85027
|
|||||||
|
Bryce Johnson2
|
1,858,333
|
5.85
|
% | ||||
|
7595 E. Gray Road
|
|||||||
|
Scottsdale, Arizona 85266
|
|||||||
|
Fred Barker3
|
1,695,990
|
5.34
|
% | ||||
|
21615 N Second Avenue
|
|||||||
|
Phoenix, AZ 85027
|
|||||||
|
Officers and Directors
|
|||||||
|
Richard H. Davis4
|
2,003,033
|
5.93
|
% | ||||
|
8365 SW 168 Terrace
|
|||||||
|
Palmetto Bay, FL l33157
|
|||||||
|
John L. Hofmann5
|
700,000
|
2.16
|
% | ||||
|
420 S. Dixie Highway, Suite 4B
|
|||||||
|
Coral Gables, Florida 33146
|
|||||||
|
All Directors and Executive Officers as a group ( persons)6
|
2,703,033
|
7.85
|
% | ||||
1 Mr. Konrad resigned as President and Director in October 2012. At that time, he surrendered 3,000,000 shares of common stock to our Treasury.
2 Mr. Johnson resigned as an officer and director in March 2013. Includes 150,000 shares represented by currently exercisable warrants.
3 Mr. Barker’s shares are owned by Mr. Barker and his wife as joint tenants. Mr. Barker resigned as an officer and director in January 2015.
4 Mr. Davis’ shares include: 1,600,000 shares represented by currently exercisable warrants, 114,033 shares owned by Mr. Davis’ wife, as to which he disclaims beneficial ownership, and 10,000 shares owned by Darby Shore Management, Inc., a Florida corporation (“Darby”), for which Mr. Davis is an officer, director and 25% shareholder. Mr. Davis may be deemed to have voting and investment power over these shares held by Darby.
5 All of these shares are represented by currently exercisable warrants.
6 Includes 2,300,000 shares represented by currently exercisable warrants.
24
See Item 11. “Executive Compensation.”
In May 2012, Mr. Barker sold 450,000 shares of common stock to PowerVerde for a price of $90,000 ($.20 per share). The 450,000 shares of common stock were surrendered to our treasury. The purchase price was payable $10,000 at closing and $10,000 per month through January 2013. Payment of the purchase price was completed in May 2013.
Mr. Barker resigned from his positions as an officer and director of the Company in January 2015.
Since July 2010, Mr. Hofmann’s accounting firm, J.L. Hofmann & Associates, P.A. (“JLHPA”) has provided financial consulting and accounting services to PowerVerde. We paid a total of $42,625 to JLHPA in 2014.
We do not have any independent directors, as our sole director Mr. Davis is an officer. We intend to seek qualified independent directors to serve on our Board of Directors by the end of 2015.
The firm of Cherry Bekaert LLP, Certified Public Accountants (“CB”) was designated by our Board of Directors to audit the consolidated financial statements of our company for the fiscal years ended December 31, 2014 and 2013. The following table summarizes the aggregate fees billed and expected to be billed to us by CB for the fiscal years ended December 31, 2014 and 2013, respectively:
Principal Accountant Fees and Service
|
2014
|
2013
|
||||||
|
Audit Fees
|
$
|
43,250
|
$
|
44,000
|
|||
|
Total
|
$
|
43,250
|
$
|
44,000
|
|||
Audit Fees
The aggregate fees billed and expected to be billed by CB for professional services rendered for the fiscal years ended 2014 and 2013, respectively, including fees associated with the annual audit, the reviews of the consolidated financial statements included in our Forms 10-K, the reviews of the quarterly reports on Form 10-Q, fees related to filings with the Securities and Exchange Commission and consultations on accounting issues and the application on new accounting pronouncements were approximately $43,250 and $44,000, respectively.
Tax Fees
The aggregate fees billed or expected to be billed by J. L. Hofmann & Associates P.A. for tax compliance, tax advice and tax planning rendered to the Company for each of the fiscal years ended December 31, 2014 and 2013 were approximately $2,000.
25
See Exhibit Index and Financial Statements Index, below.
PowerVerde, Inc.
Annual Report on Form 10-K
Year Ended December 31, 2014
EXHIBIT INDEX
|
Exhibit No.
|
Description
|
|
|
3.1
|
Certificate of Incorporation of Vyrex Corporation as filed with the Delaware Secretary of State on September 8, 2005. 1
|
|
|
3.2
|
Bylaws of Vyrex Corporation, dated as of September 9, 2005. 1
|
|
|
3.3
|
Amended and Restated Certificate of Incorporation of Vyrex Corporation as filed with the Delaware Secretary of State on August 14, 2008. 2
|
|
|
10.1
|
Agreement and Plan of Merger, dated as of February 11, 2008 by and among Vyrex Corporation, Vyrex Acquisition Corporation and PowerVerde, Inc. 1,3
|
|
|
10.4
|
Intellectual Property Transfer Agreement dated as of March 4, 2009, between PowerVerde, Inc. and Edward C. Gomez. 6
|
|
|
10.9
|
Agreement dated April 7, 2011, between PowerVerde, Inc. and George Konrad. 8
|
|
|
10.10
|
Employment Agreement dated April 7, 2011, between PowerVerde, Inc. and George Konrad. 8
|
|
|
10.11
|
Employment Agreement dated as of June 15, 2011, between PowerVerde, Inc. and Mark P. Prinz 8
|
|
|
10.14
|
Amendment to Agreement dated August 19, 2011, between PowerVerde, Inc. and George Konrad.8
|
|
|
10.15
|
License Agreement dated as of September 29, 2011, between PowerVerde, Inc. and Newton Investments BV. 9
|
|
|
10.16
|
Binding Letter of Intent for Acquisition dated November 1, 2011, between PowerVerde, Inc., Bryce Johnson, Paul Kelly and Vince Hils. 10,
|
|
|
10.17
|
Agreement dated February 9, 2012, by and between PowerVerde, Inc. and Newton Investments B.V.11
|
|
|
10.18
|
Membership Interest Purchase Agreement between PowerVerde, Inc., Bryce Johnson, Paul Kelly and Vince Hils dated March 30, 2012. 12
|
26
|
10.19
|
Agreement dated October 16, 2012, among PowerVerde, Inc., George Konrad and Arizona Research and Development Inc. 19
|
|
|
10.20
10.21
10.22
|
Consulting Agreement between the Company and Waste Heat Solutions LLC dated October 25, 2012. 14
Form of Series A Secured Promissory Note dated December 2012. 14
Security Agreement between PowerVerde Inc. and Series A Note holders dated December 31, 2012. 14
|
|
|
10.23
|
Amendment to the Settlement Agreement between the Company and George Konrad dated February 7, 2014. 15
|
|
|
21.1
|
Subsidiaries of the Company. 1
|
|
|
31.1
|
Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.2
|
Certification of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
1
|
Previously filed on Form 8-K filed with the SEC on February 11, 2008.
|
|
2
|
Previously filed on Schedule 14A filed with the SEC on July 21, 2008.
|
|
3
|
Nonmaterial schedules and exhibits identified in the Agreement and Plan of Merger have been omitted pursuant to Item 601(b)(2) of Regulation S-B. The Company agrees to furnish supplementally to the SEC upon request by the SEC a copy of any omitted schedule(s) or exhibit(s).
|
|
4
|
Previously filed on Form 10-K for the year ended December 31, 2008 filed with the SEC on April 15, 2009.
|
|
5
|
Previously filed on Form 10-Q for the quarter ended September 30, 2009 as filed with the SEC on November 17, 2009.
|
|
6
|
Previously filed on Form 10-K for the year ended December 31, 2009 filed with the SEC on April 14, 2010.
|
|
7
|
Previously filed on Form 8-K filed with the SEC on February 4, 2011.
|
|
8
|
Previously filed on Form 10-Q/A for the quarter ended June 30, 2011 filed with the SEC on September 8, 2011.
|
|
9
|
Previously filed on Form 8-K filed with the SEC on September 30, 2011
|
|
10
|
Previously filed on Form 8-K filed with the SEC on November 7, 2011
|
|
11
|
Previously filed on Form 8-K filed with the SEC on February 9, 2012.
|
|
12
|
Previously filed on Form 8-K filed with the SEC on April 5, 2012.
|
|
13
|
Previously filed on Form 8-K filed with the SEC on October 22, 2012.
|
|
14
|
Previously filed on Form 10-K for the year ended December 31, 2012, filed with the SEC on May 16, 2013.
|
|
15
|
Previously filed on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 17, 2014.
|
27
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
POWERVERDE, INC.
|
||
|
Dated: March 13, 2015
|
by:
|
/s/ Richard H. Davis
|
|
Richard H. Davis
|
||
|
CEO and Principal Executive Officer
|
||
In accordance with the Exchange Act, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/ Richard H. Davis.
|
Chief Executive Officer, Director
|
March 13, 2015
|
||
|
/s/ John L. Hofmann
|
Chief Financial Officer
|
March 13, 2015
|
28
PowerVerde, Inc. and Subsidiary
Annual Report on Form 10-K
Year Ended December 31, 2014
INDEX TO FINANCIAL STATEMENTS
i
To the Board of Directors and Stockholders of
PowerVerde, Inc. and Subsidiary
Coral Gables, Florida
We have audited the consolidated balance sheets of PowerVerde, Inc. and Subsidiary (a Development Stage Company), as of December 31, 2014 and 2013, and the related consolidated statements of operations, changes in stockholders’ equity (deficiency), and cash flows for the years then ended and the period from March 9, 2007 (Date of Inception) to December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PowerVerde, Inc. and Subsidiary as of December 31, 2014 and 2013, and the consolidated results of its operations and its consolidated cash flows for the years then ended and the period from March 9, 2007 (Date of Inception) to December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the consolidated financial statements, the Company incurred a net loss of $565,913 and $1,054,959 for 2014 and 2013, respectively. As of December 31, 2014 the accumulated deficit was $11,232,677. These factors, and others discussed in Note 2, raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amount and classification of liabilities that might be necessary in the event the Company cannot continue in existence.
Cherry Bekaert LLP
Coral Gables, Florida
March 13, 2015
1
PowerVerde, Inc. and Subsidiary
(A Development Stage Company)
|
December 31,
|
||||||||
|
2014
|
2013
|
|||||||
|
Assets
|
|
|
||||||
|
Current Assets:
|
|
|
||||||
|
Cash and cash equivalents
|
$ | 4,736 | $ | 48,306 | ||||
|
Accounts receivable
|
189,220 | 49,844 | ||||||
|
Employee advances
|
12,292 | 19,292 | ||||||
|
Prepaid expenses
|
14,238 | 18,366 | ||||||
|
Total Current Assets
|
220,486 | 135,808 | ||||||
|
Property and Equipment
|
||||||||
|
Property and equipment, net of accumulated depreciation of $55,258 and $38,616, respectively
|
52,383 | 55,434 | ||||||
|
Other Assets
|
||||||||
|
Intellectual property, net of accumulated amortization of $604,487 and $384,673, respectively
|
54,953 | 274,767 | ||||||
|
Total Assets
|
$ | 327,822 | $ | 466,009 | ||||
|
|
||||||||
|
Liabilities and Stockholders’ Equity (Deficiency)
|
||||||||
|
Current Liabilities
|
||||||||
|
Accounts payable and accrued expenses
|
$ | 100,006 | $ | 43,575 | ||||
|
Payable to related parties
|
41,900 | 163,965 | ||||||
|
Notes payable to related parties
|
— | 314,140 | ||||||
|
Total Current Liabilities
|
141,906 | 521,680 | ||||||
|
Long-Term Liabilities
|
||||||||
|
Notes payable to related parties
|
374,235 | — | ||||||
|
Total Long-Term Liabilities
|
374,235 | — | ||||||
|
Total Liabilities
|
516,141 | 521,680 | ||||||
|
|
||||||||
|
Stockholders’ Equity (Deficiency)
|
||||||||
| Preferred stock: | ||||||||
| 50,000,000 preferred shares authorized, 0 preferred shares issued and outstanding at December 31, 2014 and 2013. | — | — | ||||||
|
Common stock:
|
||||||||
|
200,000,000 common shares authorized, par value $0.0001 per share, 31,750,106 common shares issued and outstanding at December 31, 2014 and 27,600,106 common shares issued and outstanding at December 31, 2013
|
3,981 | 3,567 | ||||||
|
Additional paid-in capital
|
11,531,516 | 11,098,665 | ||||||
|
Treasury stock, 8,550,000 shares at cost
|
(491,139 | ) | (491,139 | ) | ||||
|
Deficit accumulated in the development stage
|
(11,232,677 | ) | (10,666,764 | ) | ||||
|
|
||||||||
|
Total Stockholders’ Equity (Deficiency)
|
(188,319 | ) | (55,671 | ) | ||||
|
|
||||||||
|
Total Liabilities and Stockholders’ Equity (Deficiency)
|
$ | 327,822 | $ | 466,009 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
2
PowerVerde, Inc. and Subsidiary
(A Development Stage Company)
For the years ended December 31, 2014 and 2013, and the
period from March 9, 2007 (Date of Inception) to December 31, 2014
|
2014
|
2013
|
Cumulative from
inception through
December 31, 2014
|
||||||||||
|
Revenue, Net
|
$ | 428,747 | $ | 359,362 | $ | 1,266,558 | ||||||
|
Cost of Goods Sold
|
— | — | 136,925 | |||||||||
|
Gross Profit
|
428,747 | 359,362 | 1,129,633 | |||||||||
|
Operating Expenses
|
||||||||||||
|
Research and development
|
364,095 | 459,651 | 4,152,640 | |||||||||
|
General and administrative
|
501,706 | 844,259 | 4,996,395 | |||||||||
|
Goodwill impairment
|
— | — | 2,637,760 | |||||||||
|
Total Operating Expenses
|
865,801 | 1,303,910 | 11,786,795 | |||||||||
|
Loss from Operations
|
(437,054 | ) | (944,548 | ) | (10,657,162 | ) | ||||||
|
Other Income (Expenses)
|
||||||||||||
|
Interest income
|
— | — | 2,401 | |||||||||
|
Interest expense
|
(128,859 | ) | (147,161 | ) | (633,927 | ) | ||||||
|
Other income (expenses)
|
— | 36,750 | 56,011 | |||||||||
|
Total Other Income (Expenses)
|
(128,859 | ) | (110,411 | ) | (575,515 | ) | ||||||
|
Loss before Income Taxes
|
(565,913 | ) | (1,054,959 | ) | (11,232,677 | ) | ||||||
|
Provision for Income Taxes
|
— | — | — | |||||||||
|
Net Loss
|
$ | (565,913 | ) | $ | (1,054,959 | ) | $ | (11,232,677 | ) | |||
|
Net Loss per Share - Basic and Diluted
|
$ | (0.02 | ) | $ | (0.04 | ) | ||||||
|
Weighted Average Common Shares Outstanding - Basic and Diluted
|
30,613,257 | 26,865,503 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
PowerVerde, Inc. and Subsidiary
(A Development Stage Company)
For the years ended December 31, 2014 and 2013, and the
period from March 9, 2007 (Date of Inception) to December 31, 2014
|
Common
Shares
|
Common
Stock
|
Additional
Paid in
Capital
|
Treasury
Stock
|
Deficit
Accumulated
during the
Development
Stage
|
Total
Stockholders’
Equity (Deficit)
|
|||||||||||||||||||
|
Balance at March 9, 2007 (date of inception)
|
— | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
|
Common Stock issued for cash, net of stock issuance costs of $45,398
|
20,350,000 | 20,350 | 659,252 | — | — | 679,602 | ||||||||||||||||||
|
Net Loss
|
— | — | — | — | (274,402 | ) | (274,402 | ) | ||||||||||||||||
|
Balances, December 31, 2007
|
20,350,000 | $ | 20,350 | $ | 659,252 | $ | — | $ | (274,402 | ) | $ | 405,200 | ||||||||||||
|
Sale of common stock at $.50 per share
|
50,000 | 50 | 24,950 | — | — | 25,000 | ||||||||||||||||||
|
Stockholder Equity of Vyrex Corporation at merger
|
1,019,144 | 102 | (479,771 | ) | — | — | (479,669 | ) | ||||||||||||||||
|
Recapitalization of PowerVerde stockholders’ equity
|
(20,400,000 | ) | (20,400 | ) | 20,400 | — | — | — | ||||||||||||||||
|
Shares issued related to forgiveness of debt and issued for services
|
275,000 | 28 | 249,972 | — | — | 250,000 | ||||||||||||||||||
|
Shares issued in exchange for PowerVerde shares
|
24,588,734 | 2,459 | (2,459 | ) | — | — | — | |||||||||||||||||
|
Warrants issued with debt
|
— | — | 299,984 | — | — | 299,984 | ||||||||||||||||||
|
Net loss
|
— | — | — | — | (829,556 | ) | (829,556 | ) | ||||||||||||||||
|
Balances, December 31, 2008
|
25,882,878 | $ | 2,589 | $ | 772,328 | $ | — | $ | (1,103,958 | ) | $ | (329,041 | ) | |||||||||||
|
Sale of common stock at $.75 per share, net of stock issuance costs of $85,000
|
1,266,667 | 126 | 864,874 | — | — | 865,000 | ||||||||||||||||||
|
Common stock issued on conversion of debt
|
378,521 | 38 | 189,223 | — | — | 189,261 | ||||||||||||||||||
|
Common stock issued for services
|
75,000 | 8 | 56,242 | 56,242 | ||||||||||||||||||||
|
Net loss
|
— | — | — | — | (890,980 | ) | (890,980 | ) | ||||||||||||||||
|
Balances, December 31, 2009
|
27,603,066 | $ | 2,761 | $ | 1,882,667 | $ | — | $ | (1,994,938 | ) | $ | (109,510 | ) | |||||||||||
|
Sale of common stock at $.75 per share, net of stock issuance costs of $85,000
|
439,999 | 43 | 296,958 | — | — | 297,001 | ||||||||||||||||||
|
Net loss
|
— | — | — | — | (308,352 | ) | (308,352 | ) | ||||||||||||||||
|
Balances, December 31, 2010
|
28,043,065 | $ | 2,804 | $ | 2,179,625 | $ | — | $ | (2,303,290 | ) | $ | (120,861 | ) | |||||||||||
|
Sale of common stock at $.75 per share, net of stock issuance costs of $150,000
|
2,000,000 | 200 | 1,349,800 | — | — | 1,350,000 | ||||||||||||||||||
|
Stock-based compensation
|
— | — | 466,907 | — | — | 466,907 | ||||||||||||||||||
|
Warrants issued for services
|
— | — | 612,150 | — | — | 612,150 | ||||||||||||||||||
|
Warrants exercised
|
81,500 | 8 | 122,242 | — | — | 122,250 | ||||||||||||||||||
|
Treasury stock
|
(4,500,000 | ) | — | — | (170,758 | ) | — | (170,758 | ) | |||||||||||||||
|
Net loss
|
— | — | — | — | (2,553,465 | ) | (2,553,465 | ) | ||||||||||||||||
|
Balances, December 31, 2011
|
25,624,565 | $ | 3,012 | $ | 4,730,724 | $ | (170,758 | ) | $ | (4,856,755 | ) | $ | (293,777 | ) | ||||||||||
|
Sale of 906,000 shares of common stock at $1.00 per share, 450,000 at $.715 per share and 396,000 shares at $.43 per share, net of stock issuance costs of $139,803
|
1,752,000 | 176 | 1,258,052 | — | — | 1,258,228 | ||||||||||||||||||
|
Issuance of warrants for settlement with Newton
|
— | — | 262,700 | — | — | 262,700 | ||||||||||||||||||
|
Stock-based compensation
|
— | — | 658,381 | — | — | 658,381 | ||||||||||||||||||
|
Issuance of common stock at $1.37 per share for Cornerstone acquisition
|
2,260,000 | 226 | 3,095,974 | — | — | 3,096,200 | ||||||||||||||||||
|
Issuance of warrants for Cornerstone acquisition
|
— | — | 201,000 | — | — | 201,000 | ||||||||||||||||||
|
Cancellation of shares issued for services to Del Mar Consulting
|
(75,000 | ) | — | — | — | — | — | |||||||||||||||||
|
Warrants issued in connection with notes payable to related party
|
— | — | 71,500 | — | — | 71,500 | ||||||||||||||||||
|
Treasury stock
|
(3,550,000 | ) | — | — | (320,381 | ) | — | (320,381 | ) | |||||||||||||||
|
Net loss
|
— | — | — | — | (4,755,050 | ) | (4,755,050 | ) | ||||||||||||||||
|
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
|
1,200,000 | 121 | 299,879 | — | — | 300,000 | ||||||||||||||||||
|
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 | ||||||||||||||||||
|
Warrants issued in connection with derivative liability
|
— | — | 48,000 | — | — | 48,000 | ||||||||||||||||||
|
Common stock issued on conversion of debt
|
44,791 | — | — | — | — | |||||||||||||||||||
|
Cashless exercise of options
|
18,750 | — | — | — | — | |||||||||||||||||||
|
Net loss
|
— | — | — | — | (1,054,959 | ) | (1,054,959 | ) | ||||||||||||||||
|
Balances, December 31, 2013
|
27,600,106 | $ | 3,567 | $ | 11,098,665 | $ | (491,139 | ) | $ | (10,666,764 | ) | $ | (55,671 | ) | ||||||||||
|
Sale of common stock at $.10 per share, net of stock issuance costs of $7,500
|
4,150,000 | 414 | 407,086 | — | — | 407,500 | ||||||||||||||||||
|
Modification of warrants in connection with Notes payable to related party
|
— | — | 25,765 | — | — | 25,765 | ||||||||||||||||||
|
Net loss
|
— | — | — | — | (565,913 | ) | (565,913 | ) | ||||||||||||||||
|
Balances, December 31, 2014
|
31,750,106 | $ | 3,981 | $ | 11,531,516 | $ | (491,139 | ) | $ | (11,232,677 | ) | $ | (188,319 | ) | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
PowerVerde, Inc. and Subsidiary
(A Development Stage Company)
For the years ended December 31, 2014 and 2013, and the
period from March 9, 2007 (Date of Inception) to December 31, 2014
|
2014
|
2013
|
Cumulative from
inception through
December 31, 2014
|
||||||||||
|
Cash Flows from Operating Activities
|
||||||||||||
|
Net loss
|
$ | (565,913 | ) | $ | (1,054,959 | ) | $ | (11,232,677 | ) | |||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||||||
|
Depreciation and amortization
|
236,455 | 231,658 | 659,744 | |||||||||
|
Amortization of discount
|
85,860 | 87,773 | 526,846 | |||||||||
|
Stock based compensation
|
— | 121,237 | 1,302,767 | |||||||||
|
Common stock issued for services
|
— | 124,750 | 124,750 | |||||||||
|
Goodwill impairment
|
— | — | 2,637,760 | |||||||||
|
Warrants issued for services
|
— | 210,000 | 822,150 | |||||||||
|
Warrants issued for settlement
|
— | — | 262,700 | |||||||||
|
Gain on re-measurement of derivative liability
|
— | (36,750 | ) | (40,000 | ) | |||||||
| Changes in operating assets and liabilities | ||||||||||||
|
Accounts receivable and prepaid expenses
|
(135,248 | ) | 94,118 | (203,458 | ) | |||||||
|
Employee advances
|
7,000 | (19,292 | ) | (12,292 | ) | |||||||
|
Accounts payable and accrued expenses
|
56,431 | (65,993 | ) | (130,526 | ) | |||||||
|
Payable to related parties
|
(22,065 | ) | (6,799 | ) | 130,747 | |||||||
|
Cash Used in Operating Activities
|
(337,480 | ) | (314,257 | ) | (5,151,489 | ) | ||||||
|
Cash Flows From Investing Activities
|
||||||||||||
|
Purchase of property and equipment
|
(13,590 | ) | (57,720 | ) | (107,640 | ) | ||||||
|
Cash acquired in business acquisition
|
— | — | 872 | |||||||||
|
Cash Used in Investing Activities
|
(13,590 | ) | (57,720 | ) | (106,768 | ) | ||||||
|
Cash Flows from Financing Activities
|
||||||||||||
|
Proceeds from issuance of common stock
|
415,000 | 300,000 | 5,765,281 | |||||||||
|
Proceeds from notes payable to related parties
|
— | 75,000 | 700,000 | |||||||||
|
Payment of line of credit
|
— | — | (50,000 | ) | ||||||||
|
Payment of note payable to related parties
|
(100,000 | ) | — | (371,206 | ) | |||||||
|
Purchase of treasury stock
|
— | — | (320,381 | ) | ||||||||
|
Payment of stock issuance costs
|
(7,500 | ) | — | (460,701 | ) | |||||||
|
Cash Provided by Financing Activities
|
307,500 | 375,000 | 5,262,993 | |||||||||
|
Net (Decrease) Increase in Cash and Cash Equivalents
|
(43,570 | ) | 3,023 | 4,736 | ||||||||
|
Cash and cash equivalents at Beginning of Period
|
48,306 | 45,283 | — | |||||||||
|
Cash and cash equivalents at End of Period
|
$ | 4,736 | $ | 48,306 | $ | 4,736 | ||||||
|
Supplemental Disclosure of Cashflow Information
|
||||||||||||
|
Cash Paid for Interest
|
$ | 43,000 | $ | 20,705 | $ | 63,705 | ||||||
|
Cash Paid for Income Taxes
|
$ | — | $ | — | $ | 24,221 | ||||||
|
Supplemental Schedule of Non-Cash Financing
|
||||||||||||
|
Common stock issued for convertible debt
|
$ | — | $ | — | $ | 189,261 | ||||||
|
Common stock issued for services
|
$ | — | $ | 124,750 | $ | 124,750 | ||||||
|
Common stock issued for acquisition of Cornerstone Conservation Group, LLC
|
$ | — | $ | — | $ | 3,096,200 | ||||||
|
Warrants issued in connection with acquisition of Cornerstone Conservation Group, LLC
|
$ | — | $ | — | $ | 201,000 | ||||||
|
Purchase of treasury stock with long-term related party payable
|
$ | $ | 242,758 | |||||||||
|
Warrants issued in connection with debt
|
$ | — | $ | — | $ | 299,984 | ||||||
|
Issuance of warrants as part of notes payable to related party of which $88,000 ($16,500 in Q1 2013) was classified as additional paid in capital and $88,000 ($16,500 in Q1 2013) was classified as a derivative liability
|
$ | — | $ | 176,000 | $ | 176,000 | ||||||
|
Debt discount in connection with the modified warrants
|
$ | 25,765 | $ | — | $ | 25,765 | ||||||
|
Warrants issued in connection with derivative liability
|
$ | — | $ | 48,000 | $ | 48,000 | ||||||
|
Common stock issued in connection with debt forgiveness and services rendered
|
$ | — | $ | — | $ | 250,000 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
PowerVerde, Inc. and Subsidiary
(A Development Stage Company)
Note 1 – Nature of Business
PowerVerde, Inc. (the “Company”) is a “C” Corporation organized under the Laws of Delaware with operations in Scottsdale, Arizona. The Company’s two founders, now its largest shareholders, have conceived and developed the use of a power systems patent. The Company is in the development stage and it is presently undertaking research and development on a power generating system.
On February 11, 2008, Vyrex Corporation (“Vyrex” or the “Company”); PowerVerde, Inc. (“PowerVerde”) and Vyrex Acquisition Corporation (“VAC”), a wholly-owned subsidiary of Vyrex, all Delaware corporations, entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, on February 12, 2008, VAC merged with and into PowerVerde, with PowerVerde remaining as the surviving corporation and a wholly-owned subsidiary of Vyrex (the “Merger”). As consideration for the Merger, as of the closing of the Merger, each issued and outstanding share of common stock of PowerVerde was converted into the right to receive 1.2053301 shares of the common stock of Vyrex and each share of VAC was converted into one share of PowerVerde common stock. As a result of the Merger, the former shareholders of PowerVerde held 24,588,734 shares, or 95%, of the common stock of Vyrex. Pursuant to the Merger Agreement, PowerVerde paid $233,000 in accounts payable and other liabilities owed by Vyrex. The total purchase price of the transaction of $401,894 includes $60,000 of transaction costs related to the Merger.
In addition, immediately prior to execution of the Merger Agreement, Vyrex paid a $200,000 promissory note through the issuance of 250,000 shares of common stock and issued an additional 25,000 shares of common stock as payment for certain consulting and administrative services.
At a stockholder meeting held on August 6, 2008, the Company’s stockholders approved (i) the change of the Company’s name to “PowerVerde, Inc.” and (ii) the Amended and Restated Certificate of Incorporation filed as an exhibit to the Company’s report on Form 10-Q for the quarter ended June 30, 2008. Immediately prior to the filing of the Certificate changing the Company’s name, the name of the Company’s operating subsidiary was changed from “PowerVerde, Inc.” to “PowerVerde Systems, Inc.”
Note 2 – Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has had recurring operating losses and negative cashflows from operations. Those factors, as well as uncertainty in securing additional funds for continued operations, create an uncertainty about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company plans to finance its operations for the next 12 months through Biotech IP licensing fee revenues and private sales of equity and debt securities to accredited investors.
Note 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of PowerVerde, Inc. and its wholly-owned subsidiary, PowerVerde Systems, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
Development Stage Company
The Company is a development stage company as defined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915, “Development Stage Entities”. The Company is devoting substantially all of its present efforts to establish a new business and none of its planned principal operations have commenced. All losses accumulated since inception has been considered as part of the Company’s development stage activities.
6
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 December 31, 2014 and 2013, accounts receivable were considered to be fully collectible. Accordingly, no allowance for doubtful accounts was provided.
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 reasonable 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.
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.
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 were recognized in the years ended December 31, 2014 and 2013.
7
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.
Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our consolidated financial statements. Our evaluation was performed for the tax years ended December 31, 2011, 2012, 2013 and 2014, the tax years which remain subject to examination by major tax jurisdictions as of December 31, 2014.
We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the consolidated financial statements as general and administrative expense.
Research and Development Costs
The Company’s research and development costs are expensed in the period in which they are incurred. Such expenditures amounted to $364,095 and $459,651 for the years ended December 31, 2014 and 2013, respectively.
Earnings (Loss) Per Share
Earnings (loss) per share is computed in accordance with FASB ASC Topic 260, “Earnings per Share”. Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, if any, 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 antidilutive. Excluded from weighted average common shares outstanding on a diluted basis were warrants exercisable for 5,586,000 shares and options for 2,750,000 shares for December 31, 2014 and warrants exercisable for 7,586,000 shares and options for 2,750,000 shares for December 31, 2013.
8
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.
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 option 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 consolidated balance sheet as of December 31, 2013. There were no derivative liabilities at December 31, 2014 and 2013.
Use of Estimates
The preparation of the consolidated 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 consolidated 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 July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carry forward exists. This guidance requires the unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset. When a deferred tax asset is not available, or the asset is not intended to be used for this purpose, an entity should present the unrecognized tax benefit in the financial statements as a liability. The guidance became effective for us at the beginning of our second quarter of fiscal 2014. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In January 2013, the FASB issued guidance clarifying the scope of disclosure requirements for offsetting assets and liabilities. The amended guidance limits the scope of balance sheet offsetting disclosures to derivatives, repurchase agreements, and securities lending transactions to the extent that they are offset in the financial statements of subject to an enforceable master netting arrangement or similar agreement. The guidance became effective for us at the beginning of our first quarter of fiscal 2014. The adoption of this guidance did not have a material impact on our consolidated financial statements.
9
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.
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. This change should be applied retrospectively for annual reporting periods beginning after December 15, 2014, and interim periods therein. For public business entities, the amendment eliminating the exception to the sufficiency-of-equity-at-risk criterion for development stage entities in paragraph 810-10-15-16 should be applied retrospectively for annual reporting periods beginning after December 15, 2015, and interim periods therein. Early application of each of the amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued. Upon adoption, entities will no longer present or disclose any information required by Topic 915. We are currently evaluating the impact of our pending adoption of ASU 2014-10 on our consolidated financial statements.
In August 2014, the FASB issued Accounting Standard Update ASU2014-15 Disclosure of Uncertainties about an entity’s Ability to Continue as a Going Concern. This ASU amends ASC205-40. ASC205-40 provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related note disclosures. With the amendments made by ASU 2014-15, financial statement disclosures will be required when there is substantial doubt about an entity’s ability to continue as a going concern or when substantial doubt is alleviated as a result of considerations of management’s plans. The new standard provides management with principles for evaluating whether there is substantial doubt by: providing a definition of substantial doubt, requiring an evaluation every reporting period (including interim periods), providing principles for considering the mitigating effect of management’s plans, requiring certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, requiring an express statement and other disclosures when substantial doubt is not alleviated, and requiring an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
Note 5 – Acquisition
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.
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.
10
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 each of the periods ending December 31, 2014 and 2013, amortization expense was $219,813 and accumulated amortization of the intangible asset-intellectual property was $604,487 and $384,673.
Future amortization of the intangible asset – intellectual property was as follows as of December 31, 2014:
| Year ending December 31: | ||||
| 2015 | $ | 54,953 | ||
| Total | 54,953 | |||
11
Note 6 – Property and Equipment
A summary of property and equipment at December 31, 2014 and December 31, 2013 is as follows:
|
2014
|
2013
|
Estimated Useful
Lives
(in years)
|
||||||||
|
Equipment
|
$
|
96,737
|
$
|
83,146
|
5
|
|||||
|
Computer equipment (hardware)
|
6,975
|
6,975
|
3-5
|
|||||||
|
Software
|
3,929
|
3,929
|
3
|
|||||||
|
107,641
|
94,050
|
|||||||||
|
Less: Accumulated depreciation
|
(55,258
|
) |
(38,616
|
) | ||||||
|
$
|
52,383
|
$
|
55,434
|
|||||||
The amounts charged to operations for depreciation expense for the year ended December 31, 2014 and 2013 were $16,641 and $11,845 respectively. Depreciation expense from inception through December 31, 2014 was $55,258.
Note 7– Stockholders’ Equity
Warrants
The Company issued warrants on June 3, 2011 to various persons, including affiliates of the Company, for services provided to the Company. These warrants covered the purchase of 1,855,000 unregistered shares of the Company’s stock at an exercise price of $1.05 per share with a five-year term. These share-based payments have been accounted for in accordance with ASC 815-40 using the Black Scholes warrant pricing model to determine the fair value of each warrant. As of December 31, 2014, 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 $3.00 per share with a five-year term for settlement of certain disputed amounts. These share-based payments have been accounted for in accordance with ASC 815-40 using the Black-Scholes warrant pricing model to determine the fair value of each warrant. As of December 31, 2014, 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 December 31, 2014, 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 December 31, 2014, 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 December 31, 2014, 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 December 31, 2014, 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 $.41 per share in association with the Secured Promissory Note (See Note 10). These warrants expire December 31, 2015. As of December 31, 2014, 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 10). These warrants expire December 31, 2015. As of December 31, 2014, 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 December 31, 2014, all of these warrants were outstanding.
12
On December 1, 2013, the Company issued additional three-year warrants to purchase 400,000 unregistered shares of the Company’s common stock at an exercise price equal to $0.21 per share (the average closing price of the common stock during the 10 trading days prior to December 1, 2013). This was in association with the Secured Promissory Note (See Note 10). These warrants expire December 31, 2016. As of December 31, 2014, all of these warrants were outstanding.
During the fourth quarter of 2014, the Company revised the terms of the original warrants issued December 31, 2012, extending the maturity date from December 31, 2015 to December 31, 2017 and the exercise price was reduced from $0.41 per share to $0.39 per share. The Company also revised the terms of the additional warrants issued December 1, 2013, to extend the maturity date to December 31, 2018 and the exercise price was reduced from $.21 per share to $0.17 per share.
A summary of warrants issued, exercised and expired during the year ending December 31, 2014 is as follows:
|
Shares
|
Weighted Average
Exercise Price
|
Aggregate
Intrinsic
Value
|
||||||||||
|
Balance at December 31, 2013
|
7,586,000 | $ | .92 | $ | 45,000 | |||||||
|
Issued
|
— | — | — | |||||||||
|
Expired
|
(2,000,000 | ) | (.75 | ) | — | |||||||
|
Balance at December 31, 2014
|
5,586,000 | $ | .99 | $ | 45,000 | |||||||
The weighted average grant date fair value of warrants issued during the year ended December 31, 2014 amounted to $0.06 per warrant. The fair value of each warrant granted for equity and debt raises was determined using the Black-Scholes warrant pricing model and the following assumptions:
|
December 31, 2014
|
||||
|
Risk free interest rate
|
1.10 % to 1.38 | % | ||
|
Expected term
|
3-4 years
|
|||
|
Annualized volatility
|
90 | % | ||
|
Expected dividends
|
— | |||
The expected term of warrants granted is based on historical experience with past warrant holders, 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 consolidated statement of operations.
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.
13
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.
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 accredited investors at $.25 per share.
In the first quarter of 2014, the Company raised gross proceeds of $240,000 through private placement of 2,400,000 unregistered shares of common stock to accredited investors at $.10 per share.
In the second quarter of 2014, the Company raised gross proceeds of $75,000 through private placement of 750,000 unregistered shares of common stock to accredited investors at $.10 per share. The Company paid a 10% commission on the gross proceeds of this offering to its placement agent.
In the third quarter of 2014, the Company raised gross proceeds of $100,000 through private placement of 1,000,000 unregistered shares of common stock to accredited investors at $.10 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 consolidated balance sheets. In accordance with GAAP, the Company has discounted this obligation at an imputed rate of 8%. The balance was settled on October 16, 2012 with the surrender of 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 $0.20 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 $5,000 and $33,000 at December 31, 2013 and 2012, respectively, 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, $100,000 of which was due in six equal monthly installments, beginning on November 16, 2012. The Company only made one of the required payments during 2013 and the payment schedule was renegotiated in the fourth quarter of 2013 and the first quarter of 2014. The payable had a balance of $100,000, including accrued interest, as of December 31, 2013 and was included in the “Payable to related parties” in the accompanying consolidated balance sheets. The $100,000 debt was paid in full in the first quarter of 2014.
14
Note 8 – Stock Options
Stock option activity for the year ended December 31, 2014, is summarized as follows:
|
Shares
|
Weighted Average
Exercise Price
|
Weighted Average Remaining Contractual Life (Years)
|
Aggregate Intrinsic
Value
|
|||||||||||||
|
Options outstanding at December 31, 2013
|
2,750,000 | $ | 0.78 | 9.00 | $ | — | ||||||||||
|
Granted
|
— | — | — | — | ||||||||||||
|
Expired/forfeited
|
— | — | — | — | ||||||||||||
|
Options outstanding at December 31, 2014
|
2,750,000 | $ | 0.78 | 9.00 | $ | — | ||||||||||
Total stock-based compensation for the years ended December 31, 2014 and 2013 was $0 and $121,237 respectively.
There is no unrecognized stock compensation expense at December 31, 2014.
Note 9 – 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 December 31, 2013, $400,000 was raised, of which $325,000 was raised in 2012 and $75,000 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 and a commitment to issue additional warrants on December 1, 2013. On December 1, 2013, the Company issued additional three year warrants for 400,000 shares to the investors at an exercise price equal to $.21 per share (the average price of the common stock during the 10 trading days prior to December 1, 2013). See revisions to warrants discussed below.
The promissory notes bear interest at the rate of 10% per annum based on a 365-day year. Accrued interest was 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.
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 commitment to issue warrants on December 1, 2013 was classified as derivative liabilities until issuance on December 1, 2013. On December 1, 2013 the Company determined that the warrants qualified as equity accounting and as such the Company reclassified the fair value of the derivative liability to equity at December 1, 2013.
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 was $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.
15
In the fourth quarter 2014, the Note Holders agreed to extend the maturity date of the Note principal balance to December 31, 2016. In connection with the Note extension, the Company revised the terms of the original warrants issued December 31, 2012, extending the expiration date from December 31, 2015 to December 31, 2017 and the exercise price was reduced from $0.41 per share to $0.39 per share. The Company also revised the terms of the additional warrants to extend the expiration date to December 31, 2018 and the exercise price was reduced from $.21 per share to $0.17 per share. The relative fair value of the common stock warrants recorded as additional paid in capital was $25,765. This discount is being amortized to interest expense over the extended term of the Secured Promissory Note to related parties using the effective interest method. The fair value of the modified common stock warrants was determined using the Black-Scholes pricing model.
On May 19, 2013, the Company entered into a Promissory Note with Edward Gomez, a Company shareholder, 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 was due on May 19, 2014.
On May 5, 2014, the Company entered into a Note Extension Agreement with Mr. Gomez to extend the maturity date of the principal balance to May 19, 2015 and paid the accrued interest of $3,000 through May 19, 2014.
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 acquired, for a period of 10 years, 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 technical problems with the Company’s Systems, the Company deferred commencement of the minimum sales requirement until the problems were resolved. Newton terminated the License Agreement in August 2014.
On October 25, 2012, the Company entered into a consulting agreement with Hank Leibowitz, the principal of Waste Heat Solutions, LLC. Pursuant to this consulting agreement, which is terminable by either party on 30 days’ notice, the Company paid Waste Heat Solutions, $5,000 per month through February 2013 and has paid $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 general and administrative expenses in the consolidated statement 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 as research and development expense in the consolidated statement of operations during 2012. Approximately $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 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.
On November 2, 2012, Keith Johnson, the Company’s former Chief Technical Officer, filed suit against the Company’s operating subsidiary PowerVerde Systems, Inc., in Maricopa County, Arizona, Superior Court. The suit included claims for breach of his employment agreement, for back pay and related claims. Mr. Johnson, whose salary was $12,500 per month, sought back pay of $37,500, reimbursement of expenses totaling approximately $5,012 and other unspecified damages. The Company believes that Mr. Johnson voluntarily terminated his employment in accordance with the agreement and that he has been paid in full. In an abundance of caution, the Company also gave Mr. Johnson 30 days’ notice of termination without cause pursuant to the employment agreement, with this notice to be effective only if the Court determines that his employment was not previously terminated by him. Mr. Johnson ceased working for the Company in early September 2012. Based on the foregoing, the Company believed that it had substantial defenses to Mr. Johnson’s claims, which were denied in the Company’s answer.
16
In May 2014, the case was settled pursuant to the Company’s agreement to pay Mr. Johnson $30,088, with $5,088 due upon execution of the settlement agreement plus an additional $25,000 payable in installments of $12,500 each in July and August 2014. The installments due in July and August are included in the Payable to Related Parties on the condensed consolidated financial statements. As of the date of this filing, all of the settlement payments have been made, and this case is concluded.
Note 11 – Income Taxes
Deferred income taxes are provided based on the provisions of ASC Topic 740, “Accounting for Income Taxes”, to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company did not have any tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months. The tax years that remain subject to examination by major taxing jurisdictions are those for the years ended December 31, 2014, 2013, 2012 and 2011.
The Company classifies interest and penalties arising from underpayment of income taxes in the consolidated statements of operations as general and administrative expenses. As of December 31, 2014, the Company had no accrued interest or penalties related to uncertain tax provisions.
Significant components of the Company’s net deferred income taxes are as follows:
|
|
For the Years ended
December 31,
|
||||||||
| 2014 | 2013 | ||||||||
|
Deferred tax assets:
|
|||||||||
|
Net operating loss carryforwards
|
$ | 2,307,440 | $ | 2,092,216 | |||||
|
Start-up cost
|
350,834 | 381,070 | |||||||
|
Goodwill
|
805,100 | 871,272 | |||||||
|
Amortization of Intellectual Property
|
(6,893 | ) | (6,893 | ) | |||||
|
Stock based compensation
|
621,858 | 542,836 | |||||||
|
Other
|
131 | 1,653 | |||||||
|
Deferred tax assets
|
4,078,470 | 3,882,154 | |||||||
|
Less valuation allowance
|
(4,078,470 | ) | (3,882,154 | ) | |||||
|
Net deferred tax assets after valuation allowance
|
$ | — | $ | — | |||||
A reconciliation of the U.S. statutory federal income tax rate to the effective income tax rate (benefit) follows:
|
Rate Reconciliation
|
For the Years ended
December 31,
|
|||||||
|
|
2014 |
2013
|
||||||
|
Federal income tax at statutory rate
|
$ | (192,410 | ) | $ | (358,686 | ) | ||
|
State Tax, net of Federal rate
|
(20,543 | ) | (58,023 | ) | ||||
|
Permanent Differences
|
237 | (13,829 | ) | |||||
|
Forfeiture of fully vested stock compensation
|
— | 255,438 | ||||||
|
Rate Change from 39.5% to 37.63%
|
— | 88,950 | ||||||
|
Other
|
16,400 | 21,891 | ||||||
|
Change in Valuation Allowance
|
196,316 | 64,259 | ||||||
|
|
$ | — | $ | — | ||||
17
In assessing the ability to realize a portion of the deferred tax assets, management considers whether it is more than likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making the assessment. After consideration of the evidence, both positive and negative, management has determined that a $4,078,470 valuation allowance at December 31, 2014 is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The change in the valuation allowance for the current year is $196,315, as opposed to $64,259 on December 31, 2013. At December 31, 2014, the Company has available net operating loss carry forwards for federal income tax purposes of $5,841,620 expiring at various times from 2027 through 2032.
Valuation and Qualifying Accounts
|
Description
|
Balance at
|
Charged to
|
Write-offs
|
Other
|
Balance at | |||||||||||||||
|
Beginning
|
Cost and
|
|
Charges
|
End of | ||||||||||||||||
|
of Period
|
Expenses
|
|
Period | |||||||||||||||||
|
Deferred tax asset valuation allowance
|
||||||||||||||||||||
|
Year ended December 31, 2014
|
$ | 3,882,154 | $ | 196,316 | $ | — | $ | — | $ | 4,078,470 | ||||||||||
|
Year ended December 31, 2013
|
$ | 3,817,895 | $ | 64,259 | $ | — | $ | — | $ | 3,882,154 | ||||||||||
Note 12 – Related Party Transactions
See Note 7 for discussion of transactions with the Company’s Co-Founders, George Konrad and Fred Barker.
Note 13 – Subsequent Events
There have been no material events since December 31, 2014.
18