374Water Inc. - Quarter Report: 2014 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the Quarterly Period ended June 30, 2014
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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Commission file number: 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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(IRS Employer
Identification No.)
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420 S. Dixie Highway Suite 4-B
Coral Gables, FL 33146
(Address of principal executive offices)
(305) 666-0024
(Registrant’s telephone number including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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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).
o Yes x No
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of August 12, 2014 the issuer had 30,750,106 shares of common stock outstanding.
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PowerVerde, Inc. and Subsidiary
(A Development Stage Company)
June 30, 2014 (Unaudited) and December 31, 2013
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2014
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2013
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Assets
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Current Assets:
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Cash and cash equivalents
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$ | 8,403 | $ | 48,306 | ||||
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Accounts receivable
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125,975 | 49,844 | ||||||
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Employee advances
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19,292 | 19,292 | ||||||
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Prepaid expenses
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11,725 | 18,366 | ||||||
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Total Current Assets
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165,395 | 135,808 | ||||||
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Property and Equipment
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Property and equipment, net of accumulated depreciation of $46,392 and $38,616, respectively
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61,249 | 55,434 | ||||||
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Other Assets
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Intellectual Property, net of accumulated amortization of $494,580 and $384,673, respectively
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164,860 | 274,767 | ||||||
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Total Assets
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$ | 391,504 | $ | 466,009 | ||||
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Liabilities and Stockholders’ Deficiency
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Current Liabilities
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Accounts payable and accrued expenses
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$ | 126,336 | $ | 43,575 | ||||
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Payable to related parties
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71,965 | 163,965 | ||||||
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Notes payable to related parties
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356,719 | 314,140 | ||||||
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Total Liabilities
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555,020 | 521,680 | ||||||
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Stockholders’ Deficiency
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| Common stock: | ||||||||
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100,000,000 common shares authorized, par value $0.0001 per share, 30,750,106 common shares issued and outstanding at June 30, 2014 and 27,600,106 common shares issued and outstanding at December 31, 2013
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3,882 | 3,567 | ||||||
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Additional paid-in capital
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11,405,850 | 11,098,665 | ||||||
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Treasury stock, 8,550,000 shares at cost
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(491,139 | ) | (491,139 | ) | ||||
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Deficit accumulated in the development stage
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(11,082,109 | ) | (10,666,764 | ) | ||||
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Total Stockholders’ Deficiency
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(163,516 | ) | (55,671 | ) | ||||
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Total Liabilities and Stockholders’ Deficiency
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$ | 391,504 | $ | 466,009 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
PowerVerde, Inc. and Subsidiary
(A Development Stage Company)
For the three and six months ended June 30, 2014 and 2013, and the
period from March 9, 2007 (Date of Inception) to June 30, 2014
(Unaudited)
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Three months ended
June 30,
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Six months ended
June 30,
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Cumulative from
inception through
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| 2014 | 2013 | 2014 | 2013 | June 30, 2014 | ||||||||||||||||
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Revenue, Net
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$ | 125,975 | $ | 109,416 | $ | 166,129 | $ | 180,903 | $ | 1,003,940 | ||||||||||
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Cost of Goods Sold
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— | — | — | — | 136,925 | |||||||||||||||
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Gross Profit
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125,975 | 109,416 | 166,129 | 180,903 | 867,015 | |||||||||||||||
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Operating Expenses
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Research and development
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111,115 | 77,405 | 262,596 | 313,562 | 4,051,141 | |||||||||||||||
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General and administrative
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101,887 | 189,827 | 255,322 | 642,504 | 4,750,011 | |||||||||||||||
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Goodwill impairment
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— | — | — | — | 2,637,760 | |||||||||||||||
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Total Operating Expenses
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213,002 | 267,232 | 517,918 | 956,066 | 11,438,912 | |||||||||||||||
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Loss from Operations
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(87,027 | ) | (157,816 | ) | (351,789 | ) | (775,163 | ) | (10,571,897 | ) | ||||||||||
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Other Income (Expenses)
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Interest income
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— | — | — | — | 2,401 | |||||||||||||||
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Interest expense
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(42,368 | ) | (22,021 | ) | (63,556 | ) | (41,759 | ) | (568,624 | ) | ||||||||||
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Other income (expenses)
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— | 4,000 | — | 44,750 | 56,011 | |||||||||||||||
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Total Other Income (Expense)
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(42,368 | ) | (18,021 | ) | (63,556 | ) | 2,991 | (510,212 | ) | |||||||||||
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Loss before Income Taxes
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(129,395 | ) | (175,837 | ) | (415,345 | ) | (772,172 | ) | (11,082,109 | ) | ||||||||||
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Provision for Income Taxes
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— | — | — | — | — | |||||||||||||||
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Net Loss
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$ | (129,395 | ) | $ | (175,837 | ) | $ | (415,345 | ) | $ | (772,172 | ) | $ | (11,082,109 | ) | |||||
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Net Loss per Share - Basic and Diluted
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$ | (0.004 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | ||||||||
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Weighted Average Common Shares Outstanding - Basic and Diluted
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30,197,908 | 26,416,590 | 29,778,007 | 26,220,721 | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
PowerVerde, Inc. and Subsidiary
(A Development Stage Company)
For the six months ended June 30, 2014
(Unaudited)
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Common Shares
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Common Stock
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Additional Paid in Capital
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Treasury Stock
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Deficit Accumulated during the Development Stage
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Total Stockholders’ Deficiency
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Balances, December 31, 2013
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27,600,106 | $ | 3,567 | $ | 11,098,665 | $ | (491,139 | ) | $ | (10,666,764 | ) | $ | (55,671 | ) | ||||||||||
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Sale of common stock at $0.10 per share, net of stock issuance costs of $7,500
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3,150,000 | 315 | 307,185 | 307,500 | ||||||||||||||||||||
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Common stock issued for services
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Stock-based compensation
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Warrants issued for services
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Warrants issued in connection with Notes payable to related party
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Common stock issued on conversion of debt
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Cashless exercise of options
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Net loss for the six months ended June 30, 2014
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(415,345 | ) | (415,345 | ) | ||||||||||||||||||||
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Balances, June 30, 2014
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30,750,106 | $ | 3,882 | $ | 11,405,850 | $ | (491,139 | ) | $ | (11,082,109 | ) | $ | (163,516 | ) | ||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
PowerVerde, Inc. and Subsidiary
(A Development Stage Company)
For the six months ended June 30, 2014 and 2013, and the
period from March 9, 2007 (Date of Inception) to June 30, 2014
(Unaudited)
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2014
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2013
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Cumulative from
inception through
June 30, 2014 |
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Cash Flows from Operating Activities
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Net loss
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$ | (415,345 | ) | $ | (772,172 | ) | $ | (11,082,109 | ) | |||
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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117,683 | 113,424 | 540,972 | |||||||||
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Amortization of discount
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42,579 | 21,061 | 483,565 | |||||||||
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Stock based compensation
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— | 121,237 | 1,302,767 | |||||||||
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Common stock issued for services
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— | 124,750 | 124,750 | |||||||||
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Goodwill impairment
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— | — | 2,637,760 | |||||||||
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Warrants issued for services
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— | 210,000 | 822,150 | |||||||||
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Warrants issued for settlement
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— | — | 262,700 | |||||||||
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Gain on re-measurement of derivative liability
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— | (44,750 | ) | (40,000 | ) | |||||||
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Changes in operating assets and liabilities:
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Accounts receivable and prepaid expenses
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(69,490 | ) | 12,892 | (137,700 | ) | |||||||
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Employee advances
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— | (19,292 | ) | (19,292 | ) | |||||||
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Accounts payable and accrued expenses
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82,761 | 148,598 | (104,196 | ) | ||||||||
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Payable to related parties
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92,000 | 1,734 | 60,812 | |||||||||
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Cash Used in Operating Activities
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(333,812 | ) | (82,518 | ) | (5,147,821 | ) | ||||||
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Cash Flows From Investing Activities
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Purchase of property and equipment
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(13,591 | ) | (55,904 | ) | (107,641 | ) | ||||||
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Cash acquired in business acquisition
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— | — | 872 | |||||||||
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Cash Used in Investing Activities
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(13,591 | ) | (55,904 | ) | (106,769 | ) | ||||||
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Cash Flows from Financing Activities
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Proceeds from issuance of common stock
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315,000 | 125,000 | 5,665,281 | |||||||||
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Proceeds from notes payable to related parties
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— | 75,000 | 700,000 | |||||||||
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Payment of line of credit
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— | — | (50,000 | ) | ||||||||
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Payment of note payable to related parties
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— | — | (271,206 | ) | ||||||||
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Purchase of treasury stock
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— | — | (320,381 | ) | ||||||||
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Payment of stock issuance costs
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(7,500 | ) | — | (460,701 | ) | |||||||
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Cash Provided by Financing Activities
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307,500 | 200,000 | 5,262,993 | |||||||||
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Net Increase (decrease) in Cash and Cash Equivalents
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(39,903 | ) | 61,578 | 8,403 | ||||||||
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Cash and Cash Equivalents at Beginning of Period
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48,306 | 45,283 | $ | — | ||||||||
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Cash and Cash Equivalents at End of Period
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$ | 8,403 | $ | 106,861 | $ | 8,403 | ||||||
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Supplemental Disclosure of Cash Flow Information
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Cash paid during the period for interest
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$ | — | $ | 20,705 | $ | 20,705 | ||||||
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Cash paid during the period for income taxes
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$ | — | $ | — | $ | 24,221 | ||||||
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Supplemental Schedule of Non-Cash Financing Activities
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Common stock issued for convertible debt
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$ | — | $ | — | $ | 189,261 | ||||||
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Common stock issued for services
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$ | — | $ | 11,458 | $ | 124,750 | ||||||
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Common stock issued for acquisition of Cornerstone Conservation Group, LLC
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$ | — | $ | — | $ | 3,096,200 | ||||||
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Warrants issued in connection with acquisition of Cornerstone Conservation Group, LLC
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$ | — | $ | — | $ | 201,000 | ||||||
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Purchase of treasury stock with long-term related party payable
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$ | — | $ | — | $ | 242,758 | ||||||
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Warrants issued in connection with debt
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$ | — | $ | — | $ | 299,984 | ||||||
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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 ($16,500 in Q1 2013) was classified as a derivative liability
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$ | — | $ | 33,000 | $ | 176,000 | ||||||
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Warrants issued in connection with derivative liability
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$ | — | $ | — | $ | 48,000 | ||||||
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Common stock issued in connection with debt forgiveness and services rendered
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$ | — | $ | — | $ | 250,000 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
PowerVerde, Inc. and Subsidiary
June 30, 2014
Note 1 – Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Annual Report of PowerVerde, Inc. (“PowerVerde,” “we,” “us,” “our,” or the “Company”) as of and for the year ended December 31, 2013. The results of operations for the three and six months ended June 30, 2014, are not necessarily indicative of the results to be expected for the full year or for future periods. The condensed consolidated financial statements include the accounts of PowerVerde, Inc., formerly known as Vyrex Corporation (the “Company"), and PowerVerde Systems, Inc., formerly known as PowerVerde, Inc., its wholly-owned subsidiary. Intercompany balances and transactions have been eliminated in consolidation.
Note 2 – Going Concern
The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has had recurring operating losses and negative cash flows from operations. Those factors, as well as uncertainty in securing additional funds for continued operations, create an uncertainty about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Note 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of PowerVerde, Inc. and its wholly-owned subsidiary, PowerVerde Systems, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
Development Stage Company
The Company is a development stage company as defined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915, “Development Stage Entities”. The Company is devoting substantially all of its present efforts to establish a new business and none of its planned principal operations have commenced. All losses accumulated since inception have been considered as part of the Company’s development stage activities.
Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable consist of balances due from sales and royalties. The Company monitors accounts receivable and provides allowances when considered necessary. At June 30, 2014, accounts receivable were considered to be fully collectible. Accordingly, no allowance for doubtful accounts was provided.
5
Employee Advances
The employee advances represent the payroll taxes due on the issuance of common stock as compensation.
Revenue Recognition
Sales revenues and associated cost of sales are recognized when title of the goods sold pass to the buyer, when shipped and when accounts receivable are determined to be reasonably collectable. Certain sales agreements also require installation and training by PowerVerde once goods are received and accepted by the customer. The Company does not consider these agreements multiple elements arrangements as defined by ASC 605-25 “Revenue Recognition”, as the Company does not offer installation or training as services separate from the sale of its products at this time. Therefore, a “best estimate of selling price” or individual pricing in accordance with ASC 605-25 is undeterminable. The Company defers all revenues and costs of sales until the agreement is 100% complete.
Licensing and royalty revenue from royalty agreements is recognized in accordance with the terms of the specific agreement.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Expenditures for major betterments and additions are capitalized, while replacement, maintenance and repairs, which do not extend the lives of the respective assets, are expensed as incurred.
Impairment of Long-Lived Assets
Impairment losses are recorded on long-lived assets (property, equipment and intellectual property) used in operations when impairment indicators are present and the undiscounted expected cash flows estimated to be generated by those assets are less than the carrying value of such assets. No impairment losses have been recognized during the six months ended June 30, 2014 or 2013.
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).
6
Accounting for Uncertainty in Income Taxes
The Company follows the provisions of ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Research and Development Costs
The Company’s research and development costs are expensed in the period in which they are incurred.
Earnings (Loss) Per Share
Earnings (loss) per share is computed in accordance with FASB ASC Topic 260, “Earnings per Share”. Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. Certain common stock equivalents were not included in the earnings (loss) per share calculation as their effect would be anti-dilutive. Warrants exercisable for 5,586,000 shares and options for 2,750,000 shares were excluded from weighted average common shares outstanding on a diluted basis.
Financial instruments
The Company carries cash and cash equivalents, accounts receivable, accounts payable and accrued expenses at historical costs. The respective estimated fair values of these assets and liabilities approximate carrying values due to their current nature. The Company also carries notes payable to related parties at historical cost less discounts from warrants issued as loan financing costs.
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.
7
The Company uses the Black-Scholes valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to measure the fair value of these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective inputs that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the Company’s trading market price and the trading market price of various peer companies, which have historically had high volatility. Since derivative financial instruments are initially and subsequently carried at fair value, the Company’s income will reflect the volatility in these estimate and assumption changes.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
Note 4 – Recent Accounting Pronouncements
In 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.
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. Nonpublic entities are no longer required to apply the presentation and disclosure provisions of ASC 915 during annual periods beginning after December 15, 2014, and the revisions to the consolidation standards are effective for annual periods beginning after December 15, 2016. Early adoption is permitted.
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.
Note 5 – Intellectual Property
Intellectual property consists of technology acquired from the purchase of 100% of the membership interests of Cornerstone Conservation Group LLC (“Cornerstone”).
For each of the six months ended June 30, 2014 and 2013, amortization expense was $109,907 and accumulated amortization of the intangible asset- intellectual property was $494,580 at June 30, 2014.
Future amortization of the intangible asset – intellectual property was as follows as of June 30, 2014:
|
Year ending December 31:
|
||||
| 2014 (after June 30, 2014) | $ | 109,907 | ||
| 2015 | 54,953 | |||
| Total | $ | 164,860 | ||
8
Note 6 – 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 pricing model to determine the fair value of each warrant. As of June 30, 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 $1.00 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 pricing model to determine the fair value of each warrant. As of June 30, 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 June 30, 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 June 30, 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 June 30, 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 June 30, 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 8). These warrants expire December 31, 2015. As of June 30, 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 $.41 per share in association with the Secured Promissory Note (See Note 8). These warrants expire December 31, 2015. As of June 30, 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 $.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 June 30, 2014, all of these warrants were outstanding.
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 8). These warrants expire December 31, 2016. As of June 30, 2014, all of these warrants were outstanding.
Expenses related to warrants issued in conjunction with settlement of certain disputes are included in the condensed consolidated statement of operations.
9
A summary of warrants issued, exercised and expired during the six months ended June 30, 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 June 30, 2014
|
5,586,000 | $ | .99 | $ | 45,000 | |||||||
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. Expenses of $113,292 and $11,458, were recognized in the first and second quarter 2013, respectively, and included in the general and administrative expenses on the condensed consolidated statement of operations.
Private Placement of Common Stock
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.
Treasury Shares
In May 2012, the Company purchased 450,000 shares of its common stock from its Co-Founder and Director Fred Barker 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. As of June 30, 2014, the Company has paid the debt in full and has no further obligations.
On October 16, 2012, 3,000,000 shares of the Company’s stock were surrendered to Treasury by Company Co-Founder and former President and Director George Konrad, in exchange for $530,000, $100,000 of which is 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 first quarter of 2014. The payable had a balance of $100,000, including accrued interest, as of December 31, 2013 and is included in the “Payable to related parties” in the accompanying consolidated condensed balance sheets. The $100,000 debt was paid in the first quarter of 2014.
10
Note 7 – Stock Options
Stock option activity for the six months ended June 30, 2014, is summarized as follows:
|
Shares
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Life (Years)
|
||||||||||
|
Options outstanding at December 31, 2013
|
2,750,000 | $ | 0.78 | 7.00 | ||||||||
|
Granted
|
— | — | — | |||||||||
|
Expired/forfeited
|
— | — | — | |||||||||
|
Options outstanding at June 30, 2014
|
2,750,000 | $ | 0.78 | 6.00 | ||||||||
Total stock option compensation for the six months ended June 30, 2014 was $0 and $121,237 for the same period in 2013. There is no unrecognized compensation expense associated with the options.
Note 8 - Notes Payable to Related Parties
In the fourth quarter of 2012, in an effort to raise capital, the Company entered into various Secured Promissory Note agreements with accredited investors, who are also existing stockholders of the Company. As of December 31, 2013, $400,000 was raised, of which $325,000 was raised in 2012 and $75,000 in the first quarter of 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).
The promissory notes bear interest at the rate of 10% per annum based on a 365-day year. Accrued interest will be paid semi-annually on June 30, 2013, December 31, 2013, June 30, 2014, and December 31, 2014. The entire principal balance of the Note, together with all unpaid interest accrued thereon, shall be due and payable on December 31, 2014. In the event the Company defaults on interest and/or principal payments, the Company will use all accounts receivable obtained now or hereafter existing, pursuant to the License Agreement from VDF FutureCeuticals Inc. (the “Licensee”), as collateral. Accrued interest of $19,836 through June 30, 2014 was paid to the investors in the second quarter of 2014.
The Company analyzed the terms of the warrants based on the provisions of ASC 480, “Distinguishing Liabilities from Equity,” and determined that the warrants issued in conjunction with the closing of the notes payable qualified for equity accounting. The warrants that were issued on December 1, 2013 were 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 of $176,000, of which $88,000 ($16,500 in Q1 2013) was recorded as additional paid in capital and $88,000 ($16,500 in Q1 2013) was recorded as a derivative liability. The Secured Promissory Note was recorded at the principal amount of $400,000 less a discount of $176,000. This discount is being amortized to interest expense over the term of the Secured Promissory Note to related parties using the effective interest method. The fair value of the common stock warrants issued in conjunction with the Secured Promissory Notes was determined using the Black-Scholes pricing model. The Company determined the fair value of its common stock warrants to be $0.22 per warrant issued with an exercise price of $0.41 per warrant.
Upon payment in full of the notes, a $25,000 fee was to be paid by the Company to its placement agent, Martinez-Ayme Securities, Inc. Subsequently, the agreed upon amount was reduced to $20,000. In the fourth quarter of 2013, Martinez-Ayme Securities transferred the receivable to Richard Davis. As of June 30, 2014, $16,000 has been paid on this liability. The balance of $4,000 is reflected as a note payable to related parties in the condensed consolidated balance sheets.
11
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 9 - Commitments and Contingencies
On September 29, 2011, the Company entered into a license agreement (the “License Agreement”) with Newton Investments BV. Pursuant to the License Agreement, Newton will, for a period of 10 years, hold the exclusive manufacturing and distribution rights for the Systems in the 27 countries which are currently members of the European Union, subject to Newton’s achieving minimum sales of at least 100 Systems per year beginning in the second year of the License Agreement, payment of a royalty equal to 20% of the gross sales price of each System sold, and other terms and conditions set forth in the License Agreement. Due to ongoing technical problems with the Company’s Systems, the Company deferred commencement of the minimum sales requirement until the problems are resolved. On July 30, 2014, Newton terminated the License Agreement.
On October 25, 2012, the Company entered into a consulting agreement with Hank Leibowitz, the principal of Waste Heat Solutions, LLC, an expert with 40 years’ experience in the field of advanced energy systems. Pursuant to this consulting agreement, which is terminable by either party on 30 days’ notice, the Company pays Waste Heat Solutions, $5,000 per month through February 2013 and $7,500 per month thereafter. In connection with this consulting agreement, the Company issued to Waste Heat Solutions (i) a fully vested 10-year option to purchase 500,000 shares of common stock at $.56 per share and (ii) a 10-year option, vesting six months from the contract date, i.e., on April 25, 2013, to purchase an additional 500,000 shares at $.56 per share. The fair value of the fully vested option was approximately $182,000 and was recorded as general and administrative expenses in the consolidated statements of operations during 2012. The fair value of the option vesting six months from the contract date was approximately $182,000 of which approximately $91,000 was recorded as research and development expense in the condensed consolidated statements of operations for the first quarter 2013. The remaining $30,300 was recognized in the second quarter of 2013 and is included in research and development expense in the accompanying condensed consolidated statements of operations.
This consulting agreement contains standard confidentiality provisions, as well as standard non-competition and non-soliciting provisions which survive for two years following termination of the consultancy.
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.
12
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 10 - Related Party Transactions
See Note 6 for discussion of transactions with the Company’s Co-Founders, George Konrad and Fred Barker and, Note 8 for discussion of a transaction with the Company’s CEO Richard Davis.
Forward Looking Statements
Readers are cautioned that the statements in this Report that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are based on the beliefs of our management, as well as on assumptions made by and information currently available to us as of the date of this Report. When used in this Report, the words “plan,” “will,” “may,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project” and similar expressions are intended to identify such forward-looking statements. Although we believe these statements are reasonable, actual actions, operations and results could differ materially from those indicated by such forward-looking statements as a result of the risk factors included in our 2012 Annual Report, or other factors. We must caution, however, that this list of factors may not be exhaustive and that these or other factors, many of which are outside of our control, could have a material adverse effect on us and our ability to achieve our objectives. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above.
The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.
Critical Accounting Policies
The condensed consolidated financial statements of PowerVerde, Inc. are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these condensed consolidated financial statements requires our management to make estimates and assumptions about future events that effect the amounts reported in the financial statements and related notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. We believe the following critical accounting policies affect its more significant judgments and estimates used in the preparation of financial statements.
Accounting for Uncertainty in Income Taxes
The Company follows the provisions of ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our condensed consolidated financial statements. Our evaluation was performed for the tax years ended December 31, 2010, 2011, 2012 and 2013, the tax years which remain subject to examination by major tax jurisdictions as of June 30, 2014.
13
We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the condensed consolidated financial statements as general and administrative expense.
Revenue Recognition
Sales revenues and associated cost of sales are recognized when title of the goods sold pass to the buyer, when shipped, and when accounts receivable are determined to be reasonably collectable. Certain sales agreements also require installation and training by PowerVerde once goods are received and accepted by the customer. The Company does not consider these agreements multiple elements arrangements as defined by ASC 605-25 Revenue Recognition , as the Company does not offer installation or training as services separate from the sale of its products, at this time, and therefore a “best estimate of selling price” or individual pricing in accordance with ASC 605-25 is undeterminable. The Company defers all revenues and costs of sales until the agreement is 100% complete.
Licensing and royalty revenue from royalty agreements is recognized in accordance with the terms of the specific agreement.
Common Stock Purchase Warrants
The Company accounts for common stock purchase warrants in accordance with ASC Topic 815- 40, Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815-40”). Based on the provisions of ASC 815- 40, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement, or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
Intellectual Property and Goodwill
The Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses an estimate of the undiscounted cash flows over the remaining life of its long-lived assets, or related group of assets where applicable, in measuring whether the assets to be held and used will be realizable. In the event of impairment, the Company would discount the future cash flows using its then estimated incremental borrowing rate to estimate the amount of the impairment.
Goodwill is evaluated for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment analysis involves a two step process. Step one involves the comparison of the fair value of the reporting unit to which goodwill relates (the Company’s enterprise value) to the carrying value of the reporting unit. If the fair value exceeds the carrying value, there is no impairment. If the carrying value exceeds the fair value of the reporting unit, the Company determines the implied fair value of goodwill and records an impairment charge for any excess of the carrying value of goodwill over its implied fair value.
For those reporting units with zero or negative carrying amounts, an entity must evaluate whether it is more likely than not that a goodwill impairment exists, regardless of the mathematical results of the Step 1 test. In making that determination, the entity should consider whether there are any adverse qualitative factors that could impact the amount of goodwill.
14
Stock-based compensation.
We account for stock-based compensation based on ASC Topic 718-Stock Compensation which requires expensing of stock options and other share-based payments based on the fair value of each stock option awarded. The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation model. This model requires management to estimate the expected volatility, expected dividends, and expected term as inputs to the valuation model.
Derivative instruments—Fair value of financial assets and liabilities
We measure the fair value of financial assets and liabilities in accordance with GAAP, which defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements.
GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. GAAP describes three levels of inputs that may be used to measure fair value:
Level 1 – quoted prices in active markets for identical assets or liabilities.
Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable.
Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions).
We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we and our consolidated subsidiaries have entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding common stock purchase warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. These instruments are required to be carried as derivative liabilities, at fair value.
We estimate fair values of all derivative instruments, such as free-standing common stock purchase warrants, and embedded conversion features utilizing Level 2 inputs. We use the Black-Scholes option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective inputs that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in our trading market price and the trading market price of various peer companies, which have historically had high volatility. Since derivative financial instruments are initially and subsequently carried at fair value, our income will reflect the volatility in these estimate and assumption changes.
We report our derivative liabilities at fair value on the accompanying condensed consolidated balance sheets as of June 30, 2014.
Overview
From January 1991 until October 2005, the Company devoted substantially all of its efforts and resources to research and development related to its unsuccessful Biotech Business, in particular the study of biological oxidation and antioxidation directed to the development of potential therapeutic products for the treatment of various diseases and conditions. In the most recent years, the Company’s research focused mainly on targeted antioxidant therapeutics and nutraceuticals. The Company is a development stage company, has generated only limited revenue from product sales and has relied primarily on equity financing, licensing revenues, and various debt instruments for its working capital. The Company has been unprofitable since its inception.
Following the cessation of material Biotech Business operations in October 2005, the Company turned its primary focus to seeking an appropriate merger partner for its public shell. This resulted in the February 2008 merger with Vyrex (the “Merger”). In March 2009, we assigned our Biotech IP to an investor in exchange for his agreement to pay all future expenses relating to the Biotech IP and to pay us 20% of any net proceeds received from new contracts for sale and/or licensing of the Biotech IP. We do not expect this arrangement to generate material revenues.
15
Since the Merger, we have focused on the development, testing and commercialization of our electric power systems, in particular, their applicability to thermal and natural gas pipeline operations. Our business is subject to significant risks, including the risks inherent in our research and development efforts, uncertainties associated with obtaining and enforcing patents and intense competition.
Except as specifically noted to the contrary, the following discussion relates only to PowerVerde since, as a result of the Merger, the only historical financial statements presented for the Company in periods following the Merger are those of the operating entity, PowerVerde.
Results of Operations
Three Months Ended June 30, 2014 as Compared to Three Months Ended June 30, 2013
Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We had no revenues from sales in the second quarter of 2014 and 2013 – but we recorded $125,975 and $109,416 in Biotech IP licensing fees (based on pre-merger contracts), respectively. In both years, we had substantial expenses due to our ongoing research and development activities and efforts to commercialize our systems, as well as substantial administrative expenses associated with our status as a public company. Our research and development expenses increased by $33,710 (43.6%) in the second quarter of 2014 as compared to 2013. This increase is mainly due to the settlement of our litigation with Keith Johnson, as discussed in Note 9. Our general and administrative expenses decreased by $87,939 (46.3%) in the second quarter of 2014 as compared to 2013, due mainly to a decrease in legal and accounting fees. Our net loss was $129,395 in the second quarter of 2014, a 26.4% decrease from the net loss of $175,837 in the second quarter of 2013. Substantial net losses will continue until we are able to successfully commercialize and market our systems, as to which there can be no assurance.
Six Months Ended June 30, 2014, as Compared to Six Months Ended June 30, 2013
Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We had no material revenues in the first six months of 2014 and 2013. In the first six months of 2014 and 2013, our revenues of $166,129 and $180,903, respectively, came solely from Biotech IP licensing fees. In both years, we had substantial expenses due to our ongoing research and development activities and efforts to commercialize our systems, as well as substantial administrative expenses associated with our status as a public company. Our research and development expenses decreased by $50,966 (16.3%) in the first six months of 2014 as compared to 2013, and our general and administrative expenses decreased by $387,181 (60.3%) in the same period. The decrease in general and administrative expenses was due to decreased expenses in 2014 for employee/consultant compensation, including the value of stock-based compensation vested and issued. Our net loss was $415,345 in the first six months of 2014, a 46.2% decrease from the net loss of $772,172 in the first six months of 2013. The decrease in our net loss in the first six months of 2014 was due to our vigorous cost control efforts and because we are in the process of testing and are not currently designing new generator systems. Substantial net losses will continue until we are able to successfully commercialize and market our systems, as to which there can be no assurance.
Liquidity and Capital Resources
We have financed our operations since inception primarily through the sale of debt and equity securities. As of June 30, 2014, we had a working capital deficit of $389,626 compared to a working capital deficit of $385,872 at December 31, 2013.
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.
16
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 expect 2014 Biotech IP revenues to approximate the 2013 levels; however, there can be no assurance that this revenue level will be achieved.
We continue to seek funding from private debt and equity investors, as we need to promptly raise substantial additional capital in order to finance our plan of operations. There can be no assurance that we will be able to promptly raise the necessary funds on commercially acceptable terms if at all. If we do not raise the necessary funds, we may be forced to cease operations.
Not applicable.
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, 2013. 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 June 30, 2014, our internal control over financial reporting was effective.
No Attestation Report
This quarterly report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this quarterly report.
Changes in Internal Control Over Financial Reporting
There were no significant changes in internal control over financial reporting during the second quarter of 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
17
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.
There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the 2013 Annual Report. Please refer to that section for disclosure regarding the risks and uncertainties related to our business.
All of our sales of unregistered securities since inception have been made pursuant to private offerings to accredited investors. Our sales of unregistered securities in the six months ended June30, 2014 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. We paid a placement agent fee of 10% of the gross price of the offering to Martinez-Ayme Securities. Net proceeds were used for working capital.
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, 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.
None.
Not applicable.
Not applicable.
18
(a) Exhibits
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31.1
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Certification of Principal Executive Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101.INS
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XBRL INSTANCE DOCUMENT
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101.SCH
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XBRL TAXONOMY EXTENSION SCHEMA
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101.CAL
|
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
|
|
|
101.DEF
|
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
|
|
|
101.LAB
|
XBRL TAXONOMY EXTENSION LABEL LINKBASE
|
|
|
101.PRE
|
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
|
19
In accordance with Section 13(a) or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
POWERVERDE, INC.
|
||
|
Dated: August 12, 2014
|
By: | /s/ Richard H. Davis |
| Richard H. Davis | ||
| Chief Executive Officer | ||
|
Dated: August 12, 2014
|
By: | /s/ John L. Hofmann |
| John L. Hofmann | ||
| Chief Financial Officer | ||
20
Exhibit Index
|
Exhibit No.
|
|
Description
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
101.INS
|
XBRL INSTANCE DOCUMENT
|
|
|
101.SCH
|
XBRL TAXONOMY EXTENSION SCHEMA
|
|
|
101.CAL
|
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
|
|
|
101.DEF
|
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
|
|
|
101.LAB
|
XBRL TAXONOMY EXTENSION LABEL LINKBASE
|
|
|
101.PRE
|
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
|
21