UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

 

 

Form 10-Q

 

SQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period ended March 31, 2013

For the Quarterly Period ended September 30, 2012

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

 

Commission file number: 000-27866

 

 

 

POWERVERDE, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware 88-0271109

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

420 S. Dixie Highway Suite 4-B

Coral Gables, FL33146

(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.S Yes£ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

S Yes£ No

 

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

 

£Large accelerated filer£Accelerated filer
£Non-accelerated filerSSmaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

£ YesS No

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of November 19, 2012May 20 , 2013 the issuer had 26,015,56526,400,106 shares of common stock outstanding.

 



 
 

 

Index to Form 10-Q

 

    Page
PART I Page
PART IFINANCIAL INFORMATION 1
    
Item 1.Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2012 (Unaudited) and December 31, 2011 1
 Condensed Consolidated Balance Sheets at March 31, 2013 and December 31, 20121
Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and nine months ended September 30, 2012 and 2011 (Unaudited) 2
 Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) (Unaudited) 3
 Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30,Ended March 31, 2013 and 2012 and 2011 (Unaudited) 4
 Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations 1315
Item 3.Quantitative and Qualitative Disclosures about Market Risk 1718
Item 4.Controls and Procedures 17Controls and Procedures18
    
PART IIOTHER INFORMATION 18OTHER INFORMATION20
    
Item 1.Legal Proceedings 18Legal Proceedings20
Item 1A.Risk Factors 1820
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds 1820
Item 3.Defaults upon Senior Securities 1920
Item 4.Mine Safety Disclosures 19
Item 5.Other Information(Removed and Reserved) 1920
Item 5.Other Information20
Item 6.Exhibits 19Exhibits20
   
SIGNATURES 2021

 

 
 

 

PART I FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

PowerVerde, Inc. and subsidiary

Subsidiary
(A Development Stage Company)


Condensed Consolidated Balance Sheets
March 31, 2013 and December 31, 2012 (Unaudited)

 

 September 30, 2012 December 31, 2011 
 (Unaudited)    2013  2012 
Assets             
Current Assets:             
Cash and cash equivalents $19,542  $7,530  $12,732  $45,283 
Accounts receivable  33,649   18,909   71,487   115,687 
Prepaid expenses and other current assets  30,549   24,267 
Trust account - restricted  403,330    
Employee advances  19,292    
Prepaid expenses  17,169   46,641 
Total Current Assets  487,070   50,706   120,680   207,611 
                
Property and Equipment                
Property and equipment, net of accumulated depreciation of $25,404 and $20,521, respectively  10,926   15,809 
Property and equipment, net of accumulated depreciation of $28,064 and $26,771, respectively  8,266   9,559 
                
Other Assets                
Intellectual Property, net of accumulated amortization of $109,907  549,533    
Goodwill  2,637,760    
        
Intellectual Property, net of accumulated amortization of $219,813  439,626   494,580 
Total Assets $3,685,289  $66,515  $568,572  $711,750 
                
Liabilities and Stockholders’ Equity        
Liabilities and Stockholders’ Equity (Deficiency)        
Current Liabilities                
Accounts payable and accrued expenses $356,155  $139,453  $136,559  $109,568 
Payable to related parties  297,755   39,851   127,998   170,764 
Trust liability  403,330     
Total Current Liabilities  1,057,240   179,304   264,557   280,332 
                
Long-Term Liabilities                
Derivative liability  44,000   68,250 
Payable to related party     180,988   235,372   184,367 
Total Long-Term Liabilities     180,988   279,372   252,617 
Total Liabilities  1,057,240   360,292   543,929   532,949 
                
Stockholders’ Equity (Deficiency)        
Stockholders’ Equity        
Common stock:                
100,000,000 common shares authorized, par value $0.0001per share, 28,165,565 common shares issued and outstanding at September 30,2012 and 25,624,565 common shares issued and outstanding at December 31, 2011  3,329   3,012 
100,000,000 common shares authorized, par value $0.0001 per share, 26,400,106 common shares issued and outstanding at March 31, 2013 and 26,011,565 common shares issued and outstanding at December 31, 2012  3,446   3,414 
Additional paid-in capital  9,470,614   4,730,724   10,720,476   10,278,331 
Treasury stock, at cost, 5,050,000 shares at September 30, 2012 and 4,500,000 shares at December 31, 2011  (285,758)  (170,758)
Treasury stock, 8,550,000 shares at cost  (491,139)  (491,139)
Deficit accumulated in the development stage  (6,560,136)  (4,856,755)  (10,208,140)  (9,611,805)
Total Stockholders’ Equity/(Deficiency)  2,628,049   (293,777)
Total Stockholders’ Equity  24,643   178,801 
                
Total liabilities and Stockholders’ Equity/(Deficiency) $3,685,289  $66,515 
Total Liabilities and Stockholders’ Equity $568,572  $711,750 

 

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

PowerVerde, Inc. and subsidiarySubsidiary


(A Development Stage Company)


Condensed Consolidated Statements of Operations


For the three and nine months ended September 30,March 31, 2013 and 2012, and 2011, and the


period from March 9, 2007 (Date of Inception) to September 30, 2012March 31, 2013


(Unaudited)

 

 Three months ended
March 31,
  Cumulative from
inception through March
 
 Three months ended
September 30,
 Nine months ended
September 30,
 Cumulative from inception through September 30,  2013   2012  31, 2013 
 2012 2011 2012 2011 2012           
Revenue, Net $33,649  $143,491  $78,006  $174,482  $362,762  $71,487  $14,435  $549,936 
                                
Cost of Goods Sold $  $130,000  $  $136,925  $136,925         136,925 
                                
Gross Profit $33,649  $13,491  $78,006  $37,557  $225,837   71,487   14,435   413,011 
                                
Operating Expenses                                
Research and development  124,612   236,730   996,900   795,546   3,004,580   236,157   577,036   3,565,051 
General and administrative  280,663   299,577   773,335   1,430,599   3,444,946   452,677   221,239   4,103,107 
Goodwill impairment        2,637,760 
Total Operating Expenses  405,275   536,307   1,770,235   2,226,145   6,449,526   688,834   798,275   10,305,918 
                                
Loss from Operations  (371,626)  (522,816)  (1,692,229)  (2,188,588)  (6,223,689)  (617,347)  (783,840)  (9,892,907)
                                
Other Income (Expenses)                                
Interest income              2,401         2,401 
Interest expense  (3,792)  (3,502)  (11,152)  (6,658)  (354,859)  (19,738)  (3,644)  (377,645)
Other Income           23,657   16,011 
Other income (expenses)  40,750      60,011 
Total Other Income (Expense)  (3,792)  (3,502)  (11,152)  16,999   (336,447)  21,012   (3,644)  (315,233)
                                
Loss before Income Taxes  (375,418)  (526,318)  (1,703,381)  (2,171,589)  (6,560,136)  (596,335)  (787,484)  (10,208,140)
Provision for Income Taxes                        
                                
Net Loss $(375,418) $(526,318) $(1,703,381) $(2,171,589) $(6,560,136) $(596,335) $(787,484) $(10,208,140)
                                
Net Loss per Share - Basic and Diluted $(0.01) $(0.02) $(0.06) $(0.08)     $(0.02) $(0.03)    
                                
Weighted Average Common Shares Outstanding - Basic and Diluted  28,142,413   25,605,940   27,397,601   26,579,277       26,244,550   25,962,587     

 

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

2

 

PowerVerde, Inc. and Subsidiary
(A Development Stage Company)


Consolidated Statement of Changes in Stockholders’ Equity/(Deficiency)

Equity
For the ninethree months ended September 30, 2012

March 31, 2013
(Unaudited)

 

              Deficit Accumulated during the  Total Stockholders’ 
  Common  Common  Paid in  Treasury  Development  Equity/ 
  Shares  Stock  Capital  Stock  Stage  (Deficiency) 
Balances, December 31, 2011  25,624,565  $3,012  $4,730,724  $(170,758) $(4,856,755) $(293,777)
Sale of common stock at $1.00 per share, net of stock issuance costs of $90,600  906,000   91   815,309           815,400 
Issuance of warrants for settlement with Newton          262,700           262,700 
Stock-based compensation          364,907           364,907 
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)                    
Treasury Stock  (550,000)          (115,000)      (115,000)
Net loss for the nine months ended September 30, 2012                  (1,703,381)  (1,703,381)
                         
Balances, September 30, 2012  28,165,565  $3,329  $9,470,614  $(285,758) $(6,560,136) $2,628,049 
  Common Shares  Common Stock  Additional Paid
in
Capital
  Treasury Stock  Deficit
Accumulated
during the
Development Stage
  Total
Stockholders’ Equity
 
                   
Balances, December 31, 2012  26,011,565  $3,414  $10,278,331  $(491,139) $(9,611,805) $178,801 
                         
Common stock issued for services  325,000   32   124,718           124,750 
Stock-based compensation        90,927           90,927 
Warrants issued for services          210,000           210,000 
Warrants issued in connection with Notes payable to related party                        
          16,500          16,500 
Common stock issued on conversion of debt  44,791                     
Cashless exercise of options  18,750                     
Net loss for the three months ended March 31, 2013                  (596,335)  (596,335)
                         
Balances, March 31, 2013  26,400,106  $3,446  $10,720,476  $(491,139) $(10,208,140) $24,643 

 

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

PowerVerde, Inc. and Subsidiary


(A Development Stage Company)


Condensed Consolidated Statements of Cash Flows


For the ninethree months ended September 30,March 31, 2013 and 2012, and 2011, and the


period from March 9, 2007 (Date of Inception) to September 30, 2012

March 31, 2013
(Unaudited)

 

 2013  2012  Cumulative from inception through March 31, 2013 
 2012  2011  Cumulative from
inception through
September 30, 2012
  (Unaudited)     
Cash Flows from Operating Activities                   
Net loss $(1,703,381) $(2,171,589) $(6,560,136) $(596,335) $(787,484) $(10,208,140)
Adjustments to reconcile net loss to net cash used in operating activities:                        
Depreciation, amortization, and impairment charges  114,790   5,505   135,311 
Depreciation and amortization  56,247   1,913   247,878 
Amortization of discount  11,153   6,658   350,845   9,005   3,644   362, 218 
Stock based compensation  364,907   415,908   888,056   90,927   131,454   1,272,457 
Common stock issued for services  113,292       113,292 
Goodwill impairment        2,637,760 
Warrants issued for services     612,150   612,150   210,000      822,150 
Warrants issued for settlement  262,700      262,700      262,700   262,700 
Gain on re-measurement of derivative liability  (40,750)     (44,000)
Changes in operating assets and liabilities:                        
Accounts receivable and other assets  (35,020)  (30,322)  (78,196)
Inventory         (130,000)
Deferred Revenue         130,000 
Accounts payable and accrued liabilities  224,463   (80,212)  173,235 
Accounts receivable and prepaid expenses  85,130   4,741   (77,198)
Employee advances  (19,292)     (19,292)
Accounts payable and accrued expenses  26,991   146,677   (93,973)
Payable to related parties  (42,766)     116,845 
                        
Cash Used in Operating Activities  (760,388)  (1,241,902)  (4,216,035)  (107,551)  (236,355)  (4,607,303)
                        
Cash Flows From Investing Activities                        
Purchase of property & equipment     (11,192)  (36,330)
Purchase of property and equipment        (36,330)
Cash acquired in business acquisition        872         872 
                        
Cash Used in Investing Activities     (11,192)  (35,458)        (35,458)
                        
Cash Flows from Financing Activities                        
Proceeds from issuance of common stock and warrants  906,000   1,622,250   4,558,250 
Proceeds from notes payable        300,000 
Proceeds from issuance of common stock     500,000   5,050,281 
Proceeds from notes payable to related parties  75,000      700,000 
Payment of line of credit        (50,000)        (50,000)
Payment of note payable        (90,217)
Payment of note payable to related parties        (271,206)
Purchase of treasury stock  (43,000)     (43,000)        (320,381)
Payment of stock issuance costs  (90,600)  (150,000)  (403,998)     (50,000)  (453,201)
                        
Cash Provided by Financing Activities  772,400   1,472,250   4,271,035   75,000   450,000   4,655,493 
                        
Net Increase in Cash  12,012   219,156   19,542 
Net (Decrease) Increase in Cash and Cash Equivalents  (32,551)  213,645   12,732 
                        
Cash, at Beginning of Period  7,530   15,646    
Cash, at End of Period $19,542  $234,802  $19,542 
Cash and Cash Equivalents at Beginning of Period  45,283   7,530  $ 
            
Cash and Cash Equivalents at End of Period $12,732  $221,175  $12,732 
            
                        
Supplemental Disclosure of Cash Flow Information                        
Cash paid during the period for interest $  $  $24,221             
Cash paid during the period for income taxes $  $  $  $  $  $24,221 
                        
Supplemental Schedule of Non-Cash Financing Activities                        
            
Common stock issued for convertible debt $  $  $189,261         189,261 
Common stock issued for services $  $  $56,250   11,458  $  $67,608 
Common stock issued for acquisition of Cornerstone Conservation Group, LLC $3,096,200  $  $3,096,200  $  $3,096,200  $3,096,200 
Warrants issued in connection with acquisition of Cornerstone Conservation Group, LLC $201,000  $  $201,000 
Purchase of treasury stock with long-term related party payable $  $170,758  $170,758 
Warrants issued in connection with acquisition of Cornerstone Conservation group, LLC $  $201,000  $201,000 
Purchase of treasury stock with long-term related party payable $72,000  $  $72,000  $  $  $242,758 
Warrants issued in connection with debt $  $  $299,984  $  $  $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 $33,000  $  $176,000 
Common stock issued in connection with debt forgiveness and services rendered $  $  $250,000  $  $  $250,000 
Restricted cash held in trust account for stock subscription $403,330  $  $403,330 

 

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

PowerVerde, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012March 31, 2013

 

Note 1 – Condensed Consolidated Financial Statements

 

The accompanying unaudited condensed consolidated financial statements prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the 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, 2011.2012. The results of operations for the ninethree months ended September 30, 2012,March 31, 2013, are not necessarily indicative of the results to be expected for the full year or for future periods. The condensed consolidated financial statements include the accounts of PowerVerde, Inc., formerly known as Vyrex Corporation (the “Company”), and PowerVerde Systems, Inc., formerly known as PowerVerde, Inc., its wholly-owned subsidiary. Intercompany balances and transactions have been eliminated in consolidation.

 

Note 2 – Going Concern

 

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

 

Note 3 – Summary of Significant Accounting Policies

 

Principles of Consolidation

The 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 FinancialAccounting Standards Board (“FASB”)

Accounting Standards Codification (“ASC”) Topic 915, “Development Stage Entities.”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 havehas been considered as part of the Company’s development stage activities.

Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

Accounts Receivable

 

Accounts receivable consist of balances due from sales and royalties. The Company monitors accounts receivable and provides allowances when considered necessary. At September 30, 2012,March 31, 2013, accounts receivable were considered to be fully collectible. Accordingly, no allowance for doubtful accounts was provided.

 

Trust Account RestrictedEmployee Advances

 

DuringThe employee advances represent the three months ended September 30, 2012,payroll taxes due on the Company received $403,330 into a trust account held by the Company’s attorney for the saleissuance of common stock subscriptions. The funds were to be returned to the investors without interest if a certain stipulated amount was not raised by October 31, 2012 through the offering. The Company raised the stipulated amount required in accordance with the subscription agreements subsequent to September 30, 2012.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 reasonablyreasonable collectable. Certain sales agreements also require installation and training by PowerVerde once goods are received and accepted by the customer. The Company does not consider these agreements multiple elements arrangements as defined by ASC 605-25 “Revenue Recognition”, as the Company does not offer installation or training as services separate from the sale of its products at this time. Therefore, a “best estimate of selling price” or individual pricing in accordance with ASC 605-25 is undeterminable. The Company defers all revenues and costs of sales until the agreement is 100% complete.

Licensing and royalty revenue from royalty agreements is recognized in accordance with the terms of the specific agreement.

 

Property and Equipment

 

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Expenditures for major betterments and additions are capitalized, while replacement, maintenance and repairs, which do not extend the lives of the respective assets, are expensed as incurred.

 

Intellectual Property and Goodwill

 

The Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses an estimate of the undiscounted cash flows over the remaining life of its long-lived assets, or related group of assets where applicable, in measuring whether the assets to be held and used will be realizable. In the event of impairment, the Company would discount the future cash flows using its then estimated incremental borrowing rate to estimate the amount of the impairment.

Goodwill is evaluated

The Company assesses goodwill for potential impairment at least annuallythe end of each fiscal year, or more frequentlyduring the year if eventsan event or changes in circumstances indicateother circumstance indicates that the Company may not be able to recover the carrying amount mayof the asset. In evaluating goodwill for impairment, first qualitative factors are assessed to determine whether it is more likely than not be recoverable. The impairment analysis involves(that is, a two step process. Step one involveslikelihood of more than 50 percent) that the comparisonfair value of a reporting unit is less than its carrying amount. If it is concluded that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then no further testing of the goodwill assigned to the reporting unit is required. However, if it is concluded that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a two-step goodwill impairment test is performed to identify potential goodwill impairment and measure the amount of goodwill impairment to be recognized, if any.

In the first step of the review process, the estimated fair value of the reporting unit is compared with its carrying value. If the estimated fair value of the reporting unit exceeds its carrying amount, no further analysis is needed.

If the estimated fair value of the reporting unit is less than its carrying amount, a second step of the review process is performed in order to calculate the implied fair value of the reporting unit goodwill in order to determine whether any impairment is required. The implied fair value of the reporting unit goodwill is then calculated by allocating the estimated fair value of the reporting unit to which goodwill relates (the Company’s enterprise value) toall of the assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. If the carrying value of the reporting unit. If the fair valueunit’s goodwill 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 the goodwill, the Company then recognizes an impairment loss for that excess amount. During the year ended December 31, 2012, the Company determined that the goodwill it had recognized in connection with its previous acquisition of Cornerstone Conservation Group LLC had been impaired and recordsaccordingly recognized an impairment charge for any excess of the$2,637,760 to reduce its 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.to zero.

 

Stock-based Compensation

 

The Company accountshas accounted for share-basedstock-based compensation in accordance withunder the provisions of ASC Topic 718Share-Based Payments – “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 Company has used the Black-Scholes option pricing model to estimate the fair value of each stock optionsoption award is estimated on the date of grant.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“Derivatives and Hedging – Contracts in Entity’s Own EquityEquity” (“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 appliesfollows the accounting standard regardingprovisions of ASC Topic 740-10, “Accounting for Uncertain Tax Positions”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. The standardThis 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, 2008, 2009, 2010 and 2011, the tax years which remain subject to examination by major tax jurisdictions as of September 30, 2012.

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 selling, 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.

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 for7,512,666 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.

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 condensed consolidated balance sheets.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

 

Financial Instruments and Fair Values

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

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

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

Reclassifications

Certain reclassifications have been made to conform to prior period’s presentation to the current period’s presentation. These reclassifications had no effect on reported losses.

Note 4 – Recent Accounting Pronouncements

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-11 “Disclosures about offsetting Assets and Liabilities” requiring additional disclosure about offsetting and related arrangements. ASU 2011-11 is effective retrospectively for periods beginning on or after January 1, 2013. The adoption of ASU 2011-11 will not have a material impact on the Company’s future financial position, results of operations or liquidity.

 

In July 2012, the FASB issued ASU 2012-02-Testing Indefinite- Lived Intangible Asserts for Impairment (“ASU 2012-02”) in order to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance. The new guidance allows an entity the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. ASU 2012-02 becomes effective for the Company on October 1, 2012, and earlier adoption is permitted. The Company does not expect the adoption of the guidance to have a material impact on its 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. TheIn January 2012, the Company also moved its operations to a 5,000 square foot facility in Scottsdale, Arizona, owned by one of the sellers, who became an officer and director in Scottsdale Arizona.connection with the Cornerstone transaction. The Company used the facility rent free of charge for two months. Since March 2012, the Company has been using the facility rent free onat a short term basis but expects to negotiate a lease on fair market terms.

cost of $700 per month which covers overhead costs.

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 
Intangible asset – Research and Development $659,440 
Goodwill  2,637,760   2,637,760 
Total assets acquired  3,297,200   3,297,200 
Aggregate purchase price $3,297,200  $3,297,200 

 

The assets acquired were recorded at preliminarybased on estimates of their fair values determined by management, based on information currentlythen available and on current assumptions as to future operations,operations.

Due to the departure of a key employee and are subjectas part of the Company’s annual impairment analysis, the goodwill associated with this acquisition was determined to change upon the completion of acquisition accounting, including the finalization of asset valuations.be impaired at December 31, 2012 and accordingly, it was written off in that period.

 

For the nine monthsthree month s ended September 30, 2012,March 31, 2013, amortization expense was $54,754 and accumulated amortization of the intangible asset- intellectual property was $109,907.$219,813 at March 31, 2013.  

The following unaudited pro forma financial information presents the combined results of operations of the Company and Cornerstone as if the acquisition had occurred as of January 1, 2012. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the acquisition been completed as of January 1, 2012. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the future financial position or operating results of PowerVerde. The unaudited pro forma financial information excludes acquisition and integration costs and does not give effect to any estimated and potential cost savings or other operating efficiencies that could result from the acquisition.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS INFORMATION

  For the Nine Months Ended
September 30
 
  2012  2011 
Revenue $92,613  $595,520 
         
Net loss attributable to common shareholders of the Company $(1,793,341) $(2,117,736)
Basic and diluted net loss per common share attributable to common shareholders of PowerVerde $(0.06) $(0.08)

 

Note 6 – Property and Equipment

A summary of property and equipment at September 30, 2012 and December 31, 2011 is as follows:

        Estimated Useful Lives 
  September 30, 2012  December 31, 2011  (in years) 
          
Equipment $25,426  $25,426   5 
Computer equipment (hardware)  6,975   6,975   3 - 5 
Software  3,929   3,929   3 
   36,330   36,330     
             
Less: Accumulated depreciation  (25,404)  (20,521)    
             
  $10,926  $15,809     

The amounts charged to operations for depreciation for the nine months ended September 30, 2012 and 2011 were $4,883 and $5,505 respectively. Depreciation expense from inception through September 30, 2012 was $25,404.

Note 7 – Stockholders’ Equity

 

Warrants

 

In 2008, the Company issued warrants to purchase 250,000 and 50,000 unregistered shares of the Company’s common stock at exercise prices of $1.50 and $2.30 per share, respectively. The warrants expired on various dates through November 2011. At September 30, 2012, 218,500 of these warrants had expired and 81,500 were exercised.

During March through December 2010, the Company issued warrants to purchase 439,999 unregistered shares of the

Company’s common stock at an exercise price of $0.75 per share in association with stock subscription agreements. These warrants expire on various dates through December 2013. As of September 30, 2012, allMarch 31, 2013, 113,333 of these warrants were outstanding.had expired.

 

During January through December 2011, the Company issued warrants to purchase 2,000,000 unregistered shares of the Company’s common stock at an exercise price of $0.75 per share in association with stock subscription agreements. These warrants expire on various dates through June 2014. As of September 30, 2012, allMarch 31, 2013, none of these warrants were outstanding.exercised or had expired.

 

The Company issued warrants on June 3, 2011 to various persons, including affiliates of the Company, for services provided to the Company. These warrants covered the purchase of 1,855,000 unregistered shares of the Company’s stock at an exercise price of $1.05 per share with a five-year term. These share-based payments have been accounted for in accordance with ASC 815-40 using the Black Scholes warrant pricing model to determine the fair value of each warrant. As of September 30, 2012,March 31, 2013, all of these warrants were outstanding.

 

On February 3, 2012, The Company issued warrants to purchase 500,000 unregistered shares of the Company’s common stock at an exercise price of $3.00$1.00 per share with a five-year term for settlement of certain disputed amounts (See Note 9)10). 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 September 30, 2012,March 31, 2013, all of these warrants were outstanding.

 

In connection with the acquisition of Cornerstone (See Note 5), on March 30, 2012, the Company issued warrants to purchase 300,000 unregistered shares of common stock at exercise prices ranging from $2.00 to $4.00 per share. These warrants expire at various dates through December 2017. As of September 30, 2012,March 31, 2013, all of these warrants were outstanding.

 

During the second quarter of 2012, the Company issued warrants to purchase 335,000 unregistered shares of the Company’s common stock at an exercise price of $3.00 per share in association with stock subscription agreements. These warrants expire on various dates through 2015. As of September 30, 2012,March 31, 2013, all of these warrants were outstanding.

 

During the third quarter of 2012, the Company issued warrants to purchase 71,000 unregistered shares of the Company’s common stock at an exercise price of $3.00 per share in association with stock subscription agreements. These warrants expire July 30, 2015. As of September 30, 2012,March 31, 2013, all of these warrants were outstanding.

During the fourth quarter of 2012, the Company issued warrants to purchase 225,000 unregistered shares of the Company’s common stock at an exercise price of $1.00 per share in association with stock subscription agreements. These warrants expire October 31, 2015. As of March 31, 2013, all of these warrants were outstanding.

In December 2012, the Company issued warrants to purchase 325,000 unregistered shares of the Company’s common stock at an exercise price of $.41 per share in association with the Secured Promissory Note (See Note 8). These warrants expire December 31, 2015. As of March 31, 2013, all of these warrants were outstanding.

During January 2013, the Company issued three-year warrants to purchase 75,000 unregistered shares of the Company’s common stock at an exercise price of $.41 per share in association with the Secured Promissory Note (See Note 8). These warrants expire December 31, 2015. As of March 31, 2013, all of these warrants were outstanding.

During March 2013, the Company issued its Chief Executive Officer and Chief Financial Officer five –year warrants to purchase common stock at an exercise price of $.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.

 

Expenses related to warrants issued in conjunction with settlement of certain disputes for the ninethree months ended September 30,March 31, 2013 and 2012 were $0 and 2011 were $262,700, and $0, respectively.

A summary of warrants issued, exercised and expired during the ninethree months ended September 30, 2012March 31, 2013 is as follows:

 

   Shares  Weighted Average Exercise Price 
Balance at December 31, 2012   6,050,999  $1.12 
Issued   1,575,000   .30 
Expired   (113,333)  (.75)
Balance at March 31, 2013   7,512,666  $.96 

      Weighted 
      Average 
   Shares  Exercise Price 
Balance at December 31, 2011   4,294,999   0.88 
Issued   1,206,000   2.17 
Balance at September 30, 2012   5,500,999   1.16 
        

The weighted average grant date fair value of warrants issued during the ninethree month period ended September 30, 2012March 31, 2013 amounted to $0.52$0.11 to $0.77$0.14 per warrant. The fair value of each warrant granted as compensation for services was determined using the Black-Scholes warrant pricing model and the following assumptions:

 

  September 30, 2012March 31, 2013 
Risk Free interest rate  .33%0.36% to 1.040.84%%
Expected term  5.03-5 years 
Annualized volatility  79%-to 8172.3%
Expected dividends   

 

The expected term of warrants granted is based on the contractual terms of the agreement and represents the period of time that warrants granted are expected to be outstanding.

 

The warrant shares referred to above are unregistered shares of the Company’s stock and are restricted from trading as defined under Rule 144 of the United States Securities Act of 1933.

 

Common Stock Issued for Services

During the quarter, 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 $ 113,292 is included in the general and administrative expenses on the condensed consolidated statements of operations. The amounts for future consulting services of $11,458 are included in prepaid expenses on the condensed consolidated balance sheets and will be recognized as general and administrative expenses during the second quarter of 2013 .

Private Placement of Common Stock

In February 2012, the Company raised gross proceeds of $500,000 through theexclusively from accredited European investors (including $275,000 from a Newton affiliate) pursuant to a private placement of 500,000 shares of its common stock at a price of $1.00 per share. There were no warrants issued pursuant to accredited investorsthis round; however, simultaneously Newton affiliates received three-year warrants to purchase 500,000 shares at $1.00 per share. The private placement was undertaken pursuant toshare in connections with the Agreementsettlement of certain claims by and between the Company and Newton as disclosed in Note 9, below.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.

 

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.

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 at September 30,was settled on October 16, 2012 was $188,349.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 $58,000$33,000 at September 30,December 31, 2012 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.

 

Preferred Shares

The Company has 50,000,000On October 16, 2012, 3,000,000 shares of authorized, $0.0001 par value preferred stock. At September 30,the Company’s stock were surrendered to Treasury in exchange for $530,000, $100,000 of which is due in six equal monthly installments, beginning on November 16, 2012. The payable has a balance of $100,000 as of December 31, 2012 noand is included in the “Payable to related parties” in the accompanying consolidated balance sheets. In the event that any amount due remains unpaid, some or all amounts can be converted into shares hadof the Company’s stock at a price of $.0667 per share. The shares have been issued.held as treasury stock from the date of closing. As of April 16, 2013, approximately $83,000 remained outstanding. In accordance with ASC 470-20, “Debt with Conversion and Other Options,” the Company determined that the non-mandatory conversion feature represents a beneficial conversion feature that should be recorded as equity based on intrinsic value. The offset will be recorded as a discount and netted against the payable during the second quarter of 2013.

 

Note 87 – Stock Options

 

Stock option activity for the nine monthsquarter ended September 30, 2012,March 31, 2013, is summarized as follows:

 

  Shares  Weighted Average
Exercise
Price
  Weighted Average Remaining Contractual
Life (Years)
 
          
Options outstanding at December 31, 2011  1,750,000  $0.91   10.00 
Granted         
             
Options outstanding at September 30, 2012  1,750,000  $0.91   9.8 
   Shares   Weighted Average Exercise Price   Weighted Average Remaining Contractual Life (Years) 
Options outstanding at December 31, 2012   2,750,000  $0.78   10.00 
Granted          
Options outstanding at March 31, 2013   2,750,000  $0.78   10.00 

 

Total stock option compensation for the ninethree months ended September 30, 2012March 31, 2013 was $90,928 and 2011 was $364,907 and $415,908 respectively.$131,454 for the same period in 2012. Remaining stock option compensation of $51,000$30,309 will be recognized through the remainder of 2012.2013.

 

Note 9–8 - 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 March 31, 2013, $400,000 was raised, of which $75,000 was raised in the first quarter 2013. Upon closing, the Company issued to the investors three-year warrants for the purchase of 400,000 shares (in the aggregate) of the Company’s common stock at a price of $.41 per share. On December 1, 2013, the Company will issue additional three-year warrants for 400,000 shares to the investors at an exercise price equal to the average price of the common stock during the 10 trading days prior to December 1, 2013.

The promissory notes bear interest at the rate of 10% per annum based on a 365-day year. Accrued interest will be paid semi-annually on June 30, 2013, December 31, 2013, June 30, 2014, and December 31, 2014. The entire principal balance of the Note, together with all unpaid interest accrued thereon, shall be due and payable on December 31, 2014. In the event the Company defaults on interest and/or principal payments, the Company will use all accounts receivable obtained now or hereafter existing, pursuant to the License Agreement from VDF FutureCeuticals Inc. (the “Licensee”), as collateral.

The Company analyzed the terms of the warrants based on the provisions of ASC 480, “Distinguishing Liabilities from Equity,” and determined that the warrants issued in conjunction with the closing of the notes payable qualified for equity accounting. The warrants that will be issued on December 1, 2013 have been determined to qualify as a derivative liability (see Note 9).

Under guidance in ASC 470, the Company allocated the $400,000 in proceeds proportionately between the Secured Promissory Note and the common stock warrants issued to the note holders based on their relative fair values. The relative fair value of the common stock warrants of $176,000, of which $88,000 ($16,500 in Q1 2013) was recorded as additional paid in capital and $88,000 ($16,500 in Q1 2013) was recorded as a derivative liability. The Secured Promissory Note was recorded at the principal amount of $400,000 less a discount of $176,000. This discount was being amortized to interest expense over the term of the Secured Promissory Note to related parties using the effective interest method. The fair value of the common stock warrants issued in conjunction with the Secured Promissory Notes was determined using the Black-Scholes pricing model. The Company determined the fair value of its common stock warrants to be $0.22 per warrant issued with an exercise price of $0.41 per warrant.

Upon payment in full of the notes, a $25,000 fee will be paid by the Company to its placement agent, Martinez-Ayme Securities, Inc. As of March 31, 2013, $20,000 has been accrued and is included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.

Note 9 - Derivative liabilities

The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has entered into certain other financial instruments and contracts, such as debt financing arrangements with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. These instruments are required to be carried as derivative liabilities, at fair value.

The following table discloses the fair value of the Company’s derivative liabilities as of March 31, 2013 and December 31, 2012. The Company held no asset derivatives at either reporting date.

  Liability Derivatives
  March 31, 2013  December 31, 2012
  Balance Sheet Location Fair Value  Balance Sheet Location Fair Value 
Derivatives not designated as hedging instruments            
             
Secured Promissory Notes Warrants Derivative Liabilities $44,000  Derivative Liabilities $68,250 

The following table summarizes liabilities measured at fair value on a recurring basis for the periods presented:

  March 31, 2013  December 31, 2012 
Fair Value Measurements Using: Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
Liabilities                                
Derivative Liabilities $  $44,000  $  $44,000  $  $68,250  $  $68,250 

Note 10 - Commitments and Contingencies

 

On September 29, 2011, the Company entered into a license agreement (the “License Agreement”) with Newton Investments BV. Pursuant to the License Agreement, Newton will, for a period of 10 years, hold the exclusive manufacturing and distribution rights for the Systems in the 27 countries which are currently members of the European Union, subject to Newton’s achieving minimum sales of at least 100 Systems per year beginning in the second year of the License Agreement, payment of a royalty equal to 20% of the gross sales price of each System sold, and other terms and conditions set forth in the License Agreement.

In Due to ongoing technical problems with the first quarter of 2012,Company’s Systems, the Company raised $500,000 exclusively from accredited European investors (including $275,000 from a Newton affiliate) pursuant to a private placementhas deferred commencement of 500,000 shares of common stock at a price of $1.00 per share. There was no warrant 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 betweenminimum sales requirement until the Company and Newton.

Note 10- Related Party Transactions

During the nine month periods ended September 30, 2012, and 2011, the Company received services for primarily research and development from an affiliate in the amount of $138,382 and $125,219, respectively. As of September 30, 2012, and December 31, 2011, the Company owed $131,805 and $31,174, respectively to this affiliate.

Note 11- Subsequent Events.problems are resolved.

 

On October 16, 2012, in order to enhance the Company’s ability to raise capital and limit dilution of its stockholders, as well as to satisfy the Company’s obligations to Arizona Research and Development (“ARD”) for past services and to George Konrad under the agreement among Mr. Konrad, ARD and the Company dated April 7, 2011, as amended August 19, 2011 (the “Initial Agreement”) and the employment agreement between the Company and Mr. Konrad dated April 7, 2011 (the “Employment Agreement”), Mr. Konrad agreed to surrender to the treasury 3,000,000 shares of the Company’s 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 agreement (the “Settlement Agreement”). The Company agreed to pay $100,000 to Mr. Konrad in six consecutive monthly installments of $16,666.67 beginning November 16, 2012. In the event any part of the $100,000 balance remains unpaid six months after the date of the Agreement, Mr. Konrad has 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, subject to appropriate adjustment for any future stock splits, stock dividends, etc. The execution of the Settlement Agreement terminated both the Initial Agreement and the Employment Agreement, and neither party has any further obligations or liabilities under those agreements. Pursuant to the Settlement Agreement, Mr. Konrad resigned from his position as President and Director of the Company. He was not replaced in either position.

In October 2012, the Company raised gross proceeds of $321,750 through the private placement of 450,000 unregistered shares of common stock to accredited investors at $.715 per share. Each investor who purchased shares at $.715 per share received a three-year warrant to purchase 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 October 2012, the Company raised gross proceeds of $170,280 through the private placement of 396,000 unregistered shares of common stock to accredited investors at $.43 per share. The $.43 shares were offered only to investors who purchased shares of Common Stock in the Company’s April – July 2012 offering at $1.00 per share. The Company paid a 10% commission on the gross proceeds of this offering to its placement agent.

The bulk of the funds raised by the Company in October 2012 was used to finance the payments totaling $430,000 to Mr. Konrad and ARD under the agreement described above. Closing of the offerings described in this Note was conditioned on the Company’s raising the minimum of $430,000 to be paid to Mr. Konrad. The Company did raise the minimum offering described above in October 2012.

In October25, 2012, the Company entered into an employmenta consulting agreement with a project engineer providing for a monthly salaryHank Leibowitz, the principal of $5,000,Waste Heat Solutions, LLC, an expert with employment39 years’ experience in the field of advanced energy systems. Pursuant to this consulting agreement, which is terminable by either party on 30 days’ prior written notice. Thenotice, 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 the employeeWaste Heat Solutions (i) a fully vested 10-year option to purchase 500,000 shares of common stock at $.56 per share and another(ii) a 10-year option, forvesting six months from the contract date, i.e., on April 25, 2013, to purchase an additional 500,000 shares at $.56 per shareshare. 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 $91,000 was recorded as research and development expense in the condensed consolidated statement of operations for the first quarter 2013. The remaining unrecognized expense of approximately $30,300 will vest in six months.be recognized as research and development expense during the second quarter 2013.

 

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.

Note 11 - Related Party Transactions

See Notes 8 and 10 for discussion of transactions with the Company’s Co-Founders, George Konrad and Fred Barker.

Since January 1, 2012, the Company has been using a 5,000 square foot Scottsdale, Arizona, facility owned by Bryce Johnson, the principal Cornerstone seller, who became an officer and director of the Company in connection with the Cornerstone Acquisition. The Company used the facility free of charge for two months. Since March 2012, it has been paying Mr. Johnson $700 per month which covers overhead costs for use of the facility on a month-to-month basis. Mr. Johnson resigned as an officer and director of the Company in March 2013; however, the Company continues to use his facility and expects to continue doing so for at least the next year on the existing terms.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward Looking Statements

 

Readers are cautioned that the statements in this Report that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are based on the beliefs of our management, as well as on assumptions made by and information currently available to us as of the date of this Report. When used in this Report, the words “plan,” “will,” “may,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project” and similar expressions are intended to identify such forward-looking statements. Although we believe these statements are reasonable, actual actions, operations and results could differ materially from those indicated by such forward-looking statements as a result of the risk factors included in our 2011 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, 2009, 2010 and 2011, the tax years which remain subject to examination by major tax jurisdictions as of March 31, 2013.

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

Revenue Recognition

 

Sales revenues and associated cost of sales are recognized when title of the goods sold pass to the buyer, when shipped, and when accounts receivable are determined to be reasonably collectable. Certain sales agreements also require installation and training by PowerVerde once goods are received and accepted by the customer. The Company does not consider these agreements multiple elements arrangements as defined by ASC 605-25Revenue 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.

Valuation of Goodwill and Intangible Assets

Our intangible assets include goodwill and intellectual property, all of which are accounted for based on GAAP related to Goodwill and Other Intangible Assets. Accordingly, goodwill is not amortized but is tested annually in December for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired. Intangible assets with limited useful lives are amortized using the straight-line method over their estimated period of benefit. Our carrying value of goodwill at September 30, 2012 was $2,637,760.

We amortize intangibles with limited useful lives based on their expected useful lives and look to a number of factors for such estimations, including the longevity of our underlying patents. Our carrying value of amortizing intangible assets at September 30, 2012 was $549,533, net of accumulated amortization of $109,907. We begin amortizing capitalized intangibles on their date of acquisition.

Impairment Testing

The FASB issued ASU 2011-08, “Testing Goodwill for Impairment”. The update allows us to qualitatively assess whether the fair value of a reporting unit is less than its carrying amount, and is effective for fiscal years beginning after December 15, 2011. We perform this analysis in conjunction with our annual impairment test described below.

Our annual impairment test, which is performed in December, has two steps. The first identifies potential impairments by comparing the fair value of the Company with its carrying value. If the fair value exceeds the carrying amount, goodwill is not impaired and the second step is not necessary. If the carrying value exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied fair value of goodwill is less than the carrying amount, a write-down is recorded.

Stock-based Compensation

We account for share-based compensation in accordance with ASC Topic 718Share-Based Payments. We have used the Black-Scholes option pricing model to estimate the fair value of stock options on the date of grant.

Common Stock Purchase Warrants

 

The Company accounts for common stock purchase warrants in accordance with ASC Topic 815-40,815- 40, Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815-40”). Based on the provisions of ASC 815-40,815- 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 (includingincluding 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.

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 March 31, 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 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 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, testing and commercialization of our electric power systems, in particular, their applicability to thermal and natural gas pipeline operations. Our business is subject to significant risks, including the risks inherent in our research and development efforts, uncertainties associated with obtaining and enforcing patents and intense competition.

 

Except as specifically noted to the contrary, the following discussion relates only to PowerVerde since, as a result of the Merger, the only historical financial statements presented for the Company in periods following the Merger are those of the operating entity, PowerVerde.

 

Results of Operations

 

Three Months Ended September 30, 2012,March 31, 2013 as Compared to Three Months Ended September 30, 2011March 31, 2012

 

Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We had no revenues from our current businesssales in the thirdfirst quarter of 2012. In the2013 and 2012 third quarter, our revenues of $33,649 came solely from Biotech IP licensing fees. In the 2011 third quarter, our revenues of $143,491 consisted of— but we recorded $71,487 and $14,435 in Biotech IP licensing fees, of $13,491 and $130,000 in revenues from our current business, offset by cost of goods sold of $130,000.respectively. In both years, we had substantial expenses due to our ongoing research and development activities, and efforts to commercialize our systems, as well as substantial administrative expenses associated with our status as a public company. Our research and development expenses decreased by $112,118 (47.4%$340,879 (59.1%) in the thirdfirst quarter of 20122013 as compared to 2011, due primarily to2012. This decrease is because we are in the absenceprocess of third quarter billings for services from Arizona Researchtesting and Development (“ARD”) as a result of our negotiation with ARD’s owner, our founder and former President/Director George Konrad, of the settlement transaction with ARD and Mr. Konrad which closed in October 2012 (the “Konrad Settlement”). See Note 11 of Notes to Financial Statements and Part II, Item 5 “Other Information.”are not currently building any new generator systems. Our general and administrative expenses decreasedincreased by $18,914 (6.3%$231,438 (104.6%) in the thirdfirst quarter of 20122013 as compared to 2011,2012, due primarilymainly to increased expenses in 2013 for employee/consultant compensation, including the waivervalue of certainstock-based compensation for Mr. Konrad.vested and issued. Our net loss was $375,418$596,335 in the thirdfirst quarter of 2012,2013, a 28.7%24.3% decrease from the net loss of $526,318 in the third quarter of 2011. The substantial decrease in our net loss in the third quarter of 2012 was due to our reduced research and development expenses in 2012 and our vigorous cost control efforts. Substantial net losses will continue until we are able to successfully commercialize and market our systems, as to which there can be no assurance. 

Nine Months Ended September 30, 2012, as Compared to Nine Months Ended September 30, 2011

Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We had no revenues from our current business in the first nine months of 2012. In the first nine months of 2012, our revenues of $78,006 came solely from Biotech IP licensing fees. In the first nine months of 2011, our revenues of $174,482 consisted of Biotech IP licensing fees of $37,261 and $137,221 in revenues from our current business, offset by cost of goods sold of $136,925. 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 $201,354 (25.3%) in the first nine months of 2012 as compared to 2011, and our general and administrative expenses decreased by $657,264 (45.9%) in the same period. The increase in research and development expenses was due primarily to our acquisition of the Cornerstone Conservation Group LLC (“Cornerstone”) intellectual property$787,484 in the first quarter of 2012. The increase in research and development expenses was also due to the warrants issued in the first quarter of 2012 to settle certain disputed amounts with our European distributor, Newton Investments B.V. (“Newton”), with an estimated fair value of $262,700. The decrease in general and administrative expenses was due to our nonrecurring expenses in the second quarter of 2011 in connection with the establishment and development of our relationship with Newton, which more than offset our increased compensation expenses in the second and third quarter of 2012 arising from our hiring of key Cornerstone personnel. Our net loss was $1,703,382 in the first nine months of 2012, a 21.6% decrease from the net loss of $2,171,589 in the first nine months of 2011. The decrease in our net loss in the first nine months of 2012 was due to our unusually high expenses in the comparable 2011 period and our vigorous cost control efforts in 2012. Substantial net losses will continue until we are able to successfully commercialize and market our systems,products, as to which there can be no assurance. 

 

Liquidity and Capital Resources

 

We have financed our operations since inception through the sale of debt and equity securities. As of September 30, 2012,March 31, 2013, we had a working capital deficit of $570,170$143,877 compared to a working capital deficit of $128,598$72,721 at December 31, 2011.2012.

 

During the first quarter of 2012,2013, we raised gross proceeds of $500,000$75,000 through the private placement of 500,000 unregistered sharessecured promissory notes to existing stockholders. See Note 8 of our common stockNotes to accredited investors at $1.00 per share. We paid a 10% commission on the gross proceeds of this offering to our placement agent, Martinez-Ayme Securities (“MAS”).

In the second quarter of 2012, we raised gross proceeds of $335,000 through the private placement of 335,000 unregistered shares of our common stock to accredited investors at $1.00 per share. Each investor received a three-year warrant to purchase shares of our 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. We paid a 10% commission on the gross proceeds of this offering to MAS.

In the third quarter of 2012, we 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. We paid a 10% commission on the gross proceeds of this offering to MAS.

In October 2012, we raised gross proceeds of $321,750 through the private placement of 450,000 unregistered shares of common stock to accredited investors at $.715 per share. Each investor who purchased shares at $.715 per share received a three-year warrant to purchase 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. We paid a 10% commission on the gross proceeds of this offering to MAS.

In October 2012, we raised gross proceeds of $170,280 through the private placement of 396,000 unregistered shares of common stock to accredited investors at $.43 per share. The $.43 shares were offered only to investors who purchased shares of Common Stock in the Company’s April – July 2012 offering at $1.00 per share. We paid a 10% commission on the gross proceeds of this offering to MAS.

The bulk of the funds which we raised in October 2012 was used to finance the payments totaling $430,000 to Mr. Konrad and ARD in connection with the Konrad Settlement. Closing of the October 2012 private placements was conditioned on our raising the minimum of $430,000 to be paid to Mr. Konrad. See Part II, Item 5 “Other Information.”Unaudited Condensed Consolidated Financial Statements.

 

We believeexpect 2013 Biotech IP revenues to exceed the 2012 levels; however, there can be no assurance that our currentthis revenue level of working capital will be sufficient to sustain our current operations through at least approximately the next two months. However, weachieved.

We continue to seek more funding from private debt and equity investors, as we will 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.funds on commercially acceptable terms if at all. If we do not raise the necessary funds, we willmay be forced to cease operations.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and President, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Report.report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective.

Management’s Annual Report on Internal Control Over Financial Reporting

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

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

Our chief executive officer and chief financial officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2012 . In connection with this assessment, we identified the following material weaknesses in internal control over financial reporting as of December 31, 2012 . A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—An Integrated Framework (September 1992). Because of the material weaknesses described below, management concluded that, as of December 31, 2012 , our internal control over financial reporting was not effective.

We did not maintain an effective control environment. The control environment, which is the responsibility of senior management, sets the tone of the organization, influences the control consciousness of its people, and is the foundation for all other components of internal control over financial reporting. Each of the following control environment material weaknesses also contributed to the material weaknesses discussed below. Our control environment was ineffective because of the following material weaknesses:

(a) Monitoring of internal control over financial reporting—we did not maintain effective monitoring controls to determine the adequacy of our internal control over financial reporting and related policies and procedures because of the following material weakness:

(i) Our policies and procedures with respect to the review, supervision and monitoring of our accounting operations throughout the organization were either not designed, in place or operating effectively.

No Attestation Report

This quarterly report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this quarterly report.

 

Changes in Internal Control Over Financial Reporting

 

There were no significant changes in internal control over financial reporting during the nine months ended September 30, 2012first quarter of 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting, except as set forth above regarding the material weaknesses discovered which continued in the first quarter.

PART II OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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 includes claims for breach of his employment agreement, for back pay and related claims. Mr. Johnson, whose salary was $12,500 per month, seeks back pay of $37,500, reimbursement of expenses totaling $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 have also given 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 has not worked for the Company since early September 2012. Based on the foregoing, we believe that we have substantial defenses to Mr. Johnson’s claims. We intend to vigorously defend the case.None.

 

Item 1A. Risk Factors.

 

There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the 2011 Annual Report. Please refer to that section for disclosure regarding the risks and uncertainties related to our business.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

InAll 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 secondfirst quarter of 2012, we raised gross proceeds of $335,000 through the private placement of 335,000 unregistered shares of our common stock to accredited investors at $1.00 per share. Each investor received a three-year warrant to purchase shares of our 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. We paid a 10% commission on the gross proceeds of this offering to our placement agent, Martinez-Ayme Securities.

In the third quarter of 2012, we 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 October 2012, we raised gross proceeds of $321,750 through the private placement of 450,000 unregistered shares of common stock to accredited investors at $.715 per share. Each investor who purchased shares at $.715 per share received a three-year warrant to purchase 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. We paid a 10% commission on the gross proceeds of this offering to MAS.

In October 2012, we raised gross proceeds of $170,280 through the private placement of 396,000 unregistered shares of common stock to accredited investors at $.43 per share. The $.43 shares were offered only to investors who purchased shares of Common Stock in the Company’s April – July 2012 offering at $1.00 per share. We paid a 10% commission on the gross proceeds of this offering to MAS.

The bulk of the funds which we raised in October 2012 was used to finance the payments totaling $430,000 to Mr. Konrad and ARD in connection with the Konrad Settlement. Closing of the October 2012 private placements was conditioned on our raising the minimum of $430,000 to be paid to Mr. Konrad. See Part II, Item 5 “Other Information.”

The foregoing issuances2013 were made pursuant to the private offeringan exemption from registration provided inrequirements under Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended. AllWe paid a placement agent fee of 10% of the gross price of the offering to Martinez-Ayme Securities. Net proceeds of these sales were used for working capital.

During the first quarter of 2013, we raised gross proceeds of $75,000 through the private placement of secured promissory notes to existing stockholders. See Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements.

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

On October 16, 2012, in order to enhance the our ability to raise capital and limit dilution of our stockholders, as well as to satisfy our obligations to Arizona Research and Development (“ARD”) for past services and to George Konrad under the agreement among Mr. Konrad, ARD and PowerVerde dated April 7, 2011, as amended August 19, 2011 (the “Initial Agreement”) and the employment agreement between PowerVerde and Mr. Konrad dated April 7, 2011 (the “Employment Agreement”), Mr. Konrad agreed to surrender to the 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 agreement (the “Settlement Agreement”). We agreed to pay $100,000 to Mr. Konrad in six consecutive monthly installments of $16,666.67 beginning November 16, 2012. In the event any part of the $100,000 balance remains unpaid six months after the date of the Agreement, Mr. Konrad has an option to convert some or all of the unpaid balance into shares of our common stock at a price of .0667 per share, subject to appropriate adjustment for any future stock splits, stock dividends, etc. The execution of the Settlement Agreement terminated both the Initial Agreement and the Employment Agreement, and neither party has any further obligations or liabilities under those agreements. Pursuant to the Settlement Agreement, Mr. Konrad resigned from his position as President and Director of PowerVerde. He was not replaced in either position.Not applicable.

 

Item 6. Exhibits.

 

(a)(a)Exhibits

31.1Certification of Principal Executive Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
32.1Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
32.2Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
101.INSXBRL INSTANCE DOCUMENT
  
101.SCHXBRL TAXONOMY EXTENSION SCHEMA
101.CALXBRL TAXONOMY EXTENSION CALCULATION LINKBASE
101.DEFXBRL TAXONOMY EXTENSION DEFINITION LINKBASE
101.LABXBRL TAXONOMY EXTENSION LABEL LINKBASE
101.PREXBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

SIGNATURES

 

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

 

 POWERVERDE, INC.
Dated: November 19, 2012 
 
Dated: May 20, 2013By:/s/ Richard H. Davis
  Richard H. Davis
  Chief Executive Officer

Dated: November 19, 2012
May 20, 2013By:/s/ John L. Hofmann
  John L. Hofmann
  Chief Financial Officer

Exhibit Index

 

Exhibit
No.
Description
31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  
31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  
32.1Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
32.2Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INSXBRL INSTANCE DOCUMENT
101.SCHXBRL TAXONOMY EXTENSION SCHEMA
101.CALXBRL TAXONOMY EXTENSION CALCULATION LINKBASE
101.DEFXBRL TAXONOMY EXTENSION DEFINITION LINKBASE
101.LABXBRL TAXONOMY EXTENSION LABEL LINKBASE
101.PREXBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

 

2122