XOTC:PWVI PowerVerde Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington D.C. 20549

 


 

Form 10-Q

 


S Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   
  For the Quarterly Period ended June 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, FL 33146

(Address of principal executive offices)

 

(305) 666-0024

(Registrant's telephone number including area code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 filer S                 Smaller reporting company

 

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

£ Yes S No

 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of August 13, 2012 the issuer had 28,169,565 shares of common stock outstanding.

 

 
 

 

Index to Form 10-Q

 

      Page
PART I FINANCIAL INFORMATION     
       
Item 1. Financial Statements(Unaudited)     
  Condensed Consolidated Balance Sheets     2
  Condensed Consolidated Statements of Operations     3
  Consolidated Statements of Changes in Stockholders’ Equity (Deficiency)     4
  Condensed Consolidated Statements of Cash Flows     5
  Notes to Unaudited Condensed Consolidated Financial Statements     6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   15
Item 3. Quantitative and Qualitative Disclosures about Market Risk   17
Item 4. Controls and Procedures   18
       
PART II OTHER INFORMATION   19
       
Item 1. Legal Proceedings   19
Item 1A. Risk Factors   19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   19
Item 3. Defaults upon Senior Securities   19
Item 4. (Removed and Reserved)   19
Item 5. Other Information   19
Item 6. Exhibits   20
     
SIGNATURES   21

 

 
 

 

PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Balance Sheets

June 30, 2012 and December 31, 2011

(Unaudited)

 

   2012   2011 
Assets        
Current Assets:        
Cash and cash equivalents  $100,051   $7,530 
Accounts receivable   29,922    18,909 
Prepaid expenses and other current assets   40,701    24,267 
Total Current Assets   170,674    50,706 
           
Property and Equipment          
Property and equipment, net of accumulated depreciation of $24,036 and $20,521, respectively   12,294    15,809 
           
Other Assets          
Intellectual Property, net of accumulated amortization of $54,953   604,487     
Goodwill   2,637,760     
           
Total Assets  $3,425,215   $66,515 
           
Liabilities and Stockholders' Equity          
Current Liabilities          
Accounts payable and accrued expenses  $68,838   $139,453 
Payable to related party   548,263    39,851 
Total Current Liabilities   617,101    179,304 
           
Long-Term Liabilities          
Payable to related parties       180,988 
Total Long-Term Liabilities       180,988 
Total Liabilities   617,101    360,292 
           
Stockholders' Equity/(Deficiency)          
Common stock:          
100,000,000 common shares authorized, par value $0.0001 per share, 28,094,565 common shares issued and outstanding at June 30, 2012 and 25,624,565 common shares issued and outstanding at December 31, 2011   3,322    3,012 
Additional paid-in capital   9,275,268    4,730,724 
Treasury stock at cost, 5,050,000 shares at June 30, 2012 and 4,500,000 shares at December 31, 2011   (285,758)   (170,758)
Deficit accumulated in the development stage   (6,184,718)   (4,856,755)
Total Stockholders' Equity/(Deficiency)   2,808,114    (293,777)
           
Total Liabilities and Stockholders' Equity/(Deficiency)  $3,425,215   $66,515 

 

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

 

2
 

  

PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Statements of Operations

For the three and six months ended June 30, 2012 and 2011, and the

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

(Unaudited)

 

   Three months ended   Six months ended   Cumulative from inception 
   June 30,   June 30,   through 
   2012   2011   2012   2011   June 30, 2012 
                     
Revenue, Net  $29,922   $20,553   $44,357   $30,991   $329,113 
                          
Cost of Goods Sold  $   $6,925   $   $6,925   $136,925 
                          
Gross Profit  $29,922   $13,628   $44,357   $24,066   $192,188 
                          
Operating Expenses                         
Research and development   295,251    358,729    872,287    558,815    2,879,968 
General and administrative   271,433    902,503    492,672    1,131,022    3,164,283 
Total Operating Expenses   566,684    1,261,232    1,364,959    1,689,837    6,044,251 
                          
Loss from Operations   (536,762)   (1,247,604)   (1,320,602)   (1,665,771)   (5,852,063)
                          
Other Income (Expenses)                         
Interest income                   2,401 
Interest expense   (3,717)   (3,157)   (7,361)   (3,157)   (351,067)
Other income               23,657    16,011 
Total Other Income (Expense)   (3,717)   (3,157)   (7,361)   20,500    (332,655)
                          
Loss before Income Taxes   (540,479)   (1,250,761)   (1,327,963)   (1,645,271)   (6,184,718)
Provision for Income Taxes                    
                          
Net Loss  $(540,479)  $(1,250,761)  $(1,327,963)  $(1,645,271)  $(6,184,718)
                          
Net Loss per Share - Basic and Diluted  $(0.02)  $(0.05)  $(0.05)  $(0.06)     
                          
Weighted Average Common Shares Outstanding - Basic and Diluted   28,154,620    25,415,167    27,015,795    27,074,012      

 

 

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

 

3
 

 

PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

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

For the six months ended June 30, 2012

(Unaudited)

 

   Common Shares   Common  Stock   Paid in Capital   Treasury Stock   Deficit Accumulated during the Development Stage   Total Stockholders' Equity/ (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 $83,500   835,000    84    751,416              751,500 
Issuance of warrants for settlement with Newton             262,700              262,700 
Stock-based compensation             233,454              233,454 
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 Mon Consulting   (75,000)                         
Treasury Stock   (550,000)             (115,000)        (115,000)
Net loss for the six months ended  June 30, 2012                       (1,327,963)   (1,327,963)
Balances, June 30, 2012   28,094,565   $3,322   $9,275,268    (285,758)  $(6,184,718)  $2,808,114 

 

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

 

4
 

  

PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 2012 and 2011, and the

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

(Unaudited)

 

           Cumulative from 
           inception through 
   2012   2011   June 30, 2012 
Cash Flows from Operating Activities               
Net loss  $(1,327,963)  $(1,645,271)  $(6,184,718)
Adjustments to reconcile net loss to net cash used in operating activities:               
Depreciation, amortization, and impairment charges   58,468    3,743    78,989 
Amortization of discount   7,361    3,157    347,053 
Stock based compensation   233,454    284,454    756,603 
Warrants issued for services       612,150    612,150 
Warrants issued for settlement   262,700        262,700 
Changes in operating assets and liabilities:               
Accounts receivable and other assets   (41,446)   (126,253)   (84,622)
Inventory       (130,000)   (130,000)
Deferred Revenue       130,000    130,000 
Accounts payable and accrued liabilities   179,447    9,846    128,219 
                
Cash Used in Operating Activities   (627,979)   (858,174)   (4,083,626)
                
Cash Flows From Investing Activities               
Purchase of fixed assets       (11,192)   (36,330)
Cash acquired in business acquisition           872 
        (11,192)   (35,458)
Cash Used in Investing Activities               
                
Cash Flows from Financing Activities               
Proceeds from issuance of common stock and warrants   835,000    1,500,000    4,487,250 
Proceeds from notes payable           300,000 
Payment of line of credit           (50,000)
Payment of note payable           (90,217)
Purchase of treasury stock   (31,000)       (31,000)
Payment of stock issuance costs   (83,500)   (150,000)   (396,898)
                
Cash Provided by Financing Activities   720,500    1,350,000    4,219,135 
                
Net Increase in Cash   92,521    480,634    100,051 
                
Cash, at Beginning of Period   7,530    15,646     
Cash, at End of Period  $100,051   $496,280   $100,051 
                
Supplemental Disclosure of Cash Flow Information               
Cash paid during the period for interest  $   $   $24,221 
Cash paid during the period for income taxes  $   $   $ 
                
Supplemental Schedule of Non-Cash Financing Activities               
Common stock issued for convertible debt  $   $   $189,261 
Common stock issued issued for services  $   $   $56,250 
Common stock issued for acquisition of Cornerstone Conservation Group, LLC  $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 
Purchase of treasury stock with short-term related party payable  $70,000   $   $70,000 
Warrants issued in connection with debt  $   $   $299,984 
Common stock issued in connection with debt forgiveness and services rendered  $   $   $250,000 

  

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

 

5
 

 

PowerVerde, Inc. and Subsidiary 

Notes to Unaudited Condensed Consolidated Financial Statements  

June 30, 2012

 

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. The results of operations for the six months ended June 30, 2012, 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Note 3 – Summary of Significant Accounting Policies

 

Development Stage Company

 

The Company is a development stage company as defined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915, “Development Stage Entities.” The Company is devoting substantially all of its present efforts to establish a new business and none of its planned principal operations have commenced. All losses accumulated since inception have been considered as part of the Company’s development stage activities.

 

Accounts Receivable

 

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

 

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.

 

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

 

6
 

 

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 utilize a discounted cash flow analysis to determine an estimate of 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

 

The Company accounts for share-based compensation in accordance with ASC Topic 718 Share-Based Payments. The Company has 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, Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815-40”). Based on the provisions of ASC 815- 40, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement, or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).

 

Accounting for Uncertainty in Income Taxes

 

The Company applies the accounting standard regarding “Accounting for Uncertain Tax Positions” 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 standard 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 June 30, 2012.

 

7
 

 

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.

 

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 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 Assets 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 condensed consolidated financial statements.

 

8
 

 

Note 5 – Acquisition

 

On March 30, 2012, the Company purchased 100% of the membership interests of Cornerstone Conservation Group LLC (“Cornerstone”) pursuant to a Membership Interest Purchase Agreement (the “Agreement”). Cornerstone’s main asset is its proprietary Combined Cooling, Heating and Power (“CCHP”) technology, which utilizes waste heat from commercial and residential heating, ventilation air conditioning and refrigeration (“HVACR”) systems. Cornerstone also has substantial experience and technology relating to geothermal or ground source heat pumps. The Company also moved its operations to a 5,000 square foot facility owned by one of the sellers in Scottsdale Arizona. The Company has been using the facility rent free on a short term basis but expects to negotiate a lease on fair market terms.

 

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:

 

9
 

 

  (i) 100,000 shares at an exercise price of $2.00 per share, exercisable beginning January 1, 2012, through December 31, 2016;
     
  (ii) 100,000 shares at an exercise price of $3.00 per share, exercisable beginning July 1, 2012, through June 30, 2017; and
     
  (iii) 100,000 shares at an exercise price of $4.00 per share, exercisable beginning January 1, 2013, through December 31, 2017.

 

The estimated fair value of the total warrants issued in connection with the acquisition of Cornerstone was $201,000 which was calculated using the Black-Scholes option valuation method with the following assumptions: a risk free interest rate of 1.04 percent, an estimated volatility of 79.1 percent and no dividend yield.  The total present value of all consideration expected to be paid as part of this agreement was $3,297,200.

 

The following summarizes the fair values of the assets acquired:

 

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

 

The assets acquired were recorded at preliminary estimates of fair values determined by management, based on information currently available and on current assumptions as to future operations, and are subject to change upon the completion of acquisition accounting, including the finalization of asset valuations.

 

For the six months ended June 30, 2012, amortization expense and accumulated amortization of the intangible asset- intellectual property was $54,953.

 

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 Six Months Ended June 30  
   2012     2011  
Revenue  $58,965   $ 242,352  
              
Net loss attributable to common shareholders of the Company  $(1,417,922)  $ (1,633,803 )
Basic and diluted net loss per common share attributable to common shareholders of PowerVerde  $(0.05)  $ (0.06 )

 

10
 

 

Note 6 – Property and Equipment

 

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

 

   June 30, 2012   December 31, 2011   Estimated Useful Lives (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   (24,036)   (20,521)     
                
   $12,294   $15,809      

  

The amounts charged to operations for depreciation for the six months ended June 30, 2012 and 2011 were $3,515 and $3,743, respectively. Depreciation expense from inception through June 30, 2012 was $24,036.

 

11
 

 

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 June 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 June 30, 2012, all of these warrants were outstanding.

 

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 June 30, 2012, all of these warrants were outstanding.

 

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 June 30, 2012, all of these warrants were outstanding.

 

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

 

In connection with the acquisition of Cornerstone (See Note 5), on March 30, 2012, the Company issued warrants to purchase 300,000 unregistered shares of common stock at exercise prices ranging from $2.00 to $4.00 per share. These warrants expire at various dates through December 2017. As of June 30, 2012, 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 June 2015. As of June 30, 2012, all of these warrants were outstanding.

 

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

 

A summary of warrants issued, exercised and expired during the six months ended June 30, 2012 is as follows:

 

       Weighted 
       Average 
  Shares  Exercise Price 
Balance at December 31, 2011   4,294,999    0.88 
Issued   1,135,000    2.12 
Balance at June 30, 2012   5,429,999    1.14 
          

  

12
 

 

The weighted average grant date fair value of warrants issued during the six month period ended June 30, 2012 amounted to $0.52 to $0.77 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:

 

   June 30, 2012 
Risk Free interest rate   .33% to 1.04% 
Expected term   5.0 years 
Annualized volatility   79%-to 81% 
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.

 

Private Placement of Common Stock

 

In February 2012, the Company raised gross proceeds of $500,000 through the private placement of 500,000 shares of its common stock to accredited investors at $1.00 per share. The private placement was undertaken pursuant to the Agreement between the Company and Newton as disclosed in Note 9, below.

 

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.

 

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 June 30, 2012 was $188,349.

 

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 $70,000 at June 30, 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 50,000,000 shares of authorized, $0.0001 par value preferred stock. At June 30, 2012, no shares had been issued.

 

13
 

 

Note 8 – Stock Options

 

Stock option activity for the quarter ended June 30, 2012, 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 June 30, 2012   1,750,000   $0.91    9.8 

 

Total stock option compensation for the six months ended June 30, 2012 and 2011 was $233,454 and $284,454 respectively. Remaining stock option compensation of $233,454 will be recognized through the remainder of 2012.

 

Note 9– Commitments and Contingencies

 

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

 

In the first quarter of 2012, the Company raised $500,000 exclusively from accredited European investors (including $275,000 from a Newton affiliate) pursuant to a private placement of 500,000 shares of common stock at a price of $1.00 per share. There 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 between the Company and Newton.

 

Note 10- Related Party Transactions

 

During the six month periods ended June 30, 2012, and 2011, the Company received services for primarily research and development from an affiliate in the amount of $138,382 and $95,219, respectively. As of June 30, 2012, and December 31, 2011, the Company owed $131, 805 and $31,174, respectively to this affiliate.

 

Note 11- Subsequent Events.

 

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.

 

14
 

 

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.

 

Revenue Recognition

 

Sales revenues and associated cost of sales are recognized when title of the goods sold pass to the buyer, when shipped, and when accounts receivable are determined to be reasonably collectable. Certain sales agreements also require installation and training by PowerVerde once goods are received and accepted by the customer. The Company does not consider these agreements multiple elements arrangements as defined by ASC 605-25 Revenue Recognition , as the Company does not offer installation or training as services separate from the sale of its products, at this time, and therefore a “best estimate of selling price” or individual pricing in accordance with ASC 605-25 is undeterminable. The Company defers all revenues and costs of sales until the agreement is 100% complete.

  

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

 

Stock-based Compensation

 

We account for share-based compensation in accordance with ASC Topic 718 Share-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, Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815-40”). Based on the provisions of ASC 815-40, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement, or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).

 

15
 

 

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 June 30, 2012, as Compared to Three Months Ended June 30, 2011

 

Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We had no material revenues in the second quarter of 2012 and 2011. In the 2012 second quarter, our revenues of $29,922 came solely from Biotech IP licensing fees. In the 2011 second quarter, our revenues of $20,553 consisted of Biotech IP licensing fees of $13,332 and $7,221 in revenues from our current business. 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 $63,478 (17.7%) in the second quarter of 2012 as compared to 2011, and our general and administrative expenses decreased by $631,070 (69.9%) in the same period. Our higher expenses in the second quarter of 2011 were due to the cost of establishing and developing our relationship with our European distributor, Newton Investments B.V. (“Newton”) and our intensive research and development activities in that period, which more than offset our increased expenses in the second quarter of 2012 arising from our hiring of key personnel from Cornerstone Conservation Group LLC (“Cornerstone”), whose complementary intellectual property we acquired in the first quarter of 2012. Our net loss was $540,479 in the second quarter of 2012, a 56.8% decrease from the net loss of $1,250,761 in the second quarter of 2011. The substantial decrease in our net loss in the second quarter of 2012 was due to our unusually high expenses in the comparable 2011 period 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. 

 

16
 

 

Six Months Ended June 30, 2012, as Compared to Six Months Ended June 30, 2011

 

Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We had no material revenues in the first six months of 2012 and 2011. In the first six months of 2012, our revenues of $44,357 came solely from Biotech IP licensing fees. In the first six months of 2011, our revenues of $30,991 consisted of Biotech IP licensing fees of $23,770 and $7,221 in revenues from our current business. 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 $313,472 (56.1%) in the first six months of 2012 as compared to 2011, and our general and administrative expenses decreased by $638,350 (56.4%) in the same period. The increase in research and development expenses was due primarily to our acquisition of the Cornerstone intellectual property in the first quarter of 2012. The increase in research and development was also due to the warrants issued in the first quarter of 2012 to settle certain disputed amounts with Newton with an estimated fair value of $262,700. The decrease in general and administrative expenses was due to our extraordinary 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 quarter of 2012 arising from our hiring of key Cornerstone personnel. Our net loss was $1,327,963 in the first six months of 2012, a 19.3% decrease from the net loss of $1,645,271 in the first six months of 2011. The decrease in our net loss in the first six months of 2012 was due to our unusually high expenses in the comparable 2011 period 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. 

 

Liquidity and Capital Resources

 

We have financed our operations since inception through the sale of debt and equity securities. As of June 30, 2012, we had a working capital deficit of $446,427 compared to a working capital deficit of $128,598 at December 31, 2011.

 

During the first quarter of 2012, we raised gross proceeds of $500,000 through the private placement of 500,000 unregistered shares of our common stock 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.

 

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 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. We paid a 10% commission on the gross proceeds of this offering to its placement agent.

 

We believe that our current level of working capital will be sufficient to sustain our current operations through at least approximately the next two months. However, we continue to seek more funding from private equity investors, as we will need to raise substantial additional capital in order to finance our plan of operations. There can be no assurance that we will be able to raise the necessary funds. If we do not raise the necessary funds, we will be forced to cease operations.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

17
 

 

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. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

 

Changes in Internal Control Over Financial Reporting

 

There were no significant changes in internal control over financial reporting during the six months ended June 30, 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

18
 

 

PART II OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the 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.

  

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 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.

 

The foregoing issuances were made pursuant to the private offering exemption from registration provided in Section 4(2) of the Securities Act of 1933, as amended. All proceeds of these sales were used for working capital.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

In April 2012, we purchased 100,000 shares of our common stock from a company owned by our Director and cofounder Fred Barker 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, we purchased 450,000 shares of our common stock from Mr. Barker at a price of $0.20 per share. Of the $90,000 purchase price, $10,000 was paid at closing and the balance is payable $10,000 per month through January 2013. The balance owed at June 30, 2012 is $70,000. The shares have been held as treasury stock from the date of closing.

 

19
 

 

Item 6. Exhibits.

 

(a)Exhibits

  

31.1 Certification of Principal Executive Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 


 

20
 

 

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: August 14, 2012 By: /s/ Richard H. Davis
    Richard H. Davis
    Chief Executive Officer
     
Dated: August 14, 2012  By: /s/ John L. Hofmann
    John L. Hofmann
    Chief Financial Officer

 

21
 

 

Exhibit Index

 

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

 

22


 

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