374Water Inc. - FORM 10-Q - November 14, 2011

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EXCEL - IDEA: XBRL DOCUMENT - 374Water Inc.	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - 374Water Inc.	ex32_1.htm
EX-32.2 - EXHIBIT 32.2 - 374Water Inc.	ex32_2.htm
EX-31.1 - EXHIBIT 31.1 - 374Water Inc.	ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - 374Water Inc.	ex31_2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the Quarterly Period ended September 30, 2011

o	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.)

23429 N. 35th Drive, Glendale, Arizona 85310

(Address of principal executive offices)

(623) 780-3321

(Registrant’s telephone number including area code)

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

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

x Yes o No

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

x Yes o No

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

o		Large accelerated filer	o	Accelerated filer
o		Non-accelerated filer	x	Smaller reporting company

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

o Yes x No

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of November 14, 2011 the issuer had 25,624,565 shares of common stock outstanding.

Index to Form 10-Q

		Page

PART I	FINANCIAL INFORMATION	2

Item 1.	Financial Statements	2
	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	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	15
Item 4.	Controls and Procedures	15

PART II	OTHER INFORMATION	16

Item 1.	Legal Proceedings	16
Item 1A.	Risk Factors	16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3.	Defaults Upon Senior Securities	16
Item 4.	(Removed and Reserved)	16
Item 5.	Other Information	16
Item 6.	Exhibits	17

SIGNATURES		18

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Balance Sheets

September 30, 2011 and December 31, 2010

(Unaudited)

	2011			2010
Assets
Current Assets:
Cash and cash equivalents	$	234,802		$	15,646
Accounts receivable		13,491			5,350
Receivable, related party		10,000			—
Prepaid insurance		12,181			—
Total Current Assets		270,474			20,996

Property and Equipment
Property and equipment, net of accumulated depreciation of $18,608 and $13,103, respectively		17,721			12,034

Total Assets	$	288,195		$	33,030

Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable and accrued expenses	$	73,680		$	153,891
Total Current Liabilities		73,680			153,891

Long-Term Liabilities
Payable to related party		177,416			—
Total Long-Term Liabilities		177,416			—

Total Liabilities		251,096			153,891

Stockholders’ Equity (Deficiency)
Preferred stock: 50,000,000 preferred shares authorized, par value $0.0001 per share, no shares issued and outstanding at September 30, 2011 and December 31, 2010		—			—
Common stock: 100,000,000 common shares authorized, par value $0.0001 per share, 30,124,565 common shares issued and 25,624,565 shares outstanding at September 30, 2011 and 28,043,065 common shares issued and outstanding at December 31, 2010		3,012			2,804
Additional paid-in capital		4,679,724			2,179,625
Treasury stock, 4,500,000 shares at cost		(170,758	)		—
Deficit accumulated in the development stage		(4,474,879	)		(2,303,290	)
Total Stockholders’ Equity (Deficiency)		37,099			(120,861	)
Total Liabilities and Stockholders’ Equity (Deficiency)	$	288,195		$	33,030

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 Operations

For the three and nine months ended September 30, 2011 and 2010, and the

period from March 9, 2007 (Date of Inception) to September 30, 2011

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,						Cumulative from inception through September 30,
	2011			2010			2011			2010			2011
Revenue, Net	$	143,491		$	9,805		$	174,482		$	28,492		$	265,847

Cost of Goods Sold		130,000			—			136,925			—			136,925

Gross Profit		13,491			9,805			37,557			28,492			128,922

Operating Expenses
Research and development		236,730			40,706			1,430,599			115,358			1,808,609
General and administrative		299,577			32,035			795,546			147,589			2,473,470
Total Operating Expenses		536,307			72,741			2,226,145			262,947			4,282,079

Loss from Operations		(522,816	)		(62,936	)		(2,188,588	)		(234,455	)		(4,153,157	)

Other Income (Expenses)
Interest income		—			—			—			—			2,401
Interest expense		(3,502	)		—			(6,658	)		—			(340,134	)
Other income (expense)		—			—			23,657			—			16,011
Total Other Income (Expense)		(3,502	)		—			16,999			—			(321,722	)

Loss before Income Taxes		(526,318	)		(62,936	)		(2,171,589	)		(234,455	)		(4,474,879	)
Provision for Income Taxes		—			—			—			—			—

Net Loss	$	(526,318	)	$	(62,936	)	$	(2,171,589	)	$	(234,455	)	$	(4,474,879	)

Net Loss per Share - Basic and Diluted	$	(0.02	)	$	(0.01	)	$	(0.08	)	$	(0.01	)

Weighted Average Common Shares Outstanding - Basic and Diluted		25,605,940			27,913,644			26,579,277			27,913,644

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

PowerVerde, Inc. and Subsidiary

(A Development Stage Company)

Consolidated Statement of Changes in Stockholders’ Equity (Deficiency)

For the nine months ended September 30, 2011

(Unaudited)

	Common Shares			Common Stock		Additional Paid in Capital		Treasury Stock			Deficit Accumulated during the Development Stage			Total Stockholders’ Equity (Deficiency)

Balances, December 31, 2010		28,043,065		$	2,804	$	2,179,625	$	—		$	(2,303,290	)	$	(120,861	)

Sale of common stock at $.75 per share, net of stock issuance costs of $150,000		2,000,000			200		1,349,800					—			1,350,000
Stock-based compensation							415,907								415,907
Warrants issued for services							612,150								612,150
Warrants exercised		81,500			8		122,242								122,250

Treasury stock		(4,500,000	)						(170,758	)					(170,758	)

Net loss for the nine months ended September 30, 2011		—			—		—					(2,171,589	)		(2,171,589	)

Balances, September 30, 2011		25,624,565		$	3,012	$	4,679,724	$	(170,758	)	$	(4,474,879	)	$	37,099

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 nine months ended September 30, 2011 and 2010, and the

period from March 9, 2007 (Date of Inception) to September 30, 2011

(Unaudited)

	2011			2010			Cumulative from inception through September 30, 2011
Cash Flows from Operating Activities
Net loss	$	(2,171,589	)	$	(234,455	)	$	(4,474,879	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation, amortization, and impairment charges		5,505			4,251			18,608
Amortization of discount		6,658			—			336,120
Stock based compensation		415,908			—			472,158
Warrants issued for services		612,150						612,150

Changes in operating assets and liabilities:
Accounts receivable and other assets		(30,322	)		(2,179	)		(35,672	)
Accounts payable and accrued liabilities		(80,212	)		(28,853	)		(156,862	)

Cash Used in Operating Activities		(1,241,902	)		(261,236	)		(3,228,377	)

Cash Flows From Investing Activities
Purchase of fixed assets		(11,192	)		—			(36,328	)
Cash acquired in business acquisition		—			—			872

Cash Used in Investing Activities		(11,192	)		—			(35,456	)

Cash Flows from Financing Activities
Proceeds from issuance of common stock		1,622,250			290,000			3,652,250
Proceeds from notes payable		—			—			300,000
Payment of line of credit		—			—			(50,000	)
Payment of note payable		—			—			(90,217	)
Payment of stock issuance costs		(150,000	)		(29,000	)		(313,398	)


Cash Provided by Financing Activities		1,472,250			261,000			3,498,635

Net Increase (Decrease) in Cash		219,156			(236	)		234,802

Cash and Cash Equivalents, at Beginning of Period		15,646			20,457			—

Cash and Cash Equivalents, at End of Period	$	234,802		$	20,221		$	234,802

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 for services	$	—		$	—		$	56,250
Purchase of treasury stock with long-term related party payable	$	170,758		$	—		$	170,758
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.

PowerVerde, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2011

Note 1 – Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the annual report of PowerVerde, Inc. (“PowerVerde,” “we,” “us,” “our” or the “Company”) as of and for the year ended December 31, 2010. The results of operations for the nine months ended September 30, 2011, 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

Inventories

Inventories, which consist of finished goods are stated at the lower of cost or market value, cost being determined using the first-in, first-out method. The Company records reserves for inventory shrinkage and obsolescence, when considered necessary. At September 30, 2011 the Company had no inventory.

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, 2011, 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. 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.

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, 2007, 2008, 2009 and 2010, the tax years which remain subject to examination by major tax jurisdictions as of September 30, 2011.

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.

Note 4 – Recent Accounting Pronouncements

On January 1, 2011, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force.” This ASU amended the criteria for when to evaluate individual delivered items in a multiple deliverable arrangement and how to allocate consideration received. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” which provides common requirements for measuring fair value and disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). This ASU is effective for fiscal years beginning on or after December 15, 2011. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” which improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. This ASU is effective for fiscal years beginning on or after December 15, 2011 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment”. ASU 2011-08 permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

Note 5 – Property and Equipment

A summary of property and equipment at September 30, 2011 and December 31, 2010 is as follows:

	September 30, 2011			December 31, 2010			Estimated Useful Lives (in years)

Equipment	$	25,426		$	22,339		5
Computer equipment (hardware)		6,974			2,798		3-5
Software		3,929			—		3
		36,329			25,137
Less: Accumulated depreciation		(18,608	)		(13,103	)
	$	17,721		$	12,034

The amounts charged to operations for depreciation for the nine months ended September 30, 2011 and 2010 were $5,505 and $4,251, respectively.

Note 6 – 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. Of these warrants 50,000 were still outstanding as of September 30, 2011. The warrants expire on various dates through November 2011. At September 30, 2011,168,500 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 November 14, 2011, none of these warrants were exercised or had expired.

During January through June 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 November14, 2011, none of these warrants were 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 Black Scholes warrant pricing model to determine the fair value of each warrant.

Expenses related to warrants issued for services for the nine months ended September 30, 2011 and 2010 were $612,150 and $0, respectively.

A summary of warrants issued, exercised and expired during the nine months ended September 30, 2011 is as follows:

	Shares			Weighted Average Exercise Price

Balance at December 31, 2010		739,999			1.11
Issued		3,855,000			.89
Exercised		(81,500)			1.50
Expired		(168,500	)		1.50
Balance at September 30, 2011		4,344,999			0.90

The weighted average grant date fair value of warrants issued during the nine month period September 30, 2011 amounted to $1.02 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, 2011
Risk free interest rate	1.59	%
Expected life	5.0 years
Annualized volatility	131	%
Expected dividends	—

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 the first nine months of 2011, the Company raised $1,500,000 through the private placement of 2,000,000 shares of its common stock to accredited investors at $0.75 per share. Each investor received a three-year warrant to purchase unregistered stock at $0.75 per share for a number of shares of common stock equal to the number of shares purchased by the investor in this offering. On January 31, 2011, the Company entered into a Binding Letter of Intent for European Distribution (the “BLOI”) with Newton Investments BV, a Dutch corporation based in Leeuwarden, Netherlands (“Newton”), as disclosed in Note 8, below. The $1,500,000 referred to above includes a $250,000 investment purchased by a Newton affiliate in conjunction with the Newton BLOI.

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 note payable in April 2013. See Note 8 - Commitments.

Preferred Shares

The Company has 50,000,000 shares of authorized, $0.0001 par value preferred stock. At September 30, 2011, no shares had been issued.

Note 7 – Stock Options

On January 1, 2011, the Company entered into a nonqualified stock option agreement with an employee, granting the employee a 10-year option to purchase 1,350,000 shares of the Company’s common stock at a price of $0.59 per share, of which one-fourth of the option shares, i.e., 337,500 shares, vested as of the date of the nonqualified stock option agreement, and the balance vests in equal installments every six months thereafter until fully vested, provided that the employee is still employed by the Company at the time.

On June 15, 2011 the Company entered into nonqualified stock option agreements with three employees, granting the employees 10-year options to purchase a total of 600,000 shares of the Company’s common stock consisting of 300,000 shares of the Company’s common stock at a price of $1.23 per share and 300,000 shares of the Company’s common stock at a price of $2.00 per share. In each case, one-fourth of the option shares vested as of the date of each employee’s respective nonqualified stock option agreement, and the balance vests in equal installments every six months thereafter until fully vested, provided that the relevant employee is still employed by the Company at the time. See “Note 8 Commitments.”

The fair value of each stock option granted was determined using the Black-Scholes stock option pricing model and the following weighted average assumptions:

	September 30, 2011
Risk free interest rate	1.54	%
Expected life	5.75 years
Annualized volatility	131	%
Expected dividends	—

Stock option activity for the nine months ended September 30, 2011, is summarized as follows:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
Options outstanding at December 31, 2010		—	$	—
Granted		1,950,000	$	0.91
Expired or forfeited		—		—
Options outstanding at September 30, 2011		1,950,000	$	0.91		10.00
Options exercisable at September 30, 2011		412,500	$	0.85		10.00
Options vested or expected to vest at September 30, 2011		487,500	$	0.91		10.00

Total stock option compensation for the nine months ended September 30, 2011 and 2010 was $415,907 and $0, respectively. Remaining stock option compensation of $721,909 will be recognized ratably over 18 months from the grant date.

Note 8 – Commitments and Contingencies

On January 31, 2011, the Company entered into a Binding Letter of Intent for European Distribution (the “BLOI”) with Newton Investments BV, a Dutch corporation based in Leeuwarden, Netherlands (“Newton”). Pursuant to the BLOI, the Company and Newton agreed to enter into a definitive agreement (which was entered into, as described below), pursuant to which Newton would, for a period of 10 years, be the exclusive manufacturer and distributor of the Company’s proprietary emissions-free electrical power generation systems (the “Systems”) in the 27 countries which are currently members of the European Union, subject to Newton achieving minimum sales of at least 100 Systems per year and investing at least $750,000 in establishing its manufacturing facility and distribution network. Pursuant to the BLOI, the Company would receive as a royalty an amount equal to 20% of the gross sale price of each System sold by Newton. The Company authorized Newton to manufacture its Systems under a strict licensing agreement with a Dutch/German foundry and machine shop. Newton also agreed to purchase an initial System from the Company for a discounted price. In connection with the BLOI, an affiliate of Newton invested $250,000 in PowerVerde by privately purchasing 333,333 restricted shares of common stock at a price of $0.75 per share. In connection with this purchase, the Company issued to the investor a three-year warrant to buy an additional 333,333 unregistered shares at a price of $0.75 per share.

The Company’s initial System was delivered to Newton in July 2011, pursuant to the terms of the BLOI, as described above, and the balance of the purchase price was received upon delivery in July 2011. The full $130,000 sale price was recorded as revenue in the third quarter.

On April 7, 2011, in order to enhance the Company’s ability to raise capital and limit dilution of its stockholders, the Company entered into an agreement with its co-founder, President and then-Chief Executive Officer, George Konrad, pursuant to which Mr. Konrad agreed to surrender to the treasury 4,500,000 shares of common stock owned by him since inception in exchange for the Company agreeing to pay to Mr. Konrad’s company, Arizona Research and Development (“ARD”), a related party, $200,000 to be paid no later than April of 2013. A discount of approximately $30,000 was recognized on the long-term payable as imputed interest of 8%. Interest accrued for the quarter approximated $3,200.

On August 19, 2011, the Company amended its agreement with George Konrad dated as of April 7, 2011, relating to Mr. Konrad’s surrender to the Company’s treasury of 4,500,000 shares of common stock (the “Original Agreement”). Pursuant to such amendment, the Company extended the timing of payments to be made to Mr. Konrad’s company, Arizona Research and Development (“ARD”), under the Original Agreement to on or before April 7, 2013, except that such payment shall be fully made within 30 days following the earlier of (i) a closing of a financing transaction by the Company which involves gross proceeds equal to or greater than $2 million; (ii) a closing of a Sale Transaction (as defined below); or (iii) a determination by the Company’s Board of Directors, in its sole and absolute discretion, that the Company has sufficient cash available for operations and appropriate reserves after making such payment to ARD. The term “Sale Transaction” as used herein means (i) a sale of all or substantially all of the assets of the Company; or (ii) any merger or consolidation of the Company with or into another entity or any other transaction or series of transactions, the result of which is that the holders of the Company’s voting stock immediately prior to such transaction or series of transactions continue to hold less than 50% of such stock following such transaction or series of transactions.

In addition, on April 7, 2011, the Company entered into a two-year employment agreement with Mr. Konrad, pursuant to which Mr. Konrad serves as President. Pursuant to this employment agreement, the Company pays to Mr. Konrad’s company, ARD, $10,000 per month. The employment agreement contains standard confidentiality provisions, as well as standard non-competition and non-solicitation provisions which survive for two years following termination of employment.

On June 3, 2011, the Company granted to Mr. Richard Davis a three-year warrant to purchase 600,000 unregistered shares of the Company’s common stock at an exercise price of $1.05 per share, in consideration for his service as a Director and for his substantial consulting services since inception, incorporated in the warrant section of Note 6 - Stockholder’s Equity. Since 2008, Richard H. Davis has served, and continues to serve, as a Director of the Company. The Company’s Board of Directors will determine an appropriate compensation package for Mr. Davis in consideration of his serving as the Company’s Chief Executive Officer.

Effective June 15, 2011, the Company entered into an employment agreement with Mark P. Prinz, pursuant to which Mr. Prinz serves as a Project Engineer of the Company. Pursuant to this agreement, the Company pays Mr. Prinz a salary of $11,250 per month, and paid him a one-time signing bonus of $5,000. This agreement is terminable by either party without cause upon 30 days’ prior written notice. In connection with this employment agreement, the Company granted Mr. Prinz (i) a 10-year option to purchase 100,000 shares of the Company’s common stock at a price of $1.23 per share; and (ii) a 10-year option to purchase 100,000 shares of the Company’s common stock at a price of $2.00 per share. In each case, one-fourth of the option shares, i.e., 25,000 shares, vested as of the date of the employment agreement, and the balance vests in equal installments every six months thereafter until fully vested, provided that Mr. Prinz is still employed by the Company at the time and subject to the Company achieving certain operational targets. Additionally, in connection with this employment agreement, Mr. Prinz assigned certain intellectual property rights to the Company. The employment agreement contains standard confidentiality provisions, as well as standard non-competition and non-solicitation provisions which survive for two years following termination of employment.

Effective June 15, 2011, the Company entered into an employment agreement with Patrick Orr, pursuant to which Mr. Orr serves as a Project Engineer of the Company. Pursuant to this agreement, the Company pays Mr. Orr a salary of $11,250 per month, and paid him a one-time signing bonus of $5,000. This agreement is terminable by either party without cause upon 30 days’ prior written notice. In connection with this employment agreement, the Company granted Mr. Orr (i) a 10-year option to purchase 100,000 shares of the Company’s common stock at a price of $1.23 per share; and (ii) a 10-year option to purchase 100,000 shares of the Company’s common stock at a price of $2.00 per share. In each case, one-fourth of the option shares, i.e., 25,000 shares, vested as of the date of the employment agreement, and the balance vests in equal installments every six months thereafter until fully vested, provided that Mr. Orr is still employed by the Company at the time and subject to the Company achieving certain operational targets. Additionally, in connection with this employment agreement, Mr. Orr assigned certain intellectual property rights to the Company. The employment agreement contains standard confidentiality provisions, as well as standard non-competition and non-solicitation provisions which survive for two years following termination of employment.

Effective June 15, 2011, the Company amended and restated the Company’s employment agreement with Keith Johnson, dated as of January 1, 2011 (the “Original Employment Agreement”). Pursuant to this amended and restated employment agreement (the “Amended Employment Agreement”), the Company continues to provide Mr. Johnson the compensation and benefits provided in the Original Employment Agreement, except that the Company (i) increased Mr. Johnson’s salary from $10,000 to $12,500 per month; and (ii) granted Mr. Johnson (A) a 10-year option to purchase 100,000 shares of the Company’s common stock at a price of $1.23 per share; and (B) a 10-year option to purchase 100,000 shares of the Company’s common stock at a price of $2.00 per share. In each case, one-fourth of the option shares, i.e., 25,000 shares, vested as of the date of the employment agreement, and the balance vests in equal installments every six months thereafter until fully vested, provided that Mr. Johnson is still employed by the Company at the time and subject to the Company achieving certain operational targets. As with the Original Employment Agreement, under the Amended Employment Agreement, Mr. Johnson assigned certain intellectual property rights to the Company, and the Amended Employment Agreement contains standard confidentiality provisions, as well as standard non-competition and non-solicitation provisions which survive for two years following termination of employment.

On August 19, 2011, the Company’s Board of Directors (i) accepted the resignation of George Konrad as the Company’s Chief Executive Officer and Chief Financial Officer, although Mr. Konrad remains as the Company’s President; and (ii) elected Richard H. Davis and John L. Hofmann as the Company’s Chief Executive Officer and Chief Financial Officer, respectively, to fill the vacancies created by such resignations.

On September 29, 2011, the Company entered into a license agreement (the “License Agreement”) with Newton. This is the definitive agreement contemplated by the BLOI, described above. 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.

On November 1, 2011, the Company entered into a Binding Letter of Intent for Acquisition (the “Letter of Intent”) with Bryce Johnson (“Johnson”), Paul Kelly (“Kelly”) and Vince Hils (“Hils”), each individuals (collectively, the “Sellers”). Pursuant to the Letter of Intent, the Company and Sellers agreed to enter into a definitive agreement within 60 days, pursuant to which the Sellers shall sell, assign and transfer to the Company 100% of the membership interests in Cornerstone Conservation Group LLC, an Arizona limited liability company (“Cornerstone”), free and clear of any and all liens, claims and encumbrances (the “Interests”). As a result, the Company will indirectly own all of Cornerstone’s intellectual property described on Exhibit “A” attached to the Letter of Intent. In consideration for the Interests, the Company will issue (i) 2,260,000 shares of its common stock to the Sellers and their affiliates; and (ii) fully vested three–year warrants to purchase an aggregate of 300,000 shares of the Company’s common stock, consisting of 50,000 shares to Johnson at an exercise price of $2.00 per share, exercisable beginning January 1, 2012, 50,000 shares to Kelly at an exercise price of $2.00 per share, exercisable beginning January 1, 2012, 50,000 shares to Johnson at an exercise price of $3.00 per share, exercisable beginning July 1, 2012, 50,000 shares to Kelly at an exercise price of $3.00 per share, exercisable beginning July 1, 2012, 50,000 shares to Johnson at an exercise price of $4.00 per share, exercisable beginning January 1, 2013, and 50,000 shares to Kelly at an exercise price of $4.00 per share, exercisable beginning January 1, 2013.

Until the close of business in Phoenix, Arizona, on December 31, 2011 (the “Initial Period”), Sellers shall provide to the Company and/or Cornerstone at no charge such part-time consulting services as the Company shall reasonably request, including, but not limited to, services relating to (i) further development of the Company’s combined cooling, heating and power (“CCHP”) systems, (ii) national and international distribution of CCHP systems, (iii) development of geothermal hybrid systems and advance cooling tower assisted systems, and (iv) improvement and application of the Company’s waste heat systems. After the Initial Period, the parties shall negotiate in good faith appropriate compensation/service agreements for Sellers’ further services, subject to mutual approval, which shall not be unreasonably withheld.

The Letter of Intent will be terminated upon the execution of the definitive documentation reflecting the transactions contemplated hereby (collectively, the “Definitive Document”), or earlier (i) by the mutual written consent of the Company and Sellers, (ii) by either the Company or Sellers, acting reasonably and in good faith, if the Definitive Document has not been executed on or before December 31, 2011, (iii) by Sellers, if the Company has materially breached any of its obligations under the Letter of Intent, or (iv) by the Company, if Sellers have materially breached any of their obligations under the Letter of Intent. The Definitive Document will contain representations, covenants, conditions and indemnities which are customary for comparable transactions.

Pursuant to the Letter of Intent, on November 1, 2011, the Company’s Board of Directors elected Bryce Johnson as a Director of the Company. The Company also agreed to appoint Mr. Kelly to the Board with six months following closing of the Cornerstone aquisition.

The Company is negotiating a settlement with Newton resolving all outstanding disputes that the Company and Newton have with respect to certain costs and expenses owed by and between both parties. Management believes the ultimate resolution of the disputed amounts will not have a material effect on the Company’s financial position and results of operations.

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 2010 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

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, 2011 as Compared to Three Months Ended September 30, 2010

Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We had $143,491 of revenues in 2011, consisting of $130,000 from our current business and $13,491 in Biotech IP licensing fees, compared to $9,805 in Biotech IP licensing fees in 2010. Meanwhile, we had substantial expenses due to our ongoing research and development and commercialization activities, as well as substantial administrative expenses, including the cost of warrants and options issued and expenses associated with our status as a public company. Our net loss during the third quarter of 2011 and 2010 was $526,318 and $62,936, respectively. This substantially increased loss in 2011 was due primarily to the increase of payroll expenses for engineers, professional fees, advertising costs, travel expenses and the value of stock-based compensation vested in the three-month period..

Nine Months Ended September 30, 2011 as Compared to Nine Months Ended September 30, 2010

Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We had $174,482 of revenues in 2011, consisting of $137,221 from our current business and $37,261 in Biotech IP licensing fees, compared to $28,492 in Biotech IP licensing fees in 2010. Meanwhile, we had substantial expenses due to our ongoing research and development activities, as well as substantial administrative expenses, including the cost of warrants and options issued and expenses associated with our status as a public company. Our net loss during the first nine months of 2011 and 2010 was $2,171,589 and $234,455, respectively. This substantially increased loss in 2011 was due primarily to a $612,150 (100%) increase in the value of warrants issued to outside service providers in the nine-month period, and a $415,907 (100%) increase in the value of stock options issued as compensation in the nine-month period, as well as substantial increases in payroll expenses for engineers, professional fees, advertising costs and travel expanses.

Liquidity and Capital Resources

We have financed our operations since inception through the sale of debt and equity securities. As of September 30, 2011, we had working capital of $196,794, compared to a working capital deficit of $132,895 at December 31, 2010.

In the first nine months of 2011, we raised gross proceeds of $1,500,000 through the private placement of 2,000,000 unregistered shares of our common stock to accredited investors at $0.75 per share. Each investor received a three-year warrant to purchase stock at $0.75 per share for a number of shares of common stock equal to the number of shares purchased by the investor in this offering. The $1,500,000 included a $250,000 investment by a Newton affiliate in conjunction with the Newton BLOI, as referred to in Note 8 - Commitments of the footnotes to the Unaudited Condensed Consolidated Financial Statements. We paid a 10% commission on the gross proceeds of this offering to our placement agent, Martinez-Ayme Securities. We also raised $122,250 from warrants that were exercised during July and August 2011.

We believe that our current level of working capital will be sufficient to sustain our current operations through at least the end of 2011. However, we continue to seek more funding from private equity investors, as well as governmental sources, as we will need to raise substantial additional capital in order to finance our plan of operations. There can be no assurance that we will be able to raise the necessary funds. If we do not raise the necessary funds, we will be forced to cease operations.

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. 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 nine months ended September 30, 2011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 2010 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.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved).

Item 5. Other Information.

On September 29, 2011, we entered into a license agreement (the “License Agreement”) with Newton. This is the definitive agreement contemplated by the BLOI, described above. 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.

On November 1, 2011, we entered into a Binding Letter of Intent for Acquisition (the “Letter of Intent”) with Bryce Johnson (“Johnson”), Paul Kelly (“Kelly”) and Vince Hils (“Hils”), each individuals (collectively, the “Sellers”). Pursuant to the Letter of Intent, we and Sellers agreed to enter into a definitive agreement within 60 days, pursuant to which the Sellers shall sell, assign and transfer to us 100% of the membership interests in Cornerstone Conservation Group LLC, an Arizona limited liability company (“Cornerstone”), free and clear of any and all liens, claims and encumbrances (the “Interests”). As a result, we will indirectly own all of Cornerstone’s intellectual property described on Exhibit “A” attached to the Letter of Intent. In consideration for the Interests, we will issue (i) 2,260,000 shares of our common stock to the Sellers and their affiliates; and (ii) fully vested three–year warrants to purchase an aggregate of 300,000 shares of our common stock, consisting of 50,000 shares to Johnson at an exercise price of $2.00 per share, exercisable beginning January 1, 2012, 50,000 shares to Kelly at an exercise price of $2.00 per share, exercisable beginning January 1, 2012, 50,000 shares to Johnson at an exercise price of $3.00 per share, exercisable beginning July 1, 2012, 50,000 shares to Kelly at an exercise price of $3.00 per share, exercisable beginning July 1, 2012, 50,000 shares to Johnson at an exercise price of $4.00 per share, exercisable beginning January 1, 2013, and 50,000 shares to Kelly at an exercise price of $4.00 per share, exercisable beginning January 1, 2013.

Until the close of business in Phoenix, Arizona, on December 31, 2011 (the “Initial Period”), Sellers shall provide to us and/or Cornerstone at no charge such part-time consulting services as we shall reasonably request, including, but not limited to, services relating to (i) further development of our combined cooling, heating and power (“CCHP”) systems, (ii) national and international distribution of CCHP systems, (iii) development of geothermal hybrid systems and advance cooling tower assisted systems, and (iv) improvement and application of our waste heat systems. After the Initial Period, the parties shall negotiate in good faith appropriate compensation/service agreements for Sellers’ further services, subject to mutual approval, which shall not be unreasonably withheld.

The Letter of Intent will be terminated upon the execution of the definitive documentation reflecting the transactions contemplated hereby (collectively, the “Definitive Document”), or earlier (i) by the mutual written consent of us and Sellers, (ii) by either us or Sellers, acting reasonably and in good faith, if the Definitive Document has not been executed on or before December 31, 2011, (iii) by Sellers, if we have materially breached any of our obligations under the Letter of Intent, or (iv) by us, if Sellers have materially breached any of their obligations under the Letter of Intent. The Definitive Document will contain representations, covenants, conditions and indemnities which are customary for comparable transactions.

Pursant to the Letter of Intent, on November 1, 2011, our Board of Directors elected Bryce Johnson as a Director of the Company. We also agreed to appoint Mr. Kelly to the Board within six months following closing of the Cornerstone aquisition.

Item 6. Exhibits.

(a)

Exhibits

	10.1	License Agreement dated as of September 29, 2011, between the Company and Newton Investments BV.1

	10.2	Binding Letter of Intent for Acquisition dated November 1, 2011, between the Company, Bryce Johnson, Paul Kelly and Vince Hils.2

	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.

	101.INS	XBRL Instance Document

	101.SCH	XBRL Taxonomy Extension Schema Document

	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

	101.LAB	XBRL Taxonomy Extension Label Linkbase Document

	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

1 Previously filed as an exhibit to the Current Report on Form 8-K dated September 30, 2011.

2 Previously filed as an exhibit to the Current Report on Form 8-K dated November 7, 2011.

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 14, 2011	By:	/s/ Richard H. Davis
		Richard H. Davis
		Chief Executive Officer

Dated: November 14, 2011	By:	/s/ John L. Hofmann
		John L. Hofmann
		Chief Financial Officer

Exhibit Index

Exhibit No.		Description

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

374Water Inc. - FORM 10-Q - November 14, 2011

Attached files

374Water Inc. Reports