UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

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Form 10-Q

 

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

 

For the Quarterly Period ended September 30, 2016

 

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

 

Commission file number: 000-27866

 

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POWERVERDE, INC.

(Exact name of Registrant as specified in its charter)

 

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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)

 

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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.  ☒   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). ☒   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	☒	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   ☒   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, 2016 the issuer had 31,750,106 shares of common stock outstanding.

 

 

Index to Form 10-Q

 

		Page
PART I	FINANCIAL INFORMATION	1
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets at September 30, 2016 (Unaudited) and December 31, 2015	1
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015 (Unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (Unaudited)	3
	Notes to Unaudited Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	12
Item 4.	Controls and Procedures	12
PART II	OTHER INFORMATION	13
Item 1.	Legal Proceedings	13
Item 1A.	Risk Factors	13
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 3.	Defaults upon Senior Securities	13
Item 4.	Mine Safety Disclosures	13
Item 5.	Other Information	13
Item 6.	Exhibits	13
SIGNATURES		14

 

 

PART I FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

PowerVerde, Inc. and Subsidiary

Condensed Consolidated Balance Sheets

September 30, 2016 (Unaudited) and December 31, 2015

 

		2016				2015
Assets
Current Assets:
Cash and cash equivalents		$	5,675			$	5,601
Accounts receivable			89,118				220,158
Prepaid expenses			31,426				13,332
Total Current Assets			126,219				239,091
Property and Equipment
Property and equipment, net of accumulated depreciation of $81,591 and $70,792, respectively			26,050				36,849
Other Assets
Intellectual Property, net of accumulated amortization of   $674,670 and $665,532			17,604				26,742
License, net of accumulated amortization of $3,322 and $0,   respectively			96,678				—
Total Other Assets			114,282				26,742
Total Assets		$	266,551			$	302,682
Liabilities and Stockholders’ Deficiency
Current Liabilities
Accounts payable and accrued expenses		$	38,166			$	41,951
Payable to related party			—				26,000
Note payable to related parties			421,785				412,115
Note payable			—				47,569
Total Current Liabilities			459,951				527,635
Total Liabilities			459,951				527,635
Stockholders’ Deficiency
Preferred Stock:
50,000,000 preferred shares authorized, 0 preferred shares   issued at September 30, 2016 and December 31, 2015			—				—
Common stock:
200,000,000 common shares authorized, par value $0.0001 per share, 31,750,106 common shares issued and outstanding at September 30, 2016 and December 31, 2015			3,981				3,981
Additional paid-in capital			12,126,831				11,921,516
Treasury stock, 8,550,000 shares at cost			(491,139	)			(491,139	)
Accumulated deficit			(11,833,073	)			(11,659,311	)
Total Stockholders’ Deficiency			(193,400	)			(224,953	)
Total Liabilities and Stockholders’ Deficiency		$	266,551			$	302,682

 

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

 

 

PowerVerde, Inc. and Subsidiary

Condensed Consolidated Statements of Operations

For the three and nine months ended September 30, 2016 and 2015

(Unaudited)

 

		Three months ended September 30,								Nine months ended September 30,
		2016				2015				2016				2015
Royalty revenue		$	89,118			$	122,107			$	417,074			$	309,703
Operating Expenses
Research and development			177,885				51,847				282,339				192,827
General and administrative			55,485				52,895				262,599				212,565
Total Operating Expenses			233,370				104,742				544,938				405,392
Income (Loss) from Operations			(144,252	)			17,365				(127,864	)			(95,689	)
Other Income (Expenses)
Interest income			—				570				—				570
Interest expense			(17,338	)			(13,718	)			(45,898	)			(41,429	)
Total Other Income (Expense)			(17,338	)			(13,148	)			(45,898	)			(40,859	)
Income (Loss) before Income Taxes			(161,590	)			4,217				(173,761	)			(136,548	)
Provision for Income Taxes			—				—				—				—
Net Income (Loss)		$	(161,590	)		$	4,217			$	(173,761	)		$	(136,548	)
Net Loss per Share - Basic and Diluted		$	(0.005	)		$	—			$	(0.005	)		$	(0.004	)
Weighted Average Common Shares Outstanding - Basic and Diluted			31,750,106				31,750,106				31,750,106				31,750,106

  

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

 

 

PowerVerde, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2016 and 2015

(Unaudited)

 

		2016				2015
Cash Flows from Operating Activities
Net loss		$	(173,761	)		$	(136,548	)
Adjustments to reconcile net loss to net cash   used in operating activities:
Depreciation and amortization			23,259				69,650
Amortization of discount			12,920				9,634
Stock based compensation			202,065				2,000
Changes in operating assets and liabilities:
Accounts receivable and prepaid expenses			112,946				65,787
Employee advances			—				12,292
Interest receivable, related party			—				(570	)
Accounts payable and accrued expenses			(3,786	)			(8,580	)
Payable to related parties			(26,000	)			(13,900	)
Cash Provided by (Used in) Operating Activities			147,643				(235	)
Cash Flows From Investing Activities
Purchase of intellectual property			—				(16,116	)
Cash Used in Investing Activities			—				(16,116	)
Cash Flows from Financing Activities
Proceeds from note payable, related party			25,000				25,000
Principal payments on notes payable, related parties			(25,000	)			—
Principal payments on notes payable			(147,569	)			—
Cash (Used in) Provided by Financing Activities			(147,569	)			25,000
Net Increase in Cash and Cash Equivalents			74				8,649
Cash and Cash Equivalents at Beginning of Period			5,601				4,736
Cash and Cash Equivalents at End of Period		$	5,675			$	13,385
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest		$	24,175			$	19,835
Cash paid during the period for income taxes		$	—			$	—
Supplemental Disclosure of Non-Cash Activities
Note Receivable in connection with IP acquisition		$	—			$	38,000
Note Payable in connection with license and IP   acquisition		$	100,000			$	58,436
Interest Receivable in connection with IP acquisition		$	—			$	3,718

 

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, 2016

 

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, 2015. The results of operations for the three and nine months ended September 30, 2016, are not necessarily indicative of the results to be expected for the full year or for future periods. The condensed consolidated financial statements include the accounts of PowerVerde, Inc., formerly known as Vyrex Corporation (the “Company”), and PowerVerde Systems, Inc., formerly known as PowerVerde, Inc., its wholly-owned subsidiary. Intercompany balances and transactions have been eliminated in consolidation.

 

Note 2 – Going Concern

 

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

 

Note 3 – Summary of Significant Accounting Policies

 

Nature of Business

 

The Company is devoting substantially all of its present efforts to establish a new business involving the development and commercialization of clean energy electric power generation systems, and none of its planned principal operations have commenced. However, royalties from licenses unrelated to planned principal operations continue to be recognized as revenue.

 

Cash Equivalents

 

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

 

Accounts Receivable

 

Accounts receivable consist of balances due from royalties in connection with the license agreement with VDF FutureCeuticals, Inc. The Company monitors accounts receivable and provides allowances when considered necessary. At September 30, 2016, accounts receivable were considered to be fully collectible. Accordingly, no allowance for doubtful accounts was provided.

 

Revenue Recognition

 

Royalty revenue from royalty agreements unrelated to the Company’s planned operations is recognized in accordance with the terms of the specific agreement. Revenues recognized under these agreements amount to 100% of total revenues for the nine months ended September 30, 2016 and 2015.

 

 

Property and Equipment

 

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

 

Impairment of Long-Lived Assets

 

Impairment losses are recorded on long-lived assets (property, equipment and intellectual property) used in operations when impairment indicators are present and the undiscounted expected cash flows estimated to be generated by those assets are less than the carrying value of such assets. No impairment losses have been recognized during the nine months ended September 30, 2016 or 2015.

 

Stock-based Compensation

 

The Company has accounted for stock-based compensation under the provisions of ASC Topic 718 – “Stock Compensation” which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (stock options and common stock purchase warrants). The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on historical volatility of peer companies and other factors estimated over the expected term of the stock options. The expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term.

 

Common Stock Purchase Warrants

 

The Company accounts for common stock purchase warrants in accordance with ASC Topic 815- 40, “Derivatives and Hedging – Contracts in Entity’s Own Equity” (“ASC 815-40”). Based on the provisions of ASC 815- 40, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement, or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company, or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). All outstanding warrants as of December 31, 2015 and September 30, 2016 were classified as equity.

 

Accounting for Uncertainty in Income Taxes

 

The Company follows the provisions of ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

Research and Development Costs

 

The Company’s research and development costs are expensed in the period in which they are incurred. Such expenditures amounted to $282,339 and $192,827 for the nine months ended September 30, 2016 and 2015, respectively.

 

  

Earnings (Loss) Per Share

 

Earnings (loss) per share is computed in accordance with FASB ASC Topic 260, “Earnings per Share”. Diluted earnings per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. Certain common stock equivalents were not included in the earnings (loss) per share calculation as their effect would be anti-dilutive. Warrants exercisable for 4,350,000 shares and options for 5,750,500 shares were excluded from weighted average common shares outstanding on a diluted basis.

 

Financial instruments

 

The Company carries cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and notes payable, at historical costs. The respective estimated fair values of these assets and liabilities approximate carrying values due to their current nature. The Company also carries notes payable to related parties at historical cost less discounts from warrants issued as loan financing costs. The fair value of such notes is significantly similar to the face value of the notes ($400,000).

 

Use of Estimates

 

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

 

Note 4 – Recent Accounting Pronouncements

 

Refer to the consolidated financial statements and footnotes thereto included in the PowerVerde, Inc. Annual Report on Form 10-K for the year ended December 31, 2015 for recent accounting pronouncements. Other pronouncements have been issued but the Company does not believe that their adoption will have a significant impact on the financial position or results of operations.

 

Note 5 – Intellectual Property

 

Intellectual Property partially consists of technology acquired from the purchase of 100% of the membership interests of Cornerstone Conservation Group LLC (“Cornerstone”) on March 30, 2012 for $659,440. Accumulated amortization with respect to this intellectual property was $659,440 at September 30, 2016.

 

On June 30, 2015, the Company entered into an Assignment Agreement with VyrexIP Holdings Inc., a company owned by Company shareholder Edward Gomez, for the purchase of intellectual property. The net price of these assets was comprised of a down payment of $16,116 and a $58,436 promissory note to the seller due July 15, 2016, partially offset by assignment by the seller to the Company of a $38,000 promissory note due November 14, 2015, issued by the seller’s licensee Epalex Corporation, a company of which Mr. Gomez is chairman and a major stockholder. This note was paid in full as of March 31, 2016. Accumulated amortization with respect to this intellectual property was $15,230 at September 30, 2016.

 

On June 1, 2016, the Company entered into a ten year License Agreement with Helidyne LLC to utilize the Helidyne intellectual property in the manufacturing of planetary rotor expanders and the incorporation of same in the Company’s distributed electric power generation systems. The license agreement also grants the Company an exclusive license to sell the expanders whether manufactured by Helidyne or by the Company. The Company’s royalty obligation begins on the earlier of the commercialization of the product or three years from the effective date of the agreement. Once the royalty obligation begins, the minimum annual royalty is $50,000 for the first six years, and $100,000 for the remainder of the agreement.

 

 

The license acquisition fee of $100,000 is to be paid in four consecutive monthly installments beginning June 1, 2016. This was paid in full as of September 30, 2016. The license acquisition fee is being amortized over a ten year period. The amortization expense for the three months ended September 30, 2016, was $2,500.

 

For each of the nine months ended September 30, 2016 and 2015, amortization expense was $12,460 and $58,000 and accumulated amortization of the intangible asset- intellectual property was $677,992 at September 30, 2016.

 

Future amortization of the intangible assets of intellectual property and license agreement was as follows as of September 30, 2016:

 

Year ending December 31:
2016			$	5,546
2017				22,184
2018				12,374
2019				10,000
2020				10,000
Thereafter				54,178
Total			$	114,282

 

Note 6 – Stockholders’ Deficiency

 

Warrants

 

A summary of warrants issued, exercised and expired during the nine months ended September 30, 2016 is as follows:

 

			Shares				Weighted Average Exercise Price				Aggregate Intrinsic Value
Balance at December 31, 2015				4,480,000			$	.58			$	45,000
Issued				925,000				.15				—
Expired				(1,055,000	)			(1.05	)			—
Balance at September 30, 2016				4,350,000			$	.37			$	45,000

 

A warrant for the purchase of 900,000 shares of common stock was issued in June 2016 to a stockholder at an exercise price of $0.11 per share in consideration for the Company utilizing his facility space from January 2013 to December 2015. The fair market value of the warrant was determined to be $0.08 per share, or $72,000, which is included in the general and administrative expenses as stock compensation expense.

 

In July 2016, a warrant for the purchase of 25,000 shares of common stock was issued to a stockholder as additional consideration for a $25,000 loan. See Note 8. The fair market value of the warrant was determined to be $0.13 per share, or $3,250, which was recorded as interest expense.

 

 

Note 7 – Stock Options

 

Stock option activity for the nine months ended September 30, 2016, is summarized as follows:

 

			Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (Years)
Options outstanding at December 31, 2015				4,750,000			$	0.34				6.00
Grant				1,000,500				0.19				—
Expired/forfeited				—				—				—
Options outstanding at September 30, 2016				5,750,500			$	0.28				5.37

 

Total stock option compensation for the nine months ended September 30, 2016 and 2015 was $130,065 and $0, respectively. There is no unrecognized compensation expense associated with the options.

 

Note 8 - Notes Payable to Related Parties

 

Notes payable at December 31, 2015 included a $47,569 promissory note to VyrexIP Holdings Inc. for the purchase of intellectual property. The Company agreed to pay principal plus accrued interest over 10 monthly payments of $6,080, each due on the 15^th day of each month, beginning October 15, 2015. This note was paid in full, with accrued interest, in April 2016.

 

Notes payable to related parties at September 30, 2016 consist of notes payable to stockholders of $400,000 (issued in 2012), less unamortized discount of $3,215 related to common stock warrants that had been issued to the stockholders with the notes. The discount is being amortized over the extended term of the notes, which are due in one principal payment on December 31, 2016. Interest is payable semiannually at 10%. The note is collateralized by all receivables now or hereafter existing pursuant to the license agreement with VDF FutureCeuticals, Inc. discussed in Note 3.

 

The notes payable to related parties at September 30, 2016 also includes a promissory note to a stockholder for $25,000. The principal balance and interest at 10% was due October 31, 2016. On October 26, 2016, the lender extended the maturity date of the note to January 31, 2017 in exchange for an additional 25,000 warrants with an exercise price of $0.15.

 

Payable to related party consists primarily of a $20,000 unsecured note payable to Company shareholder Edward Gomez bearing interest at 10%. On June 11, 2015, the lender extended the maturity date on the balance of the note to July 31, 2016. This note was paid in full, with accrued interest, in July 2016.

 

Note 9 - Commitments and Contingencies

 

On June 25, 2015, Company consultant Hank Leibowitz assigned to the Company a patent he obtained for a system and method for using high temperature sources in Rankine cycle power systems. The Company has agreed to pay Mr. Leibowitz a 2% royalty for any and all revenues of products and/or project sales by the Company based on the subject patent.

 

The Company’s license agreement with VDF FutureCeuticals, Inc., which has generated all of the Company’s revenues since 2012, will terminate in March 2018, when the underlying patents expire.

 

On June 1, 2016, the Company entered into a ten year License Agreement with Helidyne LLC to utilize the Helidyne intellectual property in manufacturing and to sell Helidyne expanders. As part of the licensing agreement the Company committed to purchase two 50 kW expanders, at a price of $25,000 each, on or before the sixth month anniversary of the agreement. The $50,000 is payable in two monthly installments of $25,000 beginning October 2016.

 

The Company agreed to pay Helidyne LLC a royalty of 3% of sales, subject to a minimum annual royalty of $50,000 beginning on the earlier of commercialization of the product or three years from the effective date of the agreement.

 

 

Note 10 - Related Party Transactions

 

Since July 2010, the accounting firm J.L. Hofmann & Associates, P.A. (“JLHPA”), whose principal is the Company’s CFO John L. Hofmann, has provided financial consulting and accounting services to the Company. The Company paid $28,815 and $30,695 to JLHPA for its services in the nine months ended September 30, 2016 and 2015, respectively.

 

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 2015 Annual Report, or other factors. We must caution, however, that this list of factors may not be exhaustive and that these or other factors, many of which are outside of our control, could have a material adverse effect on us and our ability to achieve our objectives. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above.

 

The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.

 

Critical Accounting Policies

 

The condensed consolidated financial statements of PowerVerde, Inc. are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these condensed consolidated financial statements requires our management to make estimates and assumptions about future events that effect the amounts reported in the financial statements and related notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. We believe the following critical accounting policies affect its more significant judgments and estimates used in the preparation of financial statements.

 

Accounting for Uncertainty in Income Taxes

 

The Company follows the provisions of ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our condensed consolidated financial statements. Our evaluation was performed for the tax years ended December 31, 2012, 2013, 2014 and 2015, the tax years which remain subject to examination by major tax jurisdictions as of September 30, 2016.

 

 

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

 

Revenue Recognition

 

Licensing and royalty revenue from royalty agreements unrelated to the Company’s planned operations is recognized in accordance with the terms of the specific agreement. Revenues recognized under these agreements amount to 100% of total revenues for the nine months ended September 30, 2016 and 2015.

 

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 netshare 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). All outstanding warrants as of September 30, 2016 and 2015 were classified as equity

 

Intellectual Property

 

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

 

Stock-based compensation.

 

We account for stock-based compensation based on ASC Topic 718-Stock Compensation which requires expensing of stock options and other share-based payments based on the fair value of each stock option awarded. The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation model. This model requires management to estimate the expected volatility, expected dividends, and expected term as inputs to the valuation model.

 

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, 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. In March 2009, we assigned most of our Biotech intellectual property other than our rights under existing licensing agreements (the “Biotech IP”) to an investor in exchange for his agreement to pay all future expenses relating to the Biotech IP and to pay us 20% of any net proceeds received from future sale and/or licensing of the Biotech IP. We do not expect this arrangement to generate material revenues.

 

 

Since the Merger, we have focused on the development, 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. See “Risk Factors.”

 

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

 

Results of Operations

 

Three Months Ended September 30, 2016 as Compared to Three Months Ended September 30, 2015

 

Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We had no revenues from sales in the third quarter of 2016 and 2015 – but we recorded $89,118 and $122,107 in Biotech IP licensing fees (based on pre-Merger contracts), respectively. In both years, we had substantial expenses due to our ongoing research and development activities and efforts to commercialize our systems, as well as substantial administrative expenses associated with our status as a public company. Our research and development expenses increased by $126,038 (243.1%) in the third quarter of 2016 as compared to 2015, due mainly to the stock options issued in July 2016. Our general and administrative expenses increased by $2,590 (5.0%) in the third quarter of 2016 as compared to 2015, due mainly to increased amortization expenses for the acquisition of the Helidyne license agreement. Our net loss was $161,590 in the third quarter of 2016, compared to net income of $4,217 in the third quarter of 2015. We expect substantial net losses will continue until we are able to successfully commercialize and market our systems, as to which there can be no assurance.

 

Nine Months Ended September 30, 2016 as Compared to Nine Months Ended September 30, 2015

 

Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We had no revenues from sales in the first nine months of 2016 and 2015 – but we recorded $417,074 and $309,703 in Biotech IP licensing fees (based on pre-Merger contracts), respectively. In both years, we had substantial expenses due to our ongoing research and development activities and efforts to commercialize our systems, as well as substantial administrative expenses associated with our status as a public company. Our research and development expenses increased by $89,512 (46.4%) in the first nine months of 2016 as compared to 2015. This increase is due mainly to the stock options issued in July 2016. Our general and administrative expenses increased by $50,033 (23.5%) in the first nine months of 2016 as compared to 2015, due mainly to the warrants issued in 2016. Our net loss was $173,761 in the first nine months of 2016, a 27.3% increase from the net loss of $136,548 in the first nine months of 2015. 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 and through Biotech IP licensing revenues. As of September 30, 2016, we had a working capital deficit of $333,732 compared to a working capital deficit of $288,544 at December 31, 2015. This decrease in working capital is due primarily to the note payable to related parties (issued in 2012) that is due on December 31, 2016.

 

We expect 2016 Biotech IP revenues to approximate the 2015 levels; however, there can be no assurance that this revenue level will be achieved.

 

We continue to seek funding from private debt and equity investors, as we need to promptly raise substantial additional capital in order to finance our plan of operations. There can be no assurance that we will be able to raise the necessary funds on commercially acceptable terms if at all. If we do not raise the necessary funds, we may be forced to cease operations.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and President, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

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

 

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

 

Our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—An Integrated Framework. Based on this evaluation, our management concluded that, as of September 30, 2016, our internal control over financial reporting was effective.

 

No Attestation Report

 

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

 

Changes in Internal Control Over Financial Reporting

 

There were no significant changes in internal control over financial reporting during the third quarter of 2016 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 2015 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. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

Not applicable.

 

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.
101.INS	XBRL INSTANCE DOCUMENT
101.SCH	XBRL TAXONOMY EXTENSION SCHEMA
101.CAL	XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
101.DEF	XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
101.LAB	XBRL TAXONOMY EXTENSION LABEL LINKBASE
101.PRE	XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

 

---

 

 

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, 2016	By:	/s/ Richard H. Davis
		Richard H. Davis
		Chief Executive Officer
Dated: November 14, 2016	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
101.CAL		XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
101.DEF		XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
101.LAB		XBRL TAXONOMY EXTENSION LABEL LINKBASE
101.PRE		XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

 

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