Attached files
| file | filename |
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| EX-32.2 - EXHIBIT 32.2 - 374Water Inc. | ex32_2.htm |
| EX-32.1 - EXHIBIT 32.1 - 374Water Inc. | ex32_1.htm |
| EX-31.2 - EXHIBIT 31.2 - 374Water Inc. | ex31_2.htm |
| EX-31.1 - EXHIBIT 31.1 - 374Water Inc. | ex31_1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
| ☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period ended September 30, 2017
| ☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number: 000-27866
POWERVERDE, INC.
(Exact name of Registrant as specified in its charter)
| Delaware | 88-0271109 | |
| (State or other jurisdiction
of incorporation or organization) |
(IRS Employer Identification No.) |
420 S. Dixie Highway Suite 4-B
Coral Gables, FL 33146
(Address of principal executive offices)
(305) 666-0024
(Registrant’s telephone number including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ 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, 2017 the issuer had 31,750,106 shares of common stock outstanding.
Index to Form 10-Q
Item 1. Condensed Consolidated Financial Statements
PowerVerde, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
September 30, 2017 (Unaudited) and December 31, 2016
| 2017 | 2016 | |||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 7,476 | $ | 4,786 | ||||
| Accounts receivable | 108,686 | 170,539 | ||||||
| Liberty note receivable | 25,000 | — | ||||||
| Prepaid expenses and other current assets | 11,334 | 56,628 | ||||||
| Total Current Assets | 152,496 | 231,953 | ||||||
| Property and Equipment | ||||||||
| Property and equipment, net of accumulated depreciation of $95,853 and $85,156, respectively | 11,788 | 22,484 | ||||||
| Other Assets | ||||||||
| Intellectual Property, net of accumulated amortization of $686,854 and $677,716 | 5,420 | 14,558 | ||||||
| License, net of accumulated amortization of $13,322 and $5,822, respectively | 86,678 | 94,178 | ||||||
| Total Other Assets | 92,098 | 108,736 | ||||||
| Total Assets | $ | 256,382 | $ | 363,173 | ||||
| Liabilities and Stockholders’ Deficiency | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 80,766 | $ | 79,073 | ||||
| Note payable to related parties | 200,000 | 425,000 | ||||||
| Total Current Liabilities | 280,766 | 504,073 | ||||||
| Total Liabilities | 280,766 | 504,073 | ||||||
| Stockholders’ Deficiency | ||||||||
| Preferred Stock: | ||||||||
| 50,000,000 preferred shares authorized, 0 preferred shares issued at September 30, 2017 and December 31, 2016 | — | — | ||||||
| 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, 2017 and December 31, 2016 | 3,981 | 3,981 | ||||||
| Additional paid-in capital | 12,129,331 | 12,129,331 | ||||||
| Treasury stock, 8,550,000 shares at cost | (491,139 | ) | (491,139 | ) | ||||
| Accumulated deficit | (11,666,557 | ) | (11,783,073 | ) | ||||
| Total Stockholders’ Deficiency | (24,384 | ) | (140,900 | ) | ||||
| Total Liabilities and Stockholders’ Deficiency | $ | 256,382 | $ | 363,173 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
PowerVerde, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 2017 and 2016
(Unaudited)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenue | $ | 133,686 | $ | 89,118 | $ | 473,485 | $ | 417,074 | ||||||||
| Operating Expenses | ||||||||||||||||
| Research and development | 78,371 | 177,885 | 172,760 | 282,339 | ||||||||||||
| General and administrative | 45,635 | 55,485 | 160,533 | 262,599 | ||||||||||||
| Total Operating Expenses | 124,006 | 233,370 | 333,293 | 544,938 | ||||||||||||
| Income (Loss) from Operations | 9,680 | (144,252 | ) | 140,192 | (127,864 | ) | ||||||||||
| Other Income (Expenses) | ||||||||||||||||
| Interest income | — | — | 50 | — | ||||||||||||
| Interest expense | (5,589 | ) | (17,338 | ) | (23,726 | ) | (45,898 | ) | ||||||||
| Total Other Income (Expense) | (5,589 | ) | (17,338 | ) | (23,676 | ) | (45,898 | ) | ||||||||
| Income (Loss) before Income Taxes | 4,090 | (161,590 | ) | 116,516 | (173,761 | ) | ||||||||||
| Provision for Income Taxes | — | — | — | — | ||||||||||||
| Net Income (Loss) | $ | 4,090 | $ | (161,590 | ) | $ | 116,516 | $ | (173,761 | ) | ||||||
| Net Income (Loss) per Share - Basic and Diluted | $ | 0.000 | $ | (0.005 | ) | $ | 0.004 | $ | (0.005 | ) | ||||||
| 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.
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PowerVerde, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2017 and 2016
(Unaudited)
| 2017 | 2016 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net income (loss) | $ | 116,516 | $ | (173,761 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 27,334 | 23,259 | ||||||
| Amortization of discount | — | 12,920 | ||||||
| Stock based compensation | — | 202,065 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable and prepaid expenses | 82,147 | 112,946 | ||||||
| Accounts payable and accrued expenses | 1,693 | (3,786 | ) | |||||
| Payable to related parties | — | (26,000 | ) | |||||
| Cash Provided by Operating Activities | 227,690 | 147,643 | ||||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from note payable, related party | — | 25,000 | ||||||
| Principal payments on notes payable, related parties | (225,000 | ) | (25,000 | ) | ||||
| Principal payments on notes payable | — | (147,569 | ) | |||||
| Cash (Used in) Provided by Financing Activities | (225,000 | ) | (147,569 | ) | ||||
| Net Increase in Cash and Cash Equivalents | 2,690 | 74 | ||||||
| Cash and Cash Equivalents at Beginning of Period | 4,786 | 5,601 | ||||||
| Cash and Cash Equivalents at End of Period | $ | 7,476 | $ | 5,675 | ||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid during the period for interest | $ | 38,664 | $ | 24,175 | ||||
| Cash paid during the period for income taxes | $ | — | $ | — | ||||
| Supplemental Disclosure of Non-Cash Activities | ||||||||
| Note Receivable in connection with Liberty accounts receivable | $ | 25,000 | $ | — | ||||
| Note Receivable in connection with IP acquisition | $ | — | $ | 100,000 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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PowerVerde, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2017
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, 2016. The results of operations for the three and nine months ended September 30, 2017, 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
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, 2017, we had a working capital deficit of $128,270 compared to a working capital deficit of $272,120 at December 31, 2016. This improvement in working capital is due primarily to reductions in notes payable to related parties, accounts payable and accrued expenses resulting from positive operating cash flows during this period.
We expect 2017 Biotech IP revenues to approximate the 2016 levels; however, there can be no assurance that this revenue level will be achieved. Further, our contract which provides our Biotech IP revenues expires in March 2018, and we will therefore be without a source of working capital at that time unless we can generate material revenues from operations and/or the Liberty Agreement or raise substantial additional capital, as to which there can be no assurance. See Note 9 – Commitments and Contingencies
In order to meet our obligations under the $150,000 balance (as of October 2017) of our secured notes payable to related parties due April 30, 2018 (the “Notes”), which are collateralized by our Biotech IP receivables, we intend to apply most of the Biotech IP revenues received in 2017 and 2018 toward payment of the interest and principal due on the Notes, after reserving the minimum amount necessary to maintain our operations. We intend to reduce our salary and consulting fee expenses until the Notes are paid in full, and we are also commencing a new source of revenue by using our employee to provide part-time skilled manufacturing services to a third party pursuant to the Liberty Agreement.
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.
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. The license will expire in March 2018, after which no further royalty revenues are expected.
4
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, 2017, accounts receivable were considered to be fully collectible. Accordingly, no allowance for doubtful accounts was provided.
Notes Receivable
Note receivable consists of revenues from Liberty Plugins, Inc in connection with the manufacturing assembly agreement dated April 15, 2017. At September 30, 2017, notes receivable were considered to be fully collectible.
Revenue Recognition
Revenue from royalty and assembly agreements unrelated to the Company’s planned operations is recognized in accordance with the terms of the specific agreements. Revenues recognized under these agreements amount to 100% of total revenues for the nine months ended September 30, 2017 and 2016. The Company does not expect any significant impact of the adoption of the standard on our financial statements based on the current sources of revenue.
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, license 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, 2017 or 2016.
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.
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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, 2016 and September 30, 2017 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 $172,760 and $282,339 for the nine months ended September 30, 2017 and 2016, 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 4,175,000 shares and options for 5,750,500 shares were excluded from weighted average common shares outstanding on an anti-diluted basis.
Financial instruments
The Company carries cash and cash equivalents, accounts receivable, note 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 ($200,000).
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.
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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, 2016 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 and License Agreement
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, 2017 and December 31, 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 $27,414 and $18,276 at September 30, 2017 and December 31, 2016, respectively.
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.
For the nine months ended September 30, 2017 and 2016, amortization expense was $16,638 and $12,460, respectively, and accumulated amortization of the intangible assets of intellectual property and license agreement was $700,176 at September 30, 2017.
Future amortization of the intangible assets of intellectual property and license agreement was as follows as of September 30, 2017:
| Year ending December 31: | |||||
| 2017 | $ | 5,546 | |||
| 2018 | 12,374 | ||||
| 2019 | 10,000 | ||||
| 2020 | 10,000 | ||||
| Thereafter | 54,178 | ||||
| Total | $ | 92,098 | |||
Note 6 – Stockholders’ Deficiency
Warrants
A summary of warrants issued, exercised and expired during the nine months ended September 30, 2017 is as follows:
| Shares | Weighted Average Exercise Price | Intrinsic Value | |||||||||||
| Balance at December 31, 2016 | 4,275,000 | $ | .33 | $ | 45,000 | ||||||||
| Issued | — | — | — | ||||||||||
| Expired | (100,000 | ) | (3.00 | ) | — | ||||||||
| Balance at September 30, 2017 | 4,175,000 | $ | .27 | $ | 18,250 | ||||||||
As of September 30, 2017, the options outstanding and exercisable had an intrinsic value of $18,250.
Note 7 – Stock Options
Stock option activity for the nine months ended September 30, 2017, is summarized as follows:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | |||||||||||
| Options outstanding at December 31, 2016 | 5,750,000 | $ | 0.31 | 5.12 | |||||||||
| Grant | — | — | — | ||||||||||
| Expired/forfeited | — | — | — | ||||||||||
| Options outstanding at September 30, 2017 | 5,750,500 | $ | 0.31 | 4.37 | |||||||||
Total stock option compensation for the nine months ended September 30, 2017 and 2016 was $0 and $72,000, respectively. There is no unrecognized compensation expense associated with the options.
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Note 8 - Notes Payable to Related Parties
Notes payable to related parties at September 30, 2017 consist of notes payable to stockholders of $200,000 (issued in 2012). The notes had been due in one principal payment on September 30, 2017, but are now due on April 30, 2018, after extensions granted by the Note holders in the third quarter of 2017. Interest is payable semiannually at 10%. The notes are collateralized by all receivables now or hereafter existing pursuant to the license agreement with VDF FutureCeuticals, Inc. discussed in Notes 3 and 9. In April and July 2017, the Company made payments totaling $100,000 each month toward the principal balance of the Notes.
The notes payable to related parties at December 31, 2016 also includes a promissory note to a stockholder for $25,000. The principal balance and interest at 10% was due March 30, 2016. This note was paid in full, with accrued interest, in January 2017.
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 order to use Helidyne expanders in Powerverde systems 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 was payable in two monthly installments of $25,000 beginning October 2016. As of September 30, 2017, the Company had made payments totaling $38,750, towards the purchase of the expanders, all of which was included in prepaid expense and other current assets in the consolidated balance sheets at December 31, 2016. Due to Helidyne’s failure to perform under the agreement, the Company has not made any further payments to Helidyne and does not intend to do so unless and until Helidyne performs as required. Helidyne has not objected to the Company’s position, and it is very unlikely that Helidyne will ever be able to perform. Consequently, as of September 30, 2017, the Company wrote off the $38,750 paid to Helidyne.
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. This minimum royalty would be payable only if Helidyne performs as required, which is very unlikely, or if the Company elects to produce its own expanders using Helidyne technology. The Company does intend to produce these expanders directly or through a contract manufacturer in the future.
On April 15, 2017, the Company entered into a manufacturing assembly agreement with Liberty Plugins, Inc. (“Liberty”) to manufacture and assemble Liberty’s Hydra electronic vehicle charging systems and ship completed Hydras to Liberty’s facility in Santa Barbara, California (the “Liberty Agreement”). Liberty has agreed to pay $1,000 for the first 10 Hydras assembled in a month, $750 per Hydra for the next 10 Hydras assembled per month and $500 per Hydra for each Hydra assembled above 20 per month. No invoices were issued to Liberty during the quarter ended June 30, 2017. As of September 30, 2017, the Company has built and shipped 25 Hydras, and these products were invoiced throughout the third quarter of 2017. The revenue for these products is reflected in the net revenue on the Company’s condensed consolidated statements of operations for the quarter ended September 30, 2017.
On September 30, 2017, the Company converted the outstanding accounts receivable from Liberty, totaling $25,000, into a Promissory Note with 12% interest and a maturity date of January 31, 2018.
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 $20,720 and $28,815 to JLHPA for its services in the nine months ended September 30, 2017 and 2016, respectively.
Note 11 – Subsequent Events
In October 2017, the Company made payments totaling $50,000 toward the principal balance of the Notes payable to related parties, discussed in Note 8, leaving a remaining principal balance of $150,000 as of October 2017.
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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 2016 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, 2017.
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
Revenue from royalty and assembly agreements unrelated to the Company’s planned operations is recognized in accordance with the terms of the specific agreements. Revenues recognized under these agreements amount to 100% of total revenues for the nine months ended September 30, 2017 and 2016. The Company does not expect any significant impact of the adoption of the standard on our financial statements based on the current sources of revenue.
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, 2017 and 2016 were classified as equity.
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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.
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Results of Operations
Three Months Ended September 30, 2017 as Compared to Three Months Ended September 30, 2016
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 2017 and 2016 – but we recorded $108,686 and $89,118 in Biotech IP licensing fees (based on pre-Merger contracts), respectively. Also, we generated $25,000 in revenue for assembly revenues under the Liberty Agreement in the third quarter of 2017. In both years, we had substantial expenses due to our ongoing research and development activities and efforts to commercialize our systems, as well as substantial administrative expenses associated with our status as a public company. Our research and development expenses decreased by $99,514 in the third quarter of 2017 as compared to the third quarter of 2016, primarily because of the decrease in stock option compensation for services. Our general and administrative expenses decreased by $9,850 in the third quarter of 2017 as compared to 2016, primarily because of the reduction in employee salaries. Our net income was $4,090 in the third quarter of 2017, a reversal of the net loss of $161,590 in the third quarter of 2016. Substantial net losses will continue until we are able to successfully commercialize and market our systems, as to which there can be no assurance. Any taxes that might result from net income for financial reporting purposes would be eliminated through use of a portion of the Company’s net operating loss carryforward.
Nine Months Ended September 30, 2017 as Compared to Nine Months Ended September 30, 2016
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 2017 and 2016 – but we recorded $448,484 and $417,074 in Biotech IP licensing fees (based on pre-Merger contracts), respectively. In the 2017 period, we generated $25,000 in assembly revenues under the Liberty Agreement in the third quarter of 2017. In both years, we had substantial expenses due to our ongoing research and development activities and efforts to commercialize our systems, as well as substantial administrative expenses associated with our status as a public company. Our research and development expenses decreased by $109,579 (38.8%) in the first nine months of 2017 as compared to 2016. This decrease is due mainly to the stock options issued in July 2016. Our general and administrative expenses decreased by $102,066 (38.9%) in the first nine months of 2017 as compared to 2016, due mainly to the warrants issued in 2016. Our net income was $116,516 in the first nine months of 2017, a reversal of the net loss of $173,761 in the third quarter of 2016. 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, 2017, we had a working capital deficit of $128,270 compared to a working capital deficit of $272,120 at December 31, 2016. This improvement in working capital is due primarily to reductions in notes payable to related parties, accounts payable and accrued expenses resulting from positive operating cash flows during this period.
We expect 2017 Biotech IP revenues to approximate the 2016 levels; however, there can be no assurance that this revenue level will be achieved. Further, our contract which provides our Biotech IP revenues expires in March 2018, and we will therefore be without a source of working capital at that time unless we can generate material revenues from operations and/or the Liberty Agreement or raise substantial additional capital, as to which there can be no assurance. See Note 9- Commitments and Contingencies
In order to meet our obligations under the $150,000 balance (as of October 2017) of our secured notes payable to related parties due April 30, 2018 (the “Notes”), which are collateralized by our Biotech IP receivables, we intend to apply most of the Biotech IP revenues received in 2017 and 2018 toward payment of the interest and principal due on the Notes, after reserving the minimum amount necessary to maintain our operations. We intend to reduce our salary and consulting fee expenses until the Notes are paid in full, and we are also commencing a new source of revenue by using our employee to provide part-time skilled manufacturing services to a third party pursuant to the Liberty Agreement.
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.
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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, 2016. 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, 2017, 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 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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None.
There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the 2016 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.
Not applicable.
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| (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 |
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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, 2017 | By: | /s/ Richard H. Davis |
| Richard H. Davis | ||
| Chief Executive Officer | ||
| Dated: November 14, 2017 | By: | /s/ John L. Hofmann |
| John L. Hofmann | ||
| Chief Financial Officer | ||
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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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