374Water Inc 10-Q for FY2020 Q1
374Water Inc. (SCWO)
About this 10-Q
374Water Inc filed this 10-Q on May 12, 2020, covering the quarter ended March 31, 2020 (FY2020 Q1).
Headline figures
Quarter ended March 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $16K
- up 220.0% from $5000 a year earlier
- Net loss
- $91.66K
- compared with a net loss of $95.15K a year earlier
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 March 31, 2020
| ☐ | 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.) |
9300 S. Dadeland Blvd, Suite 600
Miami, FL 33156
(Address of principal executive offices)
(305) 670-3370
(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 May 12, 2020, the issuer had 31,750,106 shares of common stock outstanding.
i
Index to Form 10-Q
Cautionary Note Regarding Forward-Looking Information
This Form 10-Q contains certain statements related to future results of the Company that are considered “forward-looking statements” within the meaning of the Private Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions; interest rate fluctuation; competitive pricing pressures within the Company’s market; equity and fixed income market fluctuation; technological changes; changes in law; changes in fiscal, monetary, regulatory, and tax policies; monetary fluctuations as well as other risks and uncertainties detailed elsewhere in this Form 10-Q or from time-to-time in the filings of the Company with the Securities and Exchange Commission. Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
ii
Item 1. Condensed Consolidated Financial Statements
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
PowerVerde, Inc and Subsidiary
Condensed Consolidated Changes in Stockholders’ Deficit
For the three months ended March 31, 2020 and 2019
(Unaudited)
| For the three months ended March 31, 2019 | ||||||||||||||||||||||||
| Preferred stock | Common stock | Additional paid-in capital | Accumulated deficit | Treasury stock | Total | |||||||||||||||||||
| Balances at December 31, 2018 | $ | — | $ | 3,981 | $ | 12,609,980 | $ | (12,057,798 | ) | $ | (491,139 | ) | $ | 65,024 | ||||||||||
| Net loss | — | — | — | (95,151 | ) | — | (95,151 | ) | ||||||||||||||||
| Balances at March 31, 2019 | $ | — | $ | 3,981 | $ | 12,609,980 | $ | (12,152,949 | ) | $ | (491,139 | ) | $ | (30,127 | ) | |||||||||
| For the three months ended March 31, 2020 | ||||||||||||||||||||||||
| Preferred stock | Common stock | Additional paid-in capital | Accumulated deficit | Treasury stock | Total | |||||||||||||||||||
| Balances at December 31, 2019 | $ | — | $ | 3,981 | $ | 12,689,980 | $ | (12,572,714 | ) | $ | (491,139 | ) | $ | (369,892 | ) | |||||||||
| Net loss | — | — | — | (91,663 | ) | — | (91,663 | ) | ||||||||||||||||
| Balances at March 31, 2020 | $ | — | $ | 3,981 | $ | 12,689,980 | $ | (12,664,377 | ) | $ | (491,139 | ) | $ | (461,555 | ) | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
PowerVerde, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2020
Note 1 – Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Annual Report of PowerVerde, Inc. (“PowerVerde,” “we,” “us,” “our,” or the “Company”) as of and for the year ended December 31, 2019. The results of operations for the three months ended March 31, 2020, 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 which expired in March 2018. As of March 31, 2020, we had a working capital deficit of $60,368 compared to a working capital deficit of $63,638 at December 31, 2019.
The Company has historically relied upon unrelated and related party debt and equity financing to fund its cash flow shortages and will require either additional debt or equity financing to sustain its operations. The Company’s revenues through 2018 were derived mainly from royalties under its biotech licensing agreement, which expired in March 2018. Those factors create substantial doubt about the Company’s ability to continue as a going concern.
The Company continues to seek funding from private debt and equity investors, as it needs to promptly raise substantial additional capital in order to finance its plan of operations. There can be no assurance that the Company will be able to promptly raise the necessary additional funds on commercially acceptable terms, if at all. If the Company does not raise the necessary funds, it 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 were recognized as revenue through March 2018, when the underlying license agreement terminated. No material revenues from this planned principal operation have been generated.
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 assembly services. The Company monitors accounts receivable and provides allowances when considered necessary. At March 31, 2020, accounts receivable were considered to be fully collectible. Accordingly, no allowance for doubtful accounts was provided.
5
Revenue Recognition
Royalties are recognized as earned in the period the sales to which the royalties relate occur. Manufacturing assembly services are recognized as revenue when the assembled product is delivered to the customer. Revenues recognized under these agreements amount to 100% of total revenues for the three months ended March 31, 2020 and 2019
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.
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. As of June 2019, the Company recognized an impairment loss of $69,178. The intellectual property was fully amortized as of December 31, 2019.
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, 2019 and March 31, 2020 were classified as equity.
6
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 $34,939 and $35,059 for the three months ended March 31, 2020 and 2019, 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 975,000 shares and options for 12,180,500 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, 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 or market interest rates on interest bearing debt.
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
There are several new accounting pronouncements issued or proposed by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s condensed consolidated financial position, operating results, or cash flow.
Note 5 – Intellectual Property and License Agreement
On June 1, 2016, the Company entered into a ten-year License Agreement with Helidyne LLC for total consideration of $100,000 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 each of the first six years, and $100,000, per commercial year, for the remainder of the agreement. Helidyne has defaulted under the agreement. Royalties would be payable only if Helidyne performs as required, or if the Company elects to produce its own expanders using Helidyne technology.
7
During the year, management of the Company evaluated the continued default by Helidyne and determined that Helidyne will not be able to perform under the license agreement for the foreseeable future. The Company’s license agreement continues to be active and the Company may utilize the Helidyne intellectual property in marketing its own products. Under the terms of the license agreement, the Company has the right to develop a prototype utilizing the Helidyne technology at its own cost. Due to the continued default by Helidyne and the potential cost of developing its own prototype, the Company has determined that the intangible asset related to the above license agreement is impaired and recognized an impairment charge of $69,178 in the second quarter of 2019, which is 100% of the net carrying value. See Note 9.
For the three months ended March 31, 2020 and 2019, amortization expense was $0 and $2,500 respectively.
Note 6 – Stockholders’ Deficit
Warrants
A summary of warrants issued, exercised and expired during the three months ended March 31, 2020 is as follows:
| Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Balance at December 31, 2019 | 975,000 | $ | .11 | $ | — | |||||||
| Issued | — | — | — | |||||||||
| Expired | — | — | — | |||||||||
| Balance at March 31, 2020 | 975,000 | $ | .11 | $ | 74,750 | |||||||
Note 7 – Stock Options
Stock option activity for the quarter ended March 31, 2020, is summarized as follows:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | ||||||||||
| Options outstanding at December 31, 2019 | 12,180,500 | $ | 0.21 | 5.59 | ||||||||
| Granted | — | — | — | |||||||||
| Expired/forfeited | — | — | — | |||||||||
| Options outstanding at March 31, 2020 | 12,180,500 | $ | 0.21 | 4.44 | ||||||||
There was no stock option compensation for the three months ended March 31, 2020 and 2019 and no unrecognized compensation expense associated with the options.
Note 8 – Convertible Notes Payable to Related Parties
In 2019, the Company issued Convertible Promissory Notes totaling $300,000 to stockholders. The notes are to be paid in one principal payment, along with any unpaid interest by December 31, 2021. Interest is payable semiannually at 10%. The notes are convertible into common stock at a price of $.20 per share through December 31, 2019, $.30 per share from January 1, 2020 through December 31, 2020, and $.40 per share from January 1, 2021 through the maturity date of December 31, 2021.
8
In December 2019, the Company issued a Convertible Promissory Note in the principal amount of $25,000 to a stockholder in connection with a loan in the same amount. The note is to be paid in one principal payment, along with any unpaid interest by December 31, 2022. Interest is payable semiannually at 10%. The notes are convertible into common stock at a price of $.20 per share through December 31, 2020, $.30 per share from January 1, 2021 through December 31, 2021, and $.40 per share from January 1, 2022 through the maturity date of December 31, 2022.
In March 2020, the Company issued a Convertible Promissory Note in the principal amount of $100,000 to a stockholder in connection with a loan in the same amount. The note is to be paid in one principal payment, along with any unpaid interest by December 31, 2022. Interest is payable semiannually at 10%. The note is convertible into common stock at a price of $.20 per share through December 31, 2020, $.30 per share from January 1, 2021 through December 31, 2021, and $.40 per share from January 1, 2022 through the maturity date of December 31, 2022.
Consequently, Convertible Promissory Notes have been issued in an aggregate principal amount of $425,000 in 2019 and the first quarter of 2020.
Convertible Notes Payable at March 31, 2020 consisted of the following:
| March 31, 2020 | ||||
| Note payable to stockholders | $ | 425,000 | ||
| Less: Unamortized debt issuance costs | 23,814 | |||
| Total long-term debt | $ | 401,186 | ||
Amortization of the debt issuance costs is reported as interest expense in the income statement.
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.
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. The Company had made payments totaling $38,750, towards the purchase of the expanders. 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.
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. See Note 5.
9
On April 15, 2017, the Company entered into an assembly agreement with Liberty Plugins, Inc. (“Liberty”) to 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. The Company has never assembled/shipped more than 10 Hydras in any month and does not expect to do so in the future. As of March 31, 2020, the Company has built and shipped 106 Hydras. Revenue of $16,000 and $5,000 for these products is reflected in the net revenue on the Company’s condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019, respectively.
On September 1, 2019, the Company hired Daniel Bogar to serve as its President, reporting to the CEO. As compensation, Mr. Bogar received a fully-vested non-qualified option to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $.10 per share, with an expiration date of June 30, 2026. In addition, Mr. Bogar will receive an annual salary of $90,000 beginning on the closing of a private financing with gross proceeds of at least $1,000,000; however, the Company will be permitted to defer the salary to the extent required to maintain solvency.
Note 10 - Related Party Transactions
Since July 2010, the accounting firm J.L. Hofmann & Associates, P.A. (“JLHPA”), whose principal is our CFO John L. Hofmann, has provided financial consulting and accounting services to the Company. In December 2017, J.L. Hofmann & Associates, P.A. merged with Kabat, Schertzer, De La Torre, Taraboulos & Co, LLC (“KSDT”). The Company paid $9,300 and $$9,614 for its services in the three months ended March 31, 2020 and 2019, respectively.
The Company’s consultant and shareholder Hank Leibowitz receives compensation of $7,500 per month, totaling $22,500 for the three months ended March 31, 2020 and 2019. Mr. Leibowitz was owed accrued compensation of $68,327 and $30,000 as of March 31, 2020 and 2019, respectively.
In connection with the convertible notes that were issued in 2019 and the first quarter of 2020, the Company accrued an 8% finder’s fee to its Chief Executive Officer, Richard Davis, totaling $34,000. Mr. Davis was owed accrued compensation of $9,000 and $5,200 as of March 31, 2020 and 2019, respectively.
Note 11 – Subsequent Events
None
10
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 2018 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, 2014, 2015, 2016, 2017 and 2018, the tax years which remain subject to examination by major tax jurisdictions as of March 31, 2020.
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 royalties and assembly services unrelated to the Company’s planned operations is recognized when the goods or services are transferred to the customer. Royalties are recognized as earned in the period the sales to which the royalties relate occur. Manufacturing assembly services are recognized as revenue when the assembled product is delivered to the customer. Revenues recognized under these agreements amount to 100% of total revenues for the three months ended March 31, 2020 and 2019.
11
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 March 31, 2020 and 2019 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” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 14, 2020.
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.
12
Results of Operations
Three Months Ended March 31, 2020 as Compared to Three Months Ended March 31, 2019
Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We generated $16,000 and $5,000 in revenue for assembly revenues under the Liberty Agreement in the first quarter of 2020 and 2019, 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 expenses remained consistent in the first quarter of 2020 as compared to the first quarter of 2019. Net losses were consistent in both quarters. Substantial net losses are expected 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.
Liquidity and Capital Resources
We have financed our operations since inception principally through the sale of debt and equity securities. Also, from 2012 through March 2018 we received material amounts of Biotech IP licensing fees. As of March 31, 2020, we had a working capital deficit of $60,368 compared to a working capital deficit of $63,638 at December 31, 2019.
Our Biotech IP license agreement expired in March 2018 due to the expiration of our underlying patents. Consequently, we have no further material source of revenues. We are generating some revenue by using our employee to provide part-time skilled manufacturing services to a third party; however, we expect this arrangement to generate no more than $3,000 per month. We expect to generate substantial revenue from the 374Water/Duke project if we receive the expected purchase order, which we expect to receive by the end of 2020; however, there can be no assurance that we will receive the purchase order, whether in 2020 or thereafter.
We continue to seek funding from private equity and debt investors, as we need to promptly raise substantial additional capital in order to finance our plan of operations and commercialize our systems. There can be no assurance that we will be able to promptly raise the necessary funds. If we do not promptly 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.
13
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, 2019. 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 March 31, 2020, 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 first quarter of 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
14
None.
There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the 2019 Annual Report. Please refer to that section for disclosure regarding the risks and uncertainties related to our business.
A novel strain of coronavirus (“Covid-19”) emerged globally in December 2019 and has been declared a pandemic. The extent to which Covid-19 will impact our customers, business, results and financial condition will depend on current and future developments, which are highly uncertain and cannot be predicted at this time
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.
| (a) | Exhibits |
| 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 |
__________________
15
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: May 12, 2020 | By: | /s/ Richard H. Davis | |
| Richard H. Davis | |||
| Chief Executive Officer | |||
| Dated: May 12, 2020 | By: | /s/ John L. Hofmann | |
| John L. Hofmann | |||
| Chief Financial Officer | |||
16
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 |
17
Exhibit 31.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard H. Davis, certify that:
| 1. | I have reviewed this Form 10-Q of PowerVerde, Inc. |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: | May 12, 2020 | /s/ Richard H. Davis |
| Richard H. Davis, Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John L. Hofmann, certify that:
| 1. | I have reviewed this Form 10-Q of PowerVerde, Inc. |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: | May 12, 2020 | /s/ John L. Hofmann |
| John L. Hofmann, Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard H. Davis, certify as follows:
| 1. | To the best of my knowledge, the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, fully complies in all material respects with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and |
| 2. | To the best of my knowledge, based upon a review of the report, the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| By: | /s/ Richard H. Davis | |
| Richard H. Davis | ||
| Chief Executive Officer May 12, 2020 |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, John L. Hofmann, certify as follows:
| 1. | To the best of my knowledge, the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, fully complies in all material respects with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and |
| 2. | To the best of my knowledge, based upon a review of the report, the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| By: | /s/ John L. Hofmann | |
| John L. Hofmann | ||
| Chief Financial Officer May 12, 2020 |