Note 8 - Commitments and Contingencies

9 Months Ended

Sep. 30, 2011

Commitments and Contingencies Disclosure [Text Block]

Note 8 – Commitments and Contingencies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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