(A) Overall Business Strategy
(B) Current Status of Business Plan and Ongoing Projects
We are continuing to make progress toward optimizing the designs and productizing our two key technologies, although the process, specifically for the IsoTorque® differential, continues to take longer than we had expected. The following summarizes our general operating plan and the current status of the development efforts for our IsoTorque differential and our Torvec Hydraulic Pump.
The basic elements of our operating plan for the next 12 months are as follows:
1) To engage in the activity of developing a wholly unique hydraulic pump and motor technology to revolutionize the fluid power industry; 2) To continue to enhance the development of our hydraulic pump, build prototype units, and evaluate its operating performance and efficiencies for commercial and industrial applications and to begin to market the
Torvechydraulic pump to industrial users of hydraulic pumps and associated manufacturers; and 3) To design, build and provide prototype IsoTorque differentials to domestic and foreign OEMs, to engage with aftermarket customers and OEM manufacturers in the performance and durability evaluation of our IsoTorque in rear-wheel and front-wheel drive applications, and to market the IsoTorque to manufacturers for use in their future vehicle platforms, including automotive and truck fleets; IsoTorque Differential -
We have conceptualized our IsoTorque differential technology for installation into a majority of automotive vehicles worldwide. However, due to such constraints as vehicle and axle size, vehicle weight, type of lubrication, torque and loading requirements, and vehicle use, each vehicle platform application requires us to design, develop and test our differential for each such platform's specifications.
We are confident that there is nothing in the marketplace that can compete with the anticipated performance, safety and dependability enhancements provided by our IsoTorque differential. However, our major challenge is still to produce differentials that will withstand the very stringent OEM testing with respect to durability. Our broad strategy for the automotive market is to develop numerous IsoTorque differentials for various vehicle platforms. We continue to have a great deal of interest from many companies. We have also recently provided prototype differentials to select race car teams, and the feedback we have received from them has been extremely favorable with respect to the improved handling, reduced lap times and other functions.
During 2012 and 2013, we focused our IsoTorque differential development efforts on a rear-wheel drive differential for two model platforms (for certain Corvette and Camaro models) that can be marketed and sold initially into the aftermarket. During the fourth quarter of 2012, the test results of our design were still not satisfactory to us, so we determined that we needed to make further design modifications to improve the IsoTorque's high-impact durability. We decided not to begin to ship our differentials until we are completely satisfied with the product. In mid-2013, we conducted an updated analysis of the market opportunities for the IsoTorque, and we decided to postpone development activities on the IsoTorque for the Camaro vehicle platform for the time being, as we believe there are better opportunities with other vehicles. During the third quarter of 2013, we continued to work on improving the product's durability in order to minimize any limitations in its use with customers. As a result, we have made some additional modifications to the Corvette differential design to provide incremental strength to the product under abusive conditions. In the first quarter of 2014, we have assembled a small number of units for a limited release of this product, which we began shipping in late
We plan to move forward with further development activity of the IsoTorque differential for substantially larger target markets. We are also pursuing the development of an IsoTorque for front-wheel drive vehicles, which is a very significant market opportunity. We believe that our IsoTorque design could create a very significant breakthrough in front-wheel drive technology.
Torvec Hydraulic Pump -
Our goal with the hydraulic pump technology is to give the marketplace a revolutionary new concept in hydraulic pumps and motors that:
? Is smaller and lighter than conventional pumps and motors, ? Is more efficient, ? Is reliable, ? Is price competitive, ? Has the ability to make larger and more powerful pumps and motors.
During 2012, we invested in software, test equipment and personnel to enhance our development efforts. During that year, we went through a drastic redesign of the Torvec Hydraulic Pump to improve the overall performance of our pump while maintaining the significant advantages we have in size and weight. In the fourth quarter of 2012, we completed the assembly of two newly redesigned prototypes. We built our own testing facility for initial testing, which would have otherwise taken place at a third party testing facility, and we were pleased with the knowledge that we gained. Based on the test results, we modified our designs during the first quarter of 2013. During the second quarter of 2013, we assembled prototypes and tested this revised design on our internal test equipment. In March and April of 2014, we conducted additional tests that yielded significant positive results. We have successfully passed a major milestone that has confirmed numerous aspects of the breakthrough concept of our technology.
Based on sophisticated computer modeling of our pump attributes, we are very optimistic about the qualities that our pump design has relative to conventional pumps currently in the marketplace. Because we have reached a significant milestone in our testing, we are now in the process of designing changes to enhance the overall performance even further. We will need a limited number of further design iterations before we begin marketing this technology to potential customers. We anticipate this can occur in the latter part of 2014. We have filed a provisional patent for our novel non-rotating group pump concept, and we are also working on additional patents as a result of engineering breakthroughs in our design process. Although there is much to be done, we are extremely encouraged by our recent proof of concept testing.
The development of our new pump design has taken on added significance in light of recent
In addition to the activities to be undertaken by us to implement our plan of operation detailed above, we may expand and/or refocus our marketing activities depending upon future circumstances and developments. Information regarding the Company and all of our inventions, including regular updates on technological and business developments, can be found on our website, www.torvec.com. The website and its contents are not incorporated by reference into this report.
(C) Company Revenue and Expenses
Three Month Periods Ended
In the three month period ended
Research and development expenses for the three months ended
General and administrative expense for the three months ended
The loss from operations for the three month period ended
The net loss attributable to common stockholders for the three month period ended
(D) Liquidity and Capital Resources
During the three month period ended
Current Cash Outlook
For the period from
Presently, we anticipate that our operating cash requirements for the full year of 2014 will be in the range of approximately
(E) Critical Accounting Policies
Our terms provide that customers are obligated to pay for products sold to them within a specified number of days from the date that title to the products is transferred to the customers. Our standard terms are typically net 30 days. We recognize revenue when transfer of title occurs, risk of ownership passes to a customer at the time of shipment or delivery depending on the terms of the agreement with a particular customer and collection is reasonably assured. The sale price of our products is substantially fixed and determinable at the date of the sale based upon purchase orders generated by a customer and accepted by us.
We occasionally enter into prototype development contracts with customers. In such cases, revenue is recognized using either (a) the proportional effort method based on the relationship of costs incurred to date to the total estimated cost to complete a contract, or (b) where appropriate, the milestone method, if milestones are clearly identifiable and substantive. In
We account for income taxes using the asset and liability method, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax bases of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
We account for uncertain tax positions using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax benefits that meet the more-likely-than-not recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. It is our policy to recognize interest and penalties related to income tax matters as general and administrative expenses. As of
FASB ASC 718-10 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period (generally the vesting period) in the consolidated financial statements based on their fair values on the grant date. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity in accordance with FASB ASC 718-10.
No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets. We elected to adopt the alternative method of calculating the historical pool of windfall tax benefits as permitted by FASB ASC 718-10-65 (previously known as FASB Staff Position (FSP) No. SFAS 123(R)-c, "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards"). This is a simplified method to determine the pool of windfall tax benefits that is used in determining the tax effects of stock compensation in the results of operations and cash flow reporting for awards that were outstanding as of the adoption of FASB ASC 718-10.
FASB ASC 505-50, "Equity-Based Payments to Non-Employees," requires all share-based payments to non-employees, including grants of stock options, to be recognized in the condensed consolidated financial statements as compensation expense generally over the service period of the consulting arrangement or until performance conditions are expected to be met. Using a Black-Scholes valuation model, we periodically reassess the fair value of non-employee options until service conditions are met, which generally aligns with the vesting period of the options, and we adjust the expense recognized in the consolidated financial statements accordingly.
FASB ASC 718-20 requires that modifications of the terms or conditions of equity awards be treated as an exchange of the original award for a new award. Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified.