Business Context and Reporting Period
This Form 10-Q covers the three and nine months ended September 30, 2018. The filing identifies the registrant as PowerVerde, Inc., formerly Vyrex Corporation; the request metadata identifies the company as 374Water Inc. The company is developing and commercializing clean-energy electric power generation systems, but its planned principal operations had not commenced and had generated no revenue.
Historical revenue primarily came from a Biotech intellectual-property licensing agreement that expired in March 2018. Remaining revenue came from assembly services under the Liberty Agreement.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $8,000 in 2018 vs. $133,686 in 2017 | $173,094 in 2018 vs. $473,485 in 2017 |
| Operating income (loss) | $(110,926) vs. $9,680 | $(604,866) vs. $140,192 |
| Net income (loss) | $(110,926) vs. $4,090 | $(603,944) vs. $116,516 |
| Research and development expense | $71,415 vs. $78,371 | $596,128 vs. $172,760 |
| General and administrative expense | $47,511 vs. $45,635 | $181,832 vs. $160,533 |
- Cash at September 30, 2018 was $37,084, compared with $1,336 at December 31, 2017.
- Working capital was approximately $62,168, down from $168,679 at December 31, 2017.
- Operating cash flow for the nine months was $185,748, compared with $227,690 in the prior-year period. This included $480,649 of stock-based compensation and $350,359 of favorable changes in accounts receivable and prepaid expenses.
- Financing cash flow was $(150,000), reflecting repayment of related-party notes. The notes were fully paid in January 2018, leaving no notes payable at September 30, 2018.
- Total assets were $143,369, compared with $508,763 at year-end 2017. Stockholders’ equity was reported as $140,158, compared with $263,453 at year-end.
- No income tax provision was recorded. Basic and diluted weighted-average shares were 31,750,106.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue declined 63.4%, primarily because Biotech licensing revenue fell to $159,094 from $448,485 after the licensing agreement expired in March 2018. Assembly revenue increased or decreased? The filing reports $14,000 in 2018 versus $25,000 in 2017.
- The company moved from net income of $116,516 to a net loss of $603,944 for the nine-month period.
- Research and development expense increased by $423,368, or 245.1%, primarily because of stock-based compensation associated with stock options issued or modified in 2018.
- During 2018, the company issued or modified options covering substantial share amounts. Options outstanding totaled 11,180,500 at September 30, 2018, and warrants covered 1,375,000 shares.
- Accounts receivable declined to $10,304 from $369,959, and the $34,000 note receivable outstanding at year-end was paid in June 2018, with $371 of accrued interest.
Guidance, Outlook, Risks, and Unusual Items
- Management states that substantial losses are expected until the company successfully commercializes and markets its clean-energy systems, for which there is no assurance.
- The filing contains a substantial doubt regarding the company’s ability to continue as a going concern. Management expects to require substantial additional debt or equity financing and warns that failure to obtain funding could force the company to cease operations.
- The company reported no material source of cash after receiving its final Biotech licensing payment of $159,094 in April 2018. A proposed part-time manufacturing-services arrangement was expected to generate no more than approximately $2,000 per month.
- The Liberty assembly agreement generated $14,000 of revenue during the first nine months of 2018; 48 Hydras had been built and shipped as of September 30, 2018.
- The company recognized $480,649 of stock-based compensation in the first nine months, including $344,300 for immediately vesting options issued to directors and management and $136,349 from repricing or modifying existing awards.
- The Helidyne license includes potential royalty commitments, including a minimum annual royalty beginning under specified conditions; however, the company states that Helidyne’s failure to perform makes payment unlikely unless the company elects to produce expanders using the technology.
- No legal proceedings, defaults, unregistered equity sales, or material changes to previously disclosed risk factors were reported. Management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2018.
Important Facts for Investors to Verify
- Verify the registrant’s corporate identity and name history, because the filing is presented under PowerVerde, Inc., while the request metadata identifies 374Water Inc.
- Assess the likelihood and terms of additional equity or debt financing given the explicit going-concern uncertainty and limited cash balance.
- Determine whether the clean-energy systems have reached commercialization, since the filing reports no revenue from planned principal operations.
- Evaluate the sustainability of positive operating cash flow, which was materially supported by stock-based compensation and working-capital changes.
- Review the expiration of the Biotech licensing agreement and the resulting loss of the company’s principal historical revenue source.
- Assess potential dilution from 11,180,500 outstanding options and 1,375,000 outstanding warrants.