Business Context and Reporting Period
Registrant: PowerVerde, Inc. (the submitted metadata identifies 374Water Inc.; the filing itself is for PowerVerde, Inc.). Form 10-Q for the quarter and nine months ended September 30, 2016, filed November 14, 2016.
The company was developing and commercializing clean-energy electric power generation systems, but its planned principal operations had not commenced. All reported revenue came from legacy biotech intellectual-property royalty agreements unrelated to the planned business. The company had 31,750,106 common shares outstanding as of November 14, 2016.
Financial Results and Position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Royalty revenue | $89,118 in 2016; $122,107 in 2015 | $417,074 in 2016; $309,703 in 2015 |
| Operating income (loss) | $(144,252) in 2016; $17,365 in 2015 | $(127,864) in 2016; $(95,689) in 2015 |
| Net income (loss) | $(161,590) in 2016; $4,217 in 2015 | $(173,761) in 2016; $(136,548) in 2015 |
| Net loss per share | $(0.005) in 2016; $0 in 2015 | $(0.005) in 2016; $(0.004) in 2015 |
Calculated operating margins were approximately (161.9%) for the 2016 third quarter and (30.7%) for the first nine months. The corresponding net margins were approximately (181.3%) and (41.7%). The filing does not present a conventional gross margin because the company reported royalty revenue and operating expenses without cost of revenue.
- Cash and cash equivalents were $5,675 at September 30, 2016, compared with $5,601 at December 31, 2015.
- Current assets were $126,219 and current liabilities were $459,951, producing a working-capital deficit of $333,732.
- Total assets were $266,551 versus $302,682 at year-end 2015; stockholders’ deficiency was $193,400.
- Related-party notes payable totaled $421,785, including $400,000 of notes due December 31, 2016 and a $25,000 stockholder note subsequently extended to January 31, 2017.
- Nine-month cash provided by operating activities was $147,643, compared with cash used of $235 in the prior-year period. The 2016 amount included $202,065 of stock-based compensation and $112,946 from changes in accounts receivable and prepaid expenses.
- Cash used in financing activities was $147,569, including $147,569 of principal payments on notes payable. Net cash increased by only $74 during the first nine months.
- Research and development expense was $282,339 for the first nine months, up from $192,827; general and administrative expense was $262,599, up from $212,565.
Material Changes Versus the Prior Comparable Period
- Third-quarter royalty revenue declined 27.0% from $122,107 to $89,118, while nine-month royalty revenue increased 34.7% from $309,703 to $417,074.
- Third-quarter results shifted from $4,217 of net income to a $161,590 net loss, principally reflecting higher research and development expense and interest expense.
- Nine-month net loss increased 27.3%, from $136,548 to $173,761.
- Third-quarter research and development expense increased 243.1%, primarily because of stock options issued in July 2016. Nine-month research and development expense increased 46.4%.
- Nine-month general and administrative expense increased 23.5%, mainly due to warrants issued in 2016; third-quarter expense increased 5.0%, partly because of amortization of the Helidyne license.
- The company entered into a ten-year Helidyne license in June 2016, capitalized a $100,000 acquisition fee, and committed to purchase two 50 kW expanders for $50,000.
- Warrants outstanding declined from 4,480,000 to 4,350,000 after 925,000 were issued and 1,055,000 expired. Options outstanding increased to 5,750,500 from 4,750,000.
Guidance, Outlook, Risks, Contingencies and Unusual Items
Management expected 2016 legacy biotech intellectual-property revenue to approximate 2015 levels, but stated there was no assurance this would occur. Management also stated that substantial additional capital was needed promptly and that failure to obtain financing could force the company to cease operations.
The financial statements include a going-concern uncertainty arising from recurring operating losses, negative operating cash flows and uncertainty regarding additional funding. The company stated that it expected substantial net losses to continue until its electric-power systems could be commercialized, with no assurance of successful commercialization.
- The VDF FutureCeuticals license generated all company revenue since 2012 and was scheduled to terminate in March 2018 when the underlying patents expire.
- The Helidyne license carries a 3% sales royalty and minimum annual royalties of $50,000 beginning upon commercialization or three years after the effective date, whichever is earlier.
- A patent assigned by a consultant requires a 2% royalty on revenue from products or projects based on that patent.
- Outstanding related-party notes and limited cash create significant near-term liquidity risk.
- Research and development, patent protection, commercialization, competition and the ability to obtain financing were identified as material risks. No material changes to the risk factors in the 2015 Form 10-K were reported.
- No legal proceedings, defaults upon senior securities or unregistered equity sales were reported.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2016; no significant changes in internal control were reported.
Key Facts for Investors to Verify
- Confirm the issuer identity and any subsequent name change from PowerVerde, Inc. to 374Water Inc.
- Verify the company’s ability to refinance or repay the $400,000 related-party notes due December 31, 2016 and the subsequently extended $25,000 note.
- Assess whether legacy royalty revenue can continue after the VDF license expires in March 2018.
- Evaluate progress, funding requirements and commercialization prospects for the clean-energy systems, which had generated no sales revenue through the reporting period.
- Review dilution risk from 4,350,000 outstanding warrants and 5,750,500 outstanding options.
- Reconcile reported operating cash flow to underlying cash generation, particularly the effects of stock-based compensation and working-capital changes.