Business Context and Reporting Period
This Form 10-Q was filed by PowerVerde, Inc. (the filing does not identify 374Water Inc. as the registrant name) for the quarter and nine months ended September 30, 2015. The company was focused on developing and commercializing clean-energy electric power generation systems, but its planned principal operations had not commenced. All reported revenue consisted of royalties from legacy Biotech intellectual-property license agreements.
The company reported 31,750,106 common shares outstanding as of November 10, 2015 and was classified as a smaller reporting company.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Royalty revenue | $122,107, versus $73,398 | $309,703, versus $239,527 |
| Operating income (loss) | $17,365, versus $(110,228) | $(95,689), versus $(462,017) |
| Net income (loss) | $4,217, versus $(143,053) | $(136,548), versus $(558,398) |
| Operating margin | Approximately 14.2% | Approximately (30.9)% |
| Net margin | Approximately 3.5% | Approximately (44.1)% |
| Cash used in operating activities | Not separately provided | $(235), versus $(283,466) |
| Cash and cash equivalents | $13,385 at September 30, 2015, versus $4,736 at December 31, 2014 |
At September 30, 2015, total assets were $263,864 and total liabilities were $586,731, resulting in stockholders’ deficiency of $322,867. Working capital was a deficit of $9,518, compared with a surplus of $78,580 at December 31, 2014.
Current liabilities were $202,862, including $91,426 of accounts payable and accrued expenses, $28,000 payable to related parties, a $25,000 related-party note, and a $58,436 note payable. Long-term related-party notes payable were $383,869. The $400,000 related-party borrowing, net of discount, bears 10% interest, is secured by license-agreement receivables, and is due December 31, 2016.
Investing cash outflow was $16,116 for intellectual property. Financing cash inflow was $25,000 from a related-party note. No common stock was issued during the first nine months of 2015, compared with $415,000 of issuance proceeds in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Third-quarter royalty revenue increased 66.4%; nine-month royalty revenue increased 29.3%.
- The company generated third-quarter net income of $4,217 compared with a $143,053 loss in the prior-year quarter, but remained loss-making for the nine-month period.
- Research and development expense decreased 37.5% for the nine-month period because the company was testing rather than building new generator systems. General and administrative expense decreased 45.9%, primarily due to lower amortization and employee compensation costs.
- Cash used in operations improved substantially to $235 for the nine months, compared with $283,466 in the prior-year period, but liquidity deteriorated to a working-capital deficit.
- In June 2015, the company reacquired Biotech intellectual property for a net stated price of $36,552, funded with a $16,116 cash payment, a $58,436 promissory note, and assignment of a $38,000 note receivable plus accrued interest.
- Accounts receivable declined to $122,107 from $189,220 at year-end 2014, while related-party notes receivable and interest receivable were added to current assets.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected 2015 Biotech intellectual-property revenue to approximate 2014 levels, but provided no firm quantitative guidance and stated that achievement was not assured.
- The company disclosed substantial doubt about its ability to continue as a going concern because of recurring operating losses, negative operating cash flows, and uncertainty regarding additional financing. Management stated that substantial capital must be raised promptly and that failure to obtain funding could force the company to cease operations.
- The company had no product-sales revenue in either comparative period and stated that substantial losses are expected to continue until its clean-energy systems are successfully commercialized.
- The VDF FutureCeuticals license, which generated all revenue since 2012, terminates in March 2018 when the underlying patents expire.
- The company agreed to pay a consultant a 2% royalty on revenue from products or projects based on an assigned power-systems patent.
- Subsequent to quarter-end, management options and warrants covering 3.5 million shares were repriced to $0.15 and extended to October 26, 2022, producing $208,000 of fourth-quarter stock-based compensation expense. New options covering 2.0 million shares produced an additional $180,000 of fourth-quarter expense.
- There were no reported legal proceedings, defaults upon senior securities, or material changes to the risk factors in the 2014 Form 10-K. Management concluded that disclosure controls and internal control over financial reporting were effective.
Most Important Facts to Verify
- Confirm the registrant identity and relationship between 374Water Inc. and the PowerVerde, Inc. entity named throughout this filing.
- Verify the collectibility and November 14, 2015 maturity of the $38,000 related-party note receivable and accrued interest.
- Assess refinancing requirements and maturity risk for the $58,436 intellectual-property note, the $25,000 related-party note, and the larger related-party borrowing due in 2016.
- Evaluate dependence on legacy royalty revenue, including the March 2018 expiration of the VDF FutureCeuticals license.
- Incorporate the $388,000 of subsequent-quarter stock-based compensation from repriced and newly issued options when analyzing fourth-quarter and full-year results.
- Assess whether additional debt or equity financing can be obtained on acceptable terms given the working-capital deficit, accumulated deficit of $11.4 million, and stated going-concern uncertainty.