Business Context and Reporting Period
PowerVerde, Inc. (formerly Vyrex Corporation), a development-stage company, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The company was developing and commercializing electric power systems for thermal and natural-gas pipeline applications, while substantially all reported revenue came from legacy Biotech intellectual-property licensing agreements. The filing identifies the registrant as PowerVerde, Inc.; it does not identify 374Water Inc.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2014 | Comparable 2013 Period |
|---|---|---|---|
| Revenue | $73,398 | $239,527 | $128,614 quarterly; $309,517 year-to-date |
| Gross profit | $73,398 | $239,527 | $128,614 quarterly; $309,517 year-to-date |
| Operating loss | $(110,228) | $(462,017) | $(46,301) quarterly; $(821,464) year-to-date |
| Net loss | $(143,053) | $(558,398) | $(119,972) quarterly; $(892,145) year-to-date |
| Net loss per share | Not separately stated beyond $0 | $(0.01) | $0 quarterly; $(0.03) year-to-date |
| Cash used in operations | Not separately stated | $(283,466) | $(260,989) year-to-date |
- Gross margin was effectively 100% in the quarter and nine-month period because reported revenue consisted entirely of licensing fees and no cost of goods sold was recorded.
- Cash and cash equivalents were $58,749 at September 30, 2014, compared with $48,306 at December 31, 2013.
- Working capital deficit was $374,324 at September 30, 2014, compared with $385,872 at December 31, 2013.
- Total liabilities were $561,991, including $378,361 of notes payable to related parties and $43,400 payable to related parties.
- Total assets were $355,422, and stockholders’ deficiency was $206,569.
- Accounts payable and accrued expenses increased to $140,230 from $43,575 at December 31, 2013.
- The company had no derivative liabilities at September 30, 2014.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 42.9% to $73,398 from $128,614, reflecting lower Biotech IP licensing fees. Nine-month revenue declined 22.6% to $239,527 from $309,517.
- Third-quarter research and development expense decreased 32.2% to $45,778, while general and administrative expense increased 28.3% to $137,848, primarily due to higher employee compensation.
- Nine-month research and development expense decreased 19.1% to $308,374, and general and administrative expense decreased 47.6% to $393,170, reflecting cost-control efforts and lower outside-service and stock-option costs.
- Nine-month net loss improved 37.4%, from $892,145 to $558,398, but the quarterly net loss increased 19.2% because the decline in licensing revenue exceeded operating-expense reductions.
- The company issued 4.15 million common shares during the first nine months for net proceeds of $407,500. Third-quarter private-placement proceeds were $100,000 from 1 million shares issued at $0.10 per share.
- Warrants outstanding decreased from 7.586 million at December 31, 2013 to 5.586 million at September 30, 2014 after 2 million warrants expired.
- Newton Investments BV terminated the company’s exclusive European Union manufacturing and distribution license on July 30, 2014, citing ongoing technical problems with the systems.
- The former chief technical officer’s litigation was settled for $30,088, and all settlement payments had been made as of the filing date.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected fourth-quarter 2014 and 2015 Biotech IP revenue to approximate the annualized rate achieved during the first nine months of 2014, but provided no assurance that this level would be achieved.
- The company stated that it needs to promptly raise substantial additional capital through private debt and equity financing. Management warned that failure to obtain funding could force the company to cease operations.
- The filing includes a going-concern uncertainty based on recurring operating losses, negative operating cash flows, limited cash, and dependence on equity financings and related-party advances or notes.
- The $400,000 secured promissory notes to related parties bear 10% interest and were scheduled to mature on December 31, 2014; the notes are secured by certain accounts receivable if required payments are missed. A separate $30,000 related-party note was extended to May 19, 2015.
- The company remained a development-stage entity and stated that its planned principal operations had not commenced. It had generated no revenue from its current electric-power business during the quarter or nine-month period.
- Disclosure controls and procedures were concluded to be ineffective as of September 30, 2014, although management concluded that internal control over financial reporting was effective. The filing reports no material changes in internal control during the quarter.
- There were no material changes to the risk factors in the 2013 Annual Report. Key risks include dependence on additional financing, technical and commercialization uncertainty, limited operating history, competition, intellectual-property risks, and reliance on licensing revenue.
Investor Verification Items
- Verify the registrant’s identity and corporate history, since the filing is for PowerVerde, Inc., while the request metadata identifies 374Water Inc.
- Confirm the maturity, repayment, collateral, and any subsequent refinancing or default status of the related-party notes due December 31, 2014.
- Assess whether the company obtained sufficient financing after September 30, 2014 to address the disclosed going-concern uncertainty.
- Review the termination and financial consequences of the Newton European license and the status of the company’s electric-power commercialization efforts.
- Reconcile the reported conclusion that disclosure controls were ineffective with management’s separate conclusion that internal control over financial reporting was effective.
- Evaluate the sustainability and collectibility of the legacy Biotech IP licensing revenue, which represented 100% of reported revenue in the periods presented.