Business Context and Reporting Period
The filing is a Form 10-Q for the quarter and nine months ended September 30, 2013, filed November 8, 2013. The filing identifies the registrant as PowerVerde, Inc., formerly Vyrex Corporation; the request metadata identifies 374Water Inc., so the corporate-name continuity should be verified. The company describes itself as a development-stage company focused on clean-energy electric power-generation systems and related technology. Planned principal operations had not commenced.
Revenue during the period came solely from legacy Biotech intellectual-property licensing fees; the company reported no revenue from its current clean-energy business.
Financial Results and Position
| Metric | Three months ended September 30, 2013 | Three months ended September 30, 2012 | Nine months ended September 30, 2013 | Nine months ended September 30, 2012 |
|---|---|---|---|---|
| Revenue | $128,614 | $33,649 | $309,517 | $78,006 |
| Gross profit | $128,614 | $33,649 | $309,517 | $78,006 |
| Operating loss | $(46,301) | $(371,626) | $(821,464) | $(1,692,229) |
| Net loss | $(119,972) | $(375,418) | $(892,145) | $(1,703,381) |
- Reported gross margin was 100% in each period because current-period cost of goods sold was zero. Operating margin was approximately negative 36.0% for the quarter and negative 265.4% for the nine-month period; net margin was approximately negative 93.3% and negative 288.2%, respectively.
- Research and development expense was $67,502 in the quarter and $381,064 for nine months. General and administrative expense was $107,413 and $749,917, respectively.
- Cash and cash equivalents were $76,575 at September 30, 2013, compared with $45,283 at December 31, 2012. Working capital remained negative at $(18,834), although this improved from $(72,721).
- Total assets were $644,900 and total liabilities were $610,757 at September 30, 2013. Stockholders’ equity was only $34,143.
- Current liabilities were $272,508, including $152,967 payable to related parties. Long-term liabilities were $338,249, including $258,249 payable to related parties and an $80,000 derivative liability.
- Cash used in operating activities was $260,989 for the first nine months, while cash used in investing activities was $57,719. Financing activities provided $350,000, including $275,000 from common-stock issuance and $75,000 from related-party notes.
- Debt includes secured related-party promissory notes bearing 10% interest, with principal generally due December 31, 2014, and a separate $30,000 note due May 2014. Accrued interest and financing-related amounts were included in payables.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 282% to $128,614 from $33,649, and nine-month revenue increased 297% to $309,517 from $78,006. Management attributed the increase to higher sales of licensed Biotech products.
- Third-quarter net loss declined 68.0%, and the nine-month net loss declined 47.6%, primarily because of lower research and development and general and administrative expenses and higher licensing revenue.
- Third-quarter research and development expense decreased 45.8%, and nine-month research and development expense decreased 61.8%, largely because of lower outside engineering, materials, and service costs.
- Common shares issued and outstanding increased to 27,500,106 at September 30, 2013 from 26,011,565 at December 31, 2012. The company also had 7,239,333 outstanding warrants and 2,750,000 outstanding options, creating potential dilution.
- Property and equipment increased to $61,506 from $9,559, while net intellectual property declined to $329,720 from $494,580 because of amortization.
Guidance, Outlook, Risks, and Unusual Items
- Management expected fourth-quarter 2013 Biotech intellectual-property revenue to substantially exceed the fourth-quarter 2012 level and expected 2014 Biotech intellectual-property revenue to be comparable to 2013, but provided no assurance that these expectations would be achieved.
- The company stated that it needed to promptly raise substantial additional capital. Management warned that failure to obtain financing could force the company to cease operations.
- The financial statements include a going-concern uncertainty because of recurring operating losses, negative operating cash flow, and uncertainty regarding additional funding.
- Technical problems with the company’s systems delayed the start of minimum sales requirements under its 10-year European license agreement. The clean-energy systems had not generated revenue through the reporting period.
- Derivative liabilities were measured at fair value and increased from $68,250 at year-end 2012 to $80,000. Changes in valuation assumptions may create earnings volatility.
- Management concluded that disclosure controls and procedures were not effective and reported continuing material weaknesses in internal control over financial reporting, particularly relating to monitoring and review of accounting operations. No independent auditor attestation was included.
- The company used a related party’s Scottsdale facility rent-free from July 2013 and expected to continue doing so for at least the following year.
- Subsequent to quarter-end, the company raised $25,000 through a stock placement and amended a founder’s convertible debt arrangement, increasing the amount due to $100,000 with payments scheduled for November and December 2013.
Key Facts for Investor Verification
- Confirm the registrant’s identity and name history, including the relationship between 374Water Inc. and PowerVerde, Inc.
- Verify that reported revenue is entirely legacy Biotech licensing revenue and that the current clean-energy business had generated no revenue.
- Assess near-term liquidity, including only $76,575 of cash, negative working capital, related-party obligations, and the company’s stated need for additional financing.
- Review the terms, collateral, maturity dates, accrued interest, and potential conversion features of related-party debt.
- Evaluate dilution from 27.5 million shares outstanding, 7.24 million warrants, and 2.75 million options.
- Investigate the continuing material weaknesses in internal control and the conclusion that disclosure controls were not effective.
- Assess the technical issues affecting the European license agreement and the feasibility of commercializing the clean-energy systems.