ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Managements Discussion and Analysis of Financial Condition and Results of Operations section and audited consolidated financial statements and related notes thereto included in our 2016 Annual Report on Form 10-K, and with the unaudited condensed consolidated financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
The statements contained in this report that are not historical facts are forward-looking statements that represent managements beliefs and assumptions based on currently available information. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, need for financing, competitive position, potential growth opportunities, potential operating performance improvements, ability to retain and recruit personnel, the effects of competition and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words believes, intends, may, should, anticipates, expects, could, plans, or comparable terminology or by discussions of strategy or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such forward-looking statements.
Factors that may cause actual results to differ materially from current expectations include, but are not limited to:
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the availability and terms of financing and capital and the general volatility of securities markets;
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risks related to natural disasters;
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litigation; and
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other risk factors discussed in the 2016 Annual Report on Form 10-K, filed by the Company with the Securities and Exchange Commission.
Should one or more of these risks materialize (or the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those expected. We disclaim any intention or obligation to update publicly or revise such statements whether as a result of new information, future events or otherwise.
Heatwurx, Inc. was incorporated under the laws of the State of Delaware on March 29, 2011 as Heatwurxaq, Inc. and subsequently changed its name to Heatwurx, Inc. on April 15, 2011.
Through the nine months ended September 30, 2017 we were an asphalt preservation and repair, equipment company. Our innovative, and eco-friendly hot-in-place recycling process corrects surface distresses within the top three inches of existing pavement by heating the surface material to a temperature between 325° and 375° Fahrenheit with our electrically powered infrared heating equipment, mechanically loosening the heated material with our processor/tiller attachment that is optimized for producing a seamless repair, and mixing in additional recycled asphalt pavement and a binder (asphalt-cement), and then compacting repaired area with a vibrating roller or compactor. We consider our equipment to be eco-friendly as the Heatwurx process reuses and rejuvenates distressed asphalt, uses recycled asphalt pavement for filler material, eliminates travel to and from asphalt batch plants, and extends the life of the roadway. We believe our equipment, technology and processes provide savings over other processes that can be more labor and equipment intensive.
Our hot-in-place recycling process and equipment was selected by the Technology Implementation Group of the American Association of State Highway Transportation Officials (AASHTO TIG) as an additionally Selected Technology for the year 2012. We develop, manufacture and intend to sell our unique and innovative and eco-friendly equipment to federal, state and local agencies as well as contractors for the repair and rehabilitation of damaged and deteriorated asphalt surfaces.
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During 2014, we acquired Dr. Pave, LLC a service company offering asphalt repair and restoration utilizing the Heatwurx asphalt repair technology and established a new entity Dr. Pave Worldwide LLC to house our franchise program providing franchisees with the exclusive Heatwurx equipment and processing. We launched our franchise sales program throughout the U.S. in the third quarter of 2014; however, to date, no franchises have been sold. The Company decided not to renew its franchise registrations throughout the U.S. due to the extensive costs. In 2015, we offered license agreements that grant licenses of Heatwurx equipment and supplies and the use of the Heatwurx intellectual property within a specified territory. We have one licensee as of September 30, 2017.
We believe that we are unable to achieve a level of revenues from our Heatwurx operations adequate to support our cost structure. Due to the slow growth in the service sector and the high cost of the franchise registrations, we discontinued the operations of Dr. Pave, LLC and Dr. Pave Worldwide LLC. In addition, we significantly scaled back all other operations to maintain only a minimal level of operations necessary to support our licensee while seeking potential merger candidates. The Company sold its remaining equipment and inventory to the licensee during 2016. Subsequent to the close of the quarter ended September 30, 2017, the Company entered into an asset purchase agreement, refer to Note 9 for further information.
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to opt out of such extended transition period, and as a result, we will comply with new or revised standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
Results of operations
The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements included herewith. This discussion should not be construed to imply that results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.
For the three months ended September 30, 2017 compared to the three months ended September 30, 2016
For the three months ended September 30, 2017, our net loss was approximately $204,000, compared to a net loss of approximately $68,000 including loss from discontinued operations of $42 for the same period of 2016. Further description of these losses is provided below.
Revenue
The Company recognized no revenue in the three months ended September 30, 2017 and September 30, 2016. The Company does not anticipate any future revenue from equipment sales during 2017.
Cost of goods sold
The Company had no cost of goods sold during the three months ended September 30, 2017 and 2016.
Selling, general and administrative
Selling, general and administrative expenses increased to approximately $164,000 for the three months ended September 30, 2017 from approximately $4,000 for the three months ended September 30, 2016. The increase in selling, general and administrative expenses is principally due to the use of consultants for accounting, tax and operational services of approximately $61,000; and an increase in legal and investor relations services of approximately $99,000 related to the transaction with Promet announced during the quarter.
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Research and Development
The Company had no research and development costs during the three months ended September 30, 2017; a decrease from approximately $600 for the three months ended September 30, 2016, as a result of a reduction in legal patent costs.
For the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016
For the nine months ended September 30, 2017, our net loss was approximately $323,000; compared to a net loss of approximately $245,000 including income from discontinued operations of $1,214 for the same period of 2016. Further description of these losses is provided below.
Revenue
The Company recognized no revenue in the nine months ended September 30, 2017 and $5,000 for the nine months ended September 30, 2016. The Company anticipates no future revenue from equipment sales during 2017.
Cost of goods sold
The Company had no cost of goods sold during the nine months ended September 30, 2017 and 2016.
Selling, general and administrative
Selling, general and administrative expenses increased to approximately $188,000 for the nine months ended September 30, 2017 from approximately $88,000 for the nine months ended September 30, 2016. The increase in selling, general and administrative expenses is principally due to the use of legal services related to the reverse merger announced during the period of $95,000; an increase from the use of consultants for accounting, tax and operational services of approximately $13,000, offset by a decrease in office expenses of approximately $8,000 which includes commercial insurance, rent and other expenses.
Research and Development
The Company had research and development costs during the nine months ended September 30, 2017 of approximately $200; a decrease from approximately $6,000 for the nine months ended September 30, 2016, which resulted from significant reduction in patent applications being filed thereby reducing legal and filing fees associated therewith. The Company is only utilizing legal representation to maintain the existing patents.
Liquidity and capital resources
Overview
We have incurred operating losses, accumulated deficit and negative cash flows from operations since inception. As of September 30, 2017, we had an accumulated deficit of approximately $17,036,000. The Company had total cash on hand of approximately $80,000 as of September 30, 2017. During the quarter ended the Company worked with existing debt holders to convert the principal of all existing notes payable and related accrued interest into shares of common stock. In addition, all Series D preferred shares and accrued dividends were converted into shares of common stock.
Operating Activities
During the nine months ended September 30, 2017, the Company used approximately $250,000 in cash compared to cash used of approximately $27,000 for continuing operations and approximately $8,800 for discontinued operations during the nine months ended September 30, 2016. This increase in cash used for operating activities was due to the Companys efforts to reduce liabilities and pay down outstanding accounts payable. For the nine months ended September 30, 2017, the Company incurred a net loss from continuing operations of approximately $323,000. It is the Companys intention to move forward as a public entity and to seek potential merger candidates.
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Investing Activities
There were no investing activities during the nine months ended September 30, 2017 compared to proceeds of $17,000 from the sale of assets held for sale during the nine months ended September 30, 2016.
Financing Activities
During the nine months ended September 30, 2017, the Company received $327,000 in cash from financing activities compared to $15,000 during the nine months ended September 30, 2016. This increase in cash received from financing activities was due to the Company receiving financial support from their small group of investors under the senior secured notes. On September 29, 2017 all then outstanding notes payable in the amount of $1,939,341 and related accrued interest in the amount of $613,114 were converted into 12,953,902 shares of common stock. In addition, the Company converted 178,924 shares of Series D Preferred Stock and all accrued dividends in the amount of $118,658 into 719,500 shares of common stock.
Cash Requirements
The Company is unable to achieve a level of revenues and cash flow from our Heatwurx operations adequate to support our cost structure. The Company worked with its debt and preferred shareholders to convert all outstanding debt and accrued interest and dividends into shares of common stock. The Company is no longer in default on its notes payable. The Company maintains only a minimal level of operations necessary while seeking potential merger candidates. Subsequent to the close of the quarter ended September 30, 2017, the Company entered into an asset purchase agreement. Refer to Note 9 of the Notes to Unaudited Condensed Consolidated Financial statements for further information.
Recent accounting pronouncements
There were no new accounting pronouncements issued during the three and nine months ended September 30, 2017 that had a material impact or are anticipated to have a material impact on our financial position, cash flows or operating results.