Business Context and Reporting Period
Registrant: PowerVerde, Inc. (the filing does not use the name 374Water Inc.) and its wholly owned subsidiary. The company is developing and commercializing clean-energy electric power generation systems, but planned principal operations had not commenced as of March 31, 2016. Revenue was derived entirely from legacy biotech intellectual-property royalties.
Reporting period: Three months ended March 31, 2016, compared with the three months ended March 31, 2015. The financial statements are unaudited. The company reported 31,750,106 common shares outstanding as of May 12, 2016.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Royalty revenue | $140,652 | $154,887 | Down 9.2% |
| Operating expenses | $144,036 | $194,440 | Down 25.9% |
| Loss from operations | $(3,384) | $(39,553) | Improved |
| Net loss | $(18,068) | $(53,332) | Improved 66.1% |
| Operating margin | Approximately (2.4%) | Approximately (25.5%) | Improved |
| Net margin | Approximately (12.8%) | Approximately (34.4%) | Improved |
| Net cash from operating activities | $97,362 | $(1,309) | Improved |
| Cash and cash equivalents, period-end | $54,416 | $3,427 | Increased from $5,601 at December 31, 2015 |
Interest expense was $14,684, compared with $13,779 in the prior-year quarter. No income tax expense was recorded. Basic and diluted loss per share was reported as $0.00 for both periods.
At March 31, 2016, total assets were $265,757 and total liabilities were $508,778, producing stockholders’ deficiency of $243,021. Current assets were $208,880 versus current liabilities of $508,778, implying a current ratio of approximately 0.41 and a working-capital deficit of $299,898.
Current liabilities included $390,327 of notes payable to related parties, $24,021 of other notes payable, $20,000 payable to a related party, and $74,430 of accounts payable and accrued expenses. The $400,000 related-party notes, net of unamortized discount, were due in one principal payment on December 31, 2016 and bore 10% interest. The $24,021 intellectual-property note was paid in full in April 2016.
Operating cash flow was positive primarily because of a $79,027 reduction in accounts receivable, prepaid expenses and other assets and a $32,478 increase in accounts payable and accrued expenses. Financing activities used $48,547, including a $23,547 payment on a note payable and a $25,000 related-party note item presented as a financing outflow in the statement of cash flows.
Material Changes Versus the Prior Comparable Period
- Royalty revenue declined $14,235, or 9.2%, and remained the company’s entire revenue base.
- Research and development expense declined 31.8% to $57,725 because the company was testing rather than building new generator systems.
- General and administrative expense declined 21.4% to $86,311, mainly because of lower amortization expense.
- Net loss narrowed by $35,264, or 66.1%, to $18,068.
- Depreciation and amortization declined to $6,714 from $58,836, primarily reflecting lower intellectual-property amortization.
- Cash increased by $48,815 during the quarter, but the company continued to have negative working capital and a stockholders’ deficit.
- There were no changes in outstanding common shares, warrants or stock options during the quarter. Outstanding warrants covered 4,480,000 shares and options covered 4,750,000 shares.
Guidance, Outlook, Risks and Unusual Items
Management expected 2016 biotech intellectual-property royalty revenue to approximate 2015 levels, but provided no assurance that this level would be achieved. The royalty license agreement with VDF FutureCeuticals, Inc., which has generated all company revenue since 2012, is scheduled to terminate in March 2018 when the underlying patents expire.
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 identifies recurring operating losses, negative cash flows from operations, negative working capital and uncertainty in securing funding as conditions raising substantial doubt about the company’s ability to continue as a going concern.
Management stated that substantial net losses are expected to continue until the company successfully commercializes and markets its products, for which there can be no assurance. Key risks include development and commercialization uncertainty, patent risks, competition, dependence on legacy royalty revenue, financing risk and the pending expiration of the VDF license. No material changes were reported to the risk factors in the 2015 Form 10-K.
The company reported no legal proceedings, unregistered equity sales or defaults upon senior securities. Disclosure controls and internal control over financial reporting were assessed as effective; the company’s smaller-reporting-company status meant that the internal-control assessment was not subject to an auditor attestation report.
Investor Verification Checklist
- Verify the registrant’s current corporate name and whether the filing corresponds to 374Water Inc., since the filing identifies PowerVerde, Inc.
- Confirm the collectibility, timing and expected durability of the $140,652 quarterly royalty revenue and the March 2018 expiration of the VDF license.
- Review the terms, collateral, interest and December 31, 2016 maturity of the approximately $400,000 related-party notes.
- Assess the company’s ability to raise additional capital and fund operations given $54,416 of cash, a $299,898 working-capital deficit and $243,021 of stockholders’ deficiency.
- Determine whether the positive operating cash flow is recurring or primarily reflects collection of receivables and increases in accrued liabilities.
- Track progress toward commercialization of the clean-energy systems, noting that no planned principal operations had commenced as of the reporting date.