374Water Inc. (formerly PowerVerde, Inc.) — Fiscal 2013 Form 10-K Summary
Reporting period: Year ended December 31, 2013; filed March 17, 2014. The filing identifies the registrant as PowerVerde, Inc., not 374Water Inc., and describes the company as a development-stage business.
Business context
The company develops waste-heat and solar thermal power-generation systems based on pressure-driven motor and organic Rankine cycle technology. Commercialization remains incomplete because the Liberator system has not demonstrated the continuous operating life required for commercial deployment. The natural-gas pipeline and wellhead product line was suspended so resources could be focused on waste-heat applications.
- The company had two full-time employees and used part-time technical consulting support.
- The European Newton distribution relationship was suspended after technical problems prevented commercial sales. Newton had purchased one discounted system for $130,000 in 2011; no additional systems had been sold.
- The company operated from a 5,000-square-foot Scottsdale facility without a signed lease and without rent being charged after June 2013.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $359,362 | $193,692 | Up 85.5% |
| Research and development expense | $459,651 | $1,321,214 | Down 65% |
| General and administrative expense | $844,259 | $978,818 | Down 14% |
| Goodwill impairment | None | $2,637,760 | Prior-year charge not repeated |
| Operating loss | $944,548 | $4,744,100 | Improved primarily due to lower expenses and no impairment |
| Net loss | $1,054,959 | $4,755,050 | Improved 77.8% |
| Loss per share | $0.04 | $0.18 | Improved |
| Cash used in operating activities | $314,257 | $1,044,105 | Lower cash burn |
- 2013 revenue consisted of $359,362 of Biotech IP licensing fees; the company reported no product revenue from its power systems.
- Gross profit equaled revenue because no cost of goods sold was recorded in 2013. A meaningful product gross margin cannot be assessed because product sales were not established.
- Cash and cash equivalents were $48,306 at December 31, 2013, compared with $45,283 at December 31, 2012.
- Current assets were $135,808 versus current liabilities of $521,680, producing a working-capital deficit of $385,872, compared with a $72,721 deficit at year-end 2012.
- Total assets were $466,009 and total liabilities were $521,680. Stockholders’ equity was negative $55,671, compared with positive equity of $178,801 in 2012.
- Accounts payable and accrued expenses were $43,575; notes payable to related parties were $314,140. The company also had a $30,000 promissory note to a shareholder bearing 10% interest and secured notes with aggregate principal of $400,000, generally due December 31, 2014.
- Intellectual property, net, was $274,767, with scheduled amortization of $219,814 in 2014 and $54,953 in 2015.
- The company raised $300,000 from common-stock private placements and $75,000 from related-party notes during 2013. It issued 1.2 million shares at $0.25 per share and additional shares and warrants for services and financing.
Material changes versus 2012
- Revenue increased, but entirely from licensing income rather than commercialization of the company’s power systems.
- Research and development and general and administrative spending declined substantially because of cash constraints and reduced use of outside consultants.
- The $2.64 million Cornerstone goodwill impairment recorded in 2012 was not repeated in 2013.
- Operating cash use declined from $1.04 million to $314,257, but the company continued to generate negative operating cash flow.
- Current liabilities increased from $280,332 to $521,680, primarily reflecting related-party notes and obligations.
- Common shares outstanding increased from 26,011,565 to 27,600,106 during 2013, excluding additional dilution from outstanding warrants and options.
- Outstanding warrants increased to 7,586,000 shares at a weighted-average exercise price of $0.92; 2,750,000 options remained outstanding.
Outlook, risks, contingencies, and unusual items
- Management expected to complete development and testing during 2014 and target a market-ready waste-heat system by year-end 2014, with an anticipated successful Liberator test by the end of the first quarter. The filing cautions that these milestones may not be achieved.
- Management expected 2014 Biotech IP revenue to exceed 2013 levels, but provided no quantified guidance.
- The independent auditor stated that recurring losses, negative operating cash flow, a $385,872 working-capital deficit, and dependence on additional financing raised substantial doubt about the company’s ability to continue as a going concern.
- Management stated that, after using 2013 financing and most of the $240,000 raised in the first quarter of 2014, available cash was sufficient to fund operations for approximately two months as of the filing date.
- The company stated that it needed to promptly raise substantial additional capital and could be forced to cease operations if financing was unavailable.
- In the first quarter of 2014, the company raised $240,000 through the issuance of 2.4 million shares at $0.10 per share, creating potential dilution.
- A lawsuit by former chief technical officer Keith Johnson sought $37,500 of back pay, $5,012 of expenses, and unspecified damages. Management believed it had substantial defenses and that the matter would not be material.
- George Konrad’s settlement obligation remained unresolved. Under a February 2014 amendment, the company was required to pay $75,000 or issue 1,125,000 shares by March 31, 2014; failure to pay could result in substantial dilution.
- Key risks include technical failure, lack of commercial product acceptance, limited operating history, dependence on financing and key personnel, competition, patent uncertainty, volatile energy prices, regulatory dependence, and limited trading liquidity in the OTCBB market.
- The company had no independent directors, no board committees, and had not adopted a management code of ethics, citing limited resources.
Investor verification items
- Confirm the issuer’s corporate identity and subsequent name changes, because the filing is for PowerVerde, Inc. while the request identifies 374Water Inc.
- Verify the company’s post-filing financing, cash runway, debt maturities, and whether the going-concern uncertainty was resolved.
- Confirm whether the Liberator or other waste-heat systems achieved the stated durability and commercial-readiness targets.
- Determine whether the Newton agreement was formally terminated, remains suspended, or generated any later royalties or sales.
- Review subsequent filings for the Konrad settlement, potential share issuance, the Keith Johnson litigation, and related-party obligations.
- Reconcile basic shares outstanding with the 7,586,000 warrants and 2,750,000 options outstanding at year-end to assess potential dilution.
- Assess the sustainability and contractual basis of Biotech IP licensing revenue, which represented all 2013 revenue.