Business Context and Reporting Period
The filing is a Form 10-K for the fiscal year ended December 31, 2016, filed April 17, 2017. The filing identifies the registrant as PowerVerde, Inc., formerly Vyrex Corporation, rather than 374Water Inc.; this issuer identity should be verified.
The Company is a development-stage clean-energy business developing waste-heat and pressure-driven electric power systems, including the Liberator organic Rankine cycle system. Planned product operations had not commenced, and the Company had not generated material product-sales revenue. It had one full-time employee and operated from an approximately 5,000-square-foot Scottsdale, Arizona facility without a signed lease.
Financial Highlights
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $587,613 | $529,861 | Up 10.9% |
| Research and development expense | $331,038 | $627,889 | Down 47.3% |
| General and administrative expense | $318,067 | $272,281 | Up 16.8% |
| Total operating expenses | $649,105 | $900,170 | Down 27.9% |
| Loss from operations | $(61,492) | $(370,309) | Improved |
| Net loss | $(123,762) | $(426,634) | Improved |
| Net loss per share | $(0.00) | $(0.01) | Not directly comparable due to rounding |
| Cash from operating activities | $(146,754) | $(38,871) | Use increased |
| Cash and cash equivalents | $4,786 | $5,601 | Down $815 |
| Working capital | $(272,120) | $(288,544) | Deficit improved |
| Total liabilities | $504,073 | $527,635 | Down 4.5% |
| Stockholders’ deficiency | $(140,900) | $(224,953) | Improved |
All 2016 revenue consisted of licensing and royalty income from Biotech intellectual property unrelated to the Company’s planned clean-energy operations. Based on reported figures, the operating margin was approximately negative 10.5% and the net margin was approximately negative 21.1%.
Accounts receivable were $170,539, prepaid expenses were $56,628, and accounts payable and accrued expenses were $79,073 at year-end. The Company reported $425,000 of notes payable to related parties, including a $400,000 note less an unamortized warrant-related discount and an additional $25,000 note.
Financing activities used $147,569 of cash in 2016. The Company paid $25,000 of related-party note principal and $147,569 on another note, while receiving $25,000 of related-party borrowings. Stock-based compensation was $207,815 in 2016 compared with $390,000 in 2015.
Material Changes Versus the Prior Comparable Period
- Licensing revenue increased by $57,752, or 10.9%, to $587,613, but there was no material revenue from power-system sales.
- Research and development expense decreased by $296,851, primarily because of lower stock-option issuances for services.
- General and administrative expense increased by $45,786, including stock compensation related to warrants issued for facility use.
- Net loss improved by $302,872, although the Company remained unprofitable and generated negative operating cash flow.
- Cash declined modestly to $4,786, while the working-capital deficit improved primarily because of changes in note classifications and related-party balances.
- In June 2016, the Company entered into a 10-year Helidyne license agreement for planetary rotor expander technology for total consideration of $100,000. The agreement includes a 3% sales royalty and minimum annual royalties of $50,000 after commercialization or three years from the effective date. The Company had prepaid $33,750 toward two expanders at year-end.
- The Company issued warrants for 950,000 shares in 2016 and ended the year with 4,275,000 warrants outstanding. It also had 5,750,500 stock options outstanding.
Guidance, Outlook, Risks and Unusual Items
Management expected 2017 Biotech IP revenue to exceed 2016 levels, but provided no formal quantitative guidance. The Biotech license agreement that generated all revenue since 2012 terminates in March 2018 when the underlying patents expire. Management stated that the Company may be unable to continue operations unless it commercializes its systems, obtains another revenue source, or raises substantial additional capital.
The independent auditor reported substantial doubt about the Company’s ability to continue as a going concern. Management stated that year-end cash supported approximately two months of operations, through approximately June 2017, and that additional private debt or equity financing was needed promptly.
- The $400,000 related-party notes were originally due December 31, 2016, extended to March 31, 2017, and subsequently extended to September 30, 2017. Management intended to use most second- and third-quarter 2017 licensing receipts to repay principal and interest.
- The Company’s systems continued to face technical problems, particularly the inability to demonstrate the continuous operating hours required for commercial deployment. Management targeted 20,000 hours of continuous operation but stated that commercial viability was uncertain.
- The Company faces competition from substantially better-funded clean-energy, utility, and equipment companies, as well as competition from low oil and natural-gas prices.
- Demand depends partly on government incentives, renewable-energy subsidies, regulatory approvals, and customer access to project financing; changes or reductions in these factors could impair commercialization.
- Intellectual-property protection, patent issuance and maintenance, key-person dependence, limited operating history, potential dilution, thin trading volume, and penny-stock restrictions represent additional investor risks.
- The Company had no independent directors or board committees and had not adopted a management code of ethics, citing limited resources and operations.
Most Important Facts to Verify
- Confirm that this filing belongs to the requested company, because the source identifies PowerVerde, Inc. and includes historical names Vyrex Corporation and PowerVerde Systems, Inc., not 374Water Inc.
- Verify the complete audited financial statements and the going-concern disclosure, including the accumulated deficit of $11,783,073 at December 31, 2016.
- Verify the status, repayment terms, collateral, and subsequent extensions of the $425,000 related-party notes.
- Verify the expiration and collectability of the Biotech IP licensing agreement, which was the Company’s sole material revenue source and expires in March 2018.
- Assess whether the Liberator and related clean-energy systems achieved commercially viable durability and operating performance after year-end.
- Review potential dilution from 4,275,000 outstanding warrants, 5,750,500 outstanding options, and any subsequent financing.
- Confirm subsequent financing, revenue, cash-burn, and operating-status developments after April 17, 2017.