Business Context and Reporting Period
374Water Inc. was filed under the name PowerVerde, Inc. for the quarterly period ended June 30, 2016. The company was developing and commercializing clean-energy electric power generation systems, but its planned principal operations had not commenced. All reported revenue came from legacy Biotech intellectual-property royalty agreements, not power-system sales. The filing was a unaudited Form 10-Q for a smaller reporting company.
As of August 10, 2016, 31,750,106 common shares were outstanding. The company reported that its disclosure controls and internal control over financial reporting were effective as of June 30, 2016.
Financial Results and Key Metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Royalty revenue | $187,304 | $32,709 | $327,956 | $187,596 |
| Operating expenses | $167,532 | $106,210 | $311,568 | $300,650 |
| Income (loss) from operations | $19,772 | $(73,501) | $16,389 | $(113,054) |
| Net income (loss) | $5,897 | $(87,433) | $(12,171) | $(140,765) |
| Net income (loss) per share | $0.000 | $(0.003) | $(0.000) | $(0.004) |
- Second-quarter revenue increased approximately 473%; six-month revenue increased approximately 75% year over year.
- Second-quarter operating margin was approximately 10.6% and net margin approximately 3.1%. Six-month operating margin was approximately 5.0%, while net margin was approximately negative 3.7%.
- Research and development expense was $46,730 in the quarter and $104,455 year to date, down 17.0% and 25.9%, respectively, as the company was testing rather than building new generator systems.
- General and administrative expense was $120,802 in the quarter and $207,113 year to date, increases primarily attributed to stock-based compensation and the issuance of a warrant to a stockholder.
- Interest expense was $13,875 for the quarter and $28,560 year to date. No income tax provision was recorded.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $8,030 at June 30, 2016, compared with $5,601 at December 31, 2015.
- Operating activities provided $99,998 of cash during the first six months, compared with $19,189 in the prior-year period. Investing activities used no cash; financing activities used $97,569 for debt repayments. The net increase in cash was $2,429.
- Working capital was negative $314,567 at June 30, 2016, compared with negative $288,544 at December 31, 2015.
- Total current liabilities were $517,553, including $393,538 of notes payable to related parties, $75,000 of notes payable, and $20,000 payable to a related party. The related-party notes were due in a single principal payment on December 31, 2016 and bore 10% interest.
- Total assets were $352,429 and total liabilities were $517,553, resulting in stockholders’ deficiency of $165,124.
- Accounts receivable were $187,304 and were considered fully collectible. The receivables were primarily royalties under the VDF FutureCeuticals license.
Material Changes, Outlook, Risks, and Unusual Items
- The company remained dependent on legacy royalty revenue. Management expected 2016 Biotech IP revenue to approximate 2015 levels, but provided no assurance that this would occur.
- Management stated that substantial net losses would continue until the clean-energy systems were successfully commercialized and marketed; there was no assurance of successful commercialization.
- The financial statements include a going-concern uncertainty because of recurring operating losses, historical negative operating cash flows, and uncertainty regarding additional financing. Management stated that substantial additional capital was needed promptly and that failure to raise funds could force the company to cease operations.
- The VDF FutureCeuticals license, which generated all company revenue since 2012, was scheduled to terminate in March 2018 when the underlying patents expire.
- On June 1, 2016, the company entered a 10-year Helidyne license for planetary rotor expander technology. It recorded a $100,000 license acquisition fee, with $75,000 unpaid at quarter-end and due September 1, 2016. The company also committed to purchase two 50 kW expanders for $50,000, payable in installments beginning October 2016.
- The Helidyne agreement provides for a 3% sales royalty, subject to a minimum annual royalty of $50,000 beginning on the earlier of commercialization or three years from the effective date; the minimum increases to $100,000 for the remaining four years of the agreement.
- In June 2016, the company issued a warrant for 900,000 shares at $0.11 per share for facility use from 2013 through 2015. The $72,000 fair value was recorded as general and administrative stock compensation expense.
- At June 30, 2016, outstanding potentially dilutive securities included warrants for 4,325,000 shares and options for 4,750,000 shares; these were excluded from diluted per-share calculations because their effect was anti-dilutive.
- Subsequent events included the July 1 issuance of options for 1,000,500 shares in exchange for services, valued at $130,065, and a July 7 $25,000 stockholder loan bearing 10% interest and accompanied by a warrant for 25,000 shares.
- The filing reported no legal proceedings and no material changes to the risk factors disclosed in the 2015 Form 10-K.
Key Facts for Investors to Verify
- Whether the company can obtain the additional debt or equity financing required to continue operations.
- The collectibility, duration, and termination economics of the VDF FutureCeuticals royalty stream, including the March 2018 patent expiration.
- Progress toward commercialization of the clean-energy systems and whether any product-sales revenue has commenced.
- Repayment or refinancing of the $400,000 related-party notes due December 31, 2016, the $75,000 license obligation due September 1, 2016, and other near-term commitments.
- The financial impact of the Helidyne license, required equipment purchases, minimum royalties, and related-party transactions.
- Potential dilution from outstanding warrants, options, and the post-quarter-end equity issuances.