374Water Inc. 2021 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
374Water Inc., formerly PowerVerde, Inc., filed its unaudited Form 10-Q for the three months ended March 31, 2021. During the quarter, the company remained a development-stage business with no material revenue from its planned clean-energy operations. Reported revenue consisted entirely of assembly services for one related-party customer. The April 16, 2021 merger with privately held 374Water occurred after the reporting period and substantially changed the company’s business focus toward commercialization of supercritical water oxidation systems.
Financial Performance, Liquidity and Capitalization
- Revenue: $1,000, down from $16,000 in the first quarter of 2020. Revenue was entirely related-party assembly revenue.
- Operating expenses: $192,585, compared with $96,015 in the prior-year quarter. Research and development expense was $34,398, while general and administrative expense was $158,187.
- Operating loss: $191,585, compared with $80,015 in the first quarter of 2020. Because revenue was minimal, the implied operating margin was substantially negative and is not economically meaningful.
- Interest and other items: Net other expense was $86,763, including $90,563 of interest expense and a $3,800 gain on settlement of accounts payable.
- Net loss: $278,348, compared with $91,663 in the prior-year quarter. Basic and diluted loss per share was reported as $0.00 versus $(0.01), reflecting the company’s share count and rounding.
- Cash flow: Cash used in operating activities was $65,334, compared with $55,134 in the prior-year quarter. There was no financing cash inflow during the quarter, compared with $92,000 in the prior-year period.
- Cash and working capital: Cash was $30,052 at March 31, 2021, down from $95,386 at December 31, 2020. Working capital deficit was $446,056, versus $237,593 at December 31, 2020.
- Debt: Convertible note principal totaled $1.086 million at March 31, 2021, including $325,000 owed to related parties and stockholders and $761,000 owed to nonrelated parties. The balance-sheet carrying amount of convertible notes, net of discounts and issuance costs, was approximately $477,607.
- Balance sheet: Total assets were $46,634, total liabilities were $676,598, and stockholders’ deficit was $629,964.
- Equity instruments: At March 31, 2021, 28,388,882 common shares were outstanding, along with 950,000 warrants and 10,850,500 outstanding and exercisable options.
Material Changes Versus the Prior Comparable Period
- Revenue declined 93.8% year over year, from $16,000 to $1,000.
- General and administrative expense increased $97,111, or 159.0%, primarily because of legal costs associated with the planned merger and higher payroll expense.
- Research and development expense decreased slightly by $542, or 1.6%.
- Net loss increased by $186,685, or approximately 203.6%, primarily reflecting higher general and administrative expense and substantially higher interest expense.
- Cash used in operations increased by $10,200, while the company received no financing proceeds during the quarter.
- On March 22, 2021, $102,164 of a convertible note and accrued interest was converted into 510,822 common shares.
- On March 31, 2021, an $8,200 stock option was issued to settle $12,000 of accounts payable, resulting in a $3,800 gain.
Outlook, Commentary, Risks and Unusual Items
- Management stated that substantial losses are expected until the company successfully commercializes its systems, and no assurance was provided that commercialization will occur.
- The financial statements initially reflected substantial doubt about the company’s ability to continue as a going concern because of its accumulated deficit, operating losses, cash used in operations and working capital deficit.
- After the quarter, the company raised gross proceeds of $6.552 million through a private placement of Series D Convertible Preferred Stock and converted all outstanding convertible debt and accrued interest into 5,325,452 common shares. Management concluded that these events mitigated the going-concern uncertainty and expected available funds to support operations for at least 12 months; the MD&A stated that management believed the funds would satisfy working capital needs for 24 months, subject to execution and commercialization risks.
- The April 16, 2021 merger issued 64,012,734 common shares to former 374Water shareholders. The former 374Water shareholders subsequently owned 65.8% of issued and outstanding common stock and 53.8% of voting stock, including preferred-stock voting rights.
- The Series D Preferred Stock has a $15 stated value, converts at $0.30 per common share, has voting rights based on underlying common shares and has liquidation preference over common stock.
- The merger added the AirSCWO Nix supercritical water oxidation technology, subject to a worldwide non-exclusive license from Duke University. A manufacturing and service arrangement with MB Holding remained under development, including a commitment to provide an option to purchase 3,783,350 common shares at $0.30 per share if the related agreement is executed.
- Disclosure controls and internal control over financial reporting were reported as ineffective. Material weaknesses included insufficient management review, inadequate segregation of duties and limited entity-level controls, including an ineffective board structure and no audit committee.
- The company identified risks related to development-stage operations, commercialization, financing, competition, intellectual property, regulatory and economic conditions, COVID-19 and the concentration of revenue from a single related-party customer.
Important Facts for Investors to Verify
- Verify the closing terms, capitalization effects and accounting treatment of the April 16, 2021 merger and private placement.
- Confirm that all convertible debt and accrued interest were converted as disclosed and assess the resulting dilution.
- Evaluate whether the $6.552 million financing is sufficient to fund development, manufacturing and commercialization plans.
- Review the Duke University license, intellectual-property rights and any obligations or limitations affecting the AirSCWO technology.
- Monitor the proposed MB Holding manufacturing and service agreement and the associated 3,783,350-share option commitment.
- Assess remediation of the reported material weaknesses in disclosure controls and internal control over financial reporting.
- Verify customer concentration, related-party transactions and the company’s ability to generate revenue beyond assembly services.