Business Context and Reporting Period
Registrant: PowerVerde, Inc. (the filing text does not identify 374Water Inc. as the registrant). Form 10-Q for the quarter and nine months ended September 30, 2020, filed November 13, 2020.
The company is developing and commercializing clean-energy electric power generation systems, but its planned principal operations had not commenced and had generated no material revenue. Reported revenue came from assembly services for one customer under the Liberty Agreement. On September 20, 2020, PowerVerde signed a binding letter of intent to merge with privately held 374Water Inc.; closing remained subject to conditions, including raising at least $6.25 million of net private-placement proceeds by March 31, 2021.
Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $6,000 in 2020; $3,000 in 2019 | $25,000 in 2020; $9,000 in 2019 |
| Operating expenses | $105,427 in 2020; $164,558 in 2019 | $270,093 in 2020; $343,627 in 2019 |
| Loss from operations | $(99,427) in 2020; $(161,558) in 2019 | $(245,093) in 2020; $(334,627) in 2019 |
| Net loss | $(122,551) in 2020; $(170,823) in 2019 | $(293,366) in 2020; $(426,814) in 2019 |
| Net loss per share | $(0.00) in both periods | $(0.01) in both periods |
| Cash from operations | $(207,417) for the first nine months of 2020; $(252,378) in 2019 |
Cash was $138,991 at September 30, 2020, compared with $20,033 at December 31, 2019. Current assets were $172,215 and current liabilities were $186,418, resulting in a working-capital deficit of $14,203. Total liabilities were $660,173, including $473,755 of convertible notes payable, net of discounts and issuance costs. Aggregate convertible-note principal was $961,000, including $275,000 owed to related parties and $686,000 to nonrelated parties.
Financing activities provided $326,375 during the first nine months of 2020, primarily from convertible-note proceeds of $636,000, partially offset by $300,000 used to repurchase shares from a related party and $12,625 of debt issuance costs. Stockholders' deficit was $(487,958) at September 30, 2020.
Material Changes Versus Prior Comparable Period
- Nine-month revenue increased $16,000, or approximately 178%, but remained minimal and entirely dependent on assembly services for one customer.
- Nine-month net loss improved by $133,448, primarily because 2019 included a $69,178 intangible-asset impairment charge and $80,000 of stock-based compensation; 2020 included neither item.
- General and administrative expense increased $30,828 for the nine months, while research and development expense decreased $104,362, primarily due to lower stock-based compensation for services.
- Cash increased by $118,958 during the first nine months, but this improvement was driven by financing rather than operating cash generation.
- The company issued $511,000 of convertible notes in the third quarter, recorded a $472,300 beneficial-conversion-feature debt discount, and repurchased 4,027,408 shares from founder and former CEO George Konrad for $300,000.
- Shares outstanding declined from 31,750,106 at December 31, 2019 to 27,747,698 at September 30, 2020, reflecting the treasury-stock repurchase, partially offset by a 25,000-share warrant exercise.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects continued substantial losses until the company successfully commercializes its systems, with no assurance that commercialization will occur.
- Management stated that part-time manufacturing services may generate no more than approximately $5,000 per month. It also expected substantial revenue from a 374Water/Duke project in 2021 if an anticipated purchase order was received, but acknowledged that no assurance exists.
- The financial statements contain a going-concern warning. The company has an accumulated deficit of $12.9 million, used $207,417 of cash in operations during the first nine months, and stated that substantial additional debt or equity financing is required. Failure to obtain financing could force cessation of operations.
- The proposed 374Water merger would result in 374Water shareholders owning approximately 60% of the combined company and PowerVerde shareholders approximately 40%, subject to adjustments, milestones, and other closing conditions. The filing does not confirm that the merger closed.
- Convertible notes generally bear 10% interest and mature between December 31, 2021 and December 31, 2023. Their conversion prices step from $0.20 to $0.30 and then $0.40 per share over specified periods, creating potential future dilution.
- In October 2020, after the reporting date, the company issued an additional $250,000 of convertible notes. COVID-19 was identified as a risk with impacts that remained uncertain.
- Accounts receivable were $19,000 and were due from one customer. The license agreement with Helidyne remained active, but Helidyne was in default and the related intangible asset had been fully impaired in 2019.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor was not required to provide an attestation report.
Important Facts for Investors to Verify
- Whether the 374Water merger closed, whether all milestones were satisfied, and whether the required $6.25 million capital raise occurred.
- The status, maturity terms, conversion terms, and potential dilution from the $961,000 of convertible-note principal and outstanding warrants and options.
- The company's ability to raise sufficient additional capital and continue as a going concern.
- Whether the anticipated 2021 Duke-related purchase order and related revenue materialized.
- The sustainability and concentration risk of revenue from one assembly-services customer.
- The filing's operations statement contains an apparent presentation inconsistency for three-month loss before income taxes; investors should rely on the reported net loss and verify the original financial statements.