Business Context and Reporting Period
PowerVerde, Inc. (the filing entity associated with 374Water Inc.) filed this unaudited Form 10-Q for the three months ended March 31, 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. Current revenue primarily came from assembly services under the Liberty Plugins agreement.
The company reported 31,750,106 common shares outstanding as of May 12, 2020. It was classified as a smaller reporting company.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $16,000 | $5,000 |
| Operating expenses | $96,015 | $95,857 |
| Loss from operations | $(80,015) | $(90,857) |
| Interest expense | $(11,648) | $(4,294) |
| Net loss | $(91,663) | $(95,151) |
| Net loss per share | $0.00 | $0.00 |
| Cash used in operating activities | $(55,134) | $(57,140) |
| Cash provided by financing activities | $92,000 | $267,721 |
| Ending cash | $56,899 | $218,143 |
Research and development expense was $34,939, and general and administrative expense was $61,076. The company reported no income tax provision. Operating cash burn was funded primarily through a $100,000 related-party convertible note, offset by $8,000 of debt issuance costs.
At March 31, 2020, total assets were $94,650, total liabilities were $556,205, and stockholders’ deficit was $(461,555). Accounts payable and accrued expenses were $155,019. Related-party convertible notes had $425,000 of principal outstanding, presented net of $23,814 of unamortized issuance costs as $401,186 of long-term debt.
Working capital deficit was $60,368 at March 31, 2020, compared with $63,638 at December 31, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue increased by $11,000, or 220%, to $16,000, entirely from assembly services; the filing states that 106 Hydras had been built and shipped as of March 31, 2020.
- Operating expenses were essentially unchanged, with research and development declining by $120 and general and administrative expense increasing by $278.
- Operating loss improved by $10,842, while net loss improved by $3,488 because higher interest expense partially offset the operating improvement.
- Cash used in operations improved modestly by $2,006, but ending cash declined by $161,244 from the prior-year quarter because financing proceeds were substantially lower.
- Cash increased from $20,033 at December 31, 2019 to $56,899 at March 31, 2020, primarily due to $92,000 of net financing proceeds.
- The company issued a $100,000 convertible promissory note to a stockholder in March 2020. The note bears 10% interest, matures December 31, 2022, and is convertible at specified prices beginning at $0.20 per share through December 31, 2020.
Outlook, Commentary, Risks, and Unusual Items
- Management stated that substantial losses are expected until the company successfully commercializes and markets its systems, with no assurance that commercialization will occur.
- The company expects part-time manufacturing services to generate no more than approximately $3,000 per month.
- Management expected a purchase order for the 374Water/Duke project by the end of 2020 and anticipated substantial revenue if received, but expressly stated there was no assurance the purchase order would be obtained.
- The filing states that there is substantial doubt about the company’s ability to continue as a going concern. Management needs to raise substantial additional debt or equity capital and warned that failure to do so could force the company to cease operations.
- Historical biotech licensing revenue ended when the underlying license agreement expired in March 2018, leaving no further material source of that revenue.
- The Helidyne license agreement remained active, but Helidyne was in default. The company had fully impaired the related intellectual property in 2019 by recording a $69,178 charge and had stopped further payments for two expanders unless Helidyne performed as required.
- Outstanding dilution exposure included warrants exercisable for 975,000 shares and options for 12,180,500 shares, which were excluded from diluted weighted-average shares because their effect was anti-dilutive.
- The company disclosed uncertainty regarding the potential effect of the COVID-19 pandemic on customers, operations, results, and financial condition.
- Related-party arrangements included convertible debt issued to stockholders, consulting and accounting services, accrued consultant compensation, and an 8% finder’s fee accrued to the chief executive officer on the convertible notes.
Facts an Investor Should Verify
- Whether the company obtained the expected 374Water/Duke purchase order and generated material revenue after March 31, 2020.
- The availability, terms, and timing of additional debt or equity financing needed to address the going-concern uncertainty.
- The repayment, conversion, and interest obligations associated with the $425,000 of related-party convertible notes.
- The status and commercial viability of the company’s clean-energy systems, given that planned principal operations had not commenced and material product revenue had not been generated.
- The potential dilution from 975,000 warrants and 12,180,500 stock options.
- The impact of COVID-19 and any subsequent events, as the filing’s subsequent-events note reported none as of the filing date.