Business Context and Reporting Period
PowerVerde, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The request identifies the company as 374Water Inc.; the filing itself identifies the registrant as PowerVerde, Inc. The company is developing and commercializing clean-energy electric power generation systems, but states that its planned principal operations had not commenced and had generated no related revenue.
The company reported 31,750,106 common shares outstanding as of August 14, 2019. It was classified as a smaller reporting company.
Financial Highlights
| Metric | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | Comparable 2018 Period |
|---|---|---|---|
| Revenue | $1,000 | $6,000 | $3,000 quarterly; $165,094 six months |
| Operating expenses | $83,211 | $179,069 | $553,348 quarterly; $659,034 six months |
| Loss from operations | $(82,211) | $(173,069) | $(550,348) quarterly; $(493,940) six months |
| Net loss | $(160,840) | $(255,991) | $(549,642) quarterly; $(493,018) six months |
| Basic and diluted loss per share | $(0.005) | $(0.01) | $(0.02) in both comparable periods |
Revenue consisted entirely of assembly services under the Liberty Agreement. The company reported no sales revenue from its planned clean-energy systems. The filing does not present a separate gross profit or gross margin because cost of revenue was not separately reported. Revenue was insufficient to cover operating expenses, resulting in substantially negative operating and net margins.
Cash Flow, Liquidity and Capital Structure
- Cash was $116,529 at June 30, 2019, compared with $8,482 at December 31, 2018.
- Cash used in operating activities was $167,953 for the first six months of 2019, compared with cash provided of $277,524 in the 2018 period.
- Cash provided by financing activities was $276,000, primarily from $300,000 of related-party convertible notes, net of $24,000 of debt issuance costs.
- Working capital was $88,029 at June 30, 2019, compared with a working-capital deficit of $9,788 at year-end 2018.
- Total liabilities were $322,039, including $278,996 of net long-term convertible debt. Stockholders’ equity was negative $190,967, compared with positive $65,024 at December 31, 2018.
- The company had no preferred shares issued and 8,550,000 treasury shares.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined to $1,000 from $3,000; six-month revenue declined to $6,000 from $165,094 because the Biotech IP licensing agreement expired in March 2018.
- Quarterly net loss improved to $160,840 from $549,642, and six-month net loss improved to $255,991 from $493,018.
- Research and development expense declined 87.0% for the six-month period, to $69,680 from $524,713, primarily because $444,800 of stock-based compensation recognized in the 2018 period was not recognized in 2019.
- General and administrative expense declined 18.5% for the six-month period, to $109,389 from $134,321.
- The company recorded a $69,178 impairment charge that fully eliminated the carrying value of its Helidyne license intangible asset.
- Related-party convertible debt increased from zero at December 31, 2018 to $278,996 net of issuance costs at June 30, 2019.
- Operating cash flow shifted from a $277,524 inflow to a $167,953 outflow.
Outlook, Risks and Unusual Items
Management stated that substantial losses are expected until the company successfully commercializes and markets its systems, although there can be no assurance that commercialization will occur. The company expects part-time skilled manufacturing services to generate no more than approximately $5,000 per month. Management also expected substantial revenue from the 374 Water/Duke project in 2019 if an anticipated purchase order was received, but stated that receipt of the order was not assured. The filing does not provide formal quantitative revenue or earnings guidance.
The company disclosed substantial doubt about its ability to continue as a going concern. It has historically relied on debt and equity financing and stated that it must promptly raise substantial additional capital. If financing cannot be obtained on acceptable terms, the company may be forced to cease operations.
In the first two quarters of 2019, the company issued $300,000 of convertible promissory notes to stockholders. The notes bear interest at 10%, mature December 31, 2021, and are convertible at prices ranging from $0.20 to $0.40 per share depending on the conversion date.
The Helidyne license remained active, but Helidyne was in default and management concluded it was unlikely to perform in the foreseeable future. The company recognized a full impairment of the related license asset. Potential future royalty obligations are generally contingent on Helidyne performance or the company electing to produce expanders using the technology.
Outstanding potentially dilutive securities included warrants exercisable for 975,000 shares and options for 11,180,500 shares. These were excluded from diluted loss per share because their effect was anti-dilutive. The company reported no legal proceedings and no material changes to previously disclosed risk factors.
Investor Verification Checklist
- Verify the registrant identity and corporate-name history, because the filing is for PowerVerde, Inc. while the request identifies 374Water Inc.
- Confirm whether the anticipated 374 Water/Duke purchase order was received and whether it generated revenue after June 30, 2019.
- Assess the company’s ability to obtain additional financing and the terms, maturity, interest and conversion features of related-party debt.
- Reconcile cash burn with the reported $116,529 cash balance and evaluate the going-concern disclosure.
- Determine whether the clean-energy systems reached commercialization and generated operating revenue after the reporting date.
- Review the impact of the Helidyne default, the impaired license, and any continuing royalty or prototype-development obligations.
- Consider potential dilution from 11,180,500 stock options and 975,000 warrants.