374Water Inc. (formerly PowerVerde, Inc.) — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018; filed August 9, 2018. The filing identifies the registrant as PowerVerde, Inc. and describes a business focused on developing and commercializing clean-energy electric power-generation systems. Planned principal operations had not commenced, and historical revenue was generated from unrelated biotech licensing and assembly services.
Financial Performance and Position
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $3,000 | $168,548 | $165,094 | $339,799 |
| Operating income (loss) | $(550,348) | $65,361 | $(493,940) | $130,512 |
| Net income (loss) | $(549,642) | $57,219 | $(493,018) | $112,425 |
| Basic and diluted loss per share | $(0.02) | $0.00 | $(0.02) | $0.00 |
- Expenses: Six-month research and development expense was $524,713 versus $94,389, primarily reflecting $444,800 of stock-based compensation. General and administrative expense was $134,321 versus $114,898.
- Cash flow: Operating activities provided $277,524 in the first six months, compared with $133,945 in the prior-year period. The 2018 amount included $444,800 of non-cash stock compensation, a $368,160 favorable change in accounts receivable, prepaid expenses and other assets, and a $34,000 collection of the Liberty note receivable.
- Financing: Financing activities used $150,000 for repayment of related-party notes, compared with $125,000 in the prior-year period. The related-party notes were fully repaid in January 2018.
- Liquidity: Cash and cash equivalents were $128,860 at June 30, 2018, versus $1,336 at December 31, 2017. Working capital was $134,034 versus $168,679 at year-end 2017. Total liabilities were $5,318, compared with $245,310 at December 31, 2017.
- Capitalization: The company had 31,750,106 common shares outstanding as of August 9, 2018. Outstanding options covered 11,180,500 shares and warrants covered 1,375,000 shares, creating potential dilution.
- Margins: The filing does not provide a meaningful gross margin because revenue consists of royalties and assembly services and no separate cost-of-revenue amount is reported. Operating and net margins were substantially negative in the 2018 periods.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined to $3,000 from $168,548; six-month revenue declined to $165,094 from $339,799.
- The VDF FutureCeuticals biotech licensing agreement, which generated substantially all revenue since 2012, terminated in March 2018 when the underlying patents expired. The company received its final first-quarter royalty payment of $159,094 in April 2018.
- The company shifted from prior-year profitability to losses: six-month net income of $112,425 became a net loss of $493,018.
- Research and development expense increased by $430,324, or 455.9%, largely because of stock-option grants and modifications.
- Management stock options and warrants covering 5,975,000 shares were extended to June 30, 2026 and repriced to $0.12. Warrants covering 2,300,000 shares were converted into options, and new immediately vesting options covering 3,130,000 shares were issued.
- The Liberty note receivable was paid in full in June 2018, including $371 of accrued interest. Liberty assembly revenue was $6,000 for the six-month period, representing 40 Hydras shipped.
Outlook, Risks, and Unusual Items
- Going concern: Management stated that substantial doubt exists regarding the company’s ability to continue as a going concern. The company requires substantial additional debt or equity financing and warned that failure to obtain funding could force it to cease operations.
- Revenue outlook: The company reported no revenue from its planned clean-energy operations and provided no formal revenue, earnings, or cash-flow guidance. A potential part-time skilled manufacturing arrangement was expected to generate no more than $5,000 per month.
- Commercialization risk: Management expects substantial net losses until its clean-energy systems can be successfully commercialized, although there is no assurance that commercialization will occur.
- Contract and licensing risks: The Helidyne license includes potential royalty obligations, including a minimum annual royalty beginning under specified conditions; management considers performance by Helidyne very unlikely. The company also owes a 2% royalty on revenue from products or projects based on a consultant-assigned patent.
- Unusual accounting item: Stock-based compensation of $444,800 was recorded in the first six months, including $344,300 for newly issued options and $100,500 related to repricing and modification of existing awards.
- Other disclosures: No legal proceedings, material changes to previously disclosed risk factors, or subsequent events were reported. Management concluded disclosure controls and internal control over financial reporting were effective as of June 30, 2018.
Investor Verification Checklist
- Verify the company’s current legal name, corporate history, and relationship between 374Water Inc. and the PowerVerde, Inc. registrant named in this filing.
- Assess whether the company obtained sufficient post-filing financing to address the disclosed going-concern risk.
- Confirm the status, funding requirements, and commercialization milestones of the clean-energy systems, which had generated no planned-operation revenue as of June 30, 2018.
- Review the expiration of the biotech licensing revenue stream and identify any replacement revenue sources.
- Evaluate dilution from 11,180,500 outstanding options and 1,375,000 warrants, including repricing and extended expiration terms.
- Review related-party transactions, stock-based compensation, and the terms of the Helidyne and patent royalty commitments.