Business Context and Reporting Period
PowerVerde, Inc. (the filing provided does not identify the registrant as 374Water Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 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 related revenue. Reported revenue came from third-party assembly services under the Liberty Agreement.
As of August 10, 2020, 31,750,106 common shares were outstanding. The company was classified as a smaller reporting company and reported that it was not a shell company.
Financial Results and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $3,000 in 2020; $1,000 in 2019 | $19,000 in 2020; $6,000 in 2019 |
| Operating expenses | $68,651 in 2020; $83,211 in 2019 | $164,667 in 2020; $179,069 in 2019 |
| Loss from operations | $(65,651) in 2020; $(82,211) in 2019 | $(145,667) in 2020; $(173,069) in 2019 |
| Net loss | $(79,152) in 2020; $(160,840) in 2019 | $(170,815) in 2020; $(255,991) in 2019 |
| Net loss per share | $(0.00) in both periods | $(0.01) in both periods |
Revenue consisted entirely of assembly services. The filing text does not provide meaningful positive profit margins; the company remained substantially loss-making. Research and development expense was $22,500 for the quarter and $57,440 for the six months. General and administrative expense was $46,151 for the quarter and $107,227 for the six months. Interest expense was $13,501 for the quarter and $25,148 for the six months.
At June 30, 2020, cash was $9,528, accounts receivable were $13,000, and total assets were $30,572. Current liabilities were $143,759, producing a working-capital deficit of $113,187. Convertible notes payable to related parties had an aggregate principal amount of $450,000 and a carrying value of $427,520 after unamortized issuance costs. Total liabilities were $571,279 and stockholders’ deficit was $(540,707).
For the six months ended June 30, 2020, operating activities used $125,905 of cash and financing activities provided $115,400, including $125,000 of related-party note proceeds and $9,600 of debt issuance costs. Cash decreased by $10,505 from $20,033 at December 31, 2019 to $9,528 at June 30, 2020. Cash paid for interest was $19,466.
Material Changes Versus the Prior Comparable Period
- Six-month revenue increased to $19,000 from $6,000, reflecting increased assembly revenue under the Liberty Agreement.
- Quarterly and six-month net losses narrowed to $79,152 and $170,815, respectively, from $160,840 and $255,991.
- The 2019 periods included a $69,178 impairment charge related to Helidyne intellectual property; no comparable impairment was recorded in 2020.
- Research and development expense declined 35.0% for the quarter and 17.6% for the six months, primarily due to lower personnel costs.
- Related-party convertible note principal increased by $125,000 during the first six months, from $325,000 at December 31, 2019 to $450,000 at June 30, 2020.
- Cash declined substantially from $116,529 at June 30, 2019 and from $20,033 at December 31, 2019 to $9,528 at June 30, 2020.
- The working-capital deficit increased from $63,638 at December 31, 2019 to $113,187 at June 30, 2020.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that substantial losses are expected until the company successfully commercializes its systems, for which there is no assurance. The company expected limited skilled manufacturing-service revenue of no more than approximately $5,000 per month and anticipated substantial revenue from a 374Water/Duke project in 2020 if an expected purchase order was received; the filing expressly stated that receipt of the purchase order was not assured.
The filing states that the company has substantial doubt about its ability to continue as a going concern. It has historically relied on debt and equity financing, and management said it must promptly raise substantial additional capital. Failure to obtain financing could force the company to cease operations.
The Biotech IP licensing agreement that historically generated material revenue expired in March 2018. The company therefore has no further material source of licensing revenue. Key risks include limited liquidity, dependence on financing, lack of commercialization, research and development uncertainty, competition, patent and licensing issues, regulatory and economic conditions, and the uncertain impact of COVID-19.
Related-party transactions included convertible notes bearing 10% interest, consulting and accounting fees, accrued compensation to officers and consultants, and finder’s fees to the CEO on note issuances. In July 2020, after quarter-end, the company issued additional convertible notes totaling $65,000. The filing reported no legal proceedings, no defaults upon senior securities, and no material changes to previously disclosed risk factors.
Most Important Facts to Verify
- Confirm the issuer identity: the supplied filing is for PowerVerde, Inc., while the request metadata identifies 374Water Inc.
- Verify the status, amount, timing, and financing terms of the expected 374Water/Duke purchase order.
- Assess the company’s ability to raise additional capital given $9,528 of cash, a $113,187 working-capital deficit, and substantial doubt regarding going-concern status.
- Review the maturity, conversion terms, interest obligations, and related-party nature of the $450,000 convertible notes, including the $65,000 issued in July 2020.
- Evaluate whether assembly revenue is recurring and whether the company’s planned clean-energy operations have begun generating commercial revenue.
- Consider potential dilution from 975,000 warrants and 12,180,500 outstanding stock options excluded from diluted share calculations.