Business Context and Reporting Period
PowerVerde, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2019. The filing identifies the registrant as PowerVerde, Inc.; the company later became associated with the 374Water name. The company is developing clean-energy electric power generation systems, but its planned principal operations had not commenced and it had generated no material revenue from that business.
Shares outstanding were 31,750,106 as of May 14, 2019. The company reported as a smaller reporting company.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $5,000 | $162,094 |
| Operating expenses | $95,857 | $105,686 |
| Income from operations | $(90,857) | $56,408 |
| Interest expense | $4,294 | $698 |
| Net income (loss) | $(95,151) | $56,624 |
| Net income (loss) per share | $0.00 | $0.00 |
| Cash flow from operations | $(57,140) | $184,149 |
| Cash and cash equivalents at period-end | $218,143 | $35,485 |
Revenue consisted entirely of assembly services. The company reported no sales revenue from its planned clean-energy operations and no biotech licensing revenue in the quarter. Research and development expense was $35,059, and general and administrative expense was $60,798. The filing does not provide a separate gross profit or gross margin.
At March 31, 2019, total assets were $310,395, current assets were $238,717, current liabilities were $72,801, and working capital was $165,916. Total liabilities were $340,522, including $267,721 of related-party notes payable, net of loan costs. Stockholders’ deficit was $30,127.
Material Changes Versus the Prior Comparable Period
- Revenue declined 96.9%, from $162,094 to $5,000, primarily because the biotech intellectual-property licensing agreement expired in March 2018.
- The company moved from operating income of $56,408 to an operating loss of $90,857 and from net income of $56,624 to a net loss of $95,151.
- Operating expenses decreased by $9,829, or approximately 9.3%. General and administrative expense declined by $9,596, while research and development expense was substantially unchanged.
- Operating cash flow changed from $184,149 provided to $57,140 used, reflecting the lack of prior-period licensing-related cash inflows.
- Cash increased by $209,661 during the quarter, principally because the company issued $290,000 of related-party convertible notes, offset by operating cash usage and $22,279 of debt issuance costs.
- Working capital improved from a $9,788 deficit at December 31, 2018 to positive working capital of $165,916 at March 31, 2019, primarily due to the related-party financing.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that substantial losses are expected until the company successfully commercializes and markets its systems, for which there is no assurance.
- The company expects part-time manufacturing services to generate no more than approximately $5,000 per month.
- Management expected potentially substantial 2019 revenue from the 374Water/Duke project if an anticipated purchase order was received, but emphasized that receipt of the purchase order was uncertain.
- The filing contains a going-concern warning. The company requires substantial additional debt or equity financing and stated that failure to obtain funding could force it to cease operations.
- In the first quarter, the company issued $290,000 of Series B 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.
- In May 2019, the company issued an additional $10,000 Series B note, bringing aggregate first- and second-quarter 2019 issuance to $300,000.
- The company has an agreement requiring a 2% royalty on revenue from products or projects based on a specified patent. It also has potential Helidyne-related purchase and royalty commitments, although management stated that further payments are unlikely unless Helidyne performs as required.
- Warrants for 975,000 shares remained outstanding at a weighted-average exercise price of $0.11. Stock options for 11,180,500 shares remained outstanding at a weighted-average exercise price of $0.20. These instruments may create future dilution.
- Management reported no material changes to the risk factors in the 2018 Form 10-K, no legal proceedings, and effective disclosure controls and internal control over financial reporting. The independent registered public accounting firm did not provide an attestation report because the company qualified for the applicable smaller-reporting-company exemption.
Important Facts for Investors to Verify
- Whether the company obtained the anticipated 374Water/Duke purchase order and converted its development efforts into material operating revenue.
- The amount, terms, and availability of additional financing required to address the disclosed going-concern uncertainty.
- The maturity, interest burden, and potential equity dilution from the related-party convertible notes, warrants, and stock options.
- Whether the company’s clean-energy systems have commenced commercial operations and generated recurring revenue.
- The status and enforceability of the Helidyne license, related performance obligations, and potential royalty or purchase commitments.
- Cash burn, working-capital needs, and the company’s ability to fund operations after the reported $218,143 cash balance.