Business Context and Reporting Period
PowerVerde, Inc. (the 2015 filing entity associated with 374Water Inc.) filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company was focused on developing and commercializing clean-energy electric power generation systems, but its planned principal operations had not commenced. All reported revenue came from legacy biotech intellectual-property royalty agreements rather than product sales.
The filing identifies the company as a smaller reporting company and states that 31,750,106 common shares were outstanding as of August 11, 2015.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|---|---|
| Royalty revenue | $32,709 | $125,975 | $187,596 | $166,129 |
| Operating expenses | $106,210 | $213,002 | $300,650 | $517,918 |
| Loss from operations | $(73,501) | $(87,027) | $(113,054) | $(351,789) |
| Interest expense | $(13,932) | $(42,368) | $(27,711) | $(63,556) |
| Net loss | $(87,433) | $(129,395) | $(140,765) | $(415,345) |
| Basic and diluted loss per share | $(0.003) | $(0.004) | $(0.004) | $(0.01) |
- Approximate net loss margin was negative 267% for the second quarter and negative 75% for the six-month period. Operating margins were approximately negative 225% and negative 60%, respectively.
- Cash and cash equivalents were $7,809 at June 30, 2015, compared with $4,736 at December 31, 2014.
- Working capital was $30,564 at June 30, 2015, versus $78,580 at December 31, 2014.
- Total assets declined to $164,306 from $327,822 at year-end 2014. Stockholders’ deficiency increased to $(329,084) from $(188,319).
- Total liabilities were $493,390, including $58,436 of note payable related to the intellectual-property acquisition, $380,622 of notes payable to related parties, and $20,000 payable to a related party.
- Six-month operating cash flow was $19,189, compared with $(333,812) in the prior-year period. Investing cash flow was $(16,116), principally for intellectual property, and there was no financing cash flow.
- Cash increased by $3,073 during the first six months, ending at $7,809.
Material Changes Versus the Prior Comparable Period
- Second-quarter royalty revenue decreased 74.0% to $32,709, while six-month royalty revenue increased 12.9% to $187,596.
- Research and development expense decreased 49.3% for the quarter and 46.3% for the six-month period, primarily because the company was testing rather than building new generator systems.
- General and administrative expense decreased 51.0% for the quarter and 37.5% for the six-month period, primarily due to lower amortization and employee compensation expense.
- Second-quarter net loss improved 32.4%, and six-month net loss improved 66.1%, mainly because of lower operating expenses and interest expense.
- Operating cash flow improved from a use of $333,812 to positive cash flow of $19,189, largely due to collections of accounts receivable and prepaid expenses.
- On June 30, 2015, the company acquired intellectual property from VyrexIP Holdings Inc., an entity owned by shareholder Edward Gomez, for a net stated price of $36,552. Consideration included $16,116 cash, a $58,436 promissory note, and assignment of a $38,000 note receivable from Epalex Corporation, a related licensee.
- The company reacquired legacy biotech intellectual property and stated that it expected the transaction could generate significant revenue, although no assurance was provided.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected 2015 biotech intellectual-property royalty revenue to approximate 2014 levels, but expressly stated that achievement was uncertain.
- The company stated that it needed to promptly raise substantial additional capital through private debt and equity financing. Management warned that failure to obtain funding could force the company to cease operations.
- The financial statements include a going-concern uncertainty because of recurring operating losses, negative historical operating cash flows, and uncertainty regarding additional funding.
- The license agreement generating all company revenue since 2012 is scheduled to terminate in March 2018 when the underlying patents expire.
- The company had no product-sales revenue in either comparable period and stated that substantial losses would continue until its clean-energy systems could be commercialized, with no assurance of successful commercialization.
- The acquired intellectual property is subject to future amortization; the filing reports $36,552 of remaining amortization as of June 30, 2015.
- Related-party debt includes a $400,000 principal note, net of an unamortized warrant discount, due December 31, 2016, bearing 10% interest and collateralized by royalties under the VDF FutureCeuticals license.
- A patent assigned to the company by consultant Hank Leibowitz carries a 2% royalty on product or project revenues based on the patent.
- The previously disclosed litigation by former chief technical officer Keith Johnson was settled, all payments were made, and the case was concluded. No legal proceedings were reported as pending in Part II of the filing.
- Management reported that disclosure controls and internal control over financial reporting were effective as of June 30, 2015, with no material changes during the quarter.
Important Facts for Investors to Verify
- Whether the company can obtain the additional debt or equity financing required to continue operations.
- Whether legacy royalty revenue remains near 2014 levels and whether the VDF FutureCeuticals license terminates as scheduled in March 2018.
- Whether the reacquired biotech intellectual property and clean-energy technology generate commercial revenue.
- The maturity, interest, collateral, and related-party nature of the company’s approximately $400,000 principal note and other obligations.
- The collectibility and November 14, 2015 maturity of the $38,000 note receivable assigned in the intellectual-property transaction.
- The company’s recurring losses, stockholders’ deficiency, limited cash balance, and stated going-concern uncertainty.
- Potential dilution from 4,751,000 outstanding warrants and 2,750,000 outstanding stock options excluded from diluted share calculations because their effect was anti-dilutive.