Business Context and Reporting Period
Registrant: PowerVerde, Inc. and subsidiary, identified in the request metadata as 374Water Inc. The filing covers the three and six months ended June 30, 2014, and was filed August 12, 2014. The company remained a development-stage entity focused on developing and commercializing clean-energy electric power systems. Principal operations had not commenced, and reported revenue continued to come solely from legacy biotech intellectual-property licensing fees.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $125,975; 2013: $109,416 | $166,129; 2013: $180,903 |
| Gross profit | $125,975; 2013: $109,416 | $166,129; 2013: $180,903 |
| Operating loss | $(87,027); 2013: $(157,816) | $(351,789); 2013: $(775,163) |
| Net loss | $(129,395); 2013: $(175,837) | $(415,345); 2013: $(772,172) |
| Net loss per share | $(0.004); 2013: $(0.01) | $(0.01); 2013: $(0.03) |
| Cash used in operations | $(333,812); 2013: $(82,518) |
- Reported gross margin was 100% in both 2014 periods because no cost of goods sold was recorded; the revenue consisted of licensing fees rather than product sales.
- Research and development expense was $111,115 in the second quarter and $262,596 for the first six months. General and administrative expense was $101,887 and $255,322, respectively.
- Cash and cash equivalents declined to $8,403 at June 30, 2014, from $48,306 at December 31, 2013.
- Working capital deficit was $389,626 at June 30, 2014, compared with $385,872 at year-end 2013.
- Total liabilities were $555,020, including $356,719 of notes payable to related parties, $126,336 of accounts payable and accrued expenses, and $71,965 payable to related parties.
- Stockholders’ deficiency increased to $(163,516) from $(55,671) at December 31, 2013.
- The company had 30,750,106 common shares outstanding as of August 12, 2014. It also reported 5,586,000 outstanding warrants and 2,750,000 outstanding stock options excluded from diluted share calculations because their effect was anti-dilutive.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 15.1% from 2013, but six-month revenue decreased 8.2%; management stated that all revenue came from biotech intellectual-property licensing fees and that there were no system sales.
- Second-quarter operating loss improved by $70,789, primarily because general and administrative expense declined by $87,939, partly offset by a $33,710 increase in research and development expense associated mainly with litigation settlement costs.
- Six-month operating loss improved by $423,374. Research and development expense declined 16.3%, and general and administrative expense declined 60.3%, primarily due to lower employee and consultant compensation, including stock-based compensation.
- Six-month net loss improved 46.2%, from $772,172 to $415,345.
- Operating cash burn increased substantially to $333,812 from $82,518, despite the lower net loss, reflecting changes in working capital and other cash items.
- The company issued 3,150,000 shares during the first six months at $0.10 per share, raising net proceeds of $307,500 after issuance costs. The issuance increased shares outstanding from 27,600,106 at year-end 2013 to 30,750,106 at June 30, 2014.
Guidance, Outlook, Risks, and Unusual Items
- Management expected 2014 biotech intellectual-property revenue to approximate 2013 levels, but provided no assurance that this level would be achieved.
- 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 arising from recurring operating losses, negative operating cash flow, and uncertainty regarding additional financing.
- The company’s $400,000 secured related-party notes bear 10% annual interest and mature December 31, 2014; accounts receivable from the licensing agreement serve as collateral upon specified defaults. A separate $30,000 related-party note was extended to May 19, 2015.
- On July 30, 2014, after the reporting period, Newton Investments BV terminated the company’s exclusive European manufacturing and distribution license. The filing attributes the relationship to ongoing technical problems with the systems.
- A former chief technical officer’s litigation was settled in May 2014 for $30,088; the filing states that all settlement payments had been made and the case was concluded.
- Intellectual property had a net carrying value of $164,860 at June 30, 2014, with $164,860 of remaining scheduled amortization through 2015. No impairment loss was recorded during the six months.
- The filing states that the company’s disclosure controls and internal control over financial reporting were effective, with no material changes during the quarter.
Key Facts for Investors to Verify
- Verify the registrant-name discrepancy between the requested company, 374Water Inc., and the filing’s stated registrant, PowerVerde, Inc.
- Confirm the effect of Newton’s July 30, 2014 license termination on future licensing revenue, intellectual-property value, and collateral supporting related-party debt.
- Assess whether the company obtained financing after June 30, 2014 and whether available liquidity was sufficient to address the going-concern uncertainty and December 31, 2014 debt maturity.
- Review the composition, collectibility, and concentration of the $125,975 accounts receivable balance.
- Evaluate dilution from the 3,150,000 shares issued in the first half of 2014 and the 5,586,000 warrants and 2,750,000 options outstanding.
- Reconcile the reported licensing revenue with the absence of product sales and the company’s continuing statement that principal clean-energy operations had not commenced.