Business Context and Reporting Period
This Form 10-Q covers the quarter ended March 31, 2014, and was filed under the registrant name PowerVerde, Inc. The request identifies the company as 374Water Inc.; the filing describes a development-stage company focused on clean-energy electric power-generation systems. The company states that its planned principal operations had not commenced and that it historically relied on equity, licensing revenue, and debt financing.
Financial Results and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $40,154 | $71,487 | Down 43.9% |
| Gross profit | $40,154 | $71,487 | Down 43.9% |
| Research and development | $151,481 | $236,157 | Down 35.9% |
| General and administrative | $153,435 | $452,677 | Down 66.1% |
| Loss from operations | $(264,762) | $(617,347) | Improved 57.1% |
| Net loss | $(285,950) | $(596,335) | Improved 52.1% |
| Net loss per share | $(0.01) | $(0.02) | |
| Cash used in operating activities | $(237,349) | $(107,551) | Higher use of $129,798 |
- All reported quarterly revenue consisted of biotech intellectual-property licensing fees; there were no sales of clean-energy systems. Gross margin was 100% because no cost of goods sold was recorded. Operating and net margins were approximately negative 659% and negative 712%, respectively.
- Cash and cash equivalents were $37,366 at March 31, 2014, versus $48,306 at December 31, 2013. Working capital was negative $386,459, compared with negative $385,872 at year-end 2013.
- Total liabilities were $493,200, including $324,726 of notes payable to related parties and $46,965 payable to related parties. Stockholders’ deficiency was reported as $101,621 on the balance sheet.
- The company raised $240,000 through a private placement of 2.4 million unregistered shares at $0.10 per share. Shares outstanding increased from 27,600,106 at December 31, 2013 to 30,000,106 at March 31, 2014.
Material Changes Versus the Prior Comparable Period
- Revenue declined by $31,333, reflecting lower licensing fees. Management stated that 2014 biotech intellectual-property revenue was expected to approximate 2013 levels, but provided no firm forecast.
- Research and development expense declined by $84,676 because the company was testing rather than building new generator systems.
- General and administrative expense declined by $299,242, primarily because of lower employee and consultant compensation, including stock-based compensation.
- Interest expense increased to $21,188 from $19,738, while prior-year other income of $40,750 was not repeated. Consequently, total other income of $21,012 in Q1 2013 became other expense of $21,188 in Q1 2014.
- Operating cash use increased substantially despite the lower net loss, and available cash declined during the quarter.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that substantial losses would continue until the company successfully commercializes and markets its products, for which there can be no assurance.
- The company disclosed recurring operating losses, negative operating cash flow, a working-capital deficit, and uncertainty regarding its ability to secure additional funding. Management stated that it needs to raise substantial additional capital promptly and could be forced to cease operations if funding is unavailable.
- The financial statements include a going-concern uncertainty and do not reflect adjustments that could result from its resolution.
- Technical problems with the company’s systems continued; the minimum-sales requirement under the European license agreement was deferred until those problems are resolved.
- Related-party secured notes bear 10% interest, with the principal generally due December 31, 2014. A separate $30,000 shareholder note was extended in May 2014 to May 19, 2015.
- In May 2014, the company settled a former employee lawsuit for $30,088. If settlement payments are not made, the employee may obtain a consent judgment for $60,000 less amounts paid.
- The company reported 6,252,667 outstanding warrants and 2,750,000 outstanding stock options, which could create future dilution. Warrants for 1,333,333 shares expired during the quarter.
- The filing states that disclosure controls and internal control over financial reporting were effective, but also refers to material weaknesses that continued during the quarter. This presentation should be reviewed against the complete controls disclosure.
Investor Verification Items
- Verify the registrant’s corporate identity and any subsequent name change from PowerVerde, Inc. to 374Water Inc.
- Reconcile the balance-sheet presentation of stockholders’ deficiency: the balance sheet shows $(101,621), while the stockholders’ equity statement text reports total stockholders’ equity of $101,621.
- Assess near-term liquidity, maturity and terms of related-party debt, and the feasibility and dilution impact of additional financing.
- Determine whether technical issues affecting the clean-energy systems have been resolved and whether commercialization or product-sales revenue has begun.
- Review the May 2014 litigation settlement and the potential $60,000 consent judgment.
- Reconcile the stated effectiveness of internal controls with the disclosure that material weaknesses continued.