Form 10-Q Summary
Filing entity and period: The filing identifies the registrant as PowerVerde, Inc. and its wholly owned subsidiary, PowerVerde Systems, Inc., formerly known as Vyrex Corporation and PowerVerde, Inc. The requested metadata identifies 374Water Inc.; the filing text does not use that name. The report covers the three and six months ended June 30, 2013, and was filed August 9, 2013. The company was classified as a development-stage company and reported 26.9 million common shares outstanding at June 30, 2013 and 27.5 million as of August 9, 2013.
Business Context and Reporting Period
The company focused on developing, testing, and commercializing clean-energy electric power-generation systems, including applications involving thermal and natural-gas pipeline operations. Planned principal operations had not commenced. Revenue consisted of licensing fees from legacy biotechnology intellectual property; the company reported no product sales in either comparable period.
Financial Metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $109,416 | $29,922 | $180,903 | $44,357 |
| Gross profit | $109,416 | $29,922 | $180,903 | $44,357 |
| Research and development | $77,405 | $295,251 | $313,562 | $872,287 |
| General and administrative | $189,827 | $271,433 | $642,504 | $492,672 |
| Operating loss | $(157,816) | $(536,762) | $(775,163) | $(1,320,602) |
| Net loss | $(175,837) | $(540,479) | $(772,172) | $(1,327,963) |
| Loss per share | $(0.01) | $(0.02) | $(0.03) | $(0.05) |
| Cash used in operating activities | Not separately provided | Not separately provided | $(82,518) | $(627,979) |
Reported gross margin was 100% because no cost of goods sold was recorded in the current periods; the revenue was licensing revenue rather than product sales, so this margin is not representative of a commercial product operation.
- Cash and cash equivalents were $106,861 at June 30, 2013, compared with $45,283 at December 31, 2012.
- Total assets were $722,208, including $384,673 of net intellectual property and $61,946 of net property and equipment.
- Total liabilities were $718,092, leaving stockholders’ equity of only $4,116. The filing’s balance-sheet presentation of additional paid-in capital appears as “10,875.735”; the equity statement presents the corresponding amount as $10,875,735.
- Working capital was negative $155,075 at June 30, 2013, compared with negative $72,721 at December 31, 2012.
- Current liabilities were $430,664, including $258,166 of accounts payable and accrued expenses and $172,498 payable to related parties. Long-term liabilities included $247,428 payable to related parties and a $40,000 derivative liability.
- The company raised $125,000 from a private placement of 500,000 shares at $0.25 per share during the second quarter. It also raised $75,000 through secured promissory notes in the first quarter.
- The secured notes had an aggregate principal amount of $400,000 at June 30, 2013, bore 10% annual interest, and were due December 31, 2014. The company paid $20,705 of accrued interest during the second quarter.
- Warrants outstanding increased to 7,339,333, and 2,750,000 stock options remained outstanding. Potentially dilutive securities were excluded from diluted loss per share because their effect would have been anti-dilutive.
Material Changes Versus Prior Comparable Period
- Quarterly revenue increased 265.7% to $109,416, and six-month revenue increased 307.7% to $180,903, driven by higher biotechnology intellectual-property licensing fees.
- Quarterly research and development expense declined 73.8%, primarily because the company was testing existing generator systems rather than designing new systems.
- Six-month research and development expense declined 64.1%, while six-month general and administrative expense increased 30.4%, mainly because of employee and consultant compensation, including stock-based compensation recognized in the first quarter.
- Quarterly net loss decreased 67.5%, and six-month net loss decreased 41.9%.
- Operating cash outflow improved to $82,518 from $627,979, but the company continued to consume cash from operations.
- Liabilities increased from $532,949 at December 31, 2012 to $718,092 at June 30, 2013, while stockholders’ equity declined from $178,801 to $4,116.
Outlook, Risks, Contingencies, and Unusual Items
Management expected 2013 biotechnology intellectual-property revenue to exceed 2012 levels but provided no quantified formal guidance. Management stated that substantial additional capital was needed promptly to fund operations and warned that failure to obtain financing could force the company to cease operations.
- The financial statements include a going-concern uncertainty arising from recurring operating losses, negative operating cash flows, and uncertainty about securing additional funding.
- The company continued to experience technical problems with its systems. Minimum sales requirements under its European Union license agreement were deferred until those problems were resolved.
- The company’s $2,637,760 of goodwill from the 2012 Cornerstone acquisition was written off in 2012; the remaining intellectual-property asset was $384,673 at June 30, 2013 and is subject to amortization.
- The company recognized $121,237 of stock-based compensation and issued 1,575,000 warrants during the first six months of 2013, including 1.5 million warrants issued to the chief executive and chief financial officers.
- Disclosure controls and procedures were concluded to be ineffective. Management identified a material weakness involving the control environment and ineffective review, supervision, monitoring, and accounting-operation procedures.
- In the third quarter of 2013, the company raised an additional $150,000 through the sale of 600,000 shares at $0.25 per share. In August 2013, $83,000 of convertible related-party debt was extended to October 16, 2013, with the amount due increased to $95,000.
- No material legal proceedings or material changes to previously disclosed risk factors were reported.
Investor Verification Checklist
- Confirm the registrant identity and corporate name, because the filing states PowerVerde, Inc., while the request identifies 374Water Inc.
- Reconcile the apparent formatting inconsistency in additional paid-in capital between the balance sheet and stockholders’ equity statement.
- Assess whether current cash of $106,861 and subsequent financing are sufficient to cover the $155,075 working-capital deficit and ongoing operating losses.
- Review the terms, collateral provisions, maturity dates, and related-party status of the secured notes and other related-party payables.
- Evaluate the technical status and commercialization prospects of the electric power systems, including the deferred European Union minimum-sales requirement.
- Monitor remediation of the disclosed material weakness in internal control over financial reporting.
- Consider dilution from 7,339,333 outstanding warrants, 2,750,000 options, and additional private-placement activity.