374Water Inc. (formerly PowerVerde, Inc.) — Form 10-Q Summary
Business context and reporting period
The filing is for the quarterly period ended June 30, 2012. The registrant identified in the filing is PowerVerde, Inc., a development-stage company focused on developing, testing, and commercializing clean-energy electric power-generation systems. The filing states that none of the company’s planned principal operations had commenced and that historical revenue remained limited. The company reported 28,169,565 common shares outstanding as of August 13, 2012.
Financial condition and results
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 |
|---|---|---|
| Revenue | $29,922 | $44,357 |
| Gross profit | $29,922 | $44,357 |
| Gross margin | 100.0% | 100.0% |
| Operating loss | $(536,762) | $(1,320,602) |
| Net loss | $(540,479) | $(1,327,963) |
| Basic and diluted loss per share | $(0.02) | $(0.05) |
| Cash used in operating activities | Not separately provided | $(627,979) |
- All second-quarter and first-half 2012 revenue came from licensing fees related to the company’s legacy biotech intellectual property; no material revenue came from the current clean-energy business.
- Research and development expense was $295,251 in the quarter and $872,287 for the six months. General and administrative expense was $271,433 and $492,672, respectively.
- Cash and cash equivalents were $100,051 at June 30, 2012, compared with $7,530 at December 31, 2011.
- Current assets were $170,674 and current liabilities were $617,101, producing a working-capital deficit of $446,427. Current liabilities included $548,263 payable to related parties. No long-term liabilities were reported at June 30, 2012.
- Total assets increased to $3.43 million, primarily because of the Cornerstone acquisition, which added $604,487 of net intellectual property and $2.64 million of goodwill.
- Stockholders’ equity was $2.81 million at June 30, 2012, compared with a deficiency of $293,777 at December 31, 2011, principally reflecting stock issued in financing and the Cornerstone acquisition.
Material changes versus the prior comparable period
- Second-quarter revenue increased 45.5% from $20,553 to $29,922, but the 2012 amount consisted entirely of biotech intellectual-property licensing fees; 2011 included $7,221 from the current business.
- Six-month revenue increased from $30,991 to $44,357, while six-month revenue from the current business declined to zero from $7,221.
- Second-quarter research and development expense decreased 17.7%, and general and administrative expense decreased 69.9%, resulting in a 56.8% reduction in net loss from $1.25 million to $540,479.
- For the six months, research and development expense increased 56.1%, primarily due to the Cornerstone intellectual property and a $262,700 warrant expense related to settlement of disputed amounts with Newton. General and administrative expense decreased 56.4%, and net loss declined 19.3% from $1.65 million to $1.33 million.
- On March 30, 2012, the company acquired Cornerstone Conservation Group LLC for 2.26 million shares valued at $3.096 million and warrants valued at $201,000. Cornerstone contributed CCHP and geothermal technology; acquisition accounting remained preliminary.
- The company issued 835,000 common shares for $835,000 of gross proceeds during the first half, including $500,000 in the first quarter and $335,000 in the second quarter. Second-quarter investors also received three-year warrants exercisable at $3.00 per share.
- Total outstanding warrants increased from 4,294,999 at December 31, 2011, to 5,429,999 at June 30, 2012, with a weighted-average exercise price of $1.14.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that substantial losses would continue until the company successfully commercializes and markets its systems, with no assurance that commercialization will occur.
- The company disclosed recurring operating losses, negative operating cash flow, and uncertainty regarding additional financing, creating substantial doubt about its ability to continue as a going concern. Management estimated that existing working capital would fund operations for approximately two months and stated that failure to raise substantial additional capital could require the company to cease operations.
- The company remains a development-stage business with significant risks related to research and development, commercialization, patent protection, competition, and dependence on external financing.
- The Newton license grants exclusive manufacturing and distribution rights in 27 European Union countries for 10 years, subject to minimum sales and other conditions, including a requirement for at least 100 systems annually beginning in the second year.
- The company temporarily used a 5,000-square-foot Scottsdale, Arizona facility owned by a Cornerstone seller without rent and expected to negotiate a fair-market lease.
- The company repurchased 550,000 shares from an affiliate during 2012 for $115,000. Of that amount, $70,000 remained payable to a related party at June 30, 2012.
- Subsequent to quarter-end, the company raised $71,000 through an additional private placement of 71,000 shares and related warrants. This financing is not included in the June 30, 2012 balance sheet.
- No legal proceedings, defaults upon senior securities, or material changes to previously disclosed risk factors were reported. Management stated that disclosure controls and procedures were effective.
Important facts investors should verify
- Verify the registrant’s corporate identity and relationship to 374Water Inc.; the filing itself names PowerVerde, Inc. and describes a different historical business and corporate structure.
- Assess whether the company obtained sufficient financing after the stated approximately two-month liquidity horizon and whether it remained a going concern.
- Review the preliminary valuation and impairment risk of the $2.64 million goodwill balance and $604,487 intellectual-property balance recorded for Cornerstone.
- Evaluate the absence of meaningful current-business revenue and the feasibility, timing, and funding requirements for commercialization.
- Review dilution exposure from 28.1 million shares outstanding, 5.43 million warrants, stock options, and additional equity financing.
- Examine related-party payables, the Newton settlement and license terms, and the planned lease with a Cornerstone seller.