374Water Inc. (formerly PowerVerde, Inc.) — Form 10-Q Summary
Business Context and Reporting Period
Filed November 14, 2011, for the quarterly and nine-month periods ended September 30, 2011. The filing identifies the registrant as PowerVerde, Inc., a development-stage company focused on clean-energy electric power-generation systems. The company has historically operated at a loss and has relied primarily on equity financing, licensing revenue, and debt. The financial statements consolidate PowerVerde, Inc. and its wholly owned subsidiary.
Financial Performance and Position
| Metric | Three months ended September 30, 2011 | Nine months ended September 30, 2011 | Comparable 2010 period |
|---|---|---|---|
| Revenue | $143,491 | $174,482 | $9,805 and $28,492, respectively |
| Gross profit | $13,491 | $37,557 | $9,805 and $28,492, respectively |
| Gross margin | Approximately 9.4% | Approximately 21.5% | 100% in both periods, based on reported cost of goods sold |
| Operating loss | $(522,816) | $(2,188,588) | $(62,936) and $(234,455), respectively |
| Net loss | $(526,318) | $(2,171,589) | $(62,936) and $(234,455), respectively |
| Basic and diluted loss per share | $(0.02) | $(0.08) | $(0.01) in each comparable period |
| Cash used in operating activities | Not separately provided | $(1,241,902) | $(261,236) |
- Third-quarter revenue included $130,000 from delivery of the company’s initial system to Newton and $13,491 of Biotech intellectual-property licensing fees. Nine-month revenue included $137,221 from the current business and $37,261 from Biotech licensing.
- Research and development expense was $1,430,599 for the nine months, and general and administrative expense was $795,546. Nine-month expenses included $612,150 for warrants issued for services and $415,907 of stock-based compensation.
- Cash and cash equivalents were $234,802 at September 30, 2011, compared with $15,646 at December 31, 2010. Working capital was $196,794, compared with a working-capital deficit of $132,895 at year-end 2010.
- Total assets were $288,195, total liabilities were $251,096, and stockholders’ equity was $37,099 at September 30, 2011.
- Liabilities included $177,416 payable to a related party and $73,680 of accounts payable and accrued expenses. The filing also describes a $200,000 related-party obligation, discounted for imputed interest, due no later than April 7, 2013, subject to earlier payment triggers.
- The company had no inventory at September 30, 2011.
- Cash provided by financing activities was $1,472,250 for the first nine months, primarily reflecting $1,500,000 of gross private-placement proceeds and $122,250 from warrant exercises, less $150,000 of stock-issuance costs.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially from $9,805 to $143,491 in the third quarter and from $28,492 to $174,482 for the nine months, primarily because of the Newton system sale and higher licensing revenue.
- Cost of goods sold increased to $130,000 in the third quarter and $136,925 for the nine months, resulting in positive but substantially lower gross margins than in 2010.
- Net loss increased from $62,936 to $526,318 for the quarter and from $234,455 to $2,171,589 for the nine months. Management attributed the increase principally to higher engineering payroll, professional fees, advertising, travel, warrant compensation, and stock-option compensation.
- Operating cash use increased to $1,241,902 from $261,236 for the comparable nine-month period.
- Capitalization changed materially: the company issued 2,000,000 common shares in a private placement, issued substantial warrants and options, exercised 81,500 warrants, and placed 4,500,000 shares into treasury in exchange for a related-party payable. Shares outstanding were 25,624,565 at November 14, 2011.
- Management changes included the August 2011 resignation of George Konrad as chief executive officer and chief financial officer and the appointment of Richard H. Davis as chief executive officer and John L. Hofmann as chief financial officer.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that available working capital was expected to support current operations through at least the end of 2011, but that substantial additional capital would be required. The company warned that failure to obtain funding could force it 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.
- On September 29, 2011, the company entered into a 10-year exclusive European manufacturing and distribution license with Newton covering 27 European Union countries. Newton must achieve minimum sales of 100 systems annually beginning in the second year and pay royalties equal to 20% of gross system sales.
- The company was negotiating a settlement with Newton regarding disputed costs and expenses. Management expected the resolution not to have a material effect, but the filing does not provide a final settlement amount.
- On November 1, 2011, the company signed a non-final letter of intent to acquire Cornerstone Conservation Group LLC. Consideration would include 2,260,000 common shares and warrants for 300,000 shares. The transaction remained subject to definitive documentation and could be terminated if documentation was not completed by December 31, 2011.
- The company issued 4,344,999 warrants outstanding at September 30, 2011, with a weighted-average exercise price of $0.90, and had 1,950,000 stock options outstanding with a weighted-average exercise price of $0.91. Further stock-based compensation of $721,909 remained to be recognized over 18 months.
- Management reported no material changes to the risk factors in the 2010 annual report, no legal proceedings, and effective disclosure controls and procedures.
Important Facts for Investors to Verify
- Verify the registrant’s current legal name and corporate identity, as the filing uses PowerVerde, Inc., while the request identifies 374Water Inc.
- Verify whether the company obtained sufficient financing after September 30, 2011, given the explicit going-concern warning and projected need for additional capital.
- Verify the final status and economics of the Newton license, including minimum-sales requirements, royalty payments, and the disputed-cost settlement.
- Verify whether the proposed Cornerstone acquisition closed, was terminated, or was modified, and quantify the resulting dilution.
- Reconcile the company’s cash balance with its continuing operating cash burn and related-party obligations.
- Assess the effect of outstanding warrants, options, treasury shares, and remaining stock-based compensation on future dilution and reported losses.