Business Context and Reporting Period
374Water Inc. (formerly PowerVerde, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. Following an April 16, 2021 reverse merger, the Company’s principal business shifted to developing and commercializing AirSCWO supercritical water oxidation systems for municipal and organic waste processing. The Company has generated no material revenue from its planned principal operations since inception.
Financial Highlights
| Metric | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 |
|---|---|---|
| Revenue | $14,600 | $14,600 |
| Total operating expenses | $1,889,231 | $1,955,782 |
| Net loss | $1,847,308 as presented | $1,940,858 |
| Net loss per share | $0.02 | $0.03 |
| Net cash used in operating activities | Not separately presented | $472,286 |
- Revenue consisted of manufacturing assembly, consulting, and advisory services; the filing states that six-month revenue was generated from one manufacturing assembly service and two consulting and advisory agreements.
- Major six-month expenses included product development of $1,399,833, research and development of $153,860, compensation and related expenses of $177,666, and professional fees of $160,638.
- The $1,399,833 product-development expense represented the fair value of warrants issued to a strategic partner.
- Cash was $6,295,015 at June 30, 2021, compared with $71,799 at December 31, 2020. Working capital was $6,142,238, compared with $10,572 at December 31, 2020.
- Six-month financing cash inflows were $6,686,982, primarily consisting of $6,551,745 from the Series D preferred-stock offering and $150,345 from option and warrant exercises.
- Total liabilities were $175,010 at June 30, 2021. The filing does not report outstanding debt at period-end; it states that convertible debt notes and accrued interest were converted into equity in connection with the merger.
- Series D preferred stock comprised 440,125 shares with a stated conversion price of $0.30 per common share and a liquidation preference of approximately $6.6 million. If fully converted, the preferred stock would represent 22,006,250 common shares.
Material Changes Versus Prior Comparable Period
- Revenue increased from zero to $14,600 for both the quarter and six-month period.
- Six-month net loss increased from $895 in 2020 to $1,940,858 in 2021, reflecting the post-merger development and commercialization program and increased public-company costs.
- Six-month operating expenses increased from $2,895 to $1,955,782. The principal new costs were product development, research and development, compensation, professional fees, and general and administrative expenses.
- Cash increased by $6,223,216 during the first half of 2021, primarily due to the preferred-stock financing.
- Common shares outstanding increased from 62,410,452 at December 31, 2020 to 98,391,746 at June 30, 2021. The filing reported 98,391,545 shares outstanding as of August 16, 2021.
- The Company recorded a $1,073,369 intangible asset for a worldwide license from Duke University, paid through the issuance of common stock. The license has an estimated 17-year life.
- In April 2021, the Company issued warrants for 3,783,333 common shares at $0.30 per share, expiring in March 2022, in connection with a product development and strategic relationship.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects substantial net losses until the Company successfully commercializes and markets its systems, but states that successful commercialization is not assured.
- Management believes the preferred-stock financing will provide sufficient cash to meet obligations for at least the next 12 months. The filing cautions that additional financing may nevertheless be required and may not be available on commercially reasonable terms or at all.
- The filing states that the financing and equity conversions mitigated conditions that had historically raised substantial doubt about the Company’s ability to continue as a going concern.
- On July 7, 2021, the Company entered into a three-year Manufacturing and Service Agreement with Merrell Bros. Fabrication, which became the exclusive U.S. and Canadian supplier and service provider for the AirSCWO products, subject to termination rights and renewal provisions.
- The Duke license requires royalties based on licensed product sales and sublicensing fees, as well as reimbursement of ongoing patent expenses. No license-related expenses were incurred during the reported periods.
- Key risks include dependence on successful research, development, manufacturing, and commercialization; patent and licensing risks; competition; limited operating history and revenue; financing needs; and political, economic, regulatory, tax, interest-rate, and technology changes.
- Management concluded that disclosure controls and internal control over financial reporting were not effective. Reported material weaknesses included insufficient management review, inadequate segregation of duties and accounting resources, and ineffective entity-level controls, including the absence of an audit committee.
- The filing reports no legal proceedings, defaults upon senior securities, or material market-risk disclosures.
Important Facts for Investors to Verify
- Confirm the terms, conversion mechanics, voting rights, and liquidation preference of the Series D preferred stock and the resulting potential dilution.
- Reconcile the filing’s inconsistent presentation of second-quarter net loss: the statements show net loss of $1,847,308, while the reported loss before taxes is $1,874,308.
- Evaluate whether the $6.3 million cash balance is sufficient to fund planned AirSCWO development, manufacturing, commercialization, and operating losses.
- Review the 3,783,333 outstanding warrants, 12,572,000 options, and 22,006,250 potential preferred-stock conversion shares for dilution and expiration risk.
- Assess the status and economics of the Duke license and the Merrell Bros. manufacturing and service agreement, including royalties, exclusivity, termination rights, and execution requirements.
- Monitor remediation of the disclosed material weaknesses in disclosure controls and internal control over financial reporting.
- Verify the post-merger ownership structure, share counts, and accounting treatment of the reverse acquisition.