Business Context and Reporting Period
This filing is a Form 10-K for the fiscal year ended December 31, 2012, filed May 16, 2013. The filing identifies the registrant as PowerVerde, Inc., not 374Water Inc.; investors should verify the company identity and any successor-name relationship.
PowerVerde was a development-stage company developing zero-emission electric-generation systems using waste heat, solar thermal energy and related pressure-driven technologies. The natural-gas pipeline product line was suspended so resources could be focused on waste-heat systems. The company had not commenced planned principal operations and had generated no material product-sales revenue.
In March 2012, PowerVerde acquired Cornerstone Conservation Group LLC, obtaining combined cooling, heating and power and geothermal-related technology. The consideration included 2.26 million shares and warrants valued at approximately $201,000.
Financial Performance and Position
| Metric | 2012 | 2011 | Change or comment |
|---|---|---|---|
| Revenue | $193,692 | $193,391 | Essentially flat; 2012 revenue was primarily Biotech IP licensing fees. |
| Gross profit | $193,692 | $56,466 | 2011 included $136,925 of cost of goods sold; no cost of goods sold was reported in 2012. |
| Research and development expense | $1,321,214 | $994,619 | Increased 33%. |
| General and administrative expense | $978,818 | $1,628,739 | Decreased 40%. |
| Goodwill impairment | $2,637,760 | — | One-time charge related to the Cornerstone acquisition. |
| Net loss | $(4,755,050) | $(2,553,465) | Loss increased substantially, primarily because of the goodwill impairment. |
| Basic and diluted loss per share | $(0.18) | $(0.10) | Weighted-average shares were 27.1 million in 2012 versus 26.3 million in 2011. |
| Cash used in operating activities | $(1,044,105) | $(1,469,173) | Operating cash use declined but remained significant. |
| Cash and cash equivalents at year-end | $45,283 | $7,530 | Very limited liquidity. |
| Working capital deficit | $72,721 | $128,598 | Deficit narrowed but remained negative. |
At December 31, 2012, total assets were $711,750, including $494,580 of net intellectual property. Total liabilities were $532,949, including $280,332 of current liabilities, $184,367 of notes payable to related parties and a $68,250 derivative liability.
The company raised gross proceeds of $1,723,031 during 2012 through private securities offerings, including $1,398,031 from common-stock issuances and $325,000 from secured promissory notes. Financing cash inflows were offset by operating cash use, treasury-stock purchases and stock-issuance costs, leaving only $45,283 of cash at year-end.
The company reported cumulative development-stage losses of $9,611,805 through December 31, 2012 and had no income-tax provision. Deferred tax assets of $3,817,895 were fully offset by a valuation allowance.
Material Changes Versus the Prior Comparable Period
- Revenue was effectively unchanged, but its source remained licensing income rather than commercial system sales.
- Research and development spending increased by $326,595 as the company worked to improve the durability and continuous-operation capability of its Liberator waste-heat system.
- General and administrative expense declined by $649,921 because of reduced European activity and cost controls.
- The company recognized a $2,637,760 goodwill impairment after the Cornerstone managing member resigned as an officer and director in the first quarter of 2013. Goodwill was reduced to zero.
- The Cornerstone acquisition added intellectual property and increased equity issuance and dilution. The company issued 2.26 million shares and 300,000 acquisition warrants.
- Year-end warrants outstanding increased to 6,050,999, with a weighted-average exercise price of $1.12; 2,750,000 stock options were also outstanding.
- Disclosure controls and internal control over financial reporting were determined to be ineffective because of a material weakness in the control environment and monitoring of accounting operations.
Guidance, Outlook, Risks and Unusual Items
Management expected to complete development and testing of the waste-heat system by summer 2013 and target a market-ready system by year-end 2013. Management also stated that it expected the system eventually to operate for approximately 25,000 hours, or about three years, without major mechanical failure. These are forward-looking objectives, not assurances.
Newton Investments BV held exclusive European manufacturing and distribution rights for ten years, subject to minimum sales requirements and a royalty to PowerVerde equal to 20% of gross system sales. Newton had not sold any systems because of continuing technical problems, and the minimum sales quotas had been deferred.
- The company stated that it needed to raise substantial additional capital promptly and that, without financing, it might be forced to cease operations.
- The independent auditor reported substantial doubt about the company’s ability to continue as a going concern because of recurring losses, negative operating cash flows, a working-capital deficit and uncertainty regarding additional funding.
- The company had not generated material product revenue and had sold only one discounted Liberator system, to Newton for $130,000 in 2011.
- Commercialization remained dependent on resolving mechanical durability and continuous-operation problems, obtaining customers, securing manufacturing and distribution arrangements, and competing with substantially better-funded companies.
- Demand could be affected by energy prices, interest rates, customer access to project financing, regulatory requirements and the availability of renewable-energy incentives.
- A former chief technical officer sued the company for alleged breach of an employment agreement, seeking $37,500 of back pay, $5,012 of expenses and unspecified damages. Management believed it had substantial defenses and did not expect a material impact.
- The company used a facility owned by a former director and officer at $700 per month without a signed lease, creating a related-party and continuity risk.
- In the first quarter of 2013, the company raised an additional $75,000 through secured promissory notes and issued related warrants. It also granted substantial warrants to its chief executive and chief financial officer.
Important Facts for Investors to Verify
- Confirm whether this PowerVerde filing is the intended filing for 374Water Inc. and reconcile the registrant name, ticker and corporate history.
- Review the auditor’s going-concern statement and the company’s ability to secure financing after year-end.
- Verify actual cash balances, current liabilities, related-party payables, note maturities and collateral arrangements.
- Assess the commercial readiness, durability testing and independent performance evidence for the Liberator waste-heat system.
- Review the dilution impact of 6.05 million outstanding warrants, 2.75 million options and subsequent 2013 equity awards.
- Examine the Cornerstone acquisition valuation, the goodwill impairment and the remaining value and enforceability of acquired intellectual property.
- Evaluate the material weakness in internal control and whether remediation was completed in subsequent filings.
- Track the Newton license, deferred sales quotas, European commercialization progress and any actual system orders.
- Review the former technical officer’s litigation, the Konrad settlement balance and other related-party transactions.