Business Context and Reporting Period
PowerVerde, Inc. (the filing entity; now identified in the request as 374Water Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The company remained a development-stage enterprise focused on developing and commercializing clean-energy electric power systems, including technology acquired from Cornerstone Conservation Group LLC. Planned principal operations had not commenced, and historical revenue remained limited.
The company reported 26,015,565 common shares outstanding as of November 19, 2012. The March 2012 Cornerstone acquisition added intellectual property and goodwill, with consideration consisting primarily of 2,260,000 common shares and warrants.
Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 | Change vs. Prior Period |
|---|---|---|---|
| Revenue | $33,649 | $78,006 | Q3: down 76.6%; nine months: down 55.3% |
| Gross profit | $33,649 | $78,006 | Prior periods: $13,491 and $37,557 |
| Operating loss | $(371,626) | $(1,692,229) | Q3 improved 28.9%; nine months improved 22.7% |
| Net loss | $(375,418) | $(1,703,381) | Q3 improved 28.7%; nine months improved 21.6% |
| Basic and diluted loss per share | $(0.01) | $(0.06) | Prior periods: $(0.02) and $(0.08) |
| Operating cash flow | Not provided for the quarter | $(760,388) | Prior nine-month period: $(1,241,902) |
All 2012 revenue came from legacy Biotech intellectual-property licensing fees; the filing states that the current clean-energy business generated no revenue. Gross margin was 100% in the 2012 periods because no cost of goods sold was recorded, compared with approximately 9.4% in the 2011 third quarter and 21.5% for the first nine months of 2011.
- Research and development expense was $124,612 in the third quarter and $996,900 for the first nine months. Nine-month expense increased 25.3% year over year, primarily because of the Cornerstone acquisition and a $262,700 warrant expense related to settlement of disputed amounts with Newton Investments B.V.
- General and administrative expense was $280,663 in the third quarter and $773,335 for the first nine months. Nine-month expense decreased 45.9% year over year.
- Cash and cash equivalents were $19,542 at September 30, 2012, compared with $7,530 at December 31, 2011. Restricted cash held in trust was $403,330.
- Working capital was negative $570,170 at September 30, 2012, compared with negative $128,598 at year-end 2011.
- Total assets were $3.69 million, including $2.64 million of goodwill and $549,533 of net intellectual property. Total liabilities were $1.06 million, including $356,155 of accounts payable and accrued expenses, $297,755 payable to related parties, and a $403,330 trust liability.
- The balance sheet does not report a separate long-term debt balance at September 30, 2012, although related-party obligations included a discounted $188,349 note payable associated with treasury shares and other related-party amounts.
- Financing activities provided $772,400 during the first nine months, including $906,000 of gross proceeds from common-stock sales, offset by $90,600 of stock issuance costs and $43,000 used to purchase treasury stock.
Material Changes Versus the Prior Comparable Period
- Revenue declined substantially because 2012 revenue consisted solely of legacy licensing fees, while the 2011 periods included sales from the current business.
- Despite lower revenue, the third-quarter net loss improved by $150,900, and the nine-month net loss improved by $468,208, primarily because of lower administrative costs and reduced third-quarter research and development spending.
- The company completed the Cornerstone acquisition on March 30, 2012, recording $659,440 of intellectual property and $2,637,760 of goodwill. The intellectual property had $109,907 of accumulated amortization at September 30, 2012.
- Common shares issued and outstanding increased to 28,165,565 at September 30, 2012 from 25,624,565 at December 31, 2011, before subsequent treasury-share activity. Warrants outstanding increased to 5,500,999 from 4,294,999.
- Stockholders’ equity improved from a deficiency of $293,777 at year-end 2011 to equity of $2.63 million, principally because of equity issuance and the Cornerstone acquisition, partially offset by the nine-month net loss.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that substantial losses would continue until the company successfully commercialized and marketed its systems, with no assurance that commercialization would occur. Management also stated that existing working capital was expected to support operations for only approximately two months and that substantial additional capital was required. 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 regarding additional financing. The company reported no material changes to the risk factors in its 2011 Annual Report; key risks include research and development execution, patent protection and enforcement, competition, commercialization, and financing availability.
- In October 2012, the company raised $492,030 through two private placements. Most of the proceeds funded $430,000 of payments under a settlement with former President and Director George Konrad and Arizona Research and Development.
- Under the October settlement, Konrad surrendered 3,000,000 shares for $530,000, resigned as President and Director, and retained the right to convert certain unpaid amounts into common stock at $0.0667 per share if not paid within the specified period.
- Former Chief Technical Officer Keith Johnson filed an employment-related lawsuit seeking $37,500 of back pay, $5,012 of expenses, and unspecified damages. Management believes it has substantial defenses and intends to defend the case.
- The company used a facility owned by a Cornerstone seller rent-free on a short-term basis and expected to negotiate a lease on fair-market terms.
- Restricted cash of $403,330 was held for stock subscriptions. The filing states that the required offering amount was raised after September 30, 2012, so the funds were not expected to be returned.
- Management concluded that disclosure controls and procedures were effective and reported no significant changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the company obtained sufficient financing after the reported October 2012 offerings and how long that financing supported operations.
- Whether clean-energy systems generated material commercial revenue after September 30, 2012; the filing reports no 2012 revenue from that business through the reporting date.
- The recoverability of the $2.64 million goodwill balance and $549,533 net intellectual-property balance, particularly given the company’s development-stage status and lack of operating commercialization.
- The final obligations, payments, and potential equity dilution arising from the Konrad settlement and related-party balances.
- The status and potential exposure of the Keith Johnson litigation.
- The fully diluted share count, including 5.50 million outstanding warrants, 1.75 million outstanding options, and subsequent October 2012 equity issuances and options.