Forward Looking Statements

Readers are cautioned that the statements in this Report that are not descriptions of historical facts may be "forward-looking statements" that are subject to risks and uncertainties. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are based on the beliefs of our management, as well as on assumptions made by and information currently available to us as of the date of this Report. When used in this Report, the words "plan," "will," "may," "anticipate," "believe," "estimate," "expect," "intend," "project" and similar expressions are intended to identify such forward-looking statements. Although we believe these statements are reasonable, actual actions, operations and results could differ materially from those indicated by such forward-looking statements as a result of the risk factors included in our 2021 Annual Report on Form 10-K filed with the SEC on March 1, 2022, or other factors. We must caution, however, that this list of factors may not be exhaustive and that these or other factors, many of which are outside of our control, could have a material adverse effect on us and our ability to achieve our objectives. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above.

The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.





Critical Accounting Policies

The condensed consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these condensed consolidated financial statements requires our management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and related notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. We believe the following critical accounting policies affect its more significant judgments and estimates used in the preparation of financial statements.

Accounting for Uncertainty in Income Taxes

The Company follows the provisions of ASC Topic 740-10, "Accounting for Uncertainty in Income Taxes" which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our condensed consolidated financial statements. Our evaluation was performed for the tax years ended December 31, 2019, 2020 and 2021, the tax years which remain subject to examination by major tax jurisdictions as of September 30, 2022.

We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the condensed consolidated financial statements as general and administrative expense.





Revenue Recognition

Revenues for the three and nine months ended September 30, 2022, and 2021 were generated from the sale of a AirSCWO system, consulting and advisory services, which was recognized when the Company performed the service pursuant to its agreements with its clients which was the point in time when the Company completed its performance obligations under the agreements.

Common Stock Purchase Warrants

The Company accounts for common stock purchase warrants in accordance with ASC Topic 815- 40, Derivatives and Hedging - Contracts in Entity's Own Equity ("ASC 815-40"). Based on the provisions of ASC 815- 40, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement, or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). As of September 30, 2022, there were 1,250,000 outstanding warrants.





Stock-based compensation.

We account for stock-based compensation based on ASC Topic 718-Stock Compensation which requires expensing of stock options and other share-based payments based on the fair value of each stock option awarded. The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation model. This model requires management to estimate the expected volatility, expected dividends, and expected term as inputs to the valuation model.





Overview

On April 16, 2021, we closed the Merger with the former 374Water Inc. ("374 Water") (the "374Water Merger"). Pursuant to the parties' merger agreement, our acquisition subsidiary merged into 374Water, with 374Water as the surviving corporation. In connection with the 374Water Merger, all 374Water shares were canceled and 374Water Inc. f/k/a PowerVerde, Inc., issued to the former 374Water shareholders a total of 62,410,452 shares of our common stock.






         15

  Table of Contents

Immediately following the Merger, 374Water changed its name to 374Water Systems Inc. and PowerVerde changed its name to 374Water Inc.





Results of Operations

Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. Since the closing of the 374Water Merger, our business has been focused on development and commercialization of 374Water's supercritical water oxidation (SCWO) systems. Our business is subject to significant risks, including the risks inherent in our research and development efforts, uncertainties associated with obtaining and enforcing patents and intense competition.

Three Months Ended September 30, 2022, as Compared to Three Months Ended September 30, 2021

We generated $922,718 and $19,000 in revenue during the periods ended September 30, 2022, and 2021, respectively. The increase in revenue during 2022 was primarily as a result of the sale of our first AirSCWO system whereas in the past our revenues were derived from treatability studies, consulting and advisory services. Our general and administrative expenses were $387,018 during the period ended September 30, 2022, as compared to $143,147 in the same period of 2021, primarily because of increased insurance costs, marketing and business development expenses, dues and subscriptions, and stock-based compensation expenses. Our professional fees decreased to $82,752 during the period ended September 30, 2022, as compared to $84,515 in the same period of 2021, primarily because of decreased legal fees. Our research and development expenses were $118,253 during the period ended September 30, 2022, as compared to $115,936 in the same period of 2021, primarily because of the increase in engineering expenses following the 374Water Merger.

Nine Months Ended September 30, 2022, as Compared to Nine Months Ended September 30,2021

We generated $2,226,477 and $33,600 in revenue during the periods ended September 30, 2022, and 2021, respectively. The increase in revenue during 2022 was primarily as a result of the sale of our first AirSCWO system whereas in the past our revenues were derived from treatability studies, consulting and advisory services. Our general and administrative expenses were $1,027,287 during the period ended September 30, 2022, as compared to $206,931 in the same period of 2021, primarily because of increased insurance costs, marketing and business development expenses, dues and subscriptions, and stock-based compensation expenses. Our professional fees increased to $375,313 during the period ended September 30, 2022, as compared to $245,152 in the same period of 2021, primarily because of increased legal fees and accounting fees relating to our status as a public company. Our research and development expenses were $726,602 during the period ended September 30, 2022, as compared to $269,796 in the same period of 2021, primarily because of the increase in engineering expenses following the 374Water Merger.

Liquidity and Capital Resources

In April 2021, in connection with the Merger, we raised approximately $6.6 million from the sale of Series D Preferred Stock and converted all of its convertible debt notes and accrued interest to shares of common stock. On December 17, 2021, the Company raised approximately $5 million from the sales of Common Stock.

As of September 30, 2022, we had working capital of $8,602,631 compared to working capital of $11,263,270 as of December 31, 2021.

We believe that these funds will satisfy our working capital needs for the next twelve months.

© Edgar Online, source Glimpses