This Form 10-Q contains certain statements related to future results of the Company that are considered “forward-looking statements” within the meaning of the Private Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions; interest rate fluctuation; competitive pricing pressures within the Company’s market; equity and fixed income market fluctuation; technological changes; changes in law; changes in fiscal, monetary, regulatory, and tax policies; monetary fluctuations as well as other risks and uncertainties detailed elsewhere in this Form 10-Q or from time-to-time in the filings of the Company with the Securities and Exchange Commission. Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

PART I FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PowerVerde,374Water, Inc. and Subsidiary

Condensed Consolidated Balance SheetsStatements of Operations

SeptemberFor the three and six months ended June 30, 2017 (Unaudited)2021 and December 31, 20162020

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PowerVerde,374Water Inc. and Subsidiary

(f/k/a PowerVerde, Inc)

Condensed Consolidated Statements of OperationsChanges in Stockholders’ Equity

For the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020

(Unaudited)

For the three and six months ended June 30, 2021

For the three and six months ended June 30, 2020

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PowerVerde,374Water Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows(f/k/a PowerVerde, Inc)

For the nine months ended September 30, 2017 and 2016

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PowerVerde, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

September

June 30, 20172021

Note 1 – Condensed ConsolidatedNature of Business and Presentation of Financial Statements

Description of the Company

374Water, Inc., f/k/a PowerVerde, Inc. (the “Company”) was a Delaware corporation formed in March 2007. The Company was formed to develop, commercialize, and market a series of unique electric generating power systems designed to produce electrical power with zero emissions or waste byproducts, based on a patented pressure-driven expander motor and related organic rankine cycle technology.

On April 16, 2021, 374Water Inc. (f/k/a PowerVerde, Inc.) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with 374Water, Inc., a privately held company based in Durham, North Carolina, (“374Water”) and 374Water Acquisition Corp., a newly-formed wholly-owned subsidiary of PowerVerde (“Sub”). The parties entered into the Agreement pursuant to their Binding Letter of Intent dated September 20, 2020.

Pursuant to the merger contemplated by the Merger Agreement (the “Merger”), on April 16, 2021, Sub merged into 374Water, with 374Water as the surviving corporation. In connection with the Merger, all 374Water shares were cancelled and 374Water, Inc. issued to the former 374Water shareholders a total of 62,410,452 shares of 374Water, Inc. common stock. Immediately following the Merger, 374Water changed its name to 374Water Systems Inc and PowerVerde changed its name to 374Water, Inc. After the Merger, the former 374Water stockholders own 64.2% of 374Water Inc’s issued and outstanding common stock and 53.8% of 374Water Inc.’s issued and outstanding voting stock which includes the Preferred Stock (See Note 4). The Merger was accounted for as a reverse acquisition.

Nature of Business

With the Merger, 374Water Inc.’s current mission is to support a clean and healthy environment to sustain life. The Company plans to use cutting-edge science to recover resources from the waste our society generates and keep drinking water clean. The Company’s customers will include businesses and local governments that will make the sustainable development goals a reality. No material revenues from this planned principal operation have been generated since inception. Revenues to date have been from manufacturing assembly services and from testing, consulting, and advisory services procedures for multiple customers, which have been performed in collaboration with Duke University.

Presentation of Financial Statements

The accompanying unaudited condensed consolidated financial statements prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Annual Report of 374Water Inc, formerly known as PowerVerde, Inc. (“PowerVerde,” “we,” “us,” “our,” or the “Company”) as of and for the year ended December 31, 2016.2020 filed with the Securities and Exchange Commission (“SEC”) on March 9, 2021. The results of operations for the three and ninesix months ended SeptemberJune 30, 2017,2021, are not necessarily indicative of the results to be expected for the full year or for future periods. The condensed consolidated financial statements include the accounts of PowerVerde, Inc.,374Water Inc, formerly known as Vyrex CorporationPowerVerde, Inc. (the “Company”), and PowerVerde Systems, Inc., formerly known as PowerVerde, Inc., its wholly-owned subsidiary. Intercompany balances and transactions have been eliminated in consolidation.consolidation

Note 2 – Going Concern

We have financed our operations since inception through the sale of debt and equity securities and through Biotech IP licensing revenues. As of September 30, 2017, we had a working capital deficit of $128,270 compared to a working capital deficit of $272,120 at December 31, 2016. This improvement in working capital is due primarily to reductions in notes payable to related parties, accounts payable and accrued expenses resulting from positive operating cash flows during this period.

We expect 2017 Biotech IP revenues to approximate the 2016 levels; however, there can be no assurance that this revenue level will be achieved. Further, our contract which provides our Biotech IP revenues expires in March 2018, and we will therefore be without a source of working capital at that time unless we can generate material revenues from operations and/or the Liberty Agreement or raise substantial additional capital, as to which there can be no assurance. See Note 9 – Commitments and Contingencies

In order to meet our obligations under the $150,000 balance (as of October 2017) of our secured notes payable to related parties due April 30, 2018 (the “Notes”), which are collateralized by our Biotech IP receivables, we intend to apply most of the Biotech IP revenues received in 2017 and 2018 toward payment of the interest and principal due on the Notes, after reserving the minimum amount necessary to maintain our operations. We intend to reduce our salary and consulting fee expenses until the Notes are paid in full, and we are also commencing a new source of revenue by using our employee to provide part-time skilled manufacturing services to a third party pursuant to the Liberty Agreement.

We continue to seek funding from private debt and equity investors, as we need to promptly raise substantial additional capital in order to finance our plan of operations. There can be no assurance that we will be able to raise the necessary funds on commercially acceptable terms if at all. If we do not raise the necessary funds, we may be forced to cease operations.

Note 3 – Summary of Significant Accounting Policies

Nature of Business

The Company is devoting substantially all of its present efforts to establish a new business involving the developmentCash and commercialization of clean energy electric power generation systems, and none of its planned principal operations have commenced. However, royalties from licenses unrelated to planned principal operations continue to be recognized as revenue. The license will expire in March 2018, after which no further royalty revenues are expected.

Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company held no cash equivalents as of June 30, 2021, and December 31, 2020.

Accounts Receivable

Accounts receivablereceivables consist of balances due from royalties in connection with the license agreement with VDF FutureCeuticals, Inc.assembly services and from service revenues. The Company monitors accounts receivable and provides allowances when considered necessary. At SeptemberJune 30, 2017,2021 and December 31, 2020, accounts receivable were considered to be fully collectible. Accordingly, no allowance for doubtful accounts was provided.

Notes ReceivableEquipment

Note receivable consists of revenues from Liberty Plugins, Inc in connection with the manufacturing assembly agreement dated April 15, 2017. At September 30, 2017, notes receivable were considered to be fully collectible.

Revenue Recognition

Revenue from royalty and assembly agreements unrelated to the Company’s planned operationsEquipment is recognized in accordance with the terms of the specific agreements. Revenues recognized under these agreements amount to 100% of total revenues for the nine months ended September 30, 2017 and 2016. The Company does not expect any significant impact of the adoption of the standard on our financial statements based on the current sources of revenue.

Property and Equipment

Property and equipment are statedrecorded at cost, less accumulated depreciation.cost. Depreciation is computed using the straight-line method over theand an estimated useful liveslive of the related assets. Expendituresthree years. Expenses for major betterments and additions are capitalized, while replacement, maintenance and repairs which do not extend the lives of the respective assets, are expensedcharged to expense as incurred.

Impairment of Long-LivedIntangible Assets

Impairment lossesIntangible assets are recorded onsubject to amortization, and any impairment is determined in accordance with ASC 360, “Property, Plant, and Equipment.” Intangible assets are stated at historical cost and amortized over their estimated useful lives. The Company uses a straight-line method of amortization, unless a method that better reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up can be reliably determined.

Long-Lived Assets

The Company reviews long-lived assets (property, equipment, license and intellectual property) usedfor impairment whenever events or changes in operations when impairment indicators are present andcircumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses an estimate of the undiscounted expected cash flows estimatedover the remaining life of its long-lived assets, or related group of assets where applicable, in measuring whether the assets to be held and used will be realizable. Recoverability of assets held and used is measured by a comparison of the carrying amount to the future undiscounted expected net cash flows to be generated by the asset. As of June 30, 2021, and 2020, there were 0 impairments.

Revenue Recognition and Concentration

The Company follows the revenue standards of Financial Accounting Standards Board Update No. 2014-09: “Revenue from Contracts with Customers (Topic 606).” The core principle of this Topic is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those assetsgoods or services. Revenue is recognized in accordance with that core principle by applying the following five steps: 1) identify the contracts with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize revenue when (or as) we satisfy a performance obligation.

The Company’s performance obligations will be satisfied at the point in time when products are less thanshipped or delivered to the carrying valuecustomer, which is when the customer has title and the significant risks and rewards of such assets. No impairment lossesownership. Therefore, the Company’s contracts will have beena single performance obligation (shipment or delivery of product). The Company will primarily receive fixed consideration for sales of product. Manufacturing assembly services are recognized duringas revenue when the nineassembled product is delivered to the customer and the Company has completed its performance obligations.

Revenues for the six months ended SeptemberJune 30, 2017 or 2016.2021, and 2020 were generated from one manufacturing assembly service and from two consulting and advisory service agreements, which were recognized when the Company completed its performance obligations under the relevant service agreements.

Stock-based Compensation

The Company has accounted for stock-based compensation under the provisions of ASCAccounting Standards Codification (ASC) Topic 718 – “Stock Compensation” which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (stock options and common stock purchase warrants). The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on historical volatility of peer companies and other factors estimated over the expected term of the stock options. The expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term.

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). All outstanding warrants as of December 31, 2016 and September 30, 2017 were classified as equity.

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. There were 0 uncertain tax positions as of June 30, 2021, and December 30, 2020.

Income Tax Policy

The Company accounts for income taxes using the liability method prescribed by ASC 740 - Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

Research and Development Costs

The Company’s research and development costs are expensed in the period in which they are incurred. Such expenditures amounted to $172,760$153,860 and $282,339$0 for the ninesix months ended SeptemberJune 30, 20172021, and 2016,2020, respectively.

Earnings (Loss) Per Share

Earnings (loss) per share is computed in accordance with FASB ASC Topic 260, “Earnings per Share”. Diluted earnings per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. Certain common stock equivalents were not included in the earnings (loss) per share calculation as their effect would be anti-dilutive. Warrants exercisable for4,175,000shares and options for 5,750,500 sharesAs of June 30, 2021, there were the following potentially dilutive securities that were excluded from weighted averagediluted net loss per share because their effect would be antidilutive: warrants exercisable for 3,783,333 shares of common stock, options for 12,572,000shares outstanding on an anti-diluted basis.of common stock and 22,006,250 common stock shares issuable upon conversion of the Series D Preferred Stock. There were no dilutive shares as of June 30, 2020.

Financial instrumentsInstruments

The Company carries cash, and cash equivalents, accounts receivable, note receivable, accounts payable and accrued expenses, and notes payable, at historical costs. The respective estimated fair values of these assets and liabilities approximate carrying values due to their current nature. The Company also carries notes payable to related parties at historical cost less discounts from warrants issued as loan financing costs. The fair value of such notes is significantly similar to the face value of the notes ($200,000).

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying financial statements include the fair value of equity-based compensation and valuation allowance against deferred tax assets.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases,” which created a new Topic, ASC Topic 842 and established the core principle that a lessee should recognize the assets, representing rights-of-use, and liabilities to make lease payments that arise from leases. For leases with a term of 12 months or less, a lessee is permitted to make an election under which such assets and liabilities would not be recognized, and lease expense would be recognized generally on a straight-line basis over the lease term. This ASU is effective for public entities for interim and annual reporting periods beginning after December 15, 2018, and early application is permitted. The Company adopted ASC Topic 842 on January 1, 2019 and such adoption did not have any impact on the Company’s financial statements.

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective January 1, 2022 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021.

There are several other new accounting pronouncements issued or proposed by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s condensed consolidated financial position, operating results, or cash flows.

Note 3 – Liquidity, Capital Resources and Going Concern

As of June 30, 2021, the Company had working capital of $6,142,238 compared to working capital of $10,572 at December 31, 2020. This significant increase in working capital is due primarily to the increase in cash over the six-month period based on the Company’s sale and issuance of Series D Convertible Preferred Stock (see Note 4). During the second quarter of 2021, in connection with the Merger (described in Note 4 below), the Company received gross proceeds of $6,551,745 from the sale of Series D Convertible Preferred Stock (Preferred Stock). As of June 30, 2021, the Company has an accumulated deficit of $1,936,266. For the six months ended June 30, 2021, the Company had a net loss of $1,940,858 and $472,286 of net cash used in operations for the period.

The Company believes that the capital raises from the sale of Preferred Stock will provide sufficient cash flow for the Company to meet its financial obligations for at least the next 12 months as they come due. These events served to mitigate the conditions that historically raised substantial doubt about the Company’s ability to continue as a going concern.

Note 4 – Recent Accounting PronouncementsAcquisition of 374Water, Inc. f/k/a PowerVerde Inc.

ReferAgreement and Plan of Merger

In connection with the Merger, PowerVerde closed on a private placement of 440,125 shares of Series D Convertible Preferred Stock (the “Preferred Stock”) with a par value of $.0001, yielding gross proceeds of $6,551,745 (the “Private Placement”). The Private Placement proceeds will be used for working capital, primarily for development, manufacture and commercialization of 374Water Inc.’s Air SCWO Nix systems. The Preferred Stock has a stated value of $15 per share, is convertible into common stock at $.30 per share and has voting rights based on the underlying shares of common stock. Upon liquidation of the Company, the Preferred Stockholders have liquidation preference before any assets can be distributed to common stockholders. The current liquidation value is $6,601,735. All of the Preferred Stock was sold pursuant to an exemption from registration requirements under Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended.

As a result of the Merger, the issuance of the Preferred Stock, the former 374Water shareholders own 65.8% of 374Water Inc’s issued and outstanding common stock and 53.8% of 374Water Inc.’s issued and outstanding voting stock (which includes the Preferred Stock on an as converted basis).

Also as a result of the Merger, 374Water Inc. entered into two-year employment agreements with 374Water founders Yaacov (Kobe) Nagar and Marc Deshusses, Ph. D. Mr. Nagar will serve as the Company’s CEO, replacing Richard H. Davis, who resigned upon closing of the Merger. Mr. Nagar will receive an annual salary of $200,000. Dr. Deshusses will serve as the Company’s Head of Technology on a part-time basis at a salary of $60,000 per year.

Pursuant to the consolidatedMerger, Messrs. Nagar and Deshusses were appointed to the Company’s Board of Directors, joining Mr. Davis, who remains as a Director.

The patented technology underlying 374Water’s supercritical water oxidation (SCWO) units, which was developed principally through the efforts of Messrs. Nagar and Deshusses at the facilities of Duke University, Durham, North Carolina (“Duke”), where Dr. Deshusses is a professor, is licensed to 374Water pursuant to a worldwide license agreement with Duke executed on April 16, 2021 (the “License Agreement”). In connection with the License Agreement, 374Water also executed an equity transfer Agreement with Duke pursuant to which Duke received a small block of shares of common stock (see Note 5).

As a result of the Merger Agreement, for financial statementsstatement reporting purposes, the business combination between 374Water Inc. and footnotes thereto included374Water was treated as a reverse acquisition and recapitalization for accounting purposes with 374Water deemed the accounting acquirer and 374Water Inc. deemed the accounting acquiree under the acquisition method of accounting in accordance with FASB Accounting Standards Codification (“ASC”) Section 805-10-55.

The following assets and liabilities were assumed in the PowerVerde, Inc. Annual Reporttransaction:

Note 5 – Intangible Assets

Intangible assets are recorded at cost and consist of the license agreement with Duke University. The Company issued Duke University a small block of shares of common stock estimated to have a fair value of $1,073,369 as consideration for granting the Company the license based on Form 10-Kthe Company’s common stock market price on the date the license agreement was executed (see Note 8). Intangible assets are comprised of the following as of June 30, 2021, and December 31, 2020:

Amortization expense for the yearthree and six months ended December 31, 2016 for recent accounting pronouncements. Other pronouncements have been issued butJune 30, 2021, was insignificant.

Estimated future amortization expense as of June 30, 2021:

Note 6 – Stockholder’ Equity

The Company is authorized to issue 50,000,000 preferred stock shares and 200,000,000 common stock shares both with a par value of $.0001.

Preferred Stock

On October 30, 2020, the Company does not believe that their adoptiondesignated 1,000,000 shares as Series D Convertible Preferred Stock with a par value of $.0001.

On April 16, 2021, the Company closed on a private placement of 440,125 shares of Series D Convertible Preferred Stock (the “Preferred Stock”) with a par value of $.0001, yielding gross proceeds of $6,551,691 (the “Private Placement”) and settlement of a $50,000 liability for Preferred Stock shares. The Private Placement proceeds will be used for working capital, primarily for the development, manufacturing and commercialization of 374Water’s Air SCWO Nix systems. The Preferred Stock has a stated value of $15 per share, is convertible into common stock at $.30 per share and has voting rights based on the underlying shares of common stock. Upon liquidation of the Company, the Preferred Stockholders have a significant impactliquidation preference before any assets can be distributed to common stockholders. The current liquidation value is $6,601,745. All of the Preferred Stock were sold pursuant to an exemption from registration requirements under Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended. As of June 30, 2021, there were 440,125 shares of Series D Preferred stock issued and outstanding.

Common Stock

The holders of common stock are entitled to one vote per share on all matters submitted to a vote of shareholders, including the financial positiondirectors’ election. There is no right to cumulate votes in the election of directors. The holders of common stock are entitled to any dividends that may be declared by the board of directors out of funds legally available for payment of dividends subject to the prior rights of holders of preferred stock and any contractual restrictions the Company has against the payment of dividends on common stock. In the event of our liquidation or resultsdissolution, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive rights and have no right to convert their common stock into any other securities. As of June 30, 2021, there were 98,391,746 shares of common stock issued and outstanding.

On April 16, 2021, as a result of the closing of the Merger Agreement (see Note 4), the equity of the consolidated entity is the historical equity of 374Water, Inc (“374Water”) retroactively restated to reflect the number of shares issued by the Company in the reverse recapitalization.

In connection with the Merger, 33,203,512 shares of common stock were issued to 374Water, Inc. (f/k/a PowerVerde, Inc.) stockholders.

Pursuant to the Merger, all 374Water shares were cancelled and 374Water, Inc. issued to the former 374Water stockholders a total of 62,410,452 shares of 374Water, Inc. common stock.

On April 16, 2021, the Company issued a small block of shares of common stock estimated to have a fair value of $1,073,369 as consideration for granting the Company a license (see Notes 5 and 8).

Stock-based compensation

During the six months ended June 30, 2021, and 2020, the Company recorded stock-based compensation of $25,567 and $0, respectively, related to common stock issued or vested options to employees and various consultants of the Company, of which $18,866 was charged as compensation and related expenses and $6,701 as research and development expenses in the accompanying condensed consolidated statements of operations.

Note 5 – Intellectual Property and License Agreement

Intellectual Property partially consists of technology acquired from the purchase of 100% of the membership interests of Cornerstone Conservation Group LLC (“Cornerstone”) on March 30, 2012 for $659,440. Accumulated amortization with respect to this intellectual property was $659,440 at September 30, 2017 and December 31, 2016.

On June 30, 2015, the Company entered into an Assignment Agreement with VyrexIP Holdings Inc., a company owned by Company shareholder Edward Gomez, for the purchase of intellectual property. The net price of these assets was comprised of a down payment of $16,116 and a $58,436 promissory note to the seller due July 15, 2016, partially offset by assignment by the seller to the Company of a $38,000 promissory note due November 14, 2015, issued by the seller’s licensee Epalex Corporation, a company of which Mr. Gomez is chairman and a major stockholder. This note was paid in full as of March 31, 2016. Accumulated amortization with respect to this intellectual property was $27,414 and $18,276 at September 30, 2017 and December 31, 2016, respectively.

On June 1, 2016, the Company entered into a ten-year License Agreement with Helidyne LLC to utilize the Helidyne intellectual property in the manufacturing of planetary rotor expanders and the incorporation of same in the Company’s distributed electric power generation systems. The license agreement also grants the Company an exclusive license to sell the expanders whether manufactured by Helidyne or by the Company. The Company’s royalty obligation begins on the earlier of the commercialization of the product or three years from the effective date of the agreement. Once the royalty obligation begins, the minimum annual royalty is $50,000 for the first six years, and $100,000 for the remainder of the agreement.

For the nine months ended September 30, 2017 and 2016, amortization expense was $16,638 and $12,460, respectively, and accumulated amortization of the intangible assets of intellectual property and license agreement was $700,176 at September 30, 2017.

Future amortization of the intangible assets of intellectual property and license agreement was as follows as of September 30, 2017:

Note 6 – Stockholders’ Deficiency

Warrants

A summary of warrants issued, exercised and expired during the nine months ended September 30, 2017 is as follows:

As of September 30, 2017, the options outstanding and exercisable had an intrinsic value of $18,250.

Note 7 – Stock Options

Stock option activity for the ninesix months ended SeptemberJune 30, 2017,2021, is summarized as follows:

During the period ended June 30, 2021, the Company granted to employees and outside consultants of the Company for services to be rendered options to purchase 2,467,000 shares of the Company’s common stock at an exercise price ranging from $0.45 to $1.67. Those options vest over service periods ranging from March 2021 to July 2025 and have an expiration date ranging from March 2024 to June 2031. Those options were estimated to have a grant-date fair value ranging from $0.41 to $0.67. The majority of these options begin vesting starting July 1, 2021. Total unrecognized compensation associated with these unvested options is approximately $1,018,000 which will be recognized over a period of four years.

During the period ended June 30, 2021, a total of 225,500 stock option compensationoptions were exercised resulting in the issuance of 225,500 shares of common stock and proceeds of $42,845.

The fair value of these options granted were estimated on the date of grant, using the Black-Scholes option-pricing model with the following assumptions:

Stock Warrants

In April 2021, pursuant to the binding Memorandum of Understanding dated as of March 30, 2021, between 374Water and MB Holding Inc. (the “MOU”), a warrant for the nine monthspurchase of 3,783,333 shares of common stock at an exercise price of $.30 per share were issued to MB Holding Inc. as consideration for executing the MOU and was considered fully vested upon the execution of the MOU. These warrants expire in March 2022. Those warrants were estimated to have a grant-date fair value of $0.37 per warrant or aggregate fair value of $1,399,833 which has been presented as product development expense on the condensed statements of operations.

During the period ended SeptemberJune 30, 20172021, 950,000 warrants were exercised resulting in the issuance of 950,000 shares of common stock and 2016 was $0 and $72,000, respectively. There is no unrecognized compensation expense associated with the options.proceeds of $107,500.

The fair value of those warrants granted were estimated on the date of grant, using the Black-Scholes option-pricing model with the following assumptions:

Note 8 - Notes Payable to Related Parties

Notes payable to related parties at SeptemberA summary of warrant activity during the six months ended June 30, 2017 consist of notes payable to stockholders of $200,000 (issued in 2012). The notes had been due in one principal payment on September 30, 2017, but are now due on April 30, 2018, after extensions granted by the 2021, is as follows:

Note holders in the third quarter of 2017. Interest is payable semiannually at 10%. The notes are collateralized by all receivables now or hereafter existing pursuant to the license agreement with VDF FutureCeuticals, Inc. discussed in Notes 3 and 9. In April and July 2017, the Company made payments totaling $100,000 each month toward the principal balance of the Notes.7 - Related Party Transactions

The notes payable to related parties at December 31, 2016 also includesOur CFO John L Hofmann is a promissory note to a stockholder for $25,000. The principal balance and interest at 10% was due March 30, 2016. This note was paid in full, with accrued interest, in January 2017.

Note 9 - Commitments and Contingencies

On June 25, 2015, Company consultant Hank Leibowitz assigned tomember of the Company a patent he obtained for a system and method for using high temperature sources in Rankine cycle power systems.accounting firm Kabat, Schertzer, De La Torre, Taraboulos & Co, LLC (“KSDT”). The Company has agreedpaid $42,433 and $0 to pay Mr. Leibowitz a 2% royaltyKSDT for anyits services in the six months ended June 30, 2021 and all revenues2020, respectively, and $4,350 of products and/or project sales by the Company based on the subject patent.

The Company’s license agreement with VDF FutureCeuticals, Inc.,services rendered remain unpaid as of June 30, 2021 which has generated all of the Company’s revenues since 2012, will terminate in March 2018, when the underlying patents expire.

On June 1, 2016, the Company entered into a ten-year License Agreement with Helidyne LLC to utilize the Helidyne intellectual property in order to use Helidyne expanders in Powerverde systems and to sell Helidyne expanders. As part of the licensing agreement the Company committed to purchase two 50 kW expanders, at a price of $25,000 each, on or before the sixth month anniversary of the agreement. The $50,000 was payable in two monthly installments of $25,000 beginning October 2016. As of September 30, 2017, the Company had made payments totaling $38,750, towards the purchase of the expanders, all of which wasis included in prepaid expenseaccounts payable and other current assets in the consolidated balance sheets at December 31, 2016. Due to Helidyne’s failure to perform under the agreement, the Company has not made any further payments to Helidyne and does not intend to do so unless and until Helidyne performs as required. Helidyne has not objected to the Company’s position, and it is very unlikely that Helidyne will ever be able to perform. Consequently, as of September 30, 2017, the Company wrote off the $38,750 paid to Helidyne.

accrued expenses.

The Company agreed to pay Helidyne LLC a royalty of 3% of sales, subject to a minimum annual royalty of $50,000 beginning on the earlier of commercialization of the product or three years from the effective date of the agreement. This minimum royalty would be payable only if Helidyne performs as required, which is very unlikely, or if the Company elects to produce its own expanders using Helidyne technology. The Company does intend to produce these expanders directly or through a contract manufacturer in the future.

On April 15, 2017, the Company entered into a manufacturingan assembly agreement with Liberty Plugins, Inc. (“Liberty”) to manufacture and assemble Liberty’s Hydra electronic vehicle charging systems and ship completed Hydras to Liberty’s facility in Santa Barbara, California (the “Liberty Agreement”). Initially, Liberty has agreed to pay $1,000 for the first 10 Hydras assembled in a month, $750 per Hydra for the next 10 Hydras assembled per month and $500 per Hydra for each Hydra assembled above 20 per month. No invoices were issued to Liberty during the quarter ended June 30, 2017. As of September 30, 2017, the Company has built and shipped 25 Hydras, and these products were invoiced throughout the third quarter of 2017. The revenueRevenue for these products is reflected in the net revenue on the Company’s condensed consolidated statementsstatement of operations and amounted to $1,000 and $0 for the quartersix months ended SeptemberJune 30, 2017.2021, and 2020, respectively. The Liberty Agreement is subject to termination by either party on 30 days’ notice.

On September 30, 2017,The Company’s director and former CEO is a minority shareholder and member of the Board of Directors of Liberty. Therefore, transactions with Liberty have been disclosed as transactions with a related party.

Note 8 – Commitments and Contingencies

The patented technology underlying 374Water’s supercritical water oxidation (SCWO) units, which was developed principally through the efforts of Messrs. Nagar and Deshusses at the facilities of Duke University, Durham, North Carolina (“Duke”), where Dr. Deshusses is a professor, is licensed to 374Water pursuant to a worldwide license agreement with Duke executed on April 16, 2021 (the “License Agreement”). In connection with the License Agreement, 374Water also executed an equity transfer Agreement with Duke pursuant to which Duke received a small block of common stock in the Company. Under the terms of the License Agreement, the Company convertedis required to make royalty payments based on a percentage of licensed product sales, as defined in the outstanding accounts receivable from Liberty, totaling $25,000, intoLicense Agreement which is triggered by the sale of licensed products. Further, the Company is also required to pay royalties on a Promissory Note with 12% interest and a maturity datepercentage of January 31, 2018.

Note 10 - Related Party Transactions

Since July 2010, the accounting firm J.L. Hofmann & Associates, P.A. (“JLHPA”), whose principal is the Company’s CFO John L. Hofmann, has provided financial consulting and accounting services to the Company.sublicensing fees. The Company paid $20,720will reimburse Duke for any ongoing patent expenses incurred. During the three and $28,815 to JLHPA for its services in the nine months ended Septembersix month period ending June 30, 2017 and 2016, respectively.

Note 11 – Subsequent Events

In October 2017,2021, the Company made payments totaling $50,000 towardhas not incurred any expenses in connection with this License Agreement. The Company may terminate the principal balance of the Notes payable to related parties, discussed in Note 8, leaving a remaining principal balance of $150,000 as of October 2017.

license agreement anytime by providing Duke sixty days’ notice.

Note 9 – Subsequent Events

On July 7, 2021, 374Water Systems Inc. (“374Water”), a subsidiary of 374Water Inc. (the “Company”) entered into a Manufacturing and Service Agreement (the “Manufacturing and Service Agreement”) with Merrell Bros. Fabrication, LLC (“Merrell Bros.”) pursuant to which Merrell Bros. will manufacture, supply and service AirSCWO supercritical water oxidation products for 374Water. Subject to certain termination rights, the Manufacturing and Service Agreement is for an initial period of three years and will renew for successive one-year periods thereafter. Under the Manufacturing and Service Agreement, Merrell Bros. will be 374Water’s exclusive supplier and service provider with respect to the products in the United States and Canada.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 20162020 Annual Report, 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 PowerVerde,374Water Inc. 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 effect 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 statementsstatements.

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, 2012, 2013, 20142016, 2017, 2018, 2019 and 2015,2020, the tax years which remain subject to examination by major tax jurisdictions as of SeptemberJune 30, 2017.2021.

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

Revenue from royalty andManufacturing assembly agreements unrelatedservices are recognized as revenue when the assembled product is delivered to the Company’s planned operations is recognized in accordance withcustomer and the terms of the specific agreements.Company has completed its performance obligations. Revenues recognized under these agreements amount to 100% of total revenues for the ninesix months ended SeptemberJune 30, 20172021, and 2016. The2020 were generated from manufacturing assembly services and from consulting and advisory services, which was recognized when the Company does not expect any significant impact ofperformed the adoption ofservice pursuant to its agreements with its clients which was the standard on our financial statements based onpoint in time when the current sources of revenue.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 netsharenet-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,Company), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). All outstanding warrants as of SeptemberJune 30, 20172021, and 20162020, were classified as equity.

Intellectual PropertyStock-based compensation.

The Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses an estimate of the undiscounted cash flows over the remaining life of its long-lived assets, or related group of assets where applicable, in measuring whether the assets to be held and used will be realizable. In the event of impairment, the Company would discount the future cash flows using its then estimated incremental borrowing rate to estimate the amount of the impairment.

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

From January 1991 until October 2005,The Company is a Delaware corporation formed in March 2007 by George Konrad and Fred Barker. The Company was formed in order to further develop, commercialize and market a series of unique electric generating power systems designed to produce electrical power with zero emissions or waste byproducts, based on a patented pressure-driven expander motor and related organic rankine cycle technology.

In late 2017, 374Water Inc, formerly known as PowerVerde, Inc. (“PowerVerde,” “we,” “us,” “our,” or the “Company”) was introduced to a project funded by the Bill and Melinda Gates Foundation commonly referred to as the “Reinventing the Toilet Project”. The foundation is focused on global sanitation improvements. One of the foundation-supported projects, ongoing for the previous six years, involves a technology being developed at Duke University. This technology consists mainly of a chemical reaction called supercritical water oxidation (SCWO). The concept requires a unique reactor or bioreactor that converts any organic matter such as fecal sludge into pathogen-free water and mineral ash. This bioreactor trademarked AirSCWO, utilizing compressors and pumps, is energy intensive. However, the reaction itself is exothermic, meaning it gives off heat during the reaction. The caloric value (heat content) of the fecal sludge is the source of this heat release. If this heat release is captured and converted into electricity the AirSCWO’s parasitic energy requirements may be offset or eliminated or may even result in net electricity produced. In the latter example the bioreactor, designed for processing municipal fecal sludge and other organic waste, becomes an electrical-generating machine producing free electricity as a byproduct.

After a highly competitive global search, as we announced in April 2018, the Company devoted substantially allwas selected by Duke to develop the residual heat-to-power system to work in conjunction with the bioreactor. We have begun the engineering and design process. Our selection was likely influenced by our focus on high temperature and pressure expanders and consistent with our WSC design. We believe the SCWO application is an excellent fit for our new product goal of its effortsproviding expanders and resourcessystems capable of operating at elevated operating conditions where competition is limited.

On November 6, 2019, PowerVerde and 374Water entered into a memorandum of understanding (the “Initial MOU”) regarding the strategic relationship between the parties whereby they intended for PowerVerde to researchprovide the complete heat recovery system, including an advanced expander, for 374Water’s SCWO system.

On September 20, 2020, the Initial MOU was superseded by a Binding Letter of Intent for merger (the “LOI”) signed by PowerVerde and development related to its unsuccessful Biotech Business, in particular the study of biological oxidation and antioxidation directed374Water. Subject to the developmentterms and conditions set forth in the LOI, 374Water would merge into a newly- formed wholly-owned subsidiary of potential therapeutic productsPowerVerde (the “Sub”), with the Sub as the surviving corporation (the “Merger”). Upon closing of the Merger, PowerVerde would issue new shares of PowerVerde stock to 374Water shareholders such that 374Water shareholders would own approximately 60% of the combined company, and PowerVerde shareholders would own approximately 40%. The Merger was subject to adjustments for liabilities, and the treatmentclosing was contingent on the achievement of various diseasescertain milestones and conditions. Insatisfaction of conditions by both parties prior to closing, including the most recent years, the Company’s research focused mainly on targeted antioxidant therapeutics and nutraceuticals. The Company, has generated only limited revenue from product sales and has relied primarily onraising of at least $6.25 million of additional equity financing, licensing revenues, and various debt instruments for its working capital. The Company has been unprofitable since its inception.capital pursuant to a private placement,

FollowingOn April 16, 2021, we closed the cessation of material Biotech Business operations in October 2005, the Company turned its primary focus to seeking an appropriate merger partner for its public shell. This resulted in the February 2008 Merger with Vyrex. In March 2009, we assigned most of our Biotech intellectual property other than our rights under existing licensing agreements374Water Inc. (the “Biotech IP”“374Water Merger”) to an investor in exchange for his agreement to pay all future expenses relating. Pursuant to the Biotech IPparties’ merger agreement, 2021, Sub merged into 374Water, with 374Water as the surviving corporation. In connection with the 374Water Merger, all 374Water shares were cancelled and 374Water Inc. f/k/a PowerVerde, Inc., issued to pay us 20%the former 374Water shareholders a total of any net proceeds received from future sale and/or licensing62,410,452 shares of 374Water Inc. common stock.

Immediately following the Biotech IP. We do not expect this arrangementMerger, 374Water changed its name to generate material revenues.374Water Systems Inc. and PowerVerde changed its name to 374Water Inc.

Since the closing of the 374Water Merger, we haveour business has been focused on the development testing and commercialization of our electric power374Water’s supercritical water oxidation (SCWO) systems, in particular, their applicability to thermal and natural gas pipeline operations.which include PowerVerde expanders. 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. See “Risk Factors.”

Except as specifically noted to the contrary, the following discussion relates only to PowerVerde since, as a result of the Merger, the only historical financial statements presented for the Company in periods following the Merger are those of the operating entity, PowerVerde.

Results of Operations

Three Months Ended SeptemberJune 30, 20172021, as Compared to Three Months Ended SeptemberJune 30, 20162020

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, which include PowerVerde expanders. We had no revenuesgenerated $14,600 and $0 in revenue from salesmanufacturing assembly services and from consulting and advisory services in the thirdsecond quarter of 20172021 and 2016 – but we recorded $108,686 and $89,118 in Biotech IP licensing fees (based on pre-Merger contracts),2020, respectively. Also, we generated $25,000 in revenue for assembly revenues under the Liberty Agreement in the third quarter of 2017. In both years,This year, we had substantial expenses due to our ongoing research and development activities and efforts to commercialize our systems, as well as substantial administrative expenses associated with our status as a public company. Our general and administrative expenses increased to $53,308 in the second quarter of 2021 as compared to $1,686 in the same period of 2020, primarily because of increased insurance costs and stock-based compensation expenses. Our professional fees increased to $152,437 in the second quarter of 2021 as compared to $500 in the same period of 2020, primarily because of increased legal fees and accounting fees relating to the 374Water Merger. Our compensation and related expenses increased to $158,979 in the second quarter of 2021 as compared to no such expenses in the second quarter of 2020, primarily because of increased payroll expenses. Our research and development expenses decreased by $99,514were $124,675 in the thirdsecond quarter of 2017 as2021 compared to no such expenses in the thirdsecond quarter of 2016,2020, primarily because of the decreaseincrease in engineering expenses following the 374Water Merger. Our product development expenses were $1,399,833 in the second quarter of 2021 compared to no such expenses in the same period of 2020. This activity represents the issuance of stock optionwarrants to a strategic partner in the second quarter of 2021 as part of compensation for services. Our generalthe manufacturing, supply and administrative expenses decreased by $9,850 in the third quarterservice of 2017 as compared to 2016, primarily because of the reduction in employee salaries. Our net income was $4,090 in the third quarter of 2017, a reversal of the net loss of $161,590 in the third quarter of 2016.AirSCWO supercritical water oxidation products. Substantial net losses will continueare expected until we are able to successfully commercialize and market our 374Water systems, as to which there can be no assurance.Any taxes that might result from net income for financial reporting purposes would be eliminated through use of a portion of the Company’s net operating loss carryforward.

NineSix Months Ended SeptemberJune 30, 20172021, as Compared to NineSix Months Ended SeptemberJune 30, 20162020

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, which include PowerVerde expanders. We had no revenuesgenerated $14,600 and $0 in revenue from salesmanufacturing assembly services and from consulting and advisory services in the first ninesix months of 20172021 and 2016 – but we recorded $448,484 and $417,074 in Biotech IP licensing fees (based on pre-Merger contracts),2020, respectively. In the 2017 period, we generated $25,000 in assembly revenues under the Liberty Agreement in the third quarter of 2017. In both years,This year, we had substantial expenses due to our ongoing research and development activities and efforts to commercialize our systems, as well as substantial administrative expenses associated with our status as a public company. Our general and administrative expenses increased to $63,785 in the first six months of 2021 as compared to $2,395 in the same period of 2020, primarily because of increased insurance costs and stock-based compensation expenses. Our professional fees increased to $160,638 in the first six months of 2021 as compared to $500 in the same period of 2020, primarily because of increased legal fees and accounting fees relating to the 374Water Merger. Our compensation and related expenses increased to $177,666 in the first six months of 2021 as compared to no such expenses in the same period of 2020, primarily because of increased payroll expenses. Our research and development expenses decreased by $109,579 (38.8%)were $153,860 in the first ninesix months of 2017 as2021 compared to 2016. This decrease is due mainly tono such expenses in the stock options issuedsame period of 2020, primarily because of the increase in July 2016.engineering expenses following the 374Water Merger. Our general and administrativeproduct development expenses decreased by $102,066 (38.9%)were $1,399,833 in the first ninesix months of 2017 as2021 compared to 2016, due mainly to the warrants issued in 2016. Our net income was $116,516no such expenses in the first nine monthssame period of 2017,2020. This activity represents the issuance of stock warrants to a reversal of the net loss of $173,761strategic partner in the thirdsecond quarter of 2016.2021 as part of compensation for the manufacturing, supply and service of AirSCWO supercritical water oxidation products. Substantial net losses will continueare expected until we are able to successfully commercialize and market our 374Water systems, as to which there can be no assurance.

Liquidity and Capital Resources

In April 2021, in connection with the Merger, the Company 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. These events served to mitigate the conditions that historically raised substantial doubt about the Company’s ability to continue as a going concern.

We have financed our operations since inception principally through the sale of debt and equity securities and through Biotech IP licensing revenues.securities. As of SeptemberJune 30, 2017,2021, we had a working capital deficit of $128,270$6,142,238 compared to a working capital deficit of $272,12010,572 at December 31, 2016.June 30, 2020. This improvementincrease in working capital occurred in the second quarter of 2021 and is due primarily to reductions inthe gross proceeds of $6,601,735 from the sale of Series D Convertible Preferred Stock and conversion of all of our convertible debt notes payable to related parties, accounts payable and accrued expenses resulting from positive operating cash flows during this period.into shares of common stock.

We expect 2017 Biotech IP revenues to approximatebelieve that these funds will satisfy our working capital needs for the 2016 levels; however, therenext 12 months. There can be no assurance that this revenue levelthese funds will be achieved. Further, our contract which provides our Biotech IP revenues expires in March 2018, and we will therefore be without a source of working capital at that time unless we can generate material revenues from operations and/or the Liberty Agreement or raise substantial additional capital, as to which there can be no assurance. See Note 9- Commitments and Contingencies

In order to meet our obligations under the $150,000 balance (as of October 2017) of our secured notes payable to related parties due April 30, 2018 (the “Notes”), which are collateralized by our Biotech IP receivables, we intend to apply most of the Biotech IP revenues received in 2017 and 2018 toward payment of the interest and principal due on the Notes, after reserving the minimum amount necessary to maintain our operations. We intend to reduce our salary and consulting fee expenses until the Notes are paid in full, and we are also commencing a new source of revenue by using our employee to provide part-time skilled manufacturing services to a third party pursuant to the Liberty Agreement.

We continue to seek funding from private debt and equity investors, as we need to promptly raise substantial additional capital in ordersufficient to finance our plan of operations. There can be no assuranceoperations and commercialize our systems or that we will be able to raise theany necessary additional funds on a commercially acceptable terms ifreasonable basis or at all. If we do not raise the necessary funds, we may be forced to cease operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and President, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective.

Management’s Annual Report on Internal Control Over Financial Reporting

Management of the CompanyOur management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of financial statements.

All internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding of controls. Therefore, even effective internal control over financial reporting can provide only reasonable,(as defined in Rule 13a-15(f) under the Exchange Act). Our management, with the participation of our principal executive officer and not absolute, assurance with respect toprincipal financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal controls over financial reporting may vary over time. Because of its inherent limitations, internal controls over financial reporting may also fail to prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

Our Chief Executive Officer and Chief Financial Officer assessedofficer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment,2020. Our management’s evaluation of our management usedinternal control over financial reporting was based on the criteria set forthframework in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—An Integrated Framework.Commission. Based on this evaluation, our management concluded that as of SeptemberJune 30, 2017,2021, our internal control over financial reporting was not effective.

The ineffectiveness of our internal control over financial reporting was due to the following material weaknesses which we identified in our internal control over financial reporting:

No Attestation Report

This quarterly report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this quarterly report.

Changes in Internal Control Over Financial Reporting

There were no significant changes in internal control over financial reporting during the third quarterfirst half of 20172021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the 2016 Annual Report. Please refer to that section for disclosure regarding the risks and uncertainties related to our business.Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.None

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.For information regarding the 374Water Merger, see Note 3 “Acquisition of PowerVerde Inc.” and our Report on Form 8-K filed with the SEC on April 22, 2021.

Item 6. Exhibits.

SIGNATURES

In accordance with Section 13(a) or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Exhibit Index

16

22