UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q10-Q/A
Amendment No. 1
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period ended JuneSeptember 30, 2022
☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number: 000-27866
374WATER INC. |
(Exact name of Registrant as specified in its charter) |
Delaware |
| 88-0271109 |
(State or other jurisdiction of incorporation or organization) |
| (IRS Employer Identification No.) |
701 W Main Street, Suite 410
Durham, NC 27701
(Address of principal executive offices)
(919) 888-8194
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Stock, par value $0.0001 |
| SCWO |
| The Nasdaq Capital Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
☐ | Large accelerated filer | ☐ | Accelerated filer |
☐ | Non-accelerated Filer | ☒ | Smaller reporting company |
|
| ☒ | Emerging Growth Company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of August 4,November 1, 2022, the issuer had 126,680,895 shares of common stock outstanding.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A (this “Amendment No. 1”) amends and restates in its entirety the Quarterly Report on Form 10-Q for the period ended September 30, 2022 originally filed with the United States Securities and Exchange Commission on November 1, 2022 (the “Original Filing”) of 374Water Inc. (the “Company”). The sole purpose of this Amendment No. 1 is to file the Chief Executive Officer and Chief Financial Officer certifications required by Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002. The certifications were listed in the Exhibit Index contained in Part II, Item 6 of the Original Filing but were inadvertently not filed or provided with the Original Filing.
Other than as described above, the Amendment No. 1 provides disclosure only as of the date of the Original Filing and does not amend, supplement or update any information contained in the Original Filing to give effect to any subsequent events. This Amendment No. 1 in no way revises or restates the Company's condensed consolidated financial statements included in the Original Filing. Additionally, there have been no changes to the XBRL data filed in Exhibit 101 of the Original Filing. Accordingly, this Amendment No. 1 should be read in conjunction with the Original Filing.
| 2 |
Index to Form 10-Q
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| Condensed Consolidated Balance Sheets at |
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| 6 |
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| 7 |
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| Notes to Unaudited Condensed Consolidated Financial Statements |
| 8 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| 15 |
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| Table of Contents |
Cautionary Note Regarding Forward-Looking Information
This Form 10-Q contains certain statements related to future results of the Company that are considered “forward-looking statements”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
374Water Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
JuneSeptember 30, 2022 (Unaudited) and December 31, 2021
|
| 2022 |
|
| 2021 |
| ||
Assets |
|
|
|
|
|
| ||
Current Assets: |
|
|
|
|
|
| ||
Cash |
| $ | 3,100,415 |
|
| $ | 11,131,175 |
|
Accounts receivable |
|
| 242,816 |
|
|
| 0 |
|
Investments |
|
| 6,987,913 |
|
|
| 0 |
|
Prepaid expenses |
|
| 527,700 |
|
|
| 218,466 |
|
Total Current Assets |
|
| 10,858,844 |
|
|
| 11,349,641 |
|
Long-Term Assets: |
|
|
|
|
|
|
|
|
Equipment, net |
|
| 6,843 |
|
|
| 959 |
|
Intangible asset, net |
|
| 996,540 |
|
|
| 1,028,114 |
|
Other assets |
|
| 34,357 |
|
|
| 34,742 |
|
Total Long-Term Assets |
|
| 1,037,740 |
|
|
| 1,063,815 |
|
Total Assets |
| $ | 11,896,584 |
|
| $ | 12,413,456 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
| $ | 682,633 |
|
| $ | 62,981 |
|
Deferred revenue |
|
| 732,620 |
|
|
| 0 |
|
Other liabilities |
|
| 16,925 |
|
|
| 23,390 |
|
Total Current Liabilities |
|
| 1,432,178 |
|
|
| 86,371 |
|
Total Liabilities |
|
| 1,432,178 |
|
|
| 86,371 |
|
Stockholders’ Equity |
|
|
|
|
|
|
|
|
Preferred Stock: 1,000,000 Convertible Series D preferred shares authorized; par value $0.0001 per share, nil issued and outstanding at June 30, 2022 and 27,272 issued and outstanding at December 31, 2021 |
|
| 0 |
|
|
| 3 |
|
|
|
|
|
|
|
|
|
|
Common stock: 200,000,000 common shares authorized, par value $0.0001 per share, 126,680,895 and 125,317,746 shares outstanding at June 30, 2022 and December 31, 2021, respectively |
|
| 12,667 |
|
|
| 12,531 |
|
Additional paid-in capital |
|
| 15,710,901 |
|
|
| 15,474,566 |
|
Accumulated (deficit) |
|
| (5,247,148 | ) |
|
| (3,160,015 | ) |
Accumulated other comprehensive loss |
|
| (12,014 | ) |
|
| 0 |
|
Total Stockholders’ Equity |
|
| 10,464,406 |
|
|
| 12,327,085 |
|
Total Liabilities and Stockholders’ Equity |
| $ | 11,896,584 |
|
| $ | 12,413,456 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
374Water, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the three and six months ended June 30, 2022 and 2021
(Unaudited)
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
| $ | 1,030,528 |
|
| $ | 14,600 |
|
| $ | 1,303,759 |
|
| $ | 14,600 |
|
Cost of Goods Sold |
|
| 902,508 |
|
|
| 0 |
|
|
| 1,150,494 |
|
|
| 0 |
|
Gross Profit |
|
| 128,020 |
|
|
| 14,600 |
|
|
| 153,265 |
|
|
| 14,600 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
| 422,695 |
|
|
| 124,675 |
|
|
| 608,348 |
|
|
| 153,860 |
|
Compensation and related expenses |
|
| 399,448 |
|
|
| 158,979 |
|
|
| 700,683 |
|
|
| 177,666 |
|
Product and development expenses |
|
| 0 |
|
|
| 1,399,833 |
|
|
| 0 |
|
|
| 1,399,833 |
|
Professional Fees |
|
| 141,104 |
|
|
| 152,437 |
|
|
| 291,760 |
|
|
| 160,638 |
|
General and administrative |
|
| 379,661 |
|
|
| 53,308 |
|
|
| 641,067 |
|
|
| 63,785 |
|
Total Operating Expenses |
|
| 1,342,908 |
|
|
| 1,889,231 |
|
|
| 2,241,858 |
|
|
| 1,955,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations |
|
| (1,214,888 | ) |
|
| (1,874,631 | ) |
|
| (2,088,593 | ) |
|
| (1,941,182 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Award income |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Interest income |
|
| 613 |
|
|
| 323 |
|
|
| 1,453 |
|
|
| 323 |
|
Other income |
|
| 0 |
|
|
| 0 |
|
|
| 7 |
|
|
| 0 |
|
Total Other Income (Expense) |
|
| 613 |
|
|
| 323 |
|
|
| 1,453 |
|
|
| 323 |
|
Net Loss before Income Taxes |
|
| (1,214,275 | ) |
|
| (1,874,308 | ) |
|
| (2,087,133 | ) |
|
| (1,940,858 | ) |
Provision for Income Taxes |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
| $ | (1,214,275 | ) |
| $ | (1,874,308 | ) |
| $ | (2,087,133 | ) |
| $ | (1,940,858 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation |
|
| (771 | ) |
|
| 0 |
|
|
| (771 | ) |
|
| 0 |
|
Change in unrealized loss on marketable securities |
|
| (11,243 | ) |
|
| 0 |
|
|
| (11,243 | ) |
|
| 0 |
|
Total other comprehensive loss |
|
| (12,014 | ) |
|
| 0 |
|
|
| (12,014 | ) |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
| (1,226,289 | ) |
|
| (1,874,308 | ) |
|
| (2,099,147 | ) |
|
| (1,940,858 | ) |
Net Loss per Share - Basic and Diluted |
| $ | (0.01 | ) |
| $ | (0.02 | ) |
| $ | (0.02 | ) |
| $ | (0.03 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding - Basic and Diluted |
|
| 126,680,895 |
|
|
| 91,652,090 |
|
|
| 126,591,017 |
|
|
| 77,112,049 |
|
|
| 2022 |
|
| 2021 |
| ||
Assets |
|
|
|
|
|
| ||
Current Assets: |
|
|
|
|
|
| ||
Cash |
| $ | 2,407,983 |
|
| $ | 11,131,175 |
|
Accounts receivable |
|
| 164,600 |
|
|
| - |
|
Investments |
|
| 5,994,272 |
|
|
| - |
|
Prepaid expenses |
|
| 1,297,933 |
|
|
| 218,466 |
|
Total Current Assets |
|
| 9,864,788 |
|
|
| 11,349,641 |
|
Long-Term Assets: |
|
|
|
|
|
|
|
|
Equipment, net |
|
| 124,593 |
|
|
| 959 |
|
Intangible asset, net |
|
| 980,753 |
|
|
| 1,028,114 |
|
Other assets |
|
| 35,170 |
|
|
| 34,742 |
|
Total Long-Term Assets |
|
| 1,140,516 |
|
|
| 1,063,815 |
|
Total Assets |
| $ | 11,005,304 |
|
| $ | 12,413,456 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
| $ | 1,043,660 |
|
| $ | 62,981 |
|
Deferred revenue |
|
| 200,109 |
|
|
| — |
|
Other liabilities |
|
| 18,388 |
|
|
| 23,390 |
|
Total Current Liabilities |
|
| 1,262,157 |
|
|
| 86,371 |
|
Total Liabilities |
|
| 1,262,157 |
|
|
| 86,371 |
|
Stockholders’ Equity |
|
|
|
|
|
|
|
|
Preferred Stock: 1,000,000 Convertible Series D preferred shares authorized; par value $0.0001 per share, nil issued and outstanding at September 30, 2022 and 27,272 issued and outstanding at December 31, 2021 |
|
| — |
|
|
| 3 |
|
|
|
|
|
|
|
|
|
|
Common stock: 200,000,000 common shares authorized, par value $0.0001 per share, 126,680,895 and 125,317,746 shares outstanding at September 30, 2022 and December 31, 2021, respectively |
|
| 12,667 |
|
|
| 12,531 |
|
Additional paid-in capital |
|
| 15,894,426 |
|
|
| 15,474,566 |
|
Accumulated (deficit) |
|
| (6,159,975 | ) |
|
| (3,160,015 | ) |
Accumulated other comprehensive loss |
|
| (3,971 | ) |
|
| — |
|
Total Stockholders’ Equity |
|
| 9,743,147 |
|
|
| 12,327,085 |
|
Total Liabilities and Stockholders’ Equity |
| $ | 11,005,304 |
|
| $ | 12,413,456 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
| Table of Contents |
374Water, Inc. and Subsidiaries
Condensed Consolidated Changes in Stockholders’ EquityStatements of Operations
For the three and sixnine months ended JuneSeptember 30, 2022 and 2021
(Unaudited)
For the three and six months ended June 30, 2022
|
| Preferred Stock |
|
| Common Stock |
|
| Additional |
|
|
|
| Other |
|
| Total |
| |||||||||||||||
|
| Number of |
|
|
|
| Number of |
|
|
|
| Paid in |
|
| Accumulated |
|
| Comprehensive |
|
| Stockholders’ |
| ||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Income |
|
| Equity |
| ||||||||
Balances, December 31, 2021 |
|
| 27,272 |
|
| $ | 3 |
|
|
| 125,317,746 |
|
| $ | 12,531 |
|
| $ | 15,474,566 |
|
| $ | (3,160,015 | ) |
| $ | 0 |
|
| $ | 12,327,085 |
|
Conversion of Preferred Shares to Common Shares |
|
| (27,272 | ) |
|
| (3 | ) |
|
| 1,363,149 |
|
|
| 136 |
|
|
| (135 | ) |
|
| 0 |
|
|
| 0 |
|
|
| (2 | ) |
Accretion of stock-based compensation |
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 97,558 |
|
|
| 0 |
|
|
| 0 |
|
|
| 97,558 |
|
Net loss |
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| (872,858 | ) |
|
| 0 |
|
|
| (872,858 | ) |
Balances, March 31, 2022 |
|
| — |
|
|
| 0 |
|
|
| 126,680,895 |
|
| $ | 12,667 |
|
| $ | 15,571,989 |
|
| $ | (4,032,873 | ) |
|
| 0 |
|
| $ | 11,551,783 |
|
Accretion of stock-based compensation |
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 138,912 |
|
|
| 0 |
|
|
| 0 |
|
|
| 138,912 |
|
Foreign currency gain (loss) |
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (771 | ) |
|
| (771 | ) |
Unrealized gain (loss) on investments |
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (11,243 | ) |
|
| (11,243 | ) |
Net loss |
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| (1,214,275 | ) |
|
| 0 |
|
|
| (1,214,275 | ) |
Balances, June 30, 2022 |
|
| — |
|
|
| 0 |
|
|
| 126,680,895 |
|
| $ | 12,667 |
|
| $ | 15,710,901 |
|
| $ | (5,247,148 | ) |
| $ | (12,014 | ) |
| $ | 10,464,406 |
|
For the three and six months ended June 30, 2021
|
| Preferred Stock |
|
| Common Stock |
|
| Additional |
|
|
|
|
| Other |
|
| Total |
| ||||||||||||||
|
| Number of |
|
|
|
|
| Number of |
|
|
|
|
| Paid in |
|
| Accumulated |
|
| Comprehensive |
|
| Stockholders’ |
| ||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Income |
|
| Equity |
| ||||||||
Balances, December 31, 2020 |
|
| — |
|
| $ | 0 |
|
|
| 62,410,452 |
|
| $ | 6,241 |
|
| $ | 416 |
|
| $ | 4,593 |
|
| $ | 0 |
|
| $ | 11,250 |
|
Accretion of stock-based compensation |
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 10,433 |
|
|
| 0 |
|
|
| 0 |
|
|
| 10,433 |
|
Net loss |
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| (66,551 | ) |
|
| 0 |
|
|
| (66,551 | ) |
Balances, March 31, 2021 |
|
| — |
|
|
| 0 |
|
|
| 62,410,452 |
|
|
| 6,241 |
|
|
| 10,849 |
|
|
| (61,958 | ) |
|
| 0 |
|
|
| (44,868 | ) |
Issuance of stock warrants for development of product |
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 1,399,833 |
|
|
| 0 |
|
|
| 0 |
|
|
| (1,399,833 | ) |
Recapitalization of the Company |
|
| — |
|
|
| 0 |
|
|
| 33,203,512 |
|
|
| 3,320 |
|
|
| (87,545 | ) |
|
| 0 |
|
|
| 0 |
|
|
| (84,225 | ) |
Series D preferred stock issued for cash and settlement of accounts payable |
|
| 440,125 |
|
|
| 44 |
|
|
| — |
|
|
| 0 |
|
|
| 6,601,701 |
|
|
| 0 |
|
|
| 0 |
|
|
| 6,601,745 | ) |
Exercised option and warrants |
|
| — |
|
|
| 0 |
|
|
| 1,175,500 |
|
|
| 118 |
|
|
| 150,227 |
|
|
| 0 |
|
|
| 0 |
|
|
| (150,345 | ) |
Accretion of stock-based compensation |
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 15,134 |
|
|
| 0 |
|
|
| 0 |
|
|
| (15,134 | ) |
Issuance of common stock for license rights |
|
| — |
|
|
| 0 |
|
|
| 1,602,282 |
|
|
| 160 |
|
|
| 1,073,369 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,073,529 | ) |
Net loss |
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| (1,874,307 | ) |
|
| 0 |
|
|
| (1,874,307 | ) |
Balances, June 30, 2021 |
|
| 440,125 |
|
| $ | 44 |
|
|
| 98,391,746 |
|
| $ | 9,839 |
|
| $ | 9,163,568 |
|
| $ | (1,936,265 | ) |
| $ | 0 |
|
| $ | 7,237,186 |
|
|
| Three months ended September 30, |
|
| Nine months ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
| $ | 922,718 |
|
| $ | 19,000 |
|
| $ | 2,226,477 |
|
| $ | 33,600 |
|
Cost of Goods Sold |
|
| 812,386 |
|
|
| — |
|
|
| 1,962,879 |
|
|
| — |
|
Gross Profit |
|
| 110,332 |
|
|
| 19,000 |
|
|
| 263,598 |
|
|
| 33,600 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
| 118,253 |
|
|
| 115,936 |
|
|
| 726,602 |
|
|
| 269,796 |
|
Compensation and related expenses |
|
| 435,297 |
|
|
| 227,790 |
|
|
| 1,135,979 |
|
|
| 405,456 |
|
Product and development expenses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,399,833 |
|
Professional Fees |
|
| 82,752 |
|
|
| 84,514 |
|
|
| 375,313 |
|
|
| 245,152 |
|
General and administrative |
|
| 387,018 |
|
|
| 143,147 |
|
|
| 1,027,287 |
|
|
| 206,931 |
|
Total Operating Expenses |
|
| 1,023,320 |
|
|
| 571,387 |
|
|
| 3,265,181 |
|
|
| 2,527,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations |
|
| (912,988 | ) |
|
| (552,387 | ) |
|
| (3,001,583 | ) |
|
| (2,493,568 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Award income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Interest income |
|
| 162 |
|
|
| 428 |
|
|
| 1,617 |
|
|
| 751 |
|
Other income |
|
| — |
|
|
| — |
|
|
| 7 |
|
|
| — |
|
Total Other Income (Expense) |
|
| 162 |
|
|
| 428 |
|
|
| 1,624 |
|
|
| 751 |
|
Net Loss before Income Taxes |
|
| (912,826 | ) |
|
| (551,959 | ) |
|
| (2,999,959 | ) |
|
| (2,492,817 | ) |
Provision for Income Taxes |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
| $ | (912,826 | ) |
| $ | (551,959 | ) |
| $ | (2,999,959 | ) |
| $ | (2,492,817 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation |
|
| — |
|
|
| — |
|
|
| (850 | ) |
|
| — |
|
Change in unrealized loss on marketable securities |
|
| (3,122 | ) |
|
| — |
|
|
| (3,122 | ) |
|
| — |
|
Total other comprehensive loss |
|
| (3,122 | ) |
|
| — |
|
|
| (3,972 | ) |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
| (915,948 | ) |
|
| (551,959 | ) |
|
| (3,003,931 | ) |
|
| (2,492,817 | ) |
Net Loss per Share - Basic and Diluted |
| $ | (0.01 | ) |
| $ | (0.01 | ) |
| $ | (0.02 | ) |
| $ | (0.03 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding - Basic and Diluted |
|
| 126,680,895 |
|
|
| 98,391,746 |
|
|
| 126,621,412 |
|
|
| 84,283,229 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
| Table of Contents |
374Water Inc. and Subsidiaries
Condensed Consolidated Statements of Cash FlowsChanges in Stockholders’ Equity
For the sixthree and nine months ended JuneSeptember 30, 2022 and 2021
(Unaudited)
|
| 2022 |
|
| 2021 |
| ||
Cash Flows from Operating Activities |
|
|
|
|
|
| ||
Net loss |
| $ | (2,087,133 | ) |
| $ | (1,940,858 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
| 33,174 |
|
|
| 275 |
|
Stock based compensation |
|
| 236,470 |
|
|
| 25,567 |
|
Warrant issued for product development agreement |
|
| 0 |
|
|
| 1,399,833 |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (242,816 | ) |
|
| 24,730 |
|
Prepaid inventory |
|
| (308,003 | ) |
|
| 0 |
|
Prepaid expenses |
|
| (1,231 | ) |
|
| (149 | ) |
Accounts payable and accrued expenses |
|
| 619,652 |
|
|
| (26 | ) |
Deferred revenue |
|
| 732,620 |
|
|
| 0 |
|
Other liabilities |
|
| (6,465 | ) |
|
| 18,343 |
|
|
|
|
|
|
|
|
|
|
Cash Provided by (Used In) Operating Activities |
|
| (1,023,731 | ) |
|
| (472,286 | ) |
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Purchase of marketable securities |
|
| (6,999,927 | ) |
|
| 0 |
|
Purchase of equipment |
|
| (6,608 | ) |
|
| (1,190 | ) |
Proceeds from reverse acquisition |
|
| 0 |
|
|
| 29,536 |
|
Increase in other asset |
|
| (494 | ) |
|
| (19,826 | ) |
|
|
|
|
|
|
|
|
|
Cash Provided by (Used In) Investing Activities |
|
| (7,007,029 | ) |
|
| 8,520 |
|
|
|
|
|
|
|
|
|
|
Cash Flow from Financing Activities |
|
|
|
|
|
|
|
|
Repayments to (advances) from stockholders |
|
| 0 |
|
|
| (15,108 | ) |
Proceeds from sale of series D preferred shares |
|
| 0 |
|
|
| 6,551,745 |
|
Proceeds from exercise of options and warrants |
|
| 0 |
|
|
| 150,345 |
|
|
|
|
|
|
|
|
|
|
Cash Provided by Financing Activities |
|
| 0 |
|
|
| 6,686,982 |
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash |
|
| (8,030,760 | ) |
|
| 6,223,216 |
|
Cash, Beginning of the Period |
|
| 11,131,175 |
|
|
| 71,799 |
|
Cash, End of the Period |
| $ | 3,100,415 |
|
| $ | 6,295,015 |
|
|
|
|
|
|
|
|
|
|
NON-CASH FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock |
| $ | 133 |
|
| $ | 0 |
|
License |
|
| 0 |
|
|
| 1,073,529 |
|
Accounts payable settled with Series D Preferred Stock |
|
| 0 |
|
|
| 50,000 |
|
NET LIABILITIES ASSUMED IN REVERSE ACQUISITION |
|
|
|
|
|
|
|
|
Cash |
|
| 0 |
|
|
| 29,536 |
|
Prepaid expense |
|
| 0 |
|
|
| 14,483 |
|
Accounts receivable |
|
| 0 |
|
|
| 1,000 |
|
Account payable |
|
| 0 |
|
|
| (46,150 | ) |
Accrued expenses |
|
| 0 |
|
|
| (83,094 | ) |
Net liability assumed |
|
| 0 |
|
|
| (84,225 | ) |
For the three and nine months ended September 30, 2022
|
| Preferred Stock |
|
| Common Stock |
|
| Additional |
|
|
|
| Other |
|
| Total |
| |||||||||||||||
|
| Number of |
|
|
|
| Number of |
|
|
|
| Paid in |
|
| Accumulated |
|
| Comprehensive |
|
| Stockholders’ |
| ||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Income |
|
| Equity |
| ||||||||
Balances, December 31, 2021 |
|
| 27,272 |
|
| $ | 3 |
|
|
| 125,317,746 |
|
| $ | 12,531 |
|
| $ | 15,474,566 |
|
| $ | (3,160,015 | ) |
| $ | — |
|
| $ | 12,327,085 |
|
Conversion of Preferred Shares to Common Shares |
|
| (27,272 | ) |
|
| (3 | ) |
|
| 1,363,149 |
|
|
| 136 |
|
|
| (135 | ) |
|
| — |
|
|
| — |
|
|
| (2 | ) |
Accretion of stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 97,558 |
|
|
| — |
|
|
| — |
|
|
| 97,558 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (872,858 | ) |
|
| — |
|
|
| (872,858 | ) |
Balances, March 31, 2022 |
|
| — |
|
|
| — |
|
|
| 126,680,895 |
|
| $ | 12,667 |
|
| $ | 15,571,989 |
|
| $ | (4,032,873 | ) |
|
| — |
|
| $ | 11,551,783 |
|
Accretion of stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 138,912 |
|
|
| — |
|
|
| — |
|
|
| 138,912 |
|
Foreign currency gain (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (771 | ) |
|
| (771 | ) |
Unrealized gain (loss) on investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (11,243 | ) |
|
| (11,243 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,214,275 | ) |
|
| — |
|
|
| (1,214,275 | ) |
Balances, June 30, 2022 |
|
| — |
|
|
| — |
|
|
| 126,680,895 |
|
| $ | 12,667 |
|
| $ | 15,710,901 |
|
| $ | (5,247,148 | ) |
| $ | (12,014 | ) |
| $ | 10,464,406 |
|
Accretion of stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 183,524 |
|
|
| — |
|
|
| — |
|
|
| 183,524 |
|
Foreign currency gain (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (78 | ) |
|
| (78 | ) |
Unrealized gain (loss) on investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,121 |
|
|
| 8,121 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (912,826 | ) |
|
| — |
|
|
| (912,826 | ) |
Balances, September 30, 2022 |
|
| — |
|
|
| — |
|
|
| 126,680,895 |
|
| $ | 12,667 |
|
| $ | 15,894,426 |
|
| $ | (6,159,975 | ) |
| $ | (3,971 | ) |
| $ | 9,743,147 |
|
For the three and nine months ended September 30, 2021
|
| Preferred Stock |
|
| Common Stock |
|
| Additional |
|
|
|
| Other |
|
| Total |
| |||||||||||||||
|
| Number of |
|
|
|
| Number of |
|
|
|
| Paid in |
|
| Accumulated |
|
| Comprehensive |
|
| Stockholders’ |
| ||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Income |
|
| Equity |
| ||||||||
Balances, December 31, 2020 |
|
| — |
|
| $ | — |
|
|
| 62,410,452 |
|
| $ | 6,241 |
|
| $ | 416 |
|
| $ | 4,593 |
|
| $ | — |
|
| $ | 11,250 |
|
Accretion of stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,433 |
|
|
| — |
|
|
| — |
|
|
| 10,433 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (66,551 | ) |
|
| — |
|
|
| (66,551 | ) |
Balances, March 31, 2021 |
|
| — |
|
|
| — |
|
|
| 62,410,452 |
|
|
| 6,241 |
|
|
| 10,849 |
|
|
| (61,958 | ) |
|
| — |
|
|
| (44,868 | ) |
Issuance of stock warrants for development of product |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,399,833 |
|
|
| — |
|
|
| — |
|
|
| (1,399,833 | ) |
Recapitalization of the Company |
|
| — |
|
|
| — |
|
|
| 33,203,512 |
|
|
| 3,320 |
|
|
| (87,545 | ) |
|
| — |
|
|
| — |
|
|
| (84,225 | ) |
Series D preferred stock issued for cash and settlement of accounts payable |
|
| 440,125 |
|
|
| 44 |
|
|
| — |
|
|
| — |
|
|
| 6,601,701 |
|
|
| — |
|
|
| — |
|
|
| 6,601,745 |
|
Exercised option and warrants |
|
| — |
|
|
| — |
|
|
| 1,175,500 |
|
|
| 118 |
|
|
| 150,227 |
|
|
| — |
|
|
| — |
|
|
| 150,345 |
|
Accretion of stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 15,134 |
|
|
| — |
|
|
| — |
|
|
| 15,134 |
|
Issuance of common stock for license rights |
|
| — |
|
|
| — |
|
|
| 1,602,282 |
|
|
| 160 |
|
|
| 1,073,369 |
|
|
| — |
|
|
| — |
|
|
| 1,073,529 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,874,307 | ) |
|
| — |
|
|
| (1,874,307 | ) |
Balances, June 30, 2021 |
|
| 440,125 |
|
| $ | 44 |
|
|
| 98,391,746 |
|
| $ | 9,839 |
|
| $ | 9,163,568 |
|
| $ | (1,936,265 | ) |
| $ | — |
|
| $ | 7,237,186 |
|
Exercised option and warrants |
|
| — |
|
|
| — |
|
|
| 3,783,333 |
|
|
| 377 |
|
|
| 1,134,622 |
|
|
| — |
|
|
| — |
|
|
| 1,134,999 |
|
Accretion of stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 60,585 |
|
|
| — |
|
|
| — |
|
|
| 60,585 |
|
Conversion of convertible preferred shares into common stock |
|
| (412,853 | ) |
|
| (41 | ) |
|
| 20,642,667 |
|
|
| 2,064 |
|
|
| (2,023 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (551,959 | ) |
|
| — |
|
|
| (551,959 | ) |
Balances, September 30, 2021 |
|
| 27,272 |
|
| $ | 3 |
|
|
| 122,817,746 |
|
| $ | 12,281 |
|
| $ | 10,356,751 |
|
| $ | (2,488,224 | ) |
| $ | — |
|
| $ | 7,880,811 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
| Table of Contents |
374Water Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2022 and 2021(Unaudited)
|
| 2022 |
|
| 2021 |
| ||
Cash Flows from Operating Activities |
|
|
|
|
|
| ||
Net loss |
| $ | (2,999,959 | ) |
| $ | (2,492,817 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
| 50,052 |
|
|
| 16,314 |
|
Stock based compensation |
|
| 419,995 |
|
|
| 86,152 |
|
Warrant issued for product development agreement |
|
| — |
|
|
| 1,399,833 |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (164,600 | ) |
|
| 19,663 |
|
Prepaid expenses |
|
| (1,079,467 | ) |
|
| (26,185 | ) |
Accounts payable and accrued expenses |
|
| 980,679 |
|
|
| (78,558 | ) |
Deferred revenue |
|
| 200,109 |
|
|
| — |
|
Other liabilities |
|
| (5,002 | ) |
|
| 22,007 |
|
|
|
|
|
|
|
|
|
|
Cash Provided by (Used In) Operating Activities |
|
| (2,598,193 | ) |
|
| (1,053,591 | ) |
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Purchase of marketable securities |
|
| (5,998,243 | ) |
|
| — |
|
Purchase of equipment |
|
| (125,011 | ) |
|
| (2,319 | ) |
Proceeds from reverse acquisition |
|
| — |
|
|
| 29,536 |
|
Increase in other asset |
|
| (1,745 | ) |
|
| (19,826 | ) |
|
|
|
|
|
|
|
|
|
Cash Provided by (Used In) Investing Activities |
|
| (6,123,999 | ) |
|
| 7,391 |
|
|
|
|
|
|
|
|
|
|
Cash Flow from Financing Activities |
|
|
|
|
|
|
|
|
Repayments to (advances) from stockholders |
|
| — |
|
|
| (15,108 | ) |
Proceeds from sale of series D preferred shares |
|
| — |
|
|
| 6,551,745 |
|
Proceeds from exercise of options and warrants |
|
| — |
|
|
| 1,285,344 |
|
|
|
|
|
|
|
|
|
|
Cash Provided by Financing Activities |
|
| — |
|
|
| 7,821,981 |
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash |
|
| (8,723,192 | ) |
|
| 6,775,781 |
|
Cash, Beginning of the Period |
|
| 11,131,175 |
|
|
| 71,799 |
|
Cash, End of the Period |
| $ | 2,407,983 |
|
| $ | 6,847,580 |
|
|
|
|
|
|
|
|
|
|
NON-CASH FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock |
| $ | 133 |
|
| $ | — |
|
License |
|
| — |
|
|
| 1,073,529 |
|
Accounts payable settled with Series D Preferred Stock |
|
| — |
|
|
| 50,000 |
|
NET LIABILITIES ASSUMED IN REVERSE ACQUISITION |
|
|
|
|
|
|
|
|
Cash |
|
| — |
|
|
| 29,536 |
|
Prepaid expense |
|
| — |
|
|
| 14,483 |
|
Accounts receivable |
|
| — |
|
|
| 1,000 |
|
Account payable |
|
| — |
|
|
| (46,150 | ) |
Accrued expenses |
|
| — |
|
|
| (83,094 | ) |
Net liability assumed |
|
| — |
|
|
| (84,225 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 7 |
| Table of Contents |
374Water Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 – Nature of Business and Presentation of Financial Statements
Description of the Company
374Water Inc., f/k/a PowerVerde, Inc. (the “Company”) wasis 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, (“Private 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 Private 374Water, with Private 374Water as the surviving corporation. In connection with the Merger, all Private 374Water shares were canceled and the Company issued to the former Private 374Water shareholders a total of 62,410,452 shares of the Company common stock. Immediately following the Merger, Private 374Water changed its name to 374Water Systems Inc and PowerVerde changed its name to 374Water Inc. After the Merger, the former Private 374Water stockholders owned 64.2% of the Company’s issued and outstanding common stock and 53.8% of the Company’s issued and outstanding voting stock which includes the Preferred Stock. The Merger was accounted for as a reverse acquisition (See Note 4). 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.
Nature of Business
With the Merger, theThe Company’s current mission is to support a clean and healthy environment to sustain life. The Company plans to use what it believes to be 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 the Company believes will make the sustainable development goals a reality. On February 1, 2022, the Company sold its first AirSCWO system to Orange County Sanitation District of Fountain Valley, California. Revenues to date have been from sale of the Company’s first AirSCWO system and from testing, consulting, and advisory services procedures for our customers, which have been performed in collaboration with Duke University.customers.
Presentation of Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission (SEC)(the “SEC”) for interim financial information. It is management’s opinion that the accompanying unaudited condensed consolidated financial statements are prepared in accordance with instructions for Form 10-Q and 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 on Form 10-K of 374Water Inc, formerly known as PowerVerde, Inc. (“374 Water," “we,” “us,” “our,” or the “Company”) as of and for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 1, 2022. The results of operations for the sixnine months ended JuneSeptember 30, 2022, 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 374Water Inc, formerly known as PowerVerde, Inc. (the “Company”), and PowerVerde Systems, Inc., 374Water Systems Inc, and 374Water Sustainability Israel LTD, each a wholly-owned subsidiary of 374 Water. Intercompany balances and transactions have been eliminated in consolidation. These interim financial statements reflect the acquisition of the Company’s wholly-owned subsidiary, 374Water Systems Inc., which was consummated on April 16, 2021, as more fully disclosed in Note 4 and the creation of 374Water Sustainability LTD, an Israeli wholly-owned subsidiary on March 3, 2022 and having no activity until Q2the second quarter of 2022.
| Table of Contents |
Note 2 – Summary of Significant Accounting Policies
Cash and Cash Equivalents and Marketable Securities
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 JuneSeptember 30, 2022, and December 31, 2021.
The Company held marketable securities as of JuneSeptember 30, 2022 as noted in the following table:
|
| Adjusted Cost |
| Unrealized Losses |
| Fair Value |
| Cash and Cash Equivalents |
| Current Marketable Securities |
| Non-Current Marketable Securities |
|
| Adjusted Cost |
|
| Unrealized Losses |
|
| Fair Value |
|
| Cash and Cash Equivalents |
|
| Current Marketable Securities |
|
| Non-Current Marketable Securities |
| |||||||||||||||||
Cash |
| $ | 3,100,415 |
| 0 |
| $ | 3,100,415 |
| $ | 3,100,415 |
| 0 |
| 0 |
|
| $ | 2,407,983 |
| — |
| $ | 2,407,983 |
| $ | 2,407,983 |
| — |
| — |
| ||||||||||||||||
Level 2: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
U.S. Treasury securities |
| $ | 6,968,338 |
|
| $ | 11,243 |
|
| $ | 6,987,913 |
|
| $ | 31,487 |
|
| $ | 6,956,426 |
|
|
| 0 |
|
| $ | 5,950,971 |
|
| $ | 15,052 |
|
| $ | 5,994,272 |
|
| $ | 58,353 |
|
| $ | 5,935,919 |
|
|
| — |
|
Total |
| $ | 10,068,753 |
|
| $ | 11,243 |
|
| $ | 10,056,841 |
|
| $ | 3,131,902 |
|
| $ | 6,956,426 |
|
|
| 0 |
|
| $ | 8,358,954 |
|
| $ | 15,052 |
|
| $ | 8,402,255 |
|
| $ | 2,466,336 |
|
| $ | 5,935,919 |
|
|
| — |
|
The Company held no marketable securities as of December 31, 2021.
ASCAccounting Standards Codification (ASC) Topic 820 “Fair Value Measurements” establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:
Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
Level 2 Inputs - Fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:
|
| Investment Securities Available-for-Sale. Investment securities available-for-sale (“AFS”) is recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in illiquid markets. |
Accounts Receivable
Accounts receivables consist of balances due from service revenues. The Company monitors accounts receivable and provides allowances for doubtful accounts when considered necessary. At JuneAs of September 30, 2022 and December 31, 2021, there were $242,816$35,480 and $0, outstanding accounts receivable, respectively. At JuneAs of September 30, 2022 and December 31, 2021, there was no allowance for doubtful accounts recorded.
Unbilled Receivable
Unbilled receivables consist of balances that are unconditionally due to the Company for services already rendered except for physical invoicing and the passage of time. Invoicing requirements vary by customer contract, but all unbilled revenues are billed within one year. At September 30, 2022 and December 31, 2021, there were $129,120 and $0, outstanding unbilled receivables, respectively.
Equipment
Equipment is recorded at cost. Depreciation is computed using the straight-line method and an estimated useful life of three years. Expenses for maintenance and repairs are charged to expense as incurred. The Company’s depreciation expense infor the period is $728.three months and nine months ended September 30, 2022 was $650 and $1,374, respectively.
Intangible Assets
Intangible assets are subject 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, including 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. 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 JuneSeptember 30, 2022, and 2021, there were no events or changes in circumstances requiring an impairment analysis.
Revenue Recognition and Concentration
The Company follows the revenue standards of Accounting Standards CodificationASC Topic #606.606 - “Revenue from Contracts with Customers”. The core principle of topicTopic 606 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 goods 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. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from the completion of the equipment build for each customer as the inputs are measured against the cost to build the product.
The Company’s performance obligations will be satisfied overtime as the specialized equipment is built for the customer. Based on the Company’s contracts, the Company will have a single performance obligation (build and install of the product). The Company will primarily receive fixed consideration for sales of products.
The majority of revenues for the three months ended JuneSeptember 30, 2022 were generated from the sale of the first AirSCWO system. For the three months and nine months ended JuneSeptember 30, 2021, the Company did not have any revenues. Theordinary revenue. All revenue generated as of JuneSeptember 30, 2021 was not relatedunrelated to the sale of thean AirSCWO unit.
| Table of Contents |
Stock-based Compensation
The Company has accounted for stock-based compensation under the provisions of Accounting 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.
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 no uncertain tax positions as of JuneSeptember 30, 2022, and December 31, 2021.
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 $608,348$726,602 and $153,860$269,796 for the sixnine months ended JuneSeptember 30, 2022, and 2021, respectively. The Company’s research and development costs are expensed in the period in which they are incurred. Such expenditures amounted to $118,253 and $115,936 for the three months ended September 30, 2022, and 2021, respectively.
Loss Per Share
Loss per share is computed in accordance with FASB ASC Topic 260, “Earnings per Share”. Diluted earnings per share is computed by dividing net 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 loss per share calculation as their effect would be anti-dilutive. As of March 31, 2022, there were the following potentially dilutive securities that were excluded from diluted net loss per share because their effect would be antidilutive: options for 12,660,000 shares of common stock. There were no dilutive shares as of JuneSeptember 30, 2022.
Financial Instruments
The Company carries cash, accounts receivable, accounts payable and accrued expenses, at historical costs. The respective estimated fair values of these assets and liabilities approximate carrying values / useful lives of equipment and intangible assets due to their current nature.
| Table of Contents |
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, useful lives of intangible assets, and valuation allowance against deferred tax assets.
Recent Accounting Pronouncements
All other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.
Note 3 – Liquidity, Capital Resources and Going Concern
As of JuneSeptember 30, 2022, the Company had working capital of $9,426,666$8,602,631 compared to working capital of $11,263,270 at December 31, 2021. As of JuneSeptember 30, 2022, the Company had an accumulated deficit of $5,247,148.$6,159,975. For the sixnine months ended JuneSeptember 30, 2022, the Company had a net loss of $2,087,133$2,999,959 and used $1,023,731$2,598,193 of net cash in operations for the period. As of JuneSeptember 30, 2021, the Company had working capital of $6,142,238$6,800,773 compared to working capital of $10,572 at December 31, 2020. As of JuneSeptember 30, 2021, the Company had an accumulated deficit of $1,936,266.$2,488,224. For the sixnine months ended JuneSeptember 30, 2021, the Company had a net loss of $1,940,858$2,492,817 and used $472,286$1,053,591 of net cash in operations for the period.
The Company believes it has sufficient cash-on-hand (including its marketable securities described in Note 2 above) for the Company to meet its financial obligations as they come due at least the next 12 months from the date of the report as they come due.report.
Note 4 – Acquisition of 374Water, Inc. f/k/a PowerVerde Inc.
Agreement and Plan of Merger
In connection with the Merger, (see Note 1), 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 $0.0001, yielding gross proceeds of $6,551,745 (the “Private Placement”) and the settlement of a $50,000 liability for Preferred Stock shares. The Private Placement proceeds will be used for working capital, primarily for development, manufacture and commercialization of the Company’s AirSCWO 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. 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 of September 30, 2022, there were no shares of Preferred Stock issued and outstanding.
As a result of the Merger, the issuance of the Preferred Stock, the former Private 374Water shareholders owned 65.8% of the Company’s issued and outstanding common stock and 53.8% of the Company’s issued and outstanding voting stock (which includes the Preferred Stock on an as converted basis).
| Table of Contents |
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,professor. The SCWO technology is licensed to 374Water pursuant to a worldwide license agreement with Duke executed on April 16, 2021 (the “License Agreement”) simultaneous with the merger.Merger. In connection with the License Agreement, 374Water also executed an equity transfer Agreementagreement with Duke pursuant to which Duke received a small blocknumber of shares of common stock (see Note 5).
As a result of the Merger Agreement, for financial statement reporting purposes, the business combination between 374Water Inc. and 374Water 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 805-10-55.805.
The following assets and liabilities were assumed in the transaction:
Cash |
| $ | 29,536 |
|
Prepaid expense |
|
| 14,483 |
|
Accounts Receivable |
|
| 1,000 |
|
Total assets acquired |
|
| 45,019 |
|
|
|
|
|
|
Accounts payable |
|
| (46,150 | ) |
Accrued expenses |
|
| (83,094 | ) |
Total liabilities assumed |
| $ | (129,244 | ) |
|
|
|
|
|
Net liabilities assumed |
| $ | (84,225 | ) |
Note 5 – Intangible Assets
Intangible assets are recorded at cost and consist of the license agreementLicense Agreement with Duke University. The Company issued Duke University a small blocknumber of shares of common stock estimated to have a fair value of $1,073,529 as consideration for granting the Company the license based on the Company’s common stock market price on the date the license agreementLicense Agreement was executed (see Note 8). Intangible assets are comprised of the following as of JuneSeptember 30, 2022 and December 31, 2021:
Name |
| Estimated Life |
| Balance at December 31, 2021 |
| Additions |
| Amortization |
| Balance at June 30, 2022 |
|
| Estimated Life |
| Balance at December 31, 2021 |
|
| Additions |
|
| Amortization |
|
| Balance at September 30, 2022 |
| |||||||||||
License agreement |
| 17 Years |
| $ | 1,028,114 |
|
| $ | 0 |
|
| $ | 31,574 |
|
| $ | 996,540 |
|
| 17 Years |
| $ | 1,028,114 |
|
| $ | — |
|
| $ | 47,361 |
|
| $ | 980,753 |
|
Patents |
| 20 Years |
|
| 34,742 |
|
|
| 487 |
|
|
| 872 |
|
|
| 34,357 |
|
| 20 Years |
|
| 34,742 |
|
|
| 1,745 |
|
|
| 1,317 |
|
|
| 35,170 |
|
Total |
|
|
| $ | 1,062,856 |
|
| $ | 487 |
|
| $ | 32,446 |
|
| $ | 1,030,897 |
|
|
|
| $ | 1,062,856 |
|
| $ | 1,745 |
|
| $ | 48,678 |
|
| $ | 1,015,923 |
|
Depreciation and Amortization expense for the sixnine months ended JuneSeptember 30, 2022 and 2021, was $33,174.$48,678 and $15,787, respectively.
11 |
Estimated future amortization expense as of JuneSeptember 30, 2022:
|
| March 31, |
|
| September 30, |
| ||
|
| 2022 |
|
| 2022 |
| ||
2022 (Remaining 6 months) |
| $ | 32,456 |
| ||||
2022 (Remaining 3 months) |
| $ | 16,243 |
| ||||
2023 |
| 64,913 |
|
| 64,973 |
| ||
2024 |
| 64,913 |
|
| 64,973 |
| ||
2025 |
| 64,913 |
|
| 64,973 |
| ||
2026 |
| 64,913 |
|
| 64,973 |
| ||
Thereafter |
|
| 738,789 |
|
|
| 739,788 |
|
Intangible assets, Net |
| $ | 1,030,897 |
|
| $ | 1,015,923 |
|
Note 6 – Stockholder’ Equity
The Company is authorized to issue 1,000,000 preferred stock shares and 200,000,000 common stock shares both with a par value of $0.0001.
Preferred Stock
On October 30, 2020, the Company designated 1,000,000 shares as Series D Convertible Preferred Stock with a par value of $0.0001.
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 $0.0001, 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 systems. The Preferred Stock has a stated value of $15 per share, is convertible into common stock at $0.30 per share and has voting rights based on the underlying shares of common stock. Upon liquidation of the Company, the Preferred Stockholders have a liquidation preference before any assets can be distributed to common stockholders. 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. On September 29, 2021, 412,853 shares of Preferred Stock were converted into 20,642,667 shares of common stock. On January 12, 2022, the Company converted the remaining 27,272 shares of Preferred Stock to 1,363,149 shares of common stock. As of JuneSeptember 30, 2022, there were no shares of 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 directors’ election. There is no right to cumulate votescumulative voting 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 dissolution, 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 JuneSeptember 30, 2022, there were 126,680,895 shares of common stock issued and outstanding.
| 12 |
| Table of Contents |
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 (“Private 374Water”) retroactively restated to reflect the number of shares issued by the Company in the reverse recapitalization.
Pursuant to the Merger, all Private 374Water shares were canceled and the Company issued to the former Private 374Water stockholders a total of 62,410,452 shares of the Company’s common stock.
On April 16, 2021, the Company issued a small blocknumber of shares of common stock estimated to have a fair value of $1,073,369 as consideration for the grant of a license to the Company (see Notes 5 and 8).
During the sixnine months ended JuneSeptember 30, 2022, the Company issued 1,363,149 shares of common stock from the conversion of 27,272 Preferred Stock shares.
Stock-based compensation
During the sixnine months ended JuneSeptember 30, 2022, and 2021, the Company recorded stock-based compensation of $236,471$419,995 and $25,567,$86,152, respectively, related to common stock issued or vested options to employees and various consultants of the Company. For the sixnine months ended JuneSeptember 30, 2022, $214,381$380,383 was charged as general and administrative expenses and $22,089$39,612 as research and development expenses in the accompanying condensed consolidated statements of operations. For the sixnine months ended JuneSeptember 30, 2021, $18,866$75,761 was charged as general and administrative expenses and $6,701$10,391 as research and development expenses in the accompanying condensed consolidated statements of operations.
Stock Options
Stock option activity for the sixnine months ended JuneSeptember 30, 2022, is summarized as follows:
|
| Shares |
|
| Weighted Average Exercise Price |
|
| Aggregate Intrinsic Value |
|
| Weighted Average Remaining Contractual Life (Years) |
|
| Shares |
|
| Weighted Average Exercise Price |
|
| Aggregate Intrinsic Value |
|
| Weighted Average Remaining Contractual Life (Years) |
| ||||||||
Options outstanding at December 31, 2021 |
| 12,300,000 |
|
| $ | 0.37 |
|
| $ | 30,504,000 |
|
| 5.62 |
|
| 12,300,000 |
| $ | 0.37 |
| $ | 30,504,000 |
| 5.62 |
| |||||||
Granted |
| 360,000 |
|
| 3.33 |
|
| — |
|
| — |
|
| 360,000 |
| 3.33 |
| — |
| — |
| |||||||||||
Exercised |
| 0 |
|
| 0 |
|
| — |
|
| — |
|
| — |
| — |
| — |
| — |
| |||||||||||
Expired/forfeit |
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Options outstanding at March 31, 2022 |
|
| 12,660,000 |
|
|
| 0.45 |
|
| $ | 45,576,000 |
|
|
| 5.39 |
|
|
| 12,660,000 |
|
|
| 0.45 |
|
| $ | 45,576,000 |
|
|
| 5.39 |
|
Granted |
| 560,000 |
|
| 0 |
|
| — |
|
| — |
|
| 560,000 |
| — |
| — |
| — |
| |||||||||||
Exercised |
| 0 |
|
| 0 |
|
| — |
|
| — |
|
| — |
| — |
| — |
| — |
| |||||||||||
Expired/forfeit |
|
| (40,000 | ) |
|
| 4.10 |
|
|
| — |
|
|
| — |
|
|
| (40,000 | ) |
|
| 4.10 |
|
|
| — |
|
|
| — |
|
Options outstanding at June 30, 2022 |
|
| 13,180,000 |
|
| $ | 0.54 |
|
| $ | 31,683,690 |
|
|
| 5.31 |
|
|
| 13,180,000 |
|
| $ | 0.54 |
|
| $ | 31,683,690 |
|
|
| 5.31 |
|
Granted |
| 270,000 |
| 2.39 |
| — |
| — |
| |||||||||||||||||||||||
Exercised |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||
Expired/forfeit |
|
| (58,000 | ) |
|
| 3.35 |
|
|
| — |
|
|
| — |
| ||||||||||||||||
Options outstanding at September 30, 2022 |
|
| 13,392,000 |
|
| $ | 0.56 |
|
| $ | 30,383,910 |
|
|
| 5.13 |
| ||||||||||||||||
Total unrecognized compensation associated with these unvested options is approximately $2,090,431$1,956,165 which will be recognized over a period of four years.
| 13 |
| Table of Contents |
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:
|
| June 30, 2022 |
| June 30, 2021 |
| September 30, 2022 |
|
| September 30, 2021 |
| ||||
Dividend yield |
| 0.00% |
| 0.00% | ||||||||||
Expected life |
| 5.28 – 6.10 Years |
| 5.52 – 6.25 Years |
| 5.28 – 6.10 Years |
| 1 Year |
| |||||
Expected volatility |
| 34.37 – 39.18% |
| 38.39 – 38.46% |
| 34.73 – 34.79% |
| 42.39 | % | |||||
Risk-free interest rate |
| 1.44 – 3.56% |
| 0.99 – 1.07% |
| 3.06 – 3.94% |
| 0.06 | % | |||||
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 purchase of 3,783,333 shares of common stock at an exercise price of $0.30 per share was issued to MB Holding Inc. as consideration for executing the MOU and was considered fully vested upon the execution of the MOU. These warrants were to 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 consolidated statements of operations.
During the year ended December 31, 2021, the warrants were exercised resulting in the issuance of 3,783,333 shares of common stock and proceeds of $1,134,499. Terry Merrell, a member of the Company’s Board of Directors, has sole voting and dispositive power over the securities held by MB Holdings Inc.
As of JuneSeptember 30, 2022, there were 1,250,000 warrants outstanding which relate to the Series 1 offering executed in December 2021, where investors were offered a warrant for every two common shares purchased during the offering at an exercise price of $2.50 per share. The intrinsic value of all outstanding warrants as of JuneSeptember 30, 2022 was $550,000$412,500 based on the market price of our common stock of $2.94$2.83 per share.share, which was the Company’s closing per share common stock price as reported on Nasdaq as of September 30, 2022.
During the sixnine months ended JuneSeptember 30, 2022, no warrants were issued or exercised. As of JuneSeptember 30, 2022, there are 1,250,000 outstanding warrants.
A summary of warrant activity during the sixnine months ended JuneSeptember 30, 2022, is as follows:
|
| Shares |
| Weighted Average Exercise Price |
| Aggregate Intrinsic Value |
| Weighted Average Remaining Contractual Life (Years) |
|
| Shares |
|
| Weighted Average Exercise Price |
|
| Aggregate Intrinsic Value |
|
| Weighted Average Remaining Contractual Life (Years) |
| |||||||||||
Balance at December 31, 2021 |
| 1,250,000 |
|
| 2.50 |
|
| $ | 437,500 |
|
| 2.96 |
|
| 1,250,000 |
| 2.50 |
| $ | 437,500 |
| 2.96 |
| |||||||||
Issued |
| 0 |
|
| 0 |
|
| —— |
|
| — |
|
| — |
| — |
| — |
| — |
| |||||||||||
Exercised |
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance at June 30, 2022 |
|
| 1,250,000 |
|
|
| 2.50 |
|
| $ | 550,000 |
|
|
| 2.47 |
| ||||||||||||||||
Balance at September 30, 2022 |
|
| 1,250,000 |
|
|
| 2.50 |
|
| $ | 412,500 |
|
|
| 2.21 |
| ||||||||||||||||
Note 7 - Related Party Transactions
In 2021, the Company entered into an agreement to fabricate and manufacture the AirSCWO systems with Merrell Bros. Holding Company. As part of the agreement, the Company appointed Terry Merrell to its board of directors. As of JuneSeptember 30, 2022, Merrell Bros. or their affiliates own stock in excess of 5% of the outstanding common stock. As of JuneSeptember 30, 2022, the Company incurred $551,581$841,577 in related party expenses related to the manufacturing of the AirSCWO systems. As of JuneSeptember 30, 2022, there is an accrual of $25,000$62,858 in related party expenses related to the manufacturing of the AirSCWO systems.
Note 8 - Commitments
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,professor. The SCWO technology 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 blocknumber of common stock in the Company (See Notes 4 and 6). Under the terms of the License Agreement, the Company is required to make royalty payments based on a percentage of licensed product sales, as defined in the License Agreement which is triggered by the sale of licensed products. Further, the Company is also required to pay royalties on a percentage of sublicensing fees. The Company will reimburse Duke for any ongoing patent expenses incurred. During the three month period ending JuneSeptember 30, 2022, the Company has not incurred any expenses in connection with this License Agreement. The Company may terminate the license agreement anytime by providing Duke 60 days’ written notice.
Note 9 – Deferred Revenue
As of JuneSeptember 30, 2022 and JuneSeptember 30, 2021, the Company had total deferred revenue of $732,620$200,109 and $0, respectively. As of JuneSeptember 30, 2022, the Company expects 100% of total deferred revenue from sales to be realized in less than a year and deferred revenue from grants to be realized later than a year.
| 14 |
| Table of Contents |
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“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 JuneSeptember 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 sixnine months ended JuneSeptember 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 JuneSeptember 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.
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.
Three Months Ended JuneSeptember 30, 2022, as Compared to Three Months Ended JuneSeptember 30, 2021
We generated $1,030,528$922,718 and $14,600$19,000 in revenue during the periods ended JuneSeptember 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 $379,661$387,018 during the period ended JuneSeptember 30, 2022, as compared to $53,308$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 $141,104$82,752 during the period ended JuneSeptember 30, 2022, as compared to $152,437$84,515 in the same period of 2021, primarily because of decreased legal fees. Our research and development expenses were $422,695$118,253 during the period ended JuneSeptember 30, 2022, as compared to $124,675$115,936 in the same period of 2021, primarily because of the increase in engineering expenses following the 374Water Merger.
Six Nine Months Ended JuneSeptember 30, 2022, as Compared to SixNine Months Ended June 30,2021September 30,2021
We generated $1,303,759$2,226,477 and $14,600$33,600 in revenue during the periods ended JuneSeptember 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 $641,067$1,027,287 during the period ended JuneSeptember 30, 2022, as compared to $63,785$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 $291,760$375,313 during the period ended JuneSeptember 30, 2022, as compared to $160,638$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 $608,348$726,602 during the period ended JuneSeptember 30, 2022, as compared to $153,860$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 JuneSeptember 30, 2022, we had working capital of $9,426,666$8,602,631 compared to working capital of $11,263,270 atas of December 31, 2021.
We believe that these funds will satisfy our working capital needs for the next twelve months.
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 Chief Financial Officer, 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 the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2021. Our management’s evaluation of our internal control over financial reporting was based on the framework in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that as of JuneSeptember 30, 2022, our internal control over financial reporting was effective. The Company’s management determined that the previously identified material weakness (as described below) had been remediated as of JuneSeptember 30, 2022.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
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:
● | A lack of entity level controls due to ineffective board of directors and no audit committee. |
Effective June 13, 2022, the Company appointed Buddie Joe (BJ) Penn, Yizhaq (Itzik) Polad, James M. Vanderhider and Deanna Rene to the Board of Directors. Additionally and in connection with their appointment to the Board, Mr. Penn was appointed to the Company’s recently established Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee (Chairperson), Mr. Polad was appointed to the Audit Committee, Compensation Committee (Chairperson) and Nominating and Corporate Governance Committee and Mr. Vanderhider was appointed to the Audit Committee (Chairperson). As of JuneSeptember 30, 2022, the Company now has the knowledge and expertise deemed to satisfy the entity level controls for a board of directors and associated audit committee.
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
Except for controls implemented to address the deficiencies described above, there have been no other changes in our internal control over financial reporting during the first sixnine months of 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 16 |
| Table of Contents |
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable
| 17 |
| Table of Contents |
Item 6. Exhibits.
(a) | Exhibits |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
|
|
|
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
|
|
|
| Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
|
|
|
| Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
|
|
|
101.INS |
| XBRL INSTANCE DOCUMENT |
|
|
|
101.SCH |
| XBRL TAXONOMY EXTENSION SCHEMA |
|
|
|
101.CAL |
| XBRL TAXONOMY EXTENSION CALCULATION LINKBASE |
|
|
|
101.DEF |
| XBRL TAXONOMY EXTENSION DEFINITION LINKBASE |
|
|
|
101.LAB |
| XBRL TAXONOMY EXTENSION LABEL LINKBASE |
|
|
|
101.PRE |
| XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
| Table of Contents |
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.
| 374WATER INC |
| |
|
|
|
|
Dated: | By: | /s/ Yaacov Nagar |
|
|
| Yaacov Nagar |
|
|
| Chief Executive Officer |
|
|
|
|
|
Dated: | By: | /s/ Israel Abitbol |
|
|
| Israel Abitbol |
|
|
| Chief Financial Officer |
|
| Table of Contents |
Exhibit Index
Exhibit No. |
| Description |
|
|
|
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
|
|
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
|
|
| Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
|
|
|
| Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
|
|
|
101.INS |
| XBRL INSTANCE DOCUMENT |
|
|
|
101.SCH |
| XBRL TAXONOMY EXTENSION SCHEMA |
|
|
|
101.CAL |
| XBRL TAXONOMY EXTENSION CALCULATION LINKBASE |
|
|
|
101.DEF |
| XBRL TAXONOMY EXTENSION DEFINITION LINKBASE |
|
|
|
101.LAB |
| XBRL TAXONOMY EXTENSION LABEL LINKBASE |
|
|
|
101.PRE |
| XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |