374Water (SCWO) - 2023 Q2 - Quarterly Report

Report Information - This is a Quarterly Report filed on Form 10-Q for the period ended June 30, 2023[2] - The registrant is 374WATER INC., a Delaware corporation[2] - The company is classified as a Smaller reporting company and an Emerging Growth Company[4] - As of August 8, 2023, the issuer had 132,667,107 shares of common stock outstanding[4] PART I FINANCIAL INFORMATION Condensed Consolidated Financial Statements (Unaudited) Presents 374Water Inc.'s unaudited condensed consolidated financial statements, including balance sheets, operations, equity, and cash flows Condensed Consolidated Balance Sheets | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :-------------- | :---------------- | | Assets | | | | Cash | $14,599,361 | $4,046,937 | | Total Current Assets | $18,336,862 | $8,723,730 | | Total Long-Term Assets | $1,161,746 | $1,193,101 | | Total Assets | $19,498,608 | $9,916,831 | | Liabilities & Equity | | | | Total Current Liabilities | $517,290 | $1,663,219 | | Total Liabilities | $517,290 | $1,663,219 | | Total Stockholders' Equity | $18,981,318 | $8,253,612 | | Total Liabilities and Stockholders' Equity | $19,498,608 | $9,916,831 | - Total assets increased by $9,581,777, or 96.6%, from December 31, 2022, to June 30, 2023, primarily driven by a significant increase in cash[9][10] - Total stockholders' equity increased by $10,727,706, or 130%, from December 31, 2022, to June 30, 2023[11] Condensed Consolidated Statements of Operations | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($) | Change (%) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change ($) | Change (%) | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Revenue | $49,863 | $1,030,528 | $(980,665) | (95%) | $851,321 | $1,303,759 | $(452,438) | (35%) | | Cost of Goods Sold | $45,257 | $902,508 | $(857,251) | (95%) | $765,403 | $1,150,494 | $(385,091) | (33%) | | Gross Profit | $4,606 | $128,020 | $(123,414) | (96%) | $85,918 | $153,265 | $(67,347) | (44%) | | Total Operating Expenses | $1,773,703 | $1,342,908 | $430,795 | 32% | $3,533,602 | $2,241,858 | $1,291,744 | 58% | | Loss from Operations | $(1,769,097) | $(1,214,888) | $(554,209) | (46%) | $(3,447,684) | $(2,088,593) | $(1,359,091) | (65%) | | Total Other Income (Expense) | $118,520 | $613 | $117,907 | 19,234% | $156,764 | $1,460 | $155,304 | 10,637% | | Net Loss | $(1,650,577) | $(1,214,275) | $(436,302) | (36%) | $(3,290,920) | $(2,087,133) | $(1,203,787) | (58%) | | Net Loss per Share - Basic and Diluted | $(0.01) | $(0.01) | $0.00 | 0% | $(0.03) | $(0.02) | $(0.01) | (50%) | - Revenue decreased significantly by 95% for the three months ended June 30, 2023, and 35% for the six months ended June 30, 2023, compared to the respective prior periods[13] - Net loss increased by 36% for the three months and 58% for the six months ended June 30, 2023, primarily due to higher operating expenses, particularly compensation and general & administrative costs[13] Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) | Metric | Balance at Dec 31, 2022 | Issuance of Common Stock | Stock-based Compensation | Net Loss | Balance at June 30, 2023 | | :-------------------------- | :---------------------- | :----------------------- | :----------------------- | :--------- | :----------------------- | | Common Stock (Amount) | $12,669 | $377 | $0 | $0 | $13,067 | | Additional Paid-in Capital | $16,110,221 | $13,441,061 | $443,736 | $0 | $30,103,715 | | Accumulated Deficit | $(7,849,982) | $0 | $0 | $(3,290,920) | $(11,140,902) | | Total Stockholders' Equity | $8,253,612 | $13,441,438 | $443,736 | $(3,290,920) | $18,981,318 | - Total Stockholders' Equity increased by $10,727,706 from December 31, 2022, to June 30, 2023, primarily driven by the issuance of common stock and stock-based compensation, partially offset by the net loss[16][17] Condensed Consolidated Statements of Cash Flows | Cash Flow Activity (Six Months Ended June 30) | 2023 | 2022 | Change (2023 vs 2022) | | :------------------------------------------ | :----------- | :----------- | :-------------------- | | Net Cash Provided by (Used In) Operating Activities | $(4,877,039) | $(1,023,731) | $(3,853,308) | | Net Cash Provided by (Used In) Investing Activities | $(12,926) | $(7,007,029) | +$6,994,103 | | Net Cash Provided by Financing Activities | $15,442,389 | $0 | +$15,442,389 | | Net Increase in Cash | $10,552,424 | $(8,030,760) | +$18,583,184 | | Cash, End of the Period | $14,599,361 | $3,100,415 | +$11,498,946 | - Net cash used in operating activities increased significantly to $(4,877,039) in H1 2023 from $(1,023,731) in H1 2022[19] - Cash provided by financing activities was $15,442,389 in H1 2023, primarily from the issuance of common stock ($13,478,959) and proceeds from the sale of investments ($1,963,430), which led to a net increase in cash[20] Notes to Unaudited Condensed Consolidated Financial Statements Note 1 – Nature of Business and Presentation of Financial Statements - 374Water Inc. (formerly PowerVerde, Inc.) focuses on disruptive technology that transforms wet wastes (e.g., sewage sludge, food waste, PFAS) into recoverable resources (water, energy, minerals) using Supercritical Water Oxidation (SCWO)[22][23][24] - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP and SEC rules for interim financial information, including all necessary recurring accruals[25] - The consolidated entities include 374Water Inc., 374Water Systems Inc., and 374Water Sustainability Israel LTD[27] Note 2 – Summary of Significant Accounting Policies - Cash equivalents include highly liquid investments with original maturities of three months or less. The company held $13,202,816 in cash equivalents as of June 30, 2023, a significant increase from $1,182,412 at December 31, 2022[28] Marketable Securities (Fair Value) | Marketable Securities (Fair Value) | June 30, 2023 | December 31, 2022 | | :------------------------------- | :------------ | :---------------- | | Cash | $14,599,361 | $4,046,937 | | U.S. Treasury securities | $0 | $1,944,464 | | Total | $14,599,361 | $5,991,401 | - Accounts receivable allowance for credit losses increased to $406 as of June 30, 2023, from $0 at December 31, 2022[32][35] - Revenue is recognized over time using the input method based on specific milestones and the proportion of contract costs incurred to total estimated costs, primarily from AirSCWO system sales and treatability services[44][46][48] - The company adopted ASU No. 2016-13 (Credit Losses) effective January 1, 2023, resulting in a small adjustment for the allowance for bad debt, with no other material impact on financial statements[59] Note 3 – Liquidity, Capital Resources and Going Concern Liquidity and Capital Resources | Metric | June 30, 2023 | December 31, 2022 | | :------------------ | :-------------- | :---------------- | | Working Capital | $17,819,572 | $7,060,511 | | Accumulated Deficit | $(11,140,902) | $(7,849,982) | | Net Loss (6 months) | $(3,290,920) | N/A | | Net Cash Used in Operations (6 months) | $(4,877,039) | N/A | - Working capital increased significantly to $17,819,572 at June 30, 2023, from $7,060,511 at December 31, 2022[61] - The company believes it has sufficient cash-on-hand to meet financial obligations for at least the next 12 months from the report date[62] Note 4 – Inventory Inventory Composition | Inventory Component | June 30, 2023 | December 31, 2022 | | :------------------ | :------------ | :---------------- | | Raw materials | $396,115 | $755,218 | | Work-in-process | $1,408,380 | $905,492 | | Total Inventory | $1,804,495 | $1,660,710 | - Total inventory increased by $143,785 from December 31, 2022, to June 30, 2023, driven by an increase in work-in-process inventory[63] - No inventory impairment or write-downs were recorded as of June 30, 2023, and December 31, 2022[63] Note 5 – Intangible Assets - Intangible assets primarily consist of a License Agreement with Duke University for SCWO technology, valued at $1,073,529 in common stock consideration[65][87] Intangible Asset Activity | Intangible Asset | Estimated Life | Balance at Dec 31, 2022 | Additions (6M 2023) | Amortization (6M 2023) | Balance at June 30, 2023 | | :--------------- | :------------- | :---------------------- | :------------------ | :--------------------- | :----------------------- | | License agreement | 17 Years | $964,965 | $0 | $31,574 | $933,391 | | Patents | 20 Years | $85,057 | $5,623 | $2,290 | $88,390 | | Total | | $1,050,022 | $5,623 | $33,864 | $1,021,781 | Estimated Future Amortization Expense | Estimated Future Amortization Expense (as of June 30, 2023) | Amount | | :------------------------------------------------ | :------- | | 2023 (remaining) | $33,967 | | 2024 | $67,933 | | 2025 | $67,933 | | 2026 | $67,933 | | 2027 | $67,933 | | Thereafter | $716,082 | | Intangible assets, Net | $1,021,781 | Note 6 – Revenue Revenue by Type | Revenue Type (Six Months Ended June 30) | 2023 Amount | 2023 % | 2022 Amount | 2022 % | | :------------------------------------ | :---------- | :----- | :---------- | :----- | | Equipment revenue | $843,321 | 99% | $1,303,759 | 100% | | Service revenue | $8,000 | 1% | $0 | 0% | | Total Revenue | $851,321 | 100% | $1,303,759 | 100% | - Total revenue decreased by 35% from $1,303,759 in H1 2022 to $851,321 in H1 2023, primarily due to a decrease in equipment revenue. Service revenue, though small, emerged in 2023[68] Deferred Revenue Activity | Deferred Revenue Activity | June 30, 2023 | December 31, 2022 | | :------------------------ | :------------ | :---------------- | | Beginning balance | $200,109 | $0 | | Billings deferred | $21,190 | $1,467,189 | | Recognition of prior deferred revenue | $(38,238) | $(1,267,080) | | Ending balance | $183,061 | $200,109 | Unbilled Accounts Receivable Activity | Unbilled Accounts Receivable Activity | June 30, 2023 | December 31, 2022 | | :---------------------------------- | :------------ | :---------------- | | Beginning balance | $918,164 | $0 | | Services performed but unbilled | $790,863 | $918,164 | | Ending balance | $1,709,027 | $918,164 | Note 7 – Stockholders' Equity - The company is authorized to issue 50,000,000 preferred stock shares and 200,000,000 common stock shares. As of June 30, 2023, there were no preferred shares outstanding and 130,679,012 common shares outstanding[72][73][74] - During the six months ended June 30, 2023, 3,766,422 shares of common stock were sold through an at-the-market equity distribution agreement, generating $13.44 million in net proceeds. $86.56 million remained available under this facility[77] - Stock-based compensation expense increased significantly to $514,934 for the six months ended June 30, 2023, from $236,471 in the same period of 2022, allocated to G&A and R&D[78][79] Stock Options Activity | Stock Options Activity (6 Months Ended June 30) | 2023 Shares | 2023 Avg Exercise Price | 2022 Shares | 2022 Avg Exercise Price | | :-------------------------------------------- | :---------- | :---------------------- | :---------- | :---------------------- | | Options outstanding at Dec 31 | 12,752,000 | $0.62 | 12,300,000 | $0.37 | | Granted | 913,000 | $3.19 (avg) | 920,000 | $3.33 (avg) | | Exercised | (175,045) | $1.05 | $0 | $0 | | Expired/forfeit | (634,488) | $1.36 | (40,000) | $4.10 | | Options outstanding at June 30 | 12,855,467 | $0.76 | 13,180,000 | $0.54 | - Total unrecognized compensation associated with unvested options is approximately $2,342,261[80] Stock Warrants Activity | Stock Warrants Activity (6 Months Ended June 30, 2023) | Shares | Weighted Average Exercise Price | | :--------------------------------------------------- | :----- | :------------------------------ | | Balance at December 31, 2022 | 1,250,000 | $2.50 | | Exercised | (15,000) | $2.50 | | Balance at June 30, 2023 | 1,235,000 | $2.50 | - The intrinsic value of all outstanding warrants as of June 30, 2023, was $0, as the market price ($2.39) was below the exercise price ($2.50)[82] Note 8 – Related Party Transactions - The company has an agreement with Merrell Bros. Holding Company for AirSCWO system fabrication and manufacturing. Terry Merrell, a board member, and his affiliates own over 5% of common stock[86] - Related party expenses for the six months ended June 30, 2023, totaled $599,571, primarily for non-recurring labor and manufacturing costs. An accrual of $29,293 for related party expenses existed as of June 30, 2023[86] Note 9 – Commitments - 374Water licenses its patented Supercritical Water Oxidation (SCWO) technology from Duke University, requiring royalty payments based on licensed product sales and sublicensing fees, and reimbursement for patent expenses[87] - No expenses were incurred in connection with this License Agreement during the six-month period ending June 30, 2023[87] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, results of operations, key trends, and future outlook, including critical accounting policies Forward Looking Statements - The report contains forward-looking statements subject to risks and uncertainties, including changes in economic conditions, competitive pressures, technological changes, and regulatory policies[88] - Actual results may differ materially from those expressed or implied, and the company undertakes no obligation to update these statements[88] Critical Accounting Policies - The preparation of financial statements requires management to make estimates and assumptions about future events, particularly concerning accounting for uncertainty in income taxes, revenue recognition, common stock purchase warrants, and stock-based compensation[90][91][92] - No significant uncertain tax positions were identified for the tax years ended December 31, 2020, 2021, and 2022[93] Overview - 374Water offers proprietary Supercritical Water Oxidation (SCWO) technology, branded AirSCWO, to transform wet wastes (e.g., sewage sludge, PFAS) into recoverable resources, supporting a circular economy and ESG goals[98][99] - Manufacturing of AirSCWO systems is currently outsourced to Merrell Bros., Inc. in the US, with future plans for outsourced manufacturing in other territories or establishing own capabilities[100][101] - The revenue model includes both capital equipment sales and long-term service agreements (Waste Purchase Agreements), with a market penetration strategy combining direct client and channel partner sales[102] Results of Operations Financial Performance Summary | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($) | Change (%) | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Revenue | $49,863 | $1,030,528 | $(980,665) | (95%) | | Gross Profit | $4,606 | $128,020 | $(123,414) | (96%) | | Research and development | $271,964 | $422,695 | $(150,731) | (36%) | | Compensation and related expenses | $733,121 | $399,448 | $333,673 | 84% | | Professional fees | $92,285 | $141,104 | $(48,819) | (35%) | | General and administrative | $676,333 | $379,661 | $296,672 | 78% | | Net Loss | $(1,650,577) | $(1,214,275) | $(436,302) | (36%) | - Revenue decreased significantly by 95% for the three months ended June 30, 2023, compared to the same period in 2022, primarily due to a long sales cycle and fewer contract conditions allowing for increased revenue recognition in the prior year[103] - Compensation and related expenses increased by 84% (3-month) and 107% (6-month) due to a strategic growth plan to increase personnel to support upcoming growth and sales pipeline[105][111] - General and administrative expenses increased by 78% (3-month) and 97% (6-month) due to increased stock-based compensation and marketing expenses, a strategic investment to grow the sales pipeline[104][110] - Research and development expenses decreased by 36% (3-month) due to the successful completion of the design phase and a shift from intensive R&D to streamlined efforts for product commercialization[107][113] Liquidity and Capital Resources Working Capital | Metric | June 30, 2023 | December 31, 2022 | | :--------------- | :-------------- | :---------------- | | Working Capital | $17,819,572 | $7,060,511 | - Working capital increased by $10,759,061, or 152.4%, primarily due to additional capital raised through an at-the-market common stock offering[115] - The company has an effective at-the-market equity offering facility of up to $100 million, with $86.56 million remaining available as of June 30, 2023[77][114] - Management believes current funds are sufficient for working capital needs for the next 12 months, but there's no assurance for financing operations and commercialization or raising additional funds[117] Quantitative and Qualitative Disclosures about Market Risk The company has no applicable disclosures regarding quantitative and qualitative market risk - Not applicable[118] Controls and Procedures Details the company's evaluation of disclosure controls and internal control over financial reporting, including material weakness remediation Disclosure Controls and Procedures - As of June 30, 2023, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[119] Management's Annual Report on Internal Control Over Financial Reporting - Management evaluated the effectiveness of internal control over financial reporting as of June 30, 2023, based on the COSO 2013 framework[121] - A material weakness relating to the lack of proper detailed review was remediated by increasing oversight and enhancing controls, leading to the conclusion that internal control over financial reporting was effective as of June 30, 2023[122] No Attestation Report - This quarterly report does not include an attestation report from the independent registered public accounting firm regarding internal control over financial reporting, as permitted by SEC rules for management's report[123] Changes in Internal Control Over Financial Reporting - No other material changes in internal control over financial reporting occurred during the first six months of 2023, apart from those implemented to address the remediated deficiencies[124] PART II OTHER INFORMATION Legal Proceedings No legal proceedings to report - None[127] Risk Factors No new risk factors applicable for this quarterly report - Not applicable[128] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds to report - None[129] Defaults upon Senior Securities No defaults upon senior securities to report - None[129] Mine Safety Disclosures Mine safety disclosures are not applicable to the company - Not applicable[130] Other Information No other information to report - Not applicable[131] Exhibits Lists exhibits filed with Form 10-Q, including certifications and XBRL documents - Includes certifications from CEO and CFO (Sections 302 and 906 of Sarbanes-Oxley Act) and various XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbases)[132][136][138][139] SIGNATURES Contains signatures of the CEO and CFO, certifying the report - Report signed by Yaacov Nagar (Chief Executive Officer) and Israel Abitbol (Chief Financial Officer) on August 8, 2023[135][136]