Forward Looking Statements

Readers are cautioned that the statements in this Report that are not descriptions of historical facts may be "forward-looking statements" that are subject to risks and uncertainties. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are based on the beliefs of our management, as well as on assumptions made by and information currently available to us as of the date of this Report. When used in this Report, the words "plan," "will," "may," "anticipate," "believe," "estimate," "expect," "intend," "project" and similar expressions are intended to identify such forward-looking statements. Although we believe these statements are reasonable, actual actions, operations and results could differ materially from those indicated by such forward-looking statements as a result of the risk factors included in our 2022 Annual Report on Form 10-K filed with the SEC on March 16, 2023, 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, 2020, 2021, and 2022 the tax years which remain subject to examination by major tax jurisdictions as of March 31, 2023.

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.






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Revenue Recognition

Revenues for the three months ended March 31, 2023 were generated from the sale of an AirSCWO system, and consulting and advisory services, which were 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 March 31, 2023, there were 1,250,000 outstanding warrants classified as equity.





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

374Water offers a technology that transforms wet wastes such as sewage sludge, biosolids, food waste, hazardous and non-hazardous waste, and forever chemicals (e.g., PFAS) into recoverable resources by focusing on waste as a valuable resource for water, energy, and minerals. We consider ourselves pioneers in a new era of waste management that supports a circular economy and enables organizations to achieve their environment, social, and governance (ESG) goals. Our vision is a world without waste and our mission is to help create and preserve a clean and healthy environment that sustains life.

We have developed proprietary waste stream treatment systems based on Supercritical Water Oxidation (SCWO). The term used for the process is AirSCWOTM. SCWO leverages the unique properties of water in its supercritical phase (above 374 oC and 221 Bar) to convert organic matter to energy and safe products that can be recovered and used. The AirSCWOTM systems are essentially waste stream agnostic and able to treat a variety of complex, hazardous and non-hazardous waste streams, opening up opportunities for multiple applications in diverse market verticals on an international scale. Most pertinently, the technology is shifting the landscape in addressing environmental challenges that, until now, have been considered unsurmountable (due to science/engineering or cost barriers), one good example being the global PFAS crisis.

We currently outsource manufacturing of the AirSCWOTM systems to our strategic partner in the US, Merrell Bros., Inc., that have the facilities and capability to rapidly ramp-up manufacturing volumes and also support system modifications and deployment as required per market and clients. We envision in the future applying an outsourced manufacturing model in a few territories, and may consider establishing our own manufacturing capability in geographies where this is needed to adequately grow our market share.

The systems are supplied to multiple market verticals, and our revenue model includes both capital equipment sales and long-term service agreements based on throughput and capacity (Waste Purchase Agreements). Our market penetration strategy is combined of direct client and channel partner sales routes, depending on the specific market and territory. In some cases, the systems may be white labeled and sold as part of a broader solution package.






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Results of Operations

The following table sets forth, for the periods presented, the consolidated statements of operations data, which is derived from the accompanying consolidated financial statements:





                                                     Period Ended March 31,
                                        2023            2022         $ Change       % Change
Revenue                             $    801,458     $  273,231     $  528,227            193 %
Cost of revenues                         720,146        247,986        472,160            190 %
Net revenue                               81,312         25,245         56,067            222 %
Operating expenses:
Research and development                 355,905        185,653        170,252             92 %
Compensation and related expenses        718,760        301,235        417,525            139 %
Professional fees                         99,572        150,658        (51,086 )          (34 %)
General and administrative               585,659        261,403        324,256            124 %
Total operating expenses               1,759,896        898,950        860,946             96 %
Income (loss) from operations         (1,678,584 )     (873,705 )     (804,879 )           92 %
Other income (expenses), net              38,241            847         37,394          4,415 %
Income (loss) before income taxes     (1,640,343 )     (872,858 )     (767,485 )           88 %
Provision for (benefit from)
income taxes                                   -              -              -              0 %
Net income (loss)                   $ (1,640,343 )   $ (872,858 )   $ (767,485 )           88 %

Three Months Ended March 31, 2023, as Compared to the Three Months Ended March 31, 2022

Our business has been focused on development and commercialization of 374Water's supercritical water oxidation (SCWO) systems. We generated $801,458 and $273,231 in revenue from manufacturing assembly services and from consulting and advisory services during the three months ending March 31, 2023 and March 31, 2022, respectively.

Our general and administrative expenses increased to $585,659 during the three months ending March 31, 2023, as compared to $261,403 in the same period of 2022, primarily because of increased insurance costs and NASDAQ public company expenses.

Our compensation and related expenses increased to $718,760 during the three months ending March 31, 2023, as compared to $301,235 in the same period of 2022, primarily because of increased payroll and fringe benefit expenses produced by an increase in the Company's employee headcount.

Our professional fees slightly decreased to $99,572 during the three months ending March 31, 2023, as compared to $150,658 in the same period of 2022, primarily because of increased legal fees as a result of hiring in house legal counsel.

Our research and development expenses increased to $355,905 during the three months ending March 31, 2023, as compared to $185,653 in the same period of 2022, primarily because of the increase in engineering expenses and our continued efforts to commercialize our systems.






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Liquidity and Capital Resources

We have an at-the-market equity offering under which we may issue up to $100 million of common stock, which is currently effective and under which we commenced selling shares at the end of January 2023, and which will remain available to us in the future.

We have financed our operations since inception principally through the sale of equity securities and sales of product and services. As of March 31, 2023 we had working capital of $13,966,018 compared to working capital of $7,060,511 at December 31, 2022. This increase in working capital is due primarily to the At the Market common stock offering that raised additional capital.

We believe that these funds will satisfy our working capital needs for the next 12 months. There can be no assurance that these funds will be sufficient to finance our plan of operations and commercialize our systems or that we will be able to raise any necessary additional funds on a commercially reasonable basis or at all.

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