scwo_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period ended September 30, 2023

☐	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 November 9, 2023, the issuer had 132,667,107 shares of common stock outstanding.

Index to Form 10-Q

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets at September 30, 2023 (Unaudited) and December 31, 2022	4
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022 (Unaudited)	5
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022 (Unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (Unaudited)	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23
Item 4.	Controls and Procedures	23

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	26

SIGNATURES		27

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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’’ 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.

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PART I FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

374Water Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

September 30, 2023 (Unaudited) and December 31, 2022

	2023			2022
Assets
Current Assets:
Cash	$	12,802,091		$	4,046,937
Accounts receivable, net of allowance of $74 and $0		16,761			—
Unbilled accounts receivable		1,697,576			918,164
Inventory		1,910,123			1,660,710
Investments		—			1,944,464
Prepaid expenses		416,464			153,455
Total Current Assets		16,843,015			8,723,730
Long-Term Assets:
Equipment, net		182,099			143,079
Intangible asset, net		1,004,957			1,050,022
Total Long-Term Assets		1,187,056			1,193,101
Total Assets	$	18,030,071		$	9,916,831

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses	$	382,027		$	1,449,582
Deferred revenue		183,060			200,109
Other liabilities		—			13,528
Total Current Liabilities		565,087			1,663,219
Total Liabilities		565,087			1,663,219
Stockholders’ Equity
Preferred stock: 50,000,000 authorized; par value $0.0001 per share, nil issued and outstanding at September 30, 2023 and December 31, 2022		—			—

Common stock: 200,000,000 common shares authorized, par value $0.0001 per share, 132,667,107 and 126,702,545 shares outstanding at September 30, 2023 and December 31, 2022, respectively		13,266			12,669
Additional paid-in capital		30,326,463			16,110,221
Accumulated (deficit)		(12,872,333	)		(7,849,982	)
Accumulated other comprehensive loss		(2,412	)		(19,296	)
Total Stockholders’ Equity		17,464,984			8,253,612
Total Liabilities and Stockholders’ Equity	$	18,030,071		$	9,916,831

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

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374Water Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the three and nine months ended September 30, 2023 and 2022

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2023			2022			2023			2022

Revenue	$	12,290		$	922,718		$	863,611		$	2,226,477
Cost of Goods Sold		178,680			812,386			944,082			1,962,879
Gross Profit (Loss)		(166,390	)		110,332			(80,471	)		263,598
Operating Expenses
Research and development		317,573			118,253			945,443			726,602
Compensation and related expenses		739,181			435,297			2,191,061			1,135,979
Professional fees		117,543			82,752			309,398			375,313
General and administrative		541,697			387,018			1,803,691			1,027,287
Total Operating Expenses		1,715,994			1,023,320			5,249,593			3,265,181

Loss from Operations		(1,882,384	)		(912,988	)		(5,330,064	)		(3,001,583	)

Other Income (Expense)
Interest income		148,834			162			261,660			1,617
Other income		2,119			—			46,053			7
Total Other Income (Expense)		150,953			162			307,713			1,624
Net Loss before Income Taxes		(1,731,431	)		(912,826	)		(5,022,351	)		(2,999,959	)
Provision for Income Taxes		—			—			—			—

Net Loss	$	(1,731,431	)	$	(912,826	)	$	(5,022,351	)	$	(2,999,959	)

Other Comprehensive Loss
Change in foreign currency translation		(7,850	)		—			(2,412	)		(850	)
Change in unrealized loss on marketable securities		—			(3,122	)		—			(3,122	)
Total other comprehensive gain (loss)		(7,850	)		(3,122	)		(2,412	)		(3,972	)

Total Comprehensive Loss		(1,739,281	)		(915,948	)		(5,024,763	)		(3,003,931	)
Net Loss per Share - Basic and Diluted	$	(0.01	)	$	(0.01	)	$	(0.04	)	$	(0.02	)

Weighted Average Common Shares Outstanding - Basic and Diluted		132,145,497			126,680,895			129,578,743			126,621,412

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

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374Water Inc. and Subsidiaries

Condensed Consolidated Changes in Stockholders’ Equity

For the nine months ended September 30, 2023 and 2022

(Unaudited)

For the three and nine months ended September 30, 2023

	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, 2022		—	$	—		126,702,545	$	12,669	$	16,110,221		$	(7,849,982	)	$	(19,296	)	$	8,253,612
Issuance of shares of common stock		—		—		2,137,876		214		8,294,494			—			—			8,294,708
Stock-based compensation		—		—		—		—		214,924			—			—			214,924
Foreign currency gain (Loss)		—		—		—		—		—			—			824			824
Unrealized gain (loss) on investments		—		—		—		—		—			—			18,967			18,967
Net loss		—		—		—		—		—			(1,640,343	)		—			(1,640,343	)
Balances, March 31, 2023		—		—		128,840,421	$	12,883	$	24,619,639		$	(9,490,325	)	$	495		$	15,142,692
Issuance of shares of common stock		—		—		1,628,546		163		5,146,567			—			—			5,146,730
Issuance of restricted stock						20,000		2		71,198									71,200
Exercise of stock options						175,045		18		—									18
Exercise of warrants						15,000		1		37,499									37,500
Stock-based compensation		—		—		—		—		228,812			—			—			228,812
Foreign currency gain (Loss)		—		—		—		—		—			—			4,943			4,943
Net loss		—		—		—		—		—			(1,650,577	)		—			(1,650,577	)
Balances, June 30, 2023		—		—		130,679,012	$	13,067	$	30,103,715		$	(11,140,902	)	$	5,438		$	18,981,318
Exercise of stock options						1,988,095		199		99,801									100,000
ATM issuance										(30,069	)								(30,069	)
Stock-based compensation		—		—		—		—		153,016			—			—			153,016
Foreign currency gain (Loss)		—		—		—		—		—			—			(7,850	)		(7,850	)
Net loss		—		—		—		—		—			(1,731,431	)		—			(1,731,431	)
Balances, September 30, 2023		—		—		132,667,107	$	13,266	$	30,326,463		$	(12,872,333	)	$	(2,412	)	$	17,464,984

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	)
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
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
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

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

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374Water Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2023 and 2022 (Unaudited)

	2023			2022
Cash Flows from Operating Activities
Net loss	$	(5,022,351	)	$	(2,999,959	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expense		63,582			50,052
Stock based compensation		667,950			419,995
Change in foreign currency translation		(2,083	)		—

Changes in operating assets and liabilities:
Accounts receivable		(16,761	)		(164,600	)
Unbilled accounts receivable		(779,412	)		—
Inventory		(249,413	)		—
Prepaid expenses		(263,009	)		(1,079,467	)
Accounts payable and accrued expenses		(1,067,555	)		980,679
Deferred revenue		(17,049	)		200,109
Other liabilities		(13,528	)		(5,002	)

Cash Provided by (Used In) Operating Activities		(6,699,629	)		(2,598,193	)

Cash Flows from Investing Activities
Purchase of marketable securities		—			(5,998,243	)
Purchase of equipment		(51,813	)		(125,011	)
Increase in intangible assets		(5,724	)		(1,745	)

Cash Provided by (Used In) Investing Activities		(57,537	)		(6,123,999	)

Cash Flows from Financing Activities
Proceeds from the sale of investments		1,963,431			—
Proceeds from the issuance of common stock		13,548,889			—

Cash Provided by Financing Activities		15,512,320			—

Net Increase in Cash		8,755,154			(8,723,192	)
Cash, Beginning of the Period		4,046,937			11,131,175
Cash, End of the Period	$	12,802,091		$	2,407,983

NON-CASH FINANCING ACTIVITIES
Conversion of preferred stock to common stock	$	—		$	133

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

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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. (the “Company”, “374Water”, “We”, or “Our”) is a Delaware corporation which was formed in September 2005 as PowerVerde, Inc. At that time, the Company was focused on developing, commercializing and marketing a series of unique electric generating power systems designed to produce electrical power with zero emissions or waste byproducts, based on a pressure-driven expander motor and related organic Rankine cycle technology.

On April 16, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger”) with 374Water Inc., a privately held company based in Durham, North Carolina, and 374Water Acquisition Corp., a newly-formed wholly-owned subsidiary of PowerVerde.

Following the Merger, 374Water offers a technology that transforms certain 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. Our goal is to support 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.

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 (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 (“U.S. GAAP”) 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. (“374 Water,” “we,” “us,” “our,” or the “Company”) as of and for the year ended December 31, 2022 filed with the SEC on March 16, 2023.

The results of operations for the nine months ended September 30, 2023, 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., 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.

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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 $12,354,391 and $1,182,412 in cash equivalents as of September 30, 2023 and December 31, 2022, respectively.

The Company held marketable securities as of September 30, 2023 as noted in the following table:

	Adjusted Cost		Unrealized Losses		Fair Value		Cash and Cash Equivalents		Current Marketable Securities		Non-Current Marketable Securities
Cash	$	12,802,091		—	$	12,802,091	$	12,802,091		—		—
Level 2:
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—		—
Total	$	12,802,091	$	—	$	12,802,091	$	12,802,091	$	—		—

The Company held marketable securities as of December 31, 2022 as noted in the following table:

	Adjusted Cost		Unrealized Losses		Fair Value		Cash and Cash Equivalents		Current Marketable Securities		Non-Current Marketable Securities
Cash	$	4,046,937		—	$	4,046,937	$	4,046,937		—		—
Level 2:
U.S. Treasury securities	$	1,963,432	$	18,968	$	1,944,464	$	—	$	1,944,464		—
Total	$	6,010,369	$	18,968	$	5,991,401	$	4,046,937	$	1,944,464		—

Accounting 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 an amortized cost basis:

•

Investment Securities Held-to-Maturity. Investment securities held-to-maturity (“HTM”) are recorded at their initial cost, and any discount or premium amortized over the remaining life of the security. The carrying value of the investment is adjusted for the amortized amount of any discount or premium at each reporting period.

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Accounts Receivable

Accounts receivables consist of balances due from sales, service revenues, unbilled accounts receivables which is for revenues earned but not yet billed, and other receivables relating to common stock subscription purchases where the stock has been transferred but the cash has not been received. The Company monitors accounts receivable and provides allowances when considered necessary. At September 30, 2023 and December 31, 2022, accounts receivable were considered to be fully collectible but in accordance with the allowance for credit losses, the Company recorded an allowance for bad debt based on a reserve of current and aged receivables. Accordingly, an allowance for doubtful accounts of $74 and $0 was recorded as of September 30, 2023 and December 31, 2022, respectively.

Accounts Receivable

Accounts receivables consist of balances due from sales and service revenues and accrued interest from the investment account.

Unbilled Accounts Receivable

Unbilled accounts receivables consist of balances due from sales and service revenue earned but not yet billed.

Accounts receivable allowance for credit losses

The activity related to the accounts receivable allowance for credit losses was as follows:

Name	Nine Months Ending at September 30, 2023		Year Ending at December 31, 2022
Beginning balance	$	—	$	—
Current period provision		74		—
Write-offs		—		—
Ending Balance	$	74	$	—

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. The majority of our inventory is raw materials and work in progress. Net realizable value is the value of an asset that can be realized upon the sale of the asset, less a reasonable estimate of the costs associated with either the eventual sale or the disposal of the asset in question. We utilize third-party suppliers to produce our products. Costs associated with fabrication, and other costs associated with the manufacturing of products, are recorded as inventory. We periodically evaluate the carrying value of our inventories in relation to estimated forecasts of product demand, which takes into consideration the life cycle of product releases. When quantities on hand exceed estimated sales forecasts, we perform an analysis to determine if a write-down for such excess inventories is required. Once inventory has been written down, it creates a new cost basis for inventory. Inventories are classified as current assets in accordance with recognized industry practice.

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Property and Equipment

Property and 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. Depreciation expense related to property and equipment was as follows:

	Period Ended September 30,
	2023		2022
Depreciation	$	12,793	$	1,374

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. As of September 30, 2023 and December 31, 2022, there was no impairment.

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 September 30, 2023 and December 31, 2022, there were no impairments.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, and marketable securities. Deposits with financial institutions are insured, up to certain limits, by the Federal Deposit Insurance Corporation (“FDIC”). The Company’s cash deposits often exceed the FDIC insurance limit; however, all deposits are maintained with high credit quality institutions and the Company has not experienced any losses in such accounts. The financial condition of financial institutions is periodically reassessed, and the Company believes the risk of any loss is minimal. The Company believes the risk of any loss on cash due to credit risk is minimal. Furthermore, we perform ongoing credit evaluations of our customers and generally do not require collateral.

Significant customers and suppliers are those that account for greater than 10% of the Company’s revenues and purchases. Our customer revenue for one customer made up 96% and 97% of revenue for the period ended September 30, 2023 and September 30, 2022, respectively. In 2023 and 2022, the Company purchased a substantial portion of manufacturing services from one third party vendor, Merrell Bros Fabrication, LLC.

Revenue Recognition

The Company follows the revenue standards of Codification (ASC) Topic 606: “Revenue from Contracts with Customers (Topic 606).” The core principle of this Topic is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those 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 using the input method.

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The Company’s performance obligations are satisfied over time and over the life of the contract. The Company’s revenue arrangements consist of a single performance obligation to transfer services. Revenue is recognized over time by measuring the progress toward complete satisfaction of the performance obligation using specific milestones. These milestones within the contract are assigned revenue recognition percentages, based on overall expected cost-plus margin estimates of those milestones compared to the total cost of the contract. Contract revenues are recognized in the proportion that contract costs incurred bear to total estimated costs. This method is used because management considers the input method to be the best available measure of progress on these contracts. Due to a change in gross margin during the current period, the revenue recognition percentages were updated, reflecting a change in estimate. Contract costs include all direct material and labor and subcontractor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. General, selling, and administrative costs are charged to expense as incurred.

We also record as revenue all amounts billed to customers for shipping and handling costs and record the actual shipping costs as a component of cost of revenues. Reimbursements received from customers for out-of-pocket expenses are recorded as revenues, with related costs recorded as cost of revenues. We present revenues net of any taxes collected from customers and remitted to government authorities.

Revenues for the nine-month period ended September 30, 2023 in the amount of $833,294 were generated from the sale of an AirSCWO system and $30,317 was generated from our treatability study services.

Revenues for the nine-month period ended September 30, 2022 in the amount of $2,162,702 were generated from the sale of an AirSCWO system and $63,775 was generated from our treatability study services.

Stock-based Compensation

The Company has accounted for stock-based compensation under the provisions of 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.

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.

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 September 30, 2023 and December 31, 2022.

Table of Contents

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 $945,443 and $726,602 for the nine months ended September 30, 2023 and September 30, 2022, respectively.

Earnings (Loss) Per Share

SEC Form 10-Q filed by 374Water Inc.