374WATER INC. The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.
Critical Accounting Policies
The consolidated financial statements of
Common Stock Purchase Warrants
The Company accounts for common stock purchase warrants in accordance with ASC
Topic 815- 40, Derivatives and Hedging - Contracts in Entity's Own Equity ("ASC
815-40"). Based on the provisions of ASC 815- 40, the Company classifies as
equity any contracts that (i) require physical settlement or net-share
settlement, or (ii) gives the Company a choice of net-cash settlement or
settlement in its own shares (physical settlement or net-share settlement). The
Company classifies as assets or liabilities any contracts that (i) require
net-cash settlement including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the Company), or
(ii) give the counterparty a choice of net-cash settlement or settlement in
shares (physical settlement or net-share settlement). All outstanding warrants
as of
34
Table of Contents
Intellectual Property
The Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses an estimate of the undiscounted cash flows over the remaining life of its long-lived assets, or related group of assets where applicable, in measuring whether the assets to be held and used will be realizable. In the event of impairment, the Company would discount the future cash flows using its then risk adjusted discount rate to estimate the amount of the impairment.
Inventory
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 that is not subsequently written up. Inventories are classified as current assets in accordance with recognized industry practice.
Revenue Recognition
The Company follows the revenue standards of Financial Accounting Standards Board Update No. 2014-09: "Revenue from Contracts with Customers (Topic 606)." The core principle of this Topic is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those 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.
The Company's performance obligations are satisfied over time 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. 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.
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
As a result of the Merger, the former 374Water Private Company shareholders own 65.8% of our issued and outstanding common stock and 53.8% of our issued and outstanding voting stock (which includes the preferred stock on an as converted basis).
Subsequent to the Merger, 374Water is focused on being a cleantech and social impact company providing a disruptive technology that addresses imminent environmental pollution challenges. We are focused on a new era of sustainable waste stream management that promotes circular economy initiatives and enables organizations to achieve sustainability goals and create green impact. Our vision is a world without waste and our mission is to 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,
35
Table of Contents
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.
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:
Year Ended December 31,
2022 2021 $ Change % Change
Revenue $ 3,015,521 $ 48,100 $ 2,967,421 6,169 %
Cost of revenues (2,679,020 ) - (2,679,020 ) 100 %
Net revenue 336,501 48,100 288,401 600 %
Operating expenses:
Research and development 1,113,500 375,032 738,468 197 %
Compensation and related
expenses 1,644,861 - 1,644,861 100 %
Product development - 1,399,833 (1,399,833 ) -100 %
Professional fees 768,548 343,862 424,686 124 %
General and administrative 1,565,723 1,095,381 470,342 43 %
Total operating expenses 5,092,632 3,214,108 1,878,524 58 %
Income (loss) from operations (4,756,131 ) (3,166,008 ) (1,590,123 ) 50 %
Other income (expenses), net 66,164 1,400 64,764 4,626 %
Income (loss) before income
taxes (4,689,967 ) (3,164,608 ) (1,525,359 ) 48 %
Provision for (benefit from)
income taxes - - - 0 %
Net income (loss) $ (4,689,967 ) $ (3,164,608 ) $ (1,525,359 ) 48 %
Year Ended
Since the closing of the 374Water Merger, our business has been focused on
development and commercialization of 374Water's supercritical water oxidation
(SCWO) systems. We generated
36
Table of Contents
Liquidity and Capital Resources
In
We have financed our operations since inception principally through the sale of
debt and equity securities and sales of product. As of
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.
Cash Flows
The following table presents our cash flows for the periods presented:
Year Ended December 31,
2022 2021 $ Change
Cash provided by (used in) operating
activities $ (4,948,996 ) $ (1,840,950 ) $ (3,108,046 )
Cash provided by (used in) investing
activities (2,160,291 ) 28,345 (2,188,636 )
Cash provided by (used in) financing
activities 25,049 12,871,981 (12,846,932 )
Net cash (decrease) increase (7,084,238 ) 11,059,376 (18,143,614 )
© Edgar Online, source
