The following discussion and analysis should be read in conjunction with the financial statements and accompanying notes contained elsewhere in this document.

Critical Accounting Policies

The consolidated financial statements of 374Water Inc.formerly known as
PowerVerde, Inc. (“374Water Inc.,” “we”, “us”, “our” or the “Company”) are prepared in accordance with generally accepted accounting principles in The United States of America (“GAAP”). The preparation of these consolidated financial statements requires our management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. We believe that the following critical accounting policies affect its most significant judgments and estimates used in the preparation of the consolidated financial statements.

Common stock purchase warrants

The Company accounts for common equity 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 contract that (i) requires physical settlement or net settlement in shares, or (ii) gives the Company the choice between net settlement in cash or settlement in its own shares (physical settlement or net quota-share settlement). The Company classifies as assets or liabilities any contract that (i) requires net cash settlement, including a net cash settlement requirement of the contract if an event occurs and such event is beyond the control of the Company), or ( (ii) gives the counterparty a choice of net cash settlement or equity settlement (physical settlement or net equity settlement). All warrants outstanding at December 31, 2021 and 2020 have been classified as equity. The Company uses the Black Scholes model to perform the valuation of Warrants and uses Black Scholes model inputs including risk-free rate, dividend yield, stock price, strike price, duration and volatility. The company uses the comparison of other public companies for volatility and extracts the risk-free rate from Federal Treasury rates based on duration. The Company’s exercise price is taken from the warrant contract and the share price is taken from the market close on the day of issuance. The term of the Company’s warrants uses the simplified method for the calculation of term.


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Intellectual Property

The Company tests finite-life intangible assets 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, if applicable, to determine whether the assets to be held and used will be realizable. In the event of an impairment, the Company would discount future cash flows using its then-estimated incremental borrowing rate to estimate the amount of the impairment.

Stock-based compensation

We account for stock-based compensation based on ASC Topic 718-Stock Compensation, which requires stock options and other stock-based payments to be expensed based on fair value of each stock option granted. The fair value of each stock option is estimated at the grant date using the Black-Scholes valuation model. This model requires management to estimate expected volatility, expected dividends and expected duration as inputs to the valuation model.


374Water, Inc. (the “Company”, “374Water”, “We” or “Our”) is a Delaware
company which was incorporated on September 8, 2005. The company was originally established to develop, market and market a series of unique power generation systems designed to produce electric power without emissions or waste, based on a patented pressure expansion engine and the associated organic Rankine cycle technology.

At April 16, 2021, 374Water Inc. (f/k/a PowerVerde, Inc.) has entered into an agreement and plan to amalgamate (the “Merger”) with 374Water, Inc.a private company based in Durham, North Carolina(“374Water Private enterprise“) and 374Water Acquisition companya new wholly owned subsidiary of PowerVerde.

As a result of the merger, the former shareholders of 374Water Private Company own 65.8% of our issued and outstanding common shares and 53.8% of our issued and outstanding voting shares (which include preferred shares on a converted base).

Following the merger, 374Water is focused on being a clean technology and social impact company providing disruptive technology that addresses the looming challenges of environmental pollution. We focus 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 waste-free world and our mission is to preserve a clean and healthy environment that supports life.

We have developed proprietary waste stream treatment systems based on Supercritical Water Oxidation (SCWO). The term used for the process is AirSCWOTM. SCWO harnesses the unique properties of water in its supercritical phase (above 374oC and 221 Bar) to convert organic matter into energy and safe products that can be recovered and used. AirSCWOTM systems are essentially waste stream independent and capable of handling a variety of complex, hazardous and non-hazardous waste streams, opening up opportunities for multiple applications in various vertical markets globally. More relevantly, technology is changing the landscape by addressing environmental challenges that until now have been considered insurmountable (due to science/engineering or financial barriers), a good example being the global PFAS crisis.

We are currently outsourcing the manufacturing of the AirSCWOTM systems to our strategic partner in the United States, Merrell Bros., Inc., which have the facilities and capacity to rapidly increase manufacturing volumes and support system modifications and deployment as market and customer needs dictate. We plan to apply an outsourced manufacturing model in a few territories in the future and may consider establishing our own manufacturing capacity in geographies where necessary to adequately grow our market share.


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Systems are supplied to multiple vertical markets and our revenue model includes both equipment sales and long-term service agreements based on throughput and capacity (waste purchase agreements). Our market penetration strategy combines direct sales channels to customers and distribution partners, depending on the specific market and territory. In some cases, systems may be white-labeled and sold as part of a larger solution set.

Results of Operations

Year ended December 31, 2021compared to the year ended December 31, 2020

Since our inception, we have focused on the development, testing and marketing of our clean energy electric power generation systems. Since the closing of the 374Water merger, our activities have focused on the development and commercialization of 374Water’s supercritical water oxidation (SCWO) systems. We have generated $48,100 and $86,570 manufacturing assembly services and consulting and advisory services revenue in the fiscal years ended
December 31, 2021, and 2020, respectively. This year, we had substantial expenses due to our ongoing research and development activities and efforts to commercialize our systems, as well as significant administrative expenses associated with our public company status. Our general and administrative expenses increased to $1,095,382 during the year ended December 31, 2021compared to $17,483 during the same period of 2020, mainly due to increased insurance costs, salary costs due to the hiring of employees and stock-based compensation costs. Our professional fees have increased to $343,862 during the year ended December 31, 2021compared to $8,791 over the same period of 2020, primarily due to increased legal and accounting fees related to the 374Water merger and our status as a public company. Our research and development expenses were $375,032 during the year ended December 31, 2021compared to
$57,718 during the same period of 2020, primarily due to increased engineering spending following the 374Water Fusion. Our product development expenses were $1,399,833 during the year ended December 31, 2021, compared to no such expense in the same period of 2020. This activity represents the issuance of equity warrants to a strategic partner in the second quarter of 2021 as part of manufacturing compensation, the supply and service of AirSCWO products. Substantial net losses are expected until we are able to successfully market and market our 374Water systems, which is not guaranteed.

Cash and capital resources

In April 2021as part of the Merger, we raised approximately $6.6 million from the sale of the Series D Preferred Shares and converted all of its convertible debt notes and accrued interest into common shares. At
December 17, 2021the Company raised approximately $5 million from sales of common stock.

Since its inception, we have funded our business primarily through the sale of debt and equity securities. From December 31, 2021we had a working capital of
$11,263,270 compared to the working capital of $10,572 at December 31, 2020. This increase in working capital occurred in April 2021and is primarily attributable to the gross proceeds of $6,551,745 sale of Series D Convertible Preferred Shares, the receipt of $1,134,999 of the proceeds of the exercise of a warrant, and the gross proceeds of $4,999,975 private placement in December 2021 for the sale of common stock.

We believe these funds will meet our working capital requirements for the next 12 months. There can be no assurance that such funds will be sufficient to fund our operating plan and commercialize our systems or that we will be able to raise additional necessary funds on a commercially reasonable basis or at all.

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