374Water Inc. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2023; filed August 8, 2023. 374Water develops and commercializes AirSCWO supercritical water oxidation systems intended to process wet, hazardous and non-hazardous waste into recoverable water, energy and minerals. The company outsources manufacturing principally to Merrell Bros. Fabrication, LLC.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 |
|---|---|---|---|---|
| Revenue | $49,863 | $1,030,528 | $851,321 | $1,303,759 |
| Gross profit | $4,606 | $128,020 | $85,918 | $153,265 |
| Gross margin | 9.2% | 12.4% | 10.1% | 11.8% |
| Operating loss | $(1,769,097) | $(1,214,888) | $(3,447,684) | $(2,088,593) |
| Net loss | $(1,650,577) | $(1,214,275) | $(3,290,920) | $(2,087,133) |
| Basic and diluted loss per share | $(0.01) | $(0.01) | $(0.03) | $(0.02) |
- Six-month revenue consisted of $843,321 from AirSCWO equipment and $8,000 from treatability services. One customer accounted for more than 90% of revenue for the period.
- Six-month operating expenses increased 58% to $3.53 million. Compensation and related expenses rose 107% to $1.45 million, and general and administrative expense rose 97% to $1.26 million. Research and development expense was $627,869.
- Interest and other income totaled $156,764 for the six-month period, including $112,826 of interest income and $43,938 of other income.
- Cash used in operating activities was $4.88 million for the six months ended June 30, 2023, compared with $1.02 million in the prior-year period. Investing cash use was $12,926, while financing activities provided $15.44 million.
- Cash increased to $14.60 million at June 30, 2023 from $4.05 million at December 31, 2022. Cash equivalents represented $13.20 million of the June 30 balance.
- Working capital was $17.82 million versus $7.06 million at December 31, 2022. Current liabilities were $517,290, and the filing reports no debt or other long-term liabilities.
- Total assets were $19.50 million and stockholders’ equity was $18.98 million at June 30, 2023. Accumulated deficit was $11.14 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined 95% in the second quarter and 35% for the first six months, which management attributed primarily to the company’s long sales cycle and differing contract conditions in the prior-year period.
- Operating loss widened 46% in the second quarter and 65% for the first six months, primarily because operating expenses increased while revenue declined.
- Management stated that higher marketing expense was intended to expand the sales pipeline and that higher staffing costs supported anticipated growth and commercialization.
- Second-quarter research and development expense decreased 36% as management reported completion of the systems’ design phase and a shift toward commercialization. Six-month research and development expense nevertheless increased 3% because of spending earlier in the year.
- The company sold 3,766,422 shares under its at-the-market facility during the first six months, generating approximately $13.44 million net of commissions and legal and accounting fees. Approximately $86.56 million remained available under the facility at June 30, 2023.
- Common shares outstanding increased to 130,679,012 at June 30, 2023 from 126,702,545 at December 31, 2022. Potential dilution included 12,855,467 options and 1,235,000 warrants, all excluded from diluted loss per share as antidilutive.
Guidance, Outlook, Risks and Unusual Items
- The company provided no quantitative revenue, earnings or cash-flow guidance. Management stated that available funds are expected to meet obligations for at least the next 12 months, while acknowledging that additional financing may be needed to execute its plans and commercialize its systems.
- Key risks include continuing operating losses, negative operating cash flow, long and uncertain sales cycles, dependence on a single major customer, reliance on a substantial manufacturing supplier, dependence on equity financing, and uncertainty regarding the commercial adoption and scalability of AirSCWO systems.
- The company recorded $514,934 of stock-based compensation during the first six months, compared with $236,470 in the prior-year period.
- Related-party expenses totaled $599,571 for the first six months, associated with non-recurring labor and AirSCWO manufacturing costs involving Merrell Bros. affiliates. Accrued related-party expenses were $29,293 at June 30, 2023.
- The company has a worldwide Duke University license for its technology, with potential royalty obligations based on licensed product and sublicensing revenue. No license-related expense was incurred during the first six months.
- The filing reports no legal proceedings, defaults on senior securities or material unregistered sales. Management stated that a previously identified material weakness related to detailed financial review had been remediated and that internal control over financial reporting was effective as of June 30, 2023.
Investor Verification Items
- Verify the timing, size and terms of future AirSCWO equipment orders, including the concentration of revenue in one customer and the buildup of $1.71 million in unbilled accounts receivable.
- Assess whether cash of $14.60 million can fund operations given six-month operating cash burn of $4.88 million and the company’s continuing losses.
- Monitor further use of the $100 million at-the-market facility, potential equity dilution and the conversion or exercise of outstanding options and warrants.
- Evaluate whether increased staffing and marketing spending produce measurable sales-pipeline and commercialization progress.
- Review manufacturing dependence on Merrell Bros. and the related-party nature of that relationship, including costs, capacity and potential conflicts.
- Confirm the company’s ability to convert its technology-development and commercialization plans into recurring equipment, service and throughput-based revenue.