374Water Inc. annual report, FY2022

374Water Inc. — FY2022 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2022, with comparative results for fiscal year 2021. The filing is an annual report, not a quarterly Q4 filing. 374Water is an early-stage cleantech company developing and commercializing AirSCWO^TM, a supercritical water oxidation system designed to treat wet waste and recover water, energy and minerals.

Business Context and Commercial Status

AirSCWO systems target municipal and industrial sludge, biosolids, hazardous and non-hazardous waste, PFAS and other complex waste streams.
The company sells equipment and expects to generate future revenue from long-term service agreements and related maintenance and parts services.
The first commercial AirSCWO 6 unit was sold to a Southern California public agency and was expected to be installed in the second quarter of 2023.
The company currently offers a six-wet-ton-per-day system, expects to commercialize a 30-wet-ton-per-day system in 2024 and plans to design a 200-wet-ton-per-day system in 2025.
Manufacturing is outsourced primarily to Merrell Bros. Fabrication, LLC, which is also a related party and channel partner.

Financial Performance and Liquidity

Metric	FY2022	FY2021	Change
Revenue	$3.016 million	$0.048 million	+$2.967 million
Cost of revenues	$2.679 million	$0	+$2.679 million
Net revenue after cost of revenues	$0.337 million	$0.048 million	+$0.288 million
Operating expenses	$5.093 million	$3.214 million	+58%
Loss from operations	$(4.756) million	$(3.166) million	Loss increased 50%
Net loss	$(4.690) million	$(3.165) million	Loss increased 48%
Basic and diluted loss per share	$(0.04)	$(0.03)	—
Operating cash flow	$(4.949) million	$(1.841) million	Use increased $3.108 million
Cash and cash equivalents	$4.047 million	$11.131 million	Down $7.084 million
Marketable securities	$1.944 million	$0	New balance
Working capital	$7.061 million	$11.263 million	Down $4.203 million

Equipment revenue was $2.952 million, or 98% of total revenue; service revenue was $63,501.
One customer represented more than 90% of FY2022 revenue, indicating substantial customer concentration.
Approximate FY2022 gross margin was 11.2%, operating margin was negative 157.7% and net margin was negative 155.5%.
Total assets were $9.917 million and total liabilities were $1.663 million at December 31, 2022. The filing does not disclose material interest-bearing debt; liabilities consisted primarily of accounts payable, accrued expenses, unearned revenue and other liabilities.
Cash used in investing activities was $2.160 million, including $1.963 million of purchases of U.S. Treasury securities and $144,567 of property and equipment purchases.
Financing activities provided $25,049 in FY2022, compared with $12.872 million in FY2021, when the company raised capital through preferred and common stock offerings.

Material Changes Versus FY2021

Revenue increased sharply from $48,100 to $3.016 million, primarily from the sale of an AirSCWO system and related treatability services.
Cost of revenues increased to $2.679 million, resulting in only $336,501 of net revenue after costs.
Research and development expense increased 197% to $1.114 million as engineering and commercialization efforts expanded.
Compensation and related expenses were $1.645 million in FY2022 versus none reported in FY2021.
Professional fees increased 124% to $768,548, primarily due to legal, accounting and public-company costs.
General and administrative expense increased 43% to $1.566 million, driven by insurance, payroll and stock-based compensation.
The $1.400 million of FY2021 product development expense related to warrants issued to a strategic manufacturing partner; no comparable expense was recorded in FY2022.
Cash declined substantially as operating losses and investments in inventory and marketable securities exceeded financing inflows.
Inventory increased to $1.661 million, consisting of raw materials and work-in-process. Unbilled accounts receivable totaled $918,164 and unearned revenue totaled $200,109 at year-end.
The previously identified material weakness related to board and audit committee-level controls was reported as remediated as of December 31, 2022. Management concluded that internal control over financial reporting and disclosure controls were effective; no auditor attestation was required because of the company’s emerging growth company status.

Guidance, Outlook, Risks and Unusual Items

Management expects growth to be driven by additional AirSCWO system sales, expansion into North America and EMEA, channel partnerships and potential service-agreement models such as build-operate-transfer and build-own-operate-transfer.
Management expects to increase headcount from 23 full-time employees at year-end 2022 to approximately 40 in 2023 and 50 in 2024.
The company states that cash on hand and marketable securities are expected to satisfy financial obligations for at least the next 12 months, but also warns that additional financing may be required and that failure to raise capital could force it to cease operations or materially scale back activities.
From January 1 through March 13, 2023, the company raised approximately $2.136 million through its at-the-market offering by issuing 642,146 common shares. The offering permits sales of up to $100 million of common stock, subject to amounts already issued.
AirSCWO remains an emerging technology with limited commercial operating history. The company has not yet established a sustainable market or demonstrated full-scale commercial performance at competitive costs.
Key risks include customer and government-contract concentration, permitting and environmental compliance, product performance and liability, dependence on a single manufacturing supplier, supply-chain disruptions, competition, intellectual-property protection, inflation, cybersecurity and the need for additional capital.
Merrell Bros. or its affiliates owned more than 5% of the company and had a board representative. FY2022 related-party manufacturing expenses were $1.318 million, with $559,481 payable at year-end.
The company had three pending U.S. non-provisional patent applications and three pending PCT applications as of December 31, 2022. It also incurred $7,147 in expenses under its Duke University license agreement during FY2022.
No unresolved SEC staff comments, properties, or legal proceedings were reported. The company notes that ordinary-course legal claims could arise, but does not expect currently known matters to materially affect the financial statements.

Important Facts for Investors to Verify

Verify the installation, operating performance, acceptance and revenue treatment of the first commercial AirSCWO 6 system.
Assess whether the company can convert its technology pipeline and stated 2024–2025 capacity plans into repeatable commercial sales and positive gross margins.
Review cash consumption, the pace and pricing of subsequent ATM equity sales, potential dilution and the company’s ability to fund operations beyond the stated 12-month period.
Investigate customer concentration, including the identity and financial condition of the customer contributing more than 90% of FY2022 revenue.
Evaluate dependence on Merrell Bros. for manufacturing, including related-party pricing, outstanding payables, capacity and alternative supplier arrangements.
Confirm required environmental, air, wastewater and hazardous-waste permits for deployed systems and the potential costs of compliance or remediation.
Review outstanding options for 12.752 million shares and warrants for 1.250 million shares, which could contribute to future dilution.