374Water Inc.

Note 1 – Nature of Business and Presentation of Consolidated Financial Statements

Description of the Company

374Water Inc. (the “Company”, “374Water”, “We”, or “Our”) is a global industrial technology and services company providing innovative solutions addressing global organic waste destruction/treatment and waste management issues within the Municipal, Federal, and Industrial markets. 374Water offers our proprietary AirSCWO system, which is designed to efficiently destroy and mineralize a broad spectrum of non-hazardous and hazardous organic wastes producing safe dischargeable water streams, safe mineral effluent, safe vent gas, and recoverable heat energy. Importantly, our AirSCWO system eliminates recalcitrant organic wastes without creating waste byproducts. Our AirSCWO system effectively converts solid and liquid wastes such as sewage sludge, biosolids, food waste, hazardous and non-hazardous waste, and forever chemicals (e.g., “per-and polyfluoroalkyl substances” or “PFAS”) into recoverable resources including water, minerals, and heat energy, by focusing on waste as a valuable resource.

In fiscal year 2024, 374Water outlined a new strategic plan and tactical roadmap. Throughout the year, we executed our plan reaching critical milestones which we believe position the Company’s business outlook well for fiscal year 2025. 2024 achievements include (i) ruggedizing and optimizing our AirSCWO system to effectively and continuously process a variety of organic waste streams; (ii) deploying our first commercial scale AirSCWO system to the City of Orlando’s Iron Bridge Water Reclamation Facility; (iii) completing various federal and industrial waste destruction demonstrations; (iv) growing our backlog and pipeline in the municipal, federal and industrial markets; (v) relocating our laboratory facility to a significantly larger state-of-the-art Biosafety Level 1 Laboratory to meet increasing lab-scale waste destruction demand and expedite the advancement of our AirSCWO technology; (vi) relocating our manufacturing operations; and strengthening our leadership team and organization.

374Water has a robust plan to scale revenue, operations, and capitalize our business. During 2025, we expected to complete our commercial-scale demonstration under our contract with the City of Orlando; mobilize an AS system to Detroit, MI in partnership with the Defense Innovation Unit to demonstrate AirSCWO’s waste destruction effectiveness for specific U.S. Department of Defense applications; deploy an AirSCWO system to the Orange County Sanitation District (“OC San”) in Fountain Valley, CA; mobilize an AirSCWO system to St. Cloud, MN, as part of a Legislative-Citizen Commission on Minnesota Resources (LCCMR) initiative to demonstrate its effectiveness destroying Minnesota waste; further scale our manufacturing capacity to meet client demand for AirSCWO systems of various sizes; continue to improve our AirSCWO technology; and begin accepting third party waste streams for our initial Waste Destruction Services (“WDS”) hub(s) at partner Treatment, Storage, and Disposal Facilities (“TSDF”).

Presentation of Consolidated Financial Statements and Principles of Consolidation

The accompanying consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying consolidated financial statements include the accounts and operations of the Company and all adjustments which are necessary for a fair presentation of the results of its operations, financial position, and cash flows. The consolidated financial statements include the accounts of 374Water Inc., 374Water Systems Inc., and 374Water Sustainability Israel LTD (currently inactive), each a wholly-owned subsidiary of 374Water. Intercompany balances and transactions have been eliminated in consolidation.

Note 2 – Summary of Significant Accounting Policies

Cash and Cash Equivalents and Investment 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 $10,651,644 and $10,445,404 in cash and cash equivalents as of December 31, 2024 and 2023, respectively.

Fair Value Measurements

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 categorization of a financial instrument within the fair value hierarchy is based upon the lowest level of input that is significant to its fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the assets or liabilities.

As of December 31, 2024 and 2023, the Company did not have any assets or liabilities carried at fair value.

The carrying value of the Company’s accounts receivables, accounts payable and other current assets and liabilities approximate fair value due to their short-term nature.

Inventory, Net

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. 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 or usage 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. Based on our evaluation, we estimated an inventory allowance of $50,000 and $0 at December 31, 2024 and 2023, respectively.

Receivables

Accounts Receivable, Net

Accounts receivables consist of balances due from equipment and service revenues. Unbilled accounts receivables are from revenues earned but not yet billed and relate to one customer contract. The Company monitors accounts receivable and provides allowances when considered necessary based on historical loss patterns, the number of days that billings are past due, an evaluation of the potential risk of loss associated with delinquent accounts, current market conditions and reasonable and supportable forecasts of future economic conditions to form adjustments to historical loss patterns. At December 31, 2024 and 2023, the Company recorded an allowance for estimated credit losses of $8,058 and $2,909, respectively.

Other Receivables

Other receivables consist of accrued interest income from the cash held in an interest bearing money market account with a financial institution. We typically receive payment for accrued interest one month in arrears.

Unbilled Accounts Receivables

Unbilled accounts receivables consist of balances due from revenues earned but not yet billed related to one customer contract for an equipment sale.

Accounts receivable allowance for credit loss

The activity related to the accounts receivable allowance for credit losses during the years ended December 31, 2024 and 2023 was as follows:

Property and Equipment, Net

Property and Equipment is recorded at cost. Depreciation is computed using the straight-line method and an estimated useful life of three to five years. Expenses for maintenance and repairs are charged to expenses as incurred.

The following table presents property and equipment as of December 31, 2024 and 2023:

We completed the manufacturing and fabrication of one of our AirSCWO systems that we will be using for water treatment demonstration purposes (“Demo System”). We have capitalized the material and labor costs incurred to develop this Demo System, and had previously classified these costs within inventory. In the first quarter of 2024, we executed a contract with the City of Orlando, Florida to deploy the Demo System as part of a full-scale demonstration. We began the set up and commissioning process of this Demo System in the third quarter of 2024 which was completed in October 2024. We began depreciating the Demo System over an estimated life of five years during the last calendar quarter of 2024. We expect to continue to develop and enhance this unit as we perform our demonstrations and continue progressing towards commercialization. Upgrades and enhancements that will improve the operational efficiency of the unit itself will be capitalized.

Depreciation expense for the years ended December 31, 2024 and 2023 was $156,002 and $18,098, respectively.

Intangible Assets, Net

Intangible assets are subject to amortization, and any impairment is determined in accordance with ASC 350, “Intangibles - Goodwill and Other.” 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 December 31, 2024 and 2023, there was no impairment.

Long-Lived Assets

The Company reviews long-lived assets, including property and equipment and 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 December 31, 2024 and 2023, 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, purchases, accounts receivables, and accounts payables. Two customers made up approximately 72% of revenue for the year ended December 31, 2024, compared to one customer who made up approximately 88% of revenue for the year ended December 31, 2023. As of December 31, 2024, three customer accounted for 89% of our outstanding accounts receivable. As of December 31, 2023, one customer accounted for 51% of our outstanding accounts receivable.

As of December 31, 2024 and 2023, our unbilled receivables of $1,653,007 and $1,485,803, respectively, were due from one customer and the same customer that comprises the majority of our revenue. The loss of this significant customer could adversely affect the results of our operations.

In 2023, the Company purchased a substantial portion of manufacturing services from one third party vendor, Merrell Bros. In 2024, we terminated the manufacturing agreement with Merrell Bros. and began performing these services internally.

Refer to Note 9 for a license agreement we have with Duke University for the SCWO technology used in our systems.

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.

The Company generates revenue from the sale of equipment (AirSCWO systems) and services, specifically the completion of treatability studies and demonstration services. In the case of revenues from AirSCWO systems, the Company’s performance obligations are satisfied over time over the life of the contract, which is currently a long-term fixed price contracts. 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. Equipment sale related contract revenues are recognized in proportion to the contract costs incurred compared to the total estimated costs to complete. This method is used because management considers the input method to be the best available measure of progress on these contracts.

Changes in our overall expected cost estimates are recognized as a cumulative adjustment for the inception-to-date effective of such change. If these changes in estimates result in a possible loss being incurred on the contract, we accrue for such a loss in the period such an outcome becomes probable.

Services revenues, from treatability studies, are recognized when all five revenue recognition criteria have been completed which is generally when the Company has delivered a completed treatability study report to the customer.

During 2024, we deployed our Demo System to the City of Orlando’s Iron Bridge Regional Water Reclamation Facility pursuant to a contract executed in March 2024 as part of a full-scale demonstration (the “Demo Contract”). Pursuant to the Demo Contract, the Company is responsible for system design, installation, commissioning and the start-up of the AirSCWO system at the facility. Further, the Company will operate and maintain the AirSCWO system for a period of approximately three months and is required to treat no less than 193 metric tons of wastewater during the three-month period. Lastly, the Company will decommission, disassemble and demobilize the AirSCWO system after the contract period. The Company will receive $812,000 as consideration for the full-scale demonstration.

In accordance with ASC 606-10-25-21, we have concluded that the Demo Contract includes one performance obligation the full-scale demonstration. The system design, site preparation, installation, commissioning and decommissioning represent fulfillment activities versus separate performance obligations. As of December 31, 2024, we have accounted for such costs as contract costs under ASC 340-40 (see below). We will recognize revenue on this Demo Contract over the three-month period of operations and maintenance which is the point in time that the City of Orlando receives the benefit simultaneously to the Company’s performance, which will commence in 2025.

Contract costs include all direct material, labor and subcontractor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. As of December 31, 2024, we have capitalized $136,651 of costs incurred to date to fulfill the Demo Contract which are presented as contract assets. We will expense these costs over the three-month demonstration period. General, selling, and administrative costs are charged to expenses as incurred.

We will invoice the City of Orlando in accordance with the contract terms. Invoices are due within thirty days of receipt. The City of Orlando has the right to cancel the Demo Contract for convenience with a twenty-day written notice but is responsible for paying the Company all amounts owed and outstanding for work performed prior to the effective termination date and costs and expenses incurred by the Company to uninstall, remove, relocate and delivery the AirSCWO system up to a limit of $68,000.

Revenues for the year ended December 31, 2024 in the amount of $227,956 was generated from the manufacturing of the AirSCWO equipment system and $217,489 was generated from the completion of treatability study services. Revenues for the year ended December 31, 2023 in the amount of $655,818 was generated from the manufacturing of the AirSCWO equipment system and $88,134 was generated from the completion of treatability study services.

Accrued Contract Loss Provision and Onerous Contracts

Onerous contracts are those where the costs to fulfill a contract exceed the consideration expected to be received under the contract. The revenue standard does not provide guidance on the accounting for onerous contracts or onerous performance obligations. US GAAP contains other applicable guidance on the accounting for onerous contracts, and those requirements should be used to identify and measure onerous contracts.

Our equipment manufacturing contract is a fixed price contract. Due to the nature of the contract, including customer specific equipment design, we applied ASC 605-35,*Revenue Recognition—Provision for Losses on Construction-Type and Production-Type Contract (ASC 605-35).*ASC 605-35 requires the recognition of a liability for anticipated losses on contracts prior to those losses being incurred when a loss is probable and can be estimated.

As of December 31, 2024 and 2023, we evaluated the total costs incurred on this contract to date and the estimated costs we anticipate incurring to complete the contract. Based on this analysis as of December 31, 2024 and 2023, we have an accrued a contract loss provision of $1,000,000 and $500,000, respectively, which has been presented on the accompanying consolidated balance sheets and is recorded within cost of revenues on the accompanying consolidated statements of operations. The increased loss on this contract during 2024 is due to a system design change that required unexpected labor costs to implement.

Stock-based Compensation and Change in Accounting Policy

The Company accounts 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.

Prior to January 1, 2024, the Company had elected to estimate options granted for which the requisite service period would not be rendered, due to the option being forfeited or expiring. The forfeiture rate estimate was based on the percentage of cumulative forfeitures to the total award grants. During the quarter ended December 31, 2023, the Company compared its actual forfeiture rate to its estimated forfeiture rate and made acumulative adjustment of approximately $55,000 in the quarter ended December 31, 2023 to reduce its forfeiture rate estimate to approximately 5% of the total stock-based compensation recognized during the year.

Effective January 1, 2024, the Company made a change in its accounting policy to recognize forfeitures on service-based stock award instruments as they occur. Due to the lack of history available to adequately estimate its forfeiture rate and the fact that the majority of its service based options include a one-year cliff vesting and monthly vesting after, the Company believes recognizing forfeitures as they occur will result in more accurate financial reporting. The change in this accounting policy did not have a significant impact on the current or prior period financial statements.

Leases

The Company accounts for leases under ASC Topic 842, Leases. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on the consolidated balance sheets. The Company leases an office and warehouse to conduct business. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less.

Operating lease ROU assets represent the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Operating lease expense is recognized on a straight-line basis over the lease term. During the year ended December 31, 2024, we executed a lease agreement within the scope of Topic 842. At December 31, 2023, we did not have any leases with terms that exceeded 12 months.

The Company elected to account for non-lease components when incurred and are therefore not included in operating lease assets and liabilities. The non-lease components typically represent additional services transferred to the Company, such as common area maintenance for real estate related leases.

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 December 31, 2024 and 2023.

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 $2,143,471 and $1,496,129 for the years ended December 31, 2024 and 2023, respectively.

Earnings (Loss) Per Share

Earnings (loss) per share is computed in accordance with ASC Topic 260, “Earnings per Share” Basic weighted-average number of shares of common stock outstanding for the years ended December 31, 2024 and 2023 include the shares of the Company issued and outstanding during such periods, each on a weighted average basis. The basic weighted average number of shares of common stock outstanding excludes common stock equivalent incremental shares, while diluted weighted average number of shares outstanding includes such incremental shares. However, as the Company was in a loss position for all periods presented, basic and diluted weighted average shares outstanding are the same, as the inclusion of the incremental shares would be anti-dilutive.

As of December 31, 2024, there were the following potentially dilutive securities that were excluded from diluted net loss per share because their effect would be antidilutive: options for 15,843,116 shares of common stock,14,675,244 warrants, and unvested restricted stock awards of 3,549,292. As of December 31, 2023, there were the following potentially dilutive securities that were excluded from diluted net loss per share because their effect would be antidilutive: options for 10,828,174 shares of common stock and 1,235,000 warrants.

Foreign Currency Translation

The Company’s reporting currency is the United States (“U.S.”) dollar while the functional currency of the Company’s insignificant non-U.S. subsidiary 374Water Sustainability Israel LTD (currently inactive) is the Israeli Shekel. Translation adjustments resulting from translating the functional currency financial statements into U.S. dollar equivalents are reported separately in accumulated other comprehensive income (loss) in equity. Gains (loss) arising from transactions denominated in a currency other than the functional currency of the entity that is party to the transaction are included in net income (loss) on the Company’s consolidated statements of operations.

All assets and liabilities of the 374Water Sustainability Israel LTD wholly-owned subsidiary whose accounts are denominated in foreign currency are translated into United States dollars at appropriate year-end current exchange rates. All income and expense accounts of those locations are translated at the average exchange rate for each period. The foreign currency translation amounts for the years ended December 31, 2024 and 2023 are included in accumulated comprehensive income on the consolidated statement of changes in equity.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying financial statements include the fair value of equity-based compensation, revenue recognition and accrued loss provisions on onerous contracts, fair value of intangible assets, useful lives of long-lived assets, and valuation allowance against deferred tax assets.

Recent Accounting Pronouncements - Adopted

In November 2023 the FASB issued ASU 2023-07,*Segment Reporting – Improvements to Reportable Segment Disclosures.*The ASU will now require public entities to disclose its significant segment expenses categories and amounts for each reportable segment. Under the ASU, a significant segment expense is an expense that is:

The ASU was effective for public entities for fiscal years beginning after December 15, 2023 and interim periods in fiscal years beginning after December 15, 2024 (calendar year public entity will adopt the ASU in its 2024 Form 10- K). The ASU should be adopted retrospectively unless it’s impracticable to do so. Early adoption of the ASU is permitted, including in an interim period. For the annual reporting period beginning January 1, 2024, we adopted ASU 2023-07 and evaluated the application of ASU 2023-07 to these consolidated financial statements. We have included disclosures in Note 11 to provide further information regarding the measure of our one operating segment’s gross profit and significant segment expenses as required by ASU 2023-07.

The Company considers the applicability and impact of all recently issued accounting pronouncements. Recent accounting pronouncements not specifically identified in our disclosures are either not applicable to the Company or are not expected to have a material effect on our financial condition or results of operations.

Recent Accounting Pronouncements - Not Yet Adopted

In December 2023 FASB issued Accounting Standards Update (ASU) 2023-09,Income Taxes (Topic 740): Improvements to Income Tax Disclosures(ASU 2023-09). The ASU focuses on income tax disclosures around effective tax rates and cash income taxes paid. ASU 2023-09 requires public business entities to disclose, on an annual basis, a rate reconciliation presented in both dollars and percentages. The guidance requires the rate reconciliation to include specific categories and provides further guidance on disaggregation of those categories based on a quantitative threshold equal to 5% or more of the amount determined by multiplying pretax income (loss) from continuing operations by the applicable statutory rate. For entities reconciling to the US statutory rate of 21%, this would generally require disclosing any reconciling items that impact the rate by 1.05% or more. ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024 (generally, calendar year 2025) and effective for all other business entities one year later. Entities should adopt this guidance on a prospective basis, though retrospective application is permitted. The adoption of ASU 2023-09 is expected to have a financial statement disclosure impact only and is not expected to have a material impact on the Company’s financial statements.

ASU 2024-03,Disaggregation of Income Statement Expenses (“DISE”). In November 2024, the FASB issued a new accounting standard to improve the disclosures about an entity’s expenses and address requests from investors for more detailed information about the types of expenses included in commonly presented expense captions. The new standard is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, with retrospective application permitted. The Company is evaluating the disclosure requirements related to the new standard and its impact on our consolidated financial statements.

The Company considers the applicability and impact of all recently issued accounting pronouncements. Recent accounting pronouncements not specifically identified in our disclosures are either not applicable to the Company or are not expected to have a material effect on our financial condition or results of operations.

Note 3 – Liquidity, Capital Resources and Going Concern

In accordance with ASU No. 2014-15 Presentation of Financial Statements – Going Concern (subtopic 205-40), the Company’s management evaluates whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. As of December 31, 2024, the Company had working capital and an accumulated deficit of $11,760,131 and $28,387,618, respectively. During the year ended December 31, 2024, the Company had a net loss of $12,434,114 and used cash in operations of $10,589,735.

These conditions raise substantial doubt regarding our ability to continue as a going concern as the Company will need additional debt or equity financing or a combination of both to continue its operations and meet its financial obligations for twelve months from the date these consolidated financial statements were issued.

Presently, the Company will need additional debt or equity financing or a combination of both to continue its operations and meet its financial obligations for at least the next twelve months from the date these consolidated financial statements were issued and beyond. We may consume available resources more rapidly than currently anticipated, resulting in the need for additional funding. We expect to incur continuing losses and negative cash flows from operations for the foreseeable future.

Since inception, we have financed our operations principally through the sale of debt and equity securities and operating cash flows. We have an at-the-market (ATM) equity offering under which we may issue up to $100 million of common stock, subject to applicable law. During the years ended December 31, 2024 and 2023, we raised approximately $0 and $13,400,000 respectively, of net proceeds through this ATM. During the year end December 31, 2024, the costs incurred associated with the ATM exceed proceeds by approximately $3,100 (see Note 7). The Company is evaluating strategies to obtain the required additional funding for future operations.

As further disclosed in Note 7, on November 18, 2024, we closed on an Offering of shares of common stock and common stock warrants resulting in net proceeds of approximately $11,393,000.

Any additional debt or equity financing that the Company obtains may substantially dilute the ownership held by our existing stockholders. The economic dilution to our shareholders will be significant if our stock price does not materially increase, or if the effective price of any sale is below the price paid by a particular investor. The Company may be unable to access further equity or debt financing when needed or obtain additional financing under acceptable terms, if at all.

We may decide to raise additional capital through a variety of sources in the short-term and in the long-term, including but not limited to:

If the Company is unable to raise additional capital, there is a risk that the Company could be required to discontinue or significantly reduce the scope of its operations. These consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Note 4 – Inventory

Inventory consists of:

As of December 31, 2024, the Company has a $50,000 reserve against its inventory for estimated write downs. As of December 31, 2023, the Company did not deem a reserve necessary.

Note 5 – Intangible Assets

Intangible assets are comprised of the following as of December 31, 2024 and 2023:

Amortization expense for the year ended December 31, 2024 and 2023 was $70,037 and $67,718, respectively.

Estimated future amortization expense as of December 31, 2024:

Note 6 – Revenue, Unearned Revenue and Unbilled Accounts Receivable

Revenue

The following is a summary of our revenues by type for the years ended December 31, 2024 and 2023:

Unearned Revenue

The following is a summary of our unearned revenue activity for the years ended December 31, 2024 and 2023:

At December 31, 2024, we anticipate recognizing approximately $198,000 of the unearned revenue in 2025 which has been presented as a current liability at December 31, 2024. The remaining balance of $30,000 has been classified as a long term liability as the timing of revenue recognition is unknown.

Unbilled Accounts Receivable

The following is a summary of our unbilled accounts receivable activity during the years ended December 31, 2024 and 2023:

Note 7 – Stockholder’ Equity

The Company is authorized to issue 50,000,000 preferred stock shares and 200,000,000 common stock shares both with a par value of $0.0001.

Preferred Stock

On October 30, 2020, the Company designated 1,000,000 shares of preferred stock as Series D Convertible Preferred Stock with a par value of $0.0001.

As of December 31, 2024 and 2023, there were no shares of preferred stock issued and outstanding.

Common Stock

The holders of common stock are entitled to one vote per share on all matters submitted to a vote of shareholders, including the directors’ election. There is no right to cumulative voting in the election of directors. The holders of common stock are entitled to any dividends that may be declared by the board of directors out of funds legally available for payment of dividends, subject to the prior rights of holders of preferred stock and any contractual restrictions the Company has against the payment of dividends on common stock. In the event of liquidation or dissolution of the Company, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no pre-emptive rights and have no right to convert their common stock into any other securities. At December 31, 2024, there were 144,301,977 shares of common stock issued and outstanding.

Common Stock Issued for Cash

During the years ended December 31, 2024 and 2023, a total of 50,510 and 3,766,422 shares of common stock have been sold pursuant to the open market sale agreement resulting in a total of $0 and of $13,441,438 in proceeds, net of commission fees of approximately $2,400 and $230,000 and approximately $63,100 and $110,000 of accounting and legal fees, respectively. During the year ended December 31, 2024, the costs and fees exceeded the proceeds of approximately $62,400 received resulting in net issuance costs of approximately $3,100.

As of December 31, 2024, a total of 3,816,932 shares of common stock have been sold pursuant to the open market sale agreement. As of December 31, 2024, approximately $86,154,000 remains available to be sold in the Company’s at-the-market offerings, subject to various limitations.

On November 14, 2024, we entered into a Securities Purchase Agreement with certain investors, pursuant to which the Company agreed to issue and sell (i) an aggregate of 9,783,496 shares of common stock, and (ii) one and a half warrants to purchase up to an aggregate of 14,675,244 shares of common stock in a registered direct offering (the “Offering”). The purchase price for one share and the accompanying 1.5 warrants was $1.25. The warrants are immediately exercisable for a period of five years from the date of the Offering at $1.125, subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization, or similar transactions and include anti-dilution protection provisions in the event subsequent sales or equity-linked financial instruments are issued at a price below the $1.125.

The aggregate gross proceeds to the Company from the Offering, which closed on November 18, 2024, was approximately $12,229,000 with net proceeds of approximately $11,393,000, net of placement agent fees of approximately $481,000 and legal fees of $357,000. The net proceeds were allocated between the common stock and warrants based on their relative fair values of approximately $8,118,000 and $3,275,000 with the net proceeds presented within stockholders’ equity.

The Company’s Board of Directors and executive team participated in the Offering and invested a total of $696,000 and received shares of common stock totaling 556,800 and the accompanying warrants totaling 835,200.

The fair value of the warrants for purposes of the relative fair value allocation was estimated using a black-scholes model and the following assumptions: expected term of 5 years, volatility of 24.8%, dividend rate of 0.00%, and risk free rate of 4.28%.

The Offering was made pursuant to the Company’s registration statement on Form S-3 (File No. 333-268942), which was filed with the Securities and Exchange Commission (the “Commission”) on December 22, 2022 and declared effective by the Commission on December 30, 2022, and a prospectus supplement dated November 14, 2024 filed by the Company with the Commission.

Common Stock for Services

During the year ended December 31, 2024, we issued an aggregate of 301,209 of fully vested shares of restricted common stock to service providers and directors with an aggregate fair value of $383,879 based on the market price of our common stock on date of grant which is included in general and administrative expense on the statement of operation.

During the year ended December 31, 2023, we issued 20,000 fully vested shares of restricted common stock to two former employees with a fair value of $71,200 based on the market price of our common stock on date of grant.

Common Stock for Stock Option Exercises

During the year ended December 31, 2024, we issued an aggregate of 1,499,655 shares of common stock for cash and cashless stock option exercises that resulted in cash proceeds of $60,000.

Stock-Based Compensation

Stock Options issued are part of the 2021 Equity Incentive Plan (the “2021 Plan”) initially reserved and authorized a total of 10,000,000 shares of our common stock for issuance under the 2021 Plan. At the 2024 Annual Meeting of Stockholders held on June 13, 2024, the Company’s stockholders approved an amendment to the Company’s 2021 Plan to increase the number of shares of common stock authorized and issuable pursuant to the 2021 Plan by 14,000,000 shares for a total of 24,000,000 shares.

Under the 2021 Plan, the Company has issued a total of 9,668,116 stock options with 14,331,884 reserved options remaining for issuance as of December 31, 2024. The Company recorded stock-based compensation of $907,225 and $925,181, respectively, related to vested options and options expected to vest granted to employees and various consultants of the Company, of which $738,147 and $796,881 was charged as general and administrative expenses and $169,078 and $128,300 as research and development expenses in the accompanying consolidated statements of operations during the years ended December 31, 2024 and 2023, respectively. During the years ended December 31, 2024 and 2023, the stock-based compensation expense recognized is net of estimated forfeitures of $0 and $50,000, respectively.

Stock Options

Stock option activity for the year ended December 31, 2024 and 2023 is summarized as follows:

(I) As of December 31, 2024 and 2023, the options outstanding include 5,900,000 and 6,700,000, respectively, options granted in connection with the Merger (see Note 1) and were not granted under the 2021 Plan. As of December 31, 2024, all 5,900,000 options are exercisable.

(ii) During the year ended December 31, 2024, 275,000 options were granted outside of our 2021 Plan in connection with a legal settlement (see Note 9).

During the year ended December 31, 2024, the options granted were primarily to executives, key employees and the legal settlement discussed above. The average grant-date fair value of the granted options was $0.46.

Of the total options granted during the year ended December 31, 2024,3,399,646 of the options include performance conditions. The performance-based options vest as follows:50% vest upon the achievement of operating profit, as defined in the employment agreements, and 50% upon the achievement of a revenue target of $100 million by the end of fiscal year 2028. The performance-based options with the revenue target begin vesting once the Company achieves $15 million in revenue for a fiscal year. Vesting will occur on January 31 of each year through January 31, 2029. The number of options that vest is based on the proportionate percentage of each fiscal year’s revenue to the $100 million target. For example, if our annual revenue for fiscal year 2026 is $20 million, 20% of the restricted stock units with the revenue performance condition will vest on January 31, 2027.

As of December 31, 2024, total unrecognized compensation expense for service based and performance-based options was $2,162,398 and $1,571,405, respectively. The unrecognized service-based expense will be recognized over a weighted-average period of 2.86 years. The unrecognized expense associated with the performance-based options will be expensed when it becomes probable that the performance obligations will be met.

During the year ended December 31, 2024, the options exercised consisted of 1,446,901 of cashless option exercises which resulted in the issuance of 999,655 shares of common stock shares and the exercise of 500,000 common stock options with an exercise price of $0.12 which resulted in gross proceeds of $60,000 and the issuance of 500,000 common stock shares.

During the year ended December 31, 2023, the options exercised consisted of 2,283,800 of cashless option exercises which resulted in the issuance of 2,067,902 shares of common stock shares and the exercise of 95,238 common stock options with an exercise price of $1.05 which resulted in gross proceeds of $100,000 and the issuance of 95,238 common stock shares.

Total unrecognized compensation associated with these unvested options is approximately $2,162,398 which will be recognized over a period of approximately three years.

Intrinsic value is based on the difference between the option exercise price and the quoted market price as of December 31, 2024.

The fair value of these options granted were estimated on the date of grant, using the Black-Scholes option-pricing model with the following assumptions:

Restricted Stock Units

During the year ended December 31, 2024, the Company granted an aggregate of 3,549,292 unvested restricted stock units under the 2021 Plan as follows:2,250,000 our Chief Executive Officer (Note 9),231,000 to our Chief Operating Officer (Note 9), and 1,068,292 to key employees of the Company. These unvested restricted stock units consist of 1,649,646 units with time-based vesting provisions and 1,899,646 units with performance-based vesting provisions. The performance-based units vest as follows: 50% vest upon the achievement of Operating Profit, as defined in the employment agreements, and 50% upon the achievement of revenue targets between $15.0 million and $100 million by the end of fiscal year 2028. The restricted stock units with the revenue target begin vesting once the Company achieves $15.0 million in revenue for a fiscal year. Vesting will occur on January 31 of each year through January 31, 2029. The number of restricted stock units that vest is based on the proportionate percentage of each fiscal year’s revenue to the $100 million target. For example, if our annual revenue for fiscal year 2026 is $20 million, 20% of the restricted stock units with the revenue performance condition will vest on January 31, 2027.

The grant-date fair value of the restricted stock units was determined using the market price of our common stock on the date of grant which ranged from $1.03 to $1.30. As of December 31, 2024, we have $2,330,508 of unrecognized stock-based compensation associated with the restricted stock units with a performance condition which will be recognized when the performance conditions are probable of being met. As of December 31, 2024, the Company had $1,709,608 of unrecognized stock-based compensation associated with the time vesting restricted stock units which will be recognized over a weighted-average period of approximately 3.41 years. During the year ended December 31, 2024, $308,399 of our stock-based compensation was associated with the time-based restricted stock units.

A summary of our outstanding nonvested restricted stock units is as follows:

Stock Warrants

During the year ended December 31, 2024, we issued 14,675,244 of common stock warrants in connection with the Offering discussed above and 1,235,000 warrants expired unexercised in December 2024. During the year ended December 31, 2023, there were no new warrants issued and 15,000 warrants were exercised with an exercise price of $2.50 resulting in gross proceeds of $37,500 and the issuance of 15,000 shares of common stock. The intrinsic value of all outstanding warrants as of December 31, 2024 and 2023 was $0 based on the market price of our common stock of $0.68 per share.

A summary of warrant activity for the year ended December 31, 2024, is as follows:

Note 8 – Related Party Transactions

On July 7, 2021, we entered into a manufacturing and services agreement (the “M&S Agreement”) to fabricate and manufacture the AirSCWO systems with Merrell Bros. Fabrication, LLC (“Merrell Bros.”). As part of the agreement, the Company appointed Terry Merrell, one of the owners of Merrell Bros., to its board of directors. On December 18, 2024, Mr. Merrell notified the Company of his intention to resign from the Company's Board of Directors effective December 31, 2024, to allow him to focus more on his core business responsibilities at Merrell Bros. The M&S Agreement terminated on its original expiration date of July 7, 2024.

On March 27, 2024, we executed a supplemental manufacturing and services agreement (the “Supplemental M&S Agreement”) with Merrell Bros. as Merrell Bros. indicated to us their intent to not renew the Original M&S Agreement and we indicated our desire to relocate to a larger manufacturer facility with more square footage dedicated to expanding our manufacturing operations (see Note 9). The Supplemental M&S Agreement became effective on July 7, 2024 and replaced the Original M&S Agreement. Under the Supplemental M&S Agreement, our relationship and the manufacturing services provided by Merrell Bros. will continue an as needed basis based on statements of work to be agreed upon by both parties to fulfill future and current manufacturing orders. The term of the Supplemental M&S Agreement is one year from July 7, 2024 with a one-year renewal upon a mutually executed written extension. Either party may terminate this Supplement M&S Agreement upon written notice of such a termination, specifying the extent to which performance of work is terminated and the effective date of termination. As of December 31, 2024, this Supplemental M&S Agreement has been terminated.

During the years ended December 31, 2024 and 2023, the Company incurred $241,917 and $1,210,826, respectively, in expenses with Merrell Bros. related to the manufacturing of the AirSCWO systems. As of December 31, 2024 and 2023, accounts payable and accrued expenses included $0 and $125,282, respectively of amounts owed to Merrell Bros. for the manufacturing services provided, respectively.

See also Note 7 for related parties that invested in the Offering that occurred in November 2024.

Note 9 – Commitments and Contingencies

Operating Leases

On October 15, 2024, a lease for our new laboratory space located in North Carolina commenced upon substantial completion of all improvements by the landlord. Pursuant to the terms of the lease, the Company reimbursed the landlord approximately $59,000 of these improvements. The term of the lease began September 1, 2024 and ends in sixty-one months or October 1, 2029 with one five-year extension period. The extension period was not included in our initial present value of the right-of-use asset or operating lease liability as it was not reasonably certain the option would be exercised. Monthly rental payments required under the lease are subject to annual increases and range from $14,235 - $16,503 over the initial term of the lease.

Upon the lease commencing on October 15, 2024, the Company recognized an operating right-of-use asset and operating lease liabilities of approximately $726,000 for the present value of the lease payments required over the term of the lease, including the reimbursement for lessor improvements, using a weighted average incremental borrowing rate of 12%.

Right-of-use assets are summarized below:

Operating lease liabilities are summarized below:

Future payments required on the operating lease liabilities, over a remaining lease term of approximately 4.75 years, are as follows:

The following table summarizes the supplemental cash flow information for the years ended December 31, 2024 and 2023:

During the year ended December 31, 2024, we incurred rent expense of approximately $63,000 in connection with this operating lease which is included within general and administrative expenses on the consolidated statement of operations. During the year ended December 31, 2023, we did not have any leases subject to ASC 842.

License Agreement

The patented technology underlying 374Water’s supercritical water oxidation (SCWO) units, which was developed principally through the efforts of Messrs. Nagar and Deshusses at the facilities of Duke University, Durham, North Carolina (“Duke”), where Dr. Deshusses is a professor. The SCWO technology is licensed to 374Water pursuant to a worldwide license agreement with Duke executed on April 16, 2021 (the “License Agreement”). Under the terms of the License Agreement, the Company is required to make royalty payments based on a percentage of licensed product sales, as defined in the License Agreement which is triggered by the sale of licensed products. Further, the Company is also required to pay royalties on a percentage of sublicensing fees. The Company will reimburse Duke for any ongoing patent expenses incurred. As of December 31, 2024 and 2023, the Company has not incurred any expenses in connection with this License Agreement. The Company may terminate the license agreement anytime by providing Duke 60 days’ written notice.

Legal Matters

In 2023, the Company was named in a lawsuit filed against its former stock transfer agent (“Former TA”) by certain unrelated individuals asserting claims for negligence, conversion, and various breaches. The Former TA issued 175,000 shares of Company common stock to the State of Delaware in accordance with escheat laws after the Former TA was unable to issue the shares of common stock to the individuals. While the Company was not at fault in the matter, due to certain indemnification clauses between the Company and the Former TA, the Company was part of the settlement with the individuals.

This matter was fully settled on May 31, 2024 with an aggregate of 275,000 fully vested common stock options granted to the unrelated individuals. These stock options were granted outside of the 2021 Plan. The stock options have an exercise price of $1.25, equal to the market price of our common stock on the settlement date, and an exercise period of five years. At December 31, 2023, the Company had accrued $135,000 as an estimated legal settlement for this pending matter based on the estimated grant-date fair value of these options using a Black-Scholes valuation model and the following assumptions: stock price and exercise price of $1.33. risk free rate of 4.43%, expected term of five years, and volatility of 26.36%. Upon the matter being formally settled on May 31, 2024, we determined the grant-date fair value of the options using a Black-Scholes valuation model to be $112,697 and the following assumptions: stock price and exercise price of $1.25, risk-free rate of 4.52%, expected term of five years, and volatility of 27.43%. The Company recognized a gain of $22,303 upon the settlement of this legal matter which is reflected in professional fees on the statements of operations.

On November 4, 2024, our former Chief Executive Officer and Chairman of the Board filed a complaint against the Company alleging unpaid wages and a bonus. Management and the board of directors, in consultation with its attorneys, have estimated a potential loss associated with this complaint of approximately $335,000. Therefore, as of December 31, 2024, we have established an accrual for legal settlement of this amount as presented on the consolidated balance sheet.

We note that in the ordinary course of business that we may be the subject of, or party to, various pending or threatened legal actions which could result in a material adverse outcome for which the related damages may not be estimable. We do not believe any legal action would have a significant impact on the financials other than the matter disclosed above. However, there is inherent uncertainty regarding such matters.

Employment Agreements

CEO

On April 19, 2024, the Company entered into an employment agreement with Christian Gannon (the “Employment Agreement”), for Mr. Gannon to serve as President and Chief Executive Officer (“CEO”) of the Company effective April 22, 2024 (the “Start Date”). The Employment Agreement provides for an initial annual salary for Mr. Gannon of $450,000. Mr. Gannon is also eligible to earn an annual fiscal year performance bonus for each whole or partial fiscal year of his employment period with the Company; for the initial year under the Employment Agreement in accordance with certain milestones set forth by the Company, and thereafter as determined by the compensation Committee of the Company and the Board of Directors of the Company. Mr. Gannon is eligible to earn a performance bonus up to 125% of Mr. Gannon’s then-current base salary (the “Annual Bonus”) if certain milestones are met as defined in the Employment Agreement.

Under the Employment Agreement and subject to the terms of the Company’s 2021 Plan, Mr. Gannon was granted up to 2,250,000 Restricted Stock Units (as defined in the Plan) under the Plan, vesting as follows: (a) 250,000, on the first annual anniversary of the Start Date; (b) 750,000, in equal increments on the last day of every month thereafter over the following 36 months, subject to Mr. Gannon’s continued employment with the Company on each vesting date; and (c) 1,250,000, pursuant to certain performance related milestones set forth by the Company and defined in the Employment Agreement (collectively, the “Gannon Restricted Stock Units”). Additionally, pursuant to the Employment Agreement and the terms of the 2021 Plan, Mr. Gannon was granted 5,250,000 Options (as defined in the 2021 Plan) under the 2021 Plan vesting as follows: (a) 625,000, on the first annual anniversary of the Start Date; (b) 1,875,000, in equal installments on the last day of every month thereafter over the following 36 months subject to Mr. Gannon’s continued employment with the Company on each vesting date; and (c) 2,750,000, pursuant to certain performance related milestones set forth by the Company and defined in the Employment Agreement (collectively, the “Gannon Options”, and together with the Gannon Restricted Stock Units, the “Gannon Equity Awards”). See Note 7 for further disclosures on the vesting performance related milestones.

If the Employment Agreement is terminated by the Company without “Cause” or by Mr. Gannon for “Good Reason” (each as defined in the Employment Agreement, subject to the Company’s right to cure), he will be entitled to termination benefits, pursuant to which the Company will be obligated to (i) pay Mr. Gannon 100% of his then-current annual base salary in 12 equal installments; (ii) any earned but unpaid Annual Bonus; (iii) coverage to Mr. Gannon and his dependents under the Company’s then current medical, health, and vision insurance plans for 12 months; and (iv) if such separation occurs on or after the first anniversary of the Start Date, (x) a pro-rated Annual Bonus for the fiscal year in which the employment is terminated equal to the pro-rated Annual Bonus that Mr. Gannon would have received based on actual performance for such fiscal year if Mr. Gannon was employed by the Company, and (y) accelerated vesting with respect to the Gannon Equity Awards as if Mr. Gannon had remained employed by the Company through the first anniversary of the date of such separation.

The Employment Agreement contains covenants for the benefit of the Company relating to the protection of the Company’s confidential information and standard Company indemnification obligations.

COO

On May 16, 2024 (the “Meyers Effective Date”), we entered into an employment agreement with Brad Meyers (the “COO Employment Agreement”), for Mr. Meyers to continue to serve as Chief Operating Officer (“COO”) of the Company, a position he has held since November 6, 2023. The COO Employment Agreement provides for an initial annual base salary for Mr. Meyers of $300,000. Mr. Meyers is also eligible to earn an annual fiscal year performance bonus with a target amount equal to 50% of Mr. Meyers’ then base-salary (the “Meyers Annual Bonus”).

Under the COO Employment Agreement and subject to the terms of the 2021 Plan , Mr. Meyers was granted 231,000 Restricted Stock (as defined in the 2021 Plan) and stock options for 231,000 (collectively, the “Meyers Equity Awards”), vesting as follows: (a) with respect to 115,500 Restricted Stock and 115,500 shares subject to stock options (“Options”), 25% vest on the first anniversary of the Effective Date, and the remaining 75% vest in equal increments on the last day of every month thereafter over the following 36 months, subject to Mr. Meyer’s continued employment with the Company on each vesting date: and (b) with respect to the remaining 115,500 Restricted Stock and 115,000 Options, each vest in accordance with a performance based milestone set forth by the Company and defined in the COO Employment Agreement. See Note 7 for further disclosures on the performance-related milestones.

If the COO Employment Agreement is terminated by the Company without “Cause” or by Mr. Meyers for “Good Reason” (each as defined in the COO Employment Agreement, subject to the Company’s right to cure), he will be entitled to termination benefits, pursuant to which the Company will be obligated to (i) pay Mr. Meyers six months of his then-current annual base salary in six equal installments; (ii) any earned but unpaid Meyers’ Annual Bonus; (iii) coverage to Mr. Meyers and his dependents under the Company’s then current medical, health, and vision insurance plans for six months; and (iv) if such separation occurs on the day or after the first year anniversary of employment of the Meyers Effective Date, (x) a pro-rated Annual Bonus for the fiscal year in which the employment is terminated equal to the pro-rated Annual Bonus that Mr. Meyers would have received based on actual performance for such fiscal year if Mr. Meyers was employed by the Company, and (y) accelerated vesting with respect to the Meyers Equity Awards as if Mr. Meyers had remained employed by the Company through the six-month anniversary of the date of such separation.

The Employment Agreement contains covenants for the benefit of the Company relating to protection of the Company’s confidential information and standard Company indemnification obligations.

CFO

On December 16, 2024 (the “Kline Effective Date”), we entered into an employment agreement with Russell Kline (the “CFO Employment Agreement”), for Mr. Kline to serve as Chief Financial Officer (“CFO”) of the Company. The CFO Employment Agreement provides for an initial annual base salary of $300,000. Mr. Kline is also eligible to earn an annual fiscal year performance bonus with a target amount equal to 50% of Mr. Klines’ then base-salary (the “Kline Annual Bonus”).

Under the CFO Employment Agreement and subject to the terms of the 2021 Plan and approval by the Board of Directors, Mr. Kline is eligible for a grant of 617,284 Restricted Stock (as defined in the 2021 Plan) and stock options for 617,284 (collectively, the “Kline Equity Awards”), vesting as follows: (a) with respect to 308,642 Restricted Stock and 308,642 shares subject to stock options (“Options”), 25% vest on the first anniversary of the Effective Date, and the remaining 75% vest in equal increments on the last day of every month thereafter over the following 36 months, subject to Mr. Kline’s continued employment with the Company on each vesting date: and (b) with respect to the remaining 308,642 Restricted Stock and 308,642 Options, each vest in accordance with a performance based milestone set forth by the Company and defined in the CFO Employment Agreement. See Note 7 for further disclosures on the performance-related milestones. The Kline Equity Awards were approved by the Board of Directors in January 2025 (see Note 12).

If the CFO Employment Agreement is terminated by the Company without “Cause” or by Mr. Kline for “Good Reason” (each as defined in the CFO Employment Agreement, subject to the Company’s right to cure), he will be entitled to termination benefits, pursuant to which the Company will be obligated to (i) pay Mr. Kline six months of his then-current annual base salary in six equal installments; (ii) any earned but unpaid Kline Annual Bonus; (iii) coverage to Mr. Kline and his dependents under the Company’s then current medical, health, and vision insurance plans for six months; and (iv) if such separation occurs on the day or after the first year anniversary of employment of the Kline Effective Date, (x) a pro-rated Annual Bonus for the fiscal year in which the employment is terminated equal to the pro-rated Annual Bonus that Mr. Kline would have received based on actual performance for such fiscal year if Mr. Kline was employed by the Company, and (y) accelerated vesting with respect to the Kline Equity Awards as if Mr. Kline had remained employed by the Company through the six-month anniversary of the date of such separation.

The Employment Agreement contains covenants for the benefit of the Company relating to protection of the Company’s confidential information and standard Company indemnification obligations.

Note 10 – Income Taxes

Deferred income taxes are provided based on the provisions of ASC Topic 740, “Accounting for Income Taxes”, to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Significant components of the Company’s net deferred income taxes are as follows:

A reconciliation of the U.S. statutory federal income tax rate to the effective income tax rate (benefit) follows:

Rate Reconciliation

The Company has gross net operating loss carryforwards for federal tax purposes totaling approximately $23.1 million and $13.3 million at December 31, 2024 and 2023 respectively, which will carry forward indefinitely. The Company has gross net operating loss carryforwards for state tax purposes totaling approximately $18.3 million and $11.0 million at December 31, 2024 and 2023 respectively, which will carry forward indefinitely.

NOLs that were acquired with the acquisition of businesses are excluded from the amount of available NOLs to the extent their use is limited by the provisions of Section 382 of the Internal Revenue Code. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company's ownership may result in further limitation on the amount of net operating loss carryforwards which can be utilized in future years.

In evaluating the amount of the valuation allowance against its deferred tax assets as of December 31, 2024 and 2023, the Company considered all available positive and negative evidence and concluded that it is more likely than not that a portion of its deferred tax assets would not be realized. Accordingly, the Company has recorded a valuation allowance against its net deferred tax assets due to the uncertainty surrounding the realization of such assets.

The Company had no unrecognized tax benefits as of December 31, 2024 and 2023. The Company does not anticipate a significant change in total unrecognized tax benefits within the next 12 months. Tax years 2021-2023 remain open to examination by the major taxing jurisdictions to which the Company is subject.

Note 11 – Segment Reporting

Operating segments are defined as components of an entity for which separate financial information is available and that is regularly provided to the Chief Operating Decision Maker (CODM) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s Chief Executive Officer, Chief Operating Officer and Chief Financial Officer comprise the Company’s CODMs. The CODMs review financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance. The CODMs use consolidated net income (loss) to assess performance, evaluate cost optimization, and allocate resources, including personnel-related and financial or capital resources, in the annual budget and forecasting process, as well as budget-to-actual variances on a monthly basis. As such, the Company has determined that it operates as one operating and reportable segment.

The significant expenses regularly reviewed by the CODMs are consistent with those reported on the Company's consolidated statement of operations and expenses are not regularly reviewed on a more disaggregated basis for assessing segment performance and deciding how to allocate resources. The CODMs do not regularly review total assets for our single reportable segment as total assets are not used to assess performance or allocate resources.

Note 12 – Subsequent Events

On January 15, 2025, non-executive employee restricted stock awards were granted totaling 1,755,000 with a grant date fair value of $1,105,650 based on the closing market price of our stock on the date of grant. The awards vest as follows:50% on the one year anniversary of the grant date with the remainder of the balance vesting ratably over thirty-six months.

On January 15, 2025, pursuant to the CFO Employment Agreement (see Note 9) the following awards were approved by the Board of Directors and were granted to the Company’s CFO: 617,284 Restricted Stock and 617,284 stock options with an exercise price of $0.81, vesting as follows: (a) with respect to 308,642 of the Restricted Stock and 308,642 shares subject to stock options (“Options”), 25% vest on the first anniversary of the Effective Date, and the remaining 75% vest in equal increments on the last day of every month thereafter over the following 36 months, subject to Mr. Kline’s continued employment with the Company on each vesting date, and (b) with respect to the remaining 308,642 Restricted Stock and 308,642 Options, each vest in accordance with a performance based milestone set forth by the Company and defined in the CFO Employment Agreement.

As previously reported on our Current Report on Form 8-K filed on January 15, 2025, the Company received a deficiency letter from the Nasdaq Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, for the last 30 consecutive business days, the closing bid price for the Company’s common stock has been below the minimum $1.00 per share required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”).

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been given 180 calendar days, or until July 14, 2025, to regain compliance with the Minimum Bid Price Requirement. If at any time before July 14, 2025, the bid price of the Company’s common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Staff will provide written confirmation that the Company has achieved compliance.

.

The Company intends to monitor the closing bid price of its common stock and may, if appropriate, consider available options to regain compliance with the Minimum Bid Price Requirement, including initiating a reverse stock split. However, there can be no assurance that the Company will be able to regain compliance with the Minimum Bid Price Requirement or will otherwise be in compliance with other Nasdaq Listing Rules.

Further, as previously reported on our Current Report on Form 8-K filed on March 13, 2025, the Company notified the Staff of Nasdaq that the Company no longer complies with Nasdaq’s independent director requirement (“Independent Director Requirement”) as set forth in Nasdaq Listing Rule 5605(b)(1), which requires a majority of the Company’s Board of Directors (the “Board”) to be comprised of Independent Directors as defined in Nasdaq Listing Rule 5605(a)(2). On that same date, the Company received a letter from Nasdaq confirming the foregoing (the “Letter”).

Consistent with Nasdaq Listing Rule 5605(b)(1)(A), the Letter provides that the Company is eligible for a cure period in which to regain compliance with Nasdaq Listing Rule 5605(b)(1). This cure period will expire at the earlier of the Company’s next annual meeting of stockholders or March 9, 2026; or if the Company’s next annual meeting is held before September 8, 2025, then the Company must evidence compliance no later than September 8, 2025.

The Company intends to elect an additional Independent Director to the Board as soon as practicable and prior to the expiration of this cure period. However, there can be no assurance that the Company will successfully regain compliance with Nasdaq Listing Rule 5605(b)(1) within the applicable cure period.

The Minimum Bid Price Requirement and Independent Director Requirement deficiencies have no immediate effect on the listing or trading of the Company’s common stock, which will continue to be listed and traded on The Nasdaq Capital Market under the symbol “SCWO,” subject to the Company’s compliance with the other Nasdaq listing requirements.

EXHIBIT INDEX

• Filed herewith.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Chris Gannon and Russell Kline, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution for him or her, and in his or her name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and either of them, his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.