374Water Inc.

Note 1 – Nature of Business and Presentation of 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.

Presentation of Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for interim financial information. It is management’s opinion that the accompanying unaudited condensed consolidated financial statements are prepared in accordance with instructions for Form 10-Q and include all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Annual Report on Form 10-K of 374Water Inc. as of and for the year ended December 31, 2024, filed with the SEC on March 28, 2025.

The results of operations for the six months ended June 30, 2025, are not necessarily indicative of the results to be expected for the full year or for future periods. The condensed 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 374 Water. Intercompany balances and transactions have been eliminated in consolidation.

Note 2 – Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP 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 inventory reserve, equity-based compensation, revenue recognition, accrued loss provisions on onerous contracts, useful lives of long-lived assets, and valuation allowance against deferred tax assets.

Receivables

Accounts Receivable, Net

Accounts receivable consist of balances due from equipment and service revenues. 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 June 30, 2025, and December 31, 2024, accounts receivable were considered to be fully collectible but in accordance with the allowance for credit losses, the Company recorded an allowance for credit losses based on a reserve of current and aged receivables which was not significant at June 30, 2025, and December 31, 2024.

Unbilled Accounts Receivable

Unbilled accounts receivable consist of balances due from revenues earned but not yet billed related to one customer contract for an equipment sale. Due to delays we have experienced in completing the equipment manufacturing process and meeting our next contractual milestone, we have not yet been able to bill for certain costs incurred on completing the equipment manufacturing. We anticipate meeting the next contractual milestone and billing this customer prior to December 31, 2025.

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. Net realizable value is the value of an asset that can be realized upon the sale of the asset, less a reasonable estimate of the costs associated with either the eventual sale or the disposal of the asset in question. We utilize third-party suppliers to produce our products. Costs associated with fabrication, and other costs associated with the manufacturing of products, are recorded as inventory. We periodically evaluate the carrying value of our inventories in relation to estimated forecasts of product demand, which takes into consideration the life cycle of product releases. Further, as we continue to enhance and develop our AirSCWO systems we may replace materials and parts with upgrades to enhance the units. If it is not probable that the replacement part will be used, we establish a reserve against the material or part or dispose of it. When quantities on hand exceed estimated sales forecasts, we perform an analysis to determine if a write-down for such excess inventories is required. Once inventory has been written down, it creates a new cost basis for inventory. Inventories are classified as current assets in accordance with recognized industry practice. Based on our evaluation we estimated an inventory allowance of $50,000 at both June 30, 2025, and December 31, 2024.

Property and Equipment

Property and Equipment is recorded at cost. Depreciation is computed using the straight-line method and the estimated useful life of the asset. Expenses for maintenance and repairs are charged to expense as incurred. Equipment-in-progress consists of costs incurred to build a mobile wastewater treatment unit that is not yet completed as of June 30, 2025; therefore, no depreciation has been taken on this in-process equipment.

The following table presents property and equipment at June 30, 2025, and December 31, 2024:

We completed the manufacturing and fabrication of one of our AirSCWO systems that we will be using for full-scale wastewater 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.

We are in the process of manufacturing an AirSCWO1 (“AS1”) model that can process 1 metric ton of waste water per day. The AS1 is highly mobile and can be deployed quickly to provide on-site destruction services. As of June 30, 2025, these manufacturing costs have been classified as equipment in-progress.

Depreciation expense is presented as follows in the unaudited condensed consolidated statement of operations:

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. 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 receivable and accounts payable. Three customers made up approximately 76% of total revenues for the six months ended June 30, 2025, and one customer made up 87% of total revenues for the six months ended June 30, 2024.

At June 30, 2025, and December 31, 2024, four customers comprised 94% and three customers accounted for 89% of our outstanding accounts receivable, respectively.

At both June 30, 2025, and December 31, 2024, one customer comprised approximately 100% of our unbilled receivables. The loss of a significant customer could adversely affect the results of our operations.

During the six months ended June 30, 2024, the Company purchased a substantial portion of manufacturing services from one third party vendor, Merrell Bros Fabrication, LLC (“Merrell Bros.”) (see Note 8).

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 units) and services, specifically the completion of full-scale demonstrations and treatability studies. In the case of equipment revenues, the Company’s performance obligations are satisfied over time over the life of the contract which are typically 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 the proportion that contract costs incurred bear to total estimated costs. This method is used because management considers the input method to be the best available measure of progress on these contracts.

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 related to treatability studies are recognized when all five revenue recognition criteria have been completed which is generally when we deliver a completed treatability study report to the customer.

In late 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 unit at the facility. Further, the Company will operate and maintain the AirSCWO unit for a period of approximately three months. Lastly, the Company will decommission, disassemble and demobilize the AirSCWO unit 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. At June 30, 2025 and 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. We completed our first month of demonstration during the three months ended June 30, 2025 and we recognized $270,667 of service revenue representing one-third of the total contract price. Further, we expensed one-third of the contract costs of $45,550 that had been deferred which have been included in cost of revenues. We anticipate completing the remaining two months of the demonstration in the second half of 2025.

We expect to invoice the City of Orlando in accordance with the contract terms. Invoices are due within thirty days of receipt. At June 30, 2025, we invoiced City of Orlando $361,333, of which we have collected $170,000 and $90,666 of the invoiced amount is included in unearned revenue. 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 deliver the AirSCWO system up to a maximum amount of $68,000.

During the six months ended June 30, 2025, we completed a full-scale demonstration for another customer. The contract with this customer included three performance obligations: i) treatability studies, ii) full-scale demonstration and iii) a technical report summarizing the results of the full-scale demonstration. We have allocated the transaction price of approximately $498,000 among the performance obligations using stand-alone selling price (“SASP”) for the treatability study, cost-plus-margin for the technical report and the residual approach in the case of the full-scale demonstration. Under the residual approach, the stand-alone selling price is estimated after subtracting the sum of the observable SASP allocated to the other performance obligations within the contract. We do not have a history of selling full-scale demonstrations and a technical report separately to our customers. At June 30, 2025, the delivery of the technical report is the only remaining performance obligation, which approximately $72,000 of the contract transaction price has been allocated. We anticipate this performance obligation to be completed in the third quarter of 2025.

Cost of revenues 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. General, selling, and administrative costs are charged to expenses as incurred. At June 30, 2025, we have capitalized an aggregate of $151,493 of costs incurred to date related to the following:(i) third-party costs totaling $60,393 related to the technical report to be delivered on the full-scale demonstration contract discussed above in the third quarter of 2025, which will be expensed at that time, and (ii) $91,100 of fulfillment related activities for the Demo Contract with the City of Orlando, which will be expensed over the two month demonstration period remaining on this Demo Contract.

See further revenue related disclosures in Note 5.

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. U.S. GAAP contains other applicable guidance on the accounting for onerous contracts, and those requirements should be used to identify and measure onerous contracts.

Our outstanding 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.

At June 30, 2025, and December 31, 2024, 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, we accrued an estimated loss provision of $1,230,000 and $1,000,000 at June 30, 2025 and December 31, 2024, respectively, which has been presented on the accompanying unaudited condensed consolidated balance sheets. Any changes to the estimated loss provision are reflected within cost of revenues on the accompanying unaudited condensed consolidated statements of operations.

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 $1,064,757 and $1,101,715 for the six months ended June 30, 2025 and 2024, respectively, and $531,170 and $566,568, for the three months ended June 30, 2025, and 2024, respectively.

Loss Per Share

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 six months ended June 30, 2025 and 2024 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. At June 30, 2025 and June 30, 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 17,515,502 and 15,999,370 shares of common stock,14,675,244 and 1,235,000 outstanding common stock warrants, and unvested restricted stock units of 6,212,819 and 2,962,000, respectively.

Reclassifications

We have made certain reclassifications to prior period amounts presented on our unaudited consolidated statements of operations to conform to the current period presentation with no impact to net loss or loss per share. These reclassifications consisted of reclassifying $229,680 and $368,266 of stock-based compensation expense from general and administrative expenses to compensation and related expenses for the three and six months ended June 30, 2024, respectively.

Recent Accounting Pronouncements - Not Yet Adopted

In December 2023 the Financial Accounting Standards Board (“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. Effective January 1, 2025, we adopted ASU 2023-09 on a prospective basis. The adoption of ASU 2023-09 did not have a material impact on these unaudited condensed consolidated 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. 2014-15Presentation 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. At June 30, 2025, the Company had working capital of $4,643,965 and an accumulated deficit of $36,666,480. For the six months ended June 30, 2025, the Company incurred a net loss of $8,278,862 and used $7,621,070 of net cash in operations for the period. These conditions raise substantial doubt regarding our ability to continue as a going concern.

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 unaudited condensed interim 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. We do not believe we have sufficient cash on hand or cash flows from operations to fund our obligations over the next twelve months and will need additional capital from debt or equity financing to fund our operations.

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 $15.1 million of common stock, subject to applicable law. At June 30, 2025, approximately $14.6 million remains available to be sold in the Company’s at-the-market offerings, subject to various limitations. During the six months ended June 30, 2025, we raised approximately $332,400 of net proceeds from the issuance of shares of common stock through the ATM. At June 30, 2025, we had a stock subscription receivable of approximately $334,000 from gross proceeds from the ATM that were not received until July 2025. The Company is evaluating strategies to obtain the required additional funding for future operations.

In November 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 unaudited condensed interim 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, Net

Inventory, net consists of:

Note 5 – Revenues and Contract Balances

The following is a summary of our revenues by type for the three and six months ended June 30, 2025 and June 30, 2024:

Unbilled Accounts Receivable

The following is a summary of our unbilled accounts receivable activity for the six months ended June 30, 2025 and the year ended December 31, 2024:

Pursuant to contractual terms with our customers, we anticipate billing the unbilled accounts receivable during our 2025 fiscal year.

Contract Assets

The following is a summary of our contract assets activity for the six months ended June 30, 2025 and the year ended December 31, 2024:

Unearned Revenue

The following is a summary of our unearned revenue activity for the six months ended June 30, 2025 and year ended December 31, 2024:

At June 30, 2025 , we anticipate recognizing approximately $194,000 of the unearned revenue in 2025 which has been presented as a current liability at June 30, 2025. The remaining balance of $30,000 has been classified as a long-term liability as the timing of revenue recognition is unknown.

Note 6 – Note Payable

During the six months ended June 30, 2025, we purchased approximately $48,200 of equipment with a note payable. The note bears interest at 10.75% and requires fixed payments of principal and interest of $1,042 for sixty months. As of June 30, 2025, the outstanding principal balance was $46,236 of which $9,638 will be repaid within the next twelve months and has been presented as a current liability.

At June 30, 2025, future principal payments on the note for the year ended December 31, will be as follows:

Note 7 – Stockholders’ Equity

Authorized Shares

On June 11, 2025, the Company filed a certificate of amendment toits amended and restated certificate of incorporation with the Secretary of State of the State of Delaware to increase the authorized shares of common stock from 200,000,000 to 1,000,000,000. This amendment was approved by the Company’s stockholders at the Annual Meeting. There were no changes to the authorized preferred stock which remains at 50,000,000 shares.

Common Stock Sales

On June 6, 2025, the Company entered into a sales agreement (the "2025 Sales Agreement") with Lake Street Capital Markets, LLC (“Lake Street”) as sales agent, pursuant to which the Company may offer and sell, from time to time, shares of the Company's common stock, having an aggregate offering price of up to $15.1 million (the “2025 ATM Shares”). The 2025 Sales Agreement replaces the prior sales agreement entered into between the Company and Jefferies LLC dated as of December 21, 2022 (the “2022 Sales Agreement”).

Sales of common stock, if any, will be made at market prices by any method permitted by law deemed to be an “at-the-market” (ATM) offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. The Company has no obligation to sell any shares of common stock under the open market sale agreement and may at any time suspend offers under the 2025 Sales Agreement, in whole or in part, or terminate the 2025 Sales Agreement.

During the six months ended June 30, 2025, a total of 1,270,706 shares of common stock were sold pursuant to the 2025 Sales Agreement offering resulting in gross proceeds of approximately $477,100, and issuance costs of approximately $144,700 consisting of approximately $49,300 in commissions and sale agent fees, and approximately $95,400 of accounting and legal fees for net proceeds of approximately $332,400. As of June 30, 2025, approximately $334,000 of the gross proceeds remained unpaid and were received in July 2025 which have been presented as stock subscription receivables on the accompanying consolidated balance sheet. As of June 30, 2025, a total of 1,270,706 shares of common stock have been sold pursuant to the open market sale agreement and approximately $14.6 million remains available on the 2025 Sales Agreement.

During the six months ended June 30, 2024, a total of 18,474 shares of common stock were sold pursuant to the 2022 Sales Agreement resulting in gross proceeds of approximately $24,000, and issuance costs consisting of approximately $600 in commission fees and approximately $49,100 of accounting and legal fees for net equity issuance costs of approximately $25,700.

Issuance of Stock for Services

During the six months ended June 30, 2025, we issued 293,092 fully vested shares of common stock to service providers with a fair value of $105,900 based on the market price of our common stock on date of grant.

During the six months ended June 30, 2024, we issued 6,754 fully vested shares of common stock to a service provider with a fair value of $9,000 based on the market price of our common stock on date of grant.

During the six months ended June 30, 2024, we issued an aggregate of 240,000 fully vested shares of restricted common stock to our board of directors with a fair value of $333,600 based on the market price of our common stock on the date of grant.

Common Stock for Stock Option Exercises

During the six months ended June 30, 2025, we issued an aggregate of 200,000 shares of common stock for a stock option exercise that resulted in cash proceeds of $24,000.

Fully Vested Restricted Stock

During the six months ended June 30, 2025, certain executives and key employees vested in time-based restricted stock resulting in the Company issuing 416,333 shares of common stock.

Stock-based compensation

2021 Plan

The Company has reserved 36,150,000 (increased from 24,000,000 at the Company’s Annual Shareholder Meeting on June 11, 2025) shares of common stock or common stock equivalents to be issued under our 2021 Equity Incentive Plan (the “2021 Plan”) to the Company’s employees and non-employee services providers. At June 30, 2025, the Company has issued a total of 19,725,118 stock options and restricted stock units under the 2021 Plan with 16,424,882 reserved shares remaining for issuance.

Stock-based compensation expense related to stock options and restricted stock units expected to vest is presented as follows in the condensed unaudited consolidated financial statements:

Stock Options

Stock option activity for the six months ended June 30, 2025 is summarized as follows:

*At June 30, 2025 and December 31, 2024, the options outstanding and exercisable include 5,700,000 and 5,900,000 granted in connection with a merger that occurred in 2021, respectively, which were not granted under the 2021 Plan and include 275,000 of options granted in 2024 pursuant to a legal settlement and were not granted under the 2021 Plan.

During the six months ended June 30, 2025, the options granted were primarily to our Chief Financial Officer (“CFO”), Chief Technology Officer (“CTO”) and other non-executive key employees. The weighted average grant-date fair value of the granted options was $0.24.

Of the total options outstanding at June 30, 2025,4,465,864 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. The remaining outstanding options vest over time generally over a four-year vesting period.

At June 30, 2025, total unrecognized compensation expense for service based and performance-based options was $3,387,173 and $2,898,790, respectively. The unrecognized service-based expense will be recognized over the option vesting period of four years through April 2029. The unrecognized expense associated with the performance-based options will be expensed when it becomes probable that the performance obligations will be met.

At June 30, 2025, intrinsic value is computed based on the difference between exercise price of the option and the market price of our common stock at June 30, 2025 of $0.32 per share multiplied by the total common stock options outstanding or exercisable whose exercise price is less than the market price.

During the three months ended June 30, 2025,200,000 stock options issued outside of the 2021 Plan were exercised with an exercise price of $0.12 for total proceeds to the Company of $24,000.

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 six months ended June 30, 2025, the Company granted an aggregate of 3,139,860 unvested restricted stock units under the 2021 Plan to the CFO, CTO and other non-executive key employees of the Company.

The unvested restricted stock units granted to our CFO and CTO consist of an aggregate of 687,430 units with time-based vesting provisions over four years and 687,430 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 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 1,765,000 restricted stock units granted to non-executive key employees are all time-based vesting and vest as follows: 50% on the one-year grant-date anniversary with the remaining vesting ratably over a period of thirty-six months.

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 $0.33 to $0.63.

A summary of our outstanding nonvested restricted stock units as of June 30, 2025 is as follows:

At June 30, 2025, we have $2,649,952 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. At June 30, 2025, the Company had $2,546,161 of unrecognized stock-based compensation associated with the time-based vesting restricted stock units which will be recognized over a weighted-average period of approximately 3.19 years.

Stock-based compensation expense related to time-based restricted stock units expected to vest is presented as follows in the condensed unaudited consolidated financial statements:

Stock Warrants

At June 30, 2025, there were 14,675,244 warrants outstanding which relate to an offering completed in November 2024, where investors were offered one and a half warrants for every one common share purchased in the offering at an exercise price of $1.125 per share.

During the six months ended June 30, 2025 and 2024, no warrants were issued or exercised.

A summary of warrant activity for the six months ended June 30, 2025, 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 . 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. would 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 Supplemental M&S Agreement terminated during the year ended December 31, 2024. Merrell Bros. is no longer considered a related party.

During the six months ended June 30, 2025 and 2024, the Company incurred $0 and $272,031, respectively, in related party expenses related to the manufacturing of our AirSCWO systems. At June 30, 2025 and December 31, 2024, we did not have any outstanding obligations owed to Merrell Bros. for these services.

Note 9 – Commitments and Contingencies

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”). In connection with the License Agreement, 374Water also executed an equity transfer Agreement with Duke pursuant to which Duke received a small number of common stock in the Company (See Note 5). 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. At June 30, 2025, 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 Settlement

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. At December 31, 2024, we established an accrual for legal settlement of this amount as presented on the consolidated balance sheet. This legal matter was officially settled on April 2, 2025 for the amount accrued. We agreed to pay $110,000 of the settlement within ten calendar days of certain conditions being met by the plaintiff, as defined in the settlement agreement, with the remaining settlement being paid in equal payments through December 31, 2025. As of the date of this filling, we have paid the agreed upon $110,000 as all plaintiff conditions were met, as well as an additional $105,883 in bimonthly payments.

We note that in the ordinary course of business 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.

Note 10 - 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 unaudited condensed 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 11 - Subsequent Events

On July 8, 2025, the Company submitted a request to the Nasdaq Stock Market LLC (“Nasdaq”) for a 180-day extension to regain compliance with Nasdaq Listing Rule 5550(a)(2), which requires a closing bid price for the Company’s common stock of at least $1.00 (the “Minimum Bid Price Requirement”) per share for the continued listing on the Nasdaq market. The previous 180-day compliance period ended July 14, 2025. On July 15, 2025, the Company received a letter from the Nasdaq advising that the Company had been granted a 180-day extension, or until January 12, 2026, to regain compliance with the Minimum Bid Price Requirement.

On July 18, 2025, the Company executed a warrant purchase agreement with the largest investor in the November 2024 offering of common stock and warrants (see Note 7). The total warrants held by the investor of 6,000,000 were purchased by the Company at a price of $0.10833 for total cash consideration of $649,980.

Subsequent to June 30, 2025, through the date of this file, we have sold approximately 4,546,000 shares of common stock through our ATM and received cash proceeds of approximately $956,000.