The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere herein.



Critical Accounting Policies


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

Common Stock Purchase Warrants

The Company accounts for common stock purchase warrants in accordance with ASC
Topic 815- 40, Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC
815-40”). Based on the provisions of ASC 815- 40, the Company classifies as
equity any contracts that (i) require physical settlement or net-share
settlement, or (ii) gives the Company a choice of net-cash settlement or
settlement in its own shares (physical settlement or net-share settlement). The
Company classifies as assets or liabilities any contracts that (i) require
net-cash settlement including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the Company), or
(ii) give the counterparty a choice of net-cash settlement or settlement in
shares (physical settlement or net-share settlement). All outstanding warrants
as of December 31, 2022 and 2021 were classified as equity. The Company utilizes
the Black Scholes Model to complete valuation of warrants and uses the inputs
for the Black Scholes Model including Risk Free Rate, Dividend yield, stock
price, exercise price, term, and volatility. The Company uses other public
company comparison for volatility and obtains the risk-free rate from the
federal treasury rates based on the term. The Company’s exercise price is
obtained from the warrant agreement and the stock price is obtained from the
market close on the day of issuance. The Company’s term for the warrants
utilizes the simplified method for the calculation of the term.




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Intellectual Property


The Company reviews 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. In the event of impairment, the Company would discount the
future cash flows using its then risk adjusted discount rate to estimate the
amount of the impairment.



Inventory


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. 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. 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 that
is not subsequently written up. Inventories are classified as current assets in
accordance with recognized industry practice.



Revenue Recognition


The Company follows the revenue standards of Financial Accounting Standards
Board Update No. 2014-09: “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.

The Company’s performance obligations are satisfied over time over the life of
the contract. The Company’s revenue arrangements consist of a single performance
obligation to transfer services. 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. 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. Contract
costs include all direct material and 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 expense as incurred.

We also record as revenue all amounts billed to customers for shipping and
handling costs and record the actual shipping costs as a component of cost of
revenues. Reimbursements received from customers for out-of-pocket expenses are
recorded as revenues, with related costs recorded as cost of revenues. We
present revenues net of any taxes collected from customers and remitted to
government authorities.




Stock-based compensation



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




Overview



374Water, Inc. (the “Company”, “374Water”, “We”, or “Our”) is a Delaware
corporation which was incorporated on September 8, 2005. The Company was
initially formed to develop, commercialize, and market a series of unique
electric generating power systems designed to produce electrical power with zero
emissions or waste byproducts, based on a patented pressure-driven expander
motor and related organic rankine cycle technology.

On April 16, 2021, 374Water Inc. (f/k/a PowerVerde, Inc.) entered into an
Agreement and Plan of Merger (the “Merger”) with 374Water, Inc., a privately
held company based in Durham, North Carolina, (“374Water Private Company“) and
374Water Acquisition Corp., a newly-formed wholly-owned subsidiary of
PowerVerde.

As a result of the Merger, the former 374Water Private Company shareholders own
65.8% of our issued and outstanding common stock and 53.8% of our issued and
outstanding voting stock (which includes the preferred stock on an as converted
basis).

Subsequent to the Merger, 374Water is focused on being a cleantech and social
impact company providing a disruptive technology that addresses imminent
environmental pollution challenges. We are focused on a new era of sustainable
waste stream management that promotes circular economy initiatives and enables
organizations to achieve sustainability goals and create green impact. Our
vision is a world without waste and our mission is to preserve a clean and
healthy environment that sustains life.

We have developed proprietary waste stream treatment systems based on
Supercritical Water Oxidation (SCWO). The term used for the process is
AirSCWOTM. SCWO leverages the unique properties of water in its supercritical
phase (above 374 oC and 221 Bar) to convert organic matter to energy and safe
products that can be recovered and used. The AirSCWOTM systems are essentially
waste stream agnostic and able to treat a variety of complex, hazardous and
non-hazardous waste streams, opening up opportunities for multiple applications
in diverse market verticals on an international scale. Most pertinently, the
technology is shifting the landscape in addressing environmental challenges
that, until now, have been considered unsurmountable (due to science/engineering
or cost barriers), one good example being the global PFAS crisis.

We currently outsource manufacturing of the AirSCWOTM systems to our strategic
partner in the US, Merrell Bros., Inc., that have the facilities and capability
to rapidly ramp-up manufacturing volumes and also support system modifications
and deployment as required per market and clients. We envision in the future
applying an outsourced manufacturing model in a few territories, and may
consider establishing our own manufacturing capability in geographies where this
is needed to adequately grow our market share.




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The systems are supplied to multiple market verticals, and our revenue model
includes both capital equipment sales and long-term service agreements based on
throughput and capacity (Waste Purchase Agreements). Our market penetration
strategy is combined of direct client and channel partner sales routes,
depending on the specific market and territory. In some cases, the systems may
be white labeled and sold as part of a broader solution package.



Results of Operations


The following table sets forth, for the periods presented, the consolidated
statements of operations data, which is derived from the accompanying
consolidated financial statements:



                                                    Year Ended December 31,
                                     2022             2021           $ Change        % Change
Revenue                          $  3,015,521     $     48,100     $  2,967,421          6,169 %
Cost of revenues                   (2,679,020 )              -       (2,679,020 )          100 %
Net revenue                           336,501           48,100          288,401            600 %
Operating expenses:
Research and development            1,113,500          375,032          738,468            197 %
Compensation and related
expenses                            1,644,861                -        1,644,861            100 %
Product development                         -        1,399,833       (1,399,833 )         -100 %
Professional fees                     768,548          343,862          424,686            124 %
General and administrative          1,565,723        1,095,381          470,342             43 %
Total operating expenses            5,092,632        3,214,108        1,878,524             58 %
Income (loss) from operations      (4,756,131 )     (3,166,008 )     (1,590,123 )           50 %
Other income (expenses), net           66,164            1,400           64,764          4,626 %
Income (loss) before income
taxes                              (4,689,967 )     (3,164,608 )     (1,525,359 )           48 %
Provision for (benefit from)
income taxes                                -                -                -              0 %
Net income (loss)                $ (4,689,967 )   $ (3,164,608 )   $ (1,525,359 )           48 %



Year Ended December 31, 2022, as Compared to the Year Ended December 31, 2021

Since the closing of the 374Water Merger, our business has been focused on
development and commercialization of 374Water’s supercritical water oxidation
(SCWO) systems. We generated $3,015,521 and $48,100 in revenue from
manufacturing assembly services and from consulting and advisory services during
the years ended December 31, 2022, and 2021, respectively. This year, we had
substantial expenses due to our ongoing research and development activities and
efforts to commercialize our systems, as well as substantial administrative
expenses associated with our status as a public company. Our general and
administrative expenses increased to $1,565,723 during the year end December 31,
2022
, as compared to $1,095,381 in the same period of 2021, primarily because of
increased insurance costs, payroll expenses due to hiring employees and
stock-based compensation expenses. Our professional fees increased to $768,548
during the year ended December 31, 2022, as compared to $343,862 in the same
period of 2021, primarily because of increased legal fees and accounting fees
relating to the filed Registration Statement on Form S-3 and our status as a
public company. Our research and development expenses increased to $1,113,500
during the year ended December 31, 2022, as compared to $375,032 in the same
period of 2021, primarily because of the increase in engineering expenses and
our efforts to commercialize our systems. Our product development expenses were
reduced to $0 during the year ended December 31, 2022, as compared to $1,399,833
in the same period of 2021. This activity represents the issuance of stock
warrants to a strategic partner in the second quarter of 2021 as part of
compensation for the manufacturing, supply and service of AirSCWO products.
Substantial net losses are expected until we are able to successfully
commercialize and market our 374Water systems, as to which there can be no
assurance.




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Liquidity and Capital Resources

In April 2021, in connection with the Merger, we raised approximately $6.6
million
from the sale of Series D Preferred Stock and converted all of its
convertible debt notes and accrued interest to shares of common stock. On
December 17, 2021, the Company raised approximately $5 million from the sales of
common stock. Further, we have an at-the-market equity offering under which we
may issue up to $100 million of common stock, which is currently effective and
under which we commenced selling shares at the end of January 2023, and which
will remain available to us in the future.

We have financed our operations since inception principally through the sale of
debt and equity securities and sales of product. As of December 31, 2022, we had
working capital of $7,060,511 compared to working capital of $11,263,270 at
December 31, 2021. This decrease in working capital is due primarily to the
increase of Research and Development expenses, and general and administrative
expenses.

We believe that these funds will satisfy our working capital needs for the next
12 months. There can be no assurance that these funds will be sufficient to
finance our plan of operations and commercialize our systems or that we will be
able to raise any necessary additional funds on a commercially reasonable basis
or at all.




Cash Flows



The following table presents our cash flows for the periods presented:




                                                       Year Ended December 31,
                                               2022             2021           $ Change
Cash provided by (used in) operating
activities                                 $ (4,948,996 )   $ (1,840,950 )   $  (3,108,046 )
Cash provided by (used in) investing
activities                                   (2,160,291 )         28,345        (2,188,636 )
Cash provided by (used in) financing
activities                                       25,049       12,871,981       (12,846,932 )
Net cash (decrease) increase                 (7,084,238 )     11,059,376       (18,143,614 )

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