374Water, Inc. (NASDAQ:SCWO) Q1 2024 Earnings Call Transcript

374Water, Inc. (NASDAQ:SCWO) Q1 2024 Earnings Call Transcript May 17, 2024

Operator: Greetings and welcome to the 374Water First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Heather Crowell, Investor Relations. Thank you. Ms. Crowell, you may begin.

Heather Crowell: Hello, everyone, and welcome to 374Water’s first quarter 2024 earnings conference call. My name is Heather Crowell, and I’m here today with our President and Chief Executive Officer, Chris Gannon, and our Chief Financial Officer, Adrienne Anderson. During today’s call, we may make projections and other forward-looking statements under the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995 regarding future events, or the future financial performance of the company. These statements may discuss our business, economic, and market outlook, growth expectations, new products and their performance, cost structure, and business strategy. Forward-looking statements are based on information currently available to us and on management’s beliefs, assumptions, estimates, and/or projections.

Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors. We refer you to documents the company files from time-to-time with the SEC, specifically the company’s Form 10-K and Form 10-Q. These documents identify important factors that could cause actual results to differ materially, from those contained in our projections or forward-looking statements. All statements made during today’s call are made only as of today, May 17, 2024, and the company expressly disclaims any intent, or obligation to update any forward-looking statements made during this call to reflect subsequent events or circumstances, unless otherwise required by law. Our earnings release and transcript will be available on the Investor Relations page of our website.

Now I will turn the call over to President and Chief Executive Officer, Chris Gannon. Chris?

Chris Gannon: Thank you, Heather. Good morning, everyone, and thank you for joining us today. Before we begin with our strategic, commercial, and financial update, I would like to thank the Board for appointing me as CEO. I look forward to working with all our stakeholders, including customers, demonstration and test partners, shareholders, the Board, my leadership team, and our talented employees as we enter the next phase of 374Water’s growth. I am excited to take the helm at such a pivotal time for the company, and I look forward to our future. During my first month here, I have immersed myself in the company and gained a good understanding of our markets and customers, our technology, our historical product development and commercialization and go-to-market strategy, as well as the opportunities and challenges that lie ahead.

Q&A Session

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I would like to start, by outlining how I will approach my role at 374Water. In short, my focus is to build shareholder value, over the near and long-term. To do this, I will create stability, engage with market participants, build shareholder trust, and ensure that we have the resources available to meet our objectives. We have begun a strategic planning process and have enlisted the assistance of industry experts, to provide additional guidance as it relates to the municipal, federal, military, and industrial verticals. This strategic planning process is a crucial foundational step for our company, as it will inform our go-forward approach to our products, to our markets, and to our operations. We will utilize the strategic plan or playbook, to communicate with all key constituents going forward.

You can expect me to lay out this overarching strategy during our future calls together. I will now turn to a brief discussion of our technology, and the market opportunities we see available to us. And then I will discuss our near-term areas of focus. First, let’s discuss our AirSCWO technology, which sits at the cutting edge of clean tech innovation as it provides an important solution, to the ever-increasing wastewater treatment, and waste management challenges faced globally. At the heart of our AirSCWO system sits our supercritical water oxidation technology, which eliminates a broad spectrum of organic waste, leaving clean water, safe minerals, and recoverable heat energy. Our technology has been shown to effectively process biosolids, PFAS, firefighting foams like AFFF, residuals from water and waste treatment, landfill leachate, oily sludge, granulated activated carbon, ion exchange resin, and foam fractionates, to name just a few.

Our AirSCWO system also includes our pretreatment solutions, like our biosolids dewatering skid, as well as post-treatment solutions, like pH control and filtration systems. In the future, I will go into more depth on these and other pre and post-treatment solutions that we are developing, as we continue to create modular solutions to meet individual customer needs. We are making great strides in improving the reliability, of our commercial-scale AirSCWO 6 system. We are actively running, developing, and demonstrating our technology at our development partners’ Kokomo, Indiana facility, and are seeing positive results. Before I continue, I would like to take a moment to express our sincere thanks, to the Merrell Brothers organization, as they are incredible partners.

I cannot overstate how important this collaboration has been, to accelerate our technology development process. We look forward to continued work together. In addition to our work at Kokomo, we are planning for multiple upcoming technology demonstrations in 2024, which I will discuss shortly and update you during future calls. Now, I will briefly discuss the waste management, water treatment, and other markets we are focused on. The opportunities we see there, and the recent public policy changes, which we believe will accelerate the demand side of the AirSCWO equation. From a market size perspective, we see a truly global opportunity measured in the hundreds of billions of dollars. Looking across municipal, federal, military, and industrial markets, we see monumental environmental challenges ahead.

And the corresponding opportunity to utilize our AirSCWO technology to address them. In April 2024, the EPA released a new groundbreaking and stringent national primary drinking water regulation, and a CERCLA designation for per and polyfluorinated substances, or PFAS for short, which are also known as forever chemicals. The new drinking water rules sets enforceable maximum contaminant levels at parts per trillion. The CERCLA designation is a first of its kind rule designating two PFAS chemicals as hazardous substances, providing the EPA with future enforcement capabilities. This initiative is part of a broader effort, backed by significant federal funding, to mitigate PFAS pollution and safeguard public health. The Environmental Business Journal, estimates the cost of removing PFAS in the U.S. at over $200 billion.

Meanwhile in Europe, the European Environmental Agency, has also been proactive in addressing PFAS contamination. Their regulations aim, to not only reduce PFAS emissions and exposure, but also establish rigorous environmental standards, and waste management practices throughout Europe. This global regulatory environment, is creating an unprecedented demand for technologies that, it can effectively and safely manage and treat PFAS. This environment offers substantial opportunities for companies like ours, as we anticipate these regulations will drive substantial investment, from government and industry. 374Water is positioned as an attractive alternative, to traditional waste management solutions, where these forever chemicals remain present in the environment.

Our company is working hand-in-hand, with appropriate federal and state regulators, in providing the data necessary to inform the EPA’s PFAS destruction guidance. With this background in mind, I’d like to discuss the markets where we participate. First, the U.S. municipal market, which consists of wastewater treatment plants that treat biosolids, sludges, and leachates, water utilities, which produce spent granulated activated carbon, ion exchange, and foam fractionated waste, and state and local firefighting units, which have stockpiles of AFFF. All these organizations have waste streams, which must be disposed of or destroyed. As an example of the opportunity in this space, the U.S. wastewater treatment plants treat 34 billion gallons of wastewater daily, which translates into 292 million tons of solid waste produced annually.

Current disposal options such as land application, landfill, incineration, and deep well injection are inadequate and all have environmental, health, and liability repercussions. I will discuss these issues more fully in future calls. Second, we are focused on the federal market. We continue to pursue opportunities with the Department of Defense for AFFF, organic chemical, and other waste destruction. Department of Energy sites contaminated with PFAS, manufacturing waste, and radiological waste, and the Federal Aviation Agency for destruction of PFAS. Let’s discuss the PFAS opportunity, with the Department of Defense. In 2021, the Pentagon estimated PFAS remediation costs at $29 billion. Under the new regulations, we expect this number to substantially increase.

374Water is involved in this emerging market, and we will be fulfilling demonstration contracts, with each of the military services over the coming year. In addition, we are a participant in the Defense Innovation Unit’s advanced PFAS destruction demonstration scheduled for 2025. Beyond PFAS, there are many additional AirSCWO applications with federal customers within the DoD, the Department of Energy, and other agencies for organic chemical and other waste destruction. As such, I believe the outlook for our federal government business is strong. Finally, we see significant opportunities in the industrial markets. This is a broad category, and we see AirSCWO applications in landfill leachate, oil and gas, pharmaceutical, chemical and petrochemical, automotive, aerospace, electronics, healthcare, and food and beverage, to name a few.

While it is still early in my tenure, it is becoming clear how we will evolve and position our business. I see tremendous opportunities ahead for 374Water, to grow into a leading clean technology products and services player. To ensure we build a strong foundation for the future, in the short-term, we will be focusing on first, meeting our contractual obligations with Orange County Sanitation and the City of Orlando, as well as completing multiple military waste destruction demonstrations, throughout 2024. We believe success here, will drive demand across the municipal market and federal government, and defense markets. Second, we are expanding the application of our AirSCWO technology, and will continue to invest in our product development efforts.

We are pursuing opportunities within the industrial markets, as they are all affected by PFAS contamination, have difficult to treat waste streams, and lack sustainable treatment solutions that eliminate waste, without creating potential future liability. Third, we are in active discussions with major treatment, storage, and disposal facility, or TSDF operators, to form strategic partnerships. We believe these partnerships will be critical for both parties, as we scale our technology and as the TSDFs improve and expand their service offerings to include safe destruction technology. Finally, we will invest in our internal engineering and operations capabilities, to increase the pace of technology innovation, and product commercialization. In the near term, we will transition to a dedicated manufacturing facility, to greatly increase our production velocity, as well as scale our engineering capability, to develop and test our technology more rapidly.

Further, recognizing the need for rapid innovation and problem solving, we plan to expand our engineering and field teams, to increase our capacity to develop innovative solutions, and respond to the market needs. At the same time, we will build out our leadership team, to navigate the massive market opportunities ahead. As part of our engineering and R&D efforts, we developed a smaller version of our AirSCWO system, which allows us to perform rapid treatability studies, of many waste streams in a laboratory environment. We use this system to qualify the treatability of waste streams, and the process parameters needed for our commercial-scale AirSCWO system. In addition to being a vital R&D tool, this is a revenue-generating business for our company, and a sales tool for demonstrating our capabilities.

I will discuss our laboratory business and our capabilities there, during future calls. Now, I would like to spend a moment on our pipeline. While we will not address our pipeline in specific terms, our decision to move to a new manufacturing facility, can be considered an indication, there is significant market demand for our technology. While we have a lot of work to do, the future is bright, and I’m excited to be here. With that, I will turn the call over to Adrienne, to update you on our financials.

Adrienne Anderson: Thanks, Chris. Today I’ll discuss our financial results, which reflect the current stage of our business evolution, as we begin scaling our business and enhancing our cash position, to support sustained growth. Q1, 2024, results are indicative of a period where strategic investments take precedence, as we are taking the necessary steps to lay down a robust foundation, as we chart our path to profitable growth. With that, I will touch on a few key metrics. During the quarter, the company generated revenue of approximately $315,000, which compares to $801,000 for the three months ending March 31, 2023. As we start to reach the end of the assembly and fabrication work on our sold unit, our direct costs decline, which has a direct correlation to our decline in revenue of $468,000 this period, under our percentage of completion revenue recognition method.

Total OpEx increased marginally from $1.8 million in the first quarter of 2023, to $1.9 million in this period’s quarter, driven primarily by an increase in research and development expenses. As of March 31, 2024, we have working capital of $11.7 million, consisting of $13.3 million of current assets comprised primarily of cash, receivables, and inventory, offset by $1.6 million of current liabilities comprised of accounts payable, and accrued expenses arising from the normal course of business. We currently have no outstanding debt obligations. We are actively working on optimizing our operational efficiencies and exploring new market opportunities, all aimed at long-term value creation while remaining steadfast in our commitment to innovation and excellence.

A primary financial goal for the company, is to extend its runway while scaling the business, and we are pleased to have Chris at the helm, to achieve these objectives.

Chris Gannon: Thank you, Adrienne, and thank you, everyone, for joining our call today. We look forward to providing updates, during future earnings calls. In addition, I hope to share time with everyone, at our Annual Shareholder Meeting in June. Bye for now.

Operator: This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.

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