UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED: June 30, 2023

 

 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: 333-147980

  

ORIGINCLEAR, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   26-0287664
(State or other jurisdiction of 
incorporation or organization)
  (I.R.S. Employer 
Identification No.)

 

13575 58th Street North

Suite 200

ClearwaterFL 33760

(Address of principal executive offices, Zip Code)

 

(727) 440-4603

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Ticker symbol(s)   Name of each exchange on which registered
N/A   N/A   N/A

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No 

 

As of August 24, 2023, there were 1,297,971,707 shares of common stock, par value $0.0001 per share, issued and outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
PART I  
     
Item 1. Financial Statements. 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 44
Item 4. Controls and Procedures. 44
     
PART II
     
Item 1. Legal Proceedings. 45
Item 1A. Risk Factors. 45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 45
Item 3. Defaults Upon Senior Securities. 45
Item 4. Mine Safety Disclosures. 45
Item 5. Other Information. 45
Item 6. Exhibits. 46
     
SIGNATURES 47

 

i

 

 

PART I - FINANCIAL INFORMATION

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,
2023
   December 31,
2022
 
   (Unaudited)     
ASSETS        
CURRENT ASSETS        
Cash  $1,380,390   $636,024 
Restricted cash   
-
    718,790 
Contracts receivable, net allowance of $0 and $17,315, respectively   1,418,113    2,479,123 
Fair value investment in securities   22,604    27,125 
Contract assets   1,089,285    1,479,491 
Other receivable   27,694    
-
 
Prepaid expenses   10,774    25,000 
TOTAL CURRENT ASSETS   3,948,860    5,365,553 
           
NET PROPERTY AND EQUIPMENT   161,637    177,069 
           
OTHER ASSETS          
Long term assets held for sale   
-
    400,000 
Note receivable on sale of asset   169,572    
-
 
SPAC Class B common shares purchase cost   400,000    400,000 
Fair value investment-securities   2,400    2,400 
Trademark   4,467    4,467 
TOTAL OTHER ASSETS   576,439    806,867 
           
TOTAL ASSETS  $4,686,936   $6,349,489 
           
LIABILITIES AND SHAREHOLDERS’ DEFICIT          
Current Liabilities          
Accounts payable and other payable  $2,262,907   $3,784,747 
Accrued expenses   1,958,632    1,633,904 
Cumulative preferred stock dividends payable   425,358    415,597 
Contract liabilities   723,894    932,458 
Trust escrow   24,500    
-
 
Tax liability 83(b)   13,600    15,600 
Customer deposit   146,453    146,453 
Warranty reserve   20,000    20,000 
Line of Credit   200,994    
-
 
Loan payable, merchant cash advance   30,646    30,646 
Loans payable, SBA   148,517    149,790 
Derivative liabilities   6,753,025    9,578,904 
Series F 8% Preferred Stock, 60 and 60 shares issued and outstanding, respectively, redeemable value of $60,000 and $60,000 respectively   60,000    60,000 
Series G 8% Preferred Stock, 25 and 25 shares issued and outstanding, respectively, redeemable value of $25,000 and $25,000, respectively   25,000    25,000 
Series I 8% Preferred Stock, 25 and 25 shares issued and outstanding, respectively, redeemable value of $25,000 and $25,000, respectively   25,000    25,000 
Series K 8% Preferred Stock, 307.15 and 407.15 shares issued and outstanding, respectively, respectively, redeemable value of $307,150 and $407,150, respectively   307,150    407,150 
Convertible secured promissory note (Note 5)   12,729,089    1,347,500 
Convertible promissory notes (Note 5)   2,621,983    1,037,983 
Total Current Liabilities   28,476,748    19,610,732 
           
Long Term Liabilities          
Convertible promissory notes, net of discount of $0 and $0, respectively   213,772    1,888,772 
Total Long Term Liabilities   213,772    1,888,772 
           
Total Liabilities   28,690,520    21,499,504 
           
COMMITMENTS AND CONTINGENCIES (See Note 11)   
 
    
 
 
           
Series J Convertible Preferred Stock, 210 and 210 shares issued and outstanding, respectively, redeemable value of $210,000 and $210,000, respectively   210,000    210,000 
Series L Convertible Preferred Stock, 320.5 and 320.5 shares issued and outstanding, respectively, redeemable value of 320,495 and 320,495, respectively   320,495    320,495 
Series M Preferred Stock, 40,300 and 40,300 shares issued and outstanding, respectively, redeemable value of $1,007,500 and $1,007,500, respectively   1,007,500    1,007,500 
Series O 8% Convertible Preferred Stock, 190 and 230 shares issued and outstanding, respectively, redeemable value of $190,000 and $230,000, respectively   190,000    230,000 
Series P Convertible Preferred Stock, 30 and 30 shares issued and outstanding, respectively redeemable value of $30,000 and $30,000, respectively   30,000    30,000 
Series Q 12% Convertible Preferred Stock, 560 and 615 shares issued and outstanding, respectively, redeemable value of $560,000 and $615,000, respectively   560,000    615,000 
Series R 12% Convertible Preferred Stock, 2,008 and 2,828 shares issued and outstanding, respectively, redeemable value of $2,008,000 and $2,828,000, respectively   2,008,000    2,828,000 
Series S 12% Convertible Preferred Stock, 120 and 170 shares issued and outstanding, respectively, redeemable value of $120,000 and $170,000, respectively   120,000    170,000 
Series U Convertible Preferred Stock, 320 and 385 shares issued and outstanding, respectively, redeemable value of $320,000 and $385,000, respectively   320,000    385,000 
Series W 12% Convertible Preferred Stock, 919.5 and 819.5 shares issued and outstanding, respectively, redeemable value of $919,500 and $819,500, respectively   919,500    819,500 
Series X Convertible Preferred Stock, 0 and 250 shares issued and outstanding, respectively, redeemable value of $0 and $250,000, respectively   
-
    250,000 
Series Y Convertible Preferred Stock, 27.8758 and 37.5128 shares issued and outstanding, respectively, redeemable value of $2,787,5777and $3,751,277, respectively
   2,787,577    3,751,277 
Series Z Convertible Preferred Stock, 0 and 250 shares issued and outstanding, respectively, redeemable value of $0 and $250,000, respectively   
-
    250,000 
    8,473,072    10,866,772 
           
SHAREHOLDERS’ DEFICIT          
Preferred stock, $0.0001 par value, 600,000,000 shares authorized 1,684 and 1,475 shares of Series A issued and outstanding, respectively   
-
    
-
 
367,400 and 0 shares of Series B issued and outstanding, respectively   37    
-
 
1,001,000 and 1,001,000 shares of Series C issued and outstanding, respectively   
-
    
-
 
31,500,000 and 31,500,000 shares of Series D-1 issued and outstanding, respectively   3,150    3,150 
Subscription payable for purchase of equipment   100,000    100,000 
Preferred treasury stock,1,000 and 1,000 shares outstanding, respectively   
-
    
-
 
Common stock, $0.0001 par value, 19,000,000,000 shares authorized 1,299,440,930 and 1,013,369,185 equity shares issued and outstanding, respectively   129,945    101,337 
Additional paid in capital - Common stock   86,143,085    82,745,503 
Accumulated other comprehensive gain/(loss)   (132)   (132)
Accumulated deficit   (118,852,741)   (108,966,645)
TOTAL SHAREHOLDERS’ DEFICIT   (32,476,656)   (26,016,787)
           
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT  $4,686,936   $6,349,489 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

1

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,
2023
   June 30,
2022
   June 30,
2023
   June 30,
2022
 
                 
Sales  $1,830,684   $3,167,967   $3,837,078   $4,402,072 
Cost of Goods Sold   1,635,489    2,482,493    3,510,808    3,941,348 
Gross Profit   195,195    685,474    326,270    460,724 
                     
Operating Expenses                    
Selling and marketing expenses   631,021    466,566    1,445,243    1,112,750 
General and administrative expenses   1,015,995    934,899    2,104,765    1,815,159 
Depreciation and amortization expense   7,603    10,509    15,432    21,242 
Total Operating Expenses   1,654,619    1,411,974    3,565,440    2,949,151 
                     
Loss from Operations   (1,459,424)   (726,500)   (3,239,170)   (2,488,427)
                     
OTHER INCOME (EXPENSE)                    
Other income   
-
    
 
    126,879    
-
 
Impairment of receivable from SPAC   (993,065)   
 
    (2,650,985)   
-
 
Gain on write off of loans payable   
-
    
-
    
-
    75,000 
Unrealized gain(loss) on investment securities   
-
    (29,927)   (4,521)   (142,705)
Gain (Loss) on conversion of preferred stock   
-
    (34,988)   
-
    (245,985)
Preferred stock incentive compensation   (155,852)   
-
    (155,852)   
-
 
Conversion and settlement value added to note purchase agreements   (3,532,250)   
-
    (6,037,589)   
-
 
Gain (Loss) on net change in derivative liability and conversion of debt   (1,049,498)   (242,185)   2,825,879    (1,568,898)
Interest and dividend expense   (494,754)   (232,156)   (750,737)   (471,008)
TOTAL OTHER (EXPENSE) INCOME   (6,225,419)   (539,256)   (6,646,926)   (2,353,596)
                     
NET LOSS  $(7,684,843)  $(1,265,756)  $(9,886,096)  $(4,842,023)
                     
BASIC AND DILUTED
  $(0.01)  $(0.00)  $(0.01)  $(0.01)
                     
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED
   1,195,322,992    573,084,370    1,243,518,367    495,173,641 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

2

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022

 

   SIX MONTHS ENDED JUNE 30, 2022 
                               Accumulated         
   Preferred stock   Mezzanine   Common stock   Additional
Paid-in-
   Subscription   Other Comprehensive   Accumulated     
   Shares   Amount   Equity   Shares   Amount   Capital   Payable   loss   Deficit   Total 
Balance at December 31, 2021   33,038,213   $3,304   $10,183,092    306,883,932   $30,688   $75,720,147   $100,000   $(132)  $(98,175,924)  $(22,321,917)
Rounding   -    
-
    5    -    -    (1)   
-
    
-
    1    
-
 
Common stock issuance for conversion of debt and accrued interest   
-
    
-
    
-
    12,461,909    1,246    118,388    
-
    
-
    
-
    119,634 
Common stock issued at fair value for services   
-
    
-
         24,845,550    2,485    520,050    
-
    
-
    
-
    522,535 
Common stock issued for conversion of Series J Preferred stock   
-
    
-
    (5,000)   512,737    51    4,949    
-
    
-
    
-
    5,000 
Common stock issued for conversion of Series L Preferred stock   
-
    
-
    (134,080)   15,973,192    1,598    132,482    
-
    
-
    
-
    134,080 
Common stock issued for Series O Preferred stock dividends   
-
    
-
    
-
    720,665    72    (72)   
-
    
-
    
-
    
-
 
Common stock issued for conversion of Series R Preferred stock   
-
    
-
    (398,267)   28,625,607    2,863    395,404    
-
    
-
    
-
    398,267 
Common stock issued for conversion of Series T Preferred stock   
-
    
-
    (344,000)   53,327,672    5,333    338,667    
-
    
-
    
-
    344,000 
Common stock issued for conversion of Series U Preferred stock   
-
    
-
    (431,500)   22,794,493    2,279    429,221    
-
    
-
    
-
    431,500 
Common stock issued for conversion of Series W Preferred stock   
-
    
-
    (45,000)   3,811,810    381    44,619    
-
    
-
    
-
    45,000 
Common stock issued for conversion of Series Y Preferred stock   
-
    
-
    (50,000)   4,230,769    423    49,577    
-
    
-
    
-
    50,000 
Common stock issued for make good shares for Series P Preferred stock   
-
    
-
    
-
    518,232    52    (52)   
-
    
-
    
-
    
-
 
Common stock issued for make good shares for Series R Preferred stock   
-
    
-
    
-
    1,041,662    104    (104)   
-
    
-
    
-
    
-
 
Common stock issued for conversion settlement   
-
    
-
    
-
    131,282,467    13,128    (13,128)   
-
    
-
    
-
    
-
 
Issuance of Series Y Preferred stock through a private placement   -    
-
    2,657,200    -    
-
    
-
    
-
    
-
    
-
    
-
 
Issuance of Series Z Preferred stock through a private placement   -    
-
    250,000    -    
-
    
-
    
-
    
-
    
-
    - 
Exchange of Series F Preferred Stock for Series Q Preferred stock   -    
-
    200,000    -    
-
    
-
    
-
    
-
    
-
    
-
 
Exchange of Series I Preferred Stock for Series W Preferred stock   -    
-
    210,000    -    
-
    
-
    
-
    
-
    
-
    
-
 
Exchange of Series K Preferred Stock for Series W Preferred stock   -    
-
    85,000    -    
-
    
-
    
-
    
-
    
-
    
-
 
Loss on conversion of Preferred Stock   -    
-
    
-
    -    
-
    245,985    
-
    
-
    
-
    245,985 
Net Loss   -    
-
    
-
    -    
-
    
-
    
-
    
-
    (4,842,023)   (4,842,023)
Balance at June 30, 2022 (unaudited)   33,038,213   $3,304    12,177,450    607,030,697   $60,703   $77,986,132   $100,000   $(132)  $(103,017,946)  $(24,867,939)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

3

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022

 

   SIX MONTHS ENDED JUNE 30, 2023 
   Preferred stock   Mezzanine   Common stock   Additional
Paid-in-
   Subscription   Other Comprehensive   Accumulated     
   Shares   Amount   Equity   Shares   Amount   Capital   Payable   loss   Deficit   Total 
Balance at December 31, 2022   32,502,475    3,150   $10,866,772    1,013,369,185    101,337    82,745,503    100,000    (132)   (108,966,645)   (26,016,787)
Common stock issued for cash per equity financing agreement   -    -    -    18,645,028    1,865    128,719    -    -    -    130,584 
Common stock issued upon conversion of convertible promissory note   -    -    -    55,788,402    5,579    161,786                   167,365 
Common stock issued at fair value for services   -    -    -    45,217,435    4,521    420,405    -    -    -    424,926 
Common stock issued for conversion of Series O Preferred stock   -    -    (40,000)   7,722,008    772    39,228    -    -    -    40,000 
Common stock issued for conversion of Series Q Preferred stock   -    -    (55,000)   11,490,310    1,149    53,851    -    -    -    55,000 
Common stock issued for conversion of Series R Preferred stock   -    -    (720,000)   146,475,763    14,648    705,352    -    -    -    720,000 
Common stock issued for conversion of Series S Preferred stock   -    -    (50,000)   8,864,250    886    49,114    -    -    -    50,000 
Common stock issued for conversion of Series U Preferred stock   -    -    (65,000)   9,078,212    908    64,092    -    -    -    65,000 
Common stock issued for conversion of Series Y Preferred stock   -    -    (1,330,000)   233,043,093    23,305    1,306,695    -    -    -    1,330,000 
Common stock issued for conversion of Series Z Preferred stock   -    -    (250,000)   61,728,395    6,173    243,827    -    -    -    250,000 
Common stock issued for Series O Preferred stock dividends   -    -    -    498,280    50    (50)   -    -    -    - 
Common stock issued for conversion settlement agreements   -    -    -    265,181,982    26,518    (26,518)   -    -    -    - 
Common stock issued for alternate vesting   -    -    -    11,584,932    1,158    (1,158)   -    -    -    - 
Common stock issued through a Reg A to investors for cash   -    -    -    7,500    1    37,499                   37,500 
Issuance of Series A Preferred stock granted to Series Y investors   209    -    -    -    -    23,588    -    -    -    

23,588

 
Issuance of Series B Preferred stock granted to investors   367,400    37    -    -    -    132,227    -    -    -    

132,264

 
Exchange of Series K Preferred Stock for Series W Preferred stock   -    -    100,000    -    -    -    -    -    -    - 
Issuance of Series Y Preferred stock through a private placement   -    -    376,300    -    -    -    -    -    -    - 
Exchange of Series R Preferred Stock for WODI secured convertible note   -    -    (100,000)   -    -    -    -    -    -    - 
Exchange of Series X Preferred Stock for WODI secured convertible note   -    -    (250,000)   -    -    -    -    -    -    - 
Return of investment for Series Y Preferred stock   -    -    (10,000)   -    -    -    -    -    -    - 
Redemption of common stock for note purchase agreements   -    -    -    (589,253,845)   (58,925)   58,925    -    -    -    - 
Net Loss   -    -    -    -    -    -    -    -    (9,886,096)   (9,886,096)
Balance at June 30, 2023 (unaudited)   32,870,084   $3,187   $8,473,072    1,299,440,930   $129,945   $86,143,085   $100,000   $(132)  $(118,852,741)  $(32,476,656)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

4

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022

(Unaudited)

 

   Six Months Ended 
   June 30,
2023
   June 30,
2022
 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net Income (loss)  $(9,886,096)  $(4,842,023)
Adjustment to reconcile net loss to net cash used in operating activities          
Depreciation and amortization   15,432    21,242 
Common and preferred stock issued for services   424,926    522,535 
(Gain) Loss on net change in valuation of derivative liability   (2,825,879)   1,568,898 
Conversion and settlement value added to note purchase agreements   6,037,589    
-
 
Debt discount recognized as interest expense   
-
    3,743 
Net unrealized (gain) loss on fair value of securities   4,521    142,705 
Impairment of receivable from SPAC   2,650,986    
-
 
(Gain) Loss on conversion of preferred stock   
-
    245,985 
Preferred stock incentive compensation   155,852    
-
 
Gain on write off of payable   
-
    (50,000)
Change in Assets (Increase) Decrease in:          
Contracts receivable   1,061,010    761,676 
Contract asset   390,206    (724,975)
Inventory asset   
-
    (15,175)
Prepaid expenses and other assets   14,226    1,496 
Other receivable   (27,694)   
-
 
Change in Liabilities Increase (Decrease) in:          
Accounts payable   (1,512,839)   744,372 
Accrued expenses   401,092    57,824 
Contract liabilities   (208,564)   (288,949)
Tax liability 83(b)   (2,000)   
-
 
Trust escrow   24,500    
-
 
NET CASH USED IN OPERATING ACTIVITIES   (3,282,732)   (1,850,646)
           
CASH FLOWS USED FROM INVESTING ACTIVITIES:          
Purchase of SPAC notes payable   (2,650,986)   
-
 
Payments received on long term asset   230,428      
Purchase of fixed assets   (9,000)   (9,000)
NET CASH USED IN INVESTING ACTIVITIES   (2,429,558)   (9,000)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Payments on capital lease   
-
    (4,544)
Payments on loan payable, SBA   (1,273)   
-
 
Line of Credit   200,994    
-
 
Equity financing through the purchase of common shares   168,084    
-
 
Net payments on cumulative preferred stock dividends payable   9,761    15,135 
Convertible secured promissory notes   4,994,000    
-
 
Net proceeds for issuance of preferred stock for cash - mezzanine classification   366,300    2,843,700 
NET CASH PROVIDED BY FINANCING ACTIVITIES   5,737,866    2,854,291 
           
NET (DECREASE) INCREASE IN CASH   25,576    994,645 
CASH BEGINNING OF PERIOD   1,354,814    706,421 
CASH END OF PERIOD  $1,380,390   $1,701,066 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          
Interest and dividends paid  $255,983   $828,638 
Taxes paid  $
-
   $
-
 
           
SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS          
Common stock issued at fair value for conversion of debt, plus accrued interest, and other fees  $167,365   $119,634 
Issuance of Series O dividends  $50   $72 
Preferred stock converted to common stock - mezzanine  $2,510,000   $1,407,842 
Exchange of Series R Preferred Stock for WODI secured convertible note  $100,000   $
-
 
Exchange from mezzanine to liability  $-   $495,000 
Common stock issued as settlement  $26,518   $13,128 
Exchange of Series X Preferred Stock for WODI secured convertible note  $250,000   $
-
 
Shares issued for alternate vesting  $1,158   $
-
 
Redemption of shares for secured promissory notes  $58,925   $
-
 
Conversion of liability classified preferred stock to mezzanine  $100,000   $
-
 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

5

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2023

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of OriginClear, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included.  Operating results for the six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information refer to the financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2022.

 

The Company operates an outsourced water treatment business called Water On Demand (“WOD”), which it conducts through its wholly owned subsidiary, Water on Demand, Inc. (“WODI”). The WOD model offers private businesses water self-sustainability as a service, the ability to pay for water treatment and purification services on a per-gallon basis, with a percentage of net profits paid to investors and stakeholders. This is commonly known as Design-Build-Own-Operate or “DBOO”. In addition to WODI, four subsidiaries were originally established to house capital dedicated to this program. For efficiency, during the six months ended June 30, 2023, the Company reorganized these subsidiaries into a single WOD Subsidiary. As of the period ended June 30, 2023, the Company received net aggregate funding in the amount of $366,300 through the sale of its Series Y Preferred Stock dedicated to the Water on Demand program. The Company is currently evaluating opportunities to contract with commercial customers to outsource water treatment as a managed service and pay by the gallon for the treatment of its dirty water as an alternative to having to come up with significant up-front capital. While these evaluations are ongoing, without guarantee as to when or if these will take place, the Company is placing funds from the sale of Series Y Preferred Stock into various company initiatives to support WOD. While there is no obligation to do so, the Company has made special distributions of funds to Series Y holders in lieu of share of profits, paid after the end of each quarter.

  

Going Concern

 

The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. These factors, among others raise substantial doubt about the Company’s ability to continue as a going concern. Our independent auditors, in their report on our audited financial statements for the year ended December 31, 2022 expressed substantial doubt about our ability to continue as a going concern.

 

The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, achieving a level of profitable operations and receiving additional cash infusions. During the six months ended June 30, 2023, the Company obtained funds from the issuance of convertible note agreements and from sale of its preferred stock. Management believes this funding will continue from its’ current investors and from new investors. During this period, the Company also generated revenue of $3,837,078 and has standing purchase orders and open invoices with customers, which will provide funds for operations. Management believes the existing shareholders, the prospective new investors and future sales will provide the additional cash needed to meet the Company’s obligations as they become due and will allow the development of its core business operations. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders, in case of equity financing.

 

6

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

 

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

  

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of OriginClear, Inc. and its wholly owned operating subsidiaries, Progressive Water Treatment, Inc., Water on Demand Inc., Water On Demand1, Inc., Water On Demand2, Inc., Water On Demand3, Inc. and OriginClear Technologies, Ltd. All material intercompany transactions have been eliminated upon consolidation of these entities. As of June 30, 2023, the Company reorganized Water On Demand2, Inc. and Water On Demand3, Inc and combined the subsidiaries into Water On Demand1, Inc.

 

Cash and Cash Equivalent

 

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. During the reorganization of Water On Demand1, Inc., Water On Demand2, Inc., and Water On Demand3, Inc., the restricted cash balance on the financial statements as of December 31, 2022 was combined with the overall cash balance of the consolidated Company during the six months ended June 30, 2023.

 

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 the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, warranty reserves, inventory valuation, derivative liabilities and other conversion features, fair value investments, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Net Earnings (Loss) per Share Calculations

 

Basic loss per share calculation is computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similarly to basic earnings per share except that the denominator is increased to include securities or other contracts to issue common stock that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company’s diluted earnings per share were not the same as the basic loss per share for the six months ended June 30, 2023 and 2022, respectively, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.

 

   For the Six Months Ended
June 30,
 
   2023   2022 
Loss to common shareholders (Numerator)  $(9,886,096)  $(4,842,023)
           
Basic weighted average number of common shares outstanding (Denominator)   1,243,518,367    495,173,641 
           
Diluted weighted average number of common shares outstanding (Denominator)   1,243,518,367    495,173,641 

 

7

 

 

The Company excludes issuable shares from warrants, convertible notes and preferred stock, if their impact on the loss per share is anti-dilutive and includes the issuable shares if their impact is dilutive.

  

Revenue Recognition

 

We recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.

 

Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.

 

Revisions in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts for the revisions become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions to costs and income, which are recognized in the period the revisions are determined.

 

Contract receivables are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are collectible upon completion of the contracts. Accounts payable to material suppliers and subcontractors are recorded for amounts currently due based upon work completed or materials received, as are retention due subcontractors, which are payable upon completion of the contract. General and administrative expenses are charged to operations as incurred and are not allocated to contract costs.

 

Contract Receivable

 

The Company bills its customers in accordance with contractual agreements. The agreements generally require billing to be on a progressive basis as work is completed. Credit is extended based on evaluation of clients financial condition and collateral is not required. The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any customer is unable to make required payments. Management performs a quantitative and qualitative review of the receivables past due from customers on a monthly basis. The Company records an allowance against uncollectible items for each customer after all reasonable means of collection have been exhausted, and the potential for recovery is considered remote. The allowance for doubtful accounts was $0 and $17,315 as of June 30, 2023 and December 31, 2022, respectively. The net contract receivable balance was $1,418,113 and $2,479,123 at June 30, 2023 and December 31, 2022, respectively.  

 

Indefinite Lived Intangibles and Goodwill Assets

 

The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.

 

The Company tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance with its policies, the Company performed a qualitative assessment of indefinite lived intangibles and goodwill at June 30, 2023 and December 31, 2022, respectively, and determined there was no impairment of indefinite lived intangibles and goodwill.

 

8

 

 

Prepaid Expenses

 

The Company records expenditures that have been paid in advance as prepaid expenses. The prepaid expenses are initially recorded as assets, because they have future economic benefits, and are expensed at the time the benefits are realized. The prepaid expenses balance was $10,774 and $25,000 at June 30, 2023 and December 31, 2022, respectively. 

  

Property and Equipment

 

Property and equipment are stated at cost. Gain or loss is recognized upon disposal of property and equipment, and the asset and related accumulated depreciation are removed from the accounts. Expenditures for maintenance and repairs are charged to expense as incurred, while expenditures for addition and betterment are capitalized. Furniture and equipment are depreciated on the straight-line method and include the following categories:

 

Estimated Life   
Machinery and equipment  5-10 years
Furniture, fixtures and computer equipment  5-7 years
Vehicles  3-5 years
Leasehold improvements  2-5 years

 

   June 30,
2023
   December 31,
2022
 
Machinery and Equipment  $383,569   $383,569 
Computer Equipment   66,493    66,493 
Furniture   29,810    29,810 
Leasehold Improvements   26,725    26,725 
Vehicles   64,276    64,276 
Demo Units   36,139    36,139 
    607,012    607,012 
Less accumulated depreciation   (445,375)   (429,943)
Net Property and Equipment  $161,637   $177,069 

 

Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that the facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed following generally accepted accounting principles.

 

Depreciation expense during the six months ended June 30, 2023 and 2022, was $15,432 and $21,242, respectively.

    

Stock-Based Compensation

 

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants vest immediately and the total stock-based compensation charge is recorded in the period of the measurement date.

 

9

 

 

Accounting for Derivatives

 

The Company evaluates all its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a probability weighted average series Binomial lattice option pricing models to value the derivative instruments at inception and on subsequent valuation dates.

 

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not the net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

 

Fair Value of Financial Instruments

 

Fair Value of Financial Instruments requires disclosure of the fair value information, whether or not to recognized in the balance sheet, where it is practicable to estimate that value. As of June 30, 2023, the balances reported for cash, contract receivables, cost in excess of billing, prepaid expenses, accounts payable, billing in excess of cost, and accrued expenses approximate the fair value because of their short maturities.

 

We adopted ASC Topic 820 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.

  

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

 

  Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
     
  Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
     
  Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

  

The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s balance sheets on a recurring basis and their level within the fair value hierarchy as of June 30, 2023.

 

   Total   (Level 1)   (Level 2)   (Level 3) 
Investment at fair value-securities, June 30, 2023  $25,004   $25,004   $
          -
   $
          -
 

 

   Total   (Level 1)   (Level 2)   (Level 3) 
Derivative Liability, June 30, 2023  $6,753,025   $
          -
   $
          -
   $6,753,025 

 

The derivative liabilities consist of $6,325,257 for convertible notes outstanding and $427,768 for warrants outstanding for an aggregate of $6,753,025.

 

10

 

 

The following is a reconciliation of the derivative liability for which level 3 inputs were used in determining the approximate fair value:

  

Balance as of December 31, 2022  $9,578,904 
Net loss on conversion of debt and change in derivative liabilities   (2,825,879)
Balance as of June 30, 2023  $6,753,025 

 

For purpose of determining the fair market value of the derivative liability, the Company used Binomial lattice formula valuation model. The significant assumptions used in the Binomial lattice formula valuation of the derivative are as follows:

 

   June 30,
2023
Risk free interest rate  4.06% - 5.40%
Stock volatility factor  41.0% - 135.0%
Weighted average expected option life  6 mos - 5 yrs
Expected dividend yield 
None

 

Segment Reporting

 

The Company’s business currently operates in one segment based upon the Company’s organizational structure and the way in which the operations are managed and evaluated.

 

Marketable Securities

 

The Company adopted ASU 2016-01, “Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. It requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purpose, and separate presentation of financial assets and financial liabilities by measurement category and form of financial asset. It eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The Company has evaluated the potential impact this standard may have on the condensed consolidated financial statements and determined that it had a significant impact on the condensed consolidated financial statements. The Company accounts for its investment in Water Technologies International, Inc. as available-for-sale securities, and the unrealized gain on the available-for-sale securities is recognized in net income.

 

Licensing agreement

 

The Company analyzed the licensing agreement using ASU 606 to determine the timing of revenue recognition. The licensing of the intellectual property (IP) is distinct from the non-license goods or services and has significant standalone functionality that provides a benefit or value. The functionality will not change during the license period due to the licensor’s activities. Because the significant standalone functionality is delivered immediately, the revenue is generally recognized when the license is delivered.

 

Reclassification

 

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation used in the current financial statements for comparative purpose. There was no material effect on the Company’s previously issued financial statements.

 

Work-in-Process

 

The Company recognizes as an asset the accumulated costs for work-in-process on projects expected to be delivered to customers. Work in Process includes the cost price of materials and labor related to the construction of equipment to be sold to customers.

 

11

 

 

Recently Issued Accounting Pronouncements

 

Management reviewed currently issued pronouncements and does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying condensed financial statements.

 

3. CAPITAL STOCK

 

OriginClear, Inc Preferred Stock

 

Series C

 

On March 14, 2017, the Board of Directors authorized the issuance of 1,000 shares of Series C preferred stock, par value $0.0001 per share, to T. Riggs Eckelberry in exchange for his continued employment with the Company. The holder of Series C preferred stock is not entitled to receive dividends, is not entitled to any liquidation preference and shares of Series C preferred stock does not have any conversion rights. The Series C Preferred Stock entitles the holder to 51% of the total voting power of our stockholders. The purchase price of the Series C preferred stock was $0.0001 per share representing a total purchase price of $0.10 for 1,000 shares. As of June 30, 2023, there were 1,000 shares of Series C preferred stock outstanding held by Mr. Eckelberry.

  

Series D-1

 

On April 13, 2018, the Company designated 50,000,000 shares of its authorized preferred stock as Series D-1 preferred stock. The shares of Series D-1 preferred stock are not entitled to dividends and do not have a liquidation preference. Each share of Series D-1 preferred stock is convertible into 0.0005 of one share of common stock. The Series D-1 preferred stock may not be converted to common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of our outstanding common stock, which amount may be increased to 9.99% at the holders discretion upon 61 days’ written notice. As of June 30, 2023, there were 31,500,000 shares of Series D-1 preferred stock issued and outstanding.

 

Series F

 

On August 14, 2018, the Company designated 6,000 shares as Series F preferred stock. The shares of Series F preferred stock have a liquidation preference equal to the stated value of $1,000 per share plus any accrued but unpaid dividends. The Series F preferred stock is not convertible into common stock. The holders of outstanding shares of Series F preferred stock are entitled to quarterly dividends at the annual rate of 8% of the stated value, in preference to any dividends on the common stock. The shares of Series F preferred stock do not carry any voting rights. The Company may, in its sole discretion, at any time while the Series F preferred stock is outstanding, redeem all or any portion of the outstanding Series preferred stock at a price equal to the stated value, plus any accrued but unpaid dividends. The Company was required to redeem all outstanding shares of Series F preferred stock on September 1, 2020. As of June 30, 2023, the Company had 60 outstanding shares of Series F preferred stock, which the Company was required to, and failed to redeem on September 1, 2020, and remains in default for an aggregate redemption price (equal to the stated value) of $60,000.  

 

Series G

 

On January 16, 2019, the Company designated 6,000 shares as Series G preferred stock, each share having a stated value of $1,000 per share and holders of Series G preferred stock are entitled to cumulative dividends at the annual rate of 8% of the stated value, payable quarterly. The Series G preferred stock does not have voting rights, except as required by law and is not convertible into common stock. The Company may, in its sole discretion, at any time while the Series G preferred stock is outstanding, redeem all or any portion of the outstanding Series G preferred stock at a price equal to the stated value plus any accrued but unpaid dividends. The Company was required to redeem such shares of Series G preferred stock on April 30, 2021, at a price equal to the stated value plus any accrued but unpaid dividends. Pursuant to certain subscription agreements entered into with purchasers of the Series G preferred stock, each purchaser received shares of the Company’s common stock equal to an amount of, for each share of Series G preferred stock purchased, five hundred dollars ($500) divided by the closing price on the date the Company receives the executed subscription documents and purchase price from such investor. As of June 30, 2023, there were 25 shares of Series G preferred stock issued and outstanding, which the Company was required to, and failed to redeem on April 30, 2021, for an aggregate redemption price (equal to the stated value) of $25,000.

 

12

 

 

Series I

 

On April 3, 2019, the Company designated 4,000 shares of preferred stock as Series I. The Series I has a stated value of $1,000 per share. Series I holders are entitled to cumulative dividends at the annual rate of 8% of the stated value, payable quarterly within 60 days from the end of each fiscal quarter. The Series I is not entitled to any voting rights except as may be required by applicable law, and are not convertible into common stock. The Company has the right to redeem the Series I at any time while the Series I are outstanding at a price equal to the stated value plus any accrued but unpaid dividends. The Company is required to redeem the Series I two years following the date that is the later of the (i) final closing of the tranche (as designated in the applicable subscription agreement) or (ii) the expiration date of the tranche that such shares to be redeemed were a part of. The Company was required to redeem such shares of Series I between May 2, 2021 and June 10, 2021, at a price equal to the stated value plus any accrued but unpaid dividends. The issuances of the shares were accounted for under ASC 480-10-25-4, which requires liability treatment for certain mandatorily redeemable financial instruments, and the cumulative dividends are recorded as interest expense. As of June 30, 2023, there were 25 shares of Series I preferred stock issued and outstanding which the Company was required to, and failed to redeem by June 10, 2021, and was and remains in default for an aggregate redemption price (equal to the stated value) of $25,000

  

Series J

 

On April 3, 2019, the Company designated 100,000 shares of preferred stock as Series J. The Series J has a stated value of $1,000 per share and holders are entitled to receive dividends on an as-converted basis with the Company’s common stock. The Series J preferred stock is convertible into shares of the Company’s common stock, on the terms and conditions set forth in the Series J COD, which includes certain make-good shares for certain prior investors. As of June 30, 2023, there were 210 shares of Series J preferred stock issued and outstanding.

 

Series K

 

On June 3, 2019, the Company designated 4,000 shares of preferred stock as Series K. The Series K has a stated value of $1,000 per share. Series K holders are entitled to cumulative dividends at the annual rate of 8% of the stated value, payable quarterly within 60 days from the end of each fiscal quarter. The Series K is not entitled to any voting rights except as may be required by applicable law, and is not convertible into common stock. The Company has the right to redeem the Series K at any time while the Series K are outstanding at a price equal to the stated value plus any accrued but unpaid dividends. The Company was required to redeem the Series K two years following the date that is the later of the (i) final closing of the tranche (as designated in the applicable subscription agreement) or (ii) the expiration date of the tranche that such shares to be redeemed were a part of. The Company was required to redeem such shares of Series K between August 5, 2021 and April 24, 2022, at a price equal to the stated value plus any accrued but unpaid dividends. The issuances of the shares were accounted for under ASC 480-10-25-4, which requires liability treatment for certain mandatorily redeemable financial instruments, and the cumulative dividends are recorded as interest expense. During the six months ended June 30, 2023, the Company exchanged an aggregate of 100 shares of Series K preferred stock for 100 shares of Series W preferred stock. As of June 30, 2023, there were 307 shares of Series K preferred stock issued and outstanding which the Company was required to, and failed to redeem by April 24, 2022, and was and remains in default for an aggregate redemption price (equal to the stated value) of $307,150.

  

Series L

 

On June 3, 2019, the Company designated 100,000 shares of preferred stock as Series L. The Series L has a stated value of $1,000 per share and holders are entitled to receive dividends on an as-converted basis with the Company’s common stock. The Series L preferred stock is convertible into shares of the Company’s common stock, on the terms and conditions set forth in the Series L COD, which includes certain make-good shares for certain prior investors. As of June 30, 2023, there were 321 shares of Series L preferred stock issued and outstanding.  

  

13

 

 

Series M

 

Pursuant to the Amended and Restated Certificate of Designation of Series M Preferred Stock filed with the Secretary of State of Nevada on July 1, 2020, the Company designated 800,000 shares of its preferred stock as Series M Preferred Stock. Each share of Series M Preferred Stock has a stated value of $25. The Series M Preferred Stock is not convertible into common stock. The holders of outstanding shares of Series M Preferred Stock are entitled to receive dividends, at the annual rate of 10%, payable monthly, payable in preference and priority to any payment of any dividend on the common stock. The Series M Preferred Stock is entitled to a liquidation preference in an amount equal to $25 per share plus any declared but unpaid dividends, before any payments to holders of common stock. The Series M Preferred Stock have no pre-emptive or subscription rights, and there are no sinking fund provisions applicable to the Series M Preferred Stock. The Series M Preferred Stock does not have voting rights, except as required by law and with respect to certain protective provisions set forth in the Certificate of Designation of Series M Preferred Stock. To the extent it may lawfully do so, the Company may, in its sole discretion, at any time when there are outstanding shares of Series M Preferred Stock, redeem any or all of the then outstanding shares of Series M Preferred Stock at a redemption price of $37.50 per share (150% of the stated value) plus any accrued but unpaid dividends. As of June 30, 2023, there were 40,300 shares of Series M preferred stock issued and outstanding.

 

Series O

 

On April 27, 2020, the Company designated 2,000 shares of preferred stock as Series O preferred stock. The Series O preferred stock has a stated value of $1,000 per share, and entitles holders to receive cumulative dividends (i) in cash at an annual rate of 8% of the stated value, and (ii) in shares of common stock of the Company (valued based on the conversion price as in effect on the last trading day of the applicable fiscal quarter) at an annual rate of 4% of the stated value, payable quarterly within 60 days from the end of such fiscal quarter. The Series O preferred stock has a liquidation preference equal to the stated value plus any accrued but unpaid dividends, in preference to the common stock. The Series O preferred stock has no preemptive or subscription rights, and there is no sinking fund provision applicable to the Series O preferred stock. The Series O preferred stock does not have voting rights except as required by law. The Series O preferred stock is convertible into common stock of the Company in an amount determined by dividing 200% of the stated value of the Series O preferred stock being converted by the conversion price, provided that, the Series O may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The conversion price is equal to the average closing sale price of the common stock for the five trading days prior to the conversion date. The Company has the right (but no obligation) to redeem the Series O preferred stock at any time while the Series O preferred stock are outstanding at a redemption price equal to the stated value plus any accrued but unpaid dividends. The cumulative dividends are recorded as interest expense. During the six months ended June 30, 2023, the Company issued an aggregate of 7,722,008 shares of common stock upon conversion of 40 shares of Series O preferred stock and issued an aggregate of 498,280 shares of common stock in prorated 4% annualized dividends which were recorded as interest expense. The shares were issued within the terms of the agreement and no gain or loss was recognized. As of June 30, 2023, there were 190 shares of Series O preferred stock issued and outstanding.

  

Series P

 

On April 27, 2020, the Company designated 500 shares of preferred stock as Series P preferred stock. The Series P preferred stock has a stated value of $1,000 per share, and entitles holders to receive dividends on an as-converted basis with the Company’s common stock. The Series P preferred stock is convertible into shares of the Company’s common stock, on the terms and conditions set forth in the Certificate of Designation of Series P preferred stock, which includes certain make-good shares for certain prior investors, and provided that, the Series P preferred stock may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The Series P preferred stock entitles the holders to a payment on an as-converted and pari-passu basis with the common stock upon any liquidation. The Series P preferred stock has no preemptive or subscription rights, and there is no sinking fund or redemption provisions applicable to the Series P preferred stock. The Series P preferred stock votes on an as-converted basis with the common stock, subject to the beneficial ownership limitation. As of June 30, 2023, there were 30 shares of Series P preferred stock issued and outstanding.

 

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Series Q

 

On August 21, 2020, the Company designated 2,000 shares of preferred stock as Series Q Preferred Stock. The Series Q Preferred Stock has a stated value of $1,000 per share, and entitles holders to receive cumulative dividends in cash at an annual rate of 12% of the stated value, payable quarterly within 60 days from the end of such fiscal quarter. The Series Q Preferred Stock has a liquidation preference equal to the stated value plus any accrued but unpaid dividends, in preference to the common stock. The Series Q Preferred Stock has no preemptive or subscription rights, and there is no sinking fund provision applicable to the Series Q Preferred Stock. The Series Q Preferred Stock does not have voting rights except as required by law. The Series Q Preferred Stock is convertible into common stock of the Company in an amount determined by dividing 200% of the stated value of the Series Q Preferred Stock being converted by the conversion price, provided that, the Series Q may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The conversion price will be equal to the average closing sale price of the common stock for the five trading days prior to the conversion date. The Company has the right (but no obligation) to redeem the Series Q Preferred Stock at any time while the Series Q Preferred Stock are outstanding at a redemption price equal to the stated value plus any accrued but unpaid dividends. The cumulative dividends are recorded as interest expense. During the six months ended June 30, 2023, the Company issued an aggregate of 11,490,310 shares of common stock upon conversion of 55 shares of Series Q preferred stock. The shares were issued and exchanged within the terms of the agreement and no gain or loss was recognized. As of June 30, 2023, there were 560 shares of Series Q preferred stock issued and outstanding.

  

Series R

 

On November 16, 2020, the Company designated 5,000 shares of preferred stock as Series R. The Series R has a stated value of $1,000 per share, and entitles holders to receive cumulative dividends in cash at an annual rate of 10% of the stated value, payable quarterly within 60 days from the end of such fiscal quarter. The Series R holders are not entitled to any voting rights except as may be required by applicable law. The Series R is convertible into common stock of the Company in an amount determined by dividing 200% of the stated value of the Series R being converted by the conversion price; certain prior investors will also be entitled to certain make-good shares; provided that, the Series R may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The conversion price will be equal to the average closing sale price of the common stock for the five trading days prior to the conversion date. The Company has the right (but no obligation) to redeem the Series R at any time while the Series R are outstanding at a redemption price equal to, if paid in cash, the stated value plus any accrued but unpaid cash dividends, or, if paid in shares of common stock, in an amount of shares determined by dividing the stated value being redeemed by the conversion price. The subscribers were offered warrants with the purchase of Series R. During the six months ended June 30, 2023, the Company issued an aggregate of 146,475,763 shares of common stock upon conversion of 720 shares of Series R preferred stock and the Company’s subsidiary, Water On Demand, Inc., executed a Secured Note Purchase Agreement upon redemption of an aggregate of 100 shares of Series R preferred stock. The shares were issued and exchanged within the terms of the agreement and no gain or loss was recognized. As of June 30, 2023, there were 2,008 shares of Series R preferred stock issued and outstanding.

 

Series S

 

On February 5, 2021, the Company designated 430 shares of preferred stock as Series S. The Series S has a stated value of $1,000 per share, and entitles holders to receive cumulative dividends in cash at an annual rate of 12% of the stated value, payable quarterly within 60 days from the end of such fiscal quarter. The Series S holders are not entitled to any voting rights except as may be required by applicable law. The Series S is convertible into common stock of the Company in an amount determined by dividing 200% of the stated value of the Series S being converted by the conversion price, provided that, the Series S may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The conversion price will be equal to the average closing sale price of the common stock for the five trading days prior to the conversion date. The Company has the right (but no obligation) to redeem the Series S at any time while the Series S are outstanding at a redemption price equal to the stated value plus any accrued but unpaid dividends. During the six months ended June 30, 2023, the Company issued an aggregate of 8,864,250 shares of common stock upon conversion of 50 shares of Series S preferred stock. The shares were issued within the terms of the agreement and no gain or loss was recognized. As of June 30, 2023, there were 120 shares of Series S preferred stock issued and outstanding. 

 

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Series U 

 

On May 26, 2021, the Company designated 5,000 shares of preferred stock as Series U. The Series U has a stated value of $1,000 per share. The Series U holders are not entitled to any dividends and do not have any voting rights except as may be required by applicable law. The Series U is convertible into common stock of the Company in an amount determined by dividing 150% of the stated value of the Series U being converted by the conversion price; certain prior investors will also be entitled to certain make-good shares; provided that, the Series U may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The conversion price will be equal to the lesser of $0.20 or the average closing sale price of the common stock for the five trading days prior to the conversion date. The Company has the right (but no obligation) to redeem the Series U at any time at a redemption price equal to, if paid in cash, the stated value, or, if paid in shares of common stock, in an amount of shares determined by dividing 200% of the stated value being redeemed by the conversion price then in effect, and adding any applicable make-good shares. During the six months ended June 30, 2023, the Company issued an aggregate of 9,078,212 shares of common stock upon conversion of 65 shares of Series U preferred stock. The shares were issued within the terms of the agreement and no gain or loss was recognized. As of June 30, 2023, there were 320 shares of Series U preferred stock along with 10,307,500 warrants with a fair value of $3 (with exercise prices between $0.10 and $1.00) issued and outstanding. These warrants associated with Series U were valued using the Black Scholes model (See Note 4)

 

Series W

 

On April 28, 2021, the Company designated 3,390 shares of preferred stock as Series W. The Series W has a stated value of $1,000 per share, and Series W holders are entitled to cumulative dividends in cash at an annual rate of 12% of the stated value, payable quarterly. The Series W holders are not entitled to any voting rights except as may be required by applicable law. The Series W is convertible into common stock of the Company in an amount determined by dividing 200% of the stated value of the Series W being converted by the conversion price; provided that, the Series W may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock. The conversion price will be equal to the average closing sale price of the common stock for the five trading days prior to the conversion date. The Company has the right (but no obligation) to redeem the Series W at any time at a redemption price equal to the stated value plus any accrued but unpaid dividends. During the six months ended June 30, 2023, the Company exchanged an aggregate of 100 shares of Series K preferred stock for 100 shares of Series W preferred stock. As of June 30, 2023, there were 920 shares of Series W preferred stock issued and outstanding.

  

Series X

 

On August 10, 2021, the Company designated 25 shares of preferred stock as Series X. The Series X had a stated value of $10,000 per share. The Series X holders were not entitled to any dividends and did not have any voting rights except as may have been required by applicable law. The Series X was convertible into common stock of the Company pursuant to the Series X COD, provided that, the Series X was not to be converted into common stock to the extent such conversion would have resulted in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which amount may have been increased up to 9.99% upon 61 days’ written notice). Beginning on the one year anniversary of the subscription agreement for the Series X Preferred Stock, until the two year anniversary of the subscription agreement, the holders had the right to require the Company to redeem all of the Series X purchased by the subscriber at a price equal to 125% of the $250,000 original purchase price, or $312,500. The holders also had the right, exercisable at any time, to require the Company to redeem all of the holder’s Series X in exchange for the issuance of shares of the Company’s common stock in an amount equal to 250% of the original $250,000 purchase price, or $625,000, divided by the closing price of the Company’s common stock as of the date the holders executed the subscription agreement.  During the six months ended June 30, 2023, the Company’s subsidiary, Water On Demand, Inc., executed a Secured Note Purchase Agreement upon redemption of an aggregate of 25 shares of Series X preferred stock, which had a stated value of $250,000. The shares were redeemed within the terms of the agreement and no gain or loss was recognized. As of June 30, 2023, there were no shares of Series X preferred stock issued and outstanding.

 

Series Y

 

On December 6, 2021, the Company designated 3,000 shares of preferred stock as Series Y. The Series Y has an original issue price of $100,000 per share, and holders are entitled to receive, on a pro rata and pari passu basis, annual distribution of up to 25% of annual net profits of newly established, wholly-owned, Water On Demand subsidiaries, designated by each holder, paid within 3 months of subsidiary’s accounting year-end. The Series Y holders are not entitled to any voting rights except as may be required by applicable law. The Series Y is convertible into common stock of the Company pursuant to the Series Y COD, provided that, the Series Y may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The Company has the right (but no obligation) to redeem the Series Y at any time at a redemption price equal to, if paid in cash, the original issue price plus any accrued but unpaid distributions of 25% of the subsidiary’s annual net profits. In addition, the Series Y holders are entitled to receive shares of Series A preferred stock in the Company’s subsidiary Water On Demand, Inc. During the six months ended June 30, 2023, the Company received aggregate net funding in the amount of $366,300 through the sale of Series Y preferred stock, redeemed an aggregate of 0.1 shares of Series Y preferred stock equal to the stated value of $10,000, and issued an aggregate of 233,043,093 shares of common stock upon conversion of 13.3 shares of Series Y preferred stock. The shares were issued within the terms of the agreement and no gain or loss was recognized. As of June 30, 2023, there were 27.9 shares of Series Y preferred stock along with 48,940,616 warrants with a fair value of $352,735 (with exercise prices between $0.13 and $0.25) issued and outstanding. The warrants were valued using the Black Scholes model (See Note 4).    

 

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Series Z

 

On February 11, 2022, the Company designated 25 shares of preferred stock as Series Z. The Series Z has an original issue price of $10,000 per share. The Series Z holders are not entitled to dividends or any voting rights except as may be required by applicable law. The Series Z is convertible into common stock of the Company pursuant to the Series Z COD, provided that, the Series Z may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which amount may be increased up to 9.99% upon 61 days’ written notice). The Company has the right (but no obligation) to redeem the Series Z at any time at a redemption price equal to the original issue price plus any accrued but unpaid distributions of 25% of Subsidiary’s annual net profits. On February 18, 2022, the Company issued and sold to an accredited investor an aggregate of 25 shares of Series Z preferred stock for a purchase price of $250,000 and issued an aggregate of 2,500,000 warrants. During the six months ended June 30, 2023, the Company issued an aggregate of 61,728,395 shares of common stock upon conversion of 25 shares of Series Z preferred stock. The shares were issued within the terms of the agreement and no gain or loss was recognized. As of June 30, 2023, there were 2,500,000 warrants with a fair value of $11,057 (with an exercise price of $0.10) and no shares of Series Z preferred stock issued and outstanding.

  

As of June 30, 2023, the Company accrued aggregate dividends in the amount of $425,358 for all series of preferred stock.

 

During the six months ended June 30, 2023, the Company redeemed an aggregate of 589,253,845 shares of common stock at a price ranging from $0.007 to $.013 per share with a value of $58,925 relating to Series R and Series Y conversions and settlement agreements with certain WODI convertible secured promissory note holders.

 

The Series J, Series L, Series M, Series O, Series P, Series Q Series R, Series S, Series T, Series U, Series V, Series W, Series X, Series Y, and Series Z preferred stock are accounted for outside of permanent equity due to the terms of conversion at a market component or stated value of the preferred stock.

 

Water On Demand, Inc. (“WODI”) Preferred Stock

 

On April 22, 2022, WODI designated 50,000,000 shares of authorized Preferred Stock at $0.0001 par value per share.

 

Series A

 

On October 13, 2022, WODI designated 1,000,000 shares of its authorized preferred stock as Series A preferred stock. The shares of Series A preferred stock are reserved for issuance to the holders of parent Company’s, OriginClear, Inc., Series Y preferred shares and issuable to the holders of the Series Y shares at a ratio of 500:1. The holders of Series A preferred shares shall not be entitled to dividends and shall not be entitled to a vote until such time as the Series A preferred shares are converted to common shares. Each share of Series A preferred stock shall be convertible, at any time at the conversion ratio of 50:1, or such other rate as determined by the Board, provided, however that at no time shall the total number of issued and outstanding Series A preferred shares, on a converted basis, be less than ten percent (10%) (‘Dilution Floor’) of the total authorized shares of common stock (on a fully diluted basis) based upon an anticipated sale of $20,000,000 in Series Y shares. The dilution floor shall be adjusted proportionately based upon the actual number of Series Y shares sold. On November 7, 2022, WODI filed an Amended and Restated Certificate of Incorporation and effected a 20:1 reverse stock split with respect to the common shares and the Series A preferred shares.

 

During the six months ended June 30, 2023, WODI issued an aggregate of 209 shares of its Series A preferred stock to certain holders of the Company’s Series Y preferred stock at par value of $0.0001. As of June 30, 2023, there were 1,684 shares of Series A preferred stock issued and outstanding.

 

Valuation

 

The Series A preferred shares were valued by an independent valuation expert based on a Probability Weighted Expected Return Methodology (“PWERM”) with an underlying Discounted Cash Flow (“DCF”) analysis.

 

The following parameters were considered in this analysis:

 

1.Two settlement options - either a merger occurs with the SPAC and the likelihood of it occurring or the merger does not occur.

 

2.Three main tranches of valuation dates were considered based on the dates of bulk issuances of shares.

 

3.SPAC offer value – which was based on management’s representations of the terms under negotiation during the time of issuances.

 

4.Base value of WODI – which was supported by a market analysis completed by management at the time of implementing the Reg A offering and a subsequent increase in base value in Q2, 2023 based on the estimated fair value of the Modular Water Systems assets contributed to the business.

 

5.Timing of a settlement event/conversion event for the Series A shares under the two settlement options.

 

6.The expected outstanding issuance of Series Y and convertible debt as of settlement

 

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Based on the above, the value of WODI Series A preferred shares were determined to be as follows:

 

Valuation Date  Fair Value of
 shares
 
12/28/2022  $56.68 
02/08/2023  $106.67 
06/15/2023  $266.73 

 

Out of the total 209 shares issued during the six months ended June 30, 2023, 201 shares were issued in Q1, 2023 and were valued at $106.67 per share, and 8 shares which were issued in Q2, 2023 were valued at $266.73 per share, for an aggregate expense of $23,588 for the six months ended June 30, 2023 and recorded as preferred stock incentive compensation in the consolidated financial statements.

 

Series B

 

On April 28, 2023, WODI designated 1,000,000 shares of its authorized preferred stock as Series B preferred stock. The shares of Series B preferred stock have an initial issuance value of $5.00 per share and are reserved for issuance to the holders of parent Company’s, OriginClear, Inc., Series X preferred shares and other direct issuances at the discretion of the WODI board of directors. The holders of Series B preferred shares shall not be entitled to dividends and shall not be entitled to a vote until such time as the Series B preferred shares are converted to common shares. Each share of Series B preferred stock shall be convertible, at any time per terms of the Series B Certificate of Designation, provided, however that at no time shall the total number of issued and outstanding Series B preferred shares, on a converted basis, be less than 2.5 percent (2.5%) (‘Dilution Floor’) of the total authorized shares of common stock (on a fully diluted basis) based upon an anticipated issuance of $5,000,000 in Series B shares. The dilution floor shall be adjusted proportionately based upon the actual number of Series B shares. During the six months ended June 30, 2023, WODI issued an aggregate of 367,400 shares of its Series B preferred stock with a par value of $0.0001, to certain holders of the Company’s Series X preferred stock and holders of WODI Note Purchase Agreements. As of June 30, 2023, there were 367,400 shares of Series B preferred stock issued and outstanding.

 

Valuation

 

The Series B preferred shares were valued by an independent valuation expert based on a Probability Weighted Expected Return Methodology (“PWERM”) with an underlying Discounted Cash Flow (“DCF”) analysis.

 

The following parameters were considered in this analysis:

 

1.Two settlement options - either a merger occurs with the SPAC and the likelihood of it occurring or the merger does not occur.

 

2.SPAC offer value – which was based on management’s representations of the terms under negotiation during the time of issuances.

 

3.Base value of WODI – which was supported by a market analysis completed by management at the time of implementing the Reg A offering and a subsequent increase in base value in Q2, 2023 based on the estimated fair value of the Modular Water Systems assets contributed to the business.

 

4.Timing of a settlement event/conversion event for the Series A shares under the two settlement options.

 

5.The expected outstanding issuance of Series Y and convertible debt as of settlement

 

Based on the above, the value of WODI Series B preferred shares were determined to be as follows:

 

Valuation Date  Fair Value of
 shares
 
06/27/2023  $0.36 

 

For the six months ended June 30, 2023, the shares were valued at $0.36 per share, for an aggregate expense of $132,264 and recorded as preferred stock incentive compensation in the consolidated financial statements.

 

Series C

 

On October 13, 2022, the Board of Directors authorized the issuance of 1,000,000 shares of Series C preferred stock, par value $0.0001 per share, to T. Riggs Eckelberry (the “Holder”) in exchange for his continued employment with the Company. The Holder of Series C preferred stock is not entitled to receive dividends, is not entitled to any liquidation preference and shares of Series C preferred stock does not have any conversion rights. The Holder of Series C preferred shares shall vote with the holders of the common shares on an as converted basis. However, as long as any shares of Series C preferred shares are outstanding, the Company shall not, without the affirmative vote of the Holders of a majority of the then outstanding shares of the Series C preferred shares directly and/or indirectly (a) alter or change adversely the powers, preferences or rights given to the Series C preferred shares or alter or amend this Certificate of Designation, (b) amend its Articles of Incorporation or other charter documents in any manner that adversely affects any rights of the Holders, (c) increase the number of authorized shares of Series C preferred shares, or (d) enter into any agreement with respect to any of the foregoing. Notwithstanding the foregoing, the Holder shall be entitled to vote a number of shares equal to fifty-one percent (51%) of the total number of voting shares. As of June 30, 2023, there were 1,000,000 shares of Series C preferred stock outstanding with a value of $100, held by Mr. Eckelberry.

 

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OriginClear, Inc. Common Stock

 

On October 20, 2022, the Company entered into an Equity Financing Agreement (“Financing Agreement”) with GHS Investments, LLC (“GHS”), whereby GHS agreed to purchase, at the Company’s sole discretion, up to $25,000,000 worth of the shares of the Company’s common stock (the “Shares”), par value $0.0001 per share. In accordance with the terms of the Financing Agreement and the Registration Rights Agreement (“Registration Agreement”) dated October 20, 2022 between the Company and GHS, the Company was required to register the Shares on Form S-1 with the Securities and Exchange Commission as a condition precedent to GHS’s obligation to close on the purchase of the Shares. On December 27, 2022, the Securities and Exchange Commission issued a Notice of Effectiveness of the Registration Statement filed on Form S-1 (File Number 333-268608) for OriginClear, Inc. Per Financing Agreement, during the six months ended June 30, 2023, the Company received an aggregate of $130,584 in equity financing and issued an aggregate of 18,645,028 shares of the Company’s common stock to GHS.

 

Six Months Ended June 30, 2023

 

The Company issued 18,645,028 shares of common stock for cash, through an equity financing agreement for a total aggregate of $130,584 based upon conversion prices ranging from $0.0064 to $0.00816. 

 

The Company issued 55,788,402 shares of common stock upon conversion of convertible promissory note in the amount of principal of $91,000, plus accrued interest of $76,365, for a total aggregate of $167,365 based upon a conversion price of $0.0085. The shares were issued within the terms of the agreements and no gain or loss was recognized.

 

The Company issued 45,217,435 shares of common stock for services at fair value of $424,926, at share prices ranging from $0.0051 - $0.0135. 

 

The Company issued 498,280 shares of common stock for Series O preferred stock dividends payable. 

 

The Company issued 11,584,932 shares of common stock for alternate vesting at a fair value of $1,158.

 

The Company issued 265,181,982 shares of common stock for settlement of conversion agreements at a fair value of $26,518. 

 

The Company issued 478,402,031 shares of common stock upon conversion of $2,510,000 of preferred stock. The shares were issued within the terms of the agreements and no gain or loss was recognized.

 

The Company redeemed 589,253,845 shares of common stock at a market price of $0.01 per share in the amount of $58,925.

 

Six Months Ended June 30, 2022

 

The Company issued 12,461,909 shares of common stock for the settlement of convertible promissory notes in an aggregate principal amount of $69,900, plus interest in the amount of $49,734, for a total aggregate of $119,634 based upon a conversion price of $0.00955.

 

The Company issued 24,845,550 shares of common stock for services at fair value of $522,535, at share prices ranging from $0.0134 - $0.0319.

 

The Company issued 720,665 shares of common stock for Series O preferred stock dividends payable.

 

The Company issued 131,282,467 shares of common stock for settlement of conversion agreements at a fair value of $13,128.

  

The Company issued 129,276,280 shares of common stock upon conversion of 1,557.847 shares of preferred stock.

 

Water On Demand, Inc. (‘WODI’) Common Stock

 

On February 17, 2023, the Securities and Exchange Commission qualified the Offering Circular for the offering of securities by WODI pursuant to Regulation A offering (the “Reg A offering”). The Reg A Offering was intended to accumulate capital for WODI to direct toward WOD projects.

 

On March 9, 2023, the Company announced that it launched a limited preview of the Reg A offering for WODI.

 

As of June 26, 2023 (the “Effective date”), the Company announced it suspended the sale of securities under the Reg A offering for WODI. As of the Effective Date, 12,300 shares were sold for total proceeds of $61,500. The Company booked a receivable in the amount of $27,694 for funds raised in the Reg A offering that were not yet cleared as of June 30, 2023. Prior to the Effective date, 7,500 shares of common stock were issued through the Reg A offering.

 

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4. OPTIONS AND WARRANTS

 

Restricted Stock to CEO

 

Between May 12, 2016, and January 1, 2022, the Company entered into Restricted Stock Grant Agreements (“the RSGAs”) with its Chief Executive Officer, Riggs Eckelberry, to create management incentives to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the RSGAs are performance based shares. The RSGAs provides for the issuance of up to an aggregate of 242,109,214 shares of the Company’s common stock to Mr. Eckelberry provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period as reported in the Company’s quarterly or annual financial statements, the Company will issue up to an aggregate of 121,054,607 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported in the Company’s SEC Reports, the Company will issue up to an aggregate of 121,054,607 shares of its common stock. The Company has not recognized any costs associated with the milestones, because achievement is not probable. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

  

Restricted Stock to the Board, Employees and Consultants

 

Between May 12, 2016, and August 4, 2022, the Company entered into Restricted Stock Grant Agreements (“the BEC RSGAs”) with its members of the Board, employees, and consultants to create management incentives to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the BEC RSGAs are performance based shares. The BEC RSGAs provide for the issuance of up to 281,686,042 shares of the Company’s common stock to employees and consultants provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period as reported in the Company’s quarterly or annual financial statements, the Company will issue up to an aggregate of 140,843,021 shares of its common stock; b) If the Company’s consolidated operating profit Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC reports, the Company will issue up to an aggregate of 140,843,021 shares of its common stock. The Company has not recognized any costs associated with the milestones, because achievement is not probable. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

  

On August 14, 2019, the Board of Directors approved an amendment to the RSGAs and BEC RSGAs to include an alternative vesting schedule for the Grantees and on January 26, 2022, the Company amended the procedures for processing the RSGAs and BEC RSGAs. Once a Grantee is eligible to participate in alternate vesting, then they will be added to the list of alternate vestees, enlarging the pool of vestees among which, 10% of stock sales that are allowed under the agreement is divided for the next year. The Company then (i) calculates the value of the Company common stock traded in the year immediately prior to the vesting year, using daily adjusted close and volume, as quoted on the public securities trading market on which the Company’s common stock is then traded (ii) determines the cost basis of the shares, which shall be the closing price quoted on the public securities trading market, quoted on the first trading day of the vesting year which will be the grantee’s cost basis, and (iii) applies the 10% calculation and divides it into the number of qualifying alternate vestees, giving the gross number of shares available to each Grantee. For each alternate vestee for each year in which there occurs a vesting or a potential vesting, the Company (i) does a 90-day lookback from the first day of the latest vesting month, to limit cumulative vesting of shares for each alternate vestee for the 90-day period to 1% of total Company shares of common stock outstanding for the period, using the then current figure for shares outstanding at the time of the lookback; (ii) places the excess shares (the “Overlimit Shares”) in suspense for issuance in the next 90-day period so that in each future 90-day period they may be issued, and (iii) if on the 90-day lookback, cumulative issuances are less than 1% of shares outstanding, the Company will add the shares from previous 90-day lookback, if any. For the avoidance of doubt, the Company will not record any Overlimit Shares as vested until such as time as they have been finally issued. If the fair market value of the Company’s common stock on the date the shares are vested is less than the fair market value of the Company’s common stock on the effective date of the RSGA or BEC RSGA, then the number of vested shares issuable (assuming all conditions are satisfied) shall be increased so that the aggregate fair market value of vested shares issuable on the vesting date equals the aggregate fair market value that such number of shares would have had on the effective date. Upon the occurrence of a Company performance goal, the right to participate in the alternate vesting schedule will terminate, and the vesting of the remaining unvested shares will be as set forth under the restricted stock award agreement. During the six months ended June 30, 2023, per electing and qualifying under the alternative vesting schedule, the Company issued an aggregate of 2,754,073 shares of Company’s common stock relating to the RSGAs and an aggregate of 8,830,859 shares of Company’s common stock relating to the BEC RSGAs. 

 

20

 

 

Warrants

 

During the six months ended June 30, 2023, the Company issued 2,930,400 purchase warrants, associated with the preferred stocks. A summary of the Company’s warrant activity and related information follows for the six months ended June 30, 2023:

 

   June 30, 2023 
   Number of
Warrants
   Weighted
average
exercise
price
 
Outstanding - beginning of period   93,344,989   $0.1217 
Granted   2,930,400   $0.125 
Exercised   
-
    
-
 
Expired   (25,400,000)  $(0.05)
Outstanding - end of period   70,875,389   $0.1469 

 

At June 30, 2023, the weighted average remaining contractual life of warrants outstanding:

 

    June 30, 2023 
            Weighted
Average
 
            Remaining 
Exercisable   Warrants   Warrants   Contractual 
Prices   Outstanding   Exercisable   Life (years) 
$0.02    600,000    600,000    3.18 
$0.10    5,000,000    5,000,000    0.39 - 3.64 
$0.25    9,806,000    10,006,000    0.46 - 3.50 
$0.0275    8,727,273    8,727,273    7.91 
$0.125    45,180,616    44,930,216    3.50 - 4.50 
$1.00    1,561,500    1,561,500    2.00 - 2.24 
      70,875,389    70,875,389      

 

The derivative liability recognized in the financial statements for the warrants as of June 30, 2023 was $427,768.

 

At June 30, 2023, the aggregate intrinsic value of the warrants outstanding was $0.

  

5. CONVERTIBLE PROMISSORY NOTES

 

OriginClear, Inc.

 

As of June 30, 2023, the outstanding convertible promissory notes are summarized as follows:

 

Convertible Promissory Notes  $2,835,755 
Less current portion   2,621,983 
Total long-term liabilities  $213,772 

  

21

 

 

Maturities of long-term debt for the next three years are as follows:

 

Period Ending June 30,  Amount 
2023   878,283 
2024   1,743,700 
2025   213,772 
   $2,835,755 

 

On various dates from November 2014 through April 2015, the Company issued unsecured convertible promissory notes (the “2014-2015 Notes”), that matured on various dates and were extended for an additional sixty (60) months from the effective date of each Note. The 2014-2015 Notes bear interest at 10% per year. The maturity dates were extended to November 2023 through April 2024. The 2014-2015 Notes may be converted into shares of the Company’s common stock at conversion prices ranging from the lesser of $4,200 to $9,800 (subject to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the lowest trade price on any trade day following issuance of the 2014-2015 Notes. In addition, for as long as the 2014-2015 Notes or other convertible notes in effect between the purchaser and the Company are outstanding, if the Company issues any security with terms more favorable than the terms of the 2014-2015 Notes or such other convertible notes or a term was not similarly provided to the purchaser of the 2014-2015 Notes or such other convertible notes, then such more favorable or additional term shall, at the purchaser’s option, become part of the 2014-2015 Notes and such other convertible notes. The conversion feature of the 2014-2015 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the 2014-2015 Notes. During the period ended June 30, 2023, the Company issued 55,788,042 shares upon conversion of principal in the amount of $91,000, plus accrued interest of $76,365. As of June 30, 2023, the 2014-2015 Notes had an aggregate remaining balance of $683,700, which is short term. 

 

The unsecured convertible promissory notes (the “OID Notes”) had an aggregate remaining balance of $184,124, plus accrued interest of $13,334. The OID Notes included an original issue discount and one-time interest, which has been fully amortized. The OID Notes matured on December 31, 2017, which were extended to June 30, 2023. The OID Notes were convertible into shares of the Company’s common stock at a conversion price initially of $30,620. After the amendment, the conversion price changed to the lesser of $5,600 per share, or b) fifty percent (50%) of the lowest trade price of common stock recorded since the original effective date of this note, or c) the lowest effective price per share granted to any person or entity after the effective date. The conversion feature of the OID Notes was considered a derivative in accordance with current accounting guidelines, because of the reset conversion features of the OID Notes. As of June 30, 2023, the remaining balance on the OID Notes was $62,275, which is short term.  

 

The Company issued various, unsecured convertible promissory notes (the “2015 Notes”), on various dates with the last of the 2015 Notes being issued in August 2015. The 2015 Notes matured and were extended from the date of each tranche through maturity dates ending on February 2024 through March 2024, and April 2024 through August 2024. The 2015 Notes bear interest at 10% per year. The 2015 Notes are convertible into shares of the Company’s common stock at conversion prices ranging from the lesser of $1,400 to $5,600 (subject to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the lowest trade price on any trade day following issuance of the 2015 Notes. The conversion feature of the 2015 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the 2015 Notes. As of June 30, 2023, the 2015 Notes had an aggregate remaining balance of $1,200,000, of which $1,000,000 is short term and $200,000 is long term. 

  

The Company issued a convertible note (the “Dec 2015 Note”) in exchange for accounts payable in the amount of $432,048, which could be converted into shares of the Company’s common stock after December 31, 2015. The Dec 2015 Note was accounted for under ASC 470, whereby, a beneficial conversion feature was recorded at time of issuance. The Dec 2015 Note did not meet the criteria of a derivative, and was accounted for as a beneficial conversion feature, which was amortized over the life of the Dec 2015 Note and recognized as interest expense in the financial statements. On January 1, 2016, the Dec 2015 Note met the criteria of a derivative and was accounted for under ASC 815. The Dec 2015 Note has zero stated interest rate, and the conversion price shall be equal to 75% of the average three lowest last sale prices traded during the 25 trading days immediately prior to conversion. As of June 30, 2023, the remaining balance on the Dec 2015 Note was $167,048, which is short term.  

 

22

 

 

The Company issued a convertible note (the “Sep 2016 Note”) in exchange for accounts payable in the amount of $430,896, which could be converted into shares of the Company’s common stock after September 15, 2016. The Sep 2016 Note was accounted for under ASC 470, whereby, a beneficial conversion feature was recorded at time of issuance. The Sep 2016 Note met the criteria of a derivative and was accounted for under ASC 815. The Sep 2016 Note has zero stated interest rate, and the conversion price shall be equal to 75% of the average three lowest last sale prices traded during the 25 trading days immediately prior to conversion. The Sep 2016 Note did not meet the criteria of a derivative at the date of the issuance, and was accounted for as a beneficial conversion feature, which was amortized over the life of the Sep 2016 Note and recognized as interest expense in the financial statements. The conversion feature of the Sep 2016 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion feature of the Sep 2016 Note. As of June 30, 2023, the remaining balance on the Sep 2016 Note was $430,896, which is short term. 

  

The Company issued two (2) unsecured convertible promissory notes (the “Apr & May 2018 Notes”), in the aggregate amount of $300,000 on April 2, 2018 and May 31, 2018. The Apr & May 2018 Notes had maturity dates of April 2, 2019 and May 31, 2019, respectively. The Apr & May 2018 Notes bear interest at 10% per year. The Apr & May 2018 Notes may be converted into shares of the Company’s common stock at a variable conversion price of 50% of the lesser of the lowest trading price twenty-five (25) trading days prior to conversion. The conversion feature of the Apr & May 2018 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Notes. On March 13, 2019, the Company entered into a settlement agreement with the investor in the amount of $570,000, based on the outstanding balance due and payable under the Apr & May 2018 Notes. The Company set up a reserve of 2,630,769 shares of common stock of the Company for issuance upon conversion by the investor of the amounts owed under the Notes, in accordance with the terms of the Notes, including, but not limited to the beneficial ownership limitations contained in the Notes. In addition to the foregoing, upon the sale by the investor of the settlement shares as delivered to the investor by the Company, resulting in total net proceeds less than the settlement value, the investor is entitled to additional settlement shares of the Company’s common stock. If after the investor has sold all settlement shares, the investor delivers a written notice to the Company certifying that the investor is entitled to additional settlement shares of the Company’s common stock (the “Make-Whole Shares”). The number of make-whole shares being equal to the greater of ((i) zero and (ii) the quotient of (1) the difference of (x) the settlement value with respect to each sale of shares by the Investor after the delivery of the Settlement Shares, minus (y) the aggregate net consideration received by the Investor from the resale of all shares of common stock issued by the Company, divided by (2) the average trailing closing price for ten (10) trading days for the shares immediately preceding the date of delivery of the make-whole shares. As of June 30, 2023, the remaining balance on the May 2018 Note was $218,064, which is short term.  

 

The Company entered into an unsecured convertible promissory note (the “Nov 20 Note”), on November 19, 2020 in the amount of $50,000. The Company received funds in the amount of $50,000. The Nov 20 Note had an original maturity date of November 19, 2021 and was extended for an additional sixty (60) months from the maturity date. The Nov 20 Note bears interest at 10% per year. The Nov 20 Note may be converted into shares of the Company’s common stock at a lesser price of $0.05 per share or (b) fifty percent (50%) of the lowest trade price of common stock recorded on any trade after the effective date, or (c) the lowest effective price per share granted. In addition, for each conversion, in event that shares are not delivered by the fourth business day (inclusive of the day of conversion), a penalty of $2,000 per day shall be assessed for each day after the third business day until the shares are delivered. The conversion feature of the Nov 20 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Note. As of June 30, 2023, the remaining balance on the Nov 20 Note was $13,772, which is long term. 

  

The Company entered into an unsecured convertible promissory note (the “Jan 21 Note”), on January 25, 2021 in the amount of $60,000. The Company received funds in the amount of $60,000. The Jan 21 Note had an original maturity date of January 25, 2022 and was extended for an additional sixty (60) months from the maturity date. The Jan 21 Note bears interest at 10% per year. The Jan 21 Note may be converted into shares of the Company’s common stock at a conversion price equal to the lower of (a) $0.05 per share, (b) fifty percent (50%) of the lowest trade price of common stock recorded on any trade after the effective date, or (c) the lowest effective price per share granted. In addition, for each conversion, in event that shares are not delivered by the fourth business day (inclusive of the day of conversion), a penalty of $2,000 per day shall be assessed for each day after the third business day until the shares are delivered. The conversion feature of the Jan 25 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $3,743 during the year ended December 31, 2022. As of June 30, 2023, the balance of the Jan 21 Note was $60,000, which is short term. 

 

23

 

 

We evaluated the financing transactions in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion feature of the convertible promissory notes was not afforded the exemption for conventional convertible instruments due to its variable conversion rate. The note has no explicit limit on the number of shares issuable, so they did not meet the conditions set forth in current accounting standards for equity classification. The Company elected to recognize the note under paragraph 815-15-25-4, whereby, there would be a separation into a host contract and derivative instrument. The Company elected to initially and subsequently measure the note in its entirety at fair value, with changes in fair value recognized in earnings. The Company recorded a derivative liability representing the imputed interest associated with the embedded derivative. The derivative liability is adjusted periodically according to the stock price fluctuations. 

 

The derivative liability recognized in the financial statements for the convertible promissory notes as of June 30, 2023 was $6,325,257.

 

Water On Demand, Inc.

 

In December 2022, WODI raised capital and issued convertible secured promissory notes in the amount of $1,347,500 to investors with 10% interest per annum to acquire the equity interests in Fortune Rise Acquisition Corporation (the “SPAC”) for the purchase price of $400,000 and to pay off the promissory notes the SPAC owed to sellers. Per the terms and conditions of the convertible promissory notes, all unpaid principal, together with any unpaid and accrued interest shall be due and payable on the earlier of the twelve (12) month of the date of the Notes (the “Maturity Date”) provided, that WODI shall have the option to extend the Maturity Date for up to two (2) six-month extensions, or (ii) when, upon the occurrence and during the continuance of an event of default.

 

During the six months ended June 30, 2023, WODI raised additional capital of $4,994,000 and an investor exchanged the Company’s Series X preferred stock in the amount of $250,000 and Series R preferred stock in the amount of $100,000 for a WODI convertible secured promissory note. Also during the period ended June 30, 2023, per settlement, conversion and redemption agreements with WODI shareholders, an aggregate of 589,253,845 shares of the Company’s common stock were redeemed at a market price of $0.01, which was added to the cash value of the shareholders’ investment to purchase WODI convertible secured promissory notes. The loss relating to these settlement and conversion agreements of $6,037,589 was accounted for in the consolidated statements of operations. As of June 30, 2023, WODI had outstanding convertible secured promissory notes in the amount of $12,729,089.

 

6. REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Equipment Contracts

 

Revenues and related costs on equipment contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.

  

The following table represents a disaggregation of revenue by type of good or service from contracts with customers for the six months ended June 30, 2023.

 

   Six Months Ended 
   June 30, 
   2023   2022 
Equipment Contracts  $1,980,345   $3,383,906 
Component Sales   378,872    677,963 
Waste Water Treatment Systems   1,124,075    301,770 
Pump Stations   305,712    
-
 
Rental Income   13,146    13,146 
Services Sales   33,015    25,287 
Commission & Training   1,913    
-
 
   $3,837,078   $4,402,072 

 

24

 

 

Revenue recognition for other sales arrangements, such as sales for components, and service sales will remain materially consistent.

 

Contract assets represents revenues recognized in excess of amounts billed on contracts in progress. Contract liabilities represents billings in excess of revenues recognized on contracts in progress. Assets and liabilities related to long-term contracts are included in current assets and current liabilities in the accompanying balance sheets, as they will be liquidated in the normal course of the contract completion. The contract asset for the six months ended June 30, 2023 and the year ended December 31, 2022, was $1,089,285 and $1,479,491, respectively. The contract liability for the six months ended June 30, 2023 and the year ended December 31, 2022, was $723,894 and $932,458, respectively.

 

7. FINANCIAL ASSETS

  

Fair value investment in Securities

 

On November 12, 2021, the Company served a conversion notice to WTII and recorded additional interest and fees of $15,988 through that date, according to the terms of the securities purchase agreement for an aggregate of $149,867. The Note was converted into 45,208,649 shares of WTII common stock. As of June 30, 2023, the investment in securities was recorded at fair value in the amount of $22,604, with an unrealized loss of $4,521

 

On May 15, 2018, the Company received 4,000 shares of WTII Series C convertible preferred stock for the use of OriginClear, Inc. technology associated with their proprietary electro water separation system. Each share of Series C convertible preferred stock is convertible into one thousand (1,000) shares of WTII common stock. The stock was valued at fair market value of $0.0075 for a price of $30,000 on the date of issuance. The Company analyzed the licensing agreement using ASU 606 to determine the timing of revenue recognition. The licensing of the intellectual property (IP) is distinct from the non-license goods or services and has significant standalone functionality that provides a benefit or value. The functionality will not change during the license period due to the licensor’s activities. Because the significant standalone functionality was delivered immediately, the revenue was recognized in the financial statements as of June 30, 2018. As of June 30, 2023, the fair value of the preferred shares was $2,400, and had a loss in fair value of $0.

   

8. LOANS PAYABLE

 

Secured Loans Payable

 

The Company entered into short term loans with various lenders for capital expansion secured by the Company’s assets in the amount of $1,749,970, which included finance cost of $624,810. The finance cost was amortized over the terms of the loans, which have various maturity dates ranging from October 2018 through February 2019. As of December 31, 2020, the finance cost was fully amortized. The term of the loans ranged from two months to six months. The net balance as of June 30, 2023 was $30,646.

   

9. WATER ON DEMAND INC.

 

Water On Demand, Inc. (“WODI”) was incorporated in the state of Nevada on April 22, 2022. WODI, with the support of its parent, OriginClear, Inc (the “Company”), is developing a new outsourced water treatment business called “Water On Demand”: or “WOD”.  The WOD model intends to offer private businesses the ability to pay for water treatment and purification services on a per-gallon basis. This is commonly known as Design-Build-Own-Operate or “DBOO”. WODI intends to work with regional water service companies to build and operate the water treatment systems it finances.  On March 23, 2022, WODI announced that it was evaluating the first pilot opportunity, a 50,000 gallon per day wastewater treatment project.

 

On November 16, 2022, WODI filed a Form 1-A Offering Circular for an offering under Regulation A (the “Offering”) of the Securities Act of 1933 with the U.S. Securities and Exchange Commission. The purpose of the Offering is to allow potential investors the opportunity to invest directly in WODI. The Offering has a minimum investment of $1,000 and will be on a best-efforts basis.

 

25

 

 

On December 22, 2022, WODI entered into a Membership Interest Purchase and Transfer Agreement (the “Purchase Agreement”) with Ka Wai Cheung, Koon Lin Chan, and Koon Keung Chan (each a “Seller”, and collectively, the “Sellers”) and Fortune Rise Sponsor LLC, a Delaware limited liability company (the “Sponsor”), pursuant to which WODI purchased 100 membership interests in the Sponsor (“Purchased Interests”) from the Sellers, which constitutes 100% of the membership interests in the Sponsor. The Sponsor owns 2,343,750 shares out of 2,443,750 shares of the issued and outstanding shares of Class B common stock (the “Class B Common Stock”) of Fortune Rise Acquisition Corporation, a Delaware Corporation (“FRLA” or the “SPAC”). On December 29, 2022, the Company announced that its subsidiary, Water On Demand, Inc. has closed the acquisition of Fortune Rise Sponsor, LLC, which is the sponsor of Fortune Rise Acquisition Corp.

 

On December 22, 2022, WODI paid a total of $1,137,267 to the Sellers which included a total of $400,000 to purchase the membership interest in Class B Common Stock of the SPAC and $737,267 for compensating the payment made by the Sellers on November 4, 2022, towards the first extension of the SPAC through February 5, 2023. In connection with the Extension Payment, the SPAC issued unsecured promissory notes to the Sellers. As of December 31, 2022, the $737,267 amount was reflected as Notes Payable to related party on the consolidated balance sheet of the SPAC.

  

The SPAC is a blank check company incorporated in February 2021 as a Delaware corporation formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. The SPAC is a “shell company” as defined under the Exchange Act of 1934, as amended, because it has no operations and nominal assets consisting almost entirely of cash. The SPAC will not generate any operating revenues until after the completion of its initial business combination, at the earliest.

 

On December 29, 2022, pursuant to a Membership Interest Purchase and Transfer Agreement and Securities Transfer Agreement with the members of the Sponsor, WODI acquired the membership interests of the Sponsor and became the beneficial owner of 2,343,750 shares of Class B Common Stock of the SPAC, each of which is exercisable into one share of Class A Common Stock of the SPAC. The purchase price for the membership interests was $400,000. To acquire the equity interests in the SPAC for the purchase price of $400,000, WODI issued convertible secured promissory notes to investors at 10% interest per annum. Per the terms and conditions of the convertible promissory note, all unpaid principal, together with any unpaid and accrued interest shall be due and payable on the earlier of the twelve (12) month of the date of the Note (the “Maturity Date”) (provided, WODI shall have the option to extend the Maturity Date for up to two (2) six-month extensions, or (ii) when, upon the occurrence and during the continuance of an Event of Default.

  

On January 5, 2023, WODI signed a non-binding Letter of Intent (the “LOI”) with Fortune Rise Acquisition Corporation, (“FRLA” collectively with WODI, the “Parties”). The LOI is not binding on the Parties and is intended solely to guide good-faith negotiations toward a definitive business combination agreement. The Parties will work together in good faith with their respective advisors to agree on a structure for the business combination that is most expedient to the consummation of the acquisition, which may result in a new (merged) entity. Pursuant to the LOI, if a business combination were to be consummated and approved, all of the outstanding equity securities of WODI, including all shares of common stock, preferred stock, outstanding options and warrants will convert into new equity of the merged entity.

 

On February 7, 2023, FRLA and OriginClear Inc. announced that WODI deposited $977,500 (the “Second Extension Payment”) into FRLA’s trust account for its public shareholders, representing $0.10 per public share, which enables FRLA to extend the period of time it has to consummate its initial business combination by an additional three months from February 5, 2023 to May 5, 2023 (the “Second Extension”).

 

WODI assumed the obligation to make any necessary extension payments in connection with the extension of the period of time in which the SPAC may consummate its initial business combination as described in the SPAC’s S-1 Registration Statement, including the three-month extension from November 5, 2022 to February 5, 2023, the Second Extension for an additional three months from February 5, 2023 to May 5, 2023 and a final extension for an additional six months from May 5, 2023 to November 5, 2023.

 

26

 

 

On April 10, 2023, at the Special Meeting, a total of 10,514,410 (or 81.61%) of FRLA’s issued and outstanding shares of Class A common stock and Class B common stock held of record as of March 3, 2023, were present either in person or by proxy, which constituted a quorum. In that FRLA shareholders agreed to an extension of the period of time it has to consummate its initial business combination by an additional six months from May 5, 2023 to November 5, 2023. FRLA’s stockholders voted on to approve and adopt the extension amendment which received sufficient votes (more than 65%) for approval.

 

Promissory Notes

 

Since buying the sponsorship interest in the SPAC on December 22, 2022 through June 30, 2023, WODI and the Company made payments on behalf of the SPAC in the aggregate amount of $2,650,986. As of June 30, 2023, WODI and the Company received an aggregate of $2,650,986 in unsecured promissory notes (the “SPAC Notes”) from the SPAC in exchange for the payments made on behalf of the SPAC to meet its operating expenses and the extension payments. The SPAC Notes are non-interest bearing and payable (subject to the waiver against SPAC trust provisions) on the earlier of (i) consummation of the SPAC initial business combination; and (ii) the date of the liquidation of the SPAC. The principal balance of each SPAC Note may be prepaid at any time, at the election of the SPAC.

 

As of the date of this filing, the Company and WODI are working with FRLA on extending the SPAC beyond November 5, 2023 through at least March 31, 2024, to give the Company adequate time to complete all the necessary administrative and regulatory steps, including filing of the registration statement and timely respond to satisfy potential comments, from regulatory bodies to consummate the business combination. Management continues to estimate the likelihood of the merger at 50%.

 

Impairment of receivable

 

Although the payments made on behalf of the SPAC are amounts receivable to WODI, for the period ended June 30, 2023, WODI considered the aggregate amount of $2,650,986 for the SPAC Notes to be impaired and recorded it as an expense on the consolidated income statements, as it is deemed probable that the SPAC may not have funds to pay all of the Class A shareholders back with interest and WODI for the amounts advanced to the SPAC.

 

In the event of WODI successfully merging with the SPAC, all amounts paid by WODI on behalf of the SPAC, including any future payments made until such merger is fully consummated will be received back by WODI.

 

Integration of MWS into WODI  

 

On April 14, 2023 (the “Effective Date”), WODI entered into an Asset Purchase Agreement with the Company, whereby it agreed to purchase all of the assets related to the Company’s Modular Water Systems (“MWS”) business, including licenses, technology, intellectual property, contracts, business models, patents and other assets in exchange for 6,000,000 shares of WODI common stock. The assets included MWS accounts receivables and accounts payables as of April 14, 2023 and an assignment of the Company’s existing global master license to the patents of inventor Daniel M. Early, P.E., who heads MWS, and the right to file patents for all additional inventions since 2018, when OriginClear created the MWS unit. Beginning on the Effective Date, all MWS transactions including revenue, accounts payable and accounts receivable were transferred from the Company’s Progressive Water Treatment, Inc. (“PWT”) subsidiary over to the Company’s WODI subsidiary. From the period beginning on the Effective Date and as of June 30, 2023, total MWS revenue was $670,420, accounts payable was $646,815 and accounts receivable was $531,709. All intercompany transactions related to the transactions were eliminated on the consolidated financial statements as of June 30, 2023.

 

Restricted Stock to WODI Board, Employees and Consultants

 

Between August 12, 2022, and June 22, 2023, WODI entered into Restricted Stock Grant Agreements (the “WODI RSGAs”) with its members of the Board, employees, and consultants to create management incentives to improve the economic performance of WODI and to increase its value. WODI RSGAs provide for the issuance of up to 14,550,000 shares of WODI common stock provided certain milestones and vesting are met in certain stages. The restricted shares may become fully vested and no longer subject to risk of forfeiture (“Vested Shares”) if WODI shares are uplisted to a National Exchange, then upon such uplisting, 25% of the restricted shares that shall vest and become Vested Shares and 6.25% each three-month period thereafter, subject to the following: (i) If WODI shares are traded on a National Exchange, then the amount of restricted shares which shall become Vested Shares during any three-month period shall not exceed an amount representing the greater of (a) 1% of the shares of common stock outstanding as shown by the most recent SEC Report published by WODI and (b) the average weekly reported volume of trading in the common stock on a national securities exchange during the previous four calendar weeks. (ii) If WODI shares are subsequently delisted and quoted on the over-the-counter market, including the OTCQB, then the amount of restricted shares which shall become Vested Shares during any three month period shall not exceed an amount representing 1% of the shares of common stock outstanding as shown by the most recent SEC Report published by WODI, or if WODI shares are traded on a national securities exchange, the greater of (b)(i) and the average weekly reported volume of trading in the common stock on a national securities exchange during the previous four calendar weeks. If WODI shares do not achieve listing on a national securities exchange within three years of the Effective Date, then the restricted shares shall vest and become Vested Shares at a rate equal to 25% on the three-year anniversary of the Effective Date and 6.25% each three-month period thereafter. WODI has not recognized any costs associated the WODI RSGAs because milestones and vesting have not been achieved. As the milestones are achieved, the shares shall become eligible for vesting and issuance.

 

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10. LINE OF CREDIT

 

During the six months ended June 30, 2023, the Company obtained a line of credit in the amount of $200,000 for one year, with an interest rate of 26.07%. During the period ended June 30, 2023, the Company paid principal in the amount of $44,506, which left a balance of $155,494. Also, during the period, the Company obtained a second credit line in the amount of $45,500. The total balance due at the end of the period was $200,994. During the period ended June 30, 2023, the Company paid interest in the amount of $11,986.

 

11. ASSETS HELD FOR SALE

  

On March 1, 2021, the Company issued an aggregate of 630 shares of Series T Preferred Stock to an accredited investor (the “Purchaser’’) per terms of a Securities Purchase Agreement (the “SPA”). Per the SPA, the Company agreed to sell to Purchaser, and Purchaser agreed to purchase from the Company, 630 shares of the Company’s Series T, and two-year cashless warrants to acquire 25,200,000 shares of the Company’s common stock, valued at $0.05 per share per terms of the SPA, which were exercisable at any time in whole or in part. The purchaser and the Company agreed that in lieu of the purchase price for the Series T, the Purchaser transferred to the Company real property, with an aggregate value agreed to be $630,000 based on an appraisal from an international independent company at that time. The real property consisted of residential real estate in Buenos Aires Argentina valued at $580,000, and eight undeveloped lots valued at $50,000 in Terralta private neighborhood development. The real property exchanged for 630 shares of Series T was recorded at $630,000 and reflected on the balance sheet as a long term asset for sale at that time.

   

The real property was listed for sale beginning in July 2021. However, based on indicator of impairment, during the year ended December 31, 2021, the Company adjusted the original value of the asset for sale from $630,000 to $514,000 and recorded an impairment of $116,000 in the consolidated financial statements.

 

During the period ended December 31, 2022, after evaluating several offers, the Company considered an offer for $400,000, which was $114,000 below the previously adjusted value and was indicative of the real estate market conditions in Buenos Aires Argentina. Based on that indicator of impairment, during the year ended December 31, 2022, the Company further adjusted the previous value of the asset for sale from $514,000 to $400,000 on the balance sheet and recorded an impairment of $114,000 in the consolidated financial statements. All Series T preferred stock was converted and the warrants associated with the Series T expired during the period ended December 31, 2022.

 

In January 2023, the Company accepted the offer and on April 8, 2023, a deed was executed for the sale of the property for $400,000. The agreed upon payment terms were; $235,000 initial payment and the remaining $165,000 to be paid over fifteen monthly installments of $11,000 each. The initial payment was received by SMS Argentina (“SMS”), an accounting and consulting firm that was appointed by the Company as the Power of Attorney for the property. From the proceeds, SMS remitted taxes due on the transaction to the Federal Administration of Public Income (“AFIP”), which administers taxation in Argentina. On June 21, 2023, the Company received a payment of $164,935, net of all taxes assessed by AFIP and other closing fees associated with the sale of the property totaling $65,493 and recorded a receivable of $169,572 for the remaining amount on the consolidated financial statements as of June 30, 2023.

 

12. EMPLOYEE RETENTION TAX CREDIT

 

Under the provisions of the extension of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) passed by the United States Congress and signed by the President, the Company was eligible for a refundable employee retention credit (the “ERTC”) subject to certain criteria. The Company’s subsidiary, Progressive Water Treatment applied for the ERTC and during the six months ended June 30, 2023, received an aggregate of $126,879 which was recognized in the financial statements as other income.

 

13. COMMITMENTS AND CONTINGENCIES

 

Facility Rental – Related Party

 

Our Dallas based subsidiary, PWT, rents an approximately 12,000 square foot facility located at 2535 E. University Drive, McKinney, TX 75069, with a current monthly rent of $8,500.

 

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Warranty Reserve

 

Generally, a PWT project is guaranteed against defects in material and workmanship for one year from the date of completion, while certain areas of construction and materials may have guarantees extending beyond one year. The Company has various insurance policies relating to the guarantee of completed work, which in the opinion of management will adequately cover any potential claims. A warranty reserve has been provided under PWT based on the opinion of management and based on Company history in the amount of $20,000 for six months ended June 30, 2023 and the year ending December 31, 2022.

 

Litigation

 

As of June 30, 2023, there were no material updates to the litigation matters with C6 Capital, LLC nor Auctus Fund, LLC as previously disclosed in the Form 10-K filed on April 17, 2023.

  

14. SUBSEQUENT EVENTS

 

Management has evaluated subsequent events according to the requirements of ASC TOPIC 855 and has determined that there are the following subsequent events:

  

Between July 5, 2023 and July 31, 2023, the Company issued to consultants an aggregate of 1,058,951 shares of the Company’s common stock.

  

Between July 5, 2023 and July 24, 2023, an aggregate of 13,463,778 shares of common stock were redeemed by the Company, and the redemption amount, together with cash paid by the redeeming stockholders, were used by the stockholders to purchase convertible secured promissory notes from WODI.

 

Between July 5, 2023 and August 4, 2023, WODI made payments on behalf of the SPAC in the aggregate amount of $345,000.

 

On July 12, 2023, the Company received an aggregate net amount of $9,548 in financing pertaining to the Equity Financing Agreement with GHS Investments, LLC (“GHS”) and issued an aggregate of 1,847,428 shares of the Company’s common stock to GHS.

 

On July 12, 2023, OriginClear, Inc. entered into a Confidential Settlement and Mutual Release Agreement (the “Settlement Agreement”) with Auctus Fund, LLC (“Auctus”) relating to the settlement and release of certain pending legal actions arising out of various loans and agreements between the Company and Auctus. Pursuant to the terms of the Settlement Agreement, the Company and Auctus have resolved all outstanding legal disputes and claims between them. The appeal that was pending in the United States Court of Appeals for the First Circuit and trial matter in the United States District Court for the District of Massachusetts have been terminated and all transactions and obligations thereunder between the Company and Auctus are null and void. The terms and conditions of the Settlement Agreement are confidential and have no impact on the financial condition or operations of the Company.

 

Between July 20, 2023 and August 4, 2023, holders of the Company’s Series Q preferred stock converted an aggregate of 40 Series Q shares into an aggregate of 9,088,176 shares of the Company’s common stock.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:

 

  business strategy;

 

  financial strategy;

 

  intellectual property;

 

  production;

 

  future operating results; and

 

  plans, objectives, expectations, and intentions contained in this report that are not historical.

 

All statements, other than statements of historical fact included in this report, regarding our strategy, intellectual property, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in this report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.

 

Organizational History

 

OriginClear, Inc. (“we”, “us”, “our”, the “Company” or “OriginClear”) was incorporated on June 1, 2007 under the laws of the State of Nevada. We have been engaged in business operations since June 2007. In 2015, we moved into the commercialization phase of our business plan having previously been primarily involved in research, development and licensing activities. Our principal offices are located at 13575 58th Street North, Suite 200, Clearwater, FL 33760. Our main telephone number is (727) 440-4603. Our website address is www.OriginClear.com. The information contained on, connected to or that can be accessed via our website is not part of this report.

 

Overview of Business

 

OriginClear is a water technology company which has developed in-depth capabilities over its 14-year lifespan. OriginClear structures itself as the Clean Water Innovation Hub™ and its mission is to incubate and grow valuable water properties that will disrupt the industry.

 

OriginClear’s assets, subsidiaries and product offerings consist of:

 

  Progressive Water Treatment Inc. (“PWT”) is a wholly-owned subsidiary based in Dallas, Texas, which is responsible for a significant percentage of the Company’s revenue, specializing in engineered water treatment solutions and custom treatment systems.

 

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  A worldwide, exclusive master license to the intellectual property of Daniel M. Early, consisting of five patents and related intellectual property, know-how and trade secrets (“Early IP”).

 

The brand, Modular Water Systems (MWS), featuring products differentiated by the Early IP and complemented with additional knowhow and trade secrets.

 

  OriginClear has incubated an outsourced water treatment business called Water On Demand (“WOD”). The WOD model intends to offer private businesses water self-sustainability as a service - the ability to pay for water treatment and purification services on a per-gallon basis. This is commonly known as Design-Build-Own-Operate (“DBOO”).
     
  On April 13, 2022, the Company’s Board of Directors approved the plan to spin off its WOD business into a newly formed wholly-owned subsidiary, Water On Demand Inc. (“WODI”), which will hold the assets, liabilities, intellectual property and business operations of the WOD business. WODI is designed to select projects, fully qualify them, provide financing for DBOO service contracts, and thereafter manage assets, contracts, clients, investors, strategic partners and vendors. The Company did not spin off the companies known as the WOD Subsidiaries. The funds the Company raises for these entities shall continue to be held by the Company and made available for use by WODI, to be deployed subject to a planned management contract. 

 

  On January 5, 2023, WODI signed a non-binding Letter of Intent with Fortune Rise Acquisition Corporation, a Delaware corporation (the “Fortune Rise”), under which Fortune Rise proposes to acquire all the outstanding securities of WODI, based on certain material financial and business terms and conditions being met.

 

  On April 14, 2023, WODI entered into an Asset Purchase Agreement with the Company, whereby it agreed to purchase all of the assets related to the Company’s “Modular Water Service” business, including licenses, technology, intellectual property, contracts, business models, patents and other assets in exchange for 6,000,000 shares of WODI common stock. The assets include a reissuance for a new ten-year term of OriginClear’s existing global master license to the five patents and related Intellectual Property of inventor Daniel M. Early, P.E., who heads Modular Water, and the right to file patents for all additional inventions since 2018, when OriginClear created the unit. MWS is in commercial operation and operates as a division of WODI.

 

Recently, OriginClear commissioned a valuation of the Early IP, which yielded a nominal value between $26,637,185 and $53,224,807. According to the valuation, the Projected Total Available Market in 2026 exceeds $8 Billion.

 

“This is an example of OriginClear successfully incubating and growing a healthy business over five years, and selling it for many times its investment,” said Riggs Eckelberry, OriginClear CEO. “We anticipate this transaction will further benefit OriginClear shareholders as Water On Demand executes on its business plan.”

 

Water On Demand issued a new presentation describing the new combined businesses and planning. The presentation is available online at https://www.waterondemand.net/wod-presentation/.

 

Water Businesses

 

The Company develops and incubates businesses in its role as the Clean Water Innovation Hub™ (“CWIB”). The mission of CWIB in general, is to create valuable properties through an incubation process that results in the launching of valuable spinoffs that add value to the world’s water industry.

 

The first such spinoff was on April 13, 2022, when the Company’s Board of Directors approved the plan to spin off its WOD business into a newly formed subsidiary, Water On Demand Inc., (“WODI”) which holds the assets, liabilities, intellectual property and business operations of the WOD business.

 

On April 14, 2023, the Company transferred the assets associated with its Modular Water Systems division (“MWS” or “Modular Water”) (www.modularwater.com) to WODI.

 

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On May 22, 2023, the Company announced that its subsidiary Water On Demand (WODI) had recently entered into a Memorandum of Understanding (MOU) to acquire an established international SaaS (Software as a Service) Developer (Developer), founded nearly twenty years ago, which operates with a stable customer base of technology companies. The acquisition is anticipated to be accretive. The MOU provides a framework for negotiating a definitive agreement for the acquisition of the Developer. The talks are in an early stage and may not succeed.

 

CWIB’s ongoing operations include:

 

  1. Building a network of customer-facing water brands to expand global market presence and technical expertise. These include the wholly-owned subsidiary, Progressive Water Treatment, Inc.

 

  2. Managing relationships with partners worldwide who are licensees and business partners.

 

  3. Developing the capability of partners to build systems and to deliver Operation & Maintenance (“O&M”) capability at scale, to support Water On Demand outsourced treatment and purification programs.

  

  4. Continue to study the streamlining of water assets and royalties through the blockchain, as part of the $H2O™ concept. At this time there is no plan to actively develop a blockchain-based asset.

 

  5. Prepare properties for eventual spinoff.

 

Milestones

 

Progressive Water Treatment Inc.

 

On October 1, 2015, the Company completed the acquisition of Dallas-based Progressive Water Treatment Inc. (“PWT”), a designer, builder and service provider for a wide range of industrial water treatment applications. PWT, together with MWS, other proprietary technologies and potential future acquisitions, aims to offer a complementary, end-to-end offering to serve growing corporate demand for outsourced water treatment.

 

PWT’s Business

 

Since 1995, PWT has been designing and manufacturing a complete line of water treatment systems for municipal, industrial and pure water applications. PWT designs and manufactures a complete line of water treatment systems for municipal, industrial and pure water applications. Its uniqueness is its ability to gain an in-depth understanding of customer’s needs and then to design and build an integrated water treatment system using multiple technologies to provide a complete solution for its customers.

 

PWT utilizes a wide range of technologies, including chemical injection, media filters, membrane, ion exchange and SCADA (supervisory control and data acquisition) technology in turnkey systems. PWT also offers a broad range of services including maintenance contracts, retrofits and replacement assistance. In addition, PWT rents equipment in contracts of varying duration. Customers are primarily served in the United States and Canada, with the company’s reach extending worldwide from Siberia to Argentina to the Middle East. 

 

PWT Milestones

 

In the first quarter of 2019, the Company increased the number of the manufacturer’s representatives for its operating units, PWT and Modular Water Systems (“MWS”). 

  

On April 15, 2021, the Company announced that its Progressive Water Treatment division is now shipping BroncBoost™, its workhorse Booster Pump Station equipment line. Engineered and built in Texas, BroncBoost allows customers to control water flow rates and pressure for mission critical water distribution systems. 

 

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On August 25, 2021, PWT entered into a Master Services Agreement (MSA) with a large US public utility company for water filtration systems that will provide process water at three power plants. The utility issued a purchase order for approximately $1.8 million, for the first power plant. The total purchase price payable to PWT under the MSA is approximately $5 million, subject to certain conditions, including receipt and acceptance by PWT of additional purchase orders. We expect the overall contract to take up to two years to deliver from the date of the MSA. 

 

Modular Water Systems – now part of Water On Demand, Inc.

 

On June 22, 2018, OriginClear signed an exclusive worldwide licensing agreement with Daniel “Dan” Early P. E. for his proprietary technology for prefabricated water transport and treatment systems. On July 19, 2018, the Company began incubating its Modular Water Treatment Division (MWS) around Mr. Early’s technology and perspective customers. The Company has funded the development of this division with internal cash flow. In Q1 of 2020, the Company fully integrated MWS with wholly-owned Progressive Water Treatment Inc. The Company is currently developing MWS as a discrete line of business for an eventual spinoff. Mr. Early currently serves as Chief Engineer for OriginClear.

 

On July 19, 2018, the Company launched its Modular Water Treatment Division, offering a unique product line of prefabricated water transport and treatment systems. Daniel “Dan” Early P.E. (Professional Engineer) heads the Modular Water Systems (“MWS”) division. On June 25, 2018, Dan Early granted the Company a worldwide, exclusive non-transferable license to the technology and knowhow behind MWS (See “Intellectual Property”). A ten-year renewal on May 20, 2020 added the right to sublicense and create manufacturing joint ventures. On July 25, 2018, MWS received its first order, for a brewery wastewater treatment plant.

 

With PWT and other companies as fabricators and assemblers, MWS designs, manufactures and delivers prefabricated water transport (pump and lift stations) under the EveraMOD™ brand; and wastewater treatment plant (“WWTP”) products under the EveraSKID™ and EveraTREAT™ brands to customers and end-users which are required to clean their own wastewater, such as schools, small communities, institutional facilities, real estate developments, factories, and industrial parks.

 

On Nov 7, 2019, the Company published a case study showing how Modular Water Systems may help businesses expand into rural land. The case study shows how point-of-use treatment solves lack of access to the public sewer system.

 

On March 5, 2020, the Company announced disruptive pump and lift station pricing, stating that its prefabricated modules with a lifespan of up to 100 years now compete with precast concrete. 

 

On September 28, 2021, the Company announced that MWS deployed its pilot Pondster™ brand modular lagoon treatment system at a Mobile Home Park (MHP) or trailer park, in Troy, Alabama. Modular Water Systems has since offered its treatment system to other MHPs and recently completed an installation at an MHP in Pennsylvania.

 

On June 16, 2022 the Company announced that MWS received purchase orders for approximately $1.5 Million in the single month of May of 2022. This compared to $1,774,880 in purchase orders for the entire year 2021.

 

On July 25, 2022 the Company announced that decentralized water treatment, long pioneered by OriginClear’s Modular Water Systems™ (“MWS”), is now being mandated by major US cities to recycle water in large new buildings.

 

On August 12, 2022 the Company announced the inaugural delivery and installation of its pre-engineered EveraBOX™ to implement a low-risk Liquid Ammonium Sulfate (LAS) disinfectant system for Pennsylvania’s Beaver Falls Municipal Water Authority (BFMA). Typical of MWS products, EveraBOX is manufactured using inexpensive, long-lasting High-Density Polyethylene (HDPE) or Polypropylene (PP) materials. These materials have proven to be less affected by supply chain issues currently impacting metal and fiberglass construction.

 

On April 14, 2023, the Company transferred its Modular Water Systems division (MWS or Modular Water) (www.modularwater.com) and the related assets to its subsidiary WODI in exchange for 6,000,000 shares of WODI.

 

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On May 25, 2023, the Company announced that in the 1st Quarter of 2023, Modular Water Systems (MWS), which at the time was still a division of the Company, contributed 58% of total revenue, or $1,155,803. This exceeded the publicly disclosed forecast for the division. MWS gross profit was $314,713, close to the forecast of $336,500, with a gross margin of 27%.

  

Water on Demand™: a new strategic direction

 

OriginClear has developed an outsourced water treatment business called “Water On Demand”: or “WOD” as a potential revenue source. The WOD model intends to offer private businesses the ability to pay for water treatment and purification services on a per-gallon basis. This is commonly known as Design-Build-Own-Operate or “DBOO”. WOD is designed to select projects, fully qualify them, provide financing for Design-Build-Own-Operate service contracts, and thereafter manage assets, contracts, clients, investors, strategic partners and vendors.

 

On April 13, 2021, we announced formation of a wholly-owned subsidiary called Water On Demand #1, Inc. (“WOD #1”) to pursue capitalization of the equipment required. The WOD Subsidiaries, Water On Demand #2, Inc. (“WOD #2”), Water On Demand #3, Inc. (“WOD #3”), Water On Demand #4, Inc. (“WOD #4”) were separately created to permit optional segmenting of capital pools according to strategic partnerships. The Company elected to wind down these entities and make the capital raised for them through the Company’s Series Y offering available for use by WODI, to be deployed, subject to a planned management contract. 

 

On April 13, 2022, the Company’s Board of Directors approved the plan to spin off its WOD business into a newly formed wholly-owned subsidiary, Water On Demand Inc., (“WODI”), as a result, WODI holds all of the assets, liabilities, intellectual property and business operations of the Water On Demand business. In connection with the spin off, the Company stipulated that it would exclude the WOD Subsidiaries, and the capital raised, and to be raised in the future with respect to those entities through the sale of its Series Y offering, from the assignment of assets and will make the capital available as part of a planned management contract. WODI is conducting an offering under Regulation A by which WODI is raising capital to direct toward WOD projects. (Effective as of June 26, 2023, the Company announced it is suspending the sale of securities under this Regulation A Offering. The Company will not conduct any sales of securities under this offering until such time as further notice is given by filing an amendment or a Form 1-U. As of the effective date, the Company has sold a total of 12,300 shares for total potential proceeds of $61,500.)

 

To enable rapid scaling, WODI does not itself intend to build, maintain or service the water treatment systems it finances, but instead contract with regional water service companies to carry out these functions. On April 6, 2022, an agreement in principle was reached to work with the first of these intended contractors, Envirogen Technologies (www.envirogen.com), a 30-year international provider of environmental technology and process solutions (www.originclear.com/company-news/originclear-and-envirogen-to-partner-on-water-on-demand). Future resources to build, maintain and service these financed systems may come from acquisitions; however, these are not actively being planned.

 

Delegating the building and operating of WOD-financed systems to regional water companies under performance contract, with the aim of developing a network of such partners, is expected to enable rapid scale-up of the WOD program, and the partner network would create a high barrier to entry for competitors.

 

At the time of this filing, WODI had no staff or independent resources, except for the MWS personnel transferred to WODI in the April 14, 2023. The Board of Directors of OriginClear serves as the Board for WODI, the CEO of OriginClear serves as CEO of WODI., and the CFO of OriginClear also serves as CFO of WODI. Under a prospective management services contract, OCLN is providing all staffing and administrative resources, as well as access to the funds it has raised for WOD investments. 

 

The Decentralization Megatrend 

 

According to a 2021 report by McKinsey & Co., US water infrastructure: Making funding count (https://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/us-water-infrastructure-making-funding-count):

 

“The need for investment in the US water system is at an unprecedented level. On average, 14 to 18 percent of total daily treated potable water in the United States is lost through leaks, with some water systems reporting water-loss rates exceeding 60 percent. Much of the nation’s water and wastewater infrastructure was built in the 1970s and 1980s. Since then, the share of federal capital investment has declined, putting the majority of capital-funding responsibility on state and local governments, which are increasingly juggling funding priorities.”

 

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“According to the American Water Works Association’s State of the water industry report, 31 percent of utilities surveyed in 2019 expressed doubt in their ability to cover the full cost of providing services, a figure that rose to 42 percent during the 2020 COVID-19 lockdown.

 

“Simply raising rates is not a practical solution because water bills are already too high for many US households. Even before the COVID-19 pandemic, 20.0 percent of US households in 2019 were paying more than 4.5 percent of their household income on water bills—a level that is considered unaffordable. This figure rose to 24 percent in the first seven months of 2021 (Exhibit 3).

 

 

Figure 1: Water rates rise but utilities remain underfunded.

 

As municipalities continue to be underfunded with rising water rates (Figure 1), businesses are increasingly choosing to treat and purify their own water, in a trend known as Decentralized Water, first described in the Lux Research presentation of June 28, 2016. (https://members.luxresearchinc.com/research/report/20060).

 

According to the Lux Research data, the unmet infrastructure needs of America’s 150,000+ water systems will exceed $100 billion per year by 2025. And the recent Infrastructure Investment and Jobs Act only provided one-time funding of $55 billion, which is less than one year’s deficit.

 

It is this underfunding that is creating the water quality problems we are seeing in places like Flint, Michigan and Jackson, Mississippi.

 

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It is not realistic to expect this underfunding of central water to be resolved anytime soon. The alternative is to simply reduce the load on these central systems. Since industry and agriculture together account for 89% of all water demand in the United States (https://ourworldindata.org/water-use-stress), we can enable commercial users to purify their own wastewater, thereby enabling water districts to focus on serving residential users – achieving a major social justice victory by simply unburdening the central facilities.

 

Self-treatment is a win-win, too – because businesses can do better by treating their own water; for instance, implementing recycling of the water they pay for, and controlling their own costs.

 

But to make such a decentralization program work, capital is needed. Most businesses simply do not have it in their capital plan to treat their own water. Now, with Water On Demand, they can forget about investing in capital and expertise: they can simply continue to pay on the meter as they always have, but to a micro-utility that sits on their own premises.

  

Reducing Risk through Outsourcing

 

Inflation of water rates greatly exceeds core inflation, creating a risk for managers of businesses served by municipalities. We believe this creates an incentive for self-treatment; but these businesses may lack the capital for large water plant expenditures, and the in-house expertise to manage them. Outsourcing through Water on Demand means that these companies do not have to worry about financing or managing the project.

 

As an example, in information technology sector, few companies operate their own server in-house powering their website. Rather, such servers are typically managed by professionals through a service level agreement. We believe this same concept can be applied towards water treatment, using outsourced water treatment solutions whereby the vendor retains ownership of the equipment. This concept is expanded to “Own and Operate”, an extension of the basic “Design and Build”, for a full offering known as “Design Build Own and Operate” or “DBOO”, which is very similar to the solar energy programs known as Power Purchase Agreements (PPAs).

 

Under such a plan, a business can outsource its wastewater treatment and avoid significant capital expenses and management responsibilities which can be a distraction from their core business.

 

We believe this is financially and operationally attractive to industrial, agricultural and commercial water users and can potentially drive additional revenue streams for WODI by providing water treatment as a service.

 

Technology specifically developed for decentralization.

 

In 2018, OriginClear launched its Modular Water Systems (MWS) division (www.modularwater.com), headed by Daniel M. Early, P.E., a pioneer of on-site or decentralized water treatment in this country. Supported by its proprietary technology, this division already serves businesses doing their own water treatment. These modular systems can be easily put to work for pre-funded, pay-per-gallon applications, potentially creating a barrier to entry for other companies wanting to do the same.

 

Also, the portable nature of some of these prefabricated, drop-in-place Modular Water Systems may provide a competitive benefit for a pure service model where the equipment remains the property of the Company, because the mobility of certain products MWS offers (such as EveraSKID), enables some degree of repossession in the event the client fails to pay their monthly bill. We believe this is a key competitive advantage.

 

Finally, WODI intends to license MWS technology to local water companies as part of their contract to design, build and operate systems on behalf of WODI, thus achieving both acceptance of such technology and a standardized “fleet” of installed systems.

 

Implementation of Water On Demand

 

On March 17, 2021, OriginClear incorporated Water On Demand #1 Inc. (“WOD#1”) in Nevada as a wholly owned subsidiary to provide a capital pool for our Water on Demand business.

 

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In November 2021, the Company created additional Water on Demand subsidiaries – Water on Demand # 2, Inc. (WOD # 2), Water on Demand # 3, Inc. (WOD # 3) and Water on Demand # 4, Inc. (WOD # 4) (in the aggregate, referred to as the “WOD Subsidiaries”), which were each separately created to permit optional segmenting of capital pools according to strategic partnerships. The Company simplified this structure by placing all funds in WOD #1 and intends to track the partnerships within that company. As they are subject to a security guaranty by the Company, the WOD Subsidiaries, and the capital raised for them through the sale of the Company’s Series Y offering, shall continue to be held by the Company. This capital will be made available to WODI to be deployed, subject to a planned management contract.

 

On April 6, 2022, the Company agreed in principle to an arrangement with Houston-based, international water service company Envirogen Technologies for certain operations and maintenance (O&M) functions, the first of a potential series of such partnerships, intended to enable Water On Demand to focus on finance and asset management while the water industry benefits from a steady stream of pre-capitalized projects. (https://www.originclear.com/company-news/originclear-and-envirogen-to-partner-on-water-on-demand)

 

On April 13, 2022, the Company announced the formation of Water On Demand, Inc. (“WODI”) as a wholly owned subsidiary which holds the assets, liabilities, intellectual property and business operations of the Water On Demand business. Water On Demand is designed to offer clean water systems to businesses and communities as a managed service without any capital requirement.

 

On June 29, 2022, WODI announced the launch of its $300 Million offering (the “Reg D Offering”). The offering of the securities is made pursuant to an exemption from registration under Rule 506(c) of Regulation D, to accredited investors only.

 

The Company requires funding in order to execute on its Water on Demand initiative. As of the period ended June 30, 2023, the Company received aggregate funding in the amount of $ 6,217,577 through the sale of its Series Y Preferred Stock dedicated to the Water on Demand program. (see Notes to Financial Statements- Sale of Preferred Stock).

 

On February 17, 2023, the Securities and Exchange Commission qualified the Offering Circular for the offering of securities by WODI pursuant to Regulation A offering (“Reg A Offering”). The Reg A Offering is intended to accumulate capital for WODI to direct toward WOD projects. The purpose of this Offering is to create an independent funding base for WODI and to enable the Company to provide financing for Design Build Own and Operate lifecycle projects internally without requiring direct financial support by OCLN. OCLN will continue to provide shared administrative services. The Reg A Offering is administered by New York-based Castle Placement (“Castle”) as the placement agent.

 

On March 9, 2023, the Company announced that it launched a limited preview of the Reg A Offering. Effective as of June 26, 2023 (the “Effective date”), the Company announced it suspended the sale of securities under the Reg A Offering. The Company will not conduct any sales of securities under this offering until such time as further notice is given by filing an amendment or a Form 1-U. As of the Effective Date, the Company sold a total of 12,000 shares for total proceeds of $60,000.

 

In connection with the Reg A Offering, the Company decided to limit the Reg D Offering to $20 million.

 

The Company is now actively evaluating potential clients for a test of water treatment and purification services on a pay-per-gallon basis, but a first agreement has not been reached. Also, the Company, as represented by OCLN, is in early stage talks with partners to deliver DBOO services, with the Company providing financing and contract management services. In the event such talks do not succeed, the Company, represented under contract by OCLN, would need to implement its own resources for such DBOO services. 

 

On April 14, 2023, the Company transferred its Modular Water Systems division (MWS or Modular Water) (www.modularwater.com) and the related assets to WODI.

 

Advisory Support for OriginClear

 

In September 2020, OriginClear announced that Philanthroinvestors had entered a strategic agreement with OriginClear and had listed the Company on its new Water Philanthroinvestors program. At the same time, OriginClear appointed Philanthroinvestors Founder, Ivan Anz and CEO, Arte Maren to OriginClear’s Board of Advisors. Recently, Mr. Maren was replaced as CEO and will continue to serve Philanthroinvestors in an advisory role.

 

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$H2O™

 

On May 10, 2021, OriginClear filed a patent application for its “System And Method For Water Treatment Incentive”, which includes blockchain technology and non-fungible tokens (“NFT(s)”) to simplify the distribution of payments on outsourced water treatment and purification services billed on a pay-per-gallon basis ahead of inflation, or Water On Demand.

 

On May 16, 2021, the Company applied for a registered trademark for the mark $H2O (also referred to as H2O) as the blockchain system representing this activity. The current filing basis is “Intent-to-use basis” (under Trademark Act Section 1(b)). The $H2O trademark application has been approved for publication/opposition on April 26, 2023. This application will proceed to registration if no 3rd party files an opposition to this application within 18-month from the opposition period.

  

On June 10, 2021, the Company named Ricardo Fabiani Garcia, an OriginClear investor and veteran technologist, to the Company’s Board of Advisors. Mr. Garcia will advise the management team as it sets up the roadmap and chooses the resources for the $H2O project.

 

There is no active development effort for $H2O. Depending on the final form that $H2O takes, we may encounter regulatory concerns that we cannot guarantee we will overcome. In that event, we would fall back on ordinary financial payment systems. Neither our Water on Demand or other current business models rely on any blockchain system for operation, and we can accomplish our operational goals using ordinary financial and currency channels. The Company does not intend to incorporate a blockchain system in any registered offering.

 

Potential Acquisitions and Incubations

 

The Company, in its role as the CWIB, seeks to incubate or acquire businesses that help industrial water users achieve water self-sustainability. We believe that assembling a group of such water treatment and water management businesses is potentially an opportunity for spinoffs and increased Company value for the stockholders.

 

We are particularly interested in companies which successfully execute on Design-Build-Own-Operate. These companies are growing fast, because tougher regulations, water scarcities and general outsourcing trends are driving industrial and agricultural water treatment users to delegate their water problem to service providers. As Global Water Intelligence pointed out in their report on October 30, 2015, “Water is often perceived as a secondary importance, with end-users increasingly wanting to focus solely on their own core business. This is driving a move away from internal water personnel towards external service experts to take control of water aspects.” External service experts are typically small–privately owned and locally operated. Creating a network of such providers could lead to enormous economies of scale through sharing of best practices, technologies, and customers and could represent a major barrier to entry for Water On Demand’s competitors.

 

The Company cautions that suitable acquisition candidates may not be identified and even if identified, the Company may not have adequate capital to complete the acquisition and/or definitive agreement may not be reached. Internally incubated businesses, similarly, may not become commercial successes

 

Patents and Intellectual Property

 

On June 25, 2018, Dan Early granted the Company a worldwide, exclusive non-transferable license to intellectual property consisting of five issued US patents, and design software, CAD, marketing, design and specification documents (the “Early IP”).

 

On May 20, 2020, we agreed on a renewal of the license for an additional ten years, with three-year extensions. We also gained the right to sublicense, and, with approval, to create ISO-compliant manufacturing joint ventures.

 

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The license to the Early IP was included as part of the sale of the MWS assets to WODI on April 14, 2023. The license was reissued on July 9, 2023 to WODI, restarting the 10-year term (plus three-year extensions) on that date.

 

The Early IP consists of combined protection on the materials and configurations of complete packaged water treatment systems, built into containers. The patents consist of the following:

 

#  Description  Patent No.  Date
Patent
Issued
  Expiration
Date
1  Wastewater System & Method  US 8,372,274 B2
Applications: WIPO, Mexico
  02/12/13  07/16/31
2  Steel Reinforced HDPE Rainwater Harvesting  US 8,561,633 B2  10/22/13  SEE NOTE
3  Wastewater Treatment System CIP  US 8,871,089 B2  10/28/14  SEE NOTE
4  Scum Removal System for Liquids  US 9,205,353 B2  12/08/15  02/19/34
5  Portable, Steel Reinforced HDPE Pump Station CIP  US 9,217,244 B2  12/22/15  10/20/31

 

NOTE: Two patents, U.S. Patent Nos. 8,561,633 and 8,871,089, are currently expired. Patent No. 8,561,633 is a stormwater filtration patent that does not pertain to the MWS business model. Patent No. 8,871,089 is a Continuation-in-Part (CIP) on the original Patent No. 8,372,274. This original patent and Patent No. 9,217,244 are the basis for the current MWS business and therefore the status of the CIP is not considered material.

 

Additionally, the Trade Secret documentation, engineer design programs, drawings, etc. utilized in the day-to-day business create the value of the ongoing business.

 

On May 10, 2021, OriginClear announced that it had filed a patent application titled “System And Method For Water Treatment Incentive”, for using blockchain technology and non-fungible tokens (NFT) to simplify the distribution of payments on outsourced water treatment and purification services billed on a pay-per-gallon basis ahead of inflation. 

 

With the rising need for local, point-of-use or point-of-discharge water treatment solutions, the MWS licensed IP family is the core to a portable, integrated, transportable, plug-and-play system that, unlike other packaged solutions, can be manufactured in series, have a longer life and are more respectful of the environment.

 

The common feature of this IP family is the use of a construction material (Structural Reinforced ThermoPlastic), for the containers that is:

 

  more durable: an estimated 75 to 100-year life cycle as opposed to a few decades for metal, or 40 to 50 years maximum for concrete;
     
  easier to manufacture: vessels manufacturing process can be automated; and
     
  recyclable and can be made out of biomaterials

 

In addition, patents US 8,372,274 and US 8,871,089 (1 and 3) relate to the use of vessels or containers made out of this material combined with a configuration of functional modules, or process, for general water treatment.

 

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Other subsequent patents, which build upon the original claims, focus on more targeted applications. These patents outline a given combination of modules engineered inside the vessel to address a specific water treatment challenge.

 

On April 14, 2023, WODI entered into an Asset Purchase Agreement with the Company, whereby it agreed to purchase all of the assets related to the Company’s “Modular Water Service” business, including licenses, technology, intellectual property, contracts, business models, patents and other assets in exchange for 6,000,000 shares of WODI common stock. The assets include an assignment of OriginClear’s existing global master license to the five patents of inventor Daniel M. Early, P.E., who heads Modular Water, and the right to file patents for all additional inventions since 2018, when OriginClear created the unit.

 

Recently, OriginClear commissioned a valuation of the Early IP, which yielded a nominal value between $26,637,185 and $53,224,807. According to the valuation, the Projected Total Available Market in 2026 exceeds $8 Billion.

 

Critical Accounting Policies

 

The Securities and Exchange Commission (“SEC”) defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition. 

 

Revenue Recognition

 

We recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.

  

Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss, as it is determined. Revisions in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts for the revisions become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions to costs and income, which are recognized in the period the revisions are determined.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill, impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, inventory valuation, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

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Fair Value of Financial Instruments

 

Fair value of financial instruments requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of June 30, 2023, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.

 

Results of Operations for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

 

Revenue and Cost of Sales

 

For the three months ended June 30, 2023, we had revenue of $1,830,684 compared to $3,167,967 for the three months ended June 30, 2022. Cost of sales for the three months ended June 30, 2023 was $1,635,489 compared to $2,482,493 for the three months ended June 30, 2022. Revenue and cost of sales decreased primarily due to our subsidiary’s decrease in revenue.

 

Our gross profit was $195,195 and $685,474 for the three months ended June 30, 2023 and 2022, respectively. 

 

Selling and Marketing Expenses

 

For the three months ended June 30, 2023, we had selling and marketing expenses of $631,021, compared to $466,566 for the three months ended June 30, 2022. The increase in selling and marketing expenses was primarily due to an increase in marketing expense. 

 

General and Administrative Expenses

 

For the three months ended June 30, 2023, we had general and administrative expenses of $1,015,995 compared to $934,899 for the three months ended June 30, 2022. The increase in general and administrative expenses was primarily due to an increase in professional and legal fees and outside services. 

 

Other Income and (Expenses)

 

Other income and (expenses) increased by $5,686,163 to $(6,225,419) for the three months ended June 30, 2023, compared to $(539,256) for the three months ended June 30, 2022. The increase was due primarily to an increase in present value of convertible secured promissory notes of $3,532,250, an increase in loss on non-cash accounts associated with the change in fair value of the derivatives in the amount of $807,313, increase in impairment of receivable of $993,065, increase in preferred stock incentive compensation of $155,852, with an overall increase in other expenses in the amount of $197,683.  

 

Net Income/(Loss)

 

Our net loss increased by $6,419,087 to $(7,684,843) for the three months ended June 30, 2023, compared to net loss of $(1,265,756) for the three months ended June 30, 2022. The majority of the increase in net loss was due primarily to an increase in present value of convertible secured promissory notes and other expenses associated with the net change in fair value of derivative instruments estimated each period. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price, volatility, variable conversion prices based on market prices defined in the respective agreements and probabilities of certain outcomes based on managements’ estimates. These inputs are subject to significant changes from period to period, therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.

 

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Results of Operations for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

 

Revenue and Cost of Sales

 

For the six months ended June 30, 2023, we had revenue of $3,837,078 compared to $4,402,072 for the six months ended June 30, 2022. The cost of sales for the six months ended June 30, 2023 was $3,510,808 compared to $3,941,348 for the six months ended June 30, 2022. Revenue and cost of sales decreased primarily due to our subsidiary’s decrease in revenue.

 

Our gross profit was $326,270 and $460,724 for the six months ended June 30, 2023 and 2022, respectively.

 

Selling and Marketing Expenses

 

For the six months ended June 30, 2023, we had selling and marketing expenses of $1,445,243, compared to $1,112,750 for the six months ended June 30, 2022. The increase in selling and marketing expenses was primarily due to an increase in marketing expense.

 

General and Administrative Expenses

 

General and administrative expenses were $2,104,765 for the six months ended June 30, 2023, compared to $1,815,159 for the six months ended June 30, 2022. The increase in general and administrative expenses was primarily due to an increase in professional and legal fees including non-cash, shares for services expense and outside services.

 

Other Income and (Expenses)

 

Other income and (expenses) increased by $4,293,330 to $(6,646,926) for the six months ended June 30, 2023, compared to $(2,353,596) for the six months ended June 30, 2022. The increase was due primarily to an increase in present value of convertible secured promissory notes of $6,037,589, increase in impairment of receivable of $2,650,985, increase in preferred stock incentive compensation of $155,852, with a decrease in loss on non-cash accounts associated with the change in fair value of the derivatives in the amount of $4,394,777, decrease in unrealized loss on investment securities of $138,184 and an overall decrease in other expenses in the amount of $18,135.

  

Net Income/(Loss)

 

Our net loss increased by $5,044,073 to $(9,886,096) for the six months ended June 30, 2023, compared to net loss of $(4,842,023) for the six months ended June 30, 2022. The majority of the increase in net loss was due primarily to an increase in present value of convertible secured promissory notes offset by other expenses associated with the net change in fair value of derivative instruments estimated each period. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price, volatility, variable conversion prices based on market prices defined in the respective agreements and probabilities of certain outcomes based on managements’ estimates. These inputs are subject to significant changes from period to period, therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material. 

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

 

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The condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying condensed consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company has not generated significant revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, raising additional capital and increasing sales. We obtained funds from investors during the six months ending June 30, 2023. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in case of equity financing.

 

In connection with our sale of Series M Preferred Stock conducted under Regulation A under the Securities Act, we may be subject to claims for rescission. If this occurs, it may have a negative effect on our liquidity.

 

At June 30, 2023 and December 31, 2022, we had cash of $1,380,390 and $1,354,814 and a working capital deficit of $24,527,888 and $14,245,179, respectively. The increase in working capital deficit was due primarily to an increase in convertible promissory notes and accrued expenses, with a decrease in non-cash derivative liabilities, accounts payable and contract receivables.

 

During the period ended June 30, 2023, we raised a net aggregate of $366,300 from the sale of preferred stock in private placements and $4,994,000 for WODI convertible secured promissory notes. Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future revenue.

 

Net cash used in operating activities was $3,282,732 for the six months ended June 30, 2023, compared to $1,850,646 for the prior period ended June 30, 2022. The increase in cash used in operating activities was primarily due to an increase in value added to note purchase agreements and accrued expenses, with a decrease in non-cash derivative liabilities and accounts payable.

 

Net cash flows used in investing activities was $2,429,558 for the six months ended June 30, 2023, compared to $9,000 for the prior period ended June 30, 2022. The increase in cash used in investing activities was primarily due to an increase in notes receivables during the current period.

  

Net cash flows provided by financing activities was $5,737,866 for the six months ended June 30, 2023, as compared to $2,854,291 for the prior period ended June 30, 2022. The increase in cash provided by financing activities was due primarily to an increase in proceeds from issuance of convertible promissory notes. To date we have principally financed our operations through the sale of our common and preferred stock and the issuance of debt.

 

We do not have any material commitments for capital expenditures during the next twelve months. Although our proceeds from the issuance of securities together with revenue from operations are currently sufficient to fund our operating expenses in the near future, we will need to raise additional funds in the future so that we can maintain and expand our operations. Therefore, our future operations are dependent on our ability to secure additional financing, which may not be available on acceptable terms, or at all. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans and possibly cease our operations.

 

We have estimated our current average burn, and believe that we have assets to ensure that we can function without liquidation for a limited time, due to our cash on hand, growing revenue, and our ability to raise money from our investor base. Based on the aforesaid, we believe we have the ability to continue our operations for the immediate future and will be able to realize assets and discharge liabilities in the normal course of operations. However, there cannot be any assurance that any of the aforementioned assumptions will come to fruition and as such we may only be able to function for a short time.

 

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Off-Balance Sheet Arrangements

 

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

ITEM 4. CONTROLS AND PROCEDURES  

 

Evaluation of Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed under the Exchange Act, is recorded, processed, summarized and reported within the required time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15f of the Exchange Act) that occurred during the fiscal quarter ended June 30, 2023 that has materially affected, or are reasonably likely to materially affect, the our internal control over financial reporting.

 

Limitations on Internal Controls

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

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PART II

 

Item 1. Legal Proceedings.

 

There are no material updates to the litigation matters with C6 Capital, LLC as previously disclosed in the Form 10-K filed on April 17, 2023. 

 

On July 12, 2023, OriginClear, Inc. entered into a Confidential Settlement and Mutual Release Agreement (the “Settlement Agreement”) with Auctus Fund, LLC (“Auctus”) relating to the settlement and release of certain pending legal actions arising out of various loans and agreements between the Company and Auctus. Pursuant to the terms of the Settlement Agreement, the Company and Auctus have resolved all outstanding legal disputes and claims between them. The appeal that was pending in the United States Court of Appeals for the First Circuit and trial matter in the United States District Court for the District of Massachusetts have been terminated and all transactions and obligations thereunder between the Company and Auctus are null and void.  The terms and conditions of the Settlement Agreement are confidential and have no impact on the financial condition or operations of the Company. As of the date of this filing, the Company views the Auctus matter as closed.   

 

Item 1A. Risk Factors.

 

Not required for a smaller reporting company. 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

As of the date of the filing of this report, the Company has 60 shares of Series F preferred stock outstanding which the Company failed to redeem on September 1, 2020, for an aggregate redemption price (equal to the stated value) of $60,000. 

 

As of the date of the filing of this report, the Company has 25 shares of Series G preferred stock outstanding which the Company was required to, and failed to redeem on April 30, 2021, for an aggregate redemption price (equal to the stated value) of $25,000.

 

As of the date of the filing of this report, the Company has 25 shares of Series I preferred stock outstanding which the Company was required to, and failed to redeem between May 2, 2021 and June 10, 2021, for an aggregate redemption price (equal to the stated value) of $25,000.

 

As of the date of the filing of this report, the Company has 307 shares of Series K preferred stock outstanding which the Company was required to, and failed to redeem between August 5, 2021 and March 26, 2022, for an aggregate redemption price (equal to the stated value) of $307,150.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

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Item 6. Exhibits.

 

Exhibit
Number
  Description of Exhibit
     
31.1   Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.*
31.2   Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.*
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS   Inline XBRL Instance Document.*
101.SCH   Inline XBRL Taxonomy Extension Schema.*
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase.*
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase.*
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase.*
101.PRE   Inline XBRL Extension Presentation Linkbase.*
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).*

 

* Filed herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

August 25, 2023

ORIGINCLEAR, INC.
   
  /s/ T. Riggs Eckelberry
  T. Riggs Eckelberry
  Chief Executive Officer
  (Principal Executive Officer)

 

  /s/ Prasad Tare
  Prasad Tare
  Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

 

47

 

 

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