UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
FOR THE QUARTERLY PERIOD ENDED:
For the transition period from __________ to __________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices, Zip Code)
(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 |
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.
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).
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 | ☐ |
| ☒ | 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 December 7, 2023,
there were
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. | 33 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 48 |
| Item 4. | Controls and Procedures. | 48 |
| PART II | ||
| Item 1. | Legal Proceedings. | 49 |
| Item 1A. | Risk Factors. | 49 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 49 |
| Item 3. | Defaults Upon Senior Securities. | 49 |
| Item 4. | Mine Safety Disclosures. | 49 |
| Item 5. | Other Information. | 49 |
| Item 6. | Exhibits. | 49 |
| 50 | ||
| SIGNATURES | ||
i
PART I - FINANCIAL INFORMATION
ORIGINCLEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Contracts receivable, net allowance of $ | ||||||||
| Fair value investment in securities | ||||||||
| Contract assets | ||||||||
| Prepaid expenses | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| NET PROPERTY AND EQUIPMENT | ||||||||
| OTHER ASSETS | ||||||||
| Long term assets held for sale | ||||||||
| Note receivable on sale of asset | ||||||||
| SPAC Class B common shares purchase cost | ||||||||
| Fair value investment-securities | ||||||||
| Trademark | ||||||||
| TOTAL OTHER ASSETS | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and other payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Cumulative preferred stock dividends payable | ||||||||
| Contract liabilities | ||||||||
| Tax liability 83(b) | ||||||||
| Customer deposit | ||||||||
| Warranty reserve | ||||||||
| Line of credit | ||||||||
| Loan payable, merchant cash advance | ||||||||
| Loans payable, SBA | ||||||||
| Derivative liabilities | ||||||||
| Series F 8% Preferred Stock, | ||||||||
| redeemable value of $ | ||||||||
| Series G 8% Preferred Stock, | ||||||||
| redeemable value of $ | ||||||||
| Series I 8% Preferred Stock, | ||||||||
| redeemable value of $ | ||||||||
| Series K 8% Preferred Stock, | ||||||||
| respectively, redeemable value of $ | ||||||||
| Convertible secured promissory note (Note 5) | ||||||||
| Convertible promissory notes, net of discount of $0 and $0, respectively (Note 5) | ||||||||
| Total Current Liabilities | ||||||||
| Long Term Liabilities | ||||||||
| Convertible promissory notes, net of discount of $ | ||||||||
| Total Long Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES (See Note 13) | ||||||||
| Series J Convertible Preferred Stock, | ||||||||
| Series L Convertible Preferred Stock, | ||||||||
| Series M Preferred Stock, | ||||||||
| Series O 8% Convertible Preferred Stock, | ||||||||
| Series P Convertible Preferred Stock, | ||||||||
| Series Q 12% Convertible Preferred Stock, | ||||||||
| Series R 12% Convertible Preferred Stock, | ||||||||
| Series S 12% Convertible Preferred Stock, | ||||||||
| Series U Convertible Preferred Stock, | ||||||||
| Series X Convertible Preferred Stock, | ||||||||
| Series Z Convertible Preferred Stock, | ||||||||
| SHAREHOLDERS’ DEFICIT | ||||||||
| 0 and 0 shares of Series B issued and outstanding, respectively | - | - | ||||||
| 1,000 and 1,001,000 shares of Series C issued and outstanding, respectively | - | - | ||||||
| Subscription payable for purchase of equipment | ||||||||
| Preferred treasury stock, | ||||||||
| Common stock, $ | ||||||||
| Additional paid in capital - Common stock | ||||||||
| Accumulated other comprehensive gain/(loss) | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL SHAREHOLDERS’ DEFICIT | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | $ | ||||||
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 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Cost of Goods Sold | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Selling and marketing expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Loss from Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Other income | ||||||||||||||||
| Impairment of receivable from SPAC | ( | ) | ( | ) | ||||||||||||
| Gain on write off of loans payable | ||||||||||||||||
| Unrealized gain (loss) on investment securities | ( | ) | ( | ) | ( | ) | ||||||||||
| Gain (Loss) on conversion of preferred stock | ( | ) | ( | ) | ||||||||||||
| Preferred stock incentive compensation | ( | ) | ( | ) | ||||||||||||
| Conversion and settlement value added to note purchase agreements | ( | ) | ( | ) | ||||||||||||
| Cash settlement for non-conversion of common stock | - | ( | ) | - | ( | ) | ||||||||||
| Gain (Loss) on net change in derivative liability and conversion of debt | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest and dividend expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| TOTAL OTHER (EXPENSE) INCOME | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING, | ||||||||||||||||
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 NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
| NINE MONTHS ENDED SEPTEMBER 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Preferred stock | Mezzanine | Common stock | Additional | Subscription | Other Comprehensive | Accumulated | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Equity | Shares | Amount | Paid-in-Capital | Payable | loss | Deficit | Total | |||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Rounding | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Common stock issuance for conversion of debt and accrued interest | - | |||||||||||||||||||||||||||||||||||||||
| Common stock issued at fair value for services | - | |||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series E Preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series J Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series L Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series O Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series P Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series Q Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series R Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series T Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series U Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series W Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series Y Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion Series Q Preferred stock dividends | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for make good shares for Series P Preferred stock | ( | ) | - | |||||||||||||||||||||||||||||||||||||
| Common stock issued for make good shares for Series R Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion settlement | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock returned from non conversion | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Issuance of Series Y Preferred stock through a private placement | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of Series Z Preferred stock through a private placement | - | - | ||||||||||||||||||||||||||||||||||||||
| Exchange of Series F Preferred Stock for Series Q Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Exchange of Series I Preferred Stock for Series W Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Exchange of Series K Preferred Stock for Series W Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Loss on conversion of Preferred Stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 (unaudited) | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
3
| NINE MONTHS ENDED SEPTEMBER 30, 2023 | ||||||||||||||||||||||||||||||||||||||||
| Preferred stock | Mezzanine | Common stock | Additional | Subscription | Other Comprehensive | Accumulated | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Equity | Shares | Amount | Paid-in-Capital | Payable | loss | Deficit | Total | |||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Common stock issued for cash per equity financing agreement | - | |||||||||||||||||||||||||||||||||||||||
| Common stock issued upon conversion of convertible promissory note | - | |||||||||||||||||||||||||||||||||||||||
| Common stock issued at fair value for services | - | |||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series O Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series Q Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series R Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series S Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series U Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series W Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series Y Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series Z Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for Series O Preferred stock dividends | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of settlement agreements | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for alternative vesting | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Redemption of common stock for note purchase agreements | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Issuance of Series A and B Preferred stock granted to Series Y investors at fair value | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for RegA for cash | - | |||||||||||||||||||||||||||||||||||||||
| Cancellation of RegA common and Series A and B Preferred shares | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Issuance of Series Y Preferred stock through a private placement | - | - | ||||||||||||||||||||||||||||||||||||||
| Exchange of Series K for Series W Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Exchange of Series R Preferred stock for WODI secured convertible note | - | ( | ) | - | ||||||||||||||||||||||||||||||||||||
| Exchange of Series X Preferred stock for WODI secured convertible note | - | ( | ) | - | ||||||||||||||||||||||||||||||||||||
| Return of investment for Series Y Preferred stock | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||
| Issuance of 1000:1 split of common stock through a merger with subsidiary | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock to investors after merger | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 (unaudited) | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
The accompany 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 NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(Unaudited)
| Nine Months Ended | ||||||||
| September 30, 2023 | September 30, 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Income (loss) | $ | ( | ) | $ | ( | ) | ||
| Adjustment to reconcile net loss to net cash | ||||||||
| used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Common and preferred stock issued for services | ||||||||
| Change in fair value of derivative liability | ||||||||
| Preferred stock incentive compensation expense | ||||||||
| Debt discount recognized as interest expense | ||||||||
| Net unrealized (gain) loss on fair value of securities | ||||||||
| Impairment of receivable from SPAC | ||||||||
| Conversion and settlement value loss on WODI | ||||||||
| (Gain) Loss on conversion of preferred stock | ||||||||
| Gain on write off of payable | ( | ) | ( | ) | ||||
| Change in Assets (Increase) Decrease in: | ||||||||
| Contracts receivable | ||||||||
| Contract asset | ( | ) | ||||||
| Inventory asset | ( | ) | ||||||
| Prepaid expenses and other assets | ||||||||
| Change in Liabilities Increase (Decrease) in: | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ||||||||
| Contract liabilities | ( | ) | ||||||
| Tax liability 83(b) | ( | ) | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS USED FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of SPAC notes payable | ( | ) | ||||||
| Fair value of investment | ( | ) | ||||||
| Payments received on long term asset | ||||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments on capital lease | ( | ) | ||||||
| Payments on loan payable, SBA | ( | ) | ||||||
| Line of credit | ||||||||
| Equity financing purchase agreement | ||||||||
| Net payments on cumulative preferred stock dividends payable | ||||||||
| Convertible secured promissory notes | ||||||||
| Common stock issued for RegA for cash | ||||||||
| Return of investment and common shares | ( | ) | ||||||
| Net proceeds for issuance of preferred stock for cash - mezzanine classification | ||||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| NET (DECREASE) INCREASE IN CASH | ( | ) | ||||||
| CASH BEGINNING OF PERIOD | ||||||||
| CASH END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
| Interest and dividends paid | $ | $ | ||||||
| Taxes paid | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS | ||||||||
| Common stock issued at fair value for conversion of debt, plus accrued interest, and other fees | $ | $ | ||||||
| Issuance of Series O dividends | $ | $ | ||||||
| Preferred stock converted to common stock - mezzanine | $ | $ | ||||||
| Exchange of Series R preferred stock for WODI secured convertible note | $ | $ | ||||||
| Exchange of Series X preferred stock for WODI secured convertible note | $ | $ | ||||||
| Exchange from mezzanine to liability | $ | $ | ||||||
| Common stock issued as settlement | $ | $ | ||||||
| Shares issued for alternate vesting | $ | $ | ||||||
| Issuance of PWT common stock to WODI shareholders | ||||||||
| Redemption of shares for secured promissory notes | $ | $ | ||||||
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
SEPTEMBER 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 nine months ended September 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 is developing 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 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, 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 nine months ended September 30, 2023, the
Company consolidated the funds into a single WOD Subsidiary. As of the three-month period ended September 30, 2023, the Company received
net aggregate funding in the amount of $
As disclosed in its corporate presentation, available at www.originclear.com/investing#companypresentation, the Company intends to launch a first pilot deployment of WOD in 2024. (See graph).
Reinforcement of Water On Demand Inc. with operating businesses
Because WOD is still in early stage development, the Company combined its Modular Water Systems division (MWS) and its wholly owned subsidiary, Progressive Water Systems Inc. (PWT) with Water On Demand, Inc. Due to its operating history, PWT became the master corporate entity and subsequently was renamed Water On Demand, Inc.
6
Thus, Water On Demand Inc. was absorbed into PWT, as was OriginClear’s in-house business unit MWS. Subsequently, Progressive Water Treatment Inc. was renamed Water On Demand, Inc.
WODI as it is now structured, is composed of two operating units, MWS and PWT, which are in revenue and cash-flow profitable, plus WOD which is a development stage business. (see graph)
This process is discussed in detail in the Overview of Business Section below.
On October 24, 2023, the Company announced a Business Combination Agreement (BCA) for the acquisition of WODI by Fortune Rising Corporation (NASDAQ: FRLA). The Company has a majority ownership of WODI, going into the BCA.
The Company’s mission going forward is:
| - | For its current WODI program, to support the BCA process, provide management services to WODI and the potential post-merger entity, initiate non-binding agreements for the acquisition of related businesses by WODI or the post-merger entity, which will depend on the outcome of the BCA process. |
| - | For its own account, to accelerate for new businesses that it may create (as it did with MWS in 2018), acquire (as it did with PWT in 2015) or strategically partner with. For this new phase, the Company may engage in projects outside the water industry, such as in conventional or blockchain finance projects. |
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 nine months ended September 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 $
7
| 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 September 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 nine months ended September 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 the same as the basic loss per share for the nine months ended September 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 Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Loss to common shareholders (Numerator) | $ | ( | ) | $ | ( | ) | ||
| Basic weighted average number of common shares outstanding (Denominator) | ||||||||
| Diluted weighted average number of common shares outstanding (Denominator) | ||||||||
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.
8
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 $
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 September 30, 2023 and December 31, 2022, respectively, and determined there was no impairment of indefinite lived intangibles and goodwill.
9
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 $
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.
| Estimated Life | ||
| Machinery and equipment | ||
| Furniture, fixtures and computer equipment | ||
| Vehicles | ||
| Leasehold improvements |
| September 30, 2023 | December 31, 2022 | |||||||
| Machinery and Equipment | $ | $ | ||||||
| Computer Equipment | ||||||||
| Furniture | ||||||||
| Leasehold Improvements | ||||||||
| Vehicles | ||||||||
| Demo Units | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Net Property and Equipment | $ | $ | ||||||
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 nine months
ended September 30, 2023 and 2022, was $
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.
10
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
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 September 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. |
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Investment at fair value-securities, September 30, 2023 | $ | $ | $ | $ | ||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Derivative Liability, September 30, 2023 | $ | $ | $ | $ | ||||||||||||
11
The derivative liabilities consist of $
| Balance as of December 31, 2022 | $ | |||
| Net loss on conversion of debt and change in derivative liabilities | ||||
| Balance as of September 30, 2023 | $ |
| September 30, 2023 | ||
| Risk free interest rate | ||
| Stock volatility factor | ||
| Weighted average expected option life | ||
| Expected dividend yield |
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.
12
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.
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
Series D-1
On April 13, 2018, the Company designated
Series F
On August 14, 2018, the Company designated
Series G
On January 16, 2019, the Company designated
13
Series I
On April 3, 2019,
Series J
On April 3, 2019, the Company designated
Series K
On June 3, 2019, the Company designated
Series L
On June 3, 2019, the Company designated
14
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
Series O
On April 27, 2020, the Company designated
Series P
On April 27, 2020, the Company designated
15
Series Q
On August 21, 2020, the Company designated
Series R
On November 16, 2020, the Company designated
Series S
On February 5, 2021, the Company designated
16
Series U
On May 26, 2021, the Company designated
Series W
On April 28, 2021, the Company designated
Series X
On August 10, 2021, the Company designated
17
Series Y
On December 6, 2021, the Company designated
Series Z
On
February 11, 2022, the Company designated
As of September 30, 2023, the Company accrued
aggregate dividends in the amount of $
During the nine months ended September
30, 2023, the Company redeemed an aggregate of
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.
18
Water On Demand, Inc. (“WODI”) Preferred Stock
On April 22, 2022, WODI designated
Series A
On October 13, 2022, WODI designated
During the nine months ended September
30, 2023, WODI issued an aggregate of
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 Q3, 2023 based on the estimated fair value of the Modular Water Systems assets contributed to the business and merger with PWT. |
| 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 |
19
| Valuation Date | Fair Value of shares | |||
| 12/28/2022 | $ | |||
| 02/08/2023 | $ | |||
| 06/15/2023 | $ | |||
| 08/21/2023 | $ | |||
Out of the total
Series B
On April 28, 2023, WODI designated
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 Q3, 2023 based on the estimated fair value of the Modular Water Systems assets contributed to the business and the merger with PWT. |
| 4. | Timing of a settlement event/conversion event for the Series B shares under the two settlement options. |
| 5. | The expected outstanding issuance of Series Y and convertible debt as of settlement |
20
| Valuation Date | Fair Value of shares | |||
| 06/27/2023 | $ | |||
| 08/21/2023 | $ | |||
For the nine months ended September
30, 2023, the shares granted in Q2 and Q3 were valued at $
Series C
On October 13, 2022, the Board of Directors
authorized the issuance of
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 $
Nine months ended September 30, 2023
The
Company issued
The Company issued
The
Company issued
The
Company issued
The
Company issued
The
Company issued
The
Company issued
The Company redeemed
21
Nine months ended September 30, 2022
The
Company issued
The
Company issued
The
Company issued
The
Company issued
The
Company issued
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 “Termination
date”), the Company suspended the sale of securities under the Reg A offering for WODI. As of the Termination Date,
On September 22, 2023, WODI merged with PWT (See Note 9). Pursuant to the merger:
| ● | An aggregate of |
| ● | An aggregate of |
Upon
conversion of the Series A and Series B preferred stock to an aggregate of
Progressive Water Treatment (‘PWT’) Common Stock.
On September 21, 2023, WODI merged with PWT (“PWT Merger”). Pursuant to the PWT Merger, all holders of WODI common shares were issued shares in PWT in the following amounts:
| ● | An aggregate of |
| ● | An aggregate of |
| ● | An aggregate of |
| ● | An aggregate of |
As of September 30, 2023, PWT had
22
| 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
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
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,
23
Warrants
During the nine months ended September
30, 2023, the Company issued
| September 30, 2023 | ||||||||
| Number of Warrants | Weighted average exercise price | |||||||
| Outstanding - beginning of period | $ | |||||||
| Granted | $ | |||||||
| Exercised | ||||||||
| Expired | ( | ) | $ | ( | ) | |||
| Outstanding - end of period | $ | |||||||
| September 30, 2023 | ||||||||||||||
| Weighted Average | ||||||||||||||
| Remaining | ||||||||||||||
| Exercisable | Warrants | Warrants | Contractual | |||||||||||
| Prices | Outstanding | Exercisable | Life (years) | |||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
The derivative liability recognized in
the financial statements for the warrants as of September 30, 2023 was $
At September 30, 2023, the aggregate intrinsic
value of the warrants outstanding was $
24
| 5. | CONVERTIBLE PROMISSORY NOTES |
OriginClear, Inc.
| Convertible Promissory Notes | $ | |||
| Less current portion | ||||
| Total long-term liabilities | $ |
| Period Ending September 30, | Amount | |||
| 2023 | ||||
| 2024 | ||||
| 2026 | ||||
| 2028 | ||||
| $ | ||||
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
The
unsecured convertible promissory notes (the “OID Notes”) had an aggregate remaining balance of $
25
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
The
Company issued a convertible note (the “Dec 2015 Note”) in exchange for accounts payable in the amount of $
The
Company issued a convertible note (the “Sep 2016 Note”) in exchange for accounts payable in the amount of $
The
Company issued two (2) unsecured convertible promissory notes (the “Apr & May 2018 Notes”), in the aggregate amount of
$
26
The
Company entered into an unsecured convertible promissory note (the “Nov 20 Note”), on November 19, 2020 in the amount of $
The
Company entered into an unsecured convertible promissory note (the “Jan 21 Note”), on January 25, 2021 in the amount of $
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 September 30, 2023 was $
Water On Demand, Inc.
In December 2022, WODI raised capital
and issued convertible secured promissory notes in the amount of $
During the nine months ended September
30, 2023, WODI raised additional capital of $
27
| 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.
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Equipment Contracts | $ | $ | ||||||
| Component Sales | ||||||||
| Waste Water Treatment Systems | ||||||||
| Pump Stations | ||||||||
| Rental Income | ||||||||
| Services Sales | ||||||||
| Internet Sales | ||||||||
| Commission & Training | ||||||||
| $ | $ | |||||||
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 nine months ended
September 30, 2023 and the year ended December 31, 2022, was $
| 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 $
On May 15, 2018, the Company received
28
| 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
$
| 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 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 $
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
On December 22, 2022, WODI paid a total
of $
FRLA 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. FRLA 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
29
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 $
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.
On April 10, 2023, at the Special Meeting,
a total of
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
On September 21, 2023, WODI entered into a merger agreement with PWT whereby WODI was merged with PWT. The merger of these entities was completed to create better enterprise value for a potential merger opportunity with FRLA. In connection with the merger with WODI, PWT changed its name to Water on Demand, Inc.
On September 28, 2023, WODI nominated the combined PWT/WODI merged entity, for merger with FRLA. Accordingly, the Letter of Intent (“LOI”) executed on January 5, 2023 with WODI was amended to designate PWT as the new target of the acquisition. Under the amended LOI, FRLA proposed to acquire all the outstanding securities of PWT, based on certain material financial and business terms and conditions being met. The LOI is not binding on the parties and is intended solely to guide good-faith negotiations toward definitive agreements.
On October 24,
2023 FRLA and WODI entered into a definitive business combination agreement (the “BCA”). The transaction represents a pro forma
equity valuation of approximately $
On October 25, 2023, at the Special Meeting,
a total of
30
Promissory Notes
Since buying the sponsorship interest in
the SPAC on December 22, 2022 through September 30, 2023, WODI and the Company made payments on behalf of the SPAC in the aggregate amount
of $
As of the date of this filing, the SPAC
has been extended through November 5, 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
Impairment of receivable
Although the payments made on behalf of
the SPAC are amounts receivable to WODI, for the period ended September 30, 2023, WODI considered the aggregate amount of $
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
PWT-WODI merger
On September
21, 2023, WODI entered into a merger agreement with PWT to create better enterprise value for a potential merger opportunity with FRLA
and a plan of merger agreement (the “PWT-WODI merger agreement”) was entered into between WODI and PWT. Per the PWT-WODI merger
agreement, all shares of WODI common and preferred stock were exchanged for
The merger consideration
of
| ● | Issued and outstanding shares of WODI common stock on a fully dilutive basis were calculated as of September
20, 2023 at |
| ● | WODI (including MWS) was valued at $ |
| ● | WODI/ MWS price per share of $ |
| ● | PWT was valued at $ |
| ● | PWT price per share of $ |
| ● | Based on the valuation for each as mentioned above, an exchange ratio of 1:0.1973 was determined to ascertain the number of shares to be issued in PWT for every share held by WODI stockholder. |
| ● | Using the exchange ratio, the merger consideration of |
OCLN –
WODI Reg A –
WODI Series A
–
WODI Series B
–
| ● | WODI Series A and Series B were converted to WODI common before the merger. |
31
Restricted Stock to WODI Board, Employees and Consultants
Between
August 12, 2022, and August 3, 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
| 10. | LINE OF CREDIT |
During the nine months ended September
30, 2023, the Company obtained 12 month credit lines in the aggregate amount of $
| 11. | ASSETS HELD FOR SALE |
On
March 1, 2021, the Company issued an aggregate of
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 $
During
the period ended December 31, 2022, after evaluating several offers, the Company considered an offer for $
In
January 2023, the Company accepted the offer and on April 8, 2023, a deed was executed for the sale of the property for $
32
| 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 nine months ended September 30, 2023,
received an aggregate of $
| 13. | COMMITMENTS AND CONTINGENCIES |
Facility Rental – Related Party
Our Dallas based subsidiary, PWT, rents
an approximately
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 $
Litigation
On July 12, 2023, the Company 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 September 30, 2023, there were no material updates to the litigation matters with C6 Capital, 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
October 2, 2023 and October 3, 2023, holders of the Company’s Series R preferred stock converted an aggregate of
Between
October 2, 2023 and November 29, 2023, an aggregate of
Between
October 2, 2023 and November 29, 2023, holders of the Company’s Series Y preferred stock converted an aggregate of .7 Series
Y shares into an aggregate of
Between
October 4, 2023 and November 15, 2023, the Company issued to consultants an aggregate of
Between October 5, 2023 and December
6, 2023, WODI made payments on behalf of the SPAC in the aggregate amount of $
Between
October 6, 2023 and October 20, 2023, the Company entered into settlement agreements with certain accredited investors pursuant to which
the Company issued an aggregate of
On November 9, 2023, holders of the Company’s Series W preferred stock converted an aggregate of 25 Series W shares into an aggregate of 5,241,092 shares of the Company’s common stock.
33
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 was founded as OriginOil in 2007, and began trading on the OTC in 2008. In 2015, it was renamed as OriginClear to reflect its mission to develop breakthrough businesses in the industrial water sector. Today, 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.
In 2023, OriginClear combined three of these businesses into a single subsidiary in anticipation of a merger of such subsidiary with a “blank check” company (a SPAC or Special Purpose Acquisition Company). The definitive merger agreement was announced on 24 October, 2023: https://www.originclear.com/company-news/originclears-water-on-demand-and-fortune-rise-acquisition-corporation-announce-business-combination-to-create-nasdaq-listed-company.
34
The assets and properties now incorporated as Water On Demand Inc. (WODI) consist of the following:
| ● | Progressive Water Treatment Inc. (“PWT”) - 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. |
| ● |
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”).
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. |
| ● | The brand, Modular Water Systems (MWS), featuring products differentiated by the Early IP and complemented with additional knowhow and trade secrets. |
| ● | An incubated 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”). | |
| NOTE: 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. | ||
| NOTE: the Company did not spin off the developmental blockchain instruments $H2O, a security token for the payment of dividends, and ClearAqua, a community involvement token. At this time, the Company is not actively developing these but is pursuing Intellectual Property protection for them to the extent it finds useful. |
“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.”
OriginClear issued a new presentation describing the new combined businesses and planning. The presentation is available online at https://www.originclear.com/investing#companypresentation
35
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 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. 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.
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.
On September 26, 2023, the Company announced that it merged its subsidiaries, WODI and PWT to create better enterprise value for a potential merger opportunity with Fortune Rise Acquisition Corporation (‘FRLA’).
On September 28, 2023, FRLA and OriginClear Inc., announced that FRLA and WODI agreed to nominate a new target – the recently merged PWT /WODI. Accordingly, the Letter of Intent (“LOI”) executed January 5, 2023 with WODI was amended to designate PWT as the new target of the acquisition. Under the revised/amended LOI, FRLA proposes to acquire all the outstanding securities of PWT, based on certain material financial and business terms and conditions being met. The LOI is not binding on the parties and is intended solely to guide good-faith negotiations toward definitive agreements.
Post-merger with WODI, PWT effected a name change to Water On Demand Inc.
On October 24, 2023 FRLA and OCLN announced that FRLA and WODI had entered into a definitive business combination agreement (the “BCA”). The transaction represents a pro forma equity valuation of approximately $72 million of the Combined Company, assuming no further redemptions of FRLA public shares by FRLA’s public shareholders. The estimated cash proceeds available to the Combined Company from the transaction consists of FRLA’s $ 39,635,883 of cash held in trust, assuming no further redemptions of FRLA public shares. Upon closing of the transactions contemplated under the BCA, and assuming none of FRLA’s public shareholders elect to redeem their shares of common stock and no additional shares of common stock are issued, it is anticipated that FRLA’s public shareholders would retain an ownership interest of approximately 46% of the Combined Company, the sponsors, officers, directors and other holders of FRLA founder shares and private shares will retain an ownership interest of approximately 18% of the Combined Company, and the WOD stockholders will own approximately 36% of the Combined Company, based on its agreed acquisition valuation of $32 million, an approximate 3.2x multiple of its 2022 revenue. The existing stockholders of WOD are expected to roll 100% of their equity into the Combined Company.
36
Currently, OriginClear’s mission as the CWIB is the following:
| 1. | Support the rollout of the WODI post-merger entity (the plan is to retain the name). OriginClear has proposed a post-merger management services contract with WODI, which over time will be phased out as WODI builds its own internal team and capabilities. |
| 2. | In particular, OriginClear is assisting WODI with its aggressive acquisitions plan, starting now and to be finalized post the SPAC merger (there is no assurance of merger success.) |
| 3. | Selecting companies and/or technologies for funding and development. We may not restrict ourselves to the water industry. |
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.
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.
On September 26, 2023, the Company announced that it merged its subsidiaries, WODI and PWT.
37
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, WODI entered into an Asset Purchase Agreement with the Company, whereby it agreed to purchase all of the assets related to the 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.
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%.
38
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 WOD#2, WOD#3 and WOD#4 and make the capital raised for them through the Company’s Series Y offering available 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. However, the MWS and PWT units which are part of the combined entity and managed by OriginClear under a planned management services agreement, are generating revenue and profitable. 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 the prospective management services contract, OCLN plans to provide all staffing and administrative resources, as well as fee-based access to the funds it has raised for WOD investments.
39
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.”
“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.
40
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.
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.
41
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.
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 wound down the others. 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 fee schedule under a proposed 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 September 30, 2023, the Company received net aggregate funding in the amount of $ 6,267,577 through the sale of its Reg D Offering, 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.
WODI is 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, WODI 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, WODI 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.
On September 26, 2023, the Company announced that it merged its subsidiaries, WODI and PWT to create better enterprise value for a potential merger opportunity with Fortune Rise Acquisition Corporation (‘FRLA’).
On September 28, 2023, FRLA and OriginClear Inc., announced that FRLA and WODI agreed to nominate a new target – the recently merged PWT with WODI. Accordingly, the Letter of Intent (“LOI”) executed January 5, 2023 with WODI was amended to designate PWT as the new target of the acquisition. Under the revised/amended LOI, FRLA proposes to acquire all the outstanding securities of PWT, based on certain material financial and business terms and conditions being met. The LOI is not binding on the parties and is intended solely to guide good-faith negotiations toward definitive agreements.
42
In connection with the merger with WODI, PWT effected a name change to Water On Demand Inc.
On 24 October 2023, Fortune Rise Acquisition Corporation (Nasdaq: FRLA) and the Company announced that FRLA and Water On Demand Inc. (WODI) have entered into a definitive business combination agreement (the “BCA”).
The transaction represents a pro forma equity valuation of approximately $72 million of the Combined Company, assuming no further redemptions of FRLA public shares by FRLA’s public shareholders. The estimated cash proceeds available to the Combined Company from the transaction consists of FRLA’s $ 39,635,883 of cash held in trust, assuming no further redemptions of FRLA public shares.
The proceeds will be used to develop the Water On Demand water-as-a-service network, grow the Modular Water and Progressive Water business units, and carry out an aggressive acquisition program, which is expected to accelerate the existing growth. A number of assumptions have been made as to purchase multiples, net growth, synergies and other factors, and there are no guarantees that the Combined Company will succeed in the acquisitions and subsequent integrations of the acquired entities. The acquisitions will prioritize network management software, management and engineering staffing, and vertical integration through acquisition of component fabricators.
Upon closing of the transactions contemplated under the BCA, and assuming none of FRLA’s public shareholders elect to redeem their shares of common stock and no additional shares of common stock are issued, it is anticipated that FRLA’s public shareholders would retain an ownership interest of approximately 46% of the Combined Company, the sponsors, officers, directors and other holders of FRLA founder shares and private shares will retain an ownership interest of approximately 18% of the Combined Company, and the WODI stockholders will own approximately 36% of the Combined Company, based on its agreed acquisition valuation of $32 million, an approximate 3.2x multiple of its 2022 revenue. The existing stockholders of WODI are expected to roll 100% of their equity into the Combined Company.
The board of directors of each of FRLA and WODI unanimously approved the transaction, which is expected to be completed in the second quarter of 2024, subject to, among other things, the approval by the shareholders of FRLA and WODI, satisfaction of the conditions stated in the definitive agreement and other customary closing conditions, including a registration statement being declared effective by the SEC, and approval by The Nasdaq Stock Market to list the securities of the Combined Company.
See release: https://finance.yahoo.com/news/originclear-water-demand-fortune-rise-200000291.html
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.
$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. Currently, the focus is on a prototype for $H2O, in support of the patent filing.
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.
43
Potential Acquisitions and Incubations
The Company, intends to support WODI in acquiring assets and teams to support its growth.
We are particularly interested in companies which support the drop-in-place Modular Water Systems, provide engineering services, or 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.
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.
44
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 or SRTP), 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.
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.
45
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.
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 September 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 September 30, 2023 compared to the three months ended September 30, 2022.
Revenue and Cost of Sales
For the three months ended September 30, 2023, we had revenue of $1,363,840 compared to $3,366,061 for the three months ended September 30, 2022. Cost of sales for the three months ended September 30, 2023 was $1,135,541 compared to $2,542,887 for the three months ended September 30, 2022. Revenue and cost of sales decreased primarily due to our subsidiary’s decrease in revenue.
Our gross profit was $228,299 and $823,174 for the three months ended September 30, 2023 and 2022, respectively.
Selling and Marketing Expenses
For the three months ended September 30, 2023, we had selling and marketing expenses of $470,566 compared to $712,420 for the three months ended September 30, 2022. The decrease in selling and marketing expenses was primarily due to a decrease in marketing expense.
General and Administrative Expenses
For the three months ended September 30, 2023, we had general and administrative expenses of $904,223 compared to $1,085,044 for the three months ended September 30, 2022. The decrease in general and administrative expenses was primarily due to a decrease in professional and legal fees and outside services.
Other Income and (Expenses)
Other income and (expenses) decreased by $20,927,132 to $(7,140,597) for the three months ended September 30, 2023, compared to $(28,067,729) for the three months ended September 30, 2022. The decrease was due primarily to a decrease in loss on non-cash accounts associated with the change in fair value of the derivatives in the amount of $23,543,238, offset by an increase in present value of convertible secured promissory notes of $1,690,500 an increase in impairment of receivable of $610,000, with an overall decrease in other expenses in the amount of $315,606.
Net Income/(Loss)
Our net loss decreased by $20,757,557 to $(8,294,666) for the three months ended September 30, 2023, compared to net loss of $(29,052,223) for the three months ended September 30, 2022. The majority of the decrease in net loss was due primarily to a decrease in 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.
46
Results of Operations for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.
Revenue and Cost of Sales
For the nine months ended September 30, 2023, we had revenue of $5,200,918 compared to $7,768,133 for the nine months ended September 30, 2022. The cost of sales for the nine months ended September 30, 2023 was $4,646,349 compared to $6,484,235 for the nine months ended September 30, 2022. Revenue and cost of sales decreased primarily due to our subsidiary’s decrease in revenue.
Our gross profit was $554,569 and $1,283,898 for the nine months ended September 30, 2023 and 2022, respectively.
Selling and Marketing Expenses
For the nine months ended September 30, 2023, we had selling and marketing expenses of $1,915,809, compared to $1,825,170 for the nine months ended September 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 $3,008,988 for the nine months ended September 30, 2023, compared to $2,900,203 for the nine months ended September 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) decreased by $16,633,802 to $(13,797,523) for the nine months ended September 30, 2023, compared to $(30,421,325) for the nine months ended September 30, 2022. The decrease was due primarily to a decrease in loss on non-cash accounts associated with the change in fair value of the derivatives in the amount of $27,938,016, offset by an increase in present value of convertible secured promissory notes of $7,728,089, an increase in impairment of receivable of $3,260,985, with an overall decrease in other expenses in the amount of $315,140.
Net Income/(Loss)
Our net loss decreased by $15,713,484 to $(18,180,762) for the nine months ended September 30, 2023, compared to net loss of $(33,894,246) for the nine months ended September 30, 2022. The majority of the decrease in net loss was due primarily to a decrease in 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.
47
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.
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 nine months ending September 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 September 30, 2023 and December 31, 2022, we had cash of $1,153,181 and $1,354,814 and a working capital deficit of $32,064,689 and $14,245,179, respectively. The increase in working capital deficit was due primarily to an increase in convertible promissory notes, non-cash derivative liabilities, accrued expenses and contract liabilities.
During the period ended September 30, 2023, we raised a net aggregate of $516,300 from the sale of preferred stock in private placements and $6,346,500 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 $4,417,340 for the nine months ended September 30, 2023, compared to $3,458,023 for the prior period ended September 30, 2022. The increase in cash used in operating activities was primarily due to an increase in value added to note purchase agreements, accrued expenses, non-cash derivative liabilities and accounts payable.
Net cash flows used in investing activities was $3,007,285 for the nine months ended September 30, 2023, compared to $17,138 for the prior period ended September 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 $7,222,992 for the nine months ended September 30, 2023, as compared to $4,544,966 for the prior period ended September 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.
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.
48
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 September 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.
49
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. As of the date of this filing, the Company views the C6 Capital matter as closed.
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.
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. |
50
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.
| December 8, 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) |
51