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 | N/A | N/A |
Indicate
by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
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 May 13, 2022 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. | 27 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 39 |
| Item 4. | Controls and Procedures. | 39 |
| PART II | ||
| Item 1. | Legal Proceedings. | 40 |
| Item 1A. | Risk Factors. | 40 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 40 |
| Item 3. | Defaults Upon Senior Securities. | 40 |
| Item 4. | Mine Safety Disclosures. | 41 |
| Item 5. | Other Information. | 41 |
| Item 6. | Exhibits. | 41 |
| SIGNATURES | 42 | |
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORIGINCLEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| March
31, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Contracts receivable | ||||||||
| Fair value investment in securities, current | ||||||||
| Contract assets | ||||||||
| Inventory assets | ||||||||
| Prepaid expenses | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| NET PROPERTY AND EQUIPMENT | ||||||||
| OTHER ASSETS | ||||||||
| Long term assets held for sale | ||||||||
| 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 | ||||||||
| Capital lease, current portion | ||||||||
| Customer deposit | ||||||||
| Warranty reserve | ||||||||
| Loan payable, merchant cash advance | ||||||||
| Loans payable, SBA | ||||||||
| Derivative liabilities | ||||||||
| Series F 8% Preferred Stock, | ||||||||
| Series F 8% Preferred Stock, | ||||||||
| Series G 8% Preferred Stock, | ||||||||
| Series I 8% Preferred Stock, | ||||||||
| Series K 8% Preferred Stock, | ||||||||
| Convertible promissory notes, net of discount of $ | ||||||||
| Total Current Liabilities | ||||||||
| Long Term Liabilities | ||||||||
| Capital lease, long term portion | ||||||||
| Convertible promissory notes, net of discount of $ | ||||||||
| Total Long Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES (See Note 11) | ||||||||
| 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 10% Convertible Preferred Stock, | ||||||||
| Series S 12% Convertible Preferred Stock, | ||||||||
| Series T 10% Convertible Preferred Stock, | ||||||||
| Series U Convertible Preferred Stock, | ||||||||
| Series V Convertible Preferred Stock, | ||||||||
| Series W 12% Convertible Preferred Stock, | ||||||||
| Series X Convertible Preferred Stock, | ||||||||
| Series Y Convertible Preferred Stock, | ||||||||
| Series Z Convertible Preferred Stock, | ||||||||
| SHAREHOLDERS’ DEFICIT | ||||||||
| Preferred stock, $ | ||||||||
| Subscription payable to purchase | ||||||||
| Preferred treasury stock, 1,000 and 1,000 shares outstanding, respectively Common stock, $0.0001 par value, 16,000,000,000 shares authorized | ||||||||
| Additional paid in capital - Common stock | ||||||||
| Accumulated other comprehensive 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 MONTHS ENDED MARCH 31, 2022 AND 2021
(Unaudited)
| Three Months Ended | ||||||||
| March
31, 2022 | March
31, 2021 | |||||||
| 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 | ||||||||
| Gain on write of loans payable | ||||||||
| Loss on conversion of preferred stock | ( | ) | ( | ) | ||||
| Loss on exchange of preferred stock | ( | ) | ||||||
| Unrealized gain (loss) on investment securities | ( | ) | ||||||
| Loss on net change in derivative liability and conversion of debt | ( | ) | ( | ) | ||||
| Interest expense | ( | ) | ( | ) | ||||
| TOTAL OTHER (EXPENSE) INCOME | ( | ) | ( | ) | ||||
| NET INCOME (LOSS) | $ | ( | ) | $ | ( | ) | ||
| WARRANTS DEEMED DIVIDENDS | ( | ) | ||||||
| NET (LOSS) ATTRIBUTABLE TO SHAREHOLDERS INCOME | $ | ( | ) | $ | ( | ) | ||
| BASIC EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO SHAREHOLDERS’ | $ | ( | ) | $ | ( | ) | ||
| DILUTED EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO SHAREHOLDERS’ | $ | ( | ) | $ | ( | ) | ||
| WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING, | ||||||||
| BASIC | ||||||||
| DILUTED | ||||||||
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 THREE MONTHS ENDED MARCH 31, 2022 AND 2021
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Preferred stock | Mezzanine | Common stock | Additional Paid-in- | Subscription | Other Comprehensive | Accumulated | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Equity | Shares | Amount | Capital | Payable | loss | Deficit | Total | |||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| 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 J Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series L Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for Series O Preferred stock dividends | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| 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 S Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Issuance of Series M Preferred stock through a private placement | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of Series R Preferred stock through a private placement | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of Series T Preferred stock in exchange for property | - | - | ||||||||||||||||||||||||||||||||||||||
| Exchange of Series G Preferred stock for Series S Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Exchange of Series I Preferred stock for Series R Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Exchange of Series K Preferred stock for Series R Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Exchange of Series M Preferred stock for Series R Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Loss on conversion of Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of Common stock warrants deemed dividends | - | - | ||||||||||||||||||||||||||||||||||||||
| Net Income | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Preferred stock | Mezzanine | Common stock | Additional
Paid-in- | Subscription | Other Comprehensive | Accumulated | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Equity | Shares | Amount | Capital | Payable | loss | Deficit | Total | |||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| 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 L Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for Series O Preferred stock dividends | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| 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 make good shares for Series R Preferred stock | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion settlement | ( | ) | ||||||||||||||||||||||||||||||||||||||
| 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 K Preferred stock for Series W Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Exchange of Series V Preferred stock for Series Y Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Loss on conversion of Preferred stock | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 (unaudited) | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
The accompany notes are an integral part of these unaudited condensed consolidated financial statements
3
ORIGINCLEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(Unaudited)
| Three Months Ended | ||||||||
| March
31, 2022 | March
31, 2021 | |||||||
| 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 | ||||||||
| (Gain) Loss on net change in valuation of derivative liability | ||||||||
| Debt discount recognized as interest expense | ||||||||
| Net unrealized (gain) loss on fair value of securities | ( | ) | ||||||
| Loss on exchange of preferred stock | - | |||||||
| (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 | ||||||||
| Other receivable | ( | ) | ||||||
| Change in Liabilities Increase (Decrease) in: | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ||||||||
| Contract liabilities | ( | ) | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS USED FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments on capital lease | ( | ) | ( | ) | ||||
| Repayment of loans, related party, net | - | ( | ) | |||||
| Net payments on cumulative preferred stock dividends payable | ( | ) | ||||||
| Proceeds on convertible promissory notes | ||||||||
| Payments on promissory notes | ( | ) | ||||||
| Net proceeds for issuance of preferred stock for cash - mezzanine classification | ||||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| NET 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 | $ | $ | ||||||
| Common stock issued for settlements | $ | - | ||||||
| Issuance of Series T preferred stock in exchange for property | $ | $ | ||||||
| Issuance of Series O dividends | $ | $ | ||||||
| Preferred stock converted to common stock | $ | |||||||
| Conversion of debt to mezzanine preferred stock | $ | - | ||||||
| Conversion of mezzanine preferred stock to common | $ | - | ||||||
| Exchange from mezzanine to liability | $ | $ | ||||||
| Issuance of warrants deemed dividends | $ | $ | ||||||
| Fair value of derivative at issuance | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
4
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
MARCH 31, 2022
| 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 three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021.
The
Company has implemented a new outsourced water treatment business called Water On Demand (“WOD”). The WOD model intends to
offer private businesses water self-sustainability as a service. Four subsidiaries have been established to house capital dedicated to
this program. During the three months ended March 31, 2022, the Water On Demand business reached its first $
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, 2021 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 three months ended March
31, 2022, the Company obtained funds from the sales of its preferred stock. Management believes this funding will continue from its’
current investors and from new investors. For the three months ended March 31, 2022, the Company generated revenue of $
| 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.
5
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of OriginClear, Inc. and its wholly owned operating subsidiaries, Progressive Water Treatment, Inc., and OriginClear Technologies, Ltd. All material intercompany transactions have been eliminated upon consolidation of these entities.
Cash and Cash Equivalent
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, warranty reserves, inventory valuation, derivative liabilities and other conversion features, fair value investments, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Net Earnings (Loss) per Share Calculations
Basic loss per share calculation is computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similarly to basic earnings per share except that the denominator is increased to include securities or other contracts to issue common stock that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company’s diluted earnings per share were not the same as the basic loss per share for the three months ended March 31, 2022 and 2021, respectively, as the inclusion of any potential shares in the three months ended March 31, 2022 and 2021, would have had an anti-dilutive effect due to the Company generating a loss.
| For
the Three Months Ended | ||||||||
| 2022 | 2021 | |||||||
| Income (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.
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.
6
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 March 31, 2022 and determined there was no impairment of indefinite lived intangibles and goodwill.
7
Property and Equipment
Property and equipment are stated at cost. Gain or loss is recognized upon disposal of property and equipment, and the asset and related accumulated depreciation are removed from the accounts. Expenditures for maintenance and repairs are charged to expense as incurred, while expenditures for addition and betterment are capitalized. Furniture and equipment are depreciated on the straight-line method and include the following categories:
| Estimated Life | ||||
| Machinery and equipment | ||||
| Furniture, fixtures and computer equipment | ||||
| Vehicles | ||||
| Leasehold improvements |
| 3/31/2022 | 12/31/21 | |||||||
| 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 three months ended March 31, 2022 and March 31, 2021, was $
Inventory
The
Company expenses inventory on a first in, first out basis, and had raw materials of $
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.
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
8
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 March 31, 2022, the balances reported for cash, contract receivables, cost in excess of billing, prepaid expenses, accounts payable, billing in excess of cost, and accrued expenses approximate the fair value because of their short maturities.
We adopted ASC Topic 820 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
| ● | Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; | |
| ● | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and | |
| ● | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s balance sheets on a recurring basis and their level within the fair value hierarchy as of March 31, 2022.
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Investment at fair value-securities | $ | $ | $ | $ | ||||||||||||
| Total Assets measured at fair value | $ | $ | $ | $ | ||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Derivative Liability, March 31, 2022 | $ | $ | $ | $ | ||||||||||||
| Total liabilities measured at fair value | $ | $ | $ | $ | ||||||||||||
The following is a reconciliation of the derivative liability for which level 3 inputs were used in determining the approximate fair value:
| Balance as of January 1, 2022 | $ | |||
| Fair value at issuance | ||||
| Loss on conversion of debt and change in derivative liability | ||||
| Balance as of March 31, 2022 | $ |
For purpose of determining the fair market value of the derivative liability, the Company used Binomial lattice formula valuation model. The significant assumptions used in the Binomial lattice formula valuation of the derivative are as follows:
| 3/31/22 | ||||
| Risk free interest rate | ||||
| Stock volatility factor | ||||
| Weighted average expected option life | ||||
| Expected dividend yield |
9
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.
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 |
Preferred Stock
Series C
On
March 14, 2017, the Board of Directors authorized the issuance of
10
Series D-1
On
April 13, 2018, the Company designated
Series E
On
August 14, 2018, the Company designated
Series F
On
August 14, 2018, the Company designated
Series G
On
January 16, 2019, the Company designated
11
Series I
On
April 3, 2019, the Company designated
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
12
Series M
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
13
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
14
Series T
On
February 24, 2021, the Company designated
Series U
On
May 26, 2021, the Company designated
15
Series V
On
December 1, 2021, the Company filed a certificate of withdrawal of the Company’s certificate of designation of Series V preferred
stock and filed a certificate of designation for a new series of Series V preferred stock with the Secretary of State of Nevada. Pursuant
to the Series V COD, the Company designated
Series W
On
April 28, 2021, the Company designated
Series X
On
August 10, 2021, the Company designated
16
Series Y
On
December 6, 2021, the Company designated
Series Z
On
February 11, 2022, the Company designated
As
of March 31, 2022, the Company accrued aggregate dividends in the amount 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.
Common Stock
Three Months Ended March 31, 2022
The
Company issued
The
Company issued
The
Company issued
The
Company issued
17
The
Company issued shares of common stock upon conversion of
Three Months Ended March 31, 2021
The
Company issued
The
Company issued
The
Company issued
The
Company issued
| 4. | RESTRICTED STOCK 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.
Restricted Stock to the Board, Employees and Consultants
Between
May 12, 2016, and January 1, 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
18
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,
During the three months ended March 31, 2022, the Company did not issue any shares relating to the RSGAs nor the BEC RSGAs.
Warrants
During
the three months ended March 31, 2022, the Company granted
| 3/31/2022 | ||||||||
| Number
of Warrants | Weighted
average exercise price | |||||||
| Outstanding - beginning of period | $ | |||||||
| Granted | $ | |||||||
| Exercised | ||||||||
| Expired | ( | ) | $ | |||||
| Outstanding - end of period | $ | |||||||
At March 31, 2022, the weighted average remaining contractual life of warrants outstanding:
| 2022 | ||||||||||||||
| Weighted Average | ||||||||||||||
| Remaining | ||||||||||||||
| Exercisable | Warrants | Warrants | Contractual | |||||||||||
| Prices | Outstanding | Exercisable | Life (years) | |||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
At
March 31, 2022, the aggregate intrinsic value of the warrants outstanding was $
19
| 5. | CONVERTIBLE PROMISSORY NOTES |
As of March 31, 2022, the outstanding convertible promissory notes are summarized as follows:
| Convertible Promissory Notes | $ | |||
| Less current portion | ||||
| Total long-term liabilities | $ |
Maturities of long-term debt for the next two years are as follows:
| Year Ending March 31, | Amount | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| $ | ||||
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 sixty (60) months from the effective date of each Note.
The unsecured convertible promissory notes (the “OID Notes”)
had an aggregate remaining balance of $
The Company issued various, unsecured convertible promissory notes
(the “2015Notes”), on various dates ending on 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 2022 through August 2022. The 2015 Notes bear interest
at
20
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
$
The Company entered into an unsecured convertible promissory note (the
“Nov 20 Note”), on November 19, 2020 in the amount of $
21
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 as of March 31, 2022 was $
| 6. | REVENUE FROM CONTRACTS WITH CUSTOMERS |
Equipment Contracts
Revenues and related costs on equipment contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.
The following table represents a disaggregation of revenue by type of good or service from contracts with customers for the March 31, 2022 and 2021.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Equipment Contracts | $ | $ | ||||||
| Component Sales | ||||||||
| Waste Water Treatment Systems | ||||||||
| Rental Income | ||||||||
| Services Sales | ||||||||
| $ | $ | |||||||
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 three months ended March 31, 2022 and the year ended December 31, 2021, was $
22
| 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,
| 8. | LOANS PAYABLE |
Secured Loans Payable
The
Company entered into
Small Business Administration Loans
Between
April 30, 2020 and September 12, 2020, the Company received total loan proceeds in the amount of $
23
| 9. | CAPITAL LEASES |
The
Company entered into a capital lease for the purchase of equipment during the year ended December 31, 2018. The lease is for a
| 10. | FOREIGN SUBSIDIARY |
On January 22, 2020 the Company entered into a strategic partnership with Permionics Separations Solutions, Inc., a unit of India’s Permionics Group (“Permionics”) for the Asia-Pacific Region. This strategic partnership assists the Company with overcoming the typical hurdles in commercializing a technology overseas with engineering support, developing customer proposals, infrastructure to handle logistics and purchasing, inventory and shipping from and into foreign countries, customer training, startup assistance and service.
The Company believes that Permionics is best suited to accomplish all of the above for its customers in the Asia-Pacific countries and as a result, has terminated all activities of its fully owned subsidiary, OriginClear Technologies Limited, in Hong Kong, China, working instead with Permionics when applicable.
| 11. | ASSETS HELD FOR SALE |
The
Company acquired real estate assets to be held for sale to finance their water projects, by issuing 630 shares of Series T preferred
stock for a fair value of $
| 12. | COMMITMENTS AND CONTINGENCIES |
Facility Rental – Related Party
Our
Dallas based subsidiary, PWT, rents an approximately12,
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
January 24, 2022, OriginClear, Inc., Progressive Water Treatment, Inc., OriginClear, Inc., and T. Riggs Eckelberry, individually (collectively,
the “GTR Plaintiffs”), on the one hand, and GTR Source LLC and Tzvi “Steve” Reich (collectively, the “GTR
Defendants”), on the other hand, settled a dispute between the parties relating to two distinct merchant funding agreements that
were entered into on July 20, 2018 and August 28, 2018, and a settlement agreement entered into on December 13, 2018. Pursuant to the
terms of settlement, all of which have been performed as of the filing date, (i) the GTR Defendants paid $
24
On March 12, 2021, OriginClear, Inc. Progressive Water Treatment, Inc. and T. Riggs Eckelberry, individually (collectively, the “C6 Plaintiffs”), and C6 Capital LLC (“C6 Capital”) agreed to settle the dispute between the parties relating to a merchant cash advance agreement entered into on July 17, 2018. Pursuant to the terms of the settlement, (i) C6 has vacated the judgment obtained by C6 Capital against the C6 Plaintiffs; (ii) C6 has released any and all bank levies, liens, security interests, powers of attorney, and other encumbrances its has against the C6 Plaintiffs; (iii) the C6 Plaintiffs have dismissed the plenary action commenced in the Supreme Court for the State of New York in and for the County of Broome against C6 Capital with prejudice and; (iv) the sister-state judgment C6 Capital obtained against the C6 Plaintiffs in California is currently in the process of being vacated by stipulation. Accordingly, the C6 Plaintiffs no longer owe any further amounts to C6 Capital with respect to the C6 Agreement.
On
February 12, 2019, Auctus Fund, LLC (“Auctus”) filed a complaint against OriginClear in the United States District Court
for the District of Massachusetts for numerous claims arising from two convertible promissory notes and accompanying securities purchase
agreements. On March 13, 2019, Auctus and OriginClear entered into a Settlement Agreement and Mutual General Release, under which Auctus
would be permitted to convert $
| 13. | 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:
On April 6, 2022, OriginClear agreed in principle to an arrangement with Houston-based, international water service company Envirogen Technologies (www.envirogen.com), a 30-year international provider of environmental technology and process solutions, to deliver and maintain OriginClear’s Water On Demand fully-outsourced industrial and agriculture systems.
Between
April 6, 2022 and May 10, 2022, the Company entered into subscription agreements with certain accredited investors pursuant to which
the Company sold an aggregate of
25
On April 13, 2022, the Company’s Board of Directors approved the plan to spin off its Water On Demand business into a newly formed wholly-owned subsidiary, Water On Demand Inc., which will hold the assets, liabilities, intellectual property and business operations of the Water On Demand business. The Board also approved the issuance of rights to receive shares in Water On Demand Inc. as a bonus to the purchasers of its Series Y Preferred Shares, which are currently being offering pursuant to a private placement.
On
April 18, 2022, holders of the Company’s Series K preferred stock exchanged an aggregate of
Between
April 18, 2022 and May 2, 2022, the Company issued to consultants an aggregate of
On
April 18, 2022, the Company entered into settlement agreements with certain accredited investors pursuant to which the Company issued
an aggregate of
Between
April 19, 2022 and May 11, 2022, holders of the Company’s Series W preferred stock converted an aggregate of
On
April 19, 2022, a prior holder of the Company’s Series P preferred stock was issued an aggregate of
On
April 25, 2022, holders of the Company’s Series T preferred stock converted an aggregate of
On
April 25, 2022, holders of the Company’s Series Y preferred stock converted an aggregate of
On
April 26, 2022, holders of the Company’s Series L preferred stock converted an aggregate of
On
April 26, 2022, holders of the Company’s Series R preferred stock converted an aggregate of
On
May 10, 2022, holders of the Company’s Series I preferred stock exchanged an aggregate of
On
May 11, 2022, holders of the Company’s Series J preferred stock converted an aggregate of
26
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:
| ● | business strategy; |
| ● | financial strategy; |
| ● | intellectual property; |
| ● | production; |
| ● | future operating results; and |
| ● | plans, objectives, expectations, and intentions contained in this report that are not historical. |
All statements, other than statements of historical fact included in this report, regarding our strategy, intellectual property, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in this report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.
Organizational History
OriginClear, Inc. (“we”, “us”, “our”, the “Company” or “OriginClear”) was incorporated on June 1, 2007 under the laws of the State of Nevada. We have been engaged in business operations since June 2007. In 2015, we moved into the commercialization phase of our business plan having previously been primarily involved in research, development and licensing activities. Our principal offices are located at 13575 58th Street North, Suite 200, Clearwater, FL 33760. Our main telephone number is (727) 440-4603. Our website address is www.OriginClear.com. The information contained on, connected to or that can be accessed via our website is not part of this report.
Overview of Business
OriginClear is a company that today, develops unique water assets for eventual launch as their own companies. This new role was indicated water technology company which has developed in-depth capabilities over the eight years since It began to operate in the water industry. Those capabilities have now been organized under the umbrella of OriginClear Tech Group™ (www.originclear.tech). OriginClear, under the brand of OriginClear Tech Group (“OTG”), designs, engineers, manufactures, and distributes water treatment solutions for commercial, industrial, and municipal end markets.
27
OriginClear’s assets, subsidiaries and product offerings consist of:
| ● | The Intellectual Property of Daniel M. Early (the “Early IP”), consisting of five patents and related knowhow and trade secrets, which are intended to take the place of the applications for the company’s original technology developments. |
| ● | The brand, Modular Water Systems (MWS), featuring products differentiated by the Early IP and complemented with additional knowhow and trade secrets. MWS is in commercial operation and operates as a division of Progressive Water Treatment (PWT). The Company is currently developing MWS as a discrete line of business for an eventual spinoff. In addition, the Company is evaluating the EveraMOD Pump Station product line as a potential standalone business. |
| ● | Progressive Water Treatment Inc. (“PWT”) a wholly-owned subsidiary based in Dallas, Texas which is responsible for the bulk of the company’s revenue, specializing in engineered water treatment solutions and custom treatment systems. We believe that PWT has knowhow with Intellectual property (IP) potential. |
| ● | OriginClear has incubated a new outsourced water treatment business called Water On Demand (“WOD”). |
| o | The WOD model intends to offer private businesses water self-sustainability as a service. |
| o | Four subsidiaries have been established to house capital dedicated to this program. |
| o | On April 13, 2022, the Company’s Board of Directors approved the plan to spin off its Water On Demand business into a newly formed wholly-owned subsidiary, Water On Demand Inc., which will hold the assets, liabilities, intellectual property and business operations of the Water On Demand business. |
(https://www.sec.gov/ix?doc=/Archives/edgar/data/1419793/000121390022019889/ea158479-8k_origin.htm)
OriginClear Tech Group
The Company develops and incubates businesses under the name OriginClear Tech Group (“OTG”). The mission of OTG in general, is to create and 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 Water On Demand business into a newly formed wholly-owned subsidiary, Water On Demand Inc., which will hold the assets, liabilities, intellectual property and business operations of the Water On Demand business.
Further businesses can be expected to be spun off, as the Company announced on April 26, 2022:
“The launch of Water on Demand is the first of several anticipated business property spinoffs…Other Company business properties include Modular Water Systems, which owns a master license to five key international patents for prefabricated, highly-durable modular water treatment and pumping products. Being a proprietary technology, MWS frequently qualifies as “Basis of Design” for projects, which means that competitors cannot easily undercut MWS.”
(https://www.originclear.com/company-news/originclear-to-launch-water-on-demand-fintech-startup)
OTG ongoing operations include:
| 1. | Building a line of customer-facing water brands to expand global market presence and technical expertise. These include the wholly-owned subsidiary, Progressive Water Treatment, Inc., and the Modular Water Systems brand. | |
| 2. | Managing relationships with partners worldwide who are licensees and business partners. | |
| 3. | Actively working on the ability to deliver Operation & Maintenance (“O&M”) capability at scale, to support Water On Demand outsourced treatment and purification programs. | |
| 4. | Support the development of the $H2O blockchain system, a potential future project. | |
| 5. | Prepare properties for eventual spinoff. |
Water is our most valuable resource, and the mission of OTG is to improve the quality of water and help return it to its original and clear condition.
28
Milestones
Daniel M. Early/Modular Water Systems™
On June 22, 2018, OriginClear signed an exclusive worldwide licensing agreement with Daniel “Dan” Early 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.
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 Nov 7, 2019, the Company published a case study showing how its Modular Water System may help automotive dealerships 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 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.
29
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.
In 2021, PWT received $11,319,541 in firm orders. This contrasts with $3,506,020 received in firm orders by PWT for the entirety of 2020. Orders are only a potential indication of future sales and revenue.
In the first quarter ending March 31, 2022, PWT received $1,657,055 in firm orders. This contrasts with $1,065,491 received in firm orders in the first quarter ending March 31, 2021. Orders are only a potential indication of future sales and revenue.
Modular Water Systems
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 September 28, 2021, the Company announced that MWS deployed its first Pondster™ brand modular lagoon treatment system at a Mobile Home Park (MHP) or trailer park, in Troy, Alabama. At the heart of the system is an innovative biofilm treatment process which holds promise as a technology offering of the Company.
In 2021, MWS received $1,774,880 in firm orders. This contrasts with $735,150 received in firm orders by MWS for the entirety of 2020.
In the first quarter ending March 31, 2022, MWS received $787,000 in firm orders. This contrasts with $161,950 received in firm orders in the first quarter ending March 31, 2021. Orders are only a potential indication of future sales and revenue.
Water on Demand™: a new strategic direction.
OriginClear is also developing a new 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”. 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. Additional subsidiaries have since been created for the purposed of segmenting capital pools according to strategic partnerships.
The Company intends to pilot a first DBOO contract and thereafter, work with regional water service companies to build and operate the water treatment systems it finances. Additional financing hubs could be set up in world financial centers.
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.
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On April 13, 2022, the Company’s Board of Directors approved the plan to spin off its Water On Demand business into a newly formed wholly-owned subsidiary, Water On Demand Inc., which will hold the assets, liabilities, intellectual property and business operations of the Water On Demand business, including all four WOD subsidiaries.
(https://www.sec.gov/ix?doc=/Archives/edgar/data/1419793/000121390022019889/ea158479-8k_origin.htm)
Reducing Risk through Outsourcing
Inflation of water rates greatly exceeds core inflation (see Figure 2), 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 what we call Water on Demand™ means that these companies do not have to worry about the problem, either financing it or managing it.
As an example, in information technology, few companies operate their own server in-house powering their website. Rather, such servers are typically managed by professionals through a service level agreement. In the water industry, when applied to outsourced water treatment, a service level agreement is known as O&M agreement. When the vendor retains ownership of the equipment, the concept is expanded to “Own and Operate”, an extension of the basic “Design and Build”, for a full offering known as 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 by simply signing on the dotted line; instantly avoiding most capital expense, and the trouble of managing something that is a distraction from their core business.
We believe this is financially and operationally attractive to industrial, agricultural and commercial water users, while OriginClear’s Water On Demand program can potentially drive speeded-up deals and more revenue streams from providing water treatment as a service.
The Decentralization Megatrend
Figure 1
An updated report of October 2018, “Public Spending on Transportation and Water Infrastructure, 1956 to 2017” (https://www.cbo.gov/system/files?file=2018-10/54539-Infrastructure.pdf), stated that The Federal Government’s and State and Local Governments’ Spending on Water Utilities, including water supply and wastewater treatment facilities, was $4 billion in 2016.
As municipalities continue to be underfunded (Figure 1) with rising water rates (Figure 2), 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).
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Figure 2
Small, modular systems as sold by our Modular Water Systems division meet the needs of this new segment.
We believe that our ability to deliver modular systems gives us a competitive advantage over larger water companies when it comes to DBOO for smaller systems.
Also, the portable nature 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 their mobility 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, we could license MWS technology to Water On Demand operating partners under contract to design, build and operate systems, thus achieving both acceptance of such technology and a standardized “fleet” of installed systems.
Implementation of Water On Demand
We have taken initial steps in this new direction.
On March 17, 2021, OriginClear incorporated Water On Demand #1 Inc. (“WOD#1”) in Nevada as a wholly owned subsidiary to operate and manage 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). Each subsidiary (each a “WOD Subsidiary”, and collectively the “WOD Subsidiaries”) is wholly owned by OriginClear, Inc. These WOD Subsidiaries were created in order to align with the incentives of the Company’s various strategic partners. Each WOD Subsidiary (other than WOD #1), is associated with a different strategic partner and will be compensated based on the profitability of that WOD Subsidiary.
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The Company requires funding in order to execute on its Water on Demand initiative. As of the period ended March 31, 2022, the Company received aggregate funding in the amount of $1,057,100 through the sale of its Series Y Preferred Stock dedicated to the Water on Demand program.
The Company is now actively evaluating potential clients for a test of water treatment and purification services on a pay-per-gallon basis, but a first agreement has not been reached.
On April 5, 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 and its plans to transfer each of the WOD subsidiaries and all assets, intellectual property and operations related to the Water On Demand business to WODI.
Advisory Support for OriginClear
In September 2020, OriginClear announced that Philanthroinvestors had entered a strategic agreement with the Company and had listed the Company on its new Water Philanthroinvestors program. At the same time, the Company appointed Philanthroinvestors Founder, Ivan Anz and CEO, Arte Maren to OriginClear’s Board of Advisors.
$H2O™
On May 10, 2021, OriginClear filed “System And Method For Water Treatment Incentive”, a patent application 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, or Water On Demand. The Company recently filed a PCT application pertaining to the invention.
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)).
On June 10, 2021, the Company named Ricardo Fabiani Garcia, key OriginClear investor and a veteran technologist, to the Company’s Board of Advisors. Mr. Garcia is advising the management team as it sets up the roadmap and chooses the resources for the $H2O project.
The basic intended use of the blockchain system is to streamline payments and eliminate human error. In this respect we believe it is very similar to J.P. Morgan’s JPM Coin:
Our patent application is the first step in our development process for this blockchain system, which we expect to last at least several months. We are not currently a blockchain or crypto currency developer and would need to develop or contract for this capability. There is no guarantee that this effort would succeed. 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.
ClearAqua™
OriginClear is currently exploring a utility coin, or token, named ClearAqua, The Water Coin For The World™, which would implement a grassroots network for alerts, leading to actionable proposals for water projects. There is no assurance this token will be issued or if issued, will be successful. ClearAqua is not required for OriginClear’s core business.
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“In 2019, J.P. Morgan became the first global bank to design a network to facilitate instantaneous payments using blockchain technology - enabling 24/7, business-to-business money movement by unveiling JPM Coin.” (https://www.jpmorgan.com/solutions/cib/news/digital-coin-payments).
We filed, on an intent-to-use basis, US Trademark applications on July 21, 2021, for the Mark, CLEARAQUA. We also engaged San Diego-based Baja Technologies Inc. (“Baja”) who wrote a preliminary white paper, but no other action has been taken and ClearAqua is not in active development at this time.
Potential Acquisitions and Incubations
OTG seeks to incubate or acquire businesses that help industrial water users achieve water self-sustainability. We believe that assembling a group of such water treatment and water management businesses is potentially an opportunity for spinoffs and increased Company value for the stockholders.
We are particularly interested in companies which successfully execute on Design-Build-Own-Operate or DBOO. 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 (“Early IP”).
On May 20, 2020, we agreed on a renewal of the license for an additional ten years, with three-year extensions. We also gained the right to sublicense, and, with approval, to create ISO-compliant manufacturing joint ventures.
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The 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 | 05/16/32 | ||||
| 3 | Wastewater Treatment System CIP | US 8,871,089 B2 | 10/28/14 | 05/07/32 | ||||
| 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 |
On May 10, 2021, OriginClear announced that it had filed “System And Method For Water Treatment Incentive”, a patent application 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 Modular Water Systems licensed IP family is the core to a portable, integrated, transportable, plug-and-play system that, unlike other packaged solutions, can be manufactured in series, have a longer life and are more respectful of the environment.
The common feature of this IP family is the use of a construction material (Structural Reinforced ThermoPlastic), for the containers that is:
| ● | more durable: an estimated 75 to 100-year life cycle as opposed to a few decades for metal, or 40 to 50 years maximum for concrete; | |
| ● | easier to manufacture: vessels manufacturing process can be automated; and | |
| ● | recyclable and can be made out of biomaterials |
In addition, patents US 8,372,274 and US 8,871,089 (1 and 3) relate to the use of vessels or containers made out of this material combined with a configuration of functional modules, or process, for general water treatment.
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.
Expansion of the PWT and MWS Business-Lines
Beginning with its first installation, PWT built MWS components. PWT and MWS are now fully integrated as a single profit and manufacturing center. The Company is currently developing MWS as a discrete line of business for an eventual spinoff. In addition, the Company is evaluating the EveraMOD Pump Station product line as a potential standalone business.
In April 2019, we completed the expansion of our manufacturer’s representative network to serve both PWT and MWS for customer lead generation.
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Critical Accounting Policies
The Securities and Exchange Commission (“SEC”) defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition.
Revenue Recognition
We recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.
Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss, as it is determined. Revisions in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts for the revisions become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions to costs and income, which are recognized in the period the revisions are determined.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill, impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, inventory valuation, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
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 March 31, 2022, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.
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Results of Operations for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
Revenue and Cost of Sales
For the three months ended March 31, 2022, we had revenue of $1,234,105 compared to $796,178 for the three months ended March 31, 2021. Cost of sales for the three months ended March 31, 2022 was $1,458,855 compared to $691,521 for the three months ended March 31, 2021. Revenue and cost of sales increased primarily due to our subsidiary’s increase in revenue.
Our gross profit was $(224,750) and $104,657 for the three months ended March 31, 2022 and 2021, respectively.
Selling and Marketing Expenses
For the three months ended March 31, 2022, we had selling and marketing expenses of $646,184, compared to $431,508 for the three months ended March 31, 2021. The increase in selling and marketing expenses was primarily due to an increase in marketing and investor relations expense.
General and Administrative Expenses
For the three months ended March 31, 2022, we had general and administrative expenses of $880,260 compared to $818,553 for the three months ended March 31, 2021. The increase in general and administrative expenses was primarily due to an increase in professional and legal fees and outside services.
Other Income and (Expenses)
Other income and (expenses) decreased by $14,886,200 to $(1,814,340) for the three months ended March 31, 2022, compared to $(16,700,540) for the three months ended March 31, 2021. The decrease was due primarily to a decrease in non-cash accounts associated with the change in fair value of the derivatives in the amount of $14,324,996, decrease in interest expense of $24,368, which includes amortization of debt discount of $3,743, decrease in loss on conversion of preferred stock of $579,815, an increase in gain on write-off of loan payable of $75,000, a decrease in loss on conversion of preferred stock in the amount of $40,000 offset by an increase in unrealized loss on investment securities in the amount of $157,978, and decrease in other income of $1.
Net Income/(Loss)
Our net loss decreased by $14,281,308 to $(3,576,267) for the three months ended March 31, 2022, compared to net loss of $(17,857,575) for the three months ended March 31, 2021. The majority of the decrease in net income 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.
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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 three months ending March 31, 2022. 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 March 31, 2022 and December 31, 2021, we had cash of $1,854,415 and $706,421, respectively, and a working capital deficit of $12,730,315 and $12,826,008, respectively. The decrease in working capital deficit was due primarily to a decrease in non-cash derivative liabilities, cash, and contract assets with a decrease in contract receivables, loan payable, prepaid expenses, accrued expenses, and contracts liabilities.
During the period ended March 31, 2022, we raised an aggregate of $1,494,200 from the sale of preferred stock in private placements. 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 $271,565 for the three months ended March 31, 2022, compared to $999,665 for the prior period ended March 31, 2021. The decrease in cash used in operating activities was primarily due to a decrease in the net change in fair value of derivative liabilities, with an increase in contract liabilities and contracts receivables.
Net cash flows used in investing activities for the three months ended March 31, 2022 and 2021, were unchanged at $4,500 and $4,500, respectively.
Net cash flows provided by financing activities was $1,424,059 for the three months ended March 31, 2022, as compared to $1,146,201 for the three months ended March 31, 2021. The increase in cash provided by financing activities was due primarily to an increase in proceeds for issuance of preferred stock. To date we have principally financed our operations through the sale of our common and preferred stock and the issuance of debt.
We do not have any material commitments for capital expenditures during the next twelve months. Although our proceeds from the issuance of securities together with revenue from operations are currently sufficient to fund our operating expenses in the near future, we will need to raise additional funds in the future so that we can maintain and expand our operations. Therefore, our future operations are dependent on our ability to secure additional financing, which may not be available on acceptable terms, or at all. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans and possibly cease our operations.
We have estimated our current average burn, and believe that we have assets to ensure that we can function without liquidation for a limited time, due to our cash on hand, growing revenue, and our ability to raise money from our investor base. Based on the aforesaid, we believe we have the ability to continue our operations for the immediate future and will be able to realize assets and discharge liabilities in the normal course of operations. However, there cannot be any assurance that any of the aforementioned assumptions will come to fruition and as such we may only be able to function for a short time.
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Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed under the Exchange Act, is recorded, processed, summarized and reported within the required time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15f of the Exchange Act) that occurred during the fiscal quarter ended March 31, 2021 that has materially affected, or are reasonably likely to materially affect, the our internal control over financial reporting.
Limitations on Internal Controls
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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PART II
Item 1. Legal Proceedings.
On January 24, 2022, OriginClear, Inc., Progressive Water Treatment, Inc., OriginClear, Inc., and T. Riggs Eckelberry, individually (collectively, the “GTR Plaintiffs”), on the one hand, and GTR Source LLC and Tzvi “Steve” Reich (collectively, the “GTR Defendants”), on the other hand, settled a dispute between the parties relating to two distinct merchant funding agreements that were entered into on July 20, 2018 and August 28, 2018, and a settlement agreement entered into on December 13, 2018. Pursuant to the terms of settlement, all of which have been performed as of the filing date, (i) the GTR Defendants paid $25,000 to the GTR Plaintiffs, (ii) the parties mutually released each other from all claims, controversies, etc. that could have been asserted by any party against any other party pursuant to the aforesaid merchant funding agreements and settlement entered thereunder, and (iii) the GTR Plaintiffs dismissed with prejudice the action commenced by the GTR Plaintiffs in the Supreme Court for the State of New York in and for the County of Ontario and the appeal in the United States Court of Appeals for the Second Circuit. In addition the foregoing terms of settlement, on January 11, 2022, the GTR Defendants filed a vacatur of the judgment by confession, with prejudice, that was obtained in favor of the GTR Defendants and against the GTR Plaintiffs in the Supreme Court for the State of New York in and for the County of Ontario. As of the filing date, the Company views the aforesaid GTR matter as closed.
On March 12, 2021, OriginClear, Inc. Progressive Water Treatment, Inc. and T. Riggs Eckelberry, individually (collectively, the “C6 Plaintiffs”), and C6 Capital LLC (“C6 Capital”) agreed to settle the dispute between the parties relating to a merchant cash advance agreement entered into on July 17, 2018. Pursuant to the terms of the settlement, (i) C6 has vacated the judgment obtained by C6 Capital against the C6 Plaintiffs; (ii) C6 has released any and all bank levies, liens, security interests, powers of attorney, and other encumbrances its has against the C6 Plaintiffs; (iii) the C6 Plaintiffs have dismissed the plenary action commenced in the Supreme Court for the State of New York in and for the County of Broome against C6 Capital with prejudice and; (iv) the sister-state judgment C6 Capital obtained against the C6 Plaintiffs in California is currently in the process of being vacated by stipulation. Accordingly, the C6 Plaintiffs no longer owe any further amounts to C6 Capital with respect to the C6 Agreement.
On February 12, 2019, Auctus Fund, LLC (“Auctus”) filed a complaint against OriginClear in the United States District Court for the District of Massachusetts for numerous claims arising from two convertible promissory notes and accompanying securities purchase agreements. On March 13, 2019, Auctus and OriginClear entered into a Settlement Agreement and Mutual General Release, under which Auctus would be permitted to convert $570,000 into OriginClear securities pursuant to the terms set forth in the convertible promissory notes. On February 2, 2021, OriginClear filed a Motion to Set Aside the Settlement Agreement as Void under Section 29(b) of the Securities Exchange Act of 1934 (the “Act”) for Auctus’ violation of Section 15(a) of the Act. If granted, the Settlement Agreement would be declared void and unenforceable. As of the filing date, no decision has been rendered on OriginClear’s Motion to Set Aside the Settlement Agreement.
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 160 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 $160,000.
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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 235 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 $235,000.
As of the date of the filing of this report, the Company has 482 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 $482,150.
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. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| May 16, 2022 | ORIGINCLEAR, INC. |
| /s/ T. Riggs Eckelberry | |
| T. Riggs Eckelberry | |
| Chief Executive Officer | |
| (Principal Executive Officer) and |
| /s/ Prasad Tare | |
| Prasad Tare | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
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