Originclear, Inc 10-K for FY2021
Originclear, Inc. (OCLN)
About this 10-K
Originclear, Inc filed this 10-K on April 7, 2022, covering the fiscal year ended December 31, 2021 (FY2021).
Headline figures
Fiscal year ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $4.14M
- up 1.0% from $4.1M a year earlier
- Net loss
- $2.12M
- compared with net income of $13.26M a year earlier
- Diluted EPS
- -$0.02
- compared with $0.04 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the fiscal year ended
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At
April 5, 2022,
DOCUMENTS INCORPORATED BY REFERENCE: NONE
TABLE OF CONTENTS
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NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-K 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,” and “Business,” 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, including, without limitation, the risks outlined under “Risk Factors” and matters described in this report generally. 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.
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PART I
ITEM 1. BUSINESS.
Organizational History
OriginClear, Inc. (“we”, “us”, “our”, the “Company” or “OriginClear”) was incorporated on June 1, 2007 under the laws of the State of Nevada. We have been engaged in business operations since June 2007. In 2015, we moved into the commercialization phase of our business plan having previously been primarily involved in research, development and licensing activities. Our principal offices are located at 13575 58th Street North, Suite 200, Clearwater, FL 33760. Our main telephone number is (727) 440-4603. Our website address is www.OriginClear.com. The information contained on, connected to or that can be accessed via our website is not part of this report.
Overview of Business
OriginClear is a water technology company which has developed in-depth capabilities over its 14-year lifespan. Those technology capabilities have now been organized under the umbrella brand 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.
OriginClear’s assets, subsidiaries and product offerings consist of:
| ● | The intellectual property of Daniel M. Early, consisting of five patents and related intellectual property, know-how and trade secrets (“Company IP”), which are intended to take the place of the applications for the company’s original technology developments. |
| ● | Progressive Water Treatment Inc. (“PWT”) is 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. | |
| ● | OriginClear is also developing a new outsourced water treatment business called Water On Demand (“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. Four subsidiaries have been established to house capital dedicated to this program. |
| ● | Modular Water Systems (“MWS”), is a division of PWT, which implements other Company IP. |
OriginClear Tech Group
All of the Company’s technology and operations activities are centrally branded under the name OriginClear Tech Group (“OTG”). The mission of OTG is to provide expertise and technology to help make clean water available for all. Specifically, OTG houses the following initiatives:
| 1. | Building a network of customer-facing water brands to expand global market presence and technical expertise. These include the wholly-owned subsidiary, Progressive Water Treatment, Inc., and the Modular Water Systems brand. |
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| 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, intended to succeed WaterChain. |
| 5. | Incubate the new WOD program for launch as a global brand. |
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.
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. 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”).
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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.
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.
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 stations) and wastewater treatment plant (“WWTP”) products 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 core technology offering of the Company.
After just eight days, the lagoon exhibited rapid improvement in water quality (see before and after image), which is continuing. As of December 31, 2021, the Troy, Alabama project had not completed its water testing requirements and the Company continues to enhance the Pondster operation in light of lessons learned in the field. The Company regards these efforts and additional expenses as intrinsic to the commercial pilot process.
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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.
Orders are only an indication of future 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.
On March 23, 2022, the Company announced that it was evaluating the first pilot opportunity, a 50,000 gallon per day wastewater treatment project.
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.
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 Water on Demand means that these companies do not have to worry about financing or managing the project.
As an example, in information technology sector, a limited number of companies operate their own server in-house powering their website. Rather, such servers are typically managed by professionals through a service level agreement. We believe this same concept can be applied towards water treatment, using outsourced water treatment solutions whereby the vendor retains ownership of the equipment. This concept is expanded to “Own and Operate”, an extension of the basic “Design and Build”, for a full offering known as “Design Build Own and Operate” or “DBOO”, which is very similar to the solar energy programs known as Power Purchase Agreements (PPAs).
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Under such a plan, a business can outsource its wastewater treatment and avoid significant capital expenses and management responsibilities which can be a distraction from their core business.
We believe this is financially and operationally attractive to industrial, agricultural and commercial water users and can potentially drive additional revenue streams for OriginClear by providing water treatment as a service.
The Decentralization Megatrend
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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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
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 December 31, 2021, the Company had received initial funding in the amount of $635,000 through the sale of its Series Y Preferred Stock (see Notes to Financial Statements- Sale of Preferred Stock).
On March 23, 2022, the Company announced that it had received over $1 million in capital through the sale of its Series Y Preferred Stock which capital is 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. Also, the Company is in early stage talks with partners to deliver DBOO services, with the Company handling contract management, finance and ownership. In the event such talks do not succeed, the Company would need to implement its own resources for such DBOO services.
Advisory Support for OriginClear
In September, 2020 OriginClear announced that Philanthroinvestors had entered a strategic agreement with OriginClear and had listed the Company on its new Water Philanthroinvestors program. At the same time, OriginClear appointed Philanthroinvestors Founder, Ivan Anz and CEO, Arte Maren to OriginClear’s Board of Advisors.
$H2O™
On May 10, 2021, OriginClear filed a patent application for its “System And Method For Water Treatment Incentive”, which includes blockchain technology and non-fungible tokens (“NFT(s)”) to simplify the distribution of payments on outsourced water treatment and purification services billed on a pay-per-gallon basis ahead of inflation, or Water On Demand.
On May 16, 2021, the Company applied for a registered trademark for the mark $H2O (also referred to as H2O) as the blockchain system representing this activity. The current filing basis is “Intent-to-use basis” (under Trademark Act Section 1(b)).
On June 10, 2021, the Company named Ricardo Fabiani Garcia, an OriginClear investor and veteran technologist, to the Company’s Board of Advisors. Mr. Garcia will advise the management team as it sets up the roadmap and chooses the resources for the $H2O project.
The basic intended use of the blockchain system is to streamline payments and eliminate human error, similar to other coins, such as the J.P. Morgan “JPM Coin.”1
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 cryptocurrency 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 prospective utility coin, or token, named ClearAqua, It is the Company’s intent that ClearAqua will be used to create a grassroots network of users which will be able to govern actionable proposals for water projects. There is no assurance this token will be issued or if issued, will be successful.
| 1 | “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). |
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We have filed, on an intent-to-use basis, US Trademark applications on July 21, 2021, for the Mark, CLEARAQUA, and the phrase “THE WATER COIN FOR THE WORLD”. We have also engaged San Diego-based Baja Technologies Inc. (“Baja”) to develop and help launch ClearAqua but no other action has been taken and ClearAqua is not in active development at this time.
Patents and Intellectual Property
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.
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.
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 |
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.
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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.
In April 2019, we completed the expansion of our manufacturer’s representative network to serve both PWT and MWS for customer lead generation.
PRODUCTS, TECHNOLOGY AND SERVICES
The Company deploys advanced technologies at the point of use, with modular, prefabricated systems that create durable assets and water independence for industry, commerce and agriculture.
Failing infrastructure and the rising cost of water are driving businesses to treat their own water. The Company provides on-premise systems enabling very high purification and recycling levels that centralized systems cannot achieve. Systems installed at the point of use become productive assets for businesses that also increase property values. Furthermore, the Company’s products help corporations improve their environmental, social and governance (ESG) standings with water management services.
Operations & Markets
The Company focuses on meeting the needs of businesses looking for compact, advanced water treatment technologies that can be shipped to and installed at the point of use. The Company manufactures and distributes its professional-grade water treatment and conveyance products to commercial and industrial customers, fielding both direct and indirect sales channels to reach end-market clients such as hotels and resorts, real estate housing developments, office buildings, military installations, schools, farms, food and beverage manufacturers, industrial warehouse, oil and gas producers, and medical and pharmaceutical facilities.
From its Texas-based factory, the Company designs and prefabricates an entire line of plug-n-play containerized units called Modular Water Systems that enable water purification, recycling and wastewater management.
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These onsite modular products provide clients with water independence through ownership and operational control over water quality, enabling them to increase productivity while reducing environmental, health and safety risks from pollution, contamination and corrosion. Modular water products are trusted to balance performance with cost-effectiveness, enabling business users to go well beyond municipal standards for water quality, therefore achieving high levels of satisfaction for their own customers, and improved sustainability for their properties.
The Company’s water treatment equipment can boost real estate asset value as a fundamental capital improvement, combined with long-lasting water savings for the corporate bottom line.
Product Portfolio
The Company groups its products into three main categories:
| ● | Water Treatment: achieving high grade purification; | |
| ● | Water Conveyance: water transportation and pumping; and | |
| ● | Advanced Technologies: commercialization of innovative technologies. |
The Company’s complete line of compact, on-site, point-of-use products include: advanced purification systems that are skid, rack-mounted and containerized for reverse osmosis, ultrafiltration, media filtration, disinfection, water softening, ion exchange and electrodeionization (EDI), combined as needed in small to medium commercial and industrial applications, and custom-build projects. Water conveyance products include pump and lifting stations, modular storage tanks, and control monitoring panels.
The Company’s line of modular water products and systems create “instant infrastructure” – fully engineered, prefabricated and prepackaged systems that use durable, sophisticated materials. The units are available in standard capacities for onsite closed-loop systems at commercial business locations.
The Company’s rugged wastewater treatment plants, highly reliable pump stations, and premium water purification units typically offer 25 percent lower initial costs over conventional systems, with greater quality and full connectivity. These pump stations and wastewater treatment products utilize high density thermo-plastics (HDPE) and proprietary, innovative prefabrication methods and materials that deliver the longest life and strongest products.
Original Technologies
Electro Water Separation™ (“EWS”) and Advanced Oxidation™ (“AOx”) were the Company’s original, filterless water treatment technologies, which originated in the Company’s invention of an algae dewatering process before its transition into the water industry.
EWS is OriginClear’s breakthrough water cleanup technology which utilizes a catalytic process to concentrate and eliminate suspended solids in the worst commercial and industrial wastewater.
AOx is OriginClear’s advanced oxidation technology which generates a dense cloud of ozone, hydrogen peroxide and hydroxyl radicals, dramatically reducing or eliminating dissolved organic microtoxins, including bacteria and viruses, hormones, drugs, pesticides such as Roundup, and synthetics. AOx has also been shown to effectively reduce harmful chemicals such as ammonia and hydrogen sulfide – the “rotten egg” smell in crude oil that reduces its value.
At this time, the Company is strictly marketing the EWS/AOx technology in the context of turnkey integrators such as India’s Permionics and Spain’s Depuporc. (Depuporc permanently terminated its operations in 2021 due to COVID-19 business disruptions and no future business is expected). In addition, US-based Algeternal is our partner for the original algae-harvesting applications of this technology, and reportedly continues to use Company equipment for this purpose. The Company does not maintain an internal technical staff to manage this technology or its implementation and has no plans to do so.
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Market Opportunity
On a global basis, only twenty percent (20%) of all sewage and thirty percent (30%) of all industrial waste are ever treated. Water leakage results in the loss of thirty-five percent (35%) of all clean water across the planet. Cutting that number in half would provide clean water for 100 million people. This is a situation of great danger, but also great potential.
We believe businesses can no longer rely on giant, centralized water utilities to meet the challenge. That is why more and more business users are doing their own water treatment and recycling. Whether by choice or necessity, those businesses that invest in onsite water systems gain a tangible asset on their business and real estate and can enjoy better water quality at a lower cost, especially if treated water is recycled.
We believe self-reliant businesses are quietly building “decentralized water wealth” for themselves while also helping their communities. Environmental, social and governance (ESG) investing guidelines, which drive about a quarter of all professionally managed assets around the world, specifically include the key factor of how well corporations manage water.
The Company seeks to provide ESG compliant water management for corporations that are increasingly responsible for what was once delegated to central utilities. For example, when a corporation manages its own water, and uses OriginClear’s proprietary hybrid treatment methods, it can significantly reduce both water use and nutrient footprints (carbon, nitrogen, and phosphorus) in one compact package. These hybrid processes feature advanced blackwater treatment with advanced clean water processing. They can convert toxic nutrients to less harmful compounds, and even capture them for beneficial reuse purposes, as shown in OriginClear’s recent case study.
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Integration of Operating Divisions
Since being acquired by OriginClear in 2015, Progressive Water Treatment, Inc. has evolved into the Company’s fabrication and manufacturing division for the all of the Company’s endeavors. The team at Modular Water Systems, headed by OriginClear Chief Engineer Daniel M. Early, is responsible for design and high-level engineering, and is fully integrated with PWT for the fabrication and manufacturing division to add incremental revenue for its modular product line, without requiring large increases in personnel.
Supplier Relationship
PWT has been purchasing equipment from its many suppliers for over twenty years, with potential long-term benefits from the relationships.
MWS is positioned to take advantage of PWT’s supplier relationships, but certain components are unique to MWS’s product line. In particular, SRTP pipe is unique, for which the Company has four manufacturers, with the preferred SRTP supplier being approximately 40 miles south of PWT’s facility.
Water On Demand
In addition to our MWS and PWT lines of business, we also plan to expand our planned water outsourcing program known as “Design Build Own and Operate” or “DBOO”. Typically, DBOO has been done for very large municipal and national projects. If we are successful in raising the necessary capital, we plan to deliver DBOO for smaller systems in the $250,000-$2,000,000 hardware range (treating between 5,000 and 100,000 gallons per day). With a growing number of local businesses doing their own water treatment, we see this as a promising and underserved market.
CUSTOMERS AND MARKETS
Current water and wastewater treatment infrastructure faces a crisis. The prohibitive cost of repairing buried and aging infrastructure and the need to decrease energy use and waste in the water industry offers an opportunity for a complete design rethink. New technologies, often utilizing membranes, can decentralize water and wastewater infrastructure while improving water reuse by treating to a high standard at a small scale close to the source of generation. Additionally, new automated analytics offer solutions for these more complex decentralized solutions. (Lux Research: The Future of Decentralized Water, June 28, 2016). PWT has designed and fabricated water treatment systems for over twenty years. Major markets include:
| ● | Potable Water for Small Communities | |
| ● | Recirculated and Makeup Boiler and Cooling Tower Water | |
| ● | Produced Water & Frac Flowback Water | |
| ● | Food and Beverage Feed and Effluent Waters | |
| ● | Mining Effluent | |
| ● | Ground Water Recovery | |
| ● | Agriculture Effluent | |
| ● | Environmental Water Treatment for Reuse |
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Describing the water and wastewater treatment market as a pyramid, we put the major cities at the top of the pyramid, medium size cities in the middle and smaller towns, counties, cities, townships, state agencies, federal agencies, private individuals, commercial entities, industrial facilities, agriculture facilities at the base of the pyramid.
We believe there are more opportunities at the base of the pyramid where the market opportunities are decentralized. Focusing on this market also helps us avoid the very competitive, low-profit and slow-growing market in the big city municipalities.
“The decentralized packaged/containerized water and wastewater treatment systems market, covering end users segments such as municipal, industrial, and commercial. The study forecasts the global market revenue to increase from $3.99 billion in 2016 to $6.08 billion in 2023, growing at a compound annual growth rate (CAGR) of 6.2%”.2
This is the market for MWS-engineered products and infrastructure solutions. As civil infrastructure ages and fails and as the costs for new and replacement infrastructure increase year over year, we believe engineers and end-users will search for new ways and methods of deploying water and wastewater systems that are less expensive to deliver and much less expensive to own and operate with the mission intent of substantially increasing the replacement intervals currently experienced by conventional materials of construction and conventional product delivery models.
Sales and Marketing
PWT’s sales strategy differs from MWS’s efforts. PWT sales are dependent upon relationships with past end-use customers and certain manufacturers’ representatives who have relationships with their regional end use customers. MWS’s sales strategy is based on developing relationships with consulting engineers and general contractors as opposed to end-use customers.
As MWS sales strategies develop, PWT believes it will gain recognition with various consulting engineers and general contractors. PWT and MWS are currently developing a stronger national representatives network to take advantage of the relationship the sales representatives have gained with engineers, contractors and end use customers.
PWT and MWS have substantial experience in the water & wastewater market and as well as: conventional technologies and their limitations, new technologies, the size and demand of the market and how products are specified and implemented. They also have a strong customer focus throughout the organization to discover and diagnose the customer needs, design and deliver comprehensive solutions.
We believe the keys to capitalizing on the market are visibility, relationships, market understanding, and direct access to the opportunities. Strong marketing programs are also essential, and include: websites with solutions & credibility, sales support tools like literature& webinars and trade show presence.
| 2 | Global Decentralized Packaged/Containerized Water and Wastewater Treatment Systems Market, Forecast to 2023, https://www.reportbuyer.com/product/4948731/global-decentralized-packaged-containerized-water-and-wastewater-treatment-systems-market-forecast-to-2023.html. |
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Water industry projects move slowly. Most product lines for each of PWT and MWS are considered “pipeline” products and have a gestational period of 6 months to 3 years. We believe the best strategy to increase the pipeline of opportunities is to have more sales reps with relationships with engineers, contractors and end users.
Competition
PWT shares the market with a large number of suppliers which also provide system integration using multiple technologies. These include California’s PureAqua, Florida’s Harn RO, and Illinois’ Membrane Specialists. We believe PWT’s market share differs from those competitors in areas such as regional focus, customer loyalty, market focus, limited sales representation and other. For instance, 80%+ of PureAqua’s business in the Middle East, Harn RO focuses on drinking water systems for medium to large cities in the SE, Membrane Specialist focuses on tubular membranes and many more examples.
The Company is not aware of any direct competitors to MWS that are building complete water, wastewater treatment systems, and pump stations utilizing SRTP type materials. There are several manufacturers which build metal prepackaged systems, such as Georgia’s AdEdge; however, such companies do not offer the range of hybrid treatment processes available through MWS. The major indirect competition continues to be custom designed and on-site constructed concrete & steel systems. Some fiberglass is used but is very difficult to detail, is brittle and again, has a limited life compared to SRTP systems.
While manufacturers of SRTP pipe could be competitors, none of MWS’s suppliers, other than Contech, for a short period of time, has sold, or intends to sell, comparable systems to MWS’s. Their focus is simply to sell miles of pipe.
Growth Opportunities
National Sales Rep Network
In the first quarter of 2019, the Company worked to help PWT and MWS identify seasoned sales representatives across the country through recommendations from those with deep industry knowledge. Those particular representatives were contacted and meetings set to discuss the mutual opportunity. On February 5, 2019, the Company reported on initial positive results.
By early June of 2019, seven additional organizations had signed agreements. These additional organizations cover twenty-two additional states with about thirty new representatives. Training has been completed and new potential projects have been presented to PWT and MWS.
Additional sales managers, engineers and project managers will be needed for both PWT and MWS with additional production facilities necessary for PWT. The process of hiring additional personnel and obtaining additional facilities is underway.
Domestic versus International
The market opportunity for each of PWT and MWS is not limited to the United States. The US only represents 5% of the world’s population. In addition, a great deal of that population resides in undeveloped regions or regions with poor treatment systems. We believe implementing MWS’s and PWT’s decentralized technology throughout the world with joint ventures has the potential to have a significant effect on our revenue growth.
Standardization
MWS is developing standardized designs and commoditized product engineering (eliminating the custom consulting engineering work reduces overall project costs), the goal being to design a single product once and use said design as a blueprint for future products. Our goal is to continue driving the standardization and completion of each product’s engineer technical package, using computer design algorithms and standard design approaches, so that engineering costs may potentially decrease to less than 1% for each unit sold, with a long-term goal of less than 0.1%.
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Sharing Technology & Projects
PWT’s systems remove suspended solids, oils, metals, and dissolved chemicals & salts. MWS’s focus is on the removal of organic contaminants. It is not uncommon for a waste stream of water to be contaminated with both inorganics and organics, for example, many current animal farms with large amounts of waste effluent that currently is pumped to lagoons that are no longer meeting environmental standards. In the alternative, the water can be treated in-line with MWS products to remove the organics, then PWT’s systems used to remove dissolved inorganics to create water suitable for irrigation or drinking water for the animals. In addition, OriginClear’s proprietary technologies have been shown to successfully treat problems such as animal farm effluents.
By combining these technologies, the offering to customers becomes stronger and more effective. And both companies benefit from a new opportunity.
More Specific Opportunities for PWT
We are interested in exploring the following opportunities, but we have no timeline for their implementation:
| ● | Build and promote a fleet of rental treatment systems mounted on trailers or containers. It is very common for a rental to be purchased outright. As a result, PWT’s rental fleet must be continuously replenished. | |
| ● | Develop a standard digital product line through 3-D CAD programs and market it as virtual inventory, with components on hand and engineering already done. | |
| ● | Expand production capabilities with new equipment that would lower the labor cost of production. For instance, acquire tooling that would minimize the hand tool labor. | |
| ● | Develop more services business such as membrane cleaning or resin regeneration. |
More Specific Opportunities for MWS
MWS has developed a grey/black water treatment system for forward operating basis called Expeditionary Wastewater Recycling Systems (EWRS): Patent pending, US Army Human Health Command approved, fully automated, certified wastewater recycling solution which can be sold to all DOD divisions, FEMA and NGOs.
Another new product still being incubated is building manholes utilizing SRTP versus the current precast concrete approach.
Organization
MWS is now fully integrated with PWT. MWS personnel are primarily located in Virginia remote locations.
The Company supports MWS, PWT, and other subsidiaries with various administrative, accounting and marketing functions, from the Company’s headquarters in Florida.
Facilities and Equipment
Manufacturing
PWT currently leases its facility. The facility is located at 2535 E. University Drive, McKinney, Texas 75069. There are five buildings totaling 12,400 square feet on the 1.7 acres of land. There is additional expansion space for several more assembly buildings when and if needed.
PWT’s in-house engineers and designers utilize modern 3-D CAD programs to design all of the systems sold by PWT. They also design, program and build all of the control systems and the Internet-connected Process Logic Control (PLC) video screen interfaces.
PWT in-house craftsmen complete the metal and plastic machining, welding and assembly of PWT’s and MWS’s systems.
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MWS engineering resources are provided both internally and externally. Daniel Early leads the engineering program and relies on support from engineering personnel and PWT to assist with manufacturing and engineering. MWS subcontracts engineering support to PWT, which employs its own established and experienced engineering team. MWS also subcontracts 2D and 3D engineering design work to outside vendors to assist in the development of standardized drawings and proposals.
MWS’s specialized manufacturing is currently outsourced to PWT and others. PWT provides substantial critical manufacturing support to MWS; this support takes the form of various sub assembly fabrication (membrane modules, equipment skids, MWS equipment buildings, etc.). PWT is the sole source provider for MWS’s integrated control panels. In addition to PWT, heavy plastic and or custom plastic manufacturing is provided by a company in Roanoke, Virginia and another in Ontario, Canada. Additional sub-contract manufacturing is available through fabricators in Hopkins, MO, Corsicana, TX, and Vernon Hills, IL.
The Company plans to transition the plastic fabrication of MWS’s pump stations and wastewater treatment systems to PWT from current subcontractors. There is no timeline for this, as it will require an additional 2,400 to 3,000 square foot building for assembly, engineers and project managers.
The components such as pumps, membranes and instruments will be acquired either through PWT’s or MWS’s normal vendors. The large diameter SRTP pipe will be acquired from a fabricator located about 40 miles south of Dallas.
The building blocks of all systems are metal reinforced or structural profile wall reinforced thermoplastics pipe (SRTP) available from one of over a half dozen pipe suppliers. Being pipes they are manufactured to be sold into high volume applications and are very economical for MWS’s high value applications. MWS purchases these plastic cylinders up to 11’ in diameter and are utilized as the vessel or housing part of the water treatment systems.
More efficient fabrication and assembly equipment are available at relatively little cost to expedite the fabrication time and improve the quality. Some of that equipment includes CNC waterjet, large diameter core drills, fusion welders and roto molders.
Acquisitions
The Company’s strategy is to grow incrementally by focusing on the water treatment services market, acquiring the hands-on service suppliers in this market. It intends to continue to develop a network of wholly owned water treatment companies to meet the needs of end users from all industries with a full range of treatment technologies. Due to increased regulation, water treatment recycling challenges and a need to focus on their own core business, many water users today are outsourcing their water treatment needs to outside experts. In addition, we have identified a major trend in decentralization of water treatment, which we believe will cause small water service companies to grow. There will be significant synergies within OTG as technology, manufacturing expertise, market knowledge, projects and opportunities are shared. The target acquisitions must be accretive in nature with solid sales growth and profitability. The acquired companies must have a solid management team to accelerate their previous growth with excellent customer service. Initially, the acquisition focus is in the U.S. but will be expanded internationally in a few years.
The Company believes that the policy of building business units from internal cash flow can be productive. It did so with the Daniel Early/MWS project and is now beginning the process again with Water On Demand and potentially in the future, the $H2O blockchain system.
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Intellectual Property
Status of Original Inventions:
Early developments of the Company’s intellectual property focused on algae harvesting. Beginning in 2015, the Company applied this knowledge to water treatment and began development of EWS.
In 2018, OriginClear reorganized its intellectual property portfolio to focus exclusively on its electrochemical water treatment solution with advanced oxidation (EWS plus AOx).
The Company has chosen to protect certain intellectual property with trade secrets rather than patents. Accordingly, OriginClear no longer actively maintains the patent applications and patents to its EWS and AOx technologies, willingly deeding them to the water industry as an open resource. The Company intends to reserve to itself and its partners the protected communication of further discoveries and trade secrets relative to the EWS and AOx technology domains.
At this time, the Company is not actively pursuing the development of the EWS or AOx technologies.
Patents:
| ● | On May 10, 2021, OriginClear announced that it 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. The application status is provisional. |
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Trademarks:
| ● | On April 2, 2015, we filed a trademark application with the USPTO to protect the intellectual property rights for our wordmark “OriginClear”. On August 16, 2016, the wordmark was registered with Registration Number 5023444. The registration is current. | |
| ● | On April 8, 2015, we filed a trademark application with the USPTO to protect the intellectual property rights for our current company logo “OriginClear” with the stylized “O”. On August 16, 2016, the mark was registered with Registration Number 5027992. The registration is current. | |
| ● | On January 17, 2021, we filed a trademark application with the USPTO to protect the intellectual property rights for “Waterpreneur”. The current filing basis is “Use in commerce” (under Trademark Act Section 1(a)). Worldwide registration is in process of completion. |
| ● | On May 16, 2021, we filed a trademark application with the USPTO for the mark “$H2O”. The current filing basis is “Intent-to-use basis” (under Trademark Act Section 1(b)). Worldwide registration is in process of completion. |
Licensed Patents:
On June 25, 2018, Daniel 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. See “Products, Technology and Services—Patents”.
Research and Development
During the years ended December 31, 2021 and 2020, we invested $0 and $110,338, respectively, on research and development of our technologies. Research and development costs included activities related to technology development.
Employees
As of April 5, 2022, we had 32 employees, all of whom are full-time.
ITEM 1A. RISK FACTORS
Risks Relating to Our Business
We have not been profitable.
We were formed in June 2007 and are currently developing Water On Demand, a new business model to respond to identified market demand. Since we have not been profitable, there are substantial risks, uncertainties, expenses and difficulties that we are subject to. To address these risks and uncertainties, we must do among the following:
| ● | Successfully execute our business strategy; | |
| ● | Respond to competitive developments; and | |
| ● | Attract, integrate, retain and motivate qualified personnel. |
There can be no assurance we will operate profitably or that we will have adequate working capital to meet our obligations as they become due. Investors must consider the risks and difficulties frequently encountered by early stage companies, particularly in rapidly evolving markets. We cannot be certain that our business strategy will be successful or that we will successfully address these risks. In the event that we do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially and adversely affected.
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We have a history of losses and can provide no assurance of our future operating results.
We have experienced net losses and negative cash flows from operating activities since inception and we expect such losses and negative cash flows to continue in the foreseeable future. As of December 31, 2021 and 2020, we had working capital (deficit) of $(12,826,008) and $(21,699,304), respectively, and shareholders’ (deficit) of $(22,321,917) and $(29,645,300), respectively. For the years ended December 31, 2021 and 2020, we incurred net (loss)/income of $(2,117,781) and $13,261,365, respectively. During the year ended December 31, 2021, we had a loss from operations of $5,929,452. As of December 31, 2021, we had an aggregate accumulated deficit of $98,175,924. We may never achieve profitability. The opinion of our independent registered public accountants on our audited financial statements as of and for the year ended December 31, 2021 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future sales.
We will need significant additional capital, which we may be unable to obtain.
Revenues generated from our operations are not presently sufficient to sustain our operations. Therefore, we will need to raise additional capital to continue our operations. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. We may be required to pursue sources of additional capital through various means, including debt or equity financings. Future financings through equity investments are likely to be dilutive to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for new investors. Newly issued securities may include preferences, superior voting rights, the issuance of warrants or other derivative securities, and the issuances of incentive awards under equity employee incentive plans, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. Our ability to obtain needed financing may be impaired by such factors as the capital markets and our history of losses, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations. In addition, we have outstanding convertible preferred stock that are convertible into common stock at variable conversion prices and in addition, in some cases entitle certain prior investors to certain make-good shares. Our issuance of common stock upon conversion of such preferred stock will result in further dilution to our stockholders.
We have incurred substantial indebtedness.
As of December 31, 2021, we had outstanding convertible promissory notes in the amount of $3,078,312. All such debt is payable within the following thirty-six months and is convertible at a significant discount to our market price of stock. Our level of indebtedness and insufficient cash on hand increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of the indebtedness. Our indebtedness, combined with other financial obligations and contractual commitments, could:
| ● | in the case of convertible debt that is converted into equity, result in a reduction in the overall percentage holdings of our stockholders, put downward pressure on the market price of our common stock, result in adjustments to conversion and exercise prices of outstanding notes and warrants and obligate us to issue additional shares of common stock to certain of our stockholders; | |
| ● | make it more difficult for us to satisfy our obligations with respect to the indebtedness and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in events of default under the loan agreements and instruments governing the indebtedness; |
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| ● | require us to dedicate a substantial portion of our cash flow from operations to payments on indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions, research and development and other corporate purposes; | |
| ● | increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared to competitors that have relatively less indebtedness; |
| ● | limit our flexibility in planning for, or reacting to, changes in business and the industry in which we operate; and | |
| ● | limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, research and development and other corporate purposes. |
We may incur significant additional indebtedness in the future. If we incur a substantial amount of additional indebtedness, the related risks that we face could become more significant. Additionally, the terms of any future debt that we may incur may impose requirements or restrictions that further affect our financial and operating flexibility or subject us to other events of default.
Our revenues are dependent upon acceptance of our technology and products by the market; the failure of which would cause us to curtail or cease operations.
We believe that most of our future revenues will come from the sale or license of our technology and systems. As a result, we will continue to incur substantial operating losses until such time as we are able to generate revenues from the sale or license of our technology and systems. There can be no assurance that businesses and prospective customers will adopt our technology and systems, or that businesses and prospective customers will agree to pay for or license our technology and systems. In the event that we are not able to develop a customer base that purchases or licenses our technology and systems, or if we are unable to charge the necessary prices or license fees, our financial condition and results of operations will be materially and adversely affected.
We will need to increase the size of our organization and may experience difficulties in managing growth.
We are a small company with a minimal number of employees. We expect to experience a period of significant expansion in headcount, facilities, infrastructure and overhead and anticipate that further expansion will be required to address potential growth and market opportunities. Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate managers. Our future financial performance and our ability to compete effectively will depend, in part, on our ability to manage any future growth effectively.
We may not be able to successfully license our technology and commercialize our products which would result in continued losses and may require us to curtail or cease operations.
We are currently developing our new business model, Water On Demand. We are unable to project when we will achieve profitability, if at all. We cannot assure that our executive resources will be able to develop our systems fast enough to meet market requirements. We can also not assure that our systems will gain market acceptance and that we will be able to successfully commercialize the business model. The failure to successfully develop and commercialize the business model would result in continued losses and may require us to curtail or cease operations.
If a competitor were to achieve a business breakthrough, our operations and business could be negatively impacted.
There currently exist a number of businesses that are in the business of delivering turnkey “water-as-a-service” systems. Should a competitor achieve a breakthrough, we may have difficulty attracting sales. Furthermore, competitors may have access to larger resources (capital or otherwise) that provide them with an advantage in the marketplace, which could result in a negative impact on our business.
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In addition, because we are the master licensee of only five issued patents, we may not be able to preclude development of even directly competing technologies using the same methods, materials and procedures as we use to achieve our results. Any of these competitive forces may inhibit or materially adversely affect our ability to attract customer licensees, or to obtain royalties or other fees from our customer licensees. This could have a material adverse effect on our business, prospects, results of operation and financial condition.
Our long-term success depends on developing a novel outsourcing model, and we face the risks inherent in a performance-based business model.
While our engineering and technology divisions are profitable, we are developing a new business in the Design-Build-Own-Operate sector, known as Water On Demand. We may to generate revenue through the financing and management of these systems, and our long-term success depends on the performance and oversight of these systems. We expect that the amount of payments we may receive will be based upon the performance of our operating partners, and so we will be dependent on the successful operations of these partners for a significant portion of our revenues. We face risks inherent in such a delegated business model, many of which are outside of our control, including those arising from our reliance on the management and operating capabilities of our operating partners and the cyclicality of supply and demand for end-products produced using this business model. Should our managed contracts fail to achieve sufficient profitability in their operations, our payments would be diminished and our results of operations, cash flows and financial condition could be adversely affected, and any such effects could be material.
We rely on strategic partners.
We rely on strategic partners to manage our planned outsourced systems. Should our strategic partners not regard us as significant to their own businesses, they could reduce their commitment to us or terminate their relationship with us, pursue competing relationships or attempt to develop or acquire processes that compete with ours. Any such action could materially adversely affect our business.
A lack of government subsidies may hinder the usefulness of our technology.
We assemble and sell complete engineered solutions, and products, using the expertise and knowhow of PWT and MWS. Subsidies of any of the industries vary and may be reduced or eliminated, which could have a material adverse effect on our business. Likewise, regulations may become more onerous which also could have a material adverse effect on our business.
The industries in which we operate may endure deflationary cycles, affecting our ability to sell and license our systems.
It is possible that industry sector collapses and other deflationary events may impact our business materially and adversely.
If we lose key employees and consultants or are unable to attract or retain qualified personnel, our business could suffer.
Our success is highly dependent on our ability to attract and retain qualified scientific, engineering and management personnel. We are highly dependent on our management, including T. Riggs Eckelberry, who has been critical to the development of our technology and business. The loss of the services of Mr. Eckelberry would have a material adverse effect on our operations. We do not have an employment agreement with Mr. Eckelberry. Accordingly, there can be no assurance that he will remain associated with us. His efforts will be critical to us as we continue to develop our technology and as we attempt to transition to a company with profitable commercialized products and services. If we were to lose Mr. Eckelberry, or any other key employees or consultants, we may experience difficulties in competing effectively, developing our technology and implementing our business strategies.
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Competition from other companies in our market may affect the market for our technology.
New companies are constantly entering the market, thus increasing the competition. Larger foreign owned and domestic companies which have been engaged in prefabricated or modular water systems or Design-Build-Own-Operate (DBOO) for substantially longer periods of time may have access to greater financial and other resources. These companies may have greater success in the recruitment and retention of qualified employees, as well as in conducting their own manufacturing and marketing operations, which may give them a competitive advantage. In addition, actual or potential competitors may be strengthened through the acquisition of additional assets and interests. If we or our customers are unable to compete effectively or adequately respond to competitive pressures, this may materially adversely affect our results of operation and financial condition.
An occurrence of an uncontrollable event such as the COVID-19 pandemic may negatively affect our operations.
On March 11, 2020, the World Health Organization declared the current outbreak of a novel coronavirus disease 2019 (“COVID-19”) to be a global pandemic. As further described herein, the COVID-19 outbreak has led (and may continue to lead) to disruptions in the global economy, including extreme volatility in the stock market and capital markets. On March 13, 2020, then-President Trump declared a national state of emergency under the Stafford Disaster Relief and Emergency Assistance Act (the “Stafford Act”), which permits the use of up to $50 billion of Federal Emergency Management Agency (“FEMA”) funds to combat the pandemic, directs state governments to create emergency operations centers, hospitals to activate emergency preparedness plans and gives the Secretary of Health and Human Services emergency authorities to waive certain federal regulations to allow greater flexibility to hospitals and doctors in treating patients.
On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (the “American Rescue Plan”), which provides approximately $1.9 trillion in funds to assist with the United States’ recovery from the economic and health effects of the COVID-19 pandemic, bolster the economy and provide aid to millions of Americans. Among other things, the legislation includes a third round of direct payments to a large majority of American taxpayers, provides for any student loan forgiveness passed between December 31, 2020, and January 1, 2026 to be tax-free, provides additional assistance to low-income families, and lowers the cost of health insurance and increases availability, covering the entire COBRA premium from April 1, 2021 through September 30, 2021 for Americans who have lost a job or had their hours cut. The legislation also includes approximately $45 billion in rental, utility and mortgage assistance. The Small Business Administration will be allocated approximately $25 billion for a new grant program for restaurants and other food and drinking establishments, and another $1.25 billion for the Small Business Administration’s Shuttered Venue Operators Grant program. The legislation includes approximately $7.25 billion in additional funds for PPP (as defined below) and allows more nonprofits to apply, including those groups that engage in advocacy and some limited lobbying. The Centers for Disease Control and Prevention will receive approximately $7.5 billion to track, administer and distribute COVID-19 vaccines. Approximately $46 billion is allocated for diagnosing and tracing coronavirus infections, and approximately $2 billion for purchasing and distributing various testing supplies and personal protective equipment.
The Federal Reserve has taken emergency action to further cut its benchmark rate down to a range of between 0% and 0.25%, to inject additional funds into the short-term lending markets and to implement quantitative easing and other measures to support financial institutions, other businesses and the credit markets. In addition, beginning in March 2020, the Federal Reserve, in conjunction with the United States Treasury, announced an extensive series of measures to provide liquidity and support the economy, including but not limited to: open market purchases of certain securities; establishment of the Primary Dealer Credit Facility; establishment of the Primary Market Corporate Credit Facility for new bond and loan issuance, the Secondary Market Corporate Credit Facility to provide liquidity for outstanding corporate bonds, and the Term Asset-Backed Securities Loan Facility (“TALF”) to support the flow of credit to consumers and businesses via asset-backed securities; facilitating credit to municipalities by expanding the Money Market Mutual Fund Liquidity Facility and the Commercial Paper Funding Facility; supporting the Small Business Administration’s Paycheck Protection Program (the “PPP”), a program that provides loans to small businesses so that they can keep their employees on the payroll, by supplying liquidity to participating financial institutions through term financing backed by PPP loans; and encouraging credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans through the Main Street Lending Program. Central banks in Europe, the United Kingdom (“UK”) and other countries are implementing similar and other measures to support financial markets. Although it cannot be predicted, additional action by the Federal Reserve as well as other federal and state agencies is possible in the near future.
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The COVID-19 outbreak has led to severe disruptions in the global supply chain, capital markets and economies, and those disruptions will likely continue for some time. Concern about the potential effects of COVID-19 and the effectiveness of measures (including those under the Stafford Act declaration summarized above) put in place by global governmental bodies and reserve banks at various levels as well as by private enterprises (such as workplaces, trade groups, amateur and professional sports leagues and conferences, places of worship, schools, restaurants and gyms, among others) to contain or mitigate its spread have adversely affected economic conditions and capital markets globally (and, in certain cases, have caused a near total cessation of non-essential economic activities), and have led to historic volatility in the financial markets. There can be no assurance that such measures or other measures implemented from time to time will be successful, or for how long such measures will be in place.
In addition to these general concerns, investors should consider what effect, if any, the COVID-19 outbreak, as well as the resulting recession or any further economic downturn may have on the Company and its ability to achieve its objectives.
The long-term impacts of the social, economic and financial disruptions caused by the COVID-19 outbreak are unknown. While the U.S. Federal Reserve, the U.S. government and other governments have implemented unprecedented financial support or relief measures in response to concerns surrounding the economic effects of the COVID-19 outbreak, the likelihood of such measures calming the volatility in the financial markets or preventing a long-term national or global economic downturn cannot be predicted. It is also unclear whether future economic shutdowns will be required in response to the development of a seasonal spread of COVID-19, including variants thereof, or other similar infections. President Biden also announced a coronavirus task force that is considering various actions to address the pandemic, and the Biden administration may implement new measures that will affect businesses and the economy.
Over the course of 2021, different variants of COVID-19, including the “Delta variant” and “Omicron variant,” have proliferated, including in areas with higher adult vaccination rates. Due to the emergence of the Delta variant and Omicron variant, state and local governments have reinstated various mitigation measures. It is unclear how widespread the impact of the Delta variant and Omicron variant may be or how long any additional mitigation measures will remain in effect, and whether other, more contagious or deadly, variants may emerge. There can be no assurance as to the effects such circumstances may have on economic conditions, which may adversely impact the performance of the Company.
If these conditions persist or in the event of additional COVID-19 or other coronavirus outbreaks, it is unclear whether the same mitigation or containment measures taken by various governments (including at the federal, state and local level) or businesses described herein will be continued or reimplemented in other jurisdictions and the degree to which such measures will be applied, or if different measures will be implemented, and it is uncertain what impact such measures will have on the national or global economy. In addition, it is uncertain as to the degree to which certain businesses and activities will return as lockdowns and other mitigation or containment measures are reimplemented or eased or if further COVID-19 outbreaks continue or other coronavirus outbreaks occur, which could exacerbate the effect of the pandemic. There is little certainty as to when the COVID-19 outbreak will peak or when it will abate, or when and to what extent the United States economy will recover from the disruption caused by the COVID-19 outbreak. Even if the number of new cases reaches a plateau or begins to decline, the effects of the outbreak will continue for an indefinite period of time, and another outbreak may occur at a later time. While certain vaccines have been approved recently by the Federal Drug Administration and the regulatory authorities of other countries and the initial phases of distribution of these vaccines has begun, it remains uncertain when the use of the vaccines will have the effect of reducing COVID-19 infection rates and hospitalization levels, how much of the eligible population will get vaccinated or when national or global economies will improve.
Any of the circumstances concerning COVID-19 described above or elsewhere in this Memorandum could have an adverse impact on the Company, its investments and its overall objectives.
The occurrence of an uncontrollable event such as the COVID-19 pandemic may negatively affect our operations. A pandemic typically results in social distancing, travel bans and quarantine, and this may limit access to our facilities, customers, management, support staff and professional advisors. These factors, in turn, may not only impact our operations, financial condition and demand for our goods and services but our overall ability to react timely to mitigate the impact of this event. Also, it may hamper our efforts to comply with our filing obligations with the Securities and Exchange Commission.
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Risks Related to Our Intellectual Property
If we fail to establish, maintain and enforce intellectual property rights with respect to our technology, our financial condition, results of operations and business could be negatively impacted.
Our ability to establish, maintain and enforce intellectual property rights with respect to the technology that we have acquired under master license will be a significant factor in determining our future financial and operating performance. We seek to protect our intellectual property rights by relying on a combination of trade secret and copyright laws, and the licensing of external patents. We also use confidentiality and other provisions in our agreements that restrict access to and disclosure of our confidential know-how and trade secrets.
Outside of licensed patents, we seek to protect our technology and business model as trade secrets and technical know-how. However, trade secrets and technical know-how are difficult to maintain and do not provide the same legal protections provided by patents. In particular, only patents will allow us to prohibit others from using independently developed technology that is similar. If competitors develop knowledge substantially equivalent or superior to our trade secrets and technical know-how, or gain access to our knowledge through other means such as observation of our technology that embodies trade secrets at customer sites which we do not control, the value of our trade secrets and technical know-how would be diminished.
While we strive to maintain systems and procedures to protect the confidentiality and security of our trade secrets and technical know-how, these systems and procedures may fail to provide an adequate degree of protection. For example, although we generally enter into agreements with our employees, consultants, advisors, and strategic partners restricting the disclosure and use of trade secrets, technical know-how and confidential information, we cannot provide any assurance that these agreements will be sufficient to prevent unauthorized use or disclosure. In addition, some of the technology deployed at customer sites in the future, which we do not control, may be readily observable by third parties who are not under contractual obligations of non-disclosure, which may limit or compromise our ability to continue to protect such technology as a trade secret.
Monitoring and policing unauthorized use and disclosure of intellectual property is difficult. If we learned that a third party was in fact infringing or otherwise violating our intellectual property, we may need to enforce our intellectual property rights through litigation. Litigation relating to our intellectual property may not prove successful and might result in substantial costs and diversion of resources and management attention.
From our customer licensees’ standpoint, the strength of the intellectual property under which we intend to grant licenses can be a critical determinant of the value of these licenses. If we are unable to secure, protect and enforce our intellectual property, it may become more difficult for us to attract new customers. Any such development could have a material adverse effect on our business, prospects, financial condition and results of operations.
Although we have filed various patent applications for some of our original technologies, we have opted to abandon or transfer them, in favor of a trade secrets policy.
Even if we do pursue patent protection for our inventions, these patents may not provide meaningful protection or commercial advantage. In the US, patents only provide protection for a 20-year period starting from the filing date and the longer a patent application takes to issue the less time there is to enforce it. Further, the claims under any patents that issue from our applications may not be broad enough to prevent others from developing technologies that are similar or that achieve similar results. It is also possible that the intellectual property rights of others will bar us from licensing our technology and bar us or our future licensees from exploiting any patents that issue from our pending applications. Numerous U.S. and foreign issued patents and pending patent applications owned by others exist in the fields in which we have developed and are developing our technology. These patents and patent applications might have priority over our patent applications and could subject our patent applications to invalidation. Finally, in addition to those who may claim priority, any patents that issue from our applications may also be challenged by our competitors on the basis that they are otherwise invalid or unenforceable.
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We may face claims that we are violating the intellectual property rights of others.
We may face claims, including from direct competitors, other water companies, scientists or research universities, asserting that our business models, technology or the commercial use of such technology infringe or otherwise violate the intellectual property rights of others. We have not conducted infringement, freedom to operate or landscape analyses, and as a result we cannot be certain that our technologies and processes do not violate the intellectual property rights of others. We expect that we may increasingly be subject to such claims as we begin to earn revenues and our market profile grows.
We may also face infringement claims from the employees, consultants, agents and outside organizations we have engaged to develop our technology. While we have sought to protect ourselves against such claims through contractual means, we cannot provide any assurance that such contractual provisions are adequate, and any of these parties might claim full or partial ownership of the intellectual property in the technology that they were engaged to develop.
If we were found to be infringing or otherwise violating the intellectual property rights of others, we could face significant costs to implement work-around methods, and we cannot provide any assurance that any such work-around would be available or technically equivalent to our current technology. In such cases, we might need to license a third party’s intellectual property, although any required license might not be available on acceptable terms, or at all. If we are unable to work around such infringement or obtain a license on acceptable terms, we might face substantial monetary judgments against us or an injunction against continuing to license our technology, which might cause us to cease operations.
In addition, even if we are not infringing or otherwise violating the intellectual property rights of others, we could nonetheless incur substantial costs in defending ourselves in suits brought against us for alleged infringement. Also, if any license agreements provide that we will defend and indemnify our customer licensees for claims against them relating to any alleged infringement of the intellectual property rights of third parties in connection with such customer licensees’ use of our technologies, we may incur substantial costs defending and indemnifying any customer licensees to the extent they are subject to these types of claims. Such suits, even if without merit, would likely require our management team to dedicate substantial time to addressing the issues presented. Any party bringing claims might have greater resources than we do, which could potentially lead to us settling claims against which we might otherwise prevail on the merits.
Any claims brought against us or any customer licensees alleging that we have violated the intellectual property of others could have negative consequences for our financial condition, results of operations and business, each of which could be materially adversely affected as a result.
Risks Related to Our Common Stock
Our common stock could be further diluted as the result of the issuance of additional shares of common stock, convertible securities, warrants or options.
We have issued common stock, convertible securities (such as convertible debentures, convertible preferred stock, and notes) and warrants in order to raise money, some of which have anti-dilution and other similar protections. We have also issued incentive compensation for our employees and directors. We have shares of common stock reserved for issuance upon the exercise of certain of these securities and may increase the shares reserved for these purposes in the future. Our issuance of additional common stock, convertible securities, options and warrants could affect the rights of our stockholders, result in a reduction in the overall percentage holdings of our stockholders, could put downward pressure on the market price of our common stock, could result in adjustments to conversion and exercise prices of outstanding notes and warrants, and could obligate us to issue additional shares of common stock to certain of our stockholders.
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Our chief executive officer owns the majority of the voting power of our shareholders.
As the holder of our outstanding shares of Series C Preferred Stock, our chief executive officer, T. Riggs Eckelberry has 51% of the voting power of the Company’s shareholders. As a result, Mr. Eckelberry has the ability to control all matters submitted to shareholders, and his interests may differ from those of other shareholders.
We have created various series of preferred stock and our articles of incorporation allow for our board to create additional new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock.
Our Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our Board of Directors has the authority to issue additional shares of our preferred stock without further stockholder approval. Our board of directors has created various series of preferred stock and may create additional series in the future with various preferential rights over the common stock.
Our issuance of common stock upon conversion of outstanding preferred stock will result in dilution to our stockholders.
We have outstanding various series of preferred stock that are convertible into common stock, including varies series that are convertible into common stock at variable conversion prices and which in some cases entitle certain prior investors to certain make-good shares (see Note 3 to the financial statements included in this report). Our issuance of common stock upon conversion of outstanding preferred stock will result in dilution to holders of our common stock, which may have a negative effect on the price of our common stock.
There is a limited public market for our common stock.
Our common stock is not listed on any national securities exchange. Accordingly, investors may find it more difficult to buy and sell our shares than if our common stock was traded on an exchange. Although our common stock is quoted on the OTC Pink, it is an unorganized, inter-dealer, over-the-counter market which provides significantly less liquidity than the NASDAQ Capital Market or other national securities exchange. These factors may have an adverse impact on the trading and price of our common stock. And our common stock may be less attractive for margin loans, for investment by financial institutions, as consideration in future capital raising transactions or other purposes.
The price of our common stock is volatile, which may cause investment losses for our stockholders.
The market for our common stock is highly volatile and subject to wide fluctuations in response to, among other things, quarterly variations in operating and financial results, and general economic and market conditions. In addition, statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to our market or relating to us could result in an immediate and adverse effect on the market price of our common stock. The highly volatile nature of our stock price may cause investment losses for our shareholders. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities. If securities class action litigation is brought against us, such litigation could result in substantial costs while diverting management’s attention and resources.
Shares eligible for future sale may adversely affect the market.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), subject to certain limitations. In general, pursuant to Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information requirement. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), and current public information and notice requirements. Any substantial sales of our common stock pursuant to Rule 144 may have a material adverse effect on the market price of our common stock.
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Our stock is subject to the penny stock rules, which impose significant restrictions on broker-dealers and may affect the resale of our stock.
Our common stock has been subject to the provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), commonly referred to as the “penny stock” rule. Section 15(g) sets forth certain requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act. The SEC generally defines penny stock to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. Rule 3a51-1 provides that any equity security is considered to be penny stock unless that security is: registered and traded on a national securities exchange meeting specified criteria set by the SEC; issued by a registered investment company; excluded from the definition on the basis of price (at least US$5.00 per share) or the registrant’s net tangible assets; or exempted from the definition by the Securities and Exchange Commission (“SEC”). Our common stock is considered to be a “penny stock.” The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” As our common stock is considered to be “penny stock,” trading in our common stock is subject to additional sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors. This may reduce the liquidity and trading volume of our shares.
Financial Industry Regulatory Authority, Inc. (“FINRA”) sales practice requirements may limit a shareholder’s ability to buy and sell our common shares.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.
We are required to establish and maintain appropriate internal controls over financial reporting. During the year ended December 31, 2021, we carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation and due to the lack of segregation of duties due to small Company staff size, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report. Failure to establish those controls, or any failure of those controls once established, could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.
We are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 and if we fail to comply in a timely manner, our business could be harmed, and our stock price could decline.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal controls over financial reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting firm. The standards that must be met for management to assess the internal controls over financial reporting as effective are evolving and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards. We expect to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficult for us to predict how long it will take or how costly it will be to complete the assessment of the effectiveness of our internal control over financial reporting for each year and to remediate any deficiencies, if any, in our internal controls over financial reporting. As a result, we may not be able to complete the assessment and remediation process on a timely basis. In addition, although attestation requirements by our independent registered public accounting firm are not presently applicable to us, we could become subject to these requirements in the future, and we may encounter problems or delays in completing the implementation of any resulting changes to internal controls over financial reporting. In the event that our Chief Executive Officer or Chief Financial Officer determine that our internal controls over financial reporting is not effective as defined under Section 404, we cannot predict how regulators will react or how the market prices of our shares will be affected; however, we believe that there is a risk that investor confidence and share value may be negatively affected.
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We do not intend to pay dividends on our common stock.
We do not anticipate paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally pay dividends. Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends. The declaration, payment and amount of any future dividends will be made at the discretion of our board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors our board of directors may consider relevant. In addition, we have outstanding various series of preferred stock that are entitled to dividends prior to payment of any dividends on our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
Our principal corporate offices are located at 13575 58th Street North, Suite 200, Clearwater, FL 33760. Our Dallas based subsidiary, PWT, rents an approximately 12,000 square foot facility located at 2535 E. University Drive, McKinney, TX 75069, with a current monthly rent of $7,900. We believe these facilities are suitable and adequate to meet our current business requirements.
ITEM 3. LEGAL PROCEEDINGS.
For the period ended December 31, 2021, all parties have fully and timely performed under the settlement agreement, and no further issues or proceedings, or fees and costs, are anticipated regarding the settlement of the dispute between OriginClear, Inc., and its developmental subsidiary, WaterChain, Inc., and RDI Financial, LLC, an alleged assignee of Interdependence, Inc., as previously disclosed. As of December 31, 2021, the Company views the aforesaid RDI matter as closed.
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 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is quoted on the OTC Markets Pink Open Market under the symbol “OCLN”.
The market price of our common stock, like that of other technology companies, is highly volatile and is subject to fluctuations in response to variations in operating results, announcements of technological innovations or new products, or other events or factors. Our stock price may also be affected by broader market trends unrelated to our performance.
Holders
As of April 5, 2022, we had approximately 552 holders of record of our common stock. This number does not include beneficial owners whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.
Dividend Policy
We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain future earnings, if any, to fund ongoing operations and future capital requirements of our business. Any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the board of directors deems relevant. In addition, we have outstanding various series of preferred stock that are entitled to dividends prior to any payment of dividends on the common stock.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities during the fiscal year ended December 31, 2021 other than those transactions previously reported to the SEC on our quarterly reports on Form 10-Q and current reports on Form 8-K.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 6. RESERVED.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
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.
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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 the Company believes 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 December 31, 2021, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.
Recently Issued Accounting Pronouncements
Management adopted a recently issued accounting pronouncement during the year ended December 31, 2021, as disclosed in the Notes to the financial statements included in this report.
Results of Operations for the years ended December 31, 2021 and 2020.
| Year Ended | ||||||||
| December 31, 2021 | December 31, 2020 | |||||||
| Revenue | $ | 4,143,744 | $ | 4,101,131 | ||||
| Cost of Goods Sold | 3,574,060 | 3,489,356 | ||||||
| Operating Expenses, Depreciation and Amortization | 6,499,136 | 5,323,013 | ||||||
| Loss from Operations before Other Income (Expense) | (5,929,452 | ) | (4,711,238 | ) | ||||
| Other Income (Expense) | 3,811,671 | 17,972,603 | ||||||
| Net Income (Loss) | $ | (2,117,781 | ) | $ | 13,261,365 | |||
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Revenue and Cost of Sales
Revenue for the year ended December 31, 2021 and 2020 was $4,143,744 and $4,101,131, respectively. Cost of sales for the year ended December 31, 2021 and 2020, was $3,574,060 and $3,489,356, respectively. Revenue increased slightly primarily due to our subsidiary’s increase in sales of its products.
Operating Expenses
Selling and Marketing Expenses
Selling and Marketing (“S&M”) expenses for the years ended December 31, 2021 and 2020, were $2,841,331 and $1,557,842, respectively. The increase in selling and marketing expenses was primarily due to an increase in non-cash marketing and investor relations shares for services expense.
General Administrative Expenses
General administrative (“G&A”) expenses for the years ended December 31, 2021 and 2020, were $3,612,988 and $3,602,586, respectively. General and administrative expenses remained relatively unchanged.
Research and Development Cost
Research and development (“R&D”) costs for the years ended December 31, 2021 and 2020, were $0 and $110,338. The decrease in research and development costs was primarily due to decrease in salary expense.
Depreciation Expense
Depreciation expense for the years ended December 31, 2021 and 2020, were $44,817 and $52,247, respectively.
Other Income and Expenses
Other income and (expenses) decreased by $14,160,932 to $3,811,671 for the year ended December 31, 2021, compared to $17,972,603 for the year ended December 31, 2020. The decrease was predominantly the result of a decrease in non-cash accounts associated with the fair value of the derivatives in the amount of $13,521,036, an increase in loss on conversion of preferred stock in the amount of $1,364,250, an increase in loss on exchange of preferred stock in the amount of $40,000, offset by an increase in unrealized gain on investment securities in the amount of $60,251, increase in other income in the amount of $493,285, increase in gain on write off of loans payable in the amount of $152,233, a decrease in impairment of asset for sale of $17,879, and decrease in interest expense of $40,706 which includes non-cash amortization of debt discount of $68,839.
Net Income (Loss)
Our net income decreased by $15,379,146 to $(2,117,781) for the year ended December 31, 2021, compared to net income of $13,261,365 for the year ended December 31, 2020. The majority of the decrease in net income was due primarily to an increase in other income and expenses associated with the net change in 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 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 consolidated financial statements do not reflect any adjustments that might result if we are unable to continue as a going concern. During the year ended December 31, 2021, total cash used in operations was $4,843,130. As of December 31, 2021, we had a working capital deficit of $12,826,008 and a shareholders’ deficit of $22,321,917. These factors, among others raise substantial doubt about our 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 us to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. We have obtained funds from investors in the year ended December 31, 2021, and have standing purchase orders and open invoices with customers and we are pursuing various financing alternatives to fund the Company’s operations so it can continue as a going concern in the medium to long term. Management believes this funding will continue from our current investors and new investors. There can be no assurance that such funding will be available to the Company in the amount required at any time or, if available, that it can be obtained on terms satisfactory to the Company. Management believes the existing shareholders, the prospective new investors and current and future revenue will provide the additional cash needed to meet our obligations as they become due and will allow the development of our core business operations.
At December 31, 2021 and December 31, 2020, we had cash of $706,421 and $416,121, respectively, and working capital deficit of $12,826,008 and $21,699,304, respectively. The decrease in working capital deficit was due primarily to a decrease in non-cash derivative liabilities.
During the year ended December 31, 2021, we raised an aggregate of $5,190,175 in offerings of preferred stock. Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future revenue, however, there cannot be any assurance that we will be able to raise additional capital from financings.
Net cash used in operating activities was $(4,843,130) for the year ended December 31, 2021, compared to $(3,976,198) for the year ended December 31, 2020. The increase of $866,932 in cash used in operating activities was due primarily to an increase in loss on conversion of debt and shares issued for services.
Net cash flows (used in) investing activities for the year ended December 31, 2021 and 2020 were $(18,000) and $(13,884), respectively. The net increase in cash provided in investing activities was mostly due to an increase in purchase of fixed assets.
Net cash flows provided by financing activities was $5,151,430 for the year ended December 31, 2021, as compared to $3,915,589 for the prior year ended December 31, 2020. The increase in cash provided by financing activities was primarily due to proceeds from issuances of preferred stock.
We do not have any material commitments for capital expenditures during the next twelve months. Although our proceeds from the issuance of convertible debt 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 expand our operations. Therefore, our future operations are dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. 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.
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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.
Recent Trends
Known trends, demands, commitments, events, or uncertainties that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results is set forth throughout this Report.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required for smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All financial information required by this Item is attached hereto at the end of this report beginning on page F-1 and is hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Exchange Act, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the principal executive officer and principal financial officer of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures”, as defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
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Based on 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 Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the required time periods specified in the Commission’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. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.
Management previously identified control deficiencies regarding the lack of segregation of duties due to small staff size and the need for a stronger internal control environment. The small size of the Company’s staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation. The Company hired a Chief Financial Officer, Mr. Prasad Tare, in June 2021 and added additional internal controls to help mitigate the above prior deficiency.
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 quarter ended December 31, 2021 that has materially affected, or are reasonably likely to materially affect, 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.
No Attestation Report by Independent Registered Accountant
The effectiveness of our internal control over financial reporting as of December 31, 2021 has not been audited by our independent registered public accounting firm by virtue of our exemption from such requirement as a smaller reporting company.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 9C. DISCLORES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth the names and ages of the members of our board of directors and our executive officers and the positions held by each.
| Name | Age | Position | ||
| T. Riggs Eckelberry | 70 | Chief Executive Officer, Chairman of the Board of Directors, Secretary, Treasurer, and President | ||
| Prasad Tare | 47 | Chief Financial Officer | ||
| Tom Marchesello | 52 | Chief Operating Officer | ||
| Andrea d’Agostini | 41 | Chief Strategic Officer | ||
| Anthony Fidaleo | 63 | Director | ||
| Jean-Louis Kindler | 59 | Director | ||
| Byron Elton | 67 | Director |
T. Riggs Eckelberry - Chief Executive Officer, Chairman of the Board of Directors, Secretary, Treasurer, and President
Mr. Eckelberry has served as our Chief Executive Officer, Chairman, Secretary, Treasurer, and President since our inception in June 2007. As co-founder, Mr. Eckelberry brings his veteran technology management skills to the Blue Technology sector. As President and COO of CyberDefender Corporation from 2005 to 2006, he was instrumental in building the company and its innovative product line, helping to achieve initial funding and a NASDAQ IPO. From 2001 to mid-2005, he helped launch and turn around technology companies as founder and President of TechTransform, a technology consulting firm. In 2004, he was a key member of the team that commercialized YellowPages.com, resulting in its sale for $100 million to SBC/BellSouth. In 2003, he helped make Panda Software a key player in the US market as the General Manager of its US unit. During the high-tech boom of the 1990s, he was responsible for the global brand success of the software product, CleanSweep; as Chief Operating Officer of MicroHouse Technologies, he helped to achieve a successful sale of the company to Earthweb; and he was a key member of the team that sale of venture-backed TriVida to what is now a division of ValueClick: (VCLK). During Mr. Eckelberry’s early career in the non-profit sector, he received a master’s license for oceangoing vessels. As one of the founders of the Company and a veteran executive, Mr. Eckelberry’s experience and qualifications are essential to the board of directors.
Prasad Tare – Chief Financial Officer
Mr. Tare was named CFO in June 2021. Mr. Tare brings 15+ years of experience in public accounting, financial reporting, risk and internal controls advisory services. His skillset includes company-wide risk assessments to improve focus to critical areas as well as more efficient and effective audit activities. Mr. Tare started his career with PwC India, where he was part of the financial statements’ assurance teams for various multi-national companies. In 2004, he moved to the United States where he has worked for top regional and national public accounting and consulting firms. He also led external audit engagements for large public companies like Steve Madden, The United Retail Group, and Double-Take Software.
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Tom Marchesello – Chief Operating Officer
Mr. Marchesello was named COO in June 2019. For the five years prior to joining the Company, Mr. Marchesello operated as an executive-level Business Consultant, specializing in environmental, social and governance (ESG) corporate strategy, operations, & investor relations to private-equity funded portfolio companies in high technology & industrial manufacturing industries. Prior to that, he was Director of M&A with Bainbridge. Mr. Marchesello served in the U.S. Air Force as a Captain at Air Force Space Command headquarters, leading aerospace operations and strategic planning for satellite communications, earth science monitoring and Geographic Information (GIS) and Positioning (GPS) Systems. After leaving the service, Mr. Marchesello worked in finance and high technology operations for 20 years with such companies as Sony Electronics, Thompson Reuters, Morgan Stanley, Bainbridge and CME Group. Mr. Marchesello holds a BS in Finance from Pennsylvania State University and an MBA from San Diego State University and holds US Patent #7,613,634, for performing Electronic Retailing. He received two Air Force Achievement Medals, two Air Force Commendation Medals and a Gulf War Service Medal.
Andrea d’Agostini – Chief Strategic Officer
Mr. d’Agostini was named CSO in January 2022. Mr. d’Agostini has a lengthy track record as a company builder and chief marketer and is responsible for developing, communicating and executing the Company’s strategies to enhance strategic initiatives, future goals and financial growth. As its Chief Marketing Officer for more than seven years, Mr. d’Agostini helped develop American Power and Gas into a $300 million+, 200-employee multinational company dedicated to switching customers from fossil fuels to renewables. Mr. d’Agostini has also managed marketing and public relations campaigns for brands like Sephora, Lacoste, Pandora, Sperry and many others. Mr. d’Agostini is Co-Founder and Chairman at SalesJet.io, an innovative tech startup in the marketing and automation space and also serves on the board of a private community of 20,000 crypto investors dedicated to supporting the launch of investment-oriented coins. He sits on the boards of Monarchy Media, a boutique strategic marketing firm, CoinShare LTD, a blockchain technology firm, and Viva Concepts, a customer retention marketing firm for dental practices. Since 2015, Mr. d’Agostini has been delivering over 200 seminars per year to support entrepreneurship and help entrepreneurs achieve better results through marketing, technology and creativity. To date, he has delivered over 1,200 seminars all over the world, with over 100,000 entrepreneurs attending.
Anthony Fidaleo – Director
Mr. Fidaleo has served as our director since June 2012. Mr. Fidaleo has run his own accounting and consulting practice since 1992, primarily as an acting Chief Financial Officer or Senior Consultant for publicly traded companies ranging from start-ups to Fortune 500 companies. From November 2005 to February 2009 Mr. Fidaleo was the Chief Financial Officer, Chief Operating Officer, Executive Vice President and Member of the Board of Directors and Operating Committee for iMedia International, Inc. an early stage publicly traded interactive content solutions company. Mr. Fidaleo is a California CPA (inactive) and was in public accounting from 1982 through 1992, primarily with BDO Seidman, LLP where he attained the level of audit senior manager. Mr. Fidaleo holds a B.S. degree in Accounting from California State University at Long Beach. Mr. Fidaleo’s accounting and financial experience qualifies him to serve as a member of our board of directors.
Jean-Louis Kindler – Director
Mr. (“JL”) Kindler has served as our director since December 2013. As President of OriginClear Technologies, he led the commercialization of OriginClear’s breakthrough water treatment technology. Since 2019, he has been the CEO of Clean Energy Enterprises Inc., established to commercialize the Blue Tower biomass-to-hydrogen system he helped develop two decades ago in Japan. Mr. Kindler is a veteran of 25 years as both a top executive and engineer in environmental technologies. Before OriginClear, JL was co-founder and Chief Technology Officer of Ennesys, the company’s French joint venture, where he designed its patent-pending waste-to-energy system. Earlier, as founding CEO of MHS Equipment, a French nanotechnologies equipment manufacturing firm (42 M€, 360 employees in 2008), he led the development of a breakthrough fuel cell process. And earlier still, his twenty-year career in Japan gave him unique insight into fast-growing Asian markets. There, as principal of technology incubator Pacific Junction, JL completed various assignments. These included technology sourcing for the French industrial group GEC-Altshom, building the first commercial unit of the Blue Tower (to which he has recently returned in its now-fourth generation), and market development for a fluids mixing technology that helped inspire early OriginClear inventions. Mr. Kindler holds a Master’s in Economics and Public Policy from the Institute of Political Science in Lyon, France, and an MBA in International Management in Paris. Mr. Kindler’s executive and management experience, and past involvement in the company’s technology and operations, qualifies him to serve as a member of our board of directors.
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Byron Elton – Director
Mr. Elton has served as our director since January 2014. Mr. Elton is an experienced media and marketing executive with a proven record in pioneering new business development strategies and building top-flight marketing organizations. Since June 2018, he has been President of Elton Enterprises, Inc., which is involved in the wellness, fitness and health sector. Elton is currently opening six StretchLab Studios in the Los Angeles and Seattle markets (stretchlab.com). He is a co-founder since June 2017 of Pardue Associates, operating monsho, a brand-centric, creative communications agency focused on delivering results. From 2013 to 2017, Mr. Elton was a partner of Clear Search, an executive search firm. Prior to that, from 2009 until 2013, Mr. Elton served as President and Chief Executive Officer of Carbon Sciences, Inc. (“Carbon Sciences”) (OTCBB: CABN) and has served as Chairman of Carbon Sciences since March 2009. Carbon Sciences is an early stage company developing a technology to convert earth destroying carbon dioxide into a useful form that will not contribute to greenhouse gas. Mr. Elton previously served as Senior Vice President of Sales for Univision Online from 2007 to 2008. Mr. Elton also served for eight years as an executive at AOL Media Networks from 2000 to 2007, where his assignments included Regional Vice President of Sales for AOL and Senior Vice President of E-Commerce for AOL Canada. His broadcast media experience includes leading the ABC affiliate in Santa Barbara, California in 1995 to 2000 and the CBS affiliate in Monterrey, California, from 1998 to 1999, in addition to serving as President of the Alaskan Television Network from 1995 to 1999. Mr. Elton studied Advertising and Marketing Communications at Brigham Young University. Mr. Elton’s executive and management experience qualifies him to serve as a member of our board of directors.
Family Relationships
There are no family relationships among any of our directors and executive officers.
Legal Proceedings
During the past ten years, none of our directors or executive officers has been:
| ● | the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; |
| ● | convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
| ● | subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any Federal or State authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; |
| ● | found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law; |
| ● | the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (a) any Federal or State securities or commodities law or regulation; (b) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (c) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
| ● | the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
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Election of Directors
Our directors hold office until the expiration of the term for which he or she was elected and until a successor has been elected and qualified.
Board Independence
We currently have four directors serving on our board of directors. We are not a listed issuer and, as such, are not subject to any director independence standards. Using the definition of “independent director,” as defined by Section 5605(a)(2) of the rules of the NASDAQ Capital Market, Anthony Fidaleo, Jean-Louis Kindler and Byron Elton would be considered independent directors.
Board of Directors Meetings and Attendance
The Board of Directors held four meetings in 2021, as well as acted by unanimous written consent. All Board members were present at all of the meetings. We have no formal policy regarding director attendance at the annual meeting of stockholders.
Committees of the Board of Directors
We have established an audit committee and compensation committee however we have not yet nominated any members to such committees. To date, our entire board has performed all of the duties and responsibilities which might be contemplated by a committee.
Code of Ethics
We have adopted a code of business conduct and ethics that applies to all our directors, officers (including our Chief Executive Officer, Chief Financial Officer and any person performing similar functions) and employees. Our Code of Ethics was filed previously with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed on May 21, 2021. We have made our Code of Ethics available on our website at https://www.originclear.com/investing#codeofethics.
Board Leadership Structure and Role in Risk Oversight
Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in our best interests and our shareholders to combine these roles. Mr. Eckelberry has served as our Chairman since our inception in 2007. Due to the small size of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions combined. Our board of directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks.
Our board of directors focuses on the most significant risks facing us and our general risk management strategy, and also ensures that risks undertaken by us are consistent with the Board’s appetite for risk. While the Board oversees our risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing us.
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ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the compensation to our Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer for the years ended 2021 and 2020:
| Name and Principal Position | Salary | Bonus | Stock Awards |
Option Awards |
Non-Equity Incentive Plan Compensation |
Non-qualified Deferred Compensation Earnings |
All Other Compensation |
Total | ||||||||||||||||||||||||||||
| Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ||||||||||||||||||||||||||||
| T. Riggs Eckelberry, | 2021 | 360,000 | 32,500 | - | - | - | - | 3,000 | 395,500 | |||||||||||||||||||||||||||
| Chairman of the Board, Secretary & Treasurer, President and CEO | 2020 | 360,000 | - | - | - | - | - | 3,000 | 363,000 | |||||||||||||||||||||||||||
| Prasad Tare, (1) | 2021 | 98,864 | 15,000 | - | - | - | - | 1,250 | 115,114 | |||||||||||||||||||||||||||
| Chief Financial Officer | 2020 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Tom Marchesello, | 2021 | 150,000 | - | - | - | - | - | - | 150,000 | |||||||||||||||||||||||||||
| Chief Operating Officer | 2020 | 150,000 | - | - | - | - | - | - | 150,000 | |||||||||||||||||||||||||||
| (1) | Mr. Tare was appointed Chief Financial Officer in June 2021. |
Outstanding Equity Awards at 2021 Fiscal Year-End
There were no stock option plans outstanding as of December 31, 2021.
Employment Agreements
We currently do not have an employment agreement with our Chief Executive Officer, Mr. Eckelberry, who is paid an annual salary of $360,000. Bonus payments, if any, are determined by the Board of Directors. For the year ended 2021, our Chief Executive Officer received a bonus in the amount of $32,500. We currently do not have an employment agreement with our Chief Financial Officer, Mr. Tare who is paid an annual salary of $180,000. For the year ended 2021, our Chief Financial Officer received a bonus in the amount of $15,000. We currently do not have an employment agreement with our Chief Operating Officer, Mr. Marchesello, who is paid an annual salary of $150,000.
Employee Benefit Plans
Beginning June 1, 2008, we implemented a company health plan for our employees.
Compensation of Directors
Our current directors presently do not receive monetary compensation for their service on the board of directors. Directors may receive compensation for their services in the future and reimbursement for their expenses as shall be determined from time to time by resolution of the board of directors.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding the beneficial ownership of our common stock as of April 5, 2022, by (i) each director, (ii) each named executive officer, (iii) all directors and executive officers as a group, and (iv) each person who beneficially owns more than five percent of our common stock. Beneficial ownership is determined in accordance with the rules of the SEC. The percentage ownership of each beneficial owner is based on 526,305,492 outstanding shares of common stock. Except as indicated, each person listed below has sole voting and investment power with respect to the shares set forth opposite such person’s name.
| Name and Title of Beneficial Owner (1) | Number of Shares Beneficially Owned | Percentage of Shares | ||||||
| T. Riggs Eckelberry, Chief Executive Officer, Chairman, Secretary, Treasurer, President (2) | 869,394 | * | ||||||
| Tom Marchesello, Chief Operating Officer | 1,018,198 | * | ||||||
| Anthony Fidaleo, Director | 168 | * | ||||||
| Byron Elton, Director | 166 | * | ||||||
| Jean-Louis Kindler, Director | 1 | * | ||||||
| Directors and executive officers as a group (5 persons) | 1,887,927 | * | ||||||
| * | Less than 1% |
| (1) | The address of each director and named executive officer listed above is c/o OriginClear, Inc., 13575 58th Street North, Suite 200, Clearwater, FL 33760. |
| (2) | Mr. Eckelberry also owns all 1,000 shares outstanding shares of our Series C preferred stock which entitles Mr. Eckelberry to 51% of the total voting power on all shareholder matters of the Company. The ownership of these shares is conditioned on the holder’s continued position as CEO. |
On March 15, 2017, the Company filed a Certificate of Designation for its Series C preferred stock with the Secretary of State of Nevada (the “Certificate of Designation”) designating 1,000 shares of its authorized preferred stock as Series C preferred stock. The shares of Series C preferred stock have a par value of $0.0001 per share. The Series C preferred shares do not have a dividend rate or liquidation preference and are not convertible into shares of common stock.
For so long as any shares of the Series C preferred stock remain issued and outstanding, the holders thereof, voting separately as a class, shall have voting power equal to 51% of the total vote (representing a super majority voting power) on all shareholder matters of the Company. Such vote shall be determined by the holder(s) of a majority of the then issued and outstanding shares of Series C preferred stock.
The shares of the Series C preferred stock shall be automatically redeemed by the Company at their par value on the first to occur of the following triggering events: (i) on the date that Mr. Eckelberry ceases, for any reason, to serve as officer, director or consultant of the Company, or (ii) on the date that the Company’s shares of common stock first trade on any national securities exchange provided that the listing rules of any such exchange prohibit preferential voting rights of a class of securities of the Company, or listing on any such national securities exchange is conditioned upon the elimination of the preferential voting rights of the Series C preferred stock set forth in the Certificate of Designation.
Equity Compensation Plan Information
There were no stock option incentive plans outstanding as of December 31, 2021.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Except as set forth in Item 11 under “Executive Compensation,” and Note 8 under “Loan Payable – Related Party”, since January 1, 2020 there has not been, nor is there any proposed transaction where we were or will be a party in which the amount involved exceeded or will exceed $120,000 and in which any director, executive officer, holder of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The following table shows fees that were billed by our independent registered public accounting firm for professional services rendered in 2021 and 2020. Audit fees represent fees for professional services performed by M&K CPAS, PLLC (“M&K”) or Liggett & Webb, P.A. (“Liggett& Webb”), as applicable, for the audit of our financial statements and the review of our quarterly financial statements, as well as services that are normally provided in connection with statutory and regulatory filings or engagements. Liggett & Webb, P.A. served as our independent registered public accounting firm through September 30, 2019. We engaged M& K as our independent registered public accounting on September 30, 2019.
| Fiscal Year | Audit Fees | Audit- Related Fees | Tax Fees | All Other Fees | ||||||||||||
| 2021 – M&K CPAS, PLLC | $ | 86,525 | $ | - | $ | - | $ | - | ||||||||
| 2020 – M&K CPAS, PLLC | $ | 71,500 | $ | - | $ | - | $ | - | ||||||||
| 2020 – Liggett & Webb, P.A. | $ | 15,200 | $ | - | $ | - | $ | - | ||||||||
Audit-Related Fees
We did not incur assurance and audit-related fees during 2021 and 2020, to M&K or Liggett & Webb, as applicable, nor in connection with the audit of our financial statements for the reviews of registration statements and issuance of related consents and assistance with SEC comment letters except for fees incurred relating to Company’s regulation A offering included in Audit Fees above.
Tax Fees
We did not incur fees for tax compliance, tax advice, or tax planning for the fiscal years ended December 31, 2021 and 2020, respectively.
All Other Fees
There were no fees billed to us by M&K or Liggett& Webb, as applicable, for services rendered to us during the fiscal years ended December 31, 2021 and 2020, respectively, other than the services described above under “Audit Fees” and “Audit-Related Fees.”
As of the date of this filing, our current policy is to not engage our independent registered public accounting firm to provide, among other things, bookkeeping services, appraisal or valuation services, or international audit services. The policy provides that we engage our independent registered public accounting firm to provide audit and other assurance services, such as review of SEC reports or filings, as set forth above.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
| * | Filed herewith |
| ** | Furnished herewith |
| *** | Management compensation agreement |
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| (1) | Incorporated by reference to the Company’s Form SB-2 filed with the SEC on December 11, 2007. |
| (2) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 20, 2011. |
| (3) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on June 14, 2012. |
| (4) | Incorporated by reference to the Company’s Current Report on Form 10-Q filed with the SEC on August 14, 2014. |
| (5) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 16, 2015. |
| (6) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on October 6, 2015. |
| (7) | Incorporated by reference to the Company’s Annual Report on Form 10-K filed with the SEC on April 4, 2016. |
| (8) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2016 filed with the SEC on August 15, 2016. |
| (9) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2017. |
| (10) | Incorporated by reference to the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2017. |
| (11) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 12, 2017. |
| (12) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on June 30, 2017. |
| (13) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 6, 2017. |
| (14) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on March 2, 2021. |
| (15) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on June 2, 2021. |
| (16) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 4, 2021. |
| (17) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on January 8, 2016. |
| (18) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2016 filed with the SEC on May 16, 2016. |
| (19) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2016 filed with the SEC on August 15, 2016. |
| (20) | In accordance with Item 601of Regulation S-K, this Exhibit is hereby furnished to the SEC as an accompanying document and is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933. |
| (21) | Incorporated by reference to the Company’s Annual Report on Form 10-K filed for the Fiscal Year ended December 31, 2017 filed with the SEC on April 17, 2018. |
| (22) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2018 and filed with the SEC on May 21, 2018. |
| (23) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2018 and filed with the SEC on August 14, 2018. |
| (24) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on August 20, 2018. |
| (25) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on January 22, 2019. |
| (26) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on March 20, 2019. |
| (27) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 9, 2019. |
| (28) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on October 31, 2019. |
| (29) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2019 filed with the SEC on August 19, 2019. |
| (30) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2020 filed with the SEC on July 6, 2020. |
| (31) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 1, 2020. |
| (32) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on August 27, 2020. |
| (33) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2020 filed with the SEC on November 23, 2020. |
| (34) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on February 10, 2021. |
| (35) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2018 filed with the SEC on April 25, 2019. |
| (36) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 7, 2021. |
(37) |
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on August 17, 2021. |
| (38) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2020 filed with the SEC on May 21, 2021. |
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| ORIGINCLEAR, INC. | ||
| By: | /s/ T Riggs Eckelberry | |
| T Riggs Eckelberry | ||
| Chief Executive Officer (Principal Executive Officer) | ||
| By: | /s/ Prasad Tare | |
| Prasad Tare | ||
| Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
| Date: April 6, 2022 | By: | /s/ T Riggs Eckelberry |
| T Riggs Eckelberry | ||
| Director and Chief Executive Officer |
| Date: April 6, 2022 | By: | /s/ Prasad Tare |
| Prasad Tare | ||
| Chief Financial Officer |
| Date: April 6, 2022 | By: | /s/ Anthony Fidaleo |
| Anthony Fidaleo | ||
| Director |
| Date: April 6, 2022 | By: | /s/ Jean-Louis Kindler |
| Jean-Louis Kindler | ||
| Director |
| Date: April 6, 2022 | By: | /s/ Byron Elton |
| Byron Elton | ||
| Director |
44
INDEX TO FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of OriginClear, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of OriginClear, Inc. (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations, shareholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company suffered a net loss from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
As discussed in Note 3 and 4 to the financial statements, the Company had complex financing transactions due to the issuance of multiple series of preferred stock during the year, attached dividends and warrants, and differing terms on each class of stock, resulting in multiple placements of the different series throughout the balance sheet.
Auditing management’s evaluation of these transactions can be complex due to the unusual nature of these transactions.
To evaluate the appropriateness of the instrument’s classification, we examined and evaluated the agreement along with management’s evaluation of the key terms and management’s disclosure of the transactions.
/s/
We have served as the Company’s auditor since 2019.
April 6, 2022
F-2
ORIGINCLEAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Contracts receivable | ||||||||
| Fair value investment in securities | ||||||||
| Contract assets | ||||||||
| Inventory assets | ||||||||
| Other receivable | ||||||||
| 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 | ||||||||
| Loan payable, related party | ||||||||
| 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 13) | ||||||||
| Series J Convertible Preferred Stock, | ||||||||
| Series L Convertible Preferred Stock, | ||||||||
| Series M Preferred Stock, | ||||||||
| Series O 8% Convertible Preferred Stock, | ||||||||
| Series P Convertible Preferred Stock, | ||||||||
| Series Q 12% Convertible Preferred Stock, | ||||||||
| Series R 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, | ||||||||
| SHAREHOLDERS’ DEFICIT | ||||||||
| Preferred stock, $ | ||||||||
| Subscription payable to purchase | ||||||||
| Preferred treasury stock, | ||||||||
| Common stock, $ | ||||||||
| 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 audited consolidated financial statements
F-3
ORIGINCLEAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
| Years Ended | ||||||||
| December 31, 2021 | December 31, 2020 | |||||||
| Sales | $ | $ | ||||||
| Cost of Goods Sold | ||||||||
| Gross Profit | ||||||||
| Operating Expenses | ||||||||
| Selling and marketing expenses | ||||||||
| General and administrative expenses | ||||||||
| Research and development | ||||||||
| Depreciation and amortization expense | ||||||||
| Total Operating Expenses | ||||||||
| Loss from Operations | ( | ) | ( | ) | ||||
| OTHER INCOME (EXPENSE) | ||||||||
| Other income | ||||||||
| Impairment of asset for sale | ( | ) | ( | ) | ||||
| Gain on write off of loans payable | ||||||||
| Gain/(Loss) on conversion of preferred stock | ( | ) | - | |||||
| Loss on exchange of preferred stock | ( | ) | ||||||
| Unrealized gain(loss) on investment securities | ( | ) | ||||||
| Gain on net change in derivative liability and conversion of debt | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| TOTAL OTHER INCOME (EXPENSE) | ||||||||
| 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 audited consolidated financial statements
F-4
ORIGINCLEAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
| YEARS ENDED DECEMBER 31, 2021 AND 2020 | ||||||||||||||||||||||||||||||||||||||||
| Preferred stock | Common stock | Additional Paid-in- | Subscription | Accumulated Other Comprehensive | Accumulated | Mezzanine | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Payable | loss | Deficit | Total | Equity | |||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
| 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 D-1 Preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series E Preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series J Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series L Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series M Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series O Preferred stock | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series P Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Exchange of Series F Preferred stock to Series Q Preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Issuance of Series M Preferred stock through a private placement | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Issuance of Series K Preferred stock with issuance of Series L through a private placement | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Issuance of Series P Preferred stock with issuance of Series O through a private placement | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Issuance of Series R Preferred stock through a private placement | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Exchange of Series F Preferred stock for Series Q Preferred stock | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Exchange of Series F Preferred stock for Series O/P | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Subscription payable-common stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Comprehensive gain | - | - | ||||||||||||||||||||||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | ( | ) | ( | ) | ( | ) | $ | |||||||||||||||||||||||||||||||||
| 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 D1 Preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series J Preferred stock | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series L Preferred stock | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for 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 | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Common stock issued in conjunction with the sale of Series X 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 P Preferred Stock | - | ( | ) | - | - | |||||||||||||||||||||||||||||||||||
| Issuance of Series M Preferred stock through a private placement | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of Series R Preferred stock through a private placement | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of commons stock for the exercise of Series R warrants purchased for cash | ||||||||||||||||||||||||||||||||||||||||
| Issuance of Series T Preferred stock in exchange for property | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of Series U Preferred stock through a private placement | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of Series Y Preferred stock through a private placement | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Issuance of Series X Preferred stock through a private placement | - | - | ||||||||||||||||||||||||||||||||||||||
| Exchange of Series F Preferred Stock for Series Q Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Exchange of Series G Preferred Stock for Series R Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| 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 I Preferred Stock for Series W Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Exchange of Series K Preferred Stock for Series R Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Exchange of Series K Preferred Stock for Series W Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Exchange of Series M Preferred Stock for Series R Preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Loss on issuance of Preferred stock | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Loss on conversion of Preferred Stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Adjustment to Series L Preferred stock | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Issuance of common stock warrants deemed dividends | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Adjustment to Series M Preferred stock | - | - | - | - | - | - | - | ( | ) | |||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
The accompany notes are an integral part of these audited consolidated financial statements
F-5
ORIGINCLEAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
| Years Ended | ||||||||
| December 31, 2021 | December 31, 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Income (loss) | $ | ( | ) | $ | ||||
| Adjustment to reconcile net income (loss) to net cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Interest expense associated with preferred stock issuance | ||||||||
| Stock compensation expense | ||||||||
| Gain on convertible note receivable | ( | ) | ||||||
| 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 | ||||||||
| Loss on issuance of preferred stock | ||||||||
| SBA loans forgiven | ( | ) | ||||||
| Impairment of assets held for sale | ||||||||
| Impairment expense for convertible note receivable | ||||||||
| (Gain) Loss on conversion of preferred stock | ||||||||
| (Gain) on write off of other payables | ( | ) | ||||||
| Interest receivable on convertible note receivable | ( | ) | ||||||
| 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 | ( | ) | ||||||
| Customer deposit | ||||||||
| 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 | ( | ) | ( | ) | ||||
| Proceeds from SBA loans | ||||||||
| Repayment of loans, net | ( | ) | ( | ) | ||||
| Repayment of loans, related party, net | ( | ) | ( | ) | ||||
| Redemption of preferred stock | ( | ) | ||||||
| Net payments on cumulative preferred stock dividends payable | ||||||||
| Proceeds on convertible promissory notes | ( | ) | ||||||
| Proceeds for the purchase of warrants | ||||||||
| Net proceeds for issuance of preferred stock for cash - mezzanine classification | ||||||||
| Net proceeds for issuance of preferred stock for cash - liability classification | ||||||||
| Net proceeds from convertible notes | ( | ) | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| NET INCREASE IN CASH | ( | ) | ||||||
| CASH BEGINNING OF YEAR | ||||||||
| CASH END OF YEAR | $ | $ | ||||||
| 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 | $ | $ | ||||||
| Other payable for fixed asset with common stock subscription | $ | $ | ||||||
| Issuance of Series T preferred shares in exchange for property | $ | $ | ||||||
| Issuance of Series O dividends | $ | $ | ||||||
| Preferred stock converted to common stock | $ | $ | ||||||
| Exchange from liability to mezzanine | $ | $ | ||||||
| Warrants deemed dividends | $ | $ | ||||||
| Derivative discount issued on notes payable | $ | $ | ||||||
The accompanying notes are an integral part of these audited consolidated financial statements
F-6
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - AUDITED
DECEMBER 31, 2021 AND 2020
| 1. | ORGANIZATION AND LINE OF BUSINESS |
Organization
OriginClear, Inc. (the “Company”) was incorporated in the state of Nevada on June 1, 2007. The Company, based in Los Angeles, California, began operations on June 1, 2007. The Company began its planned principal operations in December, 2010, at which time it exited the development stage.
In December 2014, the Company formed a wholly owned subsidiary, OriginClear Technologies Limited (OCT), formerly OriginClear (HK) Limited in Hong Kong, China. The Company granted OCT a master license for the People’s Republic of China. In turn, OCT is expected to license regional joint ventures for water treatment. As of December 31, 2021, OCT has limited assets and no current operations.
On October 1, 2015, the Company completed
the acquisition of
On July 19, 2018, the Company announced the launch of its Modular Water Treatment Division. MWS designs, manufactures and implements advanced prepackaged wastewater treatment, pump stations and custom systems with primary focus on decentralized opportunities away from the very competitive large municipal wastewater treatment plants. These decentralized opportunities include: rural communities, housing developments, industrial sites, schools and many more.
On April 13, 2021, OriginClear announced that it had created a wholly-owned subsidiary called Water On Demand #1, Inc. (WOD #1), to offer private businesses the ability to pay for their water treatment and purification services on a pay-per-gallon basis. The Company is in the process of selecting a use case for delivering such services, commonly known as Design-Build-Own-Operate or DBOO. The program cannot move forward without capital invested into WOD #1.
On May 10, 2021, OriginClear announced that it had recently 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. The Company is currently developing this blockchain technology and NFT under the name $H2O, and applied for a trademark for this name on May 16, 2021. The Company is aware of a high level of regulatory oversight in this area, and if implementation of $H20 is delayed or terminated altogether by reason of regulatory issues, it will employ traditional payment systems.
In November 2021, the Company created additional Water on Demand (WOD) 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 is wholly owned by OriginClear, Inc. These subsidiaries were created in order to align the incentives of each strategic partner that the Company has engaged more closely with the results of their own business development activities. Each WOD subsidiary is associated with different strategic partners who are compensated based on the profitability of that WOD subsidiary.
Line of Business
OriginClear is a provider of water treatment solutions and master licensee of a breakthrough water equipment technology. This technology enables the Company to offer prefabricated, modular water systems, which are suited for local businesses. The Company also plans to deploy this technology for outsourced water treatment programs in which the customer pays by the gallon, without capital expenditure. Blockchain technology may be employed to streamline payments. Through the acquisition of Progressive Water Treatment Inc., the Company is primarily engaged in providing water treatment systems and services for a wide variety of applications and component sales.
F-7
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 year ended December 31, 2021, the Company obtained funds from the
issuance of convertible note agreements and from sales of its preferred stock. Management believes this funding will continue from its’
current investors and from new investors. The Company also 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.
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.
Concentration Risk
Cash includes amounts deposited in
financial institutions in excess of insurable Federal Deposit Insurance Company (FDIC) limits. At times throughout the year, the Company
may maintain cash balances in certain bank accounts in excess of FDIC limits. As of December 31, 2021, the cash balance in excess of the
FDIC limits was $
F-8
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 years ended December 31, 2021 and 2020, respectively, as the inclusion of any potential shares in the year ended December 31, 2021, would have had an anti-dilutive effect due to the Company generating a loss.
| For the Years Ended | ||||||||
| 2021 | 2020 | |||||||
| 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.
| Anti-dilutive shares | Dilutive shares | |||||||
| December 31, 2021 | ||||||||
| Warrant shares | ||||||||
| Convertible debt shares | ||||||||
| Preferred shares | ||||||||
| December 31, 2020 | ||||||||
| Warrant shares | ||||||||
| Convertible debt shares | ||||||||
| Preferred shares | ||||||||
F-9
Revenue Recognition
We recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.
Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.
Revisions in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts for the revisions become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions to costs and income, which are recognized in the period the revisions are determined.
Contract receivables are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are collectible upon completion of the contracts. Accounts payable to material suppliers and subcontractors are recorded for amounts currently due based upon work completed or materials received, as are retention due subcontractors, which are payable upon completion of the contract. General and administrative expenses are charged to operations as incurred and are not allocated to contract costs.
Contract Receivable
The Company bills its customers in
accordance with contractual agreements. The agreements generally require billing to be on a progressive basis as work is completed. Credit
is extended based on evaluation of clients financial condition and collateral is not required. The Company maintains an allowance for
doubtful accounts for estimated losses that may arise if any customer is unable to make required payments. Management performs a quantitative
and qualitative review of the receivables past due from customers on a monthly basis. The Company records an allowance against uncollectible
items for each customer after all reasonable means of collection have been exhausted, and the potential for recovery is considered remote.
The allowance for doubtful accounts was
Indefinite Lived Intangibles and Goodwill Assets
The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.
The Company tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance with its policies, the Company performed a qualitative assessment of indefinite lived intangibles and goodwill at December 31, 2021 and 2020, and determined there was no impairment of indefinite lived intangibles and goodwill.
Research and Development
Research and development costs are
expensed as incurred. Total research and development costs were $
F-10
Advertising Costs
The Company expenses the cost of advertising
and promotional materials when incurred. The advertising costs were $
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 |
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| 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 year
ended December 31, 2021 and 2020, was $
Stock-Based Compensation
The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants vest immediately and the total stock-based compensation charge is recorded in the period of the measurement date.
F-11
Accounting for Derivatives
The Company evaluates all its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a probability weighted average series Binomial lattice option pricing models to value the derivative instruments at inception and on subsequent valuation dates.
The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as current or non-current based on whether or not the net-cash settlement of
the derivative instrument could be required within
Fair Value of Financial Instruments
Fair Value of Financial Instruments requires disclosure of the fair value information, whether or not to recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2021, 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 December 31, 2021 and 2020.
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Investment at fair value-securities, December 31, 2021 | $ | $ | $ | $ | ||||||||||||
| Investment at fair value-securities, December 31, 2020 | $ | $ | $ | $ | ||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Derivative Liability, December 31, 2021 | $ | $ | $ | $ | ||||||||||||
| Derivative Liability, December 31, 2020 | $ | $ | $ | $ | ||||||||||||
F-12
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, 2020 | $ | |||
| Fair value of derivative liabilities issued | ||||
| Net gain on conversion of debt and change in derivative liability | ( | ) | ||
| Balance as of December 31, 2020 | ||||
| Fair value of derivative liabilities issued | ||||
| Net gain on conversion of debt and change in derivative liability | ( | ) | ||
| Balance as of December 31, 2021 | $ |
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:
| 12/31/2021 | 12/31/2020 | |||||||
| Risk free interest rate | ||||||||
| Stock volatility factor | ||||||||
| Weighted average expected option life | ||||||||
| Expected dividend yield |
Segment Reporting
The Company’s business currently operates in one segment based upon the Company’s organizational structure and the way in which the operations are managed and evaluated.
Marketable Securities
The Company adopted ASU 2016-01, “Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. It requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purpose, and separate presentation of financial assets and financial liabilities by measurement category and form of financial asset. It eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The Company has evaluated the potential impact this standard may have on the condensed consolidated financial statements and determined that it had a significant impact on the condensed consolidated financial statements. The Company accounts for its investment in Water Technologies International, Inc. as available-for-sale securities, and the unrealized gain on the available-for-sale securities is recognized in net income.
Licensing agreement
The Company analyzed the licensing agreement using ASU 606 to determine the timing of revenue recognition. The licensing of the intellectual property (IP) is distinct from the non-license goods or services and has significant standalone functionality that provides a benefit or value. The functionality will not change during the license period due to the licensor’s activities. Because the significant standalone functionality is delivered immediately, the revenue is generally recognized when the license is delivered.
Reclassification
Certain prior period accounts and balances have been reclassified to current period presentation for comparative purposes.
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.
F-13
Recently Issued Accounting Pronouncements
In February 2016, the FASB established ASC Topic 842, Leases (Topic 842), by issuing ASU No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations. The Company adopted the new standard on January 1, 2019.
The new standard provides a number of optional practical expedients in transition. The Company has elected the ‘package of practical expedients’, which permit it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the Company.
The new standard did not have a material impact on the Company’s audited consolidated financial statements.
In August 2017, FASB issued accounting standards update ASU-2017-12, “D” (Topic 815) – “Targeted Improvements to Accounting for Hedging Activities”, to require an entity to present the earnings effect of the hedging instrument in the same statement line item in which the earnings effect of the hedged item is reported. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods with the fiscal years beginning after December 15, 2020. Early adoption is permitted in any interim period after issuance of the update. The Company has evaluated the impact of the adoption of ASU 2017-12 on the Company’s audited consolidated financial statements, which had no material impact.
In June 2018, FASB issued accounting standards update ASU 2018-07, (Topic 505) – “Shared-Based Payment Arrangements with Nonemployees”, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees will be aligned with the requirements for share-based payments granted to employees. Under the ASU 2018-07, the measurement of equity-classified nonemployee share-based payments will be fixed on the grant date, as defined in ASC 718, and will use the term nonemployee vesting period, rather than requisite service period. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted if financial statements have not yet been issued. The Company adopted ASU 2018-07 on the January 1, 2019. The adoption of the new standard did not have a material impact on the Company’s audited consolidated financial statements.
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
F-14
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
F-15
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
F-16
Series L
On June 3,
2019, the Company designated
Series M
Pursuant to the Amended and Restated
Certificate of Designation of Series M Preferred Stock filed with the Secretary of State of Nevada on July 1, 2020, the Company designated
Series O
On April 27, 2020, the Company designated
F-17
Series P
On April 27, 2020, the Company designated
Series Q
On August 21, 2020, the Company designated
F-18
Series R
On November 16, 2020, the Company designated
Series S
On February 5, 2021, the Company designated
Series T
On February 24, 2021, the Company designated
F-19
The Company has actively listed the
residential real property for sale since July 2021.
Series U
On May 26, 2021, the Company designated
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
F-20
Series W
On April 28, 2021, the Company designated
Series X
On August 10, 2021, the Company designated
Series Y
On
December 6, 2021, the Company designated
F-21
As of December 31, 2021, 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, and Series Y 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
Year ended December 31, 2021
The Company issued
The Company issued
The Company issued
The Company issued
The Company issued
The Company issued
The Company issued
Year ended December 31, 2020
The Company issued
The Company issued
The Company issued
The Company issued
F-22
| 4. | OPTIONS AND WARRANTS |
Restricted Stock to CEO
Between May 12, 2016, and August 14,
2019, 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 and none have yet vested nor have any been issued.
Restricted Stock to Employees and Consultants
Between May 12, 2016, and August 14,
2019, the Company entered into Restricted Stock Grant Agreements (“the E&C RSGAs”) with its 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 E&C RSGAs are performance based shares and none have yet vested nor have any been issued. The E&C RSGAs provide
for the issuance of up to
On August 14, 2019, the Board of Directors
approved an amendment to the RSGAs and E&C RSGAs to include an alternative vesting schedule for the Grantees. The Grantees can elect
to participate in the alternate vesting schedule for grants received at least
F-23
On May 18, 2020,
During the year ended December 31,
2021, per electing and qualifying for the Restricted Stock Grant Agreement alternate vesting schedule, the Company issued to Mr. T. Riggs
Eckelberry, one employee and one consultant an aggregate of
Warrants
During the year ended December 31, 2021,
the Company issued
| 2021 | 2020 | |||||||||||||||
| Number of Warrants | Weighted average exercise price | Number of Warrants | Weighted average exercise price | |||||||||||||
| Outstanding - beginning of year | $ | $ | ||||||||||||||
| Granted | $ | $ | ||||||||||||||
| Exercised | ( | ) | $ | ( | ) | |||||||||||
| Expired | ( | ) | $ | ( | ) | |||||||||||
| Outstanding - end of year | $ | $ | ||||||||||||||
At December 31, 2021 and 2020, the weighted average remaining contractual life of warrants outstanding:
| 2021 | 2020 | |||||||||||||||||||||||||
| Weighted Average | Weighted Average | |||||||||||||||||||||||||
| Remaining | Remaining | |||||||||||||||||||||||||
| Exercisable | Warrants | Warrants | Contractual | Warrants | Warrants | Contractual | ||||||||||||||||||||
| Prices | Outstanding | Exercisable | Life (years) | Outstanding | Exercisable | Life (years) | ||||||||||||||||||||
| $ | - | - | - | |||||||||||||||||||||||
| $ | ||||||||||||||||||||||||||
| $ | ||||||||||||||||||||||||||
| $ | - | - | - | |||||||||||||||||||||||
| $ | - | - | - | |||||||||||||||||||||||
| $ | - | - | - | - | ||||||||||||||||||||||
| $ | - | - | - | |||||||||||||||||||||||
At December 31, 2021 and 2020, the
aggregate intrinsic value of the warrants outstanding was $
F-24
| 5. | CONVERTIBLE PROMISSORY NOTES |
As of December 31, 2021, 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 December 31, | Amount | |||
| 2022 | ||||
| 2023 | ||||
| $ | ||||
At December 31, 2021, the $
On various dates from 2014 through
May 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 $
F-25
The Company issued various, unsecured
convertible promissory notes (the “2015-2016 Notes”), on various dates ending on May 19, 2016. The 2015-2016 Notes matured
and were extended from the date of each tranche through maturity dates ending on May 19, 2020. The 2015-2016 Notes bear interest at
The Company issued a convertible note
(the “Dec 2015 Note”) in exchange for accounts payable in the amount of $
The Company issued a convertible note
(the “Sep 2016 Note”) in exchange for accounts payable in the amount of $
The Company issued two (2) unsecured
convertible promissory notes (the “Apr & May 2018 Notes”), in the aggregate amount of $
F-26
The Company
entered into an unsecured convertible promissory note (the “Nov 20 Note”), on November 19, 2020 in the amount of $
We evaluated the financing transactions in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion feature of the convertible promissory notes was not afforded the exemption for conventional convertible instruments due to its variable conversion rate. The note has no explicit limit on the number of shares issuable, so they did not meet the conditions set forth in current accounting standards for equity classification. The Company elected to recognize the note under paragraph 815-15-25-4, whereby, there would be a separation into a host contract and derivative instrument. The Company elected to initially and subsequently measure the note in its entirety at fair value, with changes in fair value recognized in earnings. The Company recorded a derivative liability representing the imputed interest associated with the embedded derivative. The derivative liability is adjusted periodically according to the stock price fluctuations.
The derivative liability recognized
in the financial statements as of December 31, 2021 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.
F-27
The following table represents a disaggregation of revenue by type of good or service from contracts with customers for the year ended December 31, 2021 and 2020.
| Years Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Equipment Contracts | $ | $ | ||||||
| Component Sales | ||||||||
| Waste Water Treatment Systems | ||||||||
| Pump Stations | ||||||||
| Services Sales | ||||||||
| Commission & Training | ||||||||
| $ | $ | |||||||
Revenue recognition for other sales arrangements, such as sales for components, and service sales will remain materially consistent.
Contract assets represents revenues
recognized in excess of amounts billed on contracts in progress. Contract liabilities represents billings in excess of revenues recognized
on contracts in progress. Assets and liabilities related to long-term contracts are included in current assets and current liabilities
in the accompanying balance sheets, as they will be liquidated in the normal course of the contract completion. The contract asset for
the years ending December 31, 2021 and 2020, was $
| 7. | FINANCIAL ASSETS |
Convertible Note Receivable
The Company purchased a
Fair value investment in Securities
On May 15, 2018,
F-28
| 8. | LOANS PAYABLE |
Secured Loans Payable
The Company entered into
Loan Payable-Related Party
The Company’s CEO loaned the
Company $
Small Business Administration Loans
Between April 30, 2020 and September
12, 2020, the Company received total loan proceeds in the amount of $
| 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
As of December 31, 2021, the maturities are summarized as follows:
| Capital lease | $ | |||
| Less current portion | ||||
| Total long-term liabilities | $ |
| 10. | INCOME TAXES |
On December 22, 2017, the U.S. enacted
the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S.
statutory federal income tax rate from
F-29
The Company files income tax returns in the U.S. Federal jurisdiction, and the state of California. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2018.
Included in the balance at December 31, 2021, are no tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
The Company’s policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the periods ended December 31, 2021 and 2020, the Company did not recognize interest and penalties.
At December 31, 2021, the Company had
net operating loss carry-forwards of approximately $
The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rate to pretax income from continuing operations for the years ended December 31, 2021 and 2020 due to the following:
| 2021 | 2020 | |||||||
| Book income (loss) | $ | $ | ) | |||||
| Tax to book differences for deductible expenses | ||||||||
| Tax non-deductible expenses | ( | ) | ||||||
| Valuation Allowance | ( | ) | ||||||
| Income tax expense | $ | $ | ||||||
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred tax liabilities consist of the following components as of December 31,
| 2021 | 2020 | |||||||
| Deferred tax assets: | ||||||||
| NOL carryover | $ | $ | ||||||
| Other carryovers | ||||||||
| Deferred tax liabilities: | ||||||||
| Depreciation | ( | ) | ( | ) | ||||
| Less Valuation Allowance | ( | ) | ( | ) | ||||
| Net deferred tax asset | $ | $ | ||||||
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry-forwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry-forwards may be limited as to use in future years.
F-30
| 11. | 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.
| 12. | ASSETS HELD FOR SALE |
During the year ended December 31,
2021, 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 $
| 13. | 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
For the period ended December 31, 2021, all parties have fully and timely performed under the settlement agreement, and no further issues or proceedings, or fees and costs, are anticipated regarding the settlement of the dispute between OriginClear, Inc., and its developmental subsidiary, WaterChain, Inc., and RDI Financial, LLC, an alleged assignee of Interdependence, Inc., as disclosed in greater detail in the Form 10-Q for the period ended March 31, 2021, filed by OriginClear on August 4, 2021. As of December 31, 2021, the Company views the aforesaid RDI matter as closed.
Following the disclosures made in the Form 10-Q for the period ended March 31, 2021, filed by OriginClear on August 4, 2021, on December 14, 2021, the United States District Court for the Western District of New York rendered its decision on the motion to dismiss filed by GTR Source LLC and Tzvi “Steve” Reich’s (collectively, the “GTR Defendants”), and granted in part, and denied in part dismissal of certain claims set forth in the amended complaint filed by OriginClear, Inc., Progressive Water Treatment, Inc., and T. Riggs Eckelberry, individually (the “GTR Plaintiffs”). On December 16, 2021, the GTR Plaintiffs filed a Notice of Appeal to the United States Court of Appeals for the Second Circuit to the district court’s decision on the GTR Defendants’ motion to dismiss.
F-31
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
$
| 14. | CONCENTRATIONS |
Major Customers
PWT had
PWT had
Major Suppliers
PWT had
PWT had
| 15. | OTHER INCOME |
Other Income consisted of the following as of December 31,
| 2021 | 2020 | |||||||
| Debt forgiveness on SBA loan | $ | $ | ||||||
| Gain on conversion of note receivable | ||||||||
| Other income | ||||||||
| Total Other Income | $ | $ | ||||||
| 16. | SUBSEQUENT EVENTS |
Management has evaluated subsequent events according to the requirements of ASC TOPIC 855 and has determined that there are the following subsequent events:
Between January 3, 2022 and February 14, 2022, certain holders
of the Company’s Series K preferred stock exchanged an aggregate of
On January 4, 2022,
holders of Series W Preferred Stock converted an aggregate of
Between January 4, 2022 and February 14, 2022, holders of
the Company’s Series R preferred stock converted an aggregate of
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Between January 4, 2022 and March 3, 2022, holders of the
Company’s Series U preferred stock converted an aggregate of
Between January 4, 2022 and March 28,
2022, the Company entered into subscription agreements with certain accredited investors pursuant to which the Company sold an aggregate
of
On January 7, 2022, holders of convertible promissory notes
converted an aggregate principal and interest amount of $
Between January 20, 2022 and January 25, 2022, certain holders
of the Company’s Series V preferred stock exchanged an aggregate of
Between January 21, 2022 and March
31, 2022, the Company issued to consultants and
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,
On February 11, 2022,
On February 14, 2022, certain holders of the Company’s
Series F preferred stock exchanged an aggregate of
On February 18, 2022, the Company entered into a subscription
agreement with a certain accredited investor pursuant to which the Company sold an aggregate of
Between February 22, 2022 and March 30, 2022, holders of the Company’s
Series L preferred stock converted an aggregate of
Between February 23, 2022 and March 2, 2022, the Company entered into
settlement agreements with certain accredited investors pursuant to which the Company issued an aggregate of
On February 25, 2022, holders of the Company’s Series
T preferred stock converted an aggregate of
On
March 31, 2022, the Company issued an aggregate of
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Exhibit 3.41
CERTIFICATE OF DESIGNATION OF
RIGHTS, POWERS,
PREFERENCES, PRIVILEGES AND RESTRICTIONS OF THE
SERIES Y CONVERTIBLE PREFERRED STOCK OF
ORIGINCLEAR, INC.
I, T. Riggs Eckelberry, hereby certify that I am the Chief Executive Officer of OriginClear, Inc. (the “Company”), a corporation organized and existing under the Nevada Revised Statutes (the “NRS”), and further do hereby certify:
That, pursuant to the authority expressly conferred upon the Board of Directors of the Company (the “Board”) under the Company’s Articles of Incorporation, as amended (the “Articles of Incorporation”), the Board adopted on December 16, 2021 certain resolutions creating a series of shares of preferred convertible stock designated as the Series Y Convertible Preferred Stock (the “Preferred Stock”); the Board subsequently adopted certain other resolutions that modified the terms of the Preferred Stock.
RESOLVED, that the Board designates the Series Y Convertible Preferred Stock and the number of shares constituting such series, and fixes the rights, powers, preferences, privileges and restrictions relating to such series in addition to any set forth in the Articles of Incorporation as follows:
SECTION 1. DESIGNATION OF SERIES. There shall hereby be created and established by this Certificate of Designation of Rights, Powers, Preferences, Privileges and Restrictions of the Series Y Convertible Preferred Stock of OriginClear, Inc. (“Certificate of Designation”) a series of preferred stock of the Company designated as “Series Y Convertible Preferred Stock”. The authorized number of shares of Preferred Stock initially constituting such series shall be Three Thousand (3,000). Each share of the Preferred Stock shall have an original issue price of $100,000 (“Original Issue Price”). Each share of Preferred Stock is convertible into shares of shares of the Company’s common stock (“Common Stock”) at the conversion rate set forth in Section 6(a)(i) below, as adjusted in accordance with Section 6 and Section 7 below. Capitalized terms not defined herein shall have the meaning as set forth in Section 11. The Preferred Stock shall have the rights, preferences and privileges set forth below:
SECTION 2. DIVIDENDS. The holders of the Preferred Stock (the “Holders”) shall not be entitled to receive dividends on any outstanding shares of the Preferred Stock.
SECTION 3. DISTRIBUTION OF NET PROFITS FROM SUBSIDIARY. The Holders shall be entitled to receive, on a pro rata basis (based on the number of shares of Preferred Stock held by the shareholder as compared to each of the other holders of the Preferred Stock designating the Subsidiary, as defined below) and pari passu basis, a quarterly distribution of twenty-five percent (25%) of the quarterly Net Profits from one of the Company’s wholly-owned “Water On Demand” (“WOD”) subsidiaries (each a “WOD Subsidiary” or the “Subsidiary”) designated by a Holder in such Holder’s Subscription Agreement, paid within three (3) months of Subsidiary’s accounting quarter-end. “Net Profits” are defined as Net Profits for the WOD Subsidiary calculated according to US GAAP, after all costs and expenses are deducted, including allocations of intercompany expenses and any interest expenses, but before the deduction of income taxes. Further, past losses shall be deducted from the calculation of “Net Profits” cumulatively and on the same pro rata basis as defined above, so that the quarterly distributions of twenty-five percent of the quarterly Net Profits will be paid net of any cumulative losses incurred in prior periods.
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In the event the Company causes a Subsidiary’s business operations to be terminated, or sells a Subsidiary or substantially all of its assets, or the Subsidiary business is otherwise discontinued, in addition to the distribution of net profits of the Subsidiary for the period of the Subsidiary’s accounting quarter prior to such termination or sale, the Holders shall be entitled to receive the distribution of, on a pro rata, pari passu basis, 25% of the proceeds, net of the Subsidiary’s liabilities, from the liquidation of the Subsidiary’s assets following such termination, or 25% of the proceeds, net of the Subsidiary’s liabilities, derived from any such sale of Subsidiary or substantially all of its assets, in either case also net of any prior cumulative losses at the Subsidiary.
The rights of the Holders to the distribution of Net Profits from Subsidiary as defined in this Section 3 shall survive the conversion of the Series Y Convertible Preferred Stock into Common Stock. After any such conversion the distribution of Net Profits to the Holder shall take place as if the Holder still held the same number of Series Y Convertible Preferred Stock as it held prior to converting to Common Stock.
SECTION 4. LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holder of each outstanding share of the Preferred Stock shall be entitled to receive, out of the assets of the Company legally available for distribution to its shareholders upon such liquidation (“Proceeds”), whether such assets are capital or surplus of any nature, for each share of Preferred Stock an amount equal to Original Issue Price (as adjusted for any combinations, consolidations, stock distributions or stock dividends with respect to such shares), plus any accrued but unpaid distributions of the annual net profits of Subsidiary as provided in Section 3 above, before any distribution or payment may be made to the holders of any Common Stock. If, upon the occurrence of such event, the Proceeds thus distributed among the holders of the Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire Proceeds legally available for distribution to the holders of the Preferred Stock shall be distributed ratably among the holders of the Preferred Stock in proportion to the full preferential amount that each such holder is otherwise entitled to receive under this Section. Upon the completion of the distribution required by the foregoing and all other preferred distributions to other series of the Company’s preferred stock, the remaining Proceeds available for distribution to shareholders shall be distributed ratably among the holders of all series of the Company’s preferred stock and Common Stock.
SECTION 5. VOTING. The Preferred Stock will not entitle the Holders to any voting rights except as required under applicable law.
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SECTION 6. CONVERSION. Each share of Preferred Stock shall be convertible into validly issued, fully paid and non-assessable shares of Common Stock on the terms and conditions set forth in this Section 6.
(a) Holder’s Conversion Right. At any time or times on or after the Initial Issuance Date, each Holder shall be entitled to convert any whole number of Preferred Stock into validly issued, fully paid and non-assessable shares of Common Stock at the Conversion Rate (as defined below).
(i) Conversion Rate. The number of validly issued, fully paid and non-assessable shares of Common Stock issuable upon conversion of each share of Preferred Stock pursuant to 6(a) shall be calculated by dividing that number that is the Stated Value of a share of Preferred Stock, multiplied by the product of (1) the number of shares of Preferred Stock being converted and (2) the product of the Investment Priority Multiplier (the “IPM,” as defined below) and the Investment Tier Multiplier (the “ITM,” as defined below), divided by the lesser of (1) the Closing Price of the Common Shares (as defined below) and (2) the Conversion Price Lock (as defined below) (the “Conversion Rate”). The Conversion Rate is represented by this equation:
(Original Issue Price) x (Number of Preferred Shares being Converted) x (IPM x ITM)
The lesser of the Closing Price and the Conversion Price Lock
(A) Closing Price. The Closing Price (“Closing Price”), for any date, shall be calculated as follows: (i) if the Common Stock is listed or quoted on the OTCQB or a registered national securities exchange, the most recent bid price per share of the Common Stock as reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (ii) if the Common Stock is not then listed or quoted on the OTCQB and if prices for the Common Stock are then reported by the OTC Pink tier of the OTC Markets Group, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (iii) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holder and reasonably acceptable to the Company.
(B) Conversion Price Lock. The Conversion Price Lock shall initially be set at $0.25 for the initial subscribers in the current Preferred Stock offering (the “Series Y Offering”); however, the Company may at its sole discretion at any times during the Series Y Offering increase the Conversion Price Lock in any increments for subsequent Preferred Stock subscribers.
(C) Investment Priority Multiplier. It is the Company’s intent to incentivize and reward earlier Preferred Stock subscribers through a higher Conversion Rate than may be offered to later Preferred Stock subscribers. The Investment Priority Multiplier (IPM) shall initially be set at 1.5 for the initial subscribers in the Series Y Offering, and at the Company’s sole discretion may be reduced in any increments down to no lower than 1.0 at any time during the Series Y Offering.
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(D) Investment Tier Multiplier. It is the Company’s intent to incentivize and reward Preferred Stock subscribers making larger investments in the Series Y Offering and/or for selecting certain WOD Subsidiaries (each such WOD Subsidiary that may be subject to an ITM Tier shall be determined by the Company in its sole discretion from time to time, which ITM Tier selection the Company may cancel or change at is sole discretion at any time). Accordingly, a further increase of the Conversion Rate for Preferred Stock subscribers based on those certain ITM Tiers shall be applied according to the ITM table below.
| Tier | Size of Series Y Investment or WOD Subsidiary Selected | Investment Tier Multiplier (ITM) | ||||||
| I | Up to $4,999,999 | 1 | ||||||
| II | $5,000,000 to $19,999,999 | 1.1 | ||||||
| III | $20,000,000 to $49,999,999 | 1.2 | ||||||
| IV | $50,000,000 to $74,999,999 | 1.3 | ||||||
| V | $75,000,000 to $99,999,999 | 1.4 | ||||||
| VI | $100,000,000 and above | 1.5 | ||||||
(ii) Make-Good Shares for Prior Eligible Holders. A Holder, who at the time such Holder was issued its shares of Series Y Preferred Stock being converted, was a holder of the Company’s common stock, Series E Preferred Stock (such holder of Series E Preferred Stock is referred to herein as a “Prior E Series Holder”), Series F Preferred Stock, or Series G Preferred Stock (such holder of Series F Preferred Stock or Series G Preferred Stock is referred to herein as a “Prior Series F or G Holder”), which such Holder purchased from the Company in a financing transaction completed under Regulation D under the Securities Act of 1933, as amended since June 1, 2014 (a “Prior Eligible Holder”), upon any conversion of shares of Series Y Preferred Stock, will be entitled to additional shares (the “Make-Good Shares”) of Common Stock (in addition to such shares as the Holder would receive pursuant to clause (i) above) in accordance with this clause (ii) (subject to adjustment in all cases for stock splits, stock dividends, and similar transactions).
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(A) Make-Good Shares for Prior Series F or G Holders. A Prior Series F or G Holder will be entitled to Make-Good Shares calculated as follows. The number of Make-Good Shares for any such conversion will be equal to the difference between (a) the aggregate number of shares of common stock (multiplied by the New Investment Ratio and the Conversion Proportion) such Holder received as part of the Units purchased by such Holder that also included shares of Series F Preferred Stock or Series G Preferred Stock (the “Prior Units”), and (b) the number of such shares of common stock that the Holder would have received (multiplied by the New Investment Ratio and the Conversion Ratio) had the aggregate purchase price paid by the Holder for such Prior Units been equal to the Original Investment Amount, and had the price used to calculate the number of such shares of common stock been the Conversion Price. The “Original Investment Amount” means the aggregate purchase price paid by the Prior Eligible Holder in the applicable prior financing transaction. The “New Investment Ratio” means the aggregate dollar amount of the Units including Series Y Preferred Stock purchased by the Holder (the “New Investment Amount”), divided by the Original Investment Amount (provided that the New Investment Ratio will not be greater than 1.0). The Conversion Proportion is equal to the number of shares of Series Y Preferred Stock being converted divided by the aggregate total number of shares of Series Y Preferred Stock originally issued to the Holder.
Solely by way of illustration, in the event a Prior Series F or G Holder purchased an aggregate of $200,000 in Original Investment Amount of Prior Units, such Holder was issued 1,000,000 shares of common stock as part of such Prior Units, calculated based on a price per share of common stock of $0.20, and such Holder purchased $100,000 in New Investment Amount, the New Investment Ratio for such Holder would be 0.5. In the event such Holder was issued 25 shares of Series Y Preferred Stock, and converted 12.5 of such shares of Series Y Preferred Stock to Common Stock, the Conversion Proportion for such conversion would be equal to 0.5. In the event the Conversion Price for such conversion would be equal to $0.10, the number of Make-Good Shares for such conversion would be equal to 250,000 (calculated as follows: [($200,000/$0.10)] * 0.5 *0.5] – [(0.5 * 1,000,000)* 0.5])
(B) Make-Good Shares for Prior Series E Holders that are not Prior Series F or G Holders. A Prior Series E Holder that is not a Prior Series F or G Holder will be entitled to Make-Good Shares calculated as follows. The number of Make-Good Shares for any such conversion will be equal to the difference between (a) the aggregate number of shares of common stock (multiplied by the New Investment Ratio and the Conversion Proportion) such Holder received, on an as-converted basis based on the conversion rate set forth in the Certificate of Designation of Series E Preferred Stock (the “Prior Series E Securities”), and (b) the number of such shares of common stock that the Holder would have received (multiplied by the New Investment Ratio and the Conversion Ratio) had the aggregate purchase price paid by the Holder for such Prior Series E Securities been equal to the Original Investment Amount, and had the price used to calculate the number of such shares of common stock been the Conversion Price.
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(C) Make-Good Shares for Other Eligible Prior Holders. A Prior Eligible Holder that is not a Prior Series E Holder or a Prior Series F or G Holder will be entitled to Make-Good Shares calculated as follows. The number of Make-Good Shares for any such conversion will be equal to the difference between (a) the aggregate number of shares of common stock (multiplied by the New Investment Ratio and the Conversion Proportion) such Holder received upon such Holder’s most recent purchase of shares of common stock (any of which are still held by such Holder) of the Company in a financing transaction completed under Regulation D (the “Other Prior Eligible Securities”), and (b) the number of such shares of common stock that the Holder would have received (multiplied by the New Investment Ratio and the Conversion Ratio) had the aggregate purchase price paid by the Holder for such Other Prior Eligible Securities been equal to the Original Investment Amount, and had the price used to calculate the number of such shares of common stock been the Conversion Price.
(iii) Fractional Shares. No fractional shares of Common Stock are to be issued upon the conversion of any Preferred Stock. If the issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up to the nearest whole share.
(b) Mechanics of Conversion. The conversion of each share of Preferred Stock shall be conducted in the following manner:
(i) Holder’s Conversion. To convert a share of Preferred Stock into validly issued, fully paid and non-assessable shares of Common Stock on any date (a “Conversion Date”), a Holder shall deliver (whether via facsimile or otherwise), for receipt on or prior to 11:59 p.m., New York time, on such date, a copy of an executed notice of conversion of the share(s) of Preferred Stock subject to such conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to the Company. If required under any provision of this Section 6, within five (5) Trading Days following a conversion of any such Preferred Stock as aforesaid, such Holder shall surrender to a nationally recognized overnight delivery service for delivery to the Company the original certificates representing the share(s) of Preferred Stock so converted as aforesaid.
(ii) Company’s Response. On or before the second (2nd) Trading Day following the date of receipt of a Conversion Notice by the Company (such date the “Company’s Conversion Notice Date”), the Company shall transmit by facsimile an acknowledgment of confirmation, in the form attached hereto as Exhibit II, of receipt of such Conversion Notice to such Holder and the transfer agent for the Common Stock (the “Transfer Agent”), which confirmation shall constitute an instruction to the Transfer Agent to process such Conversion Notice in accordance with the terms herein. On or before the second (2nd) Trading Day following the Company’s Conversion Notice Date (such date the “Conversion Certificate Date”), the Company shall (1) provided that the Transfer Agent is participating in DTC Fast Automated Securities Transfer Program, credit such aggregate number of shares of Common Stock to which such Holder shall be entitled to such Holder’s or its designee’s balance account with DTC through its Deposit and Withdrawal at Custodian system, or (2) if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program, issue and deliver (via reputable overnight courier) to the address as specified in such Conversion Notice, a certificate, registered in the name of such Holder or its designee, for the number of shares of Common Stock to which such Holder shall be entitled. If the number of shares of Preferred Stock represented by the Preferred Stock certificate(s) submitted for conversion is greater than the number of shares of Preferred Stock being converted, then the Company shall, if requested by such Holder, as soon as practicable and in no event later than three (3) Trading Days after receipt of the Preferred Stock certificate(s) and at its own expense, issue and deliver to such Holder (or its designee) a new Preferred Stock certificate representing the number of shares of Preferred Stock not converted.
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(iii) Record Holder. The Person or Persons entitled to receive the shares of Common Stock issuable upon a conversion of Preferred Stock shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date.
(iv) Company’s Failure to Timely Convert. If the Company shall fail, for any reason or for no reason, except in the case that the relevant Preferred Stock certificate is required to be and shall not have been timely received by the Transfer Agent, to issue to a Holder within three (3) Trading Days after the Company’s Conversion Notice Date (whether via facsimile or otherwise) (the “Share Delivery Deadline”), a certificate for the number of shares of Common Stock to which such Holder is entitled and register such shares of Common Stock on the Company’s share register or to credit such Holder’s or its designee’s balance account with DTC for such number of shares of Common Stock to which such Holder is entitled upon such Holder’s conversion of any shares of Preferred Stock (as the case may be) (a “Conversion Failure”), then, in addition to all other remedies available to such Holder, such Holder, upon written notice to the Company, (x) may void its Conversion Notice with respect to, and retain or have returned (as the case may be) any Preferred Stock that have not been converted pursuant to such Holder’s Conversion Notice, provided that the voiding of a Conversion Notice shall not affect the Company’s obligations to make any payments that have accrued prior to the date of such Conversion Notice pursuant to the terms of this Certificate of Designation or otherwise and (y) the Company shall pay in cash to such Holder on each day after such Conversion Certificate Date that the issuance of such shares of Common Stock is not timely effected an amount equal to 1.0 % of the product of (A) the aggregate number of shares of Common Stock not issued to such Holder on a timely basis and to which the Holder is entitled and the Closing Sale Price of the Common Stock on the Trading Day immediately preceding the last possible date on which the Company could have issued such shares of Common Stock to the Holder. In addition to the foregoing, if within three (3) Trading Days after the Company’s Conversion Notice Date, the Company shall fail to issue and deliver a certificate to such Holder and register such shares of Common Stock on the Company’s share register or credit such Holder’s or its designee’s balance account with DTC for the number of shares of Common Stock to which such Holder is entitled upon such Holder’s conversion hereunder (as the case may be), and, if on or after the Conversion Certificate Date, such Holder (or any other Person in respect, or on behalf, of such Holder) purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Holder of all or any portion of the number of shares of Common Stock, or a sale of a number of shares of Common Stock equal to all or any portion of the number of shares of Common Stock, issuable upon such conversion that such Holder so anticipated receiving from the Company, then, in addition to all other remedies available to such Holder, the Company shall, within three (3) Business Days after such Holder’s request and in such Holder’s discretion, either pay cash to such Holder in an amount equal to such Holder’s total purchase price (including brokerage commissions and other out-of-pocket expenses, if any) for the shares of Common Stock so purchased (including, without limitation, by any other Person in respect, or on behalf, of such Holder) (the “Buy-In Price”), at which point the Company’s obligation to so issue and deliver such certificate or credit such Holder’s balance account with DTC for the number of shares of Common Stock to which such Holder is entitled upon such Holder’s conversion hereunder (as the case may be) (and to issue such shares of Common Stock) shall terminate, or (ii) promptly honor its obligation to so issue and deliver to such Holder a certificate or certificates representing such shares of Common Stock or credit such Holder’s balance account with DTC for the number of shares of Common Stock to which such Holder is entitled upon such Holder’s conversion hereunder (as the case may be) and pay cash to such Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock multiplied by (B) the lowest Closing Sale Price of the Common Stock on any Trading Day during the period commencing on the date of the applicable Conversion Notice and ending on the date of such issuance and payment under this clause (ii).
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(v) Pro Rata Conversion; Disputes. In the event the Company receives a Conversion Notice from more than one Holder for the same Conversion Date and the Company can convert some, but not all, of such Preferred Stock submitted for conversion, the Company shall convert from each Holder electing to have Preferred Stock converted on such date a pro rata amount of such Holder’s Preferred Stock submitted for conversion on such date based on the number of shares of Preferred Stock submitted for conversion on such date by such Holder relative to the aggregate number of shares of Preferred Stock submitted for conversion on such date.
(vi) Book-Entry. Notwithstanding anything to the contrary set forth in this Section 6, upon conversion of any Preferred Stock in accordance with the terms hereof, no Holder thereof shall be required to physically surrender the certificate representing the Preferred Stock to the Company following conversion thereof unless (A) the full or remaining number of shares of Preferred Stock represented by the certificate are being converted (in which event such certificate(s) shall be delivered to the Company as contemplated by this 6(b)(vi)) or (B) such Holder has provided the Company with prior written notice (which notice may be included in a Conversion Notice) requesting reissuance of Preferred Stock upon physical surrender of any shares of Preferred Stock. Each Holder and the Company shall maintain records showing the number of shares of Preferred Stock so converted by such Holder and the dates of such conversions or shall use such other method, reasonably satisfactory to such Holder and the Company, so as not to require physical surrender of the certificate representing the Preferred Stock upon each such conversion. In the event of any dispute or discrepancy, such records of the Company establishing the number of shares of Preferred Stock to which the Holder is entitled shall be controlling and determinative in the absence of manifest error. A Holder and any transferee or assignee, by acceptance of a certificate, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of any Preferred Stock, the number of shares of Preferred Stock represented by such certificate may be less than the number of shares of Preferred Stock stated on the face thereof. Each certificate for Preferred Stock shall bear the following legend:
ANY TRANSFEREE OR ASSIGNEE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE TERMS OF THE CORPORATION’S CERTIFICATE OF DESIGNATION RELATING TO THE SHARES OF SERIES Y CONVERTIBLE PREFERRED STOCK THAT MAY BE REPRESENTED BY THIS CERTIFICATE, INCLUDING SECTION 6(b)(vi) THEREOF. THE NUMBER OF SHARES OF SERIES Y CONVERTIBLE PREFERRED STOCK REPRESENTED BY THIS CERTIFICATE MAY BE LESS THAN THE NUMBER OF SHARES OF SERIES Y CONVERTIBLE PREFERRED STOCK STATED ON THE FACE HEREOF PURSUANT TO SECTION 6(b)(vi) OF THE CERTIFICATE OF DESIGNATION RELATING TO THE SHARES OF SERIES Y PREFERRED CONVERTIBLE STOCK REPRESENTED BY THIS CERTIFICATE.
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(c) Taxes. The Company shall pay any and all documentary, stamp, transfer (but only in respect of the registered Holder thereof), issuance and other similar taxes that may be payable with respect to the issuance and delivery of shares of Common Stock upon the conversion of shares of Preferred Stock.
(d) Limitation on Beneficial Ownership. Notwithstanding anything to the contrary set forth in this Certificate of Designation, at no time may all or a portion of the Preferred Stock be converted if the number of shares of Common Stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of Common Stock owned by the Holder at such time, the number of shares of Common Stock that would result in the Holder beneficially owning (as determined in accordance with Section 13(d) of the 1934 Act), and the rules thereunder) more than 4.99% of all of the Common Stock outstanding at such time (the “4.99% Beneficial Ownership Limitation”); provided, however, that, upon the Holder providing the Company with sixty-one (61) days’ advance notice (the “4.99% Waiver Notice”) that the Holder would like to waive this Section 6(d) with regard to any or all shares of Common Stock issuable upon conversion of the Preferred Stock, this Section 6(d) will be of no force or effect with regard to all or a portion of the Preferred Stock referenced in the 4.99% Waiver Notice but shall in no event waive the 9.99% Beneficial Ownership Limitation described below. Notwithstanding anything to the contrary set forth in this Certificate of Designation, at no time may all or a portion of the Preferred Stock be converted if the number of shares of Common Stock to be issued pursuant to such conversion, when aggregated with all other shares of Common Stock owned by the Holder at such time, would result in the Holder beneficially owning (as determined in accordance with Section 13(d) of the 1934 Act and the rules thereunder) in excess of 9.99% of the then-issued and outstanding shares of Common Stock outstanding at such time (the “9.99% Beneficial Ownership Limitation” and the lower of the 9.99% Beneficial Ownership Limitation and the 4.99% Beneficial Ownership Limitation then in effect, the “Maximum Percentage”). By written notice to the Company, a holder of Preferred Stock may from time to time decrease the Maximum Percentage to any other percentage specified in such notice. For purposes hereof, in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company’s most recent Annual Report on Form 10-K, Quarterly Report on Form l0-Q, Current Report on Form 8-K or other public filing wi1h the Securities and Exchange Commission, as the case may be, (2) a more recent public announcement by the Company or (3) any other notice by the Company setting forth the number of shares of Common Stock outstanding. For any reason at any time, upon the written or oral request of a holder of Preferred Stock, the Company shall within three (3) Business Days confirm orally and in writing to such Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including the Preferred Stock, by the Holder and its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported, that in any event are convertible or exercisable, as the case may be, into shares of Common Stock within 60 days’ of such calculation and that are not subject to a limitation on conversion or exercise analogous to the limitation contained herein. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 6(d) to correct this paragraph (or any portion hereof) that may be defective or inconsistent with the intended beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation.
SECTION 7. REDEMPTION RIGHTS. The Company may, in its sole discretion, at any time while the Preferred Stock is outstanding, redeem all or any portion of the outstanding Preferred Stock upon the issuance to the Holders of such number of Common Stock, valued at the Closing Price on the effective date of such redemption (as calculated in Section 6(a)(i)(A) herein), as shall equal the Original Issue Price (as adjusted for any combinations, consolidations, stock distributions or stock dividends with respect to such shares) plus any accrued but unpaid distributions of 25% of Subsidiary’s annual net profits. In the event the Company exercises such redemption right for less than all of the then-outstanding shares of Preferred Stock, the Company shall redeem the outstanding shares of the Holders on a pro rata basis. Any such redemption shall not affect the ongoing pro rata distribution of the net profits of Subsidiary to the redeemed Holder after redemption.
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SECTION 8. AUTHORIZED COMMON SHARES. So long as any of the Preferred Shares are outstanding, the Company shall take all action necessary to keep available out of its authorized and unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Preferred Shares, as of any given date, 100% of the number of shares of Common Stock as shall from time to time be necessary to effect the conversion of all of the Preferred Stock.
SECTION 9. NOTICES. Any notice required hereby to be given to the Holders shall be deemed given if deposited in the United States mail, postage prepaid, or provided by fax or e-mail, to each Holder of record at his, her or its address appearing on the books of the Company.
SECTION 10. SHAREHOLDER MATTERS; AMENDMENT.
(a) Shareholder Matters. Any shareholder action, approval or consent required, desired or otherwise sought by the Company pursuant to the NRS, the Articles of Incorporation, this Certificate of Designation or otherwise with respect to the issuance of shares of Preferred Stock may be effected by written consent of the Company’s shareholders or at a duly called meeting of the Company’s shareholders, all in accordance with the applicable rules and regulations of the NRS. This provision is intended to comply with the applicable sections of the NRS permitting shareholder action, approval and consent affected by written consent in lieu of a meeting.
(b) Amendment. This Certificate of Designation or any provision hereof may be amended by obtaining the affirmative vote at a meeting duly called for such purpose, or written consent without a meeting in accordance with the NRS, of the Holders owning a majority of the shares of Preferred Stock remaining at the time of the vote, voting separate as a single class, and with such other shareholder approval, if any, as may then be required pursuant to the NRS and the Articles of Incorporation.
SECTION 11. CERTAIN DEFINED TERMS. For purposes of this Certificate of Designation, the following terms shall have the following meanings:
(a) “1934 Act” means the Securities Exchange Act of 1934, as amended.
(b) “Affiliate” as applied to any Person, means any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, “control” (including, with correlative meanings, the terms “controlling”, “controlled by” and “under common control with”), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise. For purposes of this definition, a Person shall be deemed to be “controlled by” a Person if such latter Person possesses, directly or indirectly, power to vote 10% or more of the securities having ordinary voting power for the election of directors of such former Person.
(c) “Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed.
(d) “Common Stock” means (i) the Company’s shares of common stock, par value $0.0001 per share, and (ii) any capital stock into which such common stock shall have been changed or any share capital resulting from a reclassification of such common stock.
(e) “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity or a government or any department or agency thereof.
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(f) “Principal Market” means The OTCQB, OTCQX, Pink Sheets, the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange or NYSE American.
(g) “Subscription Agreement” means that certain Subscription Agreement by and among the Company and the initial holders of shares of Preferred Stock, dated as of the Initial Issuance Date, as may be amended from time in accordance with the terms thereof.
(h) “Subsidiaries” shall have the meaning as set forth in the Subscription Agreement.
(i) “Successor Entity” means the Person or Entity formed by, resulting from or surviving any Fundamental Transaction or the Person or Entity with which such Fundamental Transaction shall have been entered into.
(j) “Trading Day” means, as applicable, (i) with respect to all price determinations relating to the Common Stock, any day on which the Common Stock is traded on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market on which the Common Stock is then traded, provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York time) or (ii) with respect to all determinations other than price determinations relating to the Common Stock, any day on which The New York Stock Exchange (or any successor thereto) is open for trading of securities.
(k) “Transaction Document” means the Subscription Agreement and any other document related thereto.
(l) “Voting Stock” of a Person means capital stock of such Person of the class or classes pursuant to which the holders thereof have the general voting power to elect, or the general power to appoint, at least a majority of the board of directors, managers, trustees or other similar governing body of such Person (irrespective of whether or not at the time capital stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency).
SECTION 12. MISCELLANEOUS.
(a) The headings of the various sections and subsections of this Certificate of Designation are for convenience of reference only and shall not affect the interpretation of any of the provisions of this Certificate of Designation.
(b) Whenever possible, each provision of this Certificate of Designation shall be interpreted in a manner as to be effective and valid under applicable law and public policy. If any provision set forth herein is held to be invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or otherwise adversely affecting the remaining provisions of this Certificate of Designation. No provision herein set forth shall be deemed dependent upon any other provision unless so expressed herein. If a court of competent jurisdiction should determine that a provision of this Certificate of Designation would be valid or enforceable if a period of time were provision in question effective and valid under applicable law.
(c) Except as may otherwise be required by law, the shares of the Preferred Stock shall not have any powers, designations, preferences or other special rights, other than those specifically set forth in this Certificate of Designation.
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IN WITNESS WHERE OF, the Company has caused this Certificate of Designation of Series Y Convertible Preferred Stock of OriginClear, Inc. to be signed by its Chief Executive Officer on this 17th day of December 2021.
| OriginClear, Inc. | ||
| By: | /s/ T. Riggs Eckelberry | |
| T. Riggs Eckelberry, Chairman & CEO | ||
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Exhibit 21.1
Subsidiaries of the Registrant
| Name | Jurisdiction of Organization | |
| Progressive Water Treatment, Inc. | Texas | |
| Water On Demand #1, Inc. | Nevada | |
| Water On Demand #2, Inc. | Nevada | |
| Water On Demand #3, Inc. | Nevada | |
| Water On Demand #4, Inc. | Nevada |
Exhibit 31.1
CERTIFICATION OF THE
PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
RULE 13a-14(a) AND RULE 15d-14(a)
UNDER THE
SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, T Riggs Eckelberry, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of OriginClear, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | (Paragraph omitted pursuant to SEC Release Nos. 33-8238/34-47986 and 33-8392/34-49313); |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: April 6, 2022 | By: | /s/ T Riggs Eckelberry |
| T Riggs Eckelberry | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF THE
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
RULE 13a-14(a) AND RULE 15d-14(a)
UNDER THE
SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Prasad Tare, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of OriginClear, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | (Paragraph omitted pursuant to SEC Release Nos. 33-8238/34-47986 and 33-8392/34-49313); |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: April 6, 2022 | By: | /s/ Prasad Tare |
| Prasad Tare | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION OF THE
PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of OriginClear, Inc. (the “Company”) for the year ended December 31, 2021, as filed with the Securities and Exchange Commission (the “Report”), I, T Riggs Eckelberry, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. |
| Date: April 6, 2022 | By: | /s/ T Riggs Eckelberry |
| T Riggs Eckelberry | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION OF THE
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of OriginClear, Inc. (the “Company”) for the year ended December 31, 2021, as filed with the Securities and Exchange Commission (the “Report”), I, Prasad Tare, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the report. |
| Date: April 6, 2022 | By: | /s/ Prasad Tare |
| Prasad Tare | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) |