Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller
reporting company,” and “emerging growth company in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has fi led a report on
and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
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:
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.
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. |
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● |
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. |
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● |
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. |
|
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”).
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.
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).
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).
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.
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). |
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:
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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; |
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easier
to manufacture: vessels manufacturing process can be automated; and |
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recyclable
and can be made out of biomaterials |
In
addition, patents US 8,372,274 and US 8,871,089 (1 and 3) relate to the use of vessels or containers made out of this material combined
with a configuration of functional modules, or process, for general water treatment.
Other subsequent patents,
which build upon the original claims, focus on more targeted applications. These patents outline a given combination of modules engineered
inside the vessel to address a specific water treatment challenge.
Expansion of the PWT and MWS Business-Lines
Beginning with its first installation,
PWT built MWS components. PWT and MWS are now fully integrated as a single profit and manufacturing center.
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.
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:
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Water Treatment: achieving high grade purification; |
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Water Conveyance: water transportation and pumping; and |
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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.
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.
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:
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Potable Water for Small Communities |
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Recirculated and Makeup Boiler and Cooling Tower Water |
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Produced Water & Frac Flowback Water |
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Food and Beverage Feed and Effluent Waters |
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Mining Effluent |
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Ground Water Recovery |
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Environmental Water Treatment for Reuse |
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. |
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%.
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:
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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. |
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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. |
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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. |
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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.
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.
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:
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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. |
Trademarks:
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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. |
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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. |
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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. |
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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:
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Successfully execute our business strategy; |
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Respond to competitive developments; and |
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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.
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:
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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; |
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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; |
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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; |
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limit our flexibility in planning for, or reacting to, changes in business and the industry in which we operate; and |
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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.
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.
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.
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.
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.
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.
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.
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.
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.
The accompanying notes are an integral part of these audited consolidated financial statements
The accompanying notes are an integral part of these audited consolidated financial statements
The accompany notes are an integral part of these audited consolidated financial statements
The accompanying notes are an integral part of these audited consolidated financial statements
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 100% of the total issued and outstanding stock of Progressive Water Treatment, Inc. (“PWT”) and is included
in these consolidated financial statements as a wholly owned subsidiary.
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.
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 $4,143,744 and has standing purchase orders and open invoices
with customers, which will provide funds for operations. Management believes the existing shareholders, the prospective new investors
and future sales will provide the additional cash needed to meet the Company’s obligations as they become due and will allow the
development of its core business operations. No assurance can be given that any future financing will be available or, if available, that
it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain restrictions
on our operations, in the case of debt financing or cause substantial dilution for our stockholders, in case of equity financing.
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 $440,954. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant
credit risk in these accounts.
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) | |
$ | (4,155,630 | ) | |
$ | 13,261,365 | |
| |
| | | |
| | |
Basic weighted average number of common shares outstanding (Denominator) | |
| 180,500,778 | | |
| 20,651,668 | |
| |
| | | |
| | |
Diluted weighted average number of common shares outstanding (Denominator) | |
| 180,500,778 | | |
| 312,352,351 | |
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 | |
| 206,638,283 | | |
| - | |
Convertible debt shares | |
| 407,916,803 | | |
| - | |
Preferred shares | |
| 33,037,213 | | |
| - | |
| |
| | | |
| | |
December 31, 2020 | |
| | | |
| | |
Warrant shares | |
| 9,922,044 | | |
| 6,000,000 | |
Convertible debt shares | |
| 17,954,000 | | |
| 306,352,351 | |
Preferred shares | |
| 34,037,213 | | |
| - | |
Revenue Recognition
We recognize revenue when services
are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed
to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.
Revenues and related costs on construction
contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification
(“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the
customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect
costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract
is foreseen, the Company will recognize the loss as it is determined.
Revisions in cost and profit estimates
during the course of the contract are reflected in the accounting period in which the facts for the revisions become known. Provisions
for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance,
job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements,
may result in revisions to costs and income, which are recognized in the period the revisions are determined.
Contract receivables are recorded on
contracts for amounts currently due based upon progress billings, as well as retention, which are collectible upon completion of the contracts.
Accounts payable to material suppliers and subcontractors are recorded for amounts currently due based upon work completed or materials
received, as are retention due subcontractors, which are payable upon completion of the contract. General and administrative expenses
are charged to operations as incurred and are not allocated to contract costs.
Contract Receivable
The Company bills its customers in
accordance with contractual agreements. The agreements generally require billing to be on a progressive basis as work is completed. Credit
is extended based on evaluation of clients financial condition and collateral is not required. The Company maintains an allowance for
doubtful accounts for estimated losses that may arise if any customer is unable to make required payments. Management performs a quantitative
and qualitative review of the receivables past due from customers on a monthly basis. The Company records an allowance against uncollectible
items for each customer after all reasonable means of collection have been exhausted, and the potential for recovery is considered remote.
The allowance for doubtful accounts was $0 and $0 as of December 31, 2021 and 2020, respectively. The net contract receivable balance
was $2,150,967 and $438,430 at December 31, 2021 and 2020, respectively.
Indefinite Lived Intangibles and
Goodwill Assets
The Company accounts for business combinations
under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where the total purchase price
is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The
purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after
obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates.
The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized
as goodwill.
The Company tests for indefinite lived
intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate that the carrying
amount of the asset exceeds its fair value and may not be recoverable. In accordance with its policies, the Company performed a qualitative
assessment of indefinite lived intangibles and goodwill at 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 $0 and $110,338 for the years ended December 31, 2021 and 2020, respectively.
Advertising Costs
The Company expenses the cost of advertising
and promotional materials when incurred. The advertising costs were $184,017 and $211,296 for the years ended December 31, 2021 and 2020,
respectively.
Property and Equipment
Property and equipment are stated at
cost. Gain or loss is recognized upon disposal of property and equipment, and the asset and related accumulated depreciation are removed
from the accounts. Expenditures for maintenance and repairs are charged to expense as incurred, while expenditures for addition and betterment
are capitalized. Furniture and equipment are depreciated on the straight-line method and include the following categories:
Estimated Life | |
| | |
Machinery and equipment | |
| 5-10 years | |
Furniture, fixtures and computer equipment | |
| 5-7 years | |
Vehicles | |
| 3-5 years | |
Leasehold improvements | |
| 2-5 years | |
| |
December 31, | |
| |
2021 | | |
2020 | |
Machinery and Equipment | |
$ | 383,569 | | |
$ | 383,569 | |
Computer Equipment | |
| 62,854 | | |
| 62,854 | |
Furniture | |
| 29,810 | | |
| 29,810 | |
Leasehold Improvements | |
| 26,725 | | |
| 26,725 | |
Vehicles | |
| 64,276 | | |
| 64,276 | |
Demo Units | |
| 36,139 | | |
| 36,139 | |
| |
| 603,373 | | |
| 603,373 | |
Less accumulated depreciation | |
| (389,982 | ) | |
| (345,167 | ) |
Net Property and Equipment | |
$ | 213,391 | | |
$ | 258,206 | |
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 $44,817 and $52,247, respectively.
Stock-Based Compensation
The Company periodically issues stock
options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company
accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial
Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. The
Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance
of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined
at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity
instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line
basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants vest immediately
and the total stock-based compensation charge is recorded in the period of the measurement date.
Accounting for Derivatives
The Company evaluates all its financial
instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative
financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is
then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative
financial instruments, the Company uses a probability weighted average series Binomial lattice option pricing models to value the derivative
instruments at inception and on subsequent valuation dates.
The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as current or non-current based on whether or not the net-cash settlement of
the derivative instrument could be required within 12 months of the balance sheet date.
Fair Value of Financial Instruments
Fair Value of Financial Instruments
requires disclosure of the fair value information, whether or not to recognized in the balance sheet, where it is practicable to estimate
that value. As of 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 | |
$ | 216,518 | | |
$ | 216,518 | | |
$ | - | | |
$ | - | |
Investment at fair value-securities, December 31, 2020 | |
$ | 8,000 | | |
$ | 8,000 | | |
$ | - | | |
$ | - | |
| |
Total | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
Derivative Liability, December 31, 2021 | |
$ | 6,526,129 | | |
$ | - | | |
$ | - | | |
$ | 6,526,129 | |
Derivative Liability, December 31, 2020 | |
$ | 12,310,307 | | |
$ | - | | |
$ | - | | |
$ | 12,310,307 | |
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 | |
$ | 31,640,470 | |
Fair value of derivative liabilities issued | |
| 29,703 | |
Net gain on conversion of debt and change in derivative liability | |
| (19,359,866 | ) |
Balance as of December 31, 2020 | |
| 12,310,307 | |
Fair value of derivative liabilities issued | |
| 54,652 | |
Net gain on conversion of debt and change in derivative liability | |
| (5,838,830 | ) |
Balance as of December 31, 2021 | |
$ | 6,526,129 | |
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 | |
| 0.05% - 0.73 % | | |
| 0.08% - 0.13% | |
Stock volatility factor | |
| 94.0% - 199.0 % | | |
| 127.0% - 249.0% | |
Weighted average expected option life | |
| 6 mos - 5 yrs | | |
| 6 mos - 5 yrs | |
Expected dividend yield | |
| None | | |
| None | |
Segment Reporting
The Company’s business currently
operates in one segment based upon the Company’s organizational structure and the way in which the operations are managed and evaluated.
Marketable Securities
The Company adopted ASU 2016-01, “Financial
Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires investments
(except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured
at fair value with changes in fair value recognized in net income. It requires public business entities to use the exit price notion when
measuring the fair value of financial instruments for disclosure purpose, and separate presentation of financial assets and financial
liabilities by measurement category and form of financial asset. It eliminates the requirement for public business entities to disclose
the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured
at amortized cost. The Company has evaluated the potential impact this standard may have on the condensed consolidated financial statements
and determined that it had a significant impact on the condensed consolidated financial statements. The Company accounts for its investment
in Water Technologies International, Inc. as available-for-sale securities, and the unrealized gain on the available-for-sale securities
is recognized in net income.
Licensing agreement
The Company analyzed the licensing agreement using ASU 606 to determine
the timing of revenue recognition. The licensing of the intellectual property (IP) is distinct from the non-license goods or services
and has significant standalone functionality that provides a benefit or value. The functionality will not change during the license period
due to the licensor’s activities. Because the significant standalone functionality is delivered immediately, the revenue is generally
recognized when the license is delivered.
Reclassification
Certain 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.
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.
Preferred Stock
Series C
On March 14, 2017, the Board of Directors
authorized the issuance of 1,000 shares of Series C preferred stock, par value $0.0001 per share, to T. Riggs Eckelberry in exchange for
his continued employment with the Company. The holder of Series C preferred stock is not entitled to receive dividends, is not entitled
to any liquidation preference and shares of Series C preferred stock does not have any conversion rights. The Series C Preferred Stock
entitles the holder to 51% of the total voting power of our stockholders. The purchase price of the Series C preferred stock was $0.0001
per share representing a total purchase price of $0.10 for 1,000 shares. As of December 31, 2021, there were 1,000 shares of Series C
preferred stock outstanding held by Mr. Eckelberry.
Series D-1
On April 13, 2018, the Company designated
50,000,000 shares of its authorized preferred stock as Series D-1 preferred stock. The shares of Series D-1 preferred stock are not entitled
to dividends and do not have a liquidation preference. Each share of Series D-1 preferred stock is convertible into 0.0005 of one share
of common stock. The Series D-1 preferred stock may not be converted to common stock to the extent such conversion would result in the
holder beneficially owning more than 4.99% of our outstanding common stock, which amount may be increased to 9.99% at the holders discretion
upon 61 days’ written notice. During the year ended December 31, 2021, the Company issued 68,571 shares of common stock upon conversion
of 1,000,000 shares of Series D-1 preferred stock with a fair value of $5,454 using the closing stock price on April 15, 2021. The Company
did not recognize any gain or loss on the conversion, as the shares were converted within the terms of the agreement. As of December 31,
2021, there were 31,500,000 shares of Series D-1 preferred stock issued and outstanding.
Series E
On August 14, 2018, the Company designated
4,000,000 shares of its authorized preferred stock as Series E preferred stock. The shares of Series E preferred stock are not entitled
to dividends and not have a liquidation preference. Each share of Series E preferred stock is convertible into 0.05 shares of common
stock. The shares of Series E preferred stock do not carry any voting rights. The Series E preferred stock may not be converted to
common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of our outstanding common stock
which amount may be increased to 9.99% at the holder’s discretion. There were no shares of Series E preferred stock converted during
the year ended December 31, 2021. As of December 31, 2021, there were 1,537,213 shares of Series E preferred stock issued and outstanding.
Series F
On August 14, 2018, the Company designated
6,000 shares as Series F preferred stock. The shares of Series F preferred stock have a liquidation preference equal to the stated value
of $1,000 per share plus any accrued but unpaid dividends. The Series F preferred stock is not convertible into common stock. The holders
of outstanding shares of Series F preferred stock are entitled to quarterly dividends at the annual rate of 8% of the stated value, in
preference to any dividends on the common stock. The shares of Series F preferred stock do not carry any voting rights. The Company may,
in its sole discretion, at any time while the Series F preferred stock is outstanding, redeem all or any portion of the outstanding Series
preferred stock at a price equal to the stated value, plus any accrued but unpaid dividends. The Company was required to redeem all outstanding
shares of Series F preferred stock on September 1, 2020. During the year ended December 31, 2021, the Company exchanged 15 shares of Series
F preferred stock for 15 shares of Series Q preferred stock. As of December 31, 2021, there were 260 shares of Series F preferred stock
issued and outstanding. As of December 31, 2021, a holder of 100 of such outstanding shares of Series F preferred stock, agreed that the
Company would have no obligation to redeem such holder’s shares of Series F preferred stock prior to September 1, 2022, and the
Company agreed to pay such holder, in addition to any dividends payable on such holder’s Series F preferred stock, an annual fee
of 4% of the stated value of such holder’s shares of Series F preferred stock. As of December 31, 2021, the Company had 160 outstanding
shares of Series F preferred stock (excluding the 100 shares mentioned above), which the Company was required to, and failed to redeem
on September 1, 2020, and was in default for an aggregate redemption price (equal to the stated value) of $160,000.
Series G
On January 16, 2019, the Company designated 6,000 shares
as Series G preferred stock, each share having a stated value of $1,000 per share and holders of Series G preferred stock are entitled
to cumulative dividends at the annual rate of 8% of the stated value, payable quarterly. The Series G preferred stock does not have
voting rights, except as required by law and is not convertible into common stock. The Company may, in its sole discretion, at any time
while the Series G preferred stock is outstanding, redeem all or any portion of the outstanding Series G preferred stock at a price equal
to the stated value plus any accrued but unpaid dividends. The Company was required to redeem such shares of Series G preferred stock
on April 30, 2021, at a price equal to the stated value plus any accrued but unpaid dividends. Pursuant to certain subscription agreements
entered into with purchasers of the Series G preferred stock, each purchaser received shares of the Company’s common stock equal
to an amount of, for each share of Series G preferred stock purchased, five hundred dollars ($500) divided by the closing price on the
date the Company receives the executed subscription documents and purchase price from such investor. During the year ended December 31,
2021, 380 shares of Series G preferred stock were exchanged for 365 shares of Series S preferred stock, and 15 shares
of Series R preferred stock. The shares were issued and exchanged within the terms of the agreement and no gain or loss was recognized.
During the year ended December 31, 2021, the Company redeemed 25 shares id Series G preferred stock equal to the stated value of $25,000.
As of December 31, 2021, there were 25 shares of Series G preferred stock issued and outstanding, which the Company was required
to, and failed to redeem on April 30, 2021, for an aggregate redemption price (equal to the stated value) of $25,000.
Series I
On April 3, 2019, the Company designated 4,000 shares
of preferred stock as Series I. The Series I has a stated value of $1,000 per share. Series I holders are entitled to cumulative
dividends at the annual rate of 8% of the stated value, payable quarterly within 60 days from the end of each fiscal quarter. The
Series I is not entitled to any voting rights except as may be required by applicable law, and are not convertible into common stock.
The Company has the right to redeem the Series I at any time while the Series I are outstanding at a price equal to the stated value plus
any accrued but unpaid dividends. The Company is required to redeem the Series I two years following the date that is the later of the
(i) final closing of the tranche (as designated in the applicable subscription agreement) or (ii) the expiration date of the tranche that
such shares to be redeemed were a part of. The Company was required to redeem such shares of Series I between May 2, 2021 and June 10,
2021, at a price equal to the stated value plus any accrued but unpaid dividends. The issuances of the shares were accounted for under
ASC 480-10-25-4, which requires liability treatment for certain mandatorily redeemable financial instruments, and the cumulative dividends
are recorded as interest expense. During the year ended December 31, 2021, 562 shares of Series I preferred stock were exchanged
for 317 shares of Series R preferred stock, and 245 shares of Series W preferred stock. The shares were issued and
exchanged within the terms of the agreement and no gain or loss was recognized. As of December 31, 2021, there were 235 shares
of Series I preferred stock issued and outstanding which the Company was required to, and failed to redeem between May 2, 2021, and June
10, 2021, for an aggregate redemption price (equal to the stated value) of $235,000.
Series J
On April 3, 2019, the Company designated 100,000 shares
of preferred stock as Series J. The Series J has a stated value of $1,000 per share and holders are entitled to receive dividends
on an as-converted basis with the Company’s common stock. The Series J preferred stock is convertible into shares of the Company’s
common stock, on the terms and conditions set forth in the Series J COD, which includes certain make-good shares for certain prior investors.
During the year ended December 31, 2021, the Company issued 1,705,023 shares of common stock upon the conversion of 57.5 shares
of Series J preferred stock for a state value of $57,500. For the year ended December 31, 2021, the Company recognized a loss on conversion
of Series J preferred stock in the amount of $75,284. As of December 31, 2021, there were 215 shares of Series J preferred stock
issued and outstanding.
Series K
On June 3, 2019, the Company designated 4,000 shares
of preferred stock as Series K. The Series K has a stated value of $1,000 per share. Series K holders are entitled to cumulative
dividends at the annual rate of 8% of the stated value, payable quarterly within 60 days from the end of each fiscal quarter. The
Series K is not entitled to any voting rights except as may be required by applicable law, and is not convertible into common stock. The
Company has the right to redeem the Series K at any time while the Series K are outstanding at a price equal to the stated value plus
any accrued but unpaid dividends. The Company is required to redeem the Series K two years following the date that is the later of the
(i) final closing of the tranche (as designated in the applicable subscription agreement) or (ii) the expiration date of the tranche that
such shares to be redeemed were a part of. The Company is required to redeem such shares of Series K between August 5, 2021 and April
24, 2022, at a price equal to the stated value plus any accrued but unpaid dividends. The issuances of the shares were accounted for under
ASC 480-10-25-4, which requires liability treatment for certain mandatorily redeemable financial instruments, and the cumulative dividends
are recorded as interest expense. During the year ended December 31, 2021, 2,580 shares of Series K preferred stock were exchanged
for 1,822 shares of Series R preferred stock, and 758 shares of Series W preferred stock. The shares were issued and
exchanged within the terms of the agreement and no gain or loss was recognized. As of December 31, 2021, there were 581 shares
of Series K preferred stock issued and outstanding. Of these 581 shares, the Company was required to, and failed to redeem between
August 5, 2021 and December 27, 2021, an aggregate of 476 such shares for an aggregate redemption price (equal to the stated
value) of $476,000.
Series L
On June 3,
2019, the Company designated 100,000 shares of preferred stock as Series L. The Series L has a stated value of $1,000 per
share and holders are entitled to receive dividends on an as-converted basis with the Company’s common stock. The Series L preferred
stock is convertible into shares of the Company’s common stock, on the terms and conditions set forth in the Series L COD, which
includes certain make-good shares for certain prior investors. During the year ended December 31, 2021, the Company issued an aggregate
of 18,624,403 shares of common stock upon conversion of 522 shares of Series L preferred stock, for a loss in the
amount of $828,451. As of December 31, 2021, there were 610 shares of Series L preferred stock issued and outstanding.
Series M
Pursuant to the Amended and Restated
Certificate of Designation of Series M Preferred Stock filed with the Secretary of State of Nevada on July 1, 2020, the Company designated
800,000 shares of its preferred stock as Series M Preferred Stock. Each share of Series M Preferred Stock has a stated value of $25. The
Series M Preferred Stock is not convertible into common stock. The holders of outstanding shares of Series M Preferred Stock are entitled
to receive dividends, at the annual rate of 10%, payable monthly, payable in preference and priority to any payment of any dividend on
the common stock. The Series M Preferred Stock is entitled to a liquidation preference in an amount equal to $25 per share plus any declared
but unpaid dividends, before any payments to holders of common stock. The Series M Preferred Stock have no pre-emptive or subscription
rights, and there are no sinking fund provisions applicable to the Series M Preferred Stock. The Series M Preferred Stock does not have
voting rights, except as required by law and with respect to certain protective provisions set forth in the Certificate of Designation
of Series M Preferred Stock. To the extent it may lawfully do so, the Company may, in its sole discretion, at any time when there are
outstanding shares of Series M Preferred Stock, redeem any or all of the then outstanding shares of Series M Preferred Stock at a redemption
price of $37.50 per share (150% of the stated value) plus any accrued but unpaid dividends. During the year ended December 31, 2021, prior
to the terms of the Series M preferred stock being amended, holders of Series M preferred stock converted an aggregate of 320 Series M
shares into an aggregate of 137,052 shares of the Company’s common stock. The Company did not recognize a gain or loss since the
shares were converted within the terms of the agreement. During the year ended December 31, 2021, the Company issued an aggregate of 1,177 shares
of Series M preferred stock for an aggregate purchase price of $29,425 and exchanged an aggregate of 3,200 shares of Series
M preferred stock for 120 shares of Series R preferred stock and 1.5 shares of Series U preferred stock and recognized a loss
on the exchanges in the amount of $40,000. As of December 31, 2021, there were 40,300 shares of Series M preferred stock issued
and outstanding.
Series O
On April 27, 2020, the Company designated 2,000 shares
of preferred stock as Series O preferred stock. The Series O preferred stock has a stated value of $1,000 per share, and entitles
holders to receive cumulative dividends (i) in cash at an annual rate of 8% of the stated value, and (ii) in shares of common stock
of the Company (valued based on the conversion price as in effect on the last trading day of the applicable fiscal quarter) at an annual
rate of 4% of the stated value, payable quarterly within 60 days from the end of such fiscal quarter. The Series O preferred stock
has a liquidation preference equal to the stated value plus any accrued but unpaid dividends, in preference to the common stock. The Series
O preferred stock has no preemptive or subscription rights, and there is no sinking fund provision applicable to the Series O preferred
stock. The Series O preferred stock does not have voting rights except as required by law. The Series O preferred stock is convertible
into common stock of the Company in an amount determined by dividing 200% of the stated value of the Series O preferred stock being
converted by the conversion price, provided that, the Series O may not be converted into common stock to the extent such conversion would
result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased
up to 9.99% upon 61 days’ written notice). The conversion price is equal to the average closing sale price of the common stock
for the five trading days prior to the conversion date. The Company has the right (but no obligation) to redeem the Series O preferred
stock at any time while the Series O preferred stock are outstanding at a redemption price equal to the stated value plus any accrued
but unpaid dividends. The cumulative dividends are recorded as interest expense. During the year ended December 31, 2021, the Company
issued an aggregate of 36,868,798 shares of common stock upon conversion of 1,260 shares of Series O preferred stock,
and exchanged an aggregate of 120 shares of Series O preferred stock for 120 shares of Series R preferred stock. The
shares were issued and exchanged within the terms of the agreement and no gain or loss was recognized. As of December 31, 2021, there
were 615 shares of Series O preferred stock issued and outstanding, and during the year ended December 31, 2021, the Company
issued an aggregate of 790,089 shares of common stock in prorated 4% annualized dividends.
Series P
On April 27, 2020, the Company designated 500 shares
of preferred stock as Series P preferred stock. The Series P preferred stock has a stated value of $1,000 per share, and entitles
holders to receive dividends on an as-converted basis with the Company’s common stock. The Series P preferred stock is convertible
into shares of the Company’s common stock, on the terms and conditions set forth in the Certificate of Designation of Series P preferred
stock, which includes certain make-good shares for certain prior investors, and provided that, the Series P preferred stock may not be
converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s
outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The Series P preferred stock entitles
the holders to a payment on an as-converted and pari passu basis with the common stock upon any liquidation. The Series P preferred stock
has no preemptive or subscription rights, and there is no sinking fund or redemption provisions applicable to the Series P preferred stock.
The Series P preferred stock votes on an as-converted basis with the common stock, subject to the beneficial ownership limitation. During
the year ended December 31, 2021, the Company issued an aggregate of 10,191,611 shares of common stock upon conversion of 299 shares
of Series P preferred stock. For the year ended December 31, 2021, the Company recognized a loss on conversion of Series P preferred stock
in the amount of $335,515. As of December 31, 2021, there were 57.5 shares of Series P preferred stock issued and outstanding.
Series Q
On August 21, 2020, the Company designated
2,000 shares of preferred stock as Series Q Preferred Stock. The Series Q Preferred Stock has a stated value of $1,000 per share, and
entitles holders to receive cumulative dividends in cash at an annual rate of 12% of the stated value, payable quarterly within 60 days
from the end of such fiscal quarter. The Series Q Preferred Stock has a liquidation preference equal to the stated value plus any accrued
but unpaid dividends, in preference to the common stock. The Series Q Preferred Stock has no preemptive or subscription rights, and there
is no sinking fund provision applicable to the Series Q Preferred Stock. The Series Q Preferred Stock does not have voting rights except
as required by law. The Series Q Preferred Stock is convertible into common stock of the Company in an amount determined by dividing 200%
of the stated value of the Series Q Preferred Stock being converted by the conversion price, provided that, the Series Q may not be converted
into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s
outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The conversion price will be equal to
the average closing sale price of the common stock for the five trading days prior to the conversion date. The Company will have the right
(but no obligation) to redeem the Series Q Preferred Stock at any time while the Series Q Preferred Stock are outstanding at a redemption
price equal to the stated value plus any accrued but unpaid dividends. The cumulative dividends are recorded as interest expense. During
the year ended December 31, 2021, the Company issued an aggregate of 15,064,168 shares of common stock upon conversion of 525 shares of
Series Q preferred stock, and exchanged 15 shares of Series F preferred stock for 15 shares of Series Q preferred stock. The shares were
issued and exchanged within the terms of the agreement and no gain or loss was recognized. As of December 31, 2021, there were 515 shares
of Series Q preferred stock issued and outstanding.
Series R
On November 16, 2020, the Company designated
5,000 shares of preferred stock as Series R. The Series R has a stated value of $1,000 per share, and entitles holders to receive cumulative
dividends in cash at an annual rate of 10% of the stated value, payable quarterly within 60 days from the end of such fiscal quarter.
The Series R holders are not entitled to any voting rights except as may be required by applicable law. The Series R is convertible into
common stock of the Company in an amount determined by dividing 200% of the stated value of the Series R being converted by the conversion
price; certain prior investors will also be entitled to certain make-good shares; provided that, the Series R may not be converted into
common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding
common stock (which may be increased up to 9.99% upon 61 days’ written notice). The conversion price will be equal to the average
closing sale price of the common stock for the five trading days prior to the conversion date. The Company will have the right (but no
obligation) to redeem the Series R at any time while the Series R are outstanding at a redemption price equal to, if paid in cash, the
stated value plus any accrued but unpaid cash dividends, or, if paid in shares of common stock, in an amount of shares determined by dividing
the stated value being redeemed by the conversion price. The subscribers were offered warrants with the purchase of Series R. During the
year ended December 31, 2021, the Company issued an aggregate of 2,481 shares of Series R preferred stock for an aggregate purchase price
of $2,480,750 and exchanged an aggregate of 15 shares of Series G preferred stock, 317 shares of Series I preferred stock, 1,822 shares
of Series K preferred stock, 3,200 shares of Series M preferred stock, and 120 shares of Series O preferred stock for an aggregate of
2,394 shares of Series R preferred stock, and issued an aggregate of 79,112,450 shares of common stock upon conversion of 1,933 shares
of Series R preferred stock. The shares were issued and exchanged within the terms of the agreement and no gain or loss was recognized.
As of December 31, 2021, there were 3,432 shares of Series R preferred stock along with 101,498,340 Series A warrants (with an exercise
price of $0.05) and 49,177,670 Series B warrants (with an exercise price of $0.10) issued and outstanding with a fair value of $11,181,822
on the original issuance. The warrants were valued using the Black Scholes model (see additional information under warrants footnote).
Series S
On February 5, 2021, the Company designated
430 shares of preferred stock as Series S. The Series S has a stated value of $1,000 per share, and entitles holders to receive cumulative
dividends in cash at an annual rate of 12% of the stated value, payable quarterly within 60 days from the end of such fiscal quarter.
The Series S holders are not entitled to any voting rights except as may be required by applicable law. The Series S is convertible into
common stock of the Company in an amount determined by dividing 200% of the stated value of the Series S being converted by the conversion
price, provided that, the Series S may not be converted into common stock to the extent such conversion would result in the holder beneficially
owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written
notice). The conversion price will be equal to the average closing sale price of the common stock for the five trading days prior to the
conversion date. The Company has the right (but no obligation) to redeem the Series S at any time while the Series S are outstanding at
a redemption price equal to the stated value plus any accrued but unpaid dividends. During the year ended December 31, 2021, the Company
issued an aggregate 365 shares of Series S preferred stock in exchange for an aggregate of 365 Series G preferred stock and issued an
aggregate of 5,495,406 shares of common stock upon conversion of 195 shares of Series S preferred stock. The shares were issued and exchanged
within the terms of the agreement and no gain or loss was recognized. As of December 31, 2021, there were 170 shares of Series S preferred
stock issued and outstanding.
Series T
On February 24, 2021, the Company designated
630 shares of preferred stock as Series T. The Series T has a stated value of $1,000 per share, and entitles holders to receive cumulative
dividends in cash at an annual rate of 10% of the stated value, payable monthly. The Series T holders are not entitled to any voting rights
except as may be required by applicable law. The Series T is convertible into common stock of the Company pursuant to the Series T COD,
provided that, the Series T may not be converted into common stock to the extent such conversion would result in the holder beneficially
owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written
notice). The Company will have the right (but no obligation) to redeem the Series T at any time while the Series T are outstanding at
a redemption price equal to the stated value plus any accrued but unpaid dividends. On March 1, 2021, the Company issued an aggregate
of 630 shares of Series T Preferred Stock to an accredited investor (the “Purchaser’’) per terms of a Securities Purchase
Agreement (the “SPA”). Per the SPA, the Company agreed to sell to Purchaser, and Purchaser agreed to purchase from the
Company, 630 shares of the Company’s Series T, and two-year cashless warrants to acquire 25,200,000 shares of the Company’s
common stock, valued at $0.05 per share per terms of the SPA, which may be exercised at any time in whole or in part. Per the SPA, the
Series T, including any convertible shares acquired pursuant to exercise of the warrants, the Company shall pay 10% annual dividends in
cash, paid monthly. Purchaser may convert any portion of the Series T, including convertible shares acquired pursuant to exercise of the
warrants, at any time into shares of the Company’s common stock at an agreed upon conversion rate per terms of the SPA. The purchaser
and the Company agreed that in lieu of the purchase price for the Series T, the Purchaser transferred to the Company real property, with
an aggregate value agreed to be $630,000 based on an appraisal from an international independent company. The real property consists of
residential real estate in Buenos Aires Argentina valued at $580,000, and eight undeveloped lots valued at $50,000 in Terralta private
neighborhood development. The real property exchanged for 630 shares of Series T was recorded at $630,000 and reflected on the balance
sheet as a long term asset for sale. The fair value of the warrants associated with acquiring 25,200,000 preferred shares were valued
at $2,037,849, using the Black Scholes model and accounted for as deemed dividends and reflected in stockholder’s equity as accumulated
paid in capital.
The Company has actively listed the
residential real property for sale since July 2021. On September 13, 2021, the Company received an offer for the property for $464,000,
which was $116,000 below the original independent appraisal of $580,000. However, because of administrative delays due to COVID, the buyer
opted out of the offer. Based on the above indicator of impairment, during the year ended December 31, 2021, the Company adjusted the
original value of the long term asset for sale from $630,000 to $514,000 on the balance sheet and recorded an impairment of $116,000 in
the consolidated financial statements.
Series U
On May 26, 2021, the Company designated
5,000 shares of preferred stock as Series U. The Series U has a stated value of $1,000 per share. The Series U holders are not entitled
to any dividends and do not have any voting rights except as may be required by applicable law. The Series U is convertible into common
stock of the Company in an amount determined by dividing 150% of the stated value of the Series U being converted by the conversion price;
certain prior investors will also be entitled to certain make-good shares; provided that, the Series U may not be converted into common
stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding
common stock (which may be increased up to 9.99% upon 61 days’ written notice). The conversion price will be equal to the lesser
of $0.20 or the average closing sale price of the common stock for the five trading days prior to the conversion date. The Company has
the right (but no obligation) to redeem the Series U at any time at a redemption price equal to, if paid in cash, the stated value, or,
if paid in shares of common stock, in an amount of shares determined by dividing 200% of the stated value being redeemed by the conversion
price then in effect, and adding any applicable make-good shares. During the year ended December 31, 2021, the Company issued 1,560
shares of Series U at a stated value of $1,560,000, issued an aggregate of 16,169,815 shares of common stock upon conversion of 495 shares
of Series U preferred stock, and issued an aggregate of 14,475,000 warrants with a fair value of $603,003 to Series U holders. The shares
were issued within the terms of the agreement and no gain or loss was recognized. As of December 31, 2021, there were 1,067 shares of
Series U preferred stock issued and outstanding.
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 3,000 shares of preferred stock as Series V. The Series V has an original issue price of $100,000
per share, and holders are entitled to an annual distribution of 25% of annual net profits of newly established Company wholly-owned,
Water On Demand subsidiaries, designated by each holder, paid within 3 months of subsidiary’s accounting year-end. The Series V
holders are not entitled to any dividends and do not have any voting rights except as may be required by applicable law.
The Series V is convertible into common stock of the Company pursuant to the Series V COD, provided that, the Series V may not be converted
into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s
outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The Company will have the right (but
no obligation) to redeem the Series V at any time at a redemption price equal to, if paid in cash, the stated value plus any accrued but
unpaid distributions of 25% of subsidiary’s annual net profits. During the year ended December 31, 2021, the Company issued
4 shares of Series V at a stated value of $400,000, which was classified as restricted cash per the Series V COD, and issued an aggregate
of 3,200,000 warrants with a fair value of $134,148 to Series V holders. As of December 31, 2021, there were 4 shares of Series V preferred
stock issued and outstanding.
Series W
On April 28, 2021, the Company designated
3,390 shares of preferred stock as Series W. The Series W has a stated value of $1,000 per share, and Series W holders are entitled to
cumulative dividends in cash at an annual rate of 12% of the stated value, payable quarterly. The Series W holders are not entitled to
any voting rights except as may be required by applicable law. The Series W is convertible into common stock of the Company in an amount
determined by dividing 200% of the stated value of the Series W being converted by the conversion price; provided that, the Series W may
not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the
Company’s outstanding common stock. The conversion price will be equal to the average closing sale price of the common stock for
the five trading days prior to the conversion date. The Company has the right (but no obligation) to redeem the Series W at any time at
a redemption price equal to the stated value plus any accrued but unpaid dividends. During the year ended December 31, 2021, the Company
issued 1,003 shares of Series W preferred stock in exchange for 245 shares of Series I preferred stock and 758 shares of Series K preferred
stock, and issued an aggregate of 7,538,432 shares of common stock upon conversion of 259 shares of Series U preferred stock. The shares
were issued within the terms of the agreement and no gain or loss was recognized. As of December 31, 2021, there were 745 shares of Series
W preferred stock issued and outstanding.
Series X
On August 10, 2021, the Company designated
25 shares of preferred stock as Series X. The Series X has a stated value of $10,000 per share. The Series X holders are not entitled
to any dividends and do not have any voting rights except as may be required by applicable law. The Series X is convertible into common
stock of the Company pursuant to the Series X COD, provided that, the Series X may not be converted into common stock to the extent such
conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which amount
may be increased up to 9.99% upon 61 days’ written notice). Beginning on the one year anniversary of the subscription agreement
for the Series X Preferred Stock, until the two year anniversary of the subscription agreement, the holders will have the right to require
the Company to redeem all of the Series X purchased by the subscriber at a price equal to 125% of the $250,000 original purchase price,
or $312,500. The holders will also have the right, exercisable at any time, to require the Company to redeem all of the holder’s
Series X in exchange for the issuance of shares of the Company’s common stock in an amount equal to 250% of the original $250,000
purchase price, or $625,000, divided by the closing price of the Company’s common stock as of the date the holders executed the
subscription agreement. On August 10, 2021, the Company issued and sold to an accredited investor an aggregate of 25 shares of Series
X for a purchase price of $250,000, along with an aggregate of 1,798,562 shares of common stock, pursuant to a subscription agreement
between the Company and the investor. The Company recognized a loss of $125,000, associated with the issuance of the common stock.
Per the Series X COD, as of December 31, 2021, $80,000 of the $250,000 was classified as restricted cash. As of December 31, 2021, there
were 25 shares of Series X preferred stock issued and outstanding.
Series Y
On
December 6, 2021, the Company designated 3,000 shares of preferred stock as Series Y. The Series Y has an original issue price of
$100,000 per share, and holders are entitled to receive, on a pro rata and pari passu basis, annual distribution of 25% of annual
net profits of newly established, Company wholly-owned, Water On Demand subsidiaries, designated by each holder, paid within 3 months
of subsidiary’s accounting year-end. The Series Y holders will not be entitled to any voting rights except as may be required by
applicable law. The Series Y will be convertible into common stock of the Company pursuant to the Series Y COD, provided that, the Series
Y may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99%
of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The Company will
have the right (but no obligation) to redeem the Series Y at any time at a redemption price equal to, if paid in cash, the stated value
plus any accrued but unpaid distributions of 25% of the subsidiary’s annual net profits. During the year ended December 31,
2021, the Company issued 4.7 shares of Series Y at an original issue price of $470,000 and issued an aggregate of 3,760,000 warrants with
a fair value of $114,983 to Series Y holders. Per the Series Y COD, $235,000 of the $470,000 received was classified as restricted cash.
During the period ended December 31, 2021, $150,000 of the restricted cash was used as an intercompany loan to meet capital requirements
of the Company’s PWT subsidiary. As of December 31, 2021, there were 4.7 shares of Series Y preferred stock issued and outstanding.
As of December 31, 2021, the Company accrued aggregate dividends in
the amount of $356,728 for all series of preferred stock.
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 13,927,622 shares
of common stock for the settlement of convertible promissory notes in an aggregate principal amount of $81,150, plus interest in the amount
of $52,555, based upon a conversion price of $0.00955.
The Company issued 33,476,294 shares
of common stock for services at fair value of $2,229,695 at share prices ranging from $0.0229 - $0.124.
The Company issued 790,089 shares of
common stock for Series O preferred stock dividends payable.
The Company issued 190,205,395 shares
of common stock upon conversion of 5,550,861 shares of preferred stocks.
The Company issued 1,000,000 shares
of common stock upon exercise of 1,000,000 warrants at an exercise price of $0.05 per share for $50,000.
The Company issued 1,798,562 shares
of common stock at a price of $0.0695 in conjunction with the sale of Series X preferred stock and recognized a loss of $125,000 in the
financial statements.
The Company issued 633,282 shares of
common stock for make good shares for Series P preferred stock.
Year ended December 31, 2020
The Company issued 19,276,917 shares
of common stock for the settlement of convertible promissory notes in an aggregate principal amount of $137,262, plus interest in the
amount of $51,186, and a default settlement of $204,402, based upon conversion prices of $0.00955 to $0.0394.
The Company issued 7,750,037 shares
of common stock for services at fair value of $415,036.
The Company issued 688,205 shares of
common stock for Series O preferred stock dividends payable.
The Company issued 32,482,536 shares
of common stock upon conversion of 6,603,479 shares of preferred stock.
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. The RSGAs provides for the issuance
of up to an aggregate of 109,214 shares of the Company’s common stock to Mr. Eckelberry provided certain milestones are met in certain
stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles,
consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period as reported in the Company’s quarterly
or annual financial statements, the Company will issue up to an aggregate of 54,607 shares of its common stock; b) If the Company’s
consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation &
Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing
twelve month period as reported in the Company’s SEC Reports, the Company will issue up to an aggregate of 101,054,607
shares of its common stock. The Company has not recognized any costs associated with the milestones, because achievement is not probable.
As the performance goals are achieved, the shares shall become eligible for vesting and issuance.
Restricted Stock to 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 378,750 shares of the Company’s common stock to employees and consultants provided certain milestones
are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting
principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period as reported in the Company’s
quarterly or annual financial statements, the Company will issue up to an aggregate of 189,375 shares of its common stock; b) If the Company’s
consolidated operating profit Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation &
Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing
twelve month period as reported as reported in the Company’s SEC reports, the Company will issue up to an aggregate of 109,070,842
shares of its common stock. The Company has not recognized any costs associated with the milestones, because achievement is not probable.
As the performance goals are achieved, the shares shall become eligible for vesting and issuance.
On August 14, 2019, the Board of Directors
approved an amendment to the RSGAs and 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 two years prior to the date requested. On the first day
of each calendar month, an aggregate dollar amount of restricted stock equal to an aggregate of 5% of the total dollar amount of the Company’s
common stock that traded during the prior calendar month, will vest, divided equally among all RSGAs and E&C RSGAs that have duly
elected to participate in the alternate vesting schedule, with value based on the fair market value under the respective RSGAs and E&C
RSGAs. The fair market value shall equal the average of the trailing ten (10) closing trade prices of the Company’s common stock
on the last ten (10) trading days of the month immediately prior to the date of determination as quoted on the public securities trading
market on which the Company’s common stock is then traded. If the fair market value of the Company’s common stock on the date
the shares are vested is less than the fair market value of the Company’s common stock on the effective date of the RSGA or E&C
RSGA, then the number of vested shares issuable (assuming all conditions are satisfied) shall be increased so that the aggregate fair
market value of vested shares issuable on the vesting date equals the aggregate fair market value that such number of shares would have
had on the effective date. Upon the occurrence of a Company performance goal, the right to participate in the alternate vesting schedule
will terminate, and the vesting of the remaining unvested shares will be as set forth under the restricted stock award agreement.
On May 18, 2020, the Company entered
into Restricted Stock Grant Agreements (the “May RSGAs”) with its Chief Executive Officer, T. Riggs Eckelberry, members of
the Board, employees and consultants to create management incentives to improve the economic performance of the Company and to increase
its value and stock price. All shares issuable under the May RSGAs are performance-based shares and none have yet vested nor have any
been issued. The May RSGAs provide for the issuance of up to an aggregate of 10,500,000 shares of the Company’s common stock as
follows: 2,000,000 to Mr. Eckelberry, 500,000 to each of the other three members of the Board, and an aggregate of 7,000,000 to employees
and consultants provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated
in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve
month period, the Company will issue up to an aggregate of 5,250,000 shares of its common stock; b) If the Company’s consolidated
operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated
in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported
as reported in the Company’s SEC reports, the Company will issue up to an aggregate of 5,250,000 shares of its common stock. As
the performance goals are achieved or if alternate vesting is qualified and selected, the shares shall become eligible for vesting and
issuance.
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 2,771,892 shares of the Company’s common stock with a value of $211,521,
calculated using the closing share prices on the dates of the vesting agreements.
Warrants
During the year ended December 31, 2021,
the Company issued 218,085,783 purchase warrants, associated with the preferred stocks. A summary of the Company’s warrant activity
and related information follows for the years ended December 31, 2021 and 2020:
| |
2021 | | |
2020 | |
| |
Number of Warrants | | |
Weighted average exercise price | | |
Number of Warrants | | |
Weighted average exercise price | |
Outstanding - beginning of year | |
| 15,922,044 | | |
$ | 500.03 | | |
| 122,044 | | |
$ | 500.00 | |
Granted | |
| 218,085,783 | | |
$ | 0.0868 | | |
| 15,800,000 | | |
$ | 0.03 | |
Exercised | |
| (1,000,000 | ) | |
$ | (0.05 | ) | |
| - | | |
| - | |
Expired | |
| (15,922,044 | ) | |
$ | (500.03 | ) | |
| - | | |
| - | |
Outstanding - end of year | |
| 217,085,783 | | |
$ | 0.0868 | | |
| 15,922,044 | | |
$ | 500.03 | |
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) | |
$ | 0.02 | | |
| 600,000 | | |
| 600,000 | | |
| 4.67 | | |
| - | | |
| - | | |
| - | |
$ | 0.05 | | |
| 125,698,340 | | |
| 125,698,340 | | |
| 0.14 - 1.16 | | |
| 9,800,000 | | |
| 9,800,000 | | |
| 0.88 -1.00 | |
$ | 0.10 | | |
| 67,292,670 | | |
| 67,292,670 | | |
| 0.14 - 0.74 | | |
| 6,000,000 | | |
| 6,000,000 | | |
| 0.88 | |
$ | 0.25 | | |
| 13,206,000 | | |
| 13,206,000 | | |
| 1.50 - 5.00 | | |
| - | | |
| - | | |
| - | |
$ | 0.0275 | | |
| 8,727,273 | | |
| 8,727,273 | | |
| 9.41 | | |
| - | | |
| - | | |
| - | |
$ | - | | |
| - | | |
| - | | |
| - | | |
| 122,044 | | |
| 122,044 | | |
| 0.62 | |
$ | 1.00 | | |
| 1,561,500 | | |
| 1,561,500 | | |
| 2.50 - 2.74 | | |
| - | | |
| - | | |
| - | |
| | | |
| 217,085,783 | | |
| 217,085,783 | | |
| | | |
| 15,922,044 | | |
| 15,922,044 | | |
| | |
At December 31, 2021 and 2020, the
aggregate intrinsic value of the warrants outstanding was $0.
5. |
CONVERTIBLE PROMISSORY NOTES |
As of December 31, 2021, the outstanding
convertible promissory notes are summarized as follows:
Convertible Promissory Notes | |
$ | 3,078,312 | |
Less current portion | |
| 3,016,037 | |
Total long-term liabilities | |
$ | 62,275 | |
Maturities of long-term debt for the
next two years are as follows:
Year Ending December 31, | |
Amount | |
2022 | |
| 3,019,780 | |
2023 | |
| 62,275 | |
| |
$ | 3,082,055 | |
At December 31, 2021, the $3,082,055
in convertible promissory notes and has a remaining debt discount $3,743, leaving a net balance of $3,078,312.
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 2014-2015 Notes bear interest at 10% per year. The 2014-2015
Notes may be converted into shares of the Company’s common stock at conversion prices ranging from the lesser of $4,200 to $9,800
(subject to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the lowest trade price on any
trade day following issuance of the 2014-2015 Notes. In addition, for as long as the 2014-2015 Notes or other convertible notes in effect
between the purchaser and the Company are outstanding, if the Company issues any security with terms more favorable than the terms of
the 2014-2015 Notes or such other convertible notes or a term was not similarly provided to the purchaser of the 2014-2015 Notes or such
other convertible notes, then such more favorable or additional term shall, at the purchaser’s option, become part of the 2014-2015
Notes and such other convertible notes. The conversion feature of the 2014-2015 Notes was considered a derivative in accordance with current
accounting guidelines because of the reset conversion features of the 2014-2015 Notes. During the year ended December 31, 2021, the Company
issued 13,927,621 shares of common stock, upon conversion of $81,150 in principal, plus accrued interest of $52,555. As of December 31,
2021, the 2014-2015 Notes had an aggregate remaining balance of $1,200,000, which are short term.
The unsecured convertible promissory
notes (the “OID Notes”) had an aggregate remaining balance of $184,124, plus accrued interest of $13,334. The OID Notes included
an original issue discount and one-time interest, which has been fully amortized. The OID Notes matured on December 31, 2017, which were
extended to September 30, 2018. The OID Notes were convertible into shares of the Company’s common stock at a conversion price initially
of $30,620. After the amendment, the conversion price changed to the lesser of $5,600 per share, or b) fifty percent (50%) of the
lowest trade price of common stock recorded since the original effective date of this note, or c) the lowest effective price per share
granted to any person or entity after the effective date. The conversion feature of the notes was considered a derivative in accordance
with current accounting guidelines, because of the reset conversion features of the notes. As of December 31, 2021, the remaining balance
was $62,275, which is long term.
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 10%
per year. The 2015-2016 Notes may be converted into shares of the Company’s common stock at conversion prices ranging from the lesser
of $1,400 to $5,600 (subject to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the lowest
trade price on any trade day following issuance of the 2015-2016 Notes. The conversion feature of the 2015-2016 Notes was considered a
derivative in accordance with current accounting guidelines because of the reset conversion features of the 2015-2016 Notes. As of December
31, 2021, the remaining balance of the 2015-2016 Notes was $930,000, all of which is short term.
The Company issued a convertible note
(the “Dec 2015 Note”) in exchange for accounts payable in the amount of $432,048, which could be converted into shares of
the Company’s common stock after December 31, 2015. The Dec 2015 Note was accounted for under ASC 470, whereby, a beneficial conversion
feature was recorded at time of issuance. The Dec 2015 Note did not meet the criteria of a derivative, and was accounted for as a beneficial
conversion feature, which was amortized over the life of the Dec 2015 Note and recognized as interest expense in the financial statements.
On January 1, 2016, the Dec 2015 Note met the criteria of a derivative and was accounted for under ASC 815. The Dec 2015 Note has zero
stated interest rate, and the conversion price shall be equal to 75% of the average three lowest last sale prices traded during the 25
trading days immediately prior to conversion. As of December 31, 2021, the remaining balance on the Dec 2015 Note was $167,048, which
is short term.
The Company issued a convertible note
(the “Sep 2016 Note”) in exchange for accounts payable in the amount of $430,896, which could be converted into shares of
the Company’s common stock after September 15, 2016. The Sep 2016 Note was accounted for under ASC 470, whereby, a beneficial conversion
feature was recorded at time of issuance. The Sep 2016 Note met the criteria of a derivative and was accounted for under ASC 815. The
Sep 2016 Note has zero stated interest rate, and the conversion price shall be equal to 75% of the average three lowest last sale prices
traded during the 25 trading days immediately prior to conversion. The Sep 2016 Note did not meet the criteria of a derivative at the
date of the issuance, and was accounted for as a beneficial conversion feature, which was amortized over the life of the Sep 2016 Note
and recognized as interest expense in the financial statements. The conversion feature of the Sep 2016 Note was considered a derivative
in accordance with current accounting guidelines because of the reset conversion feature of the Sep 2016 Note. As of December 31, 2021,
the remaining balance on the Sep 2016 Note was $430,896, which is short term.
The Company issued two (2) unsecured
convertible promissory notes (the “Apr & May 2018 Notes”), in the aggregate amount of $300,000 on April 2, 2018 and
May 31, 2018. The Apr & May 2018 Notes had maturity dates of April 2, 2019 and May 31, 2019, respectively. The Apr & May
2018 Notes bear interest at 10% per year. The Apr & May 2018 Notes may be converted into shares of the Company’s common stock
at a variable conversion price of 50% of the lesser of the lowest trading price twenty-five (25) trading days prior to conversion. The
conversion feature of the Apr & May 2018 Notes was considered a derivative in accordance with current accounting guidelines because
of the reset conversion features of the Notes. On March 13, 2019, the Company entered into a settlement agreement with the investor in
the amount of $570,000, based on the outstanding balance due and payable under the Apr & May 2018 Notes. The Company set up a reserve
of 2,630,769 shares of common stock of the Company for issuance upon conversion by the investor of the amounts owed under the
Notes, in accordance with the terms of the Notes, including, but not limited to the beneficial ownership limitations contained in the
Notes. In addition to the foregoing, upon the sale by the investor of the settlement shares as delivered to the investor by the Company,
resulting in total net proceeds less than the settlement value, the investor is entitled to additional settlement shares of the Company’s
common stock. If after the investor has sold all settlement shares, the investor delivers a written notice to the Company certifying that
the investor is entitled to additional settlement shares of the Company’s common stock (the “Make-Whole Shares”). The
number of make-whole shares being equal to the greater of ((i) zero and (ii) the quotient of (1) the difference of (x) the settlement
value with respect to each sale of shares by the Investor after the delivery of the Settlement Shares, minus (y) the aggregate net consideration
received by the Investor from the resale of all shares of common stock issued by the Company, divided by (2) the average trailing closing
price for ten (10) trading days for the shares immediately preceding the date of delivery of the make-whole shares. As of December 31,
2021, the remaining balance on the May 2018 Note was $218,064, which is short term.
The Company
entered into an unsecured convertible promissory note (the “Nov 20 Note”), on November 19, 2020 in the amount of $50,000.
The Company received funds in the amount of $50,000. The Nov 20 Note matures on November 19, 2021, twelve months from the effective
date of the Note. The Note may be extended sixty (60) months from the maturity date. The Nov 20 Note bears interest at 10% per year. The
Nov 20 Note may be converted into shares of the Company’s common stock at a lesser price of $0.05 per share or (b) fifty percent
(50%) of the lowest trade price of common stock recorded on any trade after the effective date, or (c) the lowest effective price per
share granted. In addition, for each conversion, in event that shares are not delivered by the fourth business day (inclusive of
the day of conversion), a penalty of $2,000 per day shall be assessed for each day after the third business day until the shares are delivered. The
conversion feature of the Nov 20 Note was considered a derivative in accordance with current accounting guidelines because of the reset
conversion features of the Note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount
of $10,047 during the year ended December 31, 2021. During the year ended December 31, 2021, the Company paid off $15,228 in
cash, of the Nov 20 Note. As of December 31, 2021, the remaining balance of the Nov 20 Note was $13,772, which is short term.
The
Company entered into an unsecured convertible promissory note (the “Jan 21 Note”), on January 25, 2021 in the amount of $60,000.
The Company received funds in the amount of $60,000. The Jan 21 Note matures on January 25, 2022, twelve months from the effective
date of the Note. The Note may be extended sixty (60) months from the maturity date. The Jan 21 Note bears interest at 10% per year. The
Jan 21 Note may be converted into shares of the Company’s common stock at a conversion price equal to the lower of (a) $0.05 per
share, (b) fifty percent (50%) of the lowest trade price of common stock recorded on any trade after the effective date, or (c) the lowest
effective price per share granted. In addition, for each conversion, in event that shares are not delivered by the fourth business day
(inclusive of the day of conversion), a penalty of $2,000 per day shall be assessed for each day after the third business day until the
shares are delivered. The conversion feature of the Jan 25 Note was considered a derivative in accordance with current accounting
guidelines because of the reset conversion features of the Note. The Company recorded amortization of debt discount, which was recognized
as interest expense in the amount of $23,358 during the twelve months ended December 31, 2021. As of December 31, 2021, the balance
of the Jan 21 Note was $60,000, which is short term.
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 $5,738,020.
6. |
REVENUE FROM CONTRACTS WITH CUSTOMERS |
Equipment Contracts
Revenues and related costs on equipment
contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification
(“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit will be recognized as the
customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect
costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract
is foreseen, the Company will recognize the loss as it is determined.
The following table represents a disaggregation
of revenue by type of good or service from contracts with customers for the year ended December 31, 2021 and 2020.
| |
Years Ended | |
| |
December 31, | |
| |
2021 | | |
2020 | |
Equipment Contracts | |
$ | 2,516,609 | | |
$ | 2,393,815 | |
Component Sales | |
| 1,149,861 | | |
| 1,441,251 | |
Waste Water Treatment Systems | |
| 57,729 | | |
| - | |
Pump Stations | |
| 285,323 | | |
| 144,755 | |
Services Sales | |
| 98.033 | | |
| 121,310 | |
Commission & Training | |
| 36,189 | | |
| - | |
| |
$ | 4,143,744 | | |
$ | 4,101,131 | |
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 $378,932 and $148,734, respectively. The contract liability for the years ended December
31, 2021 and 2020, was $1,886,946 and $340,551, respectively.
Convertible Note Receivable
The Company purchased a 10% convertible note in the amount of $80,000, through a private placement with Water Technologies International,
Inc (“WTII”). The Note is convertible into common stock of WTII at a price of 65% of the lowest trading price for the ten (10)
trading days immediately prior to the conversion date. The conversion price shall not be lower than a price of $0.0001 per share.
As of December 31, 2020, the note included principal of $80,000 plus accrued interest of $53,879 for a total of $133,879. The
Note was considered impaired as of December 31, 2020, and an allowance was recognized in the financials in the amount of $133,879, during
the year ended December 31, 2020. On November 12, 2021, the Company served a conversion notice to WTII and recorded additional interest
and fees of $15,988 through that date, according to the terms of the agreement for an aggregate of $149,867. The Note was converted into
45,208,649 shares of WTII common stock. As of December 31, 2021, the investment in securities was recorded at fair value in the amount
of $198,918, with an unrealized gain of $49,051.
Fair value investment in Securities
On May 15, 2018, the Company received
4,000 shares of WTII Series C convertible preferred stock for the use of OriginClear, Inc. technology associated with their proprietary
electro water separation system. Each share of Series C convertible preferred stock is convertible into one thousand (1,000) shares of
WTII common stock. The stock was valued at fair market value of $0.0075 for a price of $30,000 on the date of issuance. The Company analyzed
the licensing agreement using ASU 606 to determine the timing of revenue recognition. The licensing of the intellectual property (IP)
is distinct from the non-license goods or services and has significant standalone functionality that provides a benefit or value. The
functionality will not change during the license period due to the licensor’s activities. Because the significant standalone functionality
was delivered immediately, the revenue was recognized in the financial statements as of June 30, 2018. As of December 31, 2021, the fair
value of the preferred shares was $17,600.
Secured Loans Payable
The Company entered into short term
loans with various lenders for capital expansion secured by the Company’s assets in the amount of $1,749,970, which included finance
cost of $624,810. The finance cost was amortized over the terms of the loans, which have various maturity dates ranging from October 2018
through February 2019. As of December 31, 2020, the finance cost was fully amortized. During the year ended December 31, 2021, the Company
settled the majority of the loans in the amount of $262,250, of which $157,250 was recognized on the statement of operations as a gain
on write-off of loan payable. The term of the loans ranged from two months to six months. The net balance as of December 31, 2021 and
2020 was $80,646 and $342,896, respectively.
Loan Payable-Related Party
The Company’s CEO loaned the
Company $248,870 as of June 28, 2018. The loans bore interest at various rates to be originally repaid over a period of three (3) years
at various maturity dates. The funds were used for operating expenses. During the year ended December 31, 2021, all principal and interest
payments were made in full leaving a balance of $0 as of December 31, 2021.
Small Business Administration Loans
Between April 30, 2020 and September
12, 2020, the Company received total loan proceeds in the amount of $505,000, which included an aggregate of $345,000 under the Paycheck
Protection Program (the “PPP”) under the Coronavirus Aid, Relief and Economic Security Act, an Economic Injury Disaster Loan
(the “EIDL”) in the amount of $150,000, and an Economic Injury Disaster Grant in the amount of $10,000. The principal and
accrued interest under the PPP was forgivable if the Company used the PPP loan proceeds for eligible purposes, including payroll, benefits,
rent and utilities, and otherwise complied with PPP requirements. The Company used the full proceeds of the PPP loan specifically for
eligible purposes per requirements of the PPP and during the period ending December 31, 2021, the Company submitted satisfactory documentation
regarding its compliance with the applicable requirements and obtained forgiveness of the PPP loan. The Company must repay any unforgiven
principal amount, with interest, on a monthly basis following the deferral period for the EIDL. For the period ended December 31, 2021,
the aggregate amount of $345,000 received under the PPP, and the Economic Injury Disaster Grant in the amount of $10,000 was recognized
in the statement of operations as other income due to forgiveness.
The Company entered into a capital
lease for the purchase of equipment during the year ended December 31, 2018. The lease is for a sixty (60) month term, with monthly payments
of $757 per month, and a purchase option at the end of the lease for $1.00. As of December 31, 2021, there remain a current balance of
$7,985.
As of December 31, 2021, the maturities
are summarized as follows:
Capital lease | |
$ | 7,985 | |
Less current portion | |
| - | |
Total long-term liabilities | |
$ | 7,985 | |
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 35% to 21% effective January 1, 2018.
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 $46,795,341, which expire at dates that have not been determined. No tax benefit has
been reported in the December 31, 2021 financial statements since the potential tax benefit is offset by a valuation allowance of the
same amount.
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) | |
$ | 444,255 | | |
$ | 2,784,887 | ) |
Tax to book differences for deductible expenses | |
| 9,508 | | |
| 9,574 | |
Tax non-deductible expenses | |
| 1,166,218 | | |
| (3,845,607 | ) |
Valuation Allowance | |
| (1,619,981 | ) | |
| 1,051,146 | |
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 | |
$ | 7,511,485 | | |
$ | 9,827,022 | |
Other carryovers | |
| 728,907 | | |
| 749,475 | |
| |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | |
Depreciation | |
| (158,296 | ) | |
| (102,841 | ) |
Less Valuation Allowance | |
| (8,082,096 | ) | |
| (10,472,656 | ) |
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.
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.
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 $630,000, in conjunction with common stock purchase warrants, through an asset purchase agreement. The assets
held for sale consisted of residential property, plus eight (8) lots of undeveloped land. The real property has been listed actively on
the market to be sold. Based on the offers received and the market conditions, the Company adjusted the fair value and recognized a loss
on impairment of the residential property in the amount of $116,000.
13. |
COMMITMENTS AND CONTINGENCIES |
Facility Rental – Related Party
Our Dallas based subsidiary, PWT, rents
an approximately12,000 square foot facility located at 2535 E. University Drive, McKinney, TX 75069, with a current monthly rent of $7,900.
Warranty Reserve
Generally, a PWT project is guaranteed
against defects in material and workmanship for one year from the date of completion, while certain areas of construction and materials
may have guarantees extending beyond one year. The Company has various insurance policies relating to the guarantee of completed work,
which in the opinion of management will adequately cover any potential claims. A warranty reserve has been provided under PWT based on
the opinion of management and based on Company history in the amount of $20,000 for the year ending December 31, 2021.
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.
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 December 31, 2021, no decision has been rendered on OriginClear’s Motion to Set Aside the Settlement Agreement.
Major Customers
PWT had three major customers for the
year ended December 31, 2021. The customers represented 64.24% of billings for the year ending December 31, 2021. The contract receivable
balance for the customers was $1,381,875 at December 31, 2021.
PWT had two major customers for the
year ended December 31, 2020. The customers represented 34% of billings for the year ending December 31, 2020. The contract receivable
balance for the customers was $149,070 at December 31, 2020.
Major Suppliers
PWT had three major vendors for the
year ended December 31, 2021. The vendors represented 40.1% of total expenses in the year ending December 31, 2021. The accounts payable
balance due to the vendors was $279,082 at December 31, 2021. Management believes no risk is present with the vendors due to other suppliers
being readily available.
PWT had three major vendors for the
year ended December 31, 2020. The vendors represented 45.2% of total expenses in the year ending December 31, 2020. The accounts payable
balance due to the vendors was $170,963 at December 31, 2020. Management believes no risk is present with the vendors due to other suppliers
being readily available.
Other Income consisted of the following
as of December 31,
| |
2021 | | |
2020 | |
Debt forgiveness on SBA loan | |
$ | 355,000 | | |
$ | - | |
Gain on conversion of note receivable | |
| 149,867 | | |
| - | |
Other income | |
| 4,939 | | |
| 16,521 | |
Total Other Income | |
$ | 509,806 | | |
$ | 16,521 | |
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 35 shares of Series K preferred stock for 35 shares of the Company’s
Series W preferred stock.
On January 4, 2022,
holders of Series W Preferred Stock converted an aggregate of 10 Series W shares into an aggregate of 694,446 shares of the Company’s
common stock.
Between January 4, 2022 and February 14, 2022, holders of
the Company’s Series R preferred stock converted an aggregate of 378 Series R shares into an aggregate of 27,162,453, including
make-good shares, of the Company’s common stock.
Between January 4, 2022 and March 3, 2022, holders of the
Company’s Series U preferred stock converted an aggregate of 432 Series U shares into an aggregate of 22,794,493 shares, including
make-good shares, of the Company’s common stock.
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 12.4 shares of the Company’s Series Y preferred stock for an aggregate purchase price of $1,244,200. The Company also issued
an aggregate of 9,953,600 warrants to these investors.
On January 7, 2022, holders of convertible promissory notes
converted an aggregate principal and interest amount of $119,634 into an aggregate of 12,461,909 shares of the Company’s common
stock.
Between January 20, 2022 and January 25, 2022, certain holders
of the Company’s Series V preferred stock exchanged an aggregate of 4 shares of Series V preferred stock for 4 shares of the Company’s
Series Y preferred stock.
Between January 21, 2022 and March
31, 2022, the Company issued to consultants and one employee an aggregate of 13,314,289 shares of the Company’s common stock for
services.
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.
On February 11, 2022, the Company filed a certificate of
designation (the “Series Z COD”) of Series Z preferred stock (the “Series Z”) with the Secretary of State of Nevada.
Pursuant to the Series Z COD, the Company designated 25 shares of preferred stock as Series Z. The Series Z has an original issue price
of $10,000 per share. The Series Z holders will not be entitled to dividends or any voting rights except as may be required by applicable
law. The Series Z will be convertible into common stock of the Company pursuant to the Series Z COD, provided that, the Series Z may not
be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s
outstanding common stock (which amount may be increased up to 9.99% upon 61 days’ written notice). The Company will have the
right (but no obligation) to redeem the Series Z at any time at a redemption price equal to the original issue price plus any accrued
but unpaid distributions of 25% of Subsidiary’s annual net profits. On February 18, 2022, the Company issued an aggregate of 25
shares of Series Z preferred stock.
On February 14, 2022, certain holders of the Company’s
Series F preferred stock exchanged an aggregate of 100 shares of Series F preferred stock for 100 shares of the Company’s Series
Q preferred stock.
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 25 shares of the Company’s Series
Z preferred stock for an aggregate purchase price of $250,000. The Company also issued an aggregate of 2,500,000 warrants to the investor.
Between February 22, 2022 and March 30, 2022, holders of the Company’s
Series L preferred stock converted an aggregate of 124 Series L shares into an aggregate of 14,528,106 shares of the Company’s common
stock.
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 111,010,481 shares of the
Company’s common stock in settlement of certain claims with such persons.
On February 25, 2022, holders of the Company’s Series
T preferred stock converted an aggregate of 145 Series T shares into an aggregate of 17,193,676 shares of the Company’s common stock.
On
March 31, 2022, the Company issued an aggregate of 261,707 shares of the Company’s common stock as dividends to certain holders
of Series O preferred stock.
F-33
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