The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
The accompanying notes are an integral part of these unaudited condensed
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 unaudited condensed
consolidated financial statements
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER 30, 2022
The accompanying
unaudited condensed consolidated financial statements of OriginClear, Inc. (the “Company”) have been prepared in accordance
with accounting principles generally accepted in the United States of America for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments
considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30,
2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information
refer to the financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2021.
The Company
has implemented a new outsourced water treatment business called Water On Demand (“WOD”), which it will conduct through its
wholly owned subsidiary, Water on Demand, Inc. (“WODI”). The WOD model intends to offer private businesses water self-sustainability
as a service, the ability to pay for water treatment and purification services on a per-gallon basis. This is commonly known as
Design-Build-Own-Operate or “DBOO”. In addition to WODI, four subsidiaries have been
established to house capital dedicated to this program. For efficiency, the Company is reorganizing these subsidiaries into a single
WOD Subsidiary. As of the period ended September 30, 2022, the Company received aggregate funding in the amount of $2,604,639
through the sale of its Series Y Preferred Stock dedicated to the Water on Demand program. The Company
is currently evaluating the first pilot opportunity to enable a commercial customer to outsource water treatment as a managed service
and pay by the gallon for the treatment of its dirty water as an alternative to having to come up with significant up-front capital. The
Company has announced that it plans to spin off the WOD business into its newly formed wholly owned subsidiary, Water On Demand, Inc.
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 nine months ended September 30, 2022,
the Company obtained funds from the sales of its preferred stock. Management believes this funding will continue from its’ current
investors and from new investors. For the nine months ended September 30, 2022, the Company generated revenue of $7,768,133 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., Water On Demand, Inc. and OriginClear Technologies, Ltd. All material intercompany transactions have been eliminated
upon consolidation of these entities.
Cash
and Cash Equivalent
The Company
considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Use
of Estimates
The preparation
of financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Significant estimates include estimates used to review the Company’s impairments and estimations
of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, warranty
reserves, inventory valuation, derivative liabilities and other conversion features, fair value investments, valuations of non-cash capital
stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
Net
Earnings (Loss) per Share Calculations
Basic loss
per share calculation is computed by dividing income (loss) available to common shareholders by the weighted-average number of common
shares available. Diluted earnings per share is computed similarly to basic earnings per share except that the denominator is increased
to include securities or other contracts to issue common stock that would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. The Company’s diluted earnings per share were not the same as the basic
loss per share for the nine months ended September 30, 2022 and 2021, as the inclusion of any potential shares in the nine months ended
September 30, 2022 and 2021, would have an anti-dilutive effect due to the Company generating a loss.
| |
For the Nine Months Ended | |
| |
2022 | | |
2021 | |
Income (Loss) to common shareholders (Numerator) | |
$ | (33,894,246 | ) | |
$ | (12,401,812 | ) |
| |
| | | |
| | |
Basic weighted average number of common shares outstanding (Denominator) | |
| 589,675,480 | | |
| 147,762,596 | |
| |
| | | |
| | |
Diluted weighted average number of common shares outstanding (Denominator) | |
| 589,675,480 | | |
| 147,762,596 | |
The Company
excludes issuable shares from warrants, convertible notes and preferred stock, if their impact on the loss per share is anti-dilutive
and includes the issuable shares if their impact is dilutive.
Revenue
Recognition
We recognize
revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and
risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.
Revenues
and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance
with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated
profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations).
All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the
event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.
Revisions
in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts for the revisions
become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes
in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract
settlements, may result in revisions to costs and income, which are recognized in the period the revisions are determined.
Contract
receivables are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are collectible
upon completion of the contracts. Accounts payable to material suppliers and subcontractors are recorded for amounts currently due based
upon work completed or materials received, as are retention due subcontractors, which are payable upon completion of the contract. General
and administrative expenses are charged to operations as incurred and are not allocated to contract costs.
Contract
Receivable
The Company
bills its customers in accordance with contractual agreements. The agreements generally require billing to be on a progressive basis as
work is completed. Credit is extended based on evaluation of clients’ financial condition and collateral is not required. The Company
maintains an allowance for doubtful accounts for estimated losses that may arise if any customer is unable to make required payments.
Management performs a quantitative and qualitative review of the receivables past due from customers on a monthly basis. The Company records
an allowance against uncollectible items for each customer after all reasonable means of collection have been exhausted, and the potential
for recovery is considered remote. The allowance for doubtful accounts was $0 and $0 as of September 30, 2022 and
December 31, 2021, respectively. The net contract receivable balance was $1,946,882 and $2,150,967 at September 30, 2022 and
December 31, 2021, respectively.
Prepaid
Expenses
The Company
records expenditures that have been paid in advance as prepaid expenses. The prepaid expenses are initially recorded as assets, because
they have future economic benefits, and are expensed at the time the benefits are realized. The prepaid expenses balance was $10,866 and
$13,111 at September 30, 2022 and December 31, 2021, 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 September 30, 2022 and determined there was
no impairment of indefinite lived intangibles and goodwill.
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 | |
|
|
Nine Months
Ended
9/30/2022 |
|
|
Year
Ended
12/31/21 |
|
Machinery and Equipment |
|
$ |
383,570 |
|
|
$ |
383,570 |
|
Computer Equipment |
|
|
66,491 |
|
|
|
62,854 |
|
Furniture |
|
|
29,810 |
|
|
|
29,810 |
|
Leasehold Improvements |
|
|
26,725 |
|
|
|
26,725 |
|
Vehicles |
|
|
64,277 |
|
|
|
64,277 |
|
Demo Units |
|
|
36,139 |
|
|
|
36,139 |
|
|
|
|
607,012 |
|
|
|
603,375 |
|
Less accumulated depreciation |
|
|
(421,428 |
) |
|
|
(389,984 |
) |
Net Property and Equipment |
|
$ |
185,584 |
|
|
$ |
213,391 |
|
Long-lived
assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In the event that the facts and circumstances indicate that the cost of any long-lived assets
may be impaired, an evaluation of recoverability would be performed following generally accepted accounting principles.
Depreciation
expense during the nine months ended September 30, 2022 and 2021, was $31,446 and $34,034, respectively.
Inventory
The Company
expenses inventory on a first in, first out basis, and had raw materials of $18,420 and $2,850 as of September 30, 2022 and
December 31, 2021, 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 September 30, 2022, the balances reported for cash, contract receivables, cost in excess
of billing, prepaid expenses, accounts payable, billing in excess of cost, and accrued expenses approximate the fair value because of
their short maturities.
We adopted
ASC Topic 820 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework
for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about
fair value measurements.
Fair value
is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in
measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
|
● |
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; |
|
|
|
|
● |
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and |
|
|
|
|
● |
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
The following
table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the
Company’s balance sheets on a recurring basis and their level within the fair value hierarchy as of September 30, 2022.
| |
Total | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
Investment at fair value-securities | |
$ | 45,209 | | |
$ | 45,209 | | |
$ | - | | |
$ | - | |
Total Assets measured at fair value | |
$ | 45,209 | | |
$ | 45,209 | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | |
| |
| Total | | |
| (Level 1) | | |
| (Level 2) | | |
| (Level 3) | |
Derivative Liability, convertible notes | |
$ | 34,083,579 | | |
$ | - | | |
$ | - | | |
$ | 34,083,579 | |
Derivative Liability, warrants | |
$ | 1,619,251 | | |
$ | - | | |
$ | - | | |
$ | 1,619,251 | |
Total liabilities measured at fair value | |
$ | 35,702,830 | | |
$ | - | | |
$ | - | | |
$ | 35,702,830 | |
The following
is a reconciliation of the derivative liability for which level 3 inputs were used in determining the approximate fair value:
Balance as of January 1, 2022 | |
$ | 6,526,129 | |
Fair value at issuance | |
| - | |
Loss on conversion of debt and change in derivative liability | |
| 27,557,450 | |
Balance as of September 30, 2022 | |
$ | 34,083,579 | |
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:
| |
| September 30,
2022 | |
Risk free interest rate | |
| 2.79% - 4.22 % | |
Stock volatility factor | |
| 20.0% - 185.0 % | |
Weighted average expected option life | |
| 6 months - 5 years | |
Expected dividend yield | |
| None | |
Segment
Reporting
The Company’s
business currently operates in one segment based upon the Company’s organizational structure and the way in which the operations
are managed and evaluated.
Marketable
Securities
The Company
adopted ASU 2016-01, “Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities.”
ASU 2016-01 requires investments (except those accounted for under the equity method of accounting, or those that result in consolidation
of the investee) to be measured at fair value with changes in fair value recognized in net income. It requires public business entities
to use the exit price notion when measuring the fair value of financial instruments for disclosure purpose, and separate presentation
of financial assets and financial liabilities by measurement category and form of financial asset. It eliminates the requirement for public
business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed
for financial instruments measured at amortized cost. The Company has evaluated the potential impact this standard may have on the condensed
consolidated financial statements and determined that it had a significant impact on the condensed consolidated financial statements.
The Company accounts for its investment in Water Technologies International, Inc. as available-for-sale securities, and the unrealized
gain on the available-for-sale securities is recognized in net income.
Licensing
agreement
The Company
analyzed the licensing agreement using ASU 606 to determine the timing of revenue recognition. The licensing of the intellectual property
(IP) is distinct from the non-license goods or services and has significant standalone functionality that provides a benefit or value.
The functionality will not change during the license period due to the licensor’s activities. Because the significant standalone
functionality is delivered immediately, the revenue is generally recognized when the license is delivered.
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.
Reclassification of Expenses and Income
Certain amounts in the 2021 financial statements
have been reclassified to conform to the presentation used in the 2022 financial statements. There was no material effect on the Company’s
previously issued financial statements.
Recently
Issued Accounting Pronouncements
Management
reviewed currently issued pronouncements and does not believe that any other recently issued, but not yet effective, accounting standards,
if currently adopted, would have a material effect on the accompanying condensed financial statements.
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 September 30, 2022, there were 1,000 shares of Series C preferred stock outstanding held by Mr. Eckelberry.
Series
D-1
On April
13, 2018, the Company designated 50,000,000 shares of its authorized preferred stock as Series D-1 preferred stock. The shares
of Series D-1 preferred stock are not entitled to dividends and do not have a liquidation preference. Each share of Series D-1 preferred
stock is convertible into 0.0005 of one share of common stock. The Series D-1 preferred stock may not be converted to common
stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of our outstanding common stock,
which amount may be increased to 9.99% at the holders discretion upon 61 days’ written notice. As of September 30, 2022, 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.
During the nine months ended September 30, 2022, the Company issued an aggregate of 76,865 shares of common stock upon conversion
of 1,537,213 shares of Series E preferred stock. The shares were issued and exchanged within the terms of the agreement and
no gain or loss was recognized. As of September 30, 2022, there were no 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. As of September 30, 2022, the Company had 60 outstanding shares of Series F preferred stock, which the Company was required
to, and failed to redeem on September 1, 2020, and remains in default for an aggregate redemption price (equal to the stated value) of
$60,000.
Series
G
On January
16, 2019, the Company designated 6,000 shares as Series G preferred stock, each share having a stated value of $1,000 per
share and holders of Series G preferred stock are entitled to cumulative dividends at the annual rate of 8% of the stated value,
payable quarterly. The Series G preferred stock does not have voting rights, except as required by law and is not convertible into common
stock. The Company may, in its sole discretion, at any time while the Series G preferred stock is outstanding, redeem all or any portion
of the outstanding Series G preferred stock at a price equal to the stated value plus any accrued but unpaid dividends. The Company was
required to redeem such shares of Series G preferred stock on April 30, 2021, at a price equal to the stated value plus any accrued but
unpaid dividends. Pursuant to certain subscription agreements entered into with purchasers of the Series G preferred stock, each purchaser
received shares of the Company’s common stock equal to an amount of, for each share of Series G preferred stock purchased, five
hundred dollars ($500) divided by the closing price on the date the Company receives the executed subscription documents and purchase
price from such investor. As of September 30, 2022, 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, and was and remains in default 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 nine months ended September 30, 2022, the Company exchanged
an aggregate of 210 shares of Series I preferred stock for 210 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 September 30, 2022, there were 25 shares
of Series I preferred stock issued and outstanding which the Company was required to, and failed to redeem by June 10, 2021, and was and
remains in default for an aggregate redemption price (equal to the stated value) of $25,000.
Series
J
On April
3, 2019, the Company designated 100,000 shares of preferred stock as Series J. The Series J has a stated value of $1,000 per
share and holders are entitled to receive dividends on an as-converted basis with the Company’s common stock. The Series J preferred
stock is convertible into shares of the Company’s common stock, on the terms and conditions set forth in the Series J COD, which
includes certain make-good shares for certain prior investors. During the nine months ended September 30, 2022, the Company issued an
aggregate of 512,737 shares of common stock upon conversion of 5 shares of Series J preferred stock, for a loss in
the amount of $5,203. As of September 30, 2022, there were 210 shares of Series J preferred stock issued and outstanding.
Series
K
On June
3, 2019, the Company designated 4,000 shares of preferred stock as Series K. The Series K has a stated value of $1,000 per
share. Series K holders are entitled to cumulative dividends at the annual rate of 8% of the stated value, payable quarterly within
60 days from the end of each fiscal quarter. The Series K is not entitled to any voting rights except as may be required by applicable
law, and is not convertible into common stock. The Company has the right to redeem the Series K at any time while the Series K are outstanding
at a price equal to the stated value plus any accrued but unpaid dividends. The Company 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 was required to redeem such shares of Series
K between August 5, 2021 and April 24, 2022, at a price equal to the stated value plus any accrued but unpaid dividends. The issuances
of the shares were accounted for under ASC 480-10-25-4, which requires liability treatment for certain mandatorily redeemable financial
instruments, and the cumulative dividends are recorded as interest expense. During the nine months ended September 30, 2022, the Company
exchanged an aggregate of 85 shares of Series K preferred stock for 85 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 September 30, 2022, there were 432 shares
of Series K preferred stock issued and outstanding which the Company was required to, and failed to redeem by April 24, 2022, and was
and remains in default for an aggregate redemption price (equal to the stated value) of $432,150.
Series
L
On June
3, 2019, the Company designated 100,000 shares of preferred stock as Series L. The Series L has a stated value of $1,000 per
share and holders are entitled to receive dividends on an as-converted basis with the Company’s common stock. The Series L preferred
stock is convertible into shares of the Company’s common stock, on the terms and conditions set forth in the Series L COD, which
includes certain make-good shares for certain prior investors. During the nine months ended September 30, 2022, the Company issued an
aggregate of 25,145,849 shares of common stock upon conversion of 284 shares of Series L preferred stock, for a loss
in the amount of $358,585. As of September 30, 2022, there were 321 shares of Series L preferred stock issued and outstanding.
Series
M
On July
1, 2020, the Company designated 800,000 shares of its preferred stock as Series M. Each share of Series M has a stated value
of $25. The Series M is not convertible into common stock. The holders of outstanding shares of Series M 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 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 have no pre-emptive or subscription rights, and there are no sinking fund
provisions applicable to the Series M. The Series M 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, redeem any or all of the then outstanding
shares of Series M at a redemption price of $37.50 per share (150% of the stated value) plus any accrued but unpaid dividends. As
of September 30, 2022, 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. The Series O 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 has a liquidation preference equal to the stated value plus any accrued but unpaid dividends, in preference to the common stock. The
Series O has no preemptive or subscription rights, and there is no sinking fund provision applicable to the Series O. The Series O does
not have voting rights except as required by law. The Series O is convertible into common stock of the Company in an amount determined
by dividing 200% of the stated value of the Series O 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 at any time while the Series O are outstanding at a redemption price equal to
the stated value plus any accrued but unpaid dividends. During the nine months ended September 30, 2022, the Company issued an aggregate
of 1,258,812 shares of common stock upon conversion of 25 shares of Series O preferred stock and issued an aggregate of 917,821 shares
of common stock in prorated 4% annualized dividends which were recorded as interest expense. The shares were issued within the terms
of the agreement and no gain or loss was recognized. As of September 30, 2022, there were 590 shares of Series O preferred stock
issued and outstanding.
Series
P
On April
27, 2020, the Company designated 500 shares of preferred stock as Series P. The Series P 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 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 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 entitles the holders
to a payment on an as-converted and pari passu basis with the common stock upon any liquidation. The Series P has no preemptive or subscription
rights, and there is no sinking fund or redemption provisions applicable to the Series P. The Series P votes on an as-converted basis
with the common stock, subject to the beneficial ownership limitation. During the nine months ended September 30, 2022, the Company issued
an aggregate of 3,527,317 shares of common stock upon conversion of 28 shares of Series P preferred stock, for a loss in the
amount of $70,592. As of September 30, 2022, there were 30 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. The Series Q 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 has a liquidation preference equal to the stated value plus any accrued
but unpaid dividends, in preference to the common stock. The Series Q has no preemptive or subscription rights, and there is no sinking
fund provision applicable to the Series Q. The Series Q does not have voting rights except as required by law. The Series Q is convertible
into common stock of the Company in an amount determined by dividing 200% of the stated value of the Series Q being converted by
the conversion price, provided that, the Series Q may not be converted into common stock to the extent such conversion would result in
the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99%
upon 61 days’ written notice). The conversion price will be equal to the average closing sale price of the common stock for the
five trading days prior to the conversion date. The Company has the right (but no obligation) to redeem the Series Q at any time while
the Series Q 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 nine months ended September 30, 2022, the Company issued an aggregate of 12,642,226
shares of common stock upon conversion of 100 shares of Series Q preferred stock and exchanged 200 shares of Series F preferred
stock for 200 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 September 30, 2022, there were 615 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 are also entitled to certain make-good shares;
provided that, the Series R may not be converted into common stock to the extent such conversion would result in the holder beneficially
owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’
written notice). The conversion price will be equal to the average closing sale price of the common stock for the five trading days prior
to the conversion date. The Company has the right (but no obligation) to redeem the Series R at any time while the Series R are outstanding
at a redemption price equal to, if paid in cash, the stated value plus any accrued but unpaid cash dividends, or, if paid in shares of
common stock, in an amount of shares determined by dividing the stated value being redeemed by the conversion price. The subscribers were
offered warrants with the purchase of Series R but all warrants expired as of September 30, 2022. During the nine months ended September
30, 2022, the Company issued an aggregate of 44,494,096 shares of common stock upon conversion of 604 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 September
30, 2022, there were 2,828 shares of Series R preferred stock issued and outstanding.
Series
S
On February
5, 2021, the Company designated 430 shares of preferred stock as Series S. The Series S has a stated value of $1,000 per
share, and entitles holders to receive cumulative dividends in cash at an annual rate of 12% of the stated value, payable quarterly
within 60 days from the end of such fiscal quarter. The Series S holders are not entitled to any voting rights except as may be required
by applicable law. The Series S is convertible into common stock of the Company in an amount determined by dividing 200% of the stated
value of the Series S being converted by the conversion price, provided that, the Series S may not be converted into common stock to the
extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock
(which may be increased up to 9.99% upon 61 days’ written notice). The conversion price 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 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. As of September 30, 2022, 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.
Based on that 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. During
the nine months ended September 30, 2022, the Company issued an aggregate of 83,105,450 shares of common stock upon conversion
of 612 shares of Series T preferred stock. As of September 30, 2022, there were 18 shares of Series T preferred stock
issued and outstanding.
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 are also 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 is 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
nine months ended September 30, 2022, the Company issued an aggregate of 30,629,247 shares of common stock upon conversion of 582 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 September
30, 2022, there were 485 shares of Series U preferred stock issued and outstanding, along with 5,965,000 Series A
warrants (with an exercise price of $0.10), 2,500,000 Series A1 warrants (with an exercise price of $0.10), 6,246,000 Series
B warrants (with an exercise price of $0.25), and 1,561,500 Series C warrants (with an exercise price of $1.00) issued and outstanding
with a fair value of $23,053 on the original issuance. The warrants were valued using the Black Scholes model (See Note 4).
Series
W
On April
28, 2021, the Company designated 3,390 shares of preferred stock as Series W. The Series W has a stated value of $1,000 per
share, and Series W holders are entitled to cumulative dividends in cash at an annual rate of 12% of the stated value, payable quarterly.
The Series W holders are not entitled to any voting rights except as may be required by applicable law. The Series W is convertible into
common stock of the Company in an amount determined by dividing 200% of the stated value of the Series W being converted by the conversion
price; provided that, the Series W may not be converted into common stock to the extent such conversion would result in the holder beneficially
owning more than 4.99% of the Company’s outstanding common stock. The conversion price 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 W at any time at a redemption price equal to the stated value plus any accrued but unpaid dividends. During the nine months
ended September 30, 2022, the Company issued 85 shares of Series W preferred stock in exchange for 85 shares of Series
K preferred stock, issued 210 shares of Series W preferred stock in exchange for 210 shares of Series I preferred
stock and issued an aggregate of 21,489,284 shares of common stock upon conversion of 245 shares of Series W preferred
stock. The shares were issued within the terms of the agreement and no gain or loss was recognized. As of September 30, 2022, there were 795 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 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 preferred stock for a purchase price of $250,000. Per the Series X COD, as of
March 31, 2022, $140,000 of the $250,000 was classified as restricted cash. On August 10, 2022, holder of Series X removed that
restriction. As of September 30, 2022, 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 up to 25% of annual net profits of newly established, wholly-owned, Water
On Demand subsidiaries, designated by each holder, paid within 3 months of subsidiary’s accounting year-end. The Series Y holders
are not entitled to any voting rights except as may be required by applicable law. The Series Y is convertible into common stock of the
Company pursuant to the Series Y COD, provided that, the Series Y may not be converted into common stock to the extent such conversion
would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased
up to 9.99% upon 61 days’ written notice). The Company has the right (but no obligation) to redeem the Series Y at any time
at a redemption price equal to, if paid in cash, the original issue price plus any accrued but unpaid distributions of 25% of the subsidiary’s
annual net profits. In addition, the Series Y holders are entitled to receive shares of Series A preferred stock in the Company’s
subsidiary Water On Demand, Inc. Between January 20, 2022 and January 25, 2022, the Company issued 4 shares of Series Y preferred
stock in exchange for 4 shares of Series V preferred stock for an aggregate value of $400,000, and issued an aggregate of 3,200,000 warrants
with a fair value of $93,915 upon original issuance to the Series Y investors. During the nine months ended September 30, 2022, the Company
issued an aggregate of 108,238,078 shares of common stock upon conversion of 15 shares of Series Y preferred stock. Per the Series Y
COD, $2,604,639 of the $5,209,277 aggregate received for Series Y was classified as restricted cash. As of September 30, 2022,
there were 37.1 shares of Series Y preferred stock along with 41,674,216 warrants with a fair value of $1,160,266
(with exercise prices between $0.13 and $0.25) issued and outstanding. The warrants were valued using the Black Scholes model (See Note
4).
Series
Z
On February
11, 2022, the Company designated 25 shares of preferred stock as Series Z. The Series Z has an original issue price of
$10,000 per share. The Series Z holders are not entitled to dividends or any voting rights except as may be required by applicable
law. The Series Z is convertible into common stock of the Company pursuant to the Series Z COD, provided that, the Series Z may not be
converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s
outstanding common stock (which amount may be increased up to 9.99% upon 61 days’ written notice). The Company has the
right (but no obligation) to redeem the Series Z at any time at a redemption price equal to the original issue price plus any accrued
but unpaid distributions of 25% of Subsidiary’s annual net profits. On February 18, 2022, the Company issued and sold to
an accredited investor an aggregate of 25 shares of Series Z preferred stock for a purchase price of $250,000 and
issued an aggregate of 2,500,000 warrants with a fair value of $69,823 (with an exercise price of $0.10) to Series Z holders.
As of September 30, 2022, there were 25 shares of Series Z preferred stock issued and outstanding.
As of September
30, 2022, the Company accrued aggregate dividends in the amount of $393,228 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, Series Y, and
Series Z preferred stock are accounted for outside of permanent equity due to the terms of conversion at a market component or stated
value of the preferred stock.
Common
Stock
Nine
months ended September 30, 2022
The Company
issued 39,900,514 shares of common stock for the settlement of convertible promissory notes in an aggregate principal amount
of $155,300, plus interest in the amount of $115,246, for a total aggregate of $270,546 based upon a conversion price of $0.00955.
The Company
issued 41,046,848 shares of common stock for services at fair value of $1,054,949, at share prices ranging from $0.0134 -
$0.0438.
The Company
issued 917,821 shares of common stock for Series O preferred stock dividends payable.
The Company
issued 179,090,390 shares of common stock for settlement of conversion agreements at a fair value of $18,065.
The Company
issued 331,043,096 shares of common stock upon conversion of 3,984,347 shares of preferred stock.
Nine
Months Ended September 30, 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, at a conversion price of $0.00955.
The Company
issued 24,656,117 shares of common stock for services at fair value of $1,931,222, at share prices ranging from $0.0351 -
$0.124.
The Company
issued 495,366 shares of common stock for preferred Series O stock dividends payable.
The Company
issued 119,049,835 shares of common stock upon conversion of 12,086 shares of preferred stock.
The Company
issued 1,000,000 shares of common stock upon exercise of 1,000,000 warrants at an exercise price of $0.05 and
received $50,000 from their exercise.
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.
4. | RESTRICTED
STOCK AND WARRANTS |
Restricted
Stock to CEO
Between
May 12, 2016, and January 1, 2022, the Company entered into Restricted Stock Grant Agreements (“the RSGAs”) with its Chief
Executive Officer, Riggs Eckelberry, to create management incentives to improve the economic performance of the Company and to increase
its value and stock price. All shares issuable under the RSGAs are performance based shares. The RSGAs provides for the issuance
of up to an aggregate of 242,109,214 shares of the Company’s common stock to Mr. Eckelberry provided certain milestones are met
in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles,
consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period as reported in the Company’s quarterly
or annual financial statements, the Company will issue up to an aggregate of 121,054,607 shares of its common stock; b) If the Company’s
consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation &
Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing
twelve month period as reported in the Company’s SEC Reports, the Company will issue up to an aggregate of 121,054,607 shares
of its common stock. The Company has not recognized any costs associated with the milestones, because achievement is not probable.
As the performance goals are achieved, the shares shall become eligible for vesting and issuance.
Restricted
Stock to the Board, Employees and Consultants
Between
May 12, 2016, and August 4, 2022, the Company entered into Restricted Stock Grant Agreements (“the BEC RSGAs”) with its members
of the Board, employees, and consultants to create management incentives to improve the economic performance of the Company and to increase
its value and stock price. All shares issuable under the BEC RSGAs are performance based shares. The BEC RSGAs provide for the issuance of
up to 296,678,542 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 148,339,271 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 148,339,271 shares
of its common stock. The Company has not recognized any costs associated with the milestones, because achievement is not probable. As
the performance goals are achieved, the shares shall become eligible for vesting and issuance.
On August
14, 2019, the Board of Directors approved an amendment to the RSGAs and BEC RSGAs to include an alternative vesting schedule for the Grantees
and on January 26, 2022, the Company amended the procedures for processing the RSGAs and BEC RSGAs. Once a Grantee is eligible to participate
in alternate vesting, then they will be added to the list of alternate vestees, enlarging the pool of vestees among which, 10% of
stock sales that are allowed under the agreement is divided for the next year. The Company then (i) calculates the value of the Company
common stock traded in the year immediately prior to the vesting year, using daily adjusted close and volume, as quoted on the public
securities trading market on which the Company’s common stock is then traded (ii) determines the cost basis of the shares, which
shall be the closing price quoted on the public securities trading market, quoted on the first trading day of the vesting year which will
be the grantee’s cost basis, and (iii) applies the 10% calculation and divides it into the number of qualifying alternate vestees,
giving the gross number of shares available to each Grantee. For each alternate vestee for each year in which there occurs a vesting or
a potential vesting, the Company (i) does a 90-day lookback from the first day of the latest vesting month, to limit cumulative vesting
of shares for each alternate vestee for the 90-day period to 1% of total Company shares of common stock outstanding for the period, using
the then current figure for shares outstanding at the time of the lookback; (ii) places the excess shares (the “Overlimit Shares”)
in suspense for issuance in the next 90-day period so that in each future 90-day period they may be issued, and (iii) if on the 90-day
lookback, cumulative issuances are less than 1% of shares outstanding, the Company will add the shares from previous 90-day lookback,
if any. For the avoidance of doubt, the Company will not record any Overlimit Shares as vested until such as time as they have been finally
issued. If the fair market value of the Company’s common stock on the date the shares are vested is less than the fair market
value of the Company’s common stock on the effective date of the RSGA or BEC RSGA, then the number of vested shares issuable (assuming
all conditions are satisfied) shall be increased so that the aggregate fair market value of vested shares issuable on the vesting date
equals the aggregate fair market value that such number of shares would have had on the effective date. Upon the occurrence of a Company
performance goal, the right to participate in the alternate vesting schedule will terminate, and the vesting of the remaining unvested
shares will be as set forth under the restricted stock award agreement.
During the
nine months ended September 30, 2022, upon qualifying under the alternative vesting schedule, the Company issued an aggregate of 632,327
shares relating to the RSGAs and an aggregate of 390,865 shares relating to the BEC RSGAs.
Warrants
During the
nine months ended September 30, 2022, the Company granted 40,414,216 common stock purchase warrants, associated with the issuance
of preferred stock. A summary of the Company’s warrant activity and related information follows for the nine months ended September
30, 2022:
| |
September 30, 2022 | |
| |
Number of Warrants | | |
Weighted average exercise price | |
Outstanding - beginning of period | |
| 217,085,783 | | |
$ | 0.0868 | |
Granted | |
| 40,414,216 | | |
$ | 0.1234 | |
Exercised | |
| - | | |
| - | |
Expired/Exchanged | |
| (162,526,010 | ) | |
$ | 0.0723 | |
Outstanding - end of period | |
| 94,973,989 | | |
$ | 0.1201 | |
At
September 30, 2022, the weighted average remaining contractual life of warrants outstanding:
|
|
|
September 30, 2022 |
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
Exercisable |
|
|
Warrants |
|
|
Warrants |
|
|
Contractual |
|
Prices |
|
|
Outstanding |
|
|
Exercisable |
|
|
Life (years) |
|
$ |
0.02 |
|
|
|
600,000 |
|
|
|
600,000 |
|
|
|
3.92 |
|
$ |
0.05 |
|
|
|
25,200,000 |
|
|
|
25,200,000 |
|
|
|
0.42 |
|
$ |
0.10 |
|
|
|
10,965,000 |
|
|
|
10,965,000 |
|
|
|
0.21- 4.39 |
|
$ |
0.25 |
|
|
|
10,006,000 |
|
|
|
10,006,000 |
|
|
|
1.25 - 4.50 |
|
$ |
0.0275 |
|
|
|
8,727,273 |
|
|
|
8,727,273 |
|
|
|
8.66 |
|
$ |
0.125 |
|
|
|
37,914,216 |
|
|
|
37,914,216 |
|
|
|
4.22 - 4.99 |
|
$ |
1.00 |
|
|
|
1,561,500 |
|
|
|
1,561,500 |
|
|
|
1.75 - 2.21 |
|
|
|
|
|
|
94,973,989 |
|
|
|
94,973,989 |
|
|
|
|
|
At
September 30, 2022, the aggregate intrinsic value of the warrants outstanding was $0.
5. |
CONVERTIBLE PROMISSORY NOTES |
As of September
30, 2022, the outstanding convertible promissory notes are summarized as follows:
Convertible Promissory Notes | |
$ | 2,926,755 | |
Less current portion | |
| 878,283 | |
Total long-term liabilities | |
$ | 2,048,472 | |
Maturities
of long-term debt for the next three years are as follows:
Year Ending September 30, | |
Amount | |
2023 | |
| 878,283 | |
2024 | |
| 2,034,700 | |
2025 | |
| 13,772 | |
| |
$ | 2,926,755 | |
On various
dates from November 2014 through April 2015, the Company issued unsecured convertible promissory notes (the “2014-2015 Notes”),
that matured on various dates and were extended for an additional sixty (60) months from the effective date of each Note. The 2014-2015
Notes bear interest at 10% per year. The maturity dates were extended to November 2023 through April 2024. The 2014-2015 Notes may be
converted into shares of the Company’s common stock at conversion prices ranging from the lesser of $4,200 to $9,800 (subject to
adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the lowest trade price on any trade day
following issuance of the 2014-2015 Notes. In addition, for as long as the 2014-2015 Notes or other convertible notes in effect between
the purchaser and the Company are outstanding, if the Company issues any security with terms more favorable than the terms of the 2014-2015
Notes or such other convertible notes or a term was not similarly provided to the purchaser of the 2014-2015 Notes or such other convertible
notes, then such more favorable or additional term shall, at the purchaser’s option, become part of the 2014-2015 Notes and such
other convertible notes. The conversion feature of the 2014-2015 Notes was considered a derivative in accordance with current accounting
guidelines because of the reset conversion features of the 2014-2015 Notes. During the nine months ended September 30, 2022, the Company
issued 39,900,514 shares of common stock, upon conversion of $153,300 in principal, plus accrued interest of $115,247.
As of September 30, 2022, the 2014-2015 Notes had an aggregate remaining balance of $774,700, 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 June 30, 2023. The OID Notes were convertible into shares of the Company’s common stock at a conversion
price initially of $30,620. After the amendment, the conversion price changed to the lesser of $5,600 per share, or b) fifty percent
(50%) of the lowest trade price of common stock recorded since the original effective date of this note, or c) the lowest effective price
per share granted to any person or entity after the effective date. The conversion feature of the OID Notes was considered a derivative
in accordance with current accounting guidelines, because of the reset conversion features of the OID Notes. As of September 30, 2022,
the remaining balance on the OID Notes was $62,275, which is long term.
The Company
issued various, unsecured convertible promissory notes (the “2015 Notes”), on various dates with the last of the 2015 Notes
being issued in August 2015. The 2015 Notes matured and were extended from the date of each tranche through maturity dates ending on February
2024 through March 2024, and April 2024 through August 2024. The 2015 Notes bear interest at 10% per year. The 2015 Notes are
convertible into shares of the Company’s common stock at conversion prices ranging from the lesser of $1,400 to $5,600 (subject
to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the lowest trade price on any trade
day following issuance of the 2015 Notes. The conversion feature of the 2015 Notes was considered a derivative in accordance with
current accounting guidelines because of the reset conversion features of the 2015 Notes. As of September 30, 2022, the 2015 Notes had
an aggregate remaining balance of $1,200,000, of which $1,200,000 is long term.
The Company
issued a convertible note (the “Dec 2015 Note”) in exchange for accounts payable in the amount of $432,048, which could be
converted into shares of the Company’s common stock after December 31, 2015. The Dec 2015 Note was accounted for under ASC 470,
whereby, a beneficial conversion feature was recorded at time of issuance. The Dec 2015 Note did not meet the criteria of a derivative,
and was accounted for as a beneficial conversion feature, which was amortized over the life of the Dec 2015 Note and recognized as interest
expense in the financial statements. On January 1, 2016, the Dec 2015 Note met the criteria of a derivative and was accounted for under
ASC 815. The Dec 2015 Note has zero stated interest rate, and the conversion price shall be equal to 75% of the average three lowest
last sale prices traded during the 25 trading days immediately prior to conversion. As of September 30, 2022, 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 September 30, 2022, 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 September 30,
2022, the remaining balance on the May 2018 Note was $218,064, which is short term.
The Company
entered into an unsecured convertible promissory note (the “Nov 20 Note”), on November 19, 2020 in the amount of $50,000.
The Company received funds in the amount of $50,000. The Nov 20 Note had an original maturity date of November 19, 2021 and was extended
for an additional sixty (60) months from the maturity date. The Nov 20 Note bears interest at 10% per year. The Nov 20 Note
may be converted into shares of the Company’s common stock at a lesser price of $0.05 per share or (b) fifty percent (50%) of the
lowest trade price of common stock recorded on any trade after the effective date, or (c) the lowest effective price per share granted. In
addition, for each conversion, in event that shares are not delivered by the fourth business day (inclusive of the day of conversion),
a penalty of $2,000 per day shall be assessed for each day after the third business day until the shares are delivered. The conversion
feature of the Nov 20 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion
features of the Note. As of September 30, 2022, the remaining balance on the Nov 20 Note was $13,772, which is long term.
The Company
entered into an unsecured convertible promissory note (the “Jan 21 Note”), on January 25, 2021 in the amount of $60,000. The
Company received funds in the amount of $60,000. The Jan 21 Note had an original maturity date of January 25, 2022 and was extended
for an additional sixty (60) months from the maturity date. The Jan 21 Note bears interest at 10% per year. The Jan 21 Note may be converted
into shares of the Company’s common stock at a conversion price equal to the lower of (a) $0.05 per share, (b) fifty percent (50%)
of the lowest trade price of common stock recorded on any trade after the effective date, or (c) the lowest effective price per share
granted. In addition, for each conversion, in event that shares are not delivered by the fourth business day (inclusive of the day
of conversion), a penalty of $2,000 per day shall be assessed for each day after the third business day until the shares are delivered. The
conversion feature of the Jan 25 Note was considered a derivative in accordance with current accounting guidelines because of the reset
conversion features of the Note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount
of $3,743 during the nine months ended September 30, 2022. As of September 30, 2022, the balance of the Jan 21 Note was $60,000,
which is long 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 September 30, 2022 was $35,702,830.
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 September 30, 2022 and 2021.
| |
Nine Months Ended | |
| |
September 30, | |
| |
2022 | | |
2021 | |
Equipment Contracts | |
$ | 5,829,960 | | |
$ | 1,662,869 | |
Component Sales | |
| 1,390,243 | | |
| 841,203 | |
Waste Water Treatment Systems | |
| 325,005 | | |
| 57,729 | |
Pump Stations | |
| 179,005 | | |
| 182,591 | |
Rental Income | |
| 19,719 | | |
| 21,260 | |
Services Sales | |
| 24,201 | | |
| 82,635 | |
| |
$ | 7,768,133 | | |
$ | 2,848,287 | |
Revenue
recognition for other sales arrangements, such as sales for components, and service sales will remain materially consistent.
Contract
assets represents revenues recognized in excess of amounts billed on contracts in progress. Contract liabilities represents billings in
excess of revenues recognized on contracts in progress. Assets and liabilities related to long-term contracts are included in current
assets and current liabilities in the accompanying balance sheets, as they will be liquidated in the normal course of the contract completion.
The contract asset for the nine months ended September 30, 2022 and the year ended December 31, 2021, was $1,455,464 and $378,932,
respectively. The contract liability for the nine months ended September 30, 2022, and the year ended December 31, 2021, was $692,570 and
$1,886,946, respectively.
Fair
value investment in Securities
On November
12, 2021, the Company served a conversion notice to WTII and recorded additional interest and fees of $15,988 through that date,
according to the terms of the securities purchase agreement for an aggregate of $149,867. The Note was converted into 45,208,649 shares
of WTII common stock. As of September 30, 2022, the investment in securities was recorded at fair value in the amount of $45,209, with
an unrealized loss of $153,709.
On May 15,
2018, the Company received 4,000 shares of Water Technologies International, Inc. (“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 September 30, 2022, the fair value of the preferred shares was $6,000.
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. During the period
ended September 30, 2022, the Company received $25,000 as a settlement and wrote off $50,000 of secured loans payable. The net
balance as of September 30, 2022 was $30,646.
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 September 30, 2022, there
remain a current balance of $1,169.
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.
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 by $116,000 leaving a fair
value of $514,000.
12. | COMMITMENTS
AND CONTINGENCIES |
Facility Rental – Related
Party
Our Dallas
based subsidiary, PWT, rents an approximately 12,000 square foot facility located at 2535 E. University Drive, McKinney, TX 75069,
with a current monthly rent of $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 nine months ended
September 30, 2022.
Litigation
There are no material
updates to the litigation matters with C6 Capital, LLC nor Auctus Fund, LLC as previously disclosed in the Form 10-Q filed on August 15,
2022.
Management
has evaluated subsequent events according to the requirements of ASC TOPIC 855 and has determined that there are the following subsequent
events:
Between October 7, 2022
and October 28, 2022, the Company entered into subscription agreements with certain accredited investors pursuant to which the Company
sold an aggregate of 1.8 shares of the Company’s Series Y preferred stock for an aggregate purchase price of $177,000. The Company
also issued an aggregate of 1,416,000 warrants to these investors.
Between October 18, 2022 and November 2, 2022,
the Company issued to consultants an aggregate of 7,067,670 shares of the Company’s common stock for services.
On October 19, 2022, OriginClear, Inc. (the “Company”)
entered into an Equity Financing Agreement (“Financing Agreement”) with GHS Investments, LLC (“GHS”), whereby
GHS agreed to purchase, through puts made from time to time by the Company, up to $25,000,000 worth of the shares (“Shares”)
of the Company’s common stock, par value $0.0001 per share. In accordance with the terms of the Financing Agreement and the Registration
Rights Agreement dated October 20, 2022 between the Company and GHS (“Registration Agreement”), the Company is required to
register the Shares on Form S-1 with the Securities and Exchange Commission (“SEC”) as a condition precedent to GHS’s
obligation to close on the purchase of the Shares.
On October 20, 2022, holders of the Company’s
Series Y preferred stock converted an aggregate of 3 Series Y shares into an aggregate of 20,204,082 shares,
including make-good shares, of the Company’s common stock.
On October 25, 2022, holders of the Company’s
Series U preferred stock converted an aggregate of 100 Series U shares into an aggregate of 5,868,545 shares of the Company’s common
stock.
On November 3, 2022, holders of the Company’s
Series T preferred stock converted an aggregate of 18 Series T shares into an aggregate of 3,176,471 shares of the Company’s common
stock.