This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:





  ? business strategy;




  ? financial strategy;




  ? intellectual property;




  ? production;




  ? future operating results; and




       ?   plans, objectives, expectations, and intentions contained in this
           report that are not historical.



All statements, other than statements of historical fact included in this report, regarding our strategy, intellectual property, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words "could," "believe," "anticipate," "intend," "estimate," "expect," "project" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. These statements may be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as in this report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.





Organizational History



OriginClear, Inc. ("we", "us", "our", the "Company" or "OriginClear") was incorporated on June 1, 2007 under the laws of the State of Nevada. We have been engaged in business operations since June 2007. In 2015, we moved into the commercialization phase of our business plan having previously been primarily involved in research, development and licensing activities. Our principal offices are located at 13575 58th Street North, Suite 200, Clearwater, FL 33760. Our main telephone number is (727) 440-4603. Our website address is www.OriginClear.com. The information contained on, connected to or that can be accessed via our website is not part of this report.





Overview of Business


OriginClear is a water technology company which has developed in-depth capabilities over its 14-year lifespan. Those technology capabilities have now been organized under the umbrella of OriginClear Tech Group™ (www.originclear.tech).





These capabilities include:



       -   The Intellectual Property of Daniel M. Early, consisting of five
           patents and related knowhow and trade secrets, which are intended to
           take the place of the applications for the company's original
           technology developments.




       -   Progressive Water Treatment Inc. ("PWT") a wholly-owned subsidiary
           based in Dallas, Texas which is responsible for the bulk of the
           company's revenue, specializing in Engineered Solutions (custom
           treatment systems).




       -   Modular Water Systems ("MWS"), a division based at PWT, which
           implements the Daniel M. Early Intellectual Property.




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Water on Demand™: a new strategic direction.

OriginClear is developing a new business, which is outsourced water treatment, intending to offer private businesses the ability to pay for their water treatment and purification services on a pay-per-gallon basis. In the water industry, 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.

At this time, the Company does not have the ability to carry out at scale the Operation & Maintenance (O&M) activities which are required to fulfill the service obligations of DBOO contracts. Our current plan is to pursue a first DBOO contract as a use case, and thereafter either develop, contract or acquire the O&M capability. The Company is currently in discussions with prospective clients for this test DBOO contract. However, no commitments have been made, and the talks may not succeed. The outsourcing program known as Water On Demand requires both funding for WOD #1, and such a first client, to launch commercially.

On 29th October 2021, the Company received initial funding for WOD #1 and began talks with a prospective client for a pilot DBOO project.

Reducing Risk through Outsourcing

Inflation of water rates greatly exceeds core inflation (see Figure 2), creating a risk for managers of businesses served by municipalities. We believe this creates an incentive for self-treatment; but these businesses may lack the capital for large water plant expenditures, and the in-house expertise to manage them. Outsourcing through what we call Water on Demand™ means that these companies do not have to worry about the problem, either financing it or managing it.

As an example, in Information Technology, few companies operate their own server in-house powering their website. Rather, such servers are typically managed by professionals through a service level agreement. In the water industry, when applied to outsourced water treatment, a service level agreement is known as O&M agreement. When the vendor retains ownership of the equipment, the concept is expanded to "Own and Operate", an extension of the basic "Design and Build", for a full offering known as DBOO, which is very similar to the solar energy programs known as Power Purchase Agreements (PPAs).

Under such a plan, a business can outsource its wastewater treatment by simply signing on the dotted line; instantly avoiding most capital expense, and the trouble of managing something that is a distraction from their core business.

We believe this is financially and operationally attractive to industrial, agricultural and commercial water users, while OriginClear's Water On Demand program can potentially drive speeded-up deals and more revenue streams from providing water treatment as a service.

The scale of these systems is relatively small: a recent analysis showed that the 74 quotes that Modular Water Systems™ has at various stages of negotiation for 2021 average only $232,246 each. But capital is scarce for such private systems, and therefore we believe a fully outsourced solution is attractive to these businesses.

Based on its analysis, the Company believes that half of its prospective clients for Modular Water Systems would approve its quotes if they could pay for their water as a monthly bill and not a capital expense.





                                       29




The Decentralization Megatrend





                               [[Image Removed]]


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).





                               [[Image Removed]]



                                    Figure 2



                                       30




Small, modular systems as sold by our Modular Water Systems division meet the needs of this new segment. Indeed, an estimated two-thirds of the Modular Water Systems bidding backlog consists of such private (vs. municipal) customers.

Another benefit to pursuing private customers is that the private sector is relatively less regulated than the public sector.

A Company internal analysis has shown that as many as two-thirds of these prospective private customers (in other words, half of the overall backlog) could be candidates for outsourced water treatment which they would pay for by the gallon purified or treated, instead of paying for the capital expense up front. In other words, the Company believes such financing has the potential to increase the Company's revenues substantially, with additional service fees potentially improving profits.

This is known in the water industry as Design/Build/Own/Operate ("DBOO"), or colloquially as water equipment as a service. The Company is working to develop its own DBOO capabilities under the branding Water on Demand™ (https://www.originclear.com/water-on-demand).

The bulk of such sales opportunities are in the small size systems, averaging $250,000 and larger. We believe that our ability to deliver modular systems gives us a competitive advantage over larger water companies that we believe have difficulty scaling down into these smaller DBOO projects.

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 repossession in the event the client fails to pay their monthly bill. We believe this is a key competitive advantage.

Implementation of Water On Demand

We have taken initial steps in this new direction.

On March 17, 2021, OriginClear incorporated Water On Demand #1 Inc. ("WOD#1") in Nevada to offer private businesses the ability to pay for their water treatment and purification services on a pay-per-gallon basis.

The Company is now actively evaluating potential clients for a test of water treatment and purification services on a pay-per-gallon basis, but a first agreement has not been reached.

On November 1, 2021, the Company received initial funding for WOD #1 and began talks with a prospective client for a pilot DBOO project.





$H2O™


On May 10, 2021, OriginClear filed "System And Method For Water Treatment Incentive", a patent application for using blockchain technology and non-fungible tokens (NFT) to simplify the distribution of payments on outsourced water treatment and purification services billed on a pay-per-gallon basis ahead of inflation, or Water On Demand.

On May 16, 2021, the Company applied for a registered trademark for the mark $H2O (also referred to as H2O) as the blockchain system representing this activity. The current filing basis is "Intent-to-use basis" (under Trademark Act Section 1(b)).

On June 10, 2021, the Company named Ricardo Fabiani Garcia, key OriginClear investor and a veteran technologist, to the Company's Board of Advisors. Garcia will advise the management team as it sets up the roadmap and chooses the resources for the $H2O project.





                                       31




The basic intended use of the blockchain system is to streamline payments and eliminate human error. In this respect we believe it is very similar to J.P. Morgan's JPM Coin:

"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).

Like JPM Coin, we plan to streamline the delivery of payment contracts that, in our case, could last for decades.

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.

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.





Future Potential of H2O


We believe $H2O could be a way to package continuous contractual profit-share income for that investor or stakeholder's share of the life of the water equipment, adjusted for inflation. To allow the holder to transfer or "swap" it anytime and ultimately, OriginClear could accept $H2O for the funding of new Water On Demand projects, with the potential for subsidized Impact Investment.

All these scenarios are highly speculative, and none may come about. In addition, there may be regulatory restrictions on the issuance and transfer of $H2O.

Prior to the commercialization of $H2O, we would need to fully address all regulatory requirements, and as covered above, this may not be possible; in which case we would use ordinary financial systems for payments to investments and stakeholders.

Water On Demand outsourced water treatment does not rely on any blockchain system for its operation, and can accomplish its operational goals using ordinary financial and currency channels.





ClearAqua™


OriginClear is currently exploring a utility coin, or token, named ClearAqua, The Water Coin For The World™, which would implement a grassroots network for alerts, leading to actionable proposals for water projects. There is no assurance this token will be issued or if issued, will be successful. ClearAqua is not required for OriginClear's core business.

We 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".

On September 21, 2021, the Company announced it engaged San Diego-based Baja Technologies Inc. ("Baja") to develop and help launch ClearAqua. The first step in the process is the white paper, which has been drafted and is currently being evaluated by counsel for regulatory compliance.

OriginClear Tech Group

As stated above, all of our technology and operations activities have been centralized under OriginClear Tech Group ("OTG"), enabling a total focus at the corporate level on the Water On Demand strategy.





                                       32




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. We are building a network of customer-facing water brands to expand our
     global market presence and our technical expertise. These include the
     wholly-owned subsidiary, Progressive Water Treatment, and the Modular Water
     Systems brand.


  2. We manage relationships with partners worldwide who are licensees and
     business partners.


  3. OTG is actively working on the ability to deliver O&M capability at scale, to
     support Water On Demand outsourced treatment and purification programs, and
     is evaluating a pilot program to achieve this. OTG intends to support the
     development of the $H2O blockchain system, which may replace WaterChain
     altogether. In 2020, the Company also completed a pilot program with a rental
     program of a product known as Pool Preserver™, and developed a
     career-building program for entrepreneurs termed Waterpreneurs™. Water As A
     Career remains a pilot program and the Company does not plan to expand it at
     this time.



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.





Potential Acquisitions


Outsourcing is a fast-growing reality in water treatment. Tougher regulations, water scarcities and general outsourcing trends are driving industrial and agricultural water treatment users to delegate their water problem to service providers. As Global Water Intelligence pointed out in their report on October 30, 2015, "Water is often perceived as a secondary importance, with end-users increasingly wanting to focus solely on their own core business. This is driving a move away from internal water personnel towards external service experts to take control of water aspects." External service experts are typically small-privately owned and locally operated. Consolidating these companies, and creating new players where appropriate, could lead to enormous economies of scale through sharing of best practices, technologies, and customers.

OTG seeks to incubate or acquire businesses that help industrial water users treat their water themselves, and often reuse it. We believe that assembling a group of such water treatment and water management businesses is potentially an opportunity for significant growth and increased Company value for the stockholders.

We are particularly interested in companies which successfully execute on Design-Build-Own-Operate or DBOO.

The Company cautions that suitable acquisition candidates may not be identified and even if identified, the Company may not have adequate capital to complete the acquisition and/or definitive agreement may not be reached. Internally-incubated businesses, similarly, may not become commercial successes.

To support the new DBOO and acquisition goals, on June 15, 2021, the Company named Prasad Tare as the Company's Chief Financial Officer.

Prasad brings over 15 years of experience in public accounting, financial reporting, risk and internal controls advisory services. His skillset includes Company-wide risk assessments to improve focus to critical areas as well as more efficient and effective audit activities.





OTG 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 is titled Chief Engineer of OriginClear.





                                       33




Progressive Water Treatment Inc.

On October 1, 2015, the Company completed its acquisition of Dallas-based Progressive Water Treatment Inc. ("PWT"), a designer, builder and service provider for a wide range of industrial water treatment applications.

With the PWT and future potential acquisitions, the creation of the Modular Water Systems division as an integral part of PWT, and integrating its proprietary technology, OTG 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, not partial solution.

To help address customer needs, 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. The Company 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, OriginClear published a case study showing how its Modular Water System may help automotive dealership 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, OriginClear 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, OriginClear 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, a large US power utility signed a Master Services Agreement (MSA) with our subsidiary, Progressive Water Treatment (PWT), for water filtration systems that will provide process water at three power plants. The utility has now issued a purchase order for about $1.8 million, for the first power plant. The total purchase price payable to PWT under the MSA is about $5 million, subject to certain conditions, including receipt and acceptance by PWT of additional purchase orders. There is no assurance as to whether, or when, PWT will receive $5 million under the PWT. We expect the overall contract to take up to two years to deliver. We believe this contract reflects the excellent reputation enjoyed by PWT over 25 years for versatility in water engineering. For PWT, this contract represents a return to large power plant contracts.

In the first nine months of 2021, PWT received $9,188,252 in firm orders. This contrasts with $3,506,020 received in firm orders by PWT for the entirety of 2020. Orders are only an indication of future revenue.





                                       34





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 division and along with the intellectual property which the Company licensed exclusively worldwide for three years, brought a following of prospective customers. 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 that have to clean their own wastewater. It uses Structurally Reinforced Thermoplastic ("SRTP") materials to focus on patented developing water and wastewater collection, conveyance, and treatment systems that have high performance and sustainability. Typical customers may include schools, small communities, institutional facilities, real estate developments, factories, and industrial parks. Dan Early has pioneered the use of heavy reinforced plastic materials to create modular "water-systems-in-a-box". Not only is reinforced thermoplastic faster and cheaper to build, but it can have three times the lifespan, or more, compared with concrete-and-steel construction. Mr. Early's inventions have led to the patented Wastewater System & Method and four other patents, which OriginClear has licensed exclusively for the world.

Dan Early has been designing and building prepackaged pump stations and municipal wastewater treatment systems for over five years, with a career background of more than two decades of water engineering experience.

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.

Today, MWS is fully integrated with PWT in Texas.

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.





                                       35





                                [[Image Removed]]


In the first nine months of 2021, MWS received $1,154,950 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.





Patents


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. All royalties surviving the 2018 license were settled.

We may contract with distribution channels (equipment distributors, oil service companies, water treatment companies, system integrators and engineering companies) of our choice to act on our behalf for the purpose of selling and integrating the Early IP.





The Early IP consists of combined protection on the materials and configurations
of complete packaged water treatment systems, built into containers. The parents
consist of the following:



                                                                         Date
                                                                        Patent    Expiration
 #             Description                       Patent No.             Issued       Date
1    Wastewater System & Method         US 8,372,274 B2                02/12/13    07/16/31
                                        Applications: WIPO, Mexico
2    Steel Reinforced HDPE Rainwater    US 8,561,633 B2                10/22/13    05/16/32
     Harvesting
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    US 9,217,244 B2                12/22/15    10/20/31
     Pump Station CIP




                                       36




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 (SRTP or Structural Reinforced ThermoPlastic), for the containers that is:





       ?   more durable: an estimated 75 to 100-year life cycle as opposed to a
           few decades for metal, or 40 to 50 years maximum for concrete;

       ?   easier to manufacture: vessels manufacturing process can be automated;
           and

       ?   recyclable and can be made out of biomaterials



In addition, patents US 8,372,274 and US 8,871,089 (1 and 3) relate to the use of vessels or containers made out of this material combined with a configuration of functional modules, or process, for general water treatment.

Other subsequent patents, while keeping the original claims and therefore making them stronger, 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.

Critical Accounting Policies

The Securities and Exchange Commission ("SEC") defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition.





Revenue Recognition


We recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.

Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss, as it is determined. Revisions in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts for the revisions become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions to costs and income, which are recognized in the period the revisions are determined.





                                       37





Use of Estimates


The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company's goodwill, impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, inventory valuation, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Fair Value of Financial Instruments

Fair value of financial instruments requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As September 30, 2021, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.

Results of Operations for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.





Revenue and Cost of Sales


For the three months ended September 30, 2021, we had revenue of $1,120,687 compared to $917,320 for the three months ended September 30, 2020. Cost of sales for the three months ended September 30, 2021, was $790,336 compared to $934,708 for the three months ended September 30, 2020. Revenue increased primarily due to increase in sales orders for both PWT and MWS business lines.

Our gross profit (loss) was $330,351 and $(17,388) for the three months ended September 30, 2021, and 2020, respectively.

Selling and Marketing Expenses

For the three months ended September 30, 2021, we had selling and marketing expenses of $636,481 compared to $339,759 for the three months ended September 30, 2020. The increase in selling and marketing expenses was primarily due to an increase in non-cash marketing and investor relations shares for services expense.

General and Administrative Expenses

For the three months ended September 30, 2021, we had general and administrative expenses of $1,006,041 compared to $782,810 for the three months ended September 30, 2020. The increase in general and administrative expenses was primarily due to an increase in professional and legal fees including non-cash, shares for services expense and outside services.





Research and Development Cost


For the three months ended September 30, 2021, our research and development cost was $0 compared to $29,334 for the three months ended September 30, 2020. The decrease in research and development costs was primarily due to decrease in salary expense.





                                       38





Other Income and (Expenses)



Other income and (expenses) increased by $13,518,301 to $19,720,189 for the three months ended September 30, 2021, compared to $6,201,888 for the three months ended September 30, 2020. The increase was due primarily to an increase in gain on non-cash accounts associated with the change in fair value of the derivatives in the amount of $13,388,849, increase in other income by $352,437, which includes SBA loans and a grant forgiven in the amount of $355,000, an increase in gain on write off of accounts payables in the amount of $151,000, an increase in interest expense of $81,537, an increase in impairment of asset held for sale in the amount of $116,000, an increase in loss on conversion of preferred stock in the amount of $164,448 and an increase in unrealized loss on investment securities in the amount of $12,000.





Net Income/(Loss)


Our net income increased by $13,378,949 to $18,397,115 for the three months ended September 30, 2021, compared to net income of $5,018,166 for the three months ended September 30, 2020. The majority of the increase in net income was due primarily to an increase in other income associated with the gain on net change in fair value of derivative instruments estimated each period. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price, volatility, variable conversion prices based on market prices defined in the respective agreements and probabilities of certain outcomes based on managements' estimates. These inputs are subject to significant changes from period to period, therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.

Results of Operations for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.





Revenue and Cost of Sales


For the nine months ended September 30, 2021, we had revenue of $2,848,287 compared to $3,064,758 for the nine months ended September 30, 2020. The cost of sales for the nine months ended September 30, 2021, was $2,237,282 compared to $2,716,582 for the nine months ended September 30, 2020. Revenue and cost of sales decreased primarily due to our subsidiary's decrease in revenue, due to the impact of the Covid-19 pandemic.

Our gross profit was $611,005 and $348,176 for the nine months ended September 30, 2021, and 2020, respectively.

Selling and Marketing Expenses

For the nine months ended September 30, 2021, we had selling and marketing expenses of $2,201,045, compared to $1,053,559 for the nine months ended September 30, 2020. The increase in selling and marketing expenses was primarily due to an increase in non-cash marketing and investor relations shares for services expense.

General and Administrative Expenses

General and administrative expenses were $2,785,713 for the nine months ended September 30, 2021, compared to $1,853,760 for the nine months ended September 30, 2020. The increase in general and administrative expenses was primarily due to an increase in professional and legal fees, including an increase in non-cash shares issued for services.

Research and Development Cost

Research and development cost for the nine months ended September 30, 2021, and 2020, were $0 and $83,400, respectively. The decrease in research and development costs was primarily due to decrease in salary expense.





                                       39





Other Income and (Expenses)


Other income and (expenses) increased by $(28,980,942) to $(5,954,176) for the nine months ended September 30, 2021, compared to $23,026,766 for the nine months ended September 30, 2020. The increase was due primarily to an increase in loss on non-cash accounts associated with the change in fair value of the derivatives in the amount of $27,774,550, an increase in interest expense of $296,865, which includes non-cash amortization of debt discount of in the amount of $52,288, an increase in loss on conversion and exchange of preferred stock in the amount of $1,204,795, an increase in loss on issuance of preferred stock for services in the amount of $125,000, an increase in loss on impairment of an asset held for sale in the amount of $116,000, offset by an increase in unrealized gain on investment securities in the amount of $31,600, a gain on write off of accounts payable in the amount of $157,250 and an increase in other income by $347,418 due to SBA loans and grant forgiven.





Net Income/(Loss)


Our net loss for the nine months ended September 30, 2021, was $(10,363,963), compared to net income of $20,344,331 for the nine months ended September 30, 2020. The majority of the increase in net loss was due primarily to an increase in other expenses associated with the loss on net change in derivative instruments estimated each period. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price, volatility, variable conversion prices based on market prices defined in the respective agreements and probabilities of certain outcomes based on managements' estimates. These inputs are subject to significant changes from period to period, therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

The condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying condensed consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company has not generated significant revenue, and has negative cash flows from operations, which raise substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, raising additional capital and increasing sales. We obtained funds from investors during the nine months ending September 30, 2021. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in case of equity financing.

In connection with our sale of Series M Preferred Stock conducted under Regulation A under the Securities Act, we may be subject to claims for rescission. If this occurs, it may have a negative effect on our liquidity.

At September 30, 2021, and December 31, 2020, we had cash of $558,829 and $416,121, respectively, and a working capital deficit of $23,017,681 and $21,699,304, respectively. The increase in working capital deficit was due primarily to an increase in non-cash derivative liabilities, an increase in long term asset held for sale, cash, contract receivable, offset by a decrease in loans payables, accounts payable, prepaid expenses, and accrued expenses.





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During the nine months ended September 30, 2021, we raised an aggregate of $3,725,175 from the sale of preferred stock in private placements. Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future revenue.

Net cash used in operating activities was $3,560,033 for the nine months ended September 30, 2021, compared to $2,636,761 for the period ended September 30, 2020. The increase in cash used in operating activities was primarily due to a decrease in accounts payable, with an increase in contract liabilities and contracts receivables.

Net cash flows used in investing activities for the nine months ended September 30, 2021, and 2020, were $13,500 and $9,386, respectively. The increase in investing activities was due to payment of accounts payable for purchase of fixed assets.

Net cash flows provided by financing activities was $3,716,241 for the nine months ended September 30, 2021, as compared to $2,913,478 for the nine months ended September 30, 2020. The net increase in cash provided by financing activities was due primarily to an increase in proceeds from issuance of preferred stock, offset by decrease due to repayment of loans. To date we have principally financed our operations through the sale of our common and preferred stock and the issuance of debt.

We do not have any material commitments for capital expenditures during the next twelve months. Although our proceeds from the issuance of securities together with revenue from operations are currently sufficient to fund our operating expenses in the near future, we will need to raise additional funds in the future so that we can maintain and expand our operations. Therefore, our future operations are dependent on our ability to secure additional financing, which may not be available on acceptable terms, or at all. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans and possibly cease our operations.

We have estimated our current average burn, and believe that we have assets to ensure that we can function without liquidation for a limited time, due to our cash on hand, growing revenue, and our ability to raise money from our investor base. Based on the aforesaid, we believe we have the ability to continue our operations for the immediate future and will be able to realize assets and discharge liabilities in the normal course of operations. However, there cannot be any assurance that any of the aforementioned assumptions will come to fruition and as such we may only be able to function for a short time.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.

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