Fortune Rise (NASDAQ:FRLA) has entered into a definitive agreement to combine with Water On Demand at a pro forma equity value of $72 million.

Clearwater, Florida-based Water On Demand provides water treatment services and is developing a unique royalty-based platform it intends to launch as an investment vehicle.

The combined company is expected to trade on the Nasdaq once the deal is completed in the second quarter of 2024.

Transaction Overview

Fortune Rise currently has about $39.6 million in its trust after having seen 63% of shares redeemed in earlier votes. It has not yet supplemented this with any additional committed financing.

Assuming no further redemptions, Fortune Rise shareholders would own 46% of the combined entity with 18% held by the sponsor.

Sponsor shares are to be locked for six months following close, but half may be released early if the combined company trades at or above $12.50 for 20 of 30 trading days.

The parties have not yet released an investor presentation, but Fortune Rise’s profile page will be updated once any additional information is made available.

Quick Takes: As discussed a few weeks back when Fortune Rise shifted the target of this acquisition, this is an unusual deal.

To refresh, Fortune Rise’s original sponsor team sold 100% of its sponsor economics to Water On Demand late last December, which then turned around and announced its initial LOI with itself one week later.

Water On Demand is itself already a subsidiary of the listed entity OriginClear (OTC Pink:OCLN), which reported $2 million in revenue in the first quarter of 2023 and the whole group currently trades at a market cap of about $8.5 million.

OriginClear has undergone something of an internal restructuring this year as it continues to tack on acquisitions and Water On Demand is a bunching up of several of them. It first transferred the Modular Water Systems, which generated the majority of its first quarter revenues, to under the Water On Demand umbrella.

Water On Demand was then merged with Progressive Water Treatment, a seller of utility-scale water treatment equipment. It believes that the combination of Progressive’s equipment and that produced by Modular Water Systems can allow for smaller, decentralized water treatment facilities that could be more efficient on the whole than large-scale municipal water systems.

That efficiency isn’t the only end goal for this platform however.

Water On Demand itself provides the fintech side of the picture with plans to structure itself as a master limited partnership (MLP), a design that was originally pioneered in the 1980’s to allow investors to put money directly into energy assets and receive long-term royalties. Except, in this case, investors would be buying into water infrastructure instead.

Between this MLP model and the group’s notions of creating a “water-as-a-service” recurring revenue platform, the company has a lot of ideas. But, it appears like it still has a lot of pipe to lay before realizing them.

For one, the company still has much to do in building out its platform and it notes in its press release that it hopes to use this SPAC transaction to fuel an even more “aggressive” program of bolt-on acquisitions.

These further targets are to include, “management software, management and engineering staffing, and vertical integration through acquisition of component fabricators.” Equipment IP aside, many of those things seem like fairly basic business functions that most would choose to build internally and organically rather than buy it, but this group thinks different.

It seems likely that this will be a dilutive path as well.

Time will tell if Fortune Rise’s original shareholders are fully on board with their new sponsor’s plan to merge with itself rather than the crypto mining focus of the original team.

This has, in theory, been tested already as the SPAC has held two extension votes since announcing the sponsor takeover and LOI. The first allowed it to extend six months up to November 5 for monthly contributions of $0.0625 per share and a second lowered that contribution to $0.05 monthly.

At noon today, shareholders will vote on whether to give it a full additional year in one-month increments in exchange for contributions of the lesser of $100,000 or $0.05 per share.

That may be a bigger ask for investors that have been hanging around since the SPAC’s November 2021 IPO, and who could potentially not see another opportunity to redeem until November 2024.

Without that cash in the tank, however, Water On Demand’s complex path to taking its mini-conglomerate on an acquisition spree looks more difficult. The total Origin Clear group reported a -$3.2 million loss in the first half of the year from $3.8 million in revenue and noted it had about $1.3 million in cash on hand.

Water On Demand can of course still make acquisitions with stock, but that is potentially the sort of dilutive path that could land it on the pink sheets with its parent, Origin Clear. This would appear to be especially so if it is using those paper transactions to staff its management rather than pull in some assets that would be immediately accretive.

The picture will become clearer after the results of today’s meeting.

If it can get its platform online, it at least is joining a cohort of companies the market tends to like. Traditional water treatment firm Essential Utilities (NYSE:WTRG) trades at 6.8x revenue and 15x EBITDA, while Bill Gates-backed EcoLab (NYSE:ECL) trades at 3.6x and 20x, respectively, and American Water (NYSE:AWK) at 8.5x and 15x.

ADVISORS

• SPAC
  • EF Hutton, a division of Benchmark Investments, LLC is acting as Capital Markets Advisor in the transaction.
• Company
  • None are mentioned.