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EX-32 - CERTIFICATION - ORIGINCLEAR, INC.f10q0318ex32_originclearinc.htm
EX-31 - CERTIFICATION - ORIGINCLEAR, INC.f10q0318ex31_originclearinc.htm
EX-10.1 - FORM OF RESTRICTED STOCK AWARD AGREEMENT - ORIGINCLEAR, INC.f10q0318ex10-1_originclear.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

☒  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED:  March 31, 2018

 

☐  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: ________________

 

ORIGINCLEAR, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   26-0287664
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

525 S. Hewitt St.

Los Angeles, CA 90013

(Address of principal executive offices, Zip Code)

 

(323) 939-6645

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

   

Large accelerated filer Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 18, 2018, there were 146,539,983 shares of common stock, par value $0.0001 per share, issued and outstanding.

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
PART I    
     
Item 1. Financial Statements. 2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 26
Item 4. Controls and Procedures. 26
     
PART II    
     
Item 1. Legal Proceedings. 27
Item 1A. Risk Factors. 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 27
Item 3. Defaults Upon Senior Securities. 27
Item 4. Mine Safety Disclosures. 27
Item 5. Other Information. 27
Item 6. Exhibits. 27
     
SIGNATURES 28

 

i

 

 

PART I - FINANCIAL INFORMATION

 

This Quarterly Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning our possible or assumed future results of operations set forth under the heading “Management’s Discussion and Analysis of Financial Condition or Plan of Operation.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider” or similar expressions are used.

 

Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. Our future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements.

 

1

 

Item 1. Financial Statements.

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

   March 31,
2018
   December 31,
2017
 
   (Unaudited)     
ASSETS        
CURRENT ASSETS        
Cash  $236,023   $439,822 
Contracts receivable, less allowance for doubtful accounts of $6,996 and $6,996 respectively   432,148    490,441 
Prepaid expenses   63,823    61,607 
Inventory   13,614    13,614 
Contract assets   214,067    88,589 
Work in progress   84,157    84,157 
           
TOTAL CURRENT ASSETS   1,043,832    1,178,230 
           
NET PROPERTY AND EQUIPMENT   181,705    150,628 
           
OTHER ASSETS          
Other asset   19,538    19,538 
Trademark   4,467    4,467 
Security deposit   3,500    3,500 
           
TOTAL OTHER ASSETS   27,505    27,505 
           
TOTAL ASSETS  $1,253,042   $1,356,363 
           
LIABILITIES AND SHAREHOLDERS' DEFICIT          
           
Current Liabilities          
Accounts payable and other payable  $962,909   $827,656 
Accrued expenses   965,981    932,092 
Contract liabilities   141,198    154,048 
Capital lease   42,822    - 
Customer deposit and warrant reserve   133,950    133,950 
Deferred income   45,300    15,500 
Loan payable, truck   8,097    11,090 
Derivative liabilities   17,418,475    5,531,183 
Convertible promissory notes, net of discount of $304,401 and $591,835, respectively   877,417    766,931 
           
Total Current Liabilities   

20,596,149

    8,372,450 
           
Long Term Liabilities          
Loan payable, long term portion   -    4,609 
Convertible promissory notes, net of discount of $70,948 and $0, respectively   2,768,052    2,811,000 
           
Total Long Term Liabilities   2,768,052    2,815,609 
           
Total  Liabilities   23,364,201    11,188,059 
           
COMMITMENTS AND CONTINGENCIES (NOTE 8)          
           
SHAREHOLDERS' DEFICIT          
Preferred stock, $0.0001 par value, 750,000 shares authorized 3,333 shares of Series B issued and outstanding, respectively   1    1 
1,000 shares of Series C issued and outstanding, respectively   -    - 
Common stock, $0.0001 par value, 900,000,000 shares authorized 135,587,180 and 112,888,964 equity shares issued and outstanding, respectively   13,559    11,289 
Preferred treasury stock,1,000  and 1,000 shares outstanding, respectively   -    - 
Additional paid in capital   59,225,143    58,618,560 
Accumulated other comprehensive loss   (134)   (134)
Accumulated deficit   (81,349,728)   (68,461,412)
           
TOTAL SHAREHOLDERS' DEFICIT   (22,111,159)   (9,831,696)
           
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT  $1,253,042   $1,356,363 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

2

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017 

(Unaudited)

 

   Three Months Ended 
   March 31,
2018
   March 31,
2017
 
         
Sales  $1,333,539   $672,129 
           
Cost of Goods Sold   959,666    582,456 
           
Gross Profit   373,873    89,673 
           
Operating Expenses          
Selling and marketing expenses   341,933    512,801 
General and administrative expenses   686,618    624,530 
Research and development   43,539    53,653 
Depreciation and amortization expense   14,361    13,600 
           
Total Operating Expenses   1,086,451    1,204,584 
           
Loss from Operations   (712,578)   (1,114,911)
           
OTHER INCOME (EXPENSE)          
Commitment fee   (220,283)   - 
Gain (Loss) on net change in derivative liability and conversion of debt   (11,797,873)   1,072,096 
Interest expense   (157,582)   (189,738)
           
TOTAL OTHER INCOME (EXPENSE)   (12,175,738)   882,358 
           
NET LOSS  $(12,888,316)  $(232,553)
           
BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE TO SHAREHOLDERS'  $(0.11)  $(0.01)
           
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED   123,062,170    25,082,031 

  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

3

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT

 FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

  

                       Accumulated         
   Preferred stock   Common stock   Additional Paid-in   Other Comprehensive   Accumulated     
   Shares   Amount   Shares   Amount   Capital   loss   Deficit   Total 
Balance at December 31, 2017   4,333   $1    112,888,964   $11,289   $58,618,560   $(134)  $(68,461,412)  $(9,831,696)
                                         
Common stock issuance for conversion of debt   -    -    7,442,162    744    192,565    -    -    193,309 
                                         
Common stock issued at fair value for services   -    -    15,256,054    1,526    400,986    -    -    402,512 
                                  -      
Stock option compensation cost   -    -    -    -    13,032    -    -    13,032 
                                         
Net loss   -    -    -    -    -    -    (12,888,316)   (12,888,316)
                                         
Balance at March 31, 2018 (unaudited)   4,333   $1    135,587,180    13,559    59,225,143    (134)   (81,349,728)   (22,111,159)

   

The accompany notes are an integral part of these unaudited condensed consolidated financial statements

 

4

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

(Unaudited)

 

   Three Months Ended 
   March 31, 2018   March 31, 2017 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(12,888,316)  $(232,553)
Adjustment to reconcile net loss to net cash used in operating activities          
Depreciation and amortization   14,361    13,600 
Common stock and warrants issued for services   402,512    464,027 
Stock option and warrant compensation expense   13,032    34,600 
(Gain) Loss on net change in valuation of derivative liability and conversion of debt   11,797,873    (1,072,097)
Debt discount and original issue discount  recognized as interest expense   78,958    110,097 
Change in Assets (Increase) Decrease in:          
Contracts receivable   58,293    252,626 
Contract assets   (125,478)   (96,580)
Other receivable   (31,331)   - 
Inventory asset   -    (13,613)
Prepaid expenses   29,115    8,216 
Change in Liabilities Increase (Decrease) in:          
Accounts payable   135,253    105,533 
Accrued expenses   52,448    69,309 
Contract liabilities   (12,850)   16,327 
Capital lease payable   42,822    - 
Deferred income   29,800    10,300 
           
NET CASH USED IN OPERATING ACTIVITIES   (403,508)   (330,208)
           
CASH FLOWS USED FROM INVESTING ACTIVITIES:          
Capitalized leased asset   (45,440)   - 
Purchase of fixed assets   -    (32,918)
           
CASH USED IN INVESTING ACTIVITIES   (45,440)   (32,918)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Loans payable   (7,602)   31,236 
Proceeds from convertible promissory notes   252,750    - 
Proceeds for issuance of common stock for cash   -    423,500 
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   245,148    454,736 
           
Foreign currency effect on cash flow   -    (3)
           
NET (DECREASE) INCREASE IN CASH   (203,800)   91,607 
           
CASH BEGINNING OF PERIOD   439,822    351,321 
           
CASH END OF PERIOD  $236,022   $442,928 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          
Interest paid  $678   $1,258 
Taxes paid  $-   $- 
           
SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS          
Common stock issued at fair value for conversion of debt and accrued interest  $193,309   $244,212 
Common stock issued at fair value on settlement of accounts payable  $-   $90,000 
Common stock issued at fair value for supplemental shares  $220,283   $44,440 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

5

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 31, 2018

    

1. The accompanying unaudited condensed consolidated financial statements of OriginClear, Inc. (the “Company”) (formerly OriginOil, Inc.) 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 three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.  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, 2017.

 

Going Concern

The accompanying 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 financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company’s revenue is not yet sufficient to cover its operating expenditures 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, additional cash infusion. Management believes the existing shareholders, the prospective new investors, current 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 undue 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.  (“PWT”) and OriginClear Technology Limited. All material intercompany transactions have been eliminated upon consolidation of these entities.

 

Loss per Share Calculations

Basic loss per share calculations are computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar 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 has excluded 3,714,637 shares of common stock issuable pursuant to outstanding stock options, 40,931,531 shares of common stock issuable pursuant to outstanding warrants, shares of common stock issuable pursuant to outstanding convertible debt of $3,543,068 and shares of common stock issuable pursuant to outstanding convertible preferred stock for the three months ended March 31, 2018, because their impact on the loss per share is anti-dilutive.

 

The Company has excluded 3,697,495 shares of common stock issuable pursuant to outstanding stock options, 506,026 shares of common stock issuable pursuant to outstanding warrants, shares of common stock issuable pursuant to outstanding convertible debt of $3,867,068 and shares of common stock issuable pursuant to outstanding convertible preferred stock for the three months ended March 31, 2017, because their impact on the loss per share is anti-dilutive.

 

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.

  

6

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 31, 2018

    

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)

 

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, debt beneficial conversion features, 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.

 

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 are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

 

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 which require the revision, 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 and are recognized in the period in which 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 approximately $6,996 and $6,996 as of March 31, 2018 and December 31, 2017, respectively. The net contract receivable balance was $432,148 and $490,441 as of March 31, 2018 and December 31, 2017, respectively.

 

7

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 31, 2018

    

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)

 

Fair Value of Financial Instruments

Fair Value of Financial Instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of March 31, 2018, 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 March 31, 2018.

 

     Total   (Level 2)   (Level 2)   (Level 3) 
                   
  Derivative Liability  $17,418,475   $     -   $       -   $17,418,475 
                       
  Total liabilities measured at fair value  $17,418,475   $-   $-   $17,418,475 

 

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, 2018  $5,531,183 
  Fair Value of derivative liabilities issued   214,171 
  Loss on conversion of debt and change in derivative liability   11,673,121 
  Balance as of March 31, 2018   17,418,475 

 

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:

 

      3/31/2018
  Risk free interest rate   1.63% - 2.56%
  Stock volatility factor   17.0% - 171.0%
  Weighted average expected option life   6 months - 5 years
  Expected dividend yield   None

 

8

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 31, 2018

    

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)

 

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.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-2, which creates ASC Topic 842, “Leases.” This update increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. We are evaluating what impact, if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.

 

In August 2017, FASB issued accounting standards update ASU-2017-12, “D” (Topic 815) – “Targeted Improvements to Accounting for Hedging Activities”, to require an entity to present the earnings effect of the hedging instrument in the same statement line item in which the earnings effect of the hedged item is reported. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods with the fiscal years beginning after December 15, 2020. Early adoption is permitted in any interim period after issuance of the update. The Company is currently evaluating the impact of the adoption of ASU 2017-12 on the Company’s financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services. In addition, ASC 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASC is effective for fiscal years beginning after December 15, 2017. The Company has adopted ASC 606 beginning on January 1, 2018. The adoption of ASC 606 did not have a significant impact on the Company’s revenue recognition policies. See Note 7 for additional disclosures in accordance with the new revenue recognition standard.

 

Management reviewed currently issued pronouncements during the period ended March 31, 2018, and does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying condensed financial statements.

 

3. CAPITAL STOCK

 

Preferred Stock

 

Series B convertible preferred stock (“Series B Preferred Stock”)

 

On October 1, 2015, the Company filed a Certificate of Designation for Series B preferred stock with the Secretary of State of Nevada authorizing 10,000 shares of preferred stock as Series B Preferred Stock which were issued to a shareholder of PWT in connection with a share exchange agreement, dated October 1, 2015, by and between PWT and the Company. One third (1/3) of the shares of Series B Preferred Stock received by the holder may be converted into common stock beginning one (1) year after the first date on which a share of Series B Preferred Stock was issued (the “Original Issue Date); one third (1/3) may be converted beginning two (2) years after the Original Issue Date; and the remaining one third (1/3) may be converted beginning three years after the Original Issue Date. The number of shares of common stock issuable for each share of converted Series B Preferred Stock shall be calculated by dividing the stated value by the market price, with the market price being the average of the closing trade prices of the twenty-five (25) days prior to the date of the conversion notice. On August 12, 2016, the agreement was amended to include make-good shares. Upon any conversion, the conversion price shall be the lower of $1.05 or the price of the Company’s common stock calculated using the average closing prices of the Company’s common stock on the last three (3) trading days prior to the date of conversion, provided, however, if the average closing price is less than $0.35 per share, the adjusted conversion price shall be $0.35 per share. The conversion price is subject to adjustment in the case of reverse splits, stock dividends, reclassifications and the like. In addition, the conversion price is subject to certain full ratchet anti-dilution protection. Accordingly, the Series B Preferred Stock is valued under the provision of ASC Topic 815, Derivatives and Hedging, because the conversion feature of the preferred stock was not afforded the exemption for conventional convertible instruments due to its variable conversion rate. The Series B Preferred Stock shall have the rights, preferences and privileges as set forth in the exchange agreement. As of March 31, 2018, there are 3,333 shares of Series B Preferred Stock outstanding.

 

9

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 31, 2018

    

3. CAPITAL STOCK (Continued)

 

Series C preferred stock (“Series C Preferred Stock”)

 

On March 14, 2017, the Company filed a Certificate of Designation for its Series C Preferred Stock with the Secretary of State of Nevada (the “Certificate of Designation”) designating 1,000 shares of its authorized preferred stock as Series C Preferred Stock. The shares of Series C Preferred Stock have a par value of $0.0001 per share. The shares of Series C Preferred Stock do not have a dividend rate or liquidation preference and are not convertible into shares of common stock.

 

For so long as any shares of the Series C Preferred Stock remain issued and outstanding, the holders thereof, voting separately as a class, shall have voting power equal to 51% of the total vote (representing a super majority voting power) on all shareholder matters of the Company. Such vote shall be determined by the holder(s) of a majority of the then issued and outstanding shares of Series C Preferred Stock.

 

The shares of the Series C Preferred Stock shall be automatically redeemed by the Company at their par value on the first to occur of the following triggering events: (i) on the date that Mr. Eckelberry ceases, for any reason, to serve as officer, director or consultant of the Company, or (ii) on the date that the Company’s shares of common stock first trade on any national securities exchange provided that the listing rules of any such exchange prohibit preferential voting rights of a class of securities of the Company, or listing on any such national securities exchange is conditioned upon the elimination of the preferential voting rights of the Series C Preferred Stock set forth in the Certificate of Designation.

 

Additionally, the Company is prohibited from adopting any amendments to the Company’s Bylaws, Articles of Incorporation, as amended, making any changes to the Certificate of Designation establishing the Series C Preferred Stock, or effecting any reclassification of the Series C Preferred Stock, without the affirmative vote of at least 66-2/3% of the outstanding shares of Series C Preferred Stock. However, the Company may, by any means authorized by law and without any vote of the holders of shares of Series C Preferred Stock, make technical, corrective, administrative or similar changes to such Certificate of Designation that do not, individually or in the aggregate, adversely affect the rights or preferences of the holders of shares of Series C Preferred Stock.

 

On March 14, 2017, the Company entered into a securities purchase agreement pursuant to which the Company sold 1,000 shares of Series C Preferred Stock to the Company’s Chief Executive Officer and Director, T. Riggs Eckelberry.

 

Common Stock

 

Three months ended March 31, 2018

 

The Company issued 7,442,162 shares of common stock for the settlement of convertible promissory notes in an aggregate principal in the amount of $50,000, plus interest in the amount of $16,979, with an aggregate fair value loss on settlement of $126,330, based upon conversion prices of $0.0190 to $0.0329.

 

The Company issued 15,256,054 shares of common stock for services at fair value of $402,512.

 

4. CONVERTIBLE PROMISSORY NOTES

 

As of March 31, 2018, the outstanding convertible promissory notes are summarized as follows:

 

  Convertible Promissory Notes, net of debt discount  $3,645,469 
  Less current portion   877,417 
  Total long-term liabilities  $2,768,052 

 

Maturities of long-term debt for the next three years are as follows:

 

  Period Ending March 31,  Amount 
  2019   821,000 
  2020   1,822,052 
  2021   125,000 
     $2,043,052 

 

At March 31, 2018, the $4,020,818 in convertible promissory notes has a remaining debt discount of $375,349, leaving a net balance of $3,645,469.

 

10

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 31, 2018

    

4. CONVERTIBLE PROMISSORY NOTES (Continued)

  

On various dates, the Company issued unsecured convertible promissory notes (the “Notes”), that matured during the period and were extended sixty (60) days from the effective date of each Note. The Notes bear interest at 10% per annum. The Notes may be converted into shares of the Company’s common stock at conversion prices ranging from the lesser of $2.10 to $4.90 (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 Notes.  In addition, for as long as the 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 Notes or such other convertible notes or a term was not similarly provided to the purchaser of the Notes or such other convertible notes, then such more favorable or additional term shall, at the purchaser’s option, become part of the Notes and such other convertible notes. The conversion feature of the Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Notes. During the three months ended March 31, 2018, the Company issued 7,442,162 shares of common stock, upon conversion of $50,000 in principal, plus accrued interest of $16,979, with a fair value loss on settlement of $126,330. As of March 31, 2018, the Notes had an aggregate remaining balance of $1,436,000.

 

As of March 31, 2018, certain unsecured convertible promissory notes (the “OID Notes”) had an aggregate remaining principal 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, and were extended through June 30, 2018. The OID Notes were convertible into shares of the Company’s common stock at a conversion price initially of $15.31. After an amendment to the OID Notes, the conversion price changed to the lesser of $2.80 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.

 

The Company issued various, unsecured convertible promissory notes (together, the “May 2016 Notes”), on various dates ending on May 19, 2016. The May 2016 Notes matured and were extended from the date of each tranche through maturity dates ending on May 19, 2020. The May 2016 Notes bear interest at 10% per annum. The May 2016 Notes may be converted into shares of the Company’s common stock at conversion prices ranging from the lesser of $0.70 to $2.80 (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 May 2016 Notes.  The conversion feature of the May 2016 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the May 2016 Notes. The remaining balance of the May 2016 Notes as of March 31, 2018, was $1,325,000.

 

The Company issued a convertible note (“Dec 2015 Note”) in exchange for an 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 March 31, 2018, the remaining balance of the Dec 2015 Note was $167,048.

 

The Company issued a convertible note (“Sep 2016 Note”) in exchange for an 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. On September 15, 2016, 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 time it was entered into, 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. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $46,333 during the three months ended March 31, 2018.

 

The Company issued an unsecured convertible promissory note (the “Dec 20 Note”), in the amount of $150,000 on December 20, 2017. The Dec 20 Note matures on December 20, 2018. The Dec 20 Note bears interest at 10% per annum. The Dec 20 Note may be converted into shares of the Company’s common stock at a conversion price of the lesser of $0.03 per share or 50% of the lowest trade price during the twenty trading days immediately before the conversion. The conversion feature of the Dec 20 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Dec 20 Note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $2,126 during the three months ended March 31, 2018. 

 

The Company issued an unsecured convertible promissory note (the “Dec 22 Note”), in the amount of $75,000 on December 22, 2017. The Dec 22 Note matures on December 22, 2018. The Dec 22 Note bears interest at 10% per annum. The Dec 22 Note may be converted into shares of the Company’s common stock at a conversion price of the lesser of $0.05 per share or 50% of the lowest trade price during the twenty trading days upon default of the prepayment date. The conversion feature of the Dec 22 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Dec 22 Note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $11,078 during the three months ended March 31, 2018. 

 

11

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 31, 2018

    

4. CONVERTIBLE PROMISSORY NOTES (Continued)

 

The Company issued various unsecured convertible promissory notes in the aggregate amount of $174,000 on dates of January 24, 2018, February 20, 2018 and March 21, 2018. The January 24, 2018 note matures on January 24, 2019, the February 20, 2018 note matures on February 20, 2019, and the March 21, 2018 note matures on March 21, 2019. Each of the January 24, 2018, February 20, 2018 and March 21, 2018 notes bear interest at 10% per annum and may be converted into shares of the Company’s common stock at a variable conversion price of 61% of the lowest one (1) trading day during the ten (10) trading days prior to conversion. The conversion feature was considered a derivative in accordance with current accounting guidelines because of the reset conversion features. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $15,169 during the three months ended March 31, 2018.

 

The Company issued two (2) unsecured convertible promissory notes (together, the “Feb 2018 Notes”), in the aggregate principal amount of $157,500 (each in the amount of $78,750) on February 23, 2018. The Feb 2018 Notes mature on February 23, 2019 and bear interest at 10% per annum. The first of the two Feb 2018 Notes shall be paid for by the buyer as set forth herein. The second of the two Feb 2018 Notes shall initially be paid for by the issuance of an offsetting $78,750 secured note issued to the Company by the buyer. The first of the two Feb 2018 Notes was funded with cash and the Company must agree to the funding of the second note, before it can be funded with cash. The second of the Feb 2018 Notes is secured by assets of the buyer having a fair market value of at least $78,750, and provided that prior to conversion of the second Feb 2018 Note, the buyer must have paid off the buyer note in cash. The Feb 2018 Notes may be converted into shares of the Company’s common stock at a conversion price of $0.03 or 50% discount of the lowest trading price during the twenty (20) trading days prior to conversion. The conversion feature of the Feb 2018 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Feb 2018 Notes. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $4,252 during the three months ended March 31, 2018. 

  

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 March 31, 2018 was $17,418,475.

 

5. DERIVATIVE LIABILITIES

 

We evaluated the financing transactions in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion feature of the convertible promissory note 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 per the stock price fluctuations.

 

The convertible notes issued and described in Note 4 do not have fixed settlement provisions because their conversion prices are not fixed. The conversion feature has been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

 

During the three months ended March 31, 2018, as a result of the convertible notes issued that were accounted for as derivative liabilities, we determined that the fair value of the conversion feature of the convertible notes at issuance was $214,171, based upon a Binomial-Model calculation. We recorded the full value of the derivative as a liability at issuance with an offset to valuation discount, which will be amortized over the life of the convertible notes.

 

During the three months ended March 31, 2018, the Company converted $50,000 in principal of convertible promissory notes, plus accrued interest of $16,979. As a result of the conversion of these notes and the change in fair value of the remaining notes, the Company recorded a loss on net change in derivative and conversion of debt in the amount of $11,797,873 in the statement of operations for the three months ended March 31, 2018. At March 31, 2018, the fair value of the derivative liability was $17,418,475.

 

12

 

  

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 31, 2018

    

5. DERIVATIVE LIABILITIES (Continued)

 

For purpose of determining the fair market value of the derivative liability for the embedded conversion, the Company used the Binomial lattice valuation model. The significant assumptions used in the Binomial lattice valuation model for the derivative are as follows:

 

     3/31/2018
  Risk free interest rate  1.63% - 2.56%
  Stock volatility factor  17.0% - 171.0%
  Weighted average expected option life  1 years - 5 years
  Expected dividend yield  None

 

6. OPTIONS AND WARRANTS

 

Options

 

On June 14, 2013, the Board of Directors adopted a new OriginOil, Inc. 2013 Incentive Stock Option Plan (the “2013 Plan”) for the purposes of granting stock options to its employees and others providing services to the Company, which reserves and sets aside for the granting of options for 114,286 shares of common stock.  Options granted under the 2013 Plan may be either incentive options or nonqualified options and shall be administered by the Company's Board of Directors.  Each option shall state the number of shares to which it pertains. The exercise price will be determined by the holders’ percentage owned as follows: If the holder owns more than 10% of the total combined voting power or value of all classes of stock of the Company, then the exercise price will be no less than 110% of the fair market value of the stock as of the date of grant; if the person is not a 10% holder, then the exercise price will be no less than 100% of the fair market value of the stock as of the date of grant. Notwithstanding any other provision of the 2013 Plan or of any option agreement, each option shall expire on the date specified in the option agreement, which date shall not be later than the tenth (10th) anniversary from the date of grant. If the status of an employee terminates for any reason other than disability or death, then the optionee or their representative shall have the right to exercise the portion of any options which were exercisable as of the date of such termination, in whole or in part, not less than 30 days nor more than three (3) months after such termination.

 

On September 29, 2015, the Board of Directors adopted a new OriginClear, Inc. 2015 Equity Incentive Stock Option Plan (the “2015 Plan”) for the purposes of granting stock options to its employees and others providing services to the Company, which reserves and sets aside for the granting of options for 3,315,714 shares of common stock. On October 2, 2015, the Board of Directors amended the number of shares to reserve for issuance to 4,571,429 shares. Options granted under the 2015 Plan may be either incentive options or nonqualified options and shall be administered by the Company's Board of Directors.  Each option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective option agreements may provide. Notwithstanding any other provision of the 2015 Plan or of any option agreement, each option shall expire on the date specified in the option agreement, which date shall not be later than the fifth (5th) anniversary from the effective date of grant.

 

During the year ended December 31, 2016, the Company granted 31,429 shares of incentive stock options to employees, and 428,571 shares of non-statutory options to consultants. Each option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective option agreements may provide. The stock options mature on March 29, 2021 and October 17, 2021, at prices of $0.29 and $1.31.

 

With respect to non-statutory options granted to employees, directors or consultants, the Board of Directors or Committee of the Board of Directors may specify such period for exercise that the option shall automatically terminate following the termination of employment or services as to shares covered by the option as the Board of Directors or Committee of the Board of Directors deems reasonable and appropriate.

 

13

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 31, 2018

    

6. OPTIONS AND WARRANTS (Continued)

 

A summary of the Company’s stock option activity and related information follows:

 

     March 31, 2018 
         Weighted 
     Number of   average exercise 
     Options   price 
  Outstanding, beginning of period   3,697,495   $1.511 
  Granted   -    - 
  Exercised   -    - 
  Forfeited/Expired   (17,858)  $1.870 
  Outstanding, end of period   3,679,637   $1.502 
  Exercisable at the end of the period   2,719,697   $1.019 
  Weighted average fair value of options granted during the period       $- 

  

The weighted average remaining contractual life of options outstanding issued under the 2013 Plan and 2015 Plan as of March 31, 2018 was as follows: 

 

              Weighted Average 
      Stock   Stock   Remaining 
  Exercisable   Options   Options   Contractual 
  Prices   Outstanding   Exercisable   Life (years) 
  $6.65 – 31.15    51,561    51,561    4.34 – 6.52 
  $14.35 - 15.40    32,362    32,362    5.46 
  $1.31    3,595,714    2,635,774    2.52 – 3.80 
        3,679,637    2,719,697      

 

Stock-based compensation expense recognized during the year is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the financial statements of operations during the three months ended March 31, 2018 and 2017 were $13,032 and $34,600, respectively.

 

Restricted Stock to CEO

On May 12, 2016, the Company entered into a Restricted Stock Grant Agreement (the “RSGA”) 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 RSGA are performance based shares and none have yet vested nor have any been issued. The RSGA provides for the issuance of up to 1,714,286 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 857,143 shares of its common stock and 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 reports filed with the SEC (the “SEC Reports”), the Company will issue up to 857,143 shares of its common stock. The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

On August 10, 2016, the Company entered into a Restricted Stock Grant Agreement (the “August RSGA”) 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 August RSGA are performance based shares and none have yet vested nor have any been issued. The August RSGA provides for the issuance of up to 1,714,286 shares of the Company’s common stock to the CEO provided certain milestones are met in certain stages: a) if the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period, the Company will issue up to 857,143 shares of its common stock and 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 

 

14

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 31, 2018

    

6. OPTIONS AND WARRANTS (Continued)

 

Restricted Stock to CEO (Continued)

period as reported as reported in the Company’s SEC Reports, the Company will issue up to 857,143 shares of its common stock. The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

Restricted Stock to Employees and Consultants

On May 12, 2016, the Company entered into a Restricted Stock Grant Agreement (the “First Employee RSGA”) with an employee, 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 First Employee RSGA are performance based shares and none have yet vested nor have any been issued. The First Employee RSGA provides for the issuance of up to 857,143 shares of the Company’s common stock to the employee 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 428,571 shares of its common stock and 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 428,571 shares of its common stock. The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

On May 12, 2016, the Company entered into a Restricted Stock Grant Agreement (the “Second Employee RSGA”) with an employee, 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 Second Employee RSGA are performance based shares and none have yet vested nor have any been issued. The Second Employee RSGA provides for the issuance of up to 571,429 shares of the Company’s common stock to the employee 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 285,714 shares of its common stock and 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 285,714 shares of its common stock. The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

On August 10, 2016, the Company entered into a Restricted Stock Grant Agreement (together, the “Consultants RSGA”) with two of its 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 Consultants RSGA are performance based shares and none have yet vested nor have any been issued. The Consultants RSGA provides to each of the consultants the issuance of up to 285,714 shares of the Company’s common stock provided certain milestones are met in certain stages: a) if the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period, the Company will issue to each of the consultants up to 142,857 shares of its common stock and 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 142,857 shares of common stock to each of the consultants. The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

15

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 31, 2018

    

6. OPTIONS AND WARRANTS (Continued)

 

Warrants

As of March 31, 2018, the Company issued no warrants during the period. A summary of the Company’s warrant activity and related information follows for the three months ended March 31, 2018:

 

     March 31, 2018 
         Weighted 
     Number   average 
     of   exercise 
     Warrants   price 
  Outstanding -beginning of the period   53,562,961   $5.40 
  Granted   -    - 
  Exercised   -    - 
  Forfeited   (12,631,430)  $(31.50)
  Outstanding - end of the period   40,931,531   $0.0336 

 

At March 31, 2018, the weighted average remaining contractual life of warrants outstanding:

 

              Weighted 
              Average 
              Remaining 
  Exercisable   Warrants   Warrants   Contractual 
  Prices   Outstanding   Exercisable   Life (years) 
  $      5.25 - 22.75     457,143    457,143    0.24 - 0.70 
  $0.35 - 0.12    40,462,053    40,462,053    0.17 – 1.17 
  $8.75 - 22.75    12,335    12,335    0.05 – 0.97 
        40,931,531    40,931,531      

 

At March 31, 2018, the aggregate intrinsic value of the warrants outstanding was $0.

 

7. 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 three months ended March 31, 2018 and 2017.

 

     Three Months Ended March 31, 
     2018   2017 
           
  Equipment Contracts  $984,754   $323,307 
  Component Sales   307,204    331,532 
  Service Sales   11,581    7,290 
  Licensing Fees   30,000    10,000 
     $1,333,539   $672,129 

 

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ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 31, 2018

 

7. REVENUE FROM CONTRACTS WITH CUSTOMERS (Continued)

 

Revenue recognition for other sales arrangements, such as sales for components, service and licensing fees 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 cost in excess of billings for the three months ending March 31, 2018 was $214,067 and for the year ending December 31, 2017 was $88,589. The billing in excess of cost for the three months ending March 31, 2018 was $141,198 and for the year ending December 31, 2017 was $154,048.

  

8. COMMITMENTS AND CONTINGENCIES

  

Operating Lease – Related Party

 

The Company entered into a month-to-month lease agreement with a shareholder of the Company for office space in McKinney, Texas at a base rent of $4,750 per month.

 

Operating Lease – Equipment

 

The Company entered into a five (5) year equipment lease in the amount of $45,440, which was recorded as a capital lease. There are no escalation or renewal options associated with this lease. The lease has a purchase option to buy the equipment at the end of the lease for one dollar ($1). The monthly lease payments are $757 per month. The future minimum lease payments due as of March 31, 2018 are $42,822.

 

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 as of March 31, 2018.

 

9. SUBSEQUENT EVENTS

 

Management has evaluated subsequent events according to the requirements of ASC TOPIC 855 and has determined that there are the following subsequent events:

 

On April 4, 2018, the Company entered into a securities purchase agreement with an accredited investor pursuant to which it sold and issued an unsecured convertible promissory note (the “Apr 4 Note”), in the aggregate principal face amount of $150,000. The Apr 4 Note matures 12 months from the date of issuance and bears interest at a rate of 10% per annum. The Apr 4 Note may be converted into shares of the Company’s common stock at a price per share equal to 50% of the lowest trade price of the Company’s common stock recorded during the twenty five prior trading days from receipt of the conversion notice (subject to adjustment for stock splits, dividends, combinations and other similar transactions). 

 

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ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 31, 2018

    

9. SUBSEQUENT EVENTS (Continued)

 

 

On April 13, 2018, the Company issued to two members of the Board of Directors an aggregate of 400,000 shares of the Company’s common stock for services in lieu of cash consideration.

 

On April 13, 2018, the Company filed a Certificate of Amendment to its Articles of Incorporation, as amended, with the Secretary of State of the State of Nevada to effectuate an increase to the number of authorized shares of common stock of the Company to 2,000,000,000 from 900,000,000 and increased the number of authorized shares of all series of its preferred stock to 550,000,000 from 750,000. As a result of the increase of authorized shares of its common and preferred stock, the aggregate number of the Company’s authorized shares is 2,550,000,000.

 

On April 13, 2018, the Company filed a Certificate of Designation (the “Series D Certificate of Designation”) for its Series D convertible preferred stock (the “Series D Preferred Stock”) with the Secretary of State of Nevada designating 400,000,000 shares of its authorized preferred stock as Series D Preferred Stock. The shares of Series D Preferred Stock have a par value of $0.0001 per share, do not have a dividend rate or liquidation preference and do not carry any voting rights. The shares of Series D Preferred Stock are convertible into the Company’s common stock at a conversion rate which shall be the greater of (A) one share of common stock and (B) the number of shares of common stock the holder of the Series D Preferred Stock would have received pursuant to each holders respective Subscription Agreement (as defined in the Series D Certificate of Designation) if the shares of Series D Preferred Stock were priced based on the average Closing Sale Price (as defined in the Series D Certificate of Designation) of the common stock during the three trading days prior to the date the holder requests a conversion, provided the lowest price for which an adjustment will be made is $0.005 (1/2 of one cent). In the event the Company does not conduct an Initial Coin Offering (as defined in the Series D Certificate of Designation) within one (1) year of the Initial Issuance Date (as defined in the Series D Certificate of Designation), the conversion rate shall be adjusted to read as follows: the greater of (A) one share of common stock and (B) the number of shares of common stock the holder of the Series D Preferred Stock would have received pursuant to each holders respective Subscription Agreement (as defined in the Series D Certificate of Designation) if the shares of Series D Preferred Stock were priced based on the average Closing Sale Price (as defined in the Series D Certificate of Designation) of the common stock during the three trading days prior to the date the holder requests a conversion, provided the lowest price for which an adjustment will be made is $0.01 (one cent). Notwithstanding anything to the contrary set forth in the Series D Certificate of Designation, at no time may all or a portion of the Series D Preferred Stock be converted if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of common stock that would result in the holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time, which amount may be increased to 9.99% at the holders discretion.

 

On April 13, 2018, the Company filed a Certificate of Designation for its Series D-1 convertible preferred stock (the “Series D-1 Preferred Stock”) with the Secretary of State of Nevada designating 50,000,000 shares of its authorized preferred stock as Series D-1 Preferred Stock. The shares of Series D-1 Preferred Stock have a par value of $0.0001 per share, do not have a dividend rate or liquidation preference and do not carry any voting rights. Each share of Series D-1 Preferred Stock is convertible into one share of common stock. At no time may all or a portion of the Series D-1 Preferred Stock be converted if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of common stock that would result in the holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time, which amount may be increased to 9.99% at the holders discretion.

 

On April 13, 2018, the Company began offering in a private placement (the “Offering”), units (“Units”), each Unit consisting of one share of Series D Preferred Stock, and one right to purchase future digital coins, or certain other securities, issued by the Company or WaterChain, Inc., our wholly owned subsidiary. The Company is offering up to a maximum of 50,000,000 Units at a purchase price of $0.02 per Unit for an aggregate offering amount of $1,000,000, provided, that the Company may increase the Offering amount to $2,000,000 at its sole discretion.

 

Between April 13, 2018 and May 4, 2018, the Company entered into subscription agreements with certain accredited investors pursuant to which the Company sold an aggregate of 11,777,777 Units of the Company’s securities for an aggregate purchase price of $230,000.

 

On April 30, 2018, the Company issued to consultants an aggregate of 709,034 shares of the Company’s common stock for services in lieu of cash considerations. 

 

On May 3, 2018, holders of convertible promissory notes converted an aggregate principal and interest amount of $51,763 into an aggregate of 5,751,476 shares of the Company’s common stock.

 

On May 14, 2018, the Board of Directors of the Company approved an amendment to the transaction documents for the Offering providing for (i) an extension of the Offering period, (ii) an increase to the maximum Offering amount from $2,000,000 to $3,000,000 and (iii) two new discounts pursuant to which (a) investors purchasing Units for an aggregate purchase price of $1,000,000 or greater, but less than $2,000,000, will be entitled to a 40% discount, for a purchase price of $0.012 per Unit, and (b) investors purchasing Units for an aggregate purchase price of $2,000,000 or greater will be entitled to a 50% discount, for a purchase price of $0.01 per Unit.

 

On May 16, 2018, the Board of Directors of the Company approved the issuance of an aggregate of 2,000,000 shares of the Company’s common stock to a consultant for services in lieu of cash considerations.

On May 16, 2018, the Company entered into separate Restricted Stock Grant Agreements (the “May 2018 RSGAs”) with its Chief Executive Officer, Riggs Eckelberry, one employee and one consultant to create incentives to improve the economic performance of the Company and to increase its value and stock price. The May 2018 RSGAs provide for the issuance of 30,000,000 shares of common stock to Mr. Eckelberry and 2,000,000 shares to each of the employee and consultant, however all shares issuable under the May 2018 RSGAs are performance based shares and none have yet vested nor have any been issued. The May 2018 RSGAs provide for the issuance of the Company’s common stock provided certain milestones are met in certain stages with a) 50% of each employee’s or consultant’s respective award vesting 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 and b) 50% of each employee’s or consultant’s respective award vesting 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 months.

 

In connection with certain one-time make good agreements, between April 30, 2018 and May 18, 2018, the Company issued an aggregate of 4,092,293 shares of its common stock to certain holders of its common stock.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This Quarterly Report 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. We recently 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 525 South Hewitt Street, Los Angeles, California 90013. Our main telephone number is (323) 939-6645. Our website address is www.OriginClear.com. In addition to announcing material financial information through our investor relations website, press releases, SEC filings and webcasts, we also intend to use the following social media channels as a means of disclosing information about our products, our planned financial and other announcements, our attendance at upcoming investor and industry conferences, and other matters and for complying with our disclosure obligations under Regulation FD:

 

  OriginClear’s Twitter Account (https://twitter.com/OriginClear)
     
  OriginClear’s Facebook Page (https://www.facebook.com/OriginClear)
     
  OriginClear’s LinkedIn Page (https://www.linkedin.com/company/2019598)

 

The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts, in addition to following the company’s press releases, SEC filings, public conference calls and webcasts. This list may be updated from time to time.

 

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We have not incorporated by reference into this report the information in, or that can be accessed through, our website or social media channels, and you should not consider it to be a part of this report.

 

Overview of Business

 

Our mission is to provide expertise, technology, and capital to help make clean water available for all. Specifically, we have the following initiatives:

 

  1. We license our technology worldwide to treat heavily polluted waters and also to remove harmful micro-contaminants from drinking water, using minimal energy, chemicals, and materials.

 

  2. We are building a network of customer-facing water service companies to expand our global market presence and our technical expertise.

 

  3. In our latest proprietary development as a water technology company, we have conceptualized our blockchain-based WaterChain™ initiative to fund next-generation water recycling systems that can propel the world’s water supply forward into a cleaner future. We have created a concept document and have recruited an initial team of advisors. We received initial technical advice and we are now raising additional funds to architect and develop the WaterChain program. It is very likely that the initial WaterChain vision will change dramatically as we develop the program. We have not defined the final nature of any coins, tokens or other instruments, and we may not be able to raise the capital needed to execute on this concept.

 

Water is our most valuable resource, and the mission of OriginClear is to improve the quality of water and help return it to its original and clear condition.

 

OriginClear Group™

 

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 could lead to enormous economies of scale through sharing of best practices, technologies, and customers.

 

Decentralization is an even greater trend in water, similar to what has been seen in energy decentralization through solar and wind off-grid generation.

 

Water is becoming increasingly scarcer. ​McKinsey’s Transforming ​Water Economies ​forecasts that ​“without ​action, global ​water demand ​could outstrip ​supply by up to ​40 percent by ​2030.” ​Furthermore, existing water infrastructure in the United States is aging and water loss is increasing.

  

OriginClear may in the future seek to acquire companies to ​help industrial ​water users ​treat their ​water ​themselves, and often reuse ​it. We believe ​those companies ​are going to ​grow tremendously ​because of this ​“local ​water” ​growth trend. ​We believe that assembling a group of water treatment companies is an opportunity for significant growth and increased Company value for the stockholders. 

 

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Progressive Water Treatment Inc.

 

On October 1, 2015, OriginClear announced it had acquired 100 percent of Dallas-based Progressive Water Treatment Inc. (“PWT”), a fast-growing designer, builder and service provider for a wide range of industrial water treatment applications. PWT reported revenue of $3,216,182 for the period ending December 31, 2017. For the first three months of 2018, PWT reported revenue of $1,240,649 which is included in the consolidated financial statements ending March 31, 2018.

 

This marked the first transaction in OriginClear’s corporate strategy to acquire leading U.S. water service companies focused on specialized water treatment. OriginClear aims to offer a complementary, end-to-end offering to serve growing corporate demand for outsourced water treatment. The Company acquired PWT through the exchange of all issued and outstanding shares of PWT for 10,000 shares of the Company’s designated Series B Preferred Stock.

 

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. Known as an OEM (Original Equipment Manufacturer), PWT utilizes a wide range of technologies, including chemical injection, media filters, membrane, ion exchange and SCADA technology, in turnkey systems that it designs and builds. PWT also offers a broad range of services including maintenance contracts, retrofits and replacement assistance. In addition, PWT rents equipment through contracts of varying duration. Customers are primarily served in the United States and Canada, with PWT’s reach extending worldwide from Japan to Argentina to the Middle East.

 

OriginClear is currently in discussions for additional, accretive acquisitions of companies specializing in complementary markets and applications. However, no assurance can be given that the Company will complete these acquisitions.

 

Technology Licensing

 

For its first eight years of operations, OriginClear focused uniquely on development and commercialization of its breakthrough Electro Water Separation™ technology. In 2015, the technology went into commercial phase, and the Company launched it as OriginClear Technologies, operating in parallel to the Group. The mission of OriginClear Technologies is to develop Electro Water Separation™ and achieve its full recognition as an international industry standard in treating our increasingly complex wastewater treatment challenges. For this purpose, OriginClear Technologies relies on an ongoing strong R&D and engineering activity for the development of its technology, while actively building its network of partners, licensees and joint venture partners for commercial development. A key element of this strategy is OriginClear (HK), OriginClear’s wholly-owned subsidiary in Hong Kong that manages Asia-Pacific market development, with a special focus on China sales and manufacturing. While OriginClear Technologies focuses on developing and monetizing the Company’s internally-developed Intellectual Property, best practices and trade secrets, it is expected to do the same for technologies which may come in the future with the Group’s acquisition of profitable water treatment companies.

 

The Technology

 

OriginClear is the proprietary developer of EWS, the high-speed, primarily chemical-free technology to clean up large quantities of water. It removes oils, suspended solids, certain dissolved solids, and pathogens, in a continuous and energy-efficient process. The Company originally developed this technology to solve the challenge of removing microalgae from a highly dilute state. The EWS technology remains the most efficient non-chemical, continuous mechanism for the concentration of live algae cells from water.

 

The electro-chemical process was then extended, first to cleaning up oil and gas waste water and most recently, to industrial, agricultural and urban effluents. These water treatment applications are entirely electrochemical in nature and do not rely on algae for its cleaning capabilities, which is a separate application of the technology. EWS is designed to be an early step in removal of oils, solids and pathogens; reducing the work that more expensive, downstream processes such as Ultra Filtration or Reverse Osmosis must do, therefore enabling more cost-efficient and high-volume water cleanup overall.

 

21

 

 

In March of 2016, OriginClear announced that it had successfully developed and proved Advanced Oxidation for its breakthrough water cleanup system, EWS. University laboratory tests have shown that EWS with Advanced Oxidation (EWS:AOx™) can now extract dissolved contaminants, which are otherwise difficult to remove without chemicals such as chlorine. Overall, the system has shown a dramatic reduction in Total Organic Compounds which includes all forms of organic contamination, solids, miscible or dissolved, to meet new stringent global discharge requirements. Even prior to this innovation, EWS, combined with an iSep ultrafiltration membrane, demonstrated up to a 99.9% removal of dispersed oil, 99.5% removal of suspended solids as well as successful treatment of chemical oxygen demand (COD), including specific contaminants such as ammonia, phosphorus and hydrogen sulfide. These results were presented at the International Water Conference in 2015. In 2016, OriginClear filed for a patent to protect the new AOx process and system configuration.

 

Today, we are capable of pairing the two technologies as EWS:AOx™, or separately, as the application requires. OriginClear believes that its technology is valuable to the industry because it has the potential to greatly extend the life of membranes and filters by effectively treating very dirty, oily water, while reducing chemical use significantly.

 

OriginClear also believes that its Advanced Oxidation technology will help neutralize harmful micro-contaminants, such as industrial solvents, which is difficult or impossible to achieve with other technologies.

 

Overall, the system has shown a dramatic reduction in Total Organic Compounds which includes all forms of organic contamination, solids, miscible or dissolved, to meet new stringent global discharge requirements.

 

WaterChain, Inc.

 

WaterChain, Inc. was incorporated on January 5, 2018 and is a wholly-owned subsidiary of OriginClear, Inc. OriginClear is a technology company, and WaterChain is our latest invention. It is a way to raise capital for next-generation, decentralized water treatment and recycling projects.

 

An opportunity exists to create a new generation of water projects that use only the latest innovations in systems and practices. These can dramatically improve speed and costs, making it far easier to recycle water. The technologies are known; creating new capital for their implementation is new.

 

We intend to launch an Initial Coin Offering (ICO) to capitalize and rapidly scale up a series of world-class water treatment and recycling systems that return profits to investors, although there can be no assurance of this. We plan to implement a Project Management Organization (PMO) to implement a transparent and fair process to select projects, technologies and practices.

 

We plan to deploy Distributed Ledger Technology (DLT) within these systems as appropriate and scale up rapidly with the active involvement of the water industry to help meet the global water crisis.

 

We intend to adhere to securities law to the fullest extent in our ICO and related funding efforts and have retained specialized counsel to that effect. The “coin” may take any form, for example as an asset class, or as equity in OriginClear.

 

Critical Accounting Policies

 

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

 

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Revenue Recognition

 

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

 

Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss, as it is determined. The Contract Asset represents revenues recognized in excess of amounts billed on contracts in progress. The Contract Liability represents billings in excess of revenues recognized on contracts in progress. 

 

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 of March 31, 2018, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.

 

Recently Issued Accounting Pronouncements

 

Management reviewed accounting pronouncements issued during the three months ended March 31, 2018, and adopted pronouncement ASC 606, which management believes will not have a significant material impact on our present or future financial statements.

 

Results of Operations for the three months ended March 31, 2018 compared to the three months ended March 31, 2017.

 

Revenue and Cost of Sales

 

For the three months ended March 31, 2018, our revenue for the Company increased by 98% to $1,333,539 compared to $672,129 for the three months ended March 31, 2017. Cost of sales for the three months ended March 31, 2018, was $959,666 compared to $582,456 for the three months ended March 31, 2017. Revenue and cost of sales increased primarily due to PWT operations.

 

Our gross profit increased by 317% to $373,873 compared to $89,673 for the three months ended March 31, 2018 and 2017, respectively. The increase in gross profit was primarily due to PWT operations.

 

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Selling and Marketing Expenses

 

For the three months ended March 31, 2018, we had selling and marketing expenses of $341,933, compared to $512,801 for the three months ended March 31, 2017. The decrease in selling and marketing expenses was primarily due to a decrease in non-cash investor relations expenses.

 

General and Administrative Expenses

 

General and administrative expenses increased to $686,618, for the three months ended March 31, 2018, compared to $624,530 for the three months ended March 31, 2017. The increase in general and administrative expenses was primarily due to an increase in professional fees.

 

Research and Development Cost

 

Research and development cost for the three months ended March 31, 2018 and 2017, were $43,539 and $53,653, respectively.  The decrease in research and development costs was primarily due to a decrease in consultants and contractors expense.

 

Other Income and (Expenses)

 

Other income and (expenses) for the three months ended March 31, 2018 and 2017, were $(12,175,738) and $882,358, respectively. The increase in other income (expenses) was primarily a result of a change in gain of non-cash accounts associated with the fair value of the derivatives in the amount of $(12,869,969) and commitment fees of $(220,283), with an offset of interest expense of $32,156, which included non-cash amortization of debt discount of $78,958.

  

Net Income/(Loss)

 

Our net loss increased by $12,655,763 to $12,888,316 for the three months ended March 31, 2018, compared to a net loss of $232,553 for the three months ended March 31, 2017. The majority of the increase in net loss was due primarily to an increase in other expenses consisting of an increase in loss in non-cash accounts associated with derivatives and commitment fees, offset by an increase in revenue and gross profit and decrease in operating expenses.

 

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, additional cash infusion. We obtained funds from our shareholders during the three months ending March 31, 2018. Management believes the existing shareholders, 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 undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in case of equity financing.

 

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At March 31, 2018 and December 31, 2017, we had cash of $236,023 and $439,822, respectively, and working capital deficit of $19,552,317 and $7,194,220, respectively.  The increase in working capital deficit was due primarily to an increase in non-cash derivative liabilities and convertible notes, accounts payable, accrued expenses, deferred income and capital lease with a decrease in cash, contracts receivable and prepaid expenses. 

 

During the first three months of 2018, we raised an aggregate of $252,750 in an offering of unsecured convertible notes. 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 $403,508 for the three months ended March 31, 2018, compared to $330,208 for the prior period ended March 31, 2017. The increase in cash used in operating activities was due to an increase in professional fees and marketing expense.

 

Net cash flows used in investing activities was $45,440 for the three months ended March 31, 2018, as compared to $32,918 for the prior period ended March 31, 2017. The net increase in cash used in investing activities was due to an increase in leased equipment in the current period.

 

Net cash flows provided by financing activities was $245,148 for the three months ended March 31, 2018, as compared to $454,736 for the prior period ended March 31, 2017. The decrease in cash provided by financing activities was due to a decrease in equity financing through private placements offset by an increase in debt financing through convertible promissory notes. The convertible notes are convertible into shares of common stock, which have limitations on conversion. The lenders are limited to no more than a 4.99% beneficial ownership of the outstanding shares of common stock. Beneficial ownership is determined in accordance with Section 13(d) and 13(g) of the Securities Exchange Act of 1934, as amended ("Exchange Act"). To date we have principally financed our operations through the sale of our common 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 convertible debt together with revenue from operations are currently sufficient to fund our operating expenses, we will need to raise additional funds in the future so that we can expand our operations. Therefore, our future operations are dependent on our ability to secure additional financing.  Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans and possibly cease our operations.

 

We have estimated our current average burn, and believe that we have assets to ensure that we can function without liquidation over the next twelve months, 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 foreseeable future and will be able to realize assets and discharge liabilities in the normal course of operations.

 

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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Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

Item 4.   Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

  

Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Exchange Act, the Company carried out an evaluation, with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer ("CEO/CFO") of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. The term "disclosure controls and procedures", as defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

As disclosed in our annual report filing for the year ended December 31, 2017, there was a significant deficiency in the Company's internal control over financial reporting due to a lack of segregation of duties due to small Company staff size. Based upon the evaluation of the disclosure controls at the end of the period covered by this report, the Company's CEO/CFO concluded that the Company's disclosure controls were ineffective due to the significant deficiency in the Company's internal control over financial reporting due to small Company staff size.

 

To address the significant deficiency, we performed additional analysis and other post-closing procedures in an effort to ensure our condensed consolidated financial statements included in this review report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this quarterly report on Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15f of the Exchange Act) that occurred during the current period ended March 31, 2018 that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Limitations on Internal Controls

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

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PART II

 

Item 1.   Legal Proceedings.

 

None

 

Item 1A. Risk Factors.  

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

Item 3.   Defaults Upon Senior Securities.

 

None

 

Item 4.   Mine Safety Disclosures

 

Not applicable.

 

Item 5.   Other Information.

 

       On May 16, 2018, the Board of Directors of the Company approved the issuance of an aggregate of 2,000,000 shares of the Company’s common stock to a consultant for services in lieu of cash considerations.

       The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering.

       On May 16, 2018, the Company entered into separate Restricted Stock Grant Agreements (the “May 2018 RSGAs”) with its Chief Executive Officer, Riggs Eckelberry, one employee and one consultant to create incentives to improve the economic performance of the Company and to increase its value and stock price. The May 2018 RSGAs provide for the issuance of 30,000,000 shares of common stock to Mr. Eckelberry and 2,000,000 shares to each of the employee and consultant, however all shares issuable under the May 2018 RSGAs are performance based shares and none have yet vested nor have any been issued. The May 2018 RSGAs provide for the issuance of the Company’s common stock provided certain milestones are met in certain stages with a) 50% of each employee’s or consultant’s respective award vesting 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 and b) 50% of each employee’s or consultant’s respective award vesting 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 months. 

Item 6.   Exhibits.

 

Exhibit
Number
  Description of Exhibit
 
10.1   Form of Restricted Stock Award Agreement 
31   Certification by Chief Executive Officer and Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
32   Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   XBRL Instance Document.*
101.SCH   XBRL Taxonomy Extension Schema.*
101.CAL   XBRL Taxonomy Extension Calculation Linkbase.*
101.DEF   XBRL Taxonomy Extension Definition Linkbase.*
101.LAB   XBRL Taxonomy Extension Label Linkbase.*
101.PRE   XBRL Extension Presentation Linkbase.*

 

* Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statement of Operations, (iii) the Statement of Shareholders’ Equity, (iv) the Statement of Cash Flow, and (v) Notes to Financial Statements.

 

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  ORIGINCLEAR, INC.
     
  By: /s/ T Riggs Eckelberry
    T Riggs Eckelberry
    Chief Executive Officer
(Principal Executive Officer) and
    Acting Chief Financial Officer
(Principal Accounting and Financial Officer)
    May 21, 2018

 

 

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