NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
SIX
MONTHS ENDED JUNE 30, 2016
The
accompanying unaudited condensed 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 six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2016. 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, 2015.
Going
Concern
The
accompanying condensed 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 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. Management
believes the existing shareholders, the prospective new investors and future sales will provide the additional cash needed to
meet the Company’s obligations as they become due, and will allow the development of its core business operations. No assurance
can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the
Company. Even if the Company is able to obtain additional financing, it may contain 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 Company, Ltd. All material intercompany transactions have been eliminated
upon consolidation of these entities.
Revenue
Recognition
Equipment
sales
We
recognize revenue upon delivery of equipment, 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. Title
to the equipment is transferred to the customer once the last payment is received. We record revenue as goods are shipped, and
the equipment has been fully accepted by the customer. Generally, we extend credit to our customers and do not require collateral. We
do not ship a product until we have a purchase agreement signed by the customer with a payment arrangement.
Percentage
of completion
Revenues
and related costs on construction contracts are recognized using the “percentage of completion method” of accounting
in accordance with ASC 605-35 – “
Accounting for Performance of Construction-Type and Certain Production Type Contracts”.
Under this method, contract revenues and related expenses are recognized over the performance period of the contract in direct
proportion to the costs incurred as a percentage of total estimated costs for the entirety of the contract. Costs include direct
material, direct labor, subcontract labor and any allocable indirect costs. 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
asset “Costs in excess of billings” represents revenues recognized in excess of amounts billed on contracts in progress.
The liability “Billings in excess of costs” 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.
Revisions
in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts for the
revisions become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty
provisions, and final contract settlements, may result in revisions to costs and income, which are recognized in the period the
revisions are determined.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
SIX
MONTHS ENDED JUNE 30, 2016
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
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 $50,000 as of June 30, 2016
and 2015, respectively. The net contract receivable balance was $609,138 and $0 at June 30, 2016 and 2015, respectively, due to
the acquisition of PWT.
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.
On
September 29, 2015, the Company adopted and approved a new incentive stock option plan and reserved 8,000,000 shares of common
stock at par value $0.0001 per share of the Corporation for issuance.
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 June 30, 2016, the balances reported for cash, prepaid expenses, accounts
payable, 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 1measurements) 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 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 June 30, 2016:
|
|
|
Total
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Liability
|
|
$
|
4,025,029
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,025,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities measured at fair value
|
|
$
|
4,025,029
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,025,029
|
|
The
following is a reconciliation of the derivative liability for which Level 3 inputs were used in determining the approximate fair
value:
|
Beginning balance
as of January 1, 2016
|
|
$
|
9,317,475
|
|
|
Fair
value of derivative liabilities issued
|
|
|
481,428
|
|
|
Gain
on conversion of debt and change in derivative liability
|
|
|
(5,773,874
|
)
|
|
Ending
balance as of June 30, 2016
|
|
$
|
4.025.029
|
|
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
SIX
MONTHS ENDED JUNE 30, 2016
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
Income
(Loss) per Share Calculations
Basic
income (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted-average number
of common shares available. Diluted earnings per share is computed 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’s diluted
income (loss) per share is the same as the basic income (loss) per share for the six months ended June 30, 2016 and 2015, as
the inclusion of any potential shares would have had an anti-dilutive effect.
For the six months ended June 30,
2016, the Company has excluded 74,865,478 stock options, 17,897,593 common stock purchase warrants outstanding, and $4,437,068
in convertible notes, which are convertible into shares of common stock, because their impact on the loss per share is anti-dilutive. No
restricted stock grants were vested during the period.
Use
of Estimates
The
preparation of the condensed financial statements in conformity with accounting principles generally accepted in the U.S requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period.
Significant estimates are used in valuing our stock options, warrants, convertible notes, and common stock issued for services,
among other items. Actual results could differ from these estimates.
Principles
of Consolidation
The
Company adopted the guidance of ASC Topic 810 “Consolidation” of the FASB Accounting Standards Codification to determine
whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all
entities in which a parent has a controlling financial interest—shall be consolidated except (1) when control does not rest
with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely
to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee.
Pursuant to ASC Paragraph 810-10-15-8, the usual condition for a controlling financial interest is ownership of a majority voting
interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent
of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may
also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court
decree. The Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control
exists.
The
consolidated financial statements include all accounts of the entities at June 30, 2016.
|
|
|
|
|
Date of incorporation or
|
|
|
|
Name of consolidated
|
|
State or other jurisdiction
|
|
formation (date of acquisition
|
|
Attributable interest
|
|
subsidiary
or entity
|
|
of
incorporation or organization
|
|
if
applicable
|
|
at
June 30, 2016
|
|
|
|
|
|
|
|
|
|
OriginClear (HK)
Ltd.
|
|
Hong Kong
|
|
December 31, 2014
|
|
100%
|
|
Progressive Water
Treatment
|
|
Texas
|
|
October 1, 2015
|
|
100%
|
All
inter-company balances and transactions have been eliminated.
Foreign
Currency Matters
We
adopted ASC Topic 830 –
Foreign Currency Matters,
which relates to translating the records of a foreign subsidiary
from its functional currency into the reporting currency. The records are in conformity with generally accepted accounting principles
(GAAP). The financial position and results of operations of the Company’s foreign subsidiary is measured using the foreign
subsidiary’s local currency as the functional currency. Revenues and expenses of such subsidiary has been translated into
U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates
of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate
component of shareholders’ equity, unless there is a sale or complete liquidation of the underlying foreign investments.
During the six months ended June 30, 2016, the foreign currency translation adjustments resulted in a loss of $16.
Transaction
gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
Recently
Issued Accounting Pronouncements
Management
has reviewed recently issued accounting pronouncements and has adopted the following;
On
August 27, 2014, the Company adopted the amendment to ASU 2014-15 on
Presentation of Financial Statements Going Concern (Subtopic
205-40).
The amendment provides for guidance to reduce diversity in the timing and content of footnote disclosures. The amendment
requires management to assess the Company’s ability to continue as a going concern by incorporating and expanding upon certain
principles that are currently in U.S. auditing standards. The Company has to define the term of substantial doubt, which has to
be evaluated every reporting period including interim periods. Management has to provide principles for considering the mitigating
effect of its plan, and disclose when substantial doubt is alleviated as well as when it is not alleviated. The Company is required
to assess managements plan for a period of one year after the financial statements are issued (or available to be issued). The
amendment is effective for annual periods ending after December 15, 2016. Early
adoption is permitted.
The Company does not believe the accounting standards currently adopted will have a material effect on the accompanying condensed
financial statements.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
SIX
MONTHS ENDED JUNE 30, 2016
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
Segment
Reporting
Operating
segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly
by the chief operating decision maker, or decision making group, in deciding the method to allocate resources and assess performance.
The Company currently has one reportable segment for financial reporting purposes, which represents the Company’s core business.
On
October 1, 2015, the Company acquired PWT from Marc Stevens through the transfer of all issued and outstanding shares of PWT in
exchange (the “Exchange”) for 10,000 shares of a new series of preferred stock, the Series B Preferred Stock, filed
with the State of Nevada by the Company on October 1, 2015.
Each share of Series B Preferred
Stock has a stated value of $150 per share and is convertible into shares of the Company’s common stock in three annual
increments beginning 12 months from closing. 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. The Series B Preferred Stock is entitled to vote with the holders of the Company’s common stock on all corporate
actions, including the election of the Company’s directors. The holders of the Series B Preferred Stock are entitled to
cast one vote for each share of Series B Preferred Stock owed.
The
acquisition was accounted for under ASC 805. PWT is engaged in providing water treatment systems and services for a wide variety
of applications and component sales. The acquisition is designed to enhance our services in water treatment. PWT became a wholly-owned
subsidiary of the Company.
Under
the purchase method of accounting, the transactions were valued for accounting purposes at $1,500,000, which was the fair value
of PWT at the time of acquisition. The assets and liabilities of PWT were recorded at their respective fair value as of the date
of acquisition. Since, the Company determined there were no other separately identifiable intangible assets, any difference between
the cost of the acquired entity and the fair value of the assets acquired and liabilities assumed is recorded as goodwill. The
acquisition date estimated fair value of the consideration transferred consisted of the following:
|
Convertible promissory
note
|
|
$
|
1,500,000
|
|
|
Total purchase price
|
|
$
|
1,500,000
|
|
|
|
|
|
|
|
|
Tangible assets acquired
|
|
$
|
1,549,700
|
|
|
Liabilities assumed
|
|
|
(731,845
|
)
|
|
|
|
$
|
817,855
|
|
|
Goodwill
|
|
|
682,145
|
|
|
Total purchase price
|
|
$
|
1,500,000
|
|
As
of June 30, 2016, the Company has not identified any intangible assets other than goodwill. However, the above estimated fair value
of the intangible assets of PWT is based on a preliminary purchase price allocation prepared by management. As a result, during
the preliminary purchase price allocation period, which may
be
up to one year from the business combination date, we may record adjustments to the assets acquired and liabilities assumed, with
the corresponding offset to goodwill. After the preliminary purchase price allocation period, we record adjustments to assets acquired
or liabilities assumed subsequent to the purchase price allocation period in our operating results in the period in which the adjustments
were determined.
Proforma results
The following tables set forth the
unaudited pro forma results of the Company as if the acquisition of PWT had taken place on the first day of the periods presented.
These combined results are not necessarily indicative of the results that may have been achieved had the companies been combined
as of the first day of the periods presented.
|
|
|
Period Ended
|
|
|
|
|
June
30,
2015
|
|
|
|
|
(unaudited)
|
|
|
Total
Revenues
|
|
$
|
2,774,664
|
|
|
Net
Income (Loss)
|
|
$
|
(2,469,296
|
)
|
|
Basic
and Diluted Net Earnings Per Common Share
|
|
$
|
(0.029
|
)
|
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
SIX
MONTHS ENDED JUNE 30, 2016
Preferred
Stock
As
of June 30, 2016, the Company’s preferred stock consisted of Series A and Series B shares. There were 25,000,000 preferred
shares authorized and 11,000 shares outstanding. The shares have a par value of $0.0001 per share. The Series A preferred stock
provides for supermajority voting rights to the holder, and the Series B stock is convertible into shares of common stock to the
holder.
Common
Stock
During
the six months ended June 30, 2016, the Company issued 70,740,182 shares of common stock for the settlement of convertible promissory
notes in an aggregate principal in the amount of $559,000, plus interest in the amount of $69,682, based upon conversion prices
per share ranging from $0.0055 to $0.0098.
During
the six months ended June 30, 2016, the Company issued 40,126,904 shares of common stock for services at fair value of $748,601.
During
the six months ended June 30, 2016, the Company issued 80,400,000 shares of common stock for cash in the amount of $804,000 for
the purchase of shares of commons stock at a price of $0.01 per share.
5.
|
CONVERTIBLE
PROMISSORY NOTES
|
On
various dates the Company entered into unsecured convertible Notes (the “Convertible Promissory Notes” or “Notes”),
that mature between six and nine months from the date of issuance and bear interest at 10% per annum. The Notes mature on various
dates through July, 2017. The Notes may be converted into shares of the Company’s common stock at conversion prices
ranging from the lesser of $0.06 to $0.14 (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. The Notes include customary default
provisions related to payment of principal and interest and bankruptcy or creditor assignment. In the event of default,
the Notes shall become immediately due and payable at the mandatory default amount. The mandatory default amount is 150% of the
Note amount and such mandatory default amount shall bear interest at 10% per annum. 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. As of December 31, 2015,
the outstanding principal balance was $2,535,000. During the six months ended June 30, 2016, the Company issued 55,696,423 shares
of common stock upon conversion of $395,000 in aggregate principal, plus accrued interest of $69,691. As of June 30, 2016, the
Notes had an aggregate remaining balance of $2,140,000. The Company recorded amortization of debt discount, which was recognized
as interest expense in the amount of $1,691 during the six months ended June 30, 2016.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
SIX
MONTHS ENDED JUNE 30, 2016
5.
|
CONVERTIBLE
PROMISSORY NOTES (Continued)
|
On
February 24, 2015, the OID Notes with an aggregate remaining principle balance of $273,124, plus accrued interest of $13,334 were
amended. The Notes are unsecured convertible promissory notes (the “OID Notes”), that included an original issue discount
and one time interest, which has been fully amortized. The OID Notes were extended and matured on various dates through September
19, 2014. On each maturity date, each note was extended one year from its maturity date through September 19, 2015. On February
24, 2015, the Notes were amended and have a maturity date of December 31, 2015. The Notes were analyzed under ASC 470
(Extinguishment
& Modification of debt)
to determine if there was a 10% change between the fair value of the embedded conversion option
immediately before and after the modification or exchange. The change of the fair value of the conversion feature was greater
than 10% of the carrying value of the debt. As a result, in accordance with ASC 470-50, the Company deemed the terms of the amendment
to be substantially different and treated the convertible note as an extinguishment. The OID Notes were convertible into shares
of the Company’s common stock at a conversion price initially of $0.4375. After the amendment the conversion price changed
to the lesser of $0.08 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.
On May 19, 2015, a holder of a note with a more favorable term converted a note at a price of $0.02, which became part of this
note due to the reset provision mentioned above. 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. On March 31, 2016, the Company issued
10,470,588 shares of common stock upon partial conversion of principal in the amount of $89,000, leaving a remaining balance of
$184,124.
The
Company entered into various unsecured convertible Notes (the “Convertible Promissory Notes” or “Notes”),
for an aggregate amount of $1,900,000. As of June 30, 2016, the Company has received advances in the aggregate of $1,325,000.
The notes matured between nine and twelve months from the date of issuance of each advance and bears interest at 10% per annum.
The Notes were extended and mature on various dates ending on May 31, 2017. The Notes may be converted into shares of the Company’s
common stock at conversion prices ranging from the lesser of $0.02 to $0.08 (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. The
Notes include customary default provisions related to payment of principal and interest and bankruptcy or creditor assignment. In
the event of default, the Notes shall become immediately due and payable at the mandatory default amount. The mandatory default
amount is 150% of the Note amount and such mandatory default amount shall bear interest at 10% per annum. 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.
The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $83,658 during the
six months ended June 30, 2016.
On
June 30, 2015, the Company issued a convertible 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 note was accounted for under
ASC 470, whereby, a beneficial conversion feature was recorded at time of issuance. The 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 note and
recognized as interest expense in the financial statements. On January 1, 2016, the note meet the criteria of a derivative
and was accounted for under ASC 815. The note has a 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. On February
12, 2016, the Company issued 4,573,171 shares of commons stock upon conversion of $75,000 in principal, leaving a remaining
balance of $357,048. The Company recorded amortization of debt discount, which was recognized as interest expense in the
amount of $107,124 during the six months ended June 30, 2016.
On March 31, 2016, the Company
issued a convertible 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 note was accounted for under ASC 470, whereby, a beneficial
conversion feature was recorded at time of issuance. The note has a 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 note did not meet the criteria of a derivative, and was accounted for as a beneficial conversion feature, which will be amortized
over the life of the note and recognized as interest expense in the financial statements. The Company recorded amortization of
debt discount, which was recognized as interest expense in the amount of $61,841 during the six months ended June 30, 2016.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
SIX
MONTHS ENDED JUNE 30, 2016
6.
|
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 derivative
liability is adjusted periodically according to the stock price fluctuations.
For
purpose of determining the fair market value of the derivative liability for the embedded conversion, the Company used Black
Scholes option valuation model. The significant assumptions used in the Binomial lattice formula valuation of the derivative are
as follows:
|
Risk
free interest rate
|
|
|
0.14%
- 1.02
|
%
|
|
Stock
volatility factor
|
|
|
4.72%
- 189.09
|
%
|
|
Weighted average
expected option life
|
|
|
6
months - 2 years
|
|
|
Expected
dividend yield
|
|
|
None
|
|
The
derivative liability recognized in the financial statements as of June 30, 2016 was $4,025,029.
7.
|
OPTIONS, WARRANTS AND RESTRICTED STOCK
|
Options
The
Board of Directors adopted the OriginClear, Inc. (formerly OriginOil, Inc.), 2009 Incentive Stock Option Plan (the “2009
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 Five Hundred Thousand (500,000) shares of Common Stock.
On
May 25, 2012, the Board of Directors adopted a new OriginOil, Inc., 2012 Incentive Stock Option Plan (the “2012 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 One Million (1,000,000) shares of Common Stock. Options granted under these Plans
may be either incentive options or nonqualified options and shall be administered by the Company's Board. 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 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 effective date of grant.
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 Four Million (4,000,000) shares of Common Stock. Options granted under the Plan
may be either incentive options or nonqualified options and shall be administered by the Company's Board. 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.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
SIX
MONTHS ENDED JUNE 30, 2016
7.
|
OPTIONS, WARRANTS AND RESTRICTED STOCK (Continued)
|
On
October 2, 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 One Hundred Sixty Million (160,000,000) shares of Common Stock. Options
granted under these Plans may be either incentive options or nonqualified options and shall be administered by the Company's Board. 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 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.
Options
granted under these Plans may be either incentive options or nonqualified options and shall be administered by the Company's Board. 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 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 (5th) anniversary from the effective 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 thirty (30) days nor more than three (3) months after such termination.
With
respect to Non-statutory Options granted to employees, directors or consultants, the Board or Committee 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 or Committee deems reasonable and appropriate.
During
the six months ended June 30, 2016, the Company granted 1,000,000 incentive stock options, and recognized compensation costs of
$104,217 based on the fair value of the options vested for the six months ended June 30, 2016.
A
summary of the Company’s stock option activity and related information follows:
|
|
|
June
30, 2016
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
average
|
|
|
|
|
of
|
|
|
exercise
|
|
|
|
|
Options
|
|
|
price
|
|
|
Outstanding, beginning of period
|
|
|
119,404,644
|
|
|
$
|
0.05
|
|
|
Granted
|
|
|
1,000,000
|
|
|
$
|
0.02
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited/Expired
|
|
|
(6,474,999
|
)
|
|
$
|
0.06
|
|
|
Outstanding, end of period
|
|
|
113,929,645
|
|
|
$
|
0.05
|
|
|
Exercisable at
the end of period
|
|
|
74,865,478
|
|
|
$
|
0.04
|
|
|
Weighted average fair value of options granted during the period
|
|
|
|
|
|
$
|
-
|
|
The
weighted average remaining contractual life of options outstanding issued under the 2009 Plan, 2012 Plan, and 2013 Plan as of
June 30, 2016, was as follows:
|
Exercisable
Prices
|
|
|
Stock
Options
Outstanding
|
|
|
Stock
Options
Exercisable
|
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
|
$
|
0.19
- 4.20
|
|
|
|
1,846,979
|
|
|
|
1,443,020
|
|
|
|
0.04
- 8.27
|
|
|
$
|
0.41
- 0.44
|
|
|
|
1,132,666
|
|
|
|
778,708
|
|
|
|
7.21
|
|
|
$
|
0.02
- 0.0375
|
|
|
|
110,950,000
|
|
|
|
72,643,750
|
|
|
|
4.27
- 4.75
|
|
|
|
|
|
|
|
113,929,645
|
|
|
|
74,865,478
|
|
|
|
|
|
As
of June 30, 2016, there was no intrinsic value with regards to the outstanding options.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
SIX
MONTHS ENDED JUNE 30, 2016
7.
|
OPTIONS, WARRANTS AND RESTRICTED STOCK (Continued)
|
Restricted Stock
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 shares and none have yet vested nor have been issued. The RSGA provides for the issuance of up to 60,000,000
shares of the Company’s common stock, with a fair value of $1,218,000 to the CEO, provided certain milestones are met in
the following stages: a.) If the Company’s consolidated gross revenue, calculated in accordance with GAAP, equals or exceeds
$15,000,000 for the trailing twelve month period, the Company will issue 30,000,000 shares of common stock; b.) If the Company’s
consolidated net profit, calculated in accordance to GAAP, equals or exceeds $1,500,000 for the trailing twelve month period,
the Company will issue 30,000,000 shares of the Company’s common stock. As the performance goals are achieved, the shares
shall become eligible for vesting and issuance.
A summary of the restricted stock issuances to the executive officer is as follows:
|
|
|
Number of Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Unvested share balance, January 1, 2016
|
|
|
0
|
|
|
$
|
0
|
|
|
Granted
|
|
|
60,000,000
|
|
|
|
0.0203
|
|
|
Vested
|
|
|
0
|
|
|
|
0
|
|
|
Forfeited
|
|
|
0
|
|
|
|
0
|
|
|
Unvested share balance, June 30, 2016
|
|
|
60,000,000
|
|
|
$
|
0.0203
|
|
Employees
On May 12, 2016, the Company entered into
a Restricted Stock Grant Agreement (“the 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 RSGA are performance shares
and none have yet vested nor have been issued. The RSGA provides for the issuance of up to 20,000,000 shares of the Company’s
common stock, with a fair value of $406,000 to the employee, provided certain milestones are met in the following stages: a.) If
the Company’s consolidated gross revenue, calculated in accordance with GAAP, equals or exceeds $15,000,000 for the trailing
twelve month period, the Company will issue 10,000,000 shares of common stock; b.) If the Company’s consolidated net profit,
calculated in accordance to GAAP, equals or exceeds $1,500,000 for the trailing twelve month period, the Company will issue 10,000,000
shares of the Company’s common stock. 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 RSGA”) with 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 RSGA are performance shares
and none have yet vested nor have been issued. The RSGA provides for the issuance of up to 30,000,000 shares of the Company’s
common stock, with a fair value of $609,000 to the employee, provided certain milestones are met in the following stages: a.)
If the Company’s consolidated gross revenue, calculated in accordance with GAAP, equals or exceeds $15,000,000 for the trailing
twelve month period, the Company will issue 15,000,000 shares of common stock; b.) If the Company’s consolidated net profit,
calculated in accordance to GAAP, equals or exceeds $1,500,000 for the trailing twelve month period, the Company will issue 15,000,000
shares of the Company’s common stock. As the performance goals are achieved, the shares shall become eligible for vesting
and issuance.
A summary of the restricted stock issuances to the employees is as follows:
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Unvested share balance, January 1, 2016
|
|
|
0
|
|
|
$
|
0
|
|
|
Granted
|
|
|
50,000,000
|
|
|
|
0.0203
|
|
|
Vested
|
|
|
0
|
|
|
|
0
|
|
|
Forfeited
|
|
|
0
|
|
|
|
0
|
|
|
Unvested share balance, June 30, 2016
|
|
|
50,000,000
|
|
|
$
|
0.0203
|
|
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
SIX
MONTHS ENDED JUNE 30, 2016
7.
|
OPTIONS, WARRANTS, AND RESTRICTED STOCK (Continued)
|
Warrants
During
the six months ended June 30, 2016, the Company did not grant any warrants.
A
summary of the Company’s warrant activity and related information follows:
|
|
|
June
30, 2016
|
|
|
|
|
Options
|
|
|
Weighted
average exercise price
|
|
|
Outstanding - January
1, 2016
|
|
|
23,297,108
|
|
|
$
|
0.21
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(5,399,515
|
)
|
|
$
|
0.05
|
|
|
Outstanding
- June 30, 2016
|
|
|
17,897,593
|
|
|
$
|
0.24
|
|
At
June 30, 2016, the weighted average remaining contractual life of warrants outstanding:
|
Exercisable
Prices
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
$
|
0.15
- 0.65
|
|
|
|
16,809,233
|
|
|
|
16,809,233
|
|
|
0.08- 1.95
|
|
$
|
0.25
- 1.75
|
|
|
|
841,692
|
|
|
|
841,692
|
|
|
0.82 - 2.22
|
|
$
|
0.90
- 6.90
|
|
|
|
246,668
|
|
|
|
246,668
|
|
|
0.21
- 6.38
|
|
|
|
|
|
|
17,897,593
|
|
|
|
17,897,593
|
|
|
|
Management evaluated subsequent events
as of the date of the financial statements pursuant to ASC TOPIC 855, and reported the following events:
In connection with certain one-time
make good agreements, between July 8, 2016 and August 12, 2016, the Company issued an aggregate of 23,649,134 shares of its common
stock to certain holders of its common stock.
Between July 15, 2016 and August
10, 2016 the Company issued to consultants and one employee an aggregate of 15,303,033 shares of the Company’s common stock
in lieu of cash consideration.
On August 10, 2016,
the Company issued to two members of the Board of Directors an aggregate of 2,000,000 shares of the Company’s common stock
for services in lieu of cash consideration.
On August 10, 2016,
the Company entered into Restricted Stock Award Agreements with T. Riggs Eckelberry (“Eckelberry”), a consultant (“Consultant”)
and employee of the Company (“Employee”), pursuant to which the Company granted 60,000,000 shares of common stock,
par value $0.0001 per share to Eckelberry, 10,000,000 shares of common stock, par value $0.0001 per share to Consultant and 10,000,000
shares of common stock, par value $0.0001 per share to Employee. Shares issued are subject to related vesting terms.