The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
NINE
MONTHS ENDED SEPTEMBER 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 nine months ended September 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 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 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)
NINE
MONTHS ENDED SEPTEMBER 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 September 30, 2016 and 2015, respectively. The net contract receivable balance was $391,035 and $0 at September
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 September 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 September 30, 2016:
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$
|
12,189,026
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12,189,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
12,189,026
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12,189,026
|
|
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
NINE
MONTHS ENDED SEPTEMBER 30, 2016
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
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
|
|
|
1,122,760
|
|
|
Loss on conversion of debt and change in derivative liability
|
|
|
1,748,791
|
|
|
Ending balance as of September 30, 2016
|
|
$
|
12,189,026
|
|
Loss
per Share Calculations
Basic
loss per share is computed by dividing 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.
For
the nine months ended September 30, 2016, the Company has excluded 113,916,311 stock options, 17,824,259 common stock purchase
warrants outstanding, and $4,214,068 convertible notes that are convertible into shares of common stock, because their impact
on the loss per share is anti-dilutive.
For the nine months ended September 30, 2015, the Company has excluded 3,954,644
stock options, 23,749,549 common stock purchase warrants outstanding, and $4,741,858 convertible notes that are convertible into
shares of common stock, because their impact on the loss per share is anti-dilutive.
Use
of Estimates
The
preparation of the condensed consolidated 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 September 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 September 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 nine months ended September 30, 2016, the foreign currency translation adjustments resulted in a loss of $17.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
NINE
MONTHS ENDED SEPTEMBER 30, 2016
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
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
In
March 2016, FASB issued accounting standards update ASU-2016-09, “Compensation –Stock Compensation (Topic 718) –
Improvements to Employee Share-Based Payment Accounting”. The amendments are intended to improve the accounting for employee
share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of
the accounting for share-based payments award transactions are simplified, including: (a) income tax consequences; (b) classification
of awards as either equity or liabilities; and (c) classification on the statement of cash flows. For public companies, the amendments
are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption
is permitted for any organization in any interim or annual period. The Company is currently evaluating the impact of the adoption
of ASU 2016-9 on the Company’s financial statements.
In
March 2016, FASB issued accounting standards update ASU-2016-06, “Derivatives and Hedging (Topic 815) – Contingent
Put and Call Options in Debt Instruments”. The amendments apply to all entities that are issuers of or investors in debt
instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. U.S. GAAP
provides specific guidance for assessing whether call (put) options that can accelerate the repayment of principal on a debt instrument
meet the clearly and closely related criterion. The guidance states that for contingent call (put) options to be considered clearly
and closely related, they can be indexed only to interest rates or credit risk. Public companies must apply the new requirements
for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The Company is currently evaluating
the impact of the adoption of ASU 2016-06 on the Company’s financial statements.
In
May 2016, FASB issued accounting standards update ASU-2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope
Improvements and Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments
provide clarifying guidance in certain narrow areas and add some practical expedients. These amendments are effective at the same
time Topic 606 is effective. Topic 606 is effective for public entities for annual reporting periods beginning after December
15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). The Company is currently
evaluating the impact of the adoption of ASU 2016-12 on the Company’s financial statements.
In
August 2016, FASB issued accounting standards update ASU-2016-15, “Statement of Cash Flows” (Topic 230) – Classification
of Certain Cash Receipts and Cash Payments”, to address diversity in how certain cash receipts and cash payments are presented
and classified in the statement of cash flows. The amendments in this ASU are effective for public and nonpublic entities for
fiscal years beginning after December 15, 2018, and interim periods with fiscal years beginning after December 15, 2019. Early
adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption
of ASU 2016-15 on the Company’s financial statements.
Management 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 unaudited condensed
consolidated financial statements.
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.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
NINE
MONTHS ENDED SEPTEMBER 30, 2016
3.
|
BUSINESS ACQUISITION (Continued)
|
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. This brief description of the Certificate of Designation is only a summary of
the material terms.
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 September 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
|
|
|
|
|
9/30/2015
|
|
|
|
|
(unaudited)
|
|
|
Total Revenues
|
|
$
|
4,198,368
|
|
|
Net Income (Loss)
|
|
$
|
(7,244,377
|
)
|
|
Basic and Diluted Net Loss Per Common Share
|
|
$
|
(0.054
|
)
|
Preferred Stock
As of September 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 nine months ended September 30, 2016, the Company issued 123,247,474 shares of common stock for the settlement of convertible
promissory notes in an aggregate principal in the amount of $782,000, plus interest in the amount of $96,040, based upon conversion
prices per share ranging from $0.0047 to $0.0098.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
NINE
MONTHS ENDED SEPTEMBER 30, 2016
4.
|
CAPITAL STOCK (Continued)
|
During
the nine months ended September 30, 2016, the Company issued 65,013,845 shares of common stock for services at fair value of $999,931.
During
the nine months ended September 30, 2016, the Company issued 96,321,672 shares of common stock for cash in the amount of $963,217
for the purchase of shares of commons stock at a price of $0.01 per share.
During
the nine months ended September 30, 2016, the Company issued 81,445,772 shares of common stock for make good shares at fair value
of $787,971.
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 January 25, 2016. 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 nine months ended September 30, 2016, the Company issued 93,866,797 shares of common
stock upon conversion of $518,000 in aggregate principal, plus accrued interest of $96,040. As of September 30, 2016, the Notes
had an aggregate remaining balance of $2,017,000. The Company recorded amortization of debt discount, which was recognized as
interest expense in the amount of $1,691 during the nine months ended September 30, 2016.
On February 24, 2015, the
unsecured convertible promissory notes (the “OID Notes”), with an aggregate remaining principle balance of $273,124,
plus accrued interest of $13,334 were amended. The OID Notes 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. During the nine months ended September 30, 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 September 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 $96,104 during the
nine months ended September 30, 2016.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
NINE
MONTHS ENDED SEPTEMBER 30, 2016
5.
|
CONVERTIBLE PROMISSORY NOTES (Continued)
|
On
September 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 18,910,088
shares of commons stock upon conversion of $175,000 in principal, leaving a remaining balance of $257,048. The Company recorded
amortization of debt discount, which was recognized as interest expense in the amount of $161,574 during the nine months ended
September 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. On September 15, 2016, the note met 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. The
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 note and recognized as interest expense in the financial statements. The conversion
feature of the Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion
feature of the Note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount
of $114,065 during the nine months ended September 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 the Binomial Lattice 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 - 3.4 years
|
|
Expected dividend yield
|
|
None
|
The
derivative liability recognized in the financial statements as of September 30, 2016 was $12,189,026
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 OriginClear, Inc. (formerly 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 the 2012 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 2012 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.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
NINE
MONTHS ENDED SEPTEMBER 30, 2016
7.
|
OPTIONS, WARRANTS AND RESTRICTED STOCK (Continued)
|
On June 14, 2013, the Board
of Directors adopted a new OriginClear, Inc. (formerly 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 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 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 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.
Options granted under these
Plans 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 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 of Directors 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 of Directors or Committee deems reasonable and appropriate.
During
the nine months ended September 30, 2016, the Company granted 1,000,000 incentive stock options, and recognized compensation costs
of $155,112 based on the fair value of the options vested for the nine months ended September 30, 2016.
A
summary of the Company’s stock option activity and related information follows:
|
|
|
September 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
|
|
|
(6,488,333
|
)
|
|
$
|
0.07
|
|
|
Outstanding, end of period
|
|
|
113,916,311
|
|
|
$
|
0.05
|
|
|
Exercisable at the end of period
|
|
|
75,567,519
|
|
|
$
|
0.04
|
|
|
Weighted average fair value of options granted during the period
|
|
|
|
|
|
$
|
-
|
|
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
NINE
MONTHS ENDED SEPTEMBER 30, 2016
7.
|
OPTIONS, WARRANTS AND RESTRICTED STOCK (Continued)
|
The
weighted average remaining contractual life of options outstanding issued under the 2009 Plan, 2012 Plan, and 2013 Plan as of
September 30, 2016, was as follows:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Remaining
|
|
|
Exercisable
|
|
|
Options
|
|
|
Options
|
|
|
Contractual
|
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
|
|
$
|
0.19
- 1.70
|
|
|
|
1,833,645
|
|
|
|
1,489,894
|
|
|
|
0.003 -8.02
|
|
|
$
|
0.41
- 0.44
|
|
|
|
1,132,666
|
|
|
|
849,500
|
|
|
|
6.96
|
|
|
$
|
0.02
- 0.0375
|
|
|
|
110,950,000
|
|
|
|
73,228,125
|
|
|
|
4.02 -4.50
|
|
|
|
|
|
|
|
113,916,311
|
|
|
|
75,567,519
|
|
|
|
|
|
As
of September 30, 2016, there was no intrinsic value with regards to the outstanding options.
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. As of September 30, 2016,
no milestones have been met.
On August 10, 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 $570,000 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 as reported in the Company’s quarterly or annual financial statements
filed with the U.S. Securities and Exchange Commission (“SEC Reports”), the Company will issue 30,000,000 shares of
common stock; b.) If the Company’s consolidated operating profit (operating profit=operating revenue – cost of goods
sold –operating expenses – depreciation & amortization), calculated in accordance to GAAP, equals or exceeds $1,500,000
for the trailing twelve month period reported in the Company’s SEC Reports, 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.
As of September 30, 2016, no milestones have been met.
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. As of September 30, 2016, no milestones have been met.
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. As of September 30, 2016, no milestones have been met.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
NINE
MONTHS ENDED SEPTEMBER 30, 2016
7.
|
OPTIONS, WARRANTS AND RESTRICTED STOCK (Continued)
|
On August
10, 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 15,000,000
shares of the Company’s common stock, with a fair value of $142,500 to the contractor, 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 as reported in the Company’s quarterly or annual financial statements
filed with the U.S., Securities and Exchange Commission (SEC Reports), the Company will issue 7,500,000 shares of common stock;
b.) If the Company’s consolidated operating profit (Operating Profit=Operating Revenue – Cost of Goods Sold –
Operating Expenses – Depreciation & Amortization), calculated in accordance to GAAP, equals or exceeds $1,500,000 for
the trailing twelve month period as reported in the Company’s SEC Reports, the Company will issue 7,500,000 shares of the
Company’s common stock. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.
As of September 30, 2016, no milestones have been met.
Contractors
On August
10, 2016, the Company entered into a Restricted Stock Grant Agreement (“the RSGA”) with a contractor, 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 15,000,000
shares of the Company’s common stock, with a fair value of $142,500 to the contractor, 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 as reported in the Company’s quarterly or annual financial statements
filed with the U.S., Securities and Exchange Commission (SEC Reports), the Company will issue 7,500,000 shares of common stock;
b.) If the Company’s consolidated operating profit (Operating Profit=Operating Revenue – Cost of Goods Sold –
Operating Expenses – Depreciation & Amortization), calculated in accordance to GAAP, equals or exceeds $1,500,000 for
the trailing twelve month period as reported in the Company’s SEC Reports, the Company will issue 7,500,000 shares of the
Company’s common stock. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.
As of September 30, 2016, no milestones have been met.
Warrants
During
the nine months ended September 30, 2016, the Company did not grant any warrants.
A
summary of the Company’s warrant activity and related information follows:
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
|
exercise
|
|
|
|
|
Options
|
|
|
price
|
|
|
Outstanding -January 1, 2016
|
|
|
23,297,108
|
|
|
$
|
0.21
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(5,472,849
|
)
|
|
$
|
0.09
|
|
|
Outstanding - September 30, 2016
|
|
|
17,824,259
|
|
|
$
|
0.19
|
|
At September 30, 2016, the weighted average
remaining contractual life of warrants outstanding:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Exercisable
|
|
Warrants
|
|
|
Warrants
|
|
|
Contractual
|
|
|
Prices
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
|
|
$ 0.15 - 0.25
|
|
|
16,769,233
|
|
|
|
16,769,233
|
|
|
|
0.77- 1.70
|
|
|
$ 0.25 - 1.75
|
|
|
841,692
|
|
|
|
841,692
|
|
|
|
0.57 - 1.97
|
|
|
$ 0.90 - 6.90
|
|
|
213,334
|
|
|
|
213,334
|
|
|
|
0.01 - 6.13
|
|
|
|
|
|
17,824,259
|
|
|
|
17,824,259
|
|
|
|
|
|
8.
|
COMMITMENTS AND CONTINGENCIES
|
On
May 1, 2016, the Company entered into a subtenant agreement with the sub-landlord in the amount of $36,560 to be paid over a period
of twelve months starting June 1, 2016. As of September 30, 2016, the balance remaining is $31,636.
On May 1, 2016, the Company
entered into a Sub-user agreement for commercial space. The term of the agreement is from May 1, 2016 to July 31, 2016. The term
will automatically renew for successive periods until terminated in accordance with the agreement. The monthly payment for the
space is $3,500.
Management
evaluated subsequent events as of the date of the financial statements pursuant to ASC TOPIC 855, and reported the following events:
On
October 14, 2016, a holder of OriginClear, Inc.’s (the “Company”) Series B Preferred Stock converted 3,334 shares
of the Company’s Series B Preferred Stock into an aggregate of 50,010,000 shares of the Company’s common stock. The
shares of common stock issued included 16,670,000 shares issued upon conversion of the 3,334 shares of Series B Preferred Stock
at $0.03 per share and 33,340,000 shares as a one-time make good issuance as per the Certificate of Designation of Series B Preferred
Stock and agreement between the Company and the holder.
On October 17, 2016 (the “Grant
Date”), the Company entered into a Consultant Nonstatutory Stock Option Agreement (the “Option Agreement”) with
two consultants pursuant to which the consultants were granted options, subject to vesting to purchase an aggregate of 15,000,000
shares of the Company’s common stock at $0.084 per share. Subject to early termination as provided in the Option Agreements,
the options expire five years from the Grant Date.
On October 17, 2016 (the “Grant
Date”), the Company entered into an Incentive Stock Option Agreement (the “Option Agreement”) with a non-executive
officer employee of the Company pursuant to which the employee was granted an option, subject to vesting to purchase 500,000 shares
of the Company’s common stock at $0.084 per share. Subject to early termination as provided in the Option Agreement, the
option expires five years from the Grant Date.
Between
October 19, 2016 and October 22, 2016, the Company sold, in a private placement, an aggregate of 14,000,000 shares of its common
stock to accredited investors for an aggregate consideration of $140,000 (the “Offering”). The shares issued in this
Offering are subject to price protection for a period of one year from the issuance of the shares providing that under certain
circumstances, the Company will issue additional shares of common stock of the Company for no additional consideration to the
subscribers thereunder. The subscribers agree to the lock-up provision, under which subject to certain terms and conditions therein,
the subscribers shall not sell any of their shares of common stock of the Company obtained in this Offering for a period of twelve
months.
In
connection with certain one-time make good agreements, on October 31, 2016, the Company issued an aggregate
of 1,596,360 shares of its common stock to certain holders of its common stock.
On
October 31, 2016, the Company issued to consultants an aggregate of 3,525,641 shares of the Company’s common stock in lieu
of cash consideration.